More on California Fiscal Policy: Plotting the State’s Financial Health in Good Times
Each year, the Legislative Analyst publishes a comparison of revenues and expenditures for a medium-term forecast of the General Fund condition. This year, Legislative Analyst Mac Taylor estimated annual operating surpluses -- incoming revenues that exceed outgoing expenditures in each year -- over the medium-term. By the end of the decade, he expects surpluses to rise to nearly $10 billion, assuming steady growth in the economy.
The report also reflects on the imprecision of its estimates. To account for the uncertainty inherent in the economic and revenue assumptions, the Legislative Analyst made a second budget forecast assuming a "moderate recession" beginning in 2015 or later. If the California economy were to sustain a modest downturn, the analyst estimated that the state would run deficits perhaps as early as 2015-16. Figure 2 shows the diverging effect of these two budget scenarios. The blue line represents the analyst's "main" forecast, and the green line shows the recession forecast. It shows that the ending balance could fall by about $6.5 billion in 2015-16 and $10.7 billion in the next year, for a cumulative two-year difference of more than $17.0 billion.
The $17.0 billion swing in revenues over a two-year period represents a roughly 5 percent reduction in available revenues.
The threat of such a sudden and precipitous change to the overall budget underscores the state's sensitive and sometimes fragile budget. For policymakers and budget negotiators, the swing can have wide ranging implications, including:
- Vulnerable Programs: Temporary or sudden budget changes could be visited on those programs where spending can be easily cut or deferred. Accordingly, programs which are considered discretionary, temporary or deferrable can benefit or be at risk in any given year, depending on a rapidly evolving fiscal condition.
- Cash Management: Sudden fluctuations in the state's surplus condition can put strains on the state's ability to manage excess cash or sudden shortages of cash flow.
- Planning and Investment: With the state's long-term surplus/deficit in flux, policymakers may find it hard to make long-term commitments to programs or investment, thereby frustrating attempts to plan and invest in long-term solutions.
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Figure 2: LAO Forecast of Operating Surpluses 2013-14 through 2016-17
Main Forecast vs. "Moderate Recession" starting sometime around 2015 (Dollars in Billions)
Source: LAO