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State budget problem no one told you about

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Originally appeared here.

California’s nonpartisan Legislative Analyst Gabe Petek had some bad news for the Legislature last week. His office conducted an analysis of 10,000 possible scenarios of tax revenue collections to see how the state’s general fund would be affected.

“In 95 percent of our simulations, the state encountered a budget problem by 2025-26,” Petek wrote.

The “budget problem” is that the state has taken in so much revenue from its high tax rates that it has triggered the so-called Gann limit, a state appropriations limit that was approved by voters in 1979. An “appropriation” is a legislative authorization for spending, and the Gann limit, named after its proponent, Proposition 13 backer Paul Gann, was intended to prevent local and state government from intentionally raking in surplus tax revenue and then spending it all.

The Gann limit, also known as 1979’s Proposition 4, has specific and complicated rules about how revenue is counted and which types of appropriations are limited, but what it means is that surplus revenue can’t simply be spent on anything lawmakers choose.

Voters have had their say more than once about the state should be allocating tax dollars. Under 1988’s Proposition 98, a percentage of revenues must be spent on education, and under 2014’s Proposition 2, the Legislature must put money toward budget reserves. The Legislative Analyst’s Office determined that once the state appropriations limit (SAL) is reached, the “budget problem” kicks in with a vengeance. “We estimate that for every dollar of tax revenue above the SAL, the state faces approximately $1.60 in constitutional funding obligations,” Petek wrote.

So if the economy is strong and revenues continue to rise, the budget is in trouble by 2025-26, and if the economy goes into a recession and revenues fall, the budget is in trouble by 2025-26.

While this would seem to indicate that nothing lawmakers do will change the outcome, that’s not the case. The recommendation from the Legislative Analyst’s Office is for the Legislature to reject “the lion’s share” of $10 billion of proposals in the governor’s budget.

You might as well try to get a raw steak out of a lion’s jaws. Even the LAO admits that rejecting new spending programs is “the most jarring of the options” for the Legislature.

Still, the governor’s budget plan “is not a fiscally sustainable starting point,” Petek writes. Rejecting $10 billion of the governor’s “non-SAL-excludable spending proposals” would help by “constraining growth of the state’s spending base,” another way of saying new programs are an ongoing commitment, not a one-time expense. Rejecting the governor’s spending proposals would also help by “saving the unspent funds” to put the state on “more solid fiscal footing for whatever economic conditions the future holds.”

In a worse-case scenario, the LAO’s analysis found, the state’s budget reserves, estimated at $25 billion, “would be depleted within one year.”

It would be a good idea, Petek, wrote, for lawmakers to apply “close scrutiny to the governor’s spending proposals,” and if it’s not possible to reject them all, to at least adopt a “high threshold for new programs.” The LAO recommends approving only proposals that “address a well-defined problem with a policy strategy that has been evaluated and found to be cost-effective.”

As long as we’re indulging in daydreams, the state should cut its  highest-in-the-nation tax rates and stay within the spending limits in the state constitution.





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