Gov. Jerry Brown, warning that “the next recession is getting closer,” doubled down Thursday on holding down state spending and building reserves.
While proposing a $170.7 billion state budget for the 2016-17 fiscal year that begins on July 1, Brown stressed that the plan would continue to fill the rainy-day fund that voters, at his behest, adopted in 2014 as a buffer against a future economic downturn.
“During a moderate recession, revenue losses to the general fund could easily top $55 billion over three years,” Brown said in his cover letter to legislators, urging them to avoid “short-sighted” commitments and make “fiscal restraint … the order of the day.”
He even implied that he would oppose a pending ballot measure, sponsored by unions and other pro-spending groups, to extend temporary income tax increases on the wealthy. Brown said it contains a “fatal flaw” of exempting its revenue from the rainy-day fund requirements.
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Money has been pouring into the state treasury – primarily income taxes on the state’s most affluent. The Legislature’s own budget adviser, Mac Taylor, has projected $3.6 billion in unanticipated extra revenue this year.
Brown’s fellow Democrats in the Legislature have many proposals to increase spending on health, welfare and education services. While he has been enthusiastic about K-12 school spending and building reserves, he’s been skeptical about expanding the health and welfare services that legislators favor, or the pre-kindergarten education they also want.
Under the state’s long-standing school finance law and the more recent rainy-day fund law, much of the extra revenue will go to schools and reserves. State and local spending on schools, $47.3 billion when Brown returned to the governorship in 2011, is expected to top $71 billion next year.
That’s well over $10,000 per student, which will elevate California’s per-pupil spending into the middle ranks of the states.
Brown pointedly reminded legislators that he will have the last word.
“There’s a tendency to do everything, and I’ll have to straighten it out in the end,” Brown told reporters as he displayed giant charts illustrating the potential impact of even a mild recession on the state’s finances.
By happenstance, two events this week framed the forthcoming debate over California’s budget priorities.
The Mercatus Center at George Mason University released an exhaustive study of state governments’ finances and their ability to withstand another recession.
Having begun to build reserves after years of deficits, California ranks in the middle of the states, the study found.
However, the study found it would need an $11 billion reserve to withstand a severe recession, $3 billion more than Brown’s $8 billion projection at the end of the 2016-17 fiscal year.
The second event was a severe downturn in global equities markets, fueled by bleak economic news from China, that some economists believe could be the harbinger of recession.