California is on track for a $7 billion budget surplus. Where will the money go?
California’s long economic expansion is projected to continue into next year, giving Gov. Gavin Newsom and lawmakers another surplus as they map out a new state budget.
Legislative Analyst Gabriel Petek released a report Wednesday projecting the state will bring in a $7 billion surplus in the 2020-21 budget year.
That’s far less than the $21.5 billion surplus California is collecting this year, but it still reflects a positive outlook for the state’s economy.
“The budget picture is strong and favorable. Full stop,” Petek told reporters Wednesday.
As much $3 billion could be available for ongoing expenses, while the rest could dry up in an economic downturn, according to the report. But the analyst’s office recommends the Legislature allocate no more than $1 billion of the surplus to ongoing expenses to avoid having to cut programs during a recession.
Analysts also found the state has enough saved in reserves to weather a typical recession, but recommend the state use much of the projected surplus to pay debts and boost reserves.
Last year, lawmakers approved a $215 billion budget boosted by record surpluses that accommodated new spending on health care, early childhood programs and housing construction. Lawmakers also socked away billions of dollars in reserves, giving the state $19 billion in separate savings accounts.
Newsom has warned that next year’s budget likely won’t be so flush.
In October, Newsom told reporters he’s seeing a slowdown in state tax revenue, indicating a recession is on the horizon after a decade of economic growth.
The analyst’s office still painted a positive picture of the upcoming year in its report, projecting the economy will continue to grow in coming years, although at a slowing pace.
“With more than a decade of economic expansion, coupled with deliberate legislative action to put the budget on better footing, the California budget is in good condition,” analysts wrote, although they noted the prospect of a recession still looms.
The analyst’s office predicts California will continue adding jobs and that the housing market will improve somewhat after declining in 2019.
The report also outlines several areas of uncertainty, most notably surrounding a policy reauthorized by California lawmakers this year to offset some health care costs in the budget known as the managed care organization — or MCO — tax. That policy requires federal approval, which the analyst’s office projection assumes will happen. About $900 million is at stake.
Newsom boasted about the positive outlook Wednesday.
“Our state is now doing more than ever before to provide opportunity for all California families, especially those who are not equally sharing in our nation’s prosperity,” he said in a written statement. “We are taking important steps so that growth is broadly shared, doing it all while saving record amounts for a rainy day.”
Sen. John Moorlach, R-Costa Mesa, said the outlook showed “California continues to benefit from a booming national economy,” but cautioned that state and local governments are carrying hundreds of billions of dollars in debt that could become especially problematic in a financial downturn.
Newsom in this year’s budget nodded to those debts, providing $9 billion in optional payments to the state’s underfunded CalPERS and CalSTRS pension plans.
“Let’s hope the governor allocates the $7 billion to address increasing state unfunded liabilities. Not doing so is intergenerational theft leaving Californians saddled with these debts on their backs,” Moorlach, who sits on the Senate Budget Committee, wrote on Twitter.
Newsom must propose a plan for the 2020-21 budget in January, kicking off negotiations with the Legislature, which must approve a final plan by June 15 in time for the July 1 start of the state’s fiscal year.
This story was originally published November 20, 2019 at 12:06 PM with the headline "California is on track for a $7 billion budget surplus. Where will the money go?."