The well-being of California’s volatile revenue mix is a constant of state budgets, and Gov. Jerry Brown has regularly warned of looming red ink since returning to the statehouse six years ago.
But this month’s inauguration of President-elect Donald Trump, along with his fellow Republicans retaining control of Congress, has injected a heavy dose of trepidation into the Democrat-controlled budget process that formally begins Tuesday when Brown releases his proposed spending plan for the year beginning July 1.
The shift in Washington and questions about the state’s revenue stream mean the budget crystal ball is hazier than usual.
Assemblyman Phil Ting, D-San Francisco, chairman of the Assembly Budget Committee, said despite signs of possible trouble, the next budget shouldn’t assume the worst.
“I don’t think we can budget by catastrophe. If I was worried about the next Big One (earthquake), I wouldn’t leave the house,” Ting said, noting that lawmakers have put away almost $9 billion in voter-approved reserves since 2015 to cushion against drops in revenue. “We don’t want to stop investing in California.”
Tuesday’s budget release will shed light on Brown’s approach to those and many other issues. Here are some things to watch:
Who will pay for health care?
This is the biggie.
If Trump and congressional Republicans follow through on their pledge to repeal the federal Affordable Care Act, California faces the prospect of filling an enormous federal funding hole or cutting coverage.
California lawmakers embraced the health care law after it passed Congress in 2010. They approved the law’s optional expansion of Medicaid to cover childless adults, with the federal government initially paying all of the cost, shrinking to 90 percent by 2020.
That’s a lot of money. More than 3.8 million Californians receive the expanded coverage in the current budget year, at a cost of $16.2 billion, with all but $819 million of it paid by the federal government.
“I think the ripples go way beyond health care,” said Frank Mecca, executive director of the County Welfare Directors Association of California, of the potential fallout from the health care law’s repeal.
Obamacare will still be the law of the land Tuesday, and Trump and some Republicans have sent mixed signals in recent days about their ultimate intentions. How will Brown’s plan reflect the uncertainty?
What will happen to my taxes?
The state’s bottom line also benefited from the Nov. 8 election.
Voters approved Proposition 55, maintaining higher income tax rates on wealthy filers passed in 2012. They passed Proposition 56, imposing a new $2 tax on tobacco products, which could mean as much as $1 billion to help pay for state health programs.
In its November fiscal outlook, the Legislative Analyst’s Office projected that the state’s three top sources of revenue – the personal income tax, the sales and use tax, and the corporation tax – would end June 2018 almost 7 percent higher compared with June 2017.
There are signs, however, that revenue could begin to sag.
The country’s post-recession economic expansion is almost the fourth-longest since 1854. Last Thursday, the analyst’s office reported that preliminary income tax collections for December were $1.2 billion below lawmakers’ projections.
It’s still a long way from 2009, when revenue collapsed as the state fell into recession. The lower-than-projected revenue halfway through 2016-17 represents about 1 percent of the general fund.
Changes in Washington also underline the state’s revenue outlook. Last month’s bad income tax numbers could be made up in the coming months if taxpayers had deferred capital gains and other income into 2017 because they expect Congress and Trump to reduce taxes.
The state budget could gain, meanwhile, if Trump and Congress change corporate tax laws to encourage the return of trillions of dollars in corporate revenue from other countries.
“Due to uncertainty surrounding federal tax policy, it may be at least April 2017 before we receive information that can begin to illuminate the extent of these effects,” the analyst’s office wrote.
That means the revised budget proposal Brown will release in mid-May could have much more significance than the one he unveils Tuesday.
Will schools have enough money?
Education is the biggest piece of the state’s general fund budget. November’s outlook estimated that the constitutional school-funding guarantee will increase by $2.6 billion in the coming budget year, up from about $71.9 billion, with the state general fund paying about 70 percent of that.
The Local Control Funding Formula, meanwhile, has meant billions in supplemental payments to districts with higher percentages of children receiving free and reduced-price meals and in the foster care system.
The formula, though, is almost at full implementation. That means significant revenue growth in recent years will taper off for hundreds of districts around the state, including in the Sacramento region, potentially leading to shortfalls.
Schools also face higher costs in other areas. The recent decision by pension giant CalPERS to reduce the projected rate of return on its investment portfolio from 7.5 percent to 7 percent means districts face the prospect of having to contribute more toward the pensions of bus drivers, maintenance workers and other nonteaching employees.
Decisions in Washington loom large, as well. California gets $7.5 billion from the federal government, mainly for low-performing and low-income schools and special education. Trump’s nominee for education secretary, Betsy DeVos, is a strong advocate of charter schools and taxpayer-funded school vouchers.
Will the governor take on unfinished business?
Brown’s budget last January called for a 10-year, $36 billion transportation funding plan focused on maintaining and repairing existing roads. Nothing came close to passing the Legislature, however.
Transportation and local government groups have kept up demands for a transportation fix. And unlike last year, Democrats could have the votes to pass any new transportation-related tax increases without Republican support.
California’s high housing costs also have been a topic of recent budgets.
Last year’s package included borrowing $2 billion against the state’s mental health tax on millionaires to help pay for housing for mentally ill people who are homeless.
But the session ended with no deal on Brown’s proposal to relax local land-use rules in return for agreeing to legislative Democrats’ proposal to allocate $400 million for affordable housing projects.
The last legislative session ended with lawmakers acting on another longstanding budget issue, allocating hundreds of millions of dollars generated by the state’s cap-and-trade program to various programs meant to reduce greenhouse gas emissions.
Cap-and-trade’s future, though, is uncertain. Some recent auctions of carbon credits ended with many credits unsold and much less auction revenue.
The current program expires in 2020 and it’s unclear if lawmakers will renew it. Brown, though, could seek an alternative approach, such as by going to the ballot in 2018.