The Legislative Analyst’s Office has just published the following report:
The Key Takeaways of the Report
- May Revision Barely Balanced Before Accounting for State Appropriations Limit (SAL) Requirements. Our multiyear assessment, assuming the Governor’s May Revision policies, indicates the state would have narrow operating surpluses and deficits, but a positive ending fund balance through 2025-26. This finding indicates the budget is barely balanced. However, SAL requirements would reach $10 billion to $20 billion per year over the multiyear period. The administration does not include a plan to address these requirements, which would far exceed the state’s operating capacity. Consequently, under May Revision policies, the state likely would have significant budget shortfalls in the out-years.
- Adopting LAO Revenues Mitigates Budget Impacts of a Recession. Although predicting the next recession is impossible, economic indicators currently suggest a heightened risk of recession within two years. While reserves—which are significant—are one of the most critical tools to prepare for a recession, other steps are warranted given current conditions. Specifically, adopting our revenue estimates, which explicitly incorporate the current heightened risk of a recession, reduces the chances revenues fail to meet expectations. Coupled with multiyear planning, this approach can prevent the state from expanding programs to unsustainable levels.
- Plan for SAL Requirements Now. We recognize that some policymakers have signaled an interest in pursuing changes to the SAL with voters by 2024. In the meantime, we strongly caution the Legislature against passing a budget with a structural deficit stemming from unaddressed SAL requirements. In contrast to the Governor’s approach, we recommend the Legislature address the state’s constitutional SAL requirements in its budget architecture throughout the multiyear period. Another key way to address future SAL requirements—or a budget problem resulting from a recession—would be to increase reserves this year. The state has a $52 billion surplus—now is the time to prepare for these looming budget problems.
To read the whole report, please use the following link: https://lao.ca.gov/Publications/Report/4602?utm_source=laowww&utm_medium=email&utm_campaign=4602