Welcome to my newsletter, On California. Writings here are my own views and do not necessarily reflect the views of Stanford University, Govern For California or any other organization.
Earlier today, California’s Legislative Analyst’s Office released its annual Fiscal Outlook, which forecasts a $25 billion deficit for the 2023-24 fiscal year:
Veteran observers of the California budget have expected a deficit given the state’s dependence for revenue on capital gains from stock markets that have entered bear territory. But LAO warns of a bigger deficit should the country also enter a recession:
That’s why LAO recommends against using reserves to address a pre-recession deficit:
And why I have long encouraged the state to carry upwards of $100 billion of reserves.
You can be sure that the Department of Finance is already hard at work preparing its proposed budget for the next fiscal year, which Governor Newsom will present to the Legislature in January. They have a tough job. Because so much of the General Fund is constitutionally mandated, contractual or an entitlement, typically cuts fall hardest on discretionary programs such as UC and CSU, which fare poorly in the competition for state funds even when times are good:
That’s because UC and CSU have not assembled a powerful political presence in Sacramento, despite millions of alumni and hundreds of thousands of current students. In that regard they differ substantially from other politically-active recipients of state funds (e.g., hospitals, Corrections, K-12).
Because of California’s dependence for revenue on inherently unpredictable capital gains, no forecast by LAO or the Department of Finance is reliable, but because state budgets are required to be balanced, the Legislature and Governor will have to make choices based upon those forecasts. Expect a vigorous debate, including about whether or not to invade reserves.
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