In November, the Legislature’s budget analyst, Mac Taylor, issued his annual “fiscal outlook” that sets the stage for the next state budget cycle.
In early January, Gov. Jerry Brown will offer his own fiscal outlook as he proposes a 2018-19 budget, his last.
Chances are, Brown’s take will not vary much from Taylor’s – that in the near-term, the state’s finances look rosy, thanks to a strong economy, but the state’s longer-term situation is much cloudier.
Brown habitually warns about the inevitability of recession and the need to build reserves, and Taylor mirrors that caution in urging his bosses in the Legislature to set aside more money.
Both remember what happened a decade ago when the worst recession since the Great Depression clobbered the state and the budget’s perilous dependence on income taxes from a tiny number of high-income Californians struck home.
The state quickly saw a 20 percent decline in its general fund revenues, mostly in fewer taxes from those wealthy few, and amassed $30 billion in what Brown, upon resuming the governorship in 2011, called a “wall of debt.”
Today, the general fund budget is about 50-plus percent larger than it was then, and the state is even more dependent on those high-income Californians, thanks to a “temporary” tax increase on them that Brown proposed, that voters approved and then was extended by voters last year.
Therefore, another recession, even a moderate one, could have an even more disastrous fiscal effect. Brown cites a potential $55 billion revenue loss over three years, which would quickly consume the “rainy day fund” that he created.
That tells us that the wisest course would be to restrain spending in the next budget and squirrel away as much money as possible. And there will be some extra money available to save – or to spend.
“Under our current revenue and spending estimates, and assuming the Legislature makes no additional budget commitments, the state would end the 2018-19 fiscal year with $19.3 billion in total reserves (including $7.5 billion in discretionary reserves),” Taylor told legislators before adding, “Given all of the uncertainties faced by the state budget, we encourage the Legislature to continue its recent practice of building more reserves.”
However, the Legislature is dominated by liberal Democrats who fervently believe that more spending is a godly virtue.
A month after Taylor issued his report and a month before Brown’s budget is unveiled, Assemblyman Phil Ting, a San Francisco Democrat who chairs the Assembly Budget Committee, signaled what could be a sharp conflict with Brown over priorities.
He issued what he called a “blueprint for a responsible budget” that would spend $4.3 billion of the $7.5 billion in “discretionary reserves” that Taylor projected and bank the other $3.2 billion.
Ting, declaring that “not all Californians have benefited from our state’s renewed prosperity,” said Democrats want “smart progressive investments” such as expanding the earned income tax credit to benefit the working poor, Medi-Cal health coverage to undocumented immigrants and early childhood education.
These are the sorts of permanent entitlements that Brown has been leery of approving, because they would be virtually impossible to roll back if the state budget leaks red ink.
Brown wants to claim a legacy of fiscal prudence as he completes his fourth and last term as governor, but that would be tainted if the state once again found itself in a deep hole shortly after he departs.