California budget analyst predicts temporary $26 billion surplus, then rising long-term deficits
California could see $26 billion in one-time surplus funds that will help balance the budget next year, but moving forward will face rising deficits, according to a new report from the Legislative Analyst’s Office.
The report released Wednesday estimates California will see a temporary surplus next year beyond what lawmakers and Gov. Gavin Newsom expected when they created the current $202 billion state budget that cut money from education and state worker salaries.
That extra cash could allow them to avoid major cuts in next year’s budget, but the windfall will evaporate quickly, the report warns. California still faces long-term deficits driven by the coronavirus pandemic that will rise to $17 billion by 2024, according to the Legislative Analyst’s Office, the nonpartisan office that advises the Legislature on the budget.
“We recommend the Legislature save or essentially use half of that windfall for budget resiliency to solve the budget deficits in the future,” Ann Hollingshead, one of the analysts who worked on the report, said during a call with reporters. But even if lawmakers do save the money, “the deficits cumulatively are much bigger than the windfall, so you couldn’t just save your way out of the operating deficit problem.”
Gov. Gavin Newsom’s Department of Finance, which handles budget projections and calculations for the executive branch, won’t release its own projections until January. In the meantime, spokesman H.D. Palmer said the department agrees with the LAO’s overall assessment of the state’s finances.
“A welcome but short-term revenue surge... will allow the state to make critical investments targeting the impacts of the COVID pandemic,” Palmer wrote in a statement. “While the budget is better off than we had feared several months ago, deficits are still on the horizon, and better-than expected revenues haven’t translated into an economy that’s fully rebounding. “
Since the start of the fiscal year in July, tax revenue has come in consistently higher than expected. Through October, California has collected $11.3 billion more in tax revenue than anticipated, according to the Department of Finance.
That’s partly because the state is recovering unevenly from the pandemic-induced recession, with high-income earners continuing to prosper and low-income workers facing the worst consequences.
The limited effect on high wage earners has kept California’s revenue up as those workers have kept their jobs and continued to work from home. California’s budget relies heavily on those high earners because of the state’s progressive income taxes.
Federal stimulus checks for individuals and increased unemployment help has also boosted California revenue in the short term. This year’s revenue is also partly from taxes on 2019 income, when the economy was booming, according to the Department of Finance.
Although low-income families have been hit hard and face high unemployment rates, the Legislative Analyst’s Office found applications for government funded health care and food assistance are actually down from the previous year. That means those programs are putting less strain on the state budget.
The report warns that there’s still an “unprecedented amount of uncertainty” about the budget and that “revenues easily could end up $10 billion or more above or below” what analysts predict.
The evening before the Legislative Analyst’s Office released its report, Senate President Pro Tem Toni Atkins previewed the relatively rosy economic outlook in a statement. She said her priorities for spending the extra money would include restoring funds cut from schools and other areas in this year’s budget. The San Diego Democrat also said she wants to steer more money to hard hit local governments, COVID-19 response, homelessness, and emergency preparedness.
Atkins and her colleagues in the Legislature have until next summer to hash out a new budget for the 2021-22 fiscal year.
Gov. Gavin Newsom says he’s already working on his budget proposal, which he’ll present to lawmakers in January.
This story was originally published November 18, 2020 at 11:06 AM with the headline "California budget analyst predicts temporary $26 billion surplus, then rising long-term deficits."