Ten years ago this week, the dire predictions made by state budget analysts prompted a frank, terse response by the administration of then-Gov. Jerry Brown.
The report released Wednesday by the nonpartisan Legislative Analyst’s Office projects a sky-high $31-billion budget surplus and a state government so flush with cash that tax cuts or broad-based rebates — or maybe both — are a distinct possibility.
From the abyss to the apex
The main character in this government rags-to-riches story is the cash.
The analysis that prompted Brown’s insistence on “strong medicine” in 2011 warned that lawmakers would have to solve a $13-billion deficit by the following summer with multi-billion-dollar shortfalls in the budget years after that. It noted there were “few easy options left for balancing California’s budget.”
But one year later, a transformation was underway. LAO researchers noted in the November 2012 report that the short-term deficit was now likely less than $1 billion, along with an observation that proved prescient:
“If, however, a steady economic recovery continues and the Legislature and the Governor keep a tight rein on state spending in the next couple of years, there is a strong likelihood that the state will have budgetary surpluses in subsequent years.”
In 2013, the LAO report projected a modest reserve by the end of the fiscal year. In 2014, the annual snapshot concluded a $1.5-billion reserve was on the horizon. And from there, things became so good that they seemed surreal to the legislators, lobbyists and journalists who had lived through the depths of the crisis. The analysts began offering multiple scenarios, perhaps not believing what they were seeing.
“It is difficult to overstate how good the budget’s condition is today,” they wrote in their November 2018 report.
Higher taxes, stronger reserves
Data compiled by the convinced voters in 2012 to approve Proposition 30, raising income taxes on the state’s wealthiest taxpayers for seven years and sales taxes on everyone for four years. A coalition of his political allies led by teachers unions went back to voters in 2016 with Proposition 55, extending the higher tax bracket rates through 2030.
In between those two campaigns was an additional building block in 2014: Proposition 2, crafted by Brown’s budget team and Democratic lawmakers and strengthening the state “rainy day” fund championed in 2004 by then-Gov. Arnold Schwarzenegger. The new system was more robust and less susceptible to lawmakers who might have wanted to skip a deposit in some years.
“The required deposits take some revenues off the table,” Petek said. “Since the passage of Prop. 2 in 2014, reserves have increased from essentially zero to over 10% of the budget — that’s a huge improvement.”
‘One time’ revenue, less debt, more luck
The state’s tax revenue bonanza didn’t result in as much new spending as some lawmakers might have wanted, in part because Brown insisted on a conservative approach to fiscal forecasting that allowed him to categorize billions of dollars in taxes as a one-time windfall.
It’s a mindset that Gov. Gavin Newsom has tried to follow too, though impartial budget watchers should be forgiven for chuckling at how many successive “this year only” pronouncements have been made in the past half-decade. Regardless, the approach has forced the Legislature to treat sizable portions of the revenue growth as off-limits to long-term growth in a variety of programs — even, at times, likely limiting how many of those dollars could be counted as part of the year-to-year growth in public school funding mandated by the to pay off huge debts amassed by the use of budget-balancing gimmicks during the deficit years of the past. And they made larger-than-required payments to public employee pension plans, choosing to expand some government programs through delayed implementation efforts that allowed costs to come online concurrent with sustained growth in revenues.