Capitol Alert

Amid economic uncertainty, state’s finances could weather mild recession

The office of California Legislative Analyst Mac Taylor, shown in 2015, released its latest fiscal outlook Wednesday.
The office of California Legislative Analyst Mac Taylor, shown in 2015, released its latest fiscal outlook Wednesday.

California’s finances will stay in the black over the next four budget years, the Legislature’s nonpartisan fiscal analyst projected Wednesday, while warning of “considerable uncertainty” about the state of the economy.

The review, released a week after the upset election of Donald Trump as the next president, does not address what could happen to California’s budget if Trump, working with Republican majorities in Congress, follows through on campaign promises. Those included repealing the federal Affordable Care Act, changing tax law and other measures that would have major fiscal implications for the state.

The outlook “assumes no new changes in federal policy, even though the recent election results suggest some changes are now likely. Any such state or federal policy changes could have a significant impact on the state’s bottom line,” the analyst’s office said.

Wednesday’s release marks the unofficial launch of the next budget season. Gov. Jerry Brown will release his proposed state budget in early January. That will kick off weeks of hearings, followed by a revised proposal in May that would reflect the federal impact at that point and the state’s tax receipts from April. The next fiscal year begins July 1.

Nearly midway through the current fiscal year, state revenue has slumped slightly below what lawmakers expected when they approved the $120.3 billion budget in June.

State revenue came in $381 million below projections for October and is down about $595 million since July 1. In addition, the last fiscal year ended about $706 million below projections.

“So with what we know now, the outlook for the upcoming budget is concerning and will need to account for this declining revenue and the significant uncertainties that the analyst has identified today – including stock market performance, the potential for recession, and changes in federal policy,” finance director Michael Cohen said in a statement.

Wednesday’s report lowers projected revenue from the sales and use tax and corporate tax by about $2.6 billion. Taxable sales are down, as is corporate revenue subject to the corporate tax, according to Jason Sisney of the Legislative Analyst’s Office.

And while state finances are vastly better than they were during most of the 2000’s and amid the recession, there are unknowns out there, not the least of which is when the current economic expansion – 89 months and counting, more than 1 1/2 times the average – will start to slow.

“We wanted to be careful to emphasize the caution that goes with economic uncertainties,” Sisney said.

Under current law, the state would finish the fiscal year ending June 30, 2018, with $11.5 billion in total reserves. That includes $2.8 billion that the Legislature could spend on programs of its choosing, and $8.7 billion in that would be set aside for the state’s voter-approved reserve and debt payoff accounts.

That money positions the state to be “increasingly prepared to weather a mild recession,” the analyst’s office said, presenting economic growth and mild recession scenarios. Under current law, the state could cover all its costs through June 2021 if a mild recession hit.

The outlook also reflects the fiscal effects of ballot measures approved last Tuesday, notably the extension of higher income taxes on the wealthy and an increase in tobacco taxes. Both will generate several billion dollars for education and health programs.

California has embraced the Affordable Care Act, and receives billions in federal subsidies to expand Medi-Cal to cover childless adults. For the current budget year, the federal government will give the state $15.3 billion to help pay for the optional expansion of Medi-Cal, which added millions of people to the rolls.

Although he pledged to sign an outright repeal of Obamacare, Trump in recent days has left open the possibility that he would support keeping its most popular parts, such as requiring insurance companies to cover people with pre-existing conditions. That requirement, though, fails to pencil out financially for insurance companies without the requirement that everyone buy insurance.