Gov. Jerry Brown has 19 billion reasons to feel optimistic when he releases his last budget proposal this week.
Eight years after he took office in the free fall of the Great Recession, the state is on pace to build a $19.3 billion surplus by July 1, 2019.
But these are not necessarily flush times, warn the liberal policy advocates who normally would be urging Brown to put the surplus into new government services.
They see two strong headwinds they expect Brown to cite when he reveals a budget that salts away revenue and avoids expensive commitments.
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One comes from aftershocks created by the tax overhaul President Donald Trump signed last month.
Because Trump’s plan slashes federal revenue, California leaders expect Congress to next cut funding for social services that they consider critical. That, in turn, could blow a hole in parts of the state’s budget that depend on federal funding, like Medi-Cal.
The second drag on the upcoming budget comes from Brown’s own preoccupation with a recession. He continually warns that lean days are just around the corner even as the state exceeds its revenue targets.
“Make no doubt about it, cuts are coming in the next few years, and they’ll be big,” Brown said last year as he released a $180 billion plan.
With that backdrop, here are five things to watch when Brown’s delivers his budget:
Health care hurdles
A year ago the biggest question for Brown’s budget was whether Trump would fulfill his campaign pledge to repeal Obamacare. That mattered to California because the state used President Obama’s signature health care law to greatly expand its health insurance program for lower-income adults, Medi-Cal. Repealing Obamacare could have disrupted tens of billions of dollars in funding for Medi-Cal.
Today, Obamacare lives, but Trump’s new tax law poses similar problems for California government. The tax cuts are projected to swell the federal deficit by $1.4 trillion over a decade, increasing pressure to cut spending on entitlement programs like Medicare. Some Republicans, including House Speaker Paul Ryan, have said they want to target those programs next to rein in spending.
California gets $60 billion a year from the federal government for Medi-Cal. California residents receive about $70 billion in benefits annually from Medicare, and the Republican Congress has not yet renewed a children’s health insurance program that provides $3 billion in benefits to California families.
Changes to any of those programs would challenge Brown and California lawmakers to find money for those services or let residents lose access to those services.
“We know the Republicans in Washington, D.C., will be issuing some major federal budget cut proposals in the next weeks,” said Chris Hoene, executive director of the California Budget and Policy Center. As a result, “we’re expecting a pretty cautious (state budget from Brown) because of the high degree of uncertainty.”
Will Brown take a swipe at the tax overhaul?
Gov. Brown blasted the new tax law while Republicans advanced it, calling it “evil in the extreme.” He charged that the law favored corporations over low-income Americans and seemed to single out his state by striking a popular state and local tax deduction that some 6 million Californians claimed last year.
Brown could use his budget to strike back by signaling his intent to adjust California tax laws in a way that would let residents claim new deductions on the federal returns.
One proposal, already submitted in a bill by state Senate President Kevin de León, would let Californians report their state taxes as if they were charitable contributions, allowing residents to deduct those taxes on their IRS returns. Another more complicated idea floated by tax experts would have California shift its personal income tax to a different employer tax that businesses could deduct.
Even more California vs. Trump
Need more examples of Sacramento’s rift with the Trump administration creating unanswerable budget dilemmas?
California expects to collect $1 billion in state and local taxes from its now legalized marijuana industry. Attorney General Jeff Sessions’ announcement of a new policy raising the spectre of a revived emphasis on prosecuting federal cannabis offenses could diminish those proceeds.
California’s new “sanctuary state” law is another fault line. Sessions’ has warned cities with laws that discourage enforcement of federal immigration laws that they could lose Justice Department grants that support their police departments.
California receives about $28 million in those grants. That’s not a lot of money in the scheme of the state’s $135 billion general fund budget, but presents another potential disruption of California government services.
A dollar saved is a dollar earned
The Legislative Analyst’s Office projects that California would be free to spend about $7 billion of its surplus in the upcoming budget year, with the other $12 billion earmarked for reserves. Its outlook also projected an additional $5.3 billion in uncommitted education funding.
Few expect Brown to call for spending much of the general fund surplus. He’s cast himself as a penny-pinching check on lawmakers who’d commit revenue in windfall years to ongoing programs that would have to be cut in a recession.
Still, some lobbyists expect Brown to offer some of the money to programs and departments as one-time boosts in revenue for capital projects or short-term expenses. He’s done that in the past.
“Instead of committing any balance to ongoing money for ongoing purposes, he will give to school districts but will caution them not to spend for ongoing expenses like compensation,” said Kevin Gordon, a lobbyist who represents large school districts as president of Capitol Advisors Group.
Assembly Budget Committee Chairman Phil Ting held a briefing last month where he said Democrats would push to spend about half of the general fund surplus, using it on education, health care for undocumented immigrants, and social services.
Others are urging Brown to focus on debt. Sen. Steve Glazer, D-Orinda, has called for Brown to use some of the surplus to pay into the state’s underfunded public pension programs, CalPERS and CalSTRS. Republican Sen. John Moorlach of Costa Mesa last week made a similar argument in an editorial, encouraging Brown to use the surplus for bond debt and the pension funds.
What about Mother Nature?
Starting with the damaged Oroville Dam, California seemed to careen from disaster to disaster in 2017. The dam’s spillway alone is projected to cost more than $500 million to repair.
The state’s fire season, too, was among its deadliest and most expensive. California had spent nearly $600 million on the wildfires between July 1 and early December, a record-setting pace.
Brown maintains that the state will face more weather-related extremes in years ahead because of climate change. He could set aside more money to deal with those events in the next budget by allocating money for environmental programs or by beefing up the state’s ability to respond disasters by hiring more emergency responders. The state firefighter union, for instance, is nudging Brown to hire more year-round firefighters.
This story was updated at 11 a.m. on Tuesday, Jan. 9 to clarify that revenue projections related to retail cannabis reflect state and local taxes.