February 10, 2020 - California has made significant progress in recent years to make its budget more resilient. Yet the process of achieving resilience can never be considered finished. This report lays out a framework for evaluating the budget’s structure using two key tools: reserves and operating surpluses. Using this framework, we evaluate the Governor’s proposed 2020-21 budget structure. We find that building more reserves or preserving a larger operating surplus would be prudent.
January 13, 2020 - This report presents our office’s initial assessment of the Governor’s budget. We estimate the Governor had a $6 billion surplus to allocate to discretionary purposes in 2020-21. The Governor allocates most of the surplus toward one-time purposes, including maintaining a positive year-end balance in the state’s discretionary reserve. Under the administration’s estimates, total reserves would reach $20.5 billion at the end of 2020-21—this represents a $1.7 billion increase from the 2019-20 enacted level. California continues to enjoy a healthy fiscal situation. Despite its positive near-term picture, the budget’s multiyear outlook is subject to considerable uncertainty. In addition to describing the condition of the budget under the Governor’s proposal, this report discusses tools the Legislature can use to mitigate against these heightened risks.
January 20, 2020: Upon further review, one item included in the original version of Appendix Figure 3 on discretionary on health spending should not have been included (specfically, use of the Medi-Cal drug rebate fund to offset General Fund costs). Removing this item—which reduces General Fund spending—from the list of discretionary choices made in the Governor’s budget increases our calculation of the surplus to $6 billion. The document is updated to reflect these changes.
Update 1/24/20: Adjusted Judicial Branch items in Appendix Figure 1 to reflect ongoing spending.
November 14, 2018 - The budget is in remarkably good shape. Under our estimates of revenues and spending, the state’s constitutional reserve would reach $14.5 billion by the end of 2019-20. In addition, we project the Legislature will have nearly $15 billion in resources available to allocate in the 2019-20 budget process. The Legislature can use these funds to build more reserves or make new one-time and/or ongoing budget commitments.
The longer-term outlook for the state also is positive. Under our economic growth scenario, the state would have operating surpluses averaging around $4.5 billion per year (but declining over time). Under our recession scenario, the state would have enough reserves to cover a budget problem—provided the Legislature used all of the available resources in 2019-20 to build more reserves.
Along with the Fiscal Outlook, you can find a collection of other fiscal outlook material on our fiscal outlook budget page.
February 5, 2019 - This report considers the overall structure of the Governor’s budget to evaluate how well it prepares the state to address a future budget problem. We begin with background to explain the state budget structure, budget problems, and options for addressing budget problems. We also provide background on the state’s existing reserves and debts and liabilities. We then present some key considerations as the Legislature considers its overall budget structure. Finally, we present and assess each of the Governor’s major budget reserve and debt and liability proposals and offer some alternatives for legislative consideration.
2/5/19: Corrected total of state spending deferrals in Figure 5.
May 17, 2018 - This post presents our office’s outlook for the condition of the state’s General Fund through 2021-22 based on the Governor’s 2018-19 May Revision proposals.
January 14, 2019 - This report presents our office’s initial assessment of the Governor’s Budget. The budget’s position continues to be positive. With $20.6 billion in discretionary resources available, the Governor’s budget proposal reflects a budget situation that is even better than the one our office estimated in the November Fiscal Outlook. The Governor’s Budget allocates nearly half of these discretionary resources to repaying state liabilities. Then, the Governor allocates $5.1 billion to one-time programmatic spending, $3 billion to reserves, and $2.7 billion to ongoing spending. Although the Governor’s allocation to discretionary reserves represents a smaller share of resources than recent budgets, the Governor’s decision to use a significant share of resources to pay down state debts is prudent. The Governor’s ongoing spending proposal is roughly in line with our November estimate of the ongoing capacity of the budget under an economic growth scenario. This was just one scenario, however. Recent financial market volatility indicates revenues could be somewhat lower than either we or the administration estimated.
February 12, 2020 - In this installment of Fiscal Perspectives, Legislative Analyst Gabriel Petek discusses why, even with high budget reserve balances, it is prudent for the Legislature to continue assessing and strengthening the state’s fiscal capacity. The post also discusses how maintaining an operating surplus in the state’s multiyear budget plan can supplement reserves as an instrument of fiscal resilience. Petek makes the case that there is a particularly strong argument for doing so in the context of a mature economic expansion.
January 12, 2018 - This publication is our office’s initial response to the Governor’s 2018-19 budget. In the proposed plan, the Governor places a high priority on building reserves, proposing a total reserve balance of nearly $16 billion. We believe the Governor’s continued focus on building more reserves is prudent in light of economic and federal budget uncertainty. In addition to building reserves, the Governor’s proposed budget allocates sizeable funding increases available within the constitutionally required guarantee for schools and community colleges and supports a variety of new infrastructure projects. This report also discusses how new federal tax changes may affect state revenues and reasons why we believe there could be more resources available in May.
May 8, 2020 - This report provides an update on the budget’s condition in light of the public health emergency and economic downturn associated with the coronavirus disease 2019. Our outlook presents two potential scenarios—a somewhat optimistic “U-shaped” recession and a somewhat pessimistic “L-shaped” recession—and assumes a baseline level of expenditures. Under these two scenarios, the state would have to address an $18 billion or $31 billion budget problem. The state’s newly emergent fiscal challenges are likely to extend well beyond the end of the public health crisis. Under both of our economic scenarios, budget deficits persist until at least 2023-24 with multiyear deficits summing to $64 billion in the U-shaped recession and $126 billion in the L-shaped recession.
May 21, 2019 - Through the adoption of countercyclical fiscal policies, California is better able to navigate the business cycle within the constraints of its constitutional balanced budget requirement. The idea here is that in good times—when revenues are strong—the state spends somewhat below its capacity, sequestering the difference in reserves. Later, when the economy and tax receipts weaken, the state can draw upon its accumulated savings to fund a spending level above what revenues would otherwise support. Exercising spending restraint during good times promotes fiscal sustainability and dampens the need for austerity in subsequent recessions, thus, facilitating policy stability. The more robust California’s countercyclical fiscal policies are, the more the state can avoid boom-and-bust budgeting, which most policymakers view as anathema.
January 13, 2022 - On January 10, 2022, Governor Newsom presented his proposed state budget to the Legislature. In this report, we provide a brief summary of the proposed budget based on our initial review. In the coming weeks, we will analyze the plan in more detail and release several additional budget analyses.
Update (1/21/22): Includes a corrected estimate of Governor’s Budget proposals that are excludable under the State Appropriations Limit (SAL).
May 19, 2017 - This post presents our multiyear outlook for the condition of the state budget through 2020-21 based on current federal and state law and policies, as modified by the Governor’s May Revision proposals. This outlook assumes the passage of the Governor’s proposals, but uses our office’s own estimates of future costs of state programs, along with our own estimates of revenues.
May 27, 2021 - Our office recently released its multiyear budget outlook based on our evaluation of the Governor’s May Revision budget proposal. An important element of this annual exercise is our independent estimate of the total cost of the Governor’s May Revision budget proposals for several years into the future. A key finding from our analysis this year is that the Governor’s ongoing spending proposals are probably too high relative to his administration’s revenue projections. This manifests in operating deficits that persist through the outlook horizon (2024‑25). Adopting a budget with this combination of assumptions is inadvisable in our view. One reason is that—given the state’s balanced-budget requirement—doing so requires assuming that the multiyear budget projections are wrong. To appreciate why this is problematic, it is useful to revisit some of the reasons for doing multiyear fiscal forecasting in the first place.
May 20, 2016 - This online post is our office’s multiyear outlook for California’s General Fund through 2019-20 based on current state law and policies, as modified by the Governor’s May Revision proposals. This is part of our response to the Governor’s 2016-17 May Revision. Our outlook estimates the state will end 2016-17 with $8.7 billion in total reserves. Over our outlook period, and assuming continued economic growth, we estimate the state’s budget has the capacity to pay for the Governor’s May Revision proposals over the period. After 2016-17, the state would have a few billion dollars available each year to build reserves or make additional commitments. Despite these budgetary surpluses, compared to other recent similar analyses, our outlook shows much smaller budget surpluses. Surpluses have declined largely as a result of new spending commitments by the state, including the increased state minimum wage. As a result, the state’s budget is now more vulnerable to a future economic downturn than it was last year. For this reason, we suggest the Legislature aim to pass a state budget with a robust level of total reserves this year.
March 7, 2018 - Reserves are of critical importance to the health of the state's budget. These funds help cushion the impact of a budget problem that emerges during a recession. In this report, our office provides an overview of revenue losses that have occurred in past recessions to consider the magnitude of a budget problem that could emerge in the future. Then, we describe the Governor's reserve proposal for 2018-19 and compare this level to past reserves and other states. Next, to aid the Legislature as it evaluates the Governor’s proposal, we present a framework that the Legislature can use to plan for a recession and determine a target level of reserves. Finally, we conclude with our office’s comments on the Governor’s proposed level of reserves in light of this framework and present some alternatives for legislative consideration.