The State Legislature goes back into session next month. The number one priority should be to restore order to the state budget.

The good news is that the state enters the New Year with a surprising $26 billion “surplus,” but it is mostly a mirage. When the Covid-19 pandemic erupted, the Legislature and administration prescribed a series of fund shuffling actions to lower spending in anticipation of a drastic drop in taxes. Since it didn’t happen, you can anticipate a reshuffle of the fiscal deck in Sacramento.

California’s Legislative Advocate Office (LAO), a nonpartisan information source, addressed this issue last month in a special report on the budget situation’s possible future.

Synopsis of the report:

State Economy in Rapid but Uneven Recovery.Although the state economy abruptly ground to a halt in the spring with the emergence of coronavirus disease 2019, it has experienced a quicker rebound than expected. While the pandemic’s negative economic consequences have been severe, they do not appear to have been as catastrophic from a fiscal standpoint as the budget anticipated. 

Recent Data on Tax Collections/Expenditures Consistent with Economic Picture. Recent data on actual tax collections and program caseloads have been consistent with a more positive economic picture, especially among high-income Californians. Between August and October, collections from the state’s three top taxes so far in 2020-21 have been 22 percent ($11 billion) ahead of budget act assumptions. Simultaneously, data on new applications for safety net programs, like MediCal and CalFresh, in the first few months of 2020-21 show that new applications for these programs have been below 2019-20 levels.

Estimated Windfall of $26 Billion in 2021-22. We estimate the Legislature has a windfall of $26 billion to allocate in the upcoming budget process under our main forecast. This windfall is entirely a one-time event. Current unknowns about the economic outlook create an unprecedented amount of uncertainty about this fiscal picture. 

Looking Forward–an Operating Deficit Beginning in 2021-22. Under our main forecast, General Fund revenues from the state’s three largest sources would grow at an average annual rate of less than 1 percent. Meanwhile, General Fund expenditures under current law and policy grow at an average of 4.4 percent per year.”

Governor Newsom will outline his plans to get the budget under control in mid-January, then the State Legislature will try to join its efforts in the same direction. It is worth mentioning that it could have been far worse, so we hope for the best.

By Dave Sorem, P.E. ECA Government Affairs Chairman email: [email protected]