Commentary: State budget seems healthy, but it isn’t

Mac Taylor, the Legislature’s top adviser on the state budget, delivered some superficially good news this month to his bosses.

With no economic downturn on the horizon, he said in his annual survey of the state’s fiscal situation, there should be no problem writing a balanced 2018-19 budget next year. In fact, he said, with revenues continuing to flow nicely, it could theoretically end 2018-19 with more than $19 billion in unspent reserves

Just hours earlier, Gov. Jerry Brown’s Department of Finance had reported that through the first four months of the current fiscal year, revenues are closely tracking expectations.

Over the next few weeks, Brown will finalize his 2018-19 budget proposals, then announce them in early January.

During the ensuing five months, he and legislators will negotiate over details and almost certainly will emerge from his office with smiles to announce a comprehensive budget deal in time for enactment by June 15.

It will be, after four terms as governor, Brown’s last budget – his last chance to affect the single most important thing that governors and legislators do each year. The most difficult aspect will be to fend off demands from the Legislature’s restive liberals for more spending.

Brown will likely give a little on spending, insist on fattening reserves a little more and claim that he’s tamed the budget crisis he faced upon returning to the governorship in 2011 after a 28-year absence.

However, he hasn’t. In fact, during his second stint as governor, Brown, lawmakers and voters have made the state’s longer-term situation potentially even worse, as Taylor very indirectly hints.

For one thing, off-budget debts, especially for pensions and health care for retired state workers, have increased. Brown has made some token efforts to deal with them, but has never been willing to fully confront the issue.

For another – and more importantly – the recent comity on budgets has stemmed from two very uncertain factors: a relatively healthy economy and hefty increases in income tax rates on the highest-income Californians that most voters eagerly embraced because they wouldn’t be paying them.

Brown himself warns – and will likely do so again in January – that the state is overdue for a recession that could, his own budget staff says, drop revenues by $55 billion over three years.

That’s because the state depends on income taxes for 70 percent of its general fund revenues and the top 1 percent of taxpayers account for half of those income taxes. Their taxable incomes are weighted heavily toward capital gains, rather than salaries, and therefore are very likely to plummet in recession.

Brown has acknowledged the potential problem, but has been unwilling to undertake tax reform that would reduce volatility. Instead, he’s opted for a “rainy day” reserve fund that would cover only a small fraction of the projected shortfall should recession hit.

Taylor’s report gingerly explores the effects of a moderate recession in 2019 and confirms that it would hit revenues very hard, quickly exhaust Brown’s emergency reserve and create multi-billion-dollar deficits for his successor to resolve.

“Given all of the uncertainties faced by the state budget, we encourage the Legislature to continue its recent practice of building more reserves,” Taylor urged.

Yes it should. But no reserve is possibly big enough to stave off fiscal disaster.

If Brown really wants to leave a sound fiscal legacy for California, he would not just warn of a future recession, but spend some of his popularity to fix a taxation system that has been badly out of whack for decades and has become markedly more distorted since he returned to the governorship.