California expected to have $31 billion budget surplus, analysts find

(The Center Square) – California is projected to have a $31 billion operating surplus in the 2022-2023 financial year, according to a report released Wednesday by the Legislative Analyst’s Office (LAO).

Despite the economic impact of the ongoing COVID-19 pandemic on Californians, the LAO reported Wednesday that the state’s revenues are “growing at historic rates.” The revenue growth is attributable to multiple factors, the LAO said, such as income and sales tax.

According to the report, tax collections grew at an annual rate of 30% in the 12-month period ending in September, representing the fastest rate in at least 40 years.

While the surplus is welcome news for state lawmakers, it will not be under the full discretion of the Legislature, the report says.

In 1979, voters adopted Proposition 4, which places an appropriations limit on the state and most types of local governments. Wednesday’s report estimates that the state will likely exceed the specified limits in the 2022-2023 budget year.

With this in mind, the report estimates that in order to meet the State Appropriations Limit (SAL), the state would need to divert roughly $14 billion to meet constitutional requirements across fiscal years 2020-2021 and 2021-2022.

To meet this requirement, the state legislature could move to do one of three things – lower tax revenues, issue tax rebates, or spend the funds on things excluded from SAL, which includes infrastructure.

Last year, the state had a budget surplus of nearly $80 billion during a time when the state and nation remained in the throes of the pandemic. Taking a portion of this surplus, Gov. Gavin Newsom and legislators decided to issue about $12 billion in tax rebates, which was dubbed the “Golden State Stimulus.”

When speaking to reporters in Los Angeles on Wednesday, Gov. Newsom said a portion of the $31 billion surplus would be used to fund further investments in infrastructure, while also indicating he wants to continue to build up reserves, as the state has done with surplus dollars in the past.

“In terms of infrastructure, that’s not just the responsibility of the federal government,” Newsom said, noting the $1.2 trillion infrastructure package signed into law by President Joe Biden this week. “Infrastructure investments are the responsibility of the state as well as local leaders. We are going to substantially increase our one-time investments in infrastructure, and that’s one preview you can count on.”

The governor also noted that he is proud of the tax rebates the state allocated in the last budget year, and said the way the state “framed” the approach to the surplus last year is similar to the way the state will approach it next year. Newsom indicated that additional details on the state’s approach to the surplus will be forthcoming in January.

Wednesday’s report also concluded that there is room for new, ongoing budget commitments in the future. The LAO said when examining the budget’s condition over the long term through 2025-2026, officials found operating surpluses ranging from $3-$8 billion over the multi-year period.

Several lawmakers issued responses to the LAO’s fiscal outlook on Wednesday, offering mixed opinions about the projected surplus.

State Senate President pro Tempore Toni Atkins, D-San Diego, said the state’s fiscal health is the “direct result of responsible budgeting by Democratic legislators and Governors” that helped the state weather the pandemic. She noted, however, that work remains to help struggling families.

“As economically wealthy as our state is, we see every day that too many have been left behind and too many families struggle to get by,” Atkins said in a statement. “The Fiscal Outlook provides valuable guidance to the Senate’s ongoing budget work to craft transformative priorities that put California’s wealth to work building a more equitable economy and a stronger middle class.”

Some Republican lawmakers said Wednesday they were in favor of using the surplus to bring down the cost of living in the state.

“There’s something wrong when the state is flush with extra cash – $750 for every man, woman and child – while ordinary people have to choose between putting food on the table and filling their gas tank,” Assembly Republican Leader Marie Waldron, R-Escondido, said in a statement. “If California won’t give this money back, let’s at least spend it in a way that brings down the cost of living and improves the quality of people’s lives.”

Within the report, LAO officials did note that actual revenues could easily “end up tens of billions of dollars above or below our main forecast” of $31 billion. If revenues in 2021-2022 and 2022-2023 are at the lower end, the surplus could be as low as $10 billion, and on the high end, up to $60 billion, the LAO said.

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