Instead, budget analysts expect that a series of fiscal actions will be needed throughout the spring and summer. This means that, even if the budget has the capacity to pay for some of the affected programs, under current law, none of those expenditures would continue. Proposition 98 Minimum Guarantee Grows Steadily Under LAO Outlook Estimates. School and Community College General Fund Spending Growth Declines Slightly. A number of school districts are still struggling with a variety of costs, including sizable pension obligations to teachers and other employees. Column: Dump Gavin Newsom? Our recession scenario assumes that the unemployment rate in California begins to rise in January 2021, eventually peaking at 8 percent, and begins to decline in 2022. Before the pandemic, California began the year with a $5.6 billion surplus and a projected $21 billion in its “rainy day” fund, ... More about California Budget 2020. First, pursuant to federal law, the state’s share of cost for major Medi‑Cal populations was scheduled to gradually increase before reaching stable levels 2021‑22. Our baseline expenditure scenario assumes the federal government approves the MCO tax, as described earlier in “Chapter 1”. These programs—Medi‑Cal (the state’s Medicaid program), Cal Grants (financial aid to certain eligible students), and California Work Opportunity and Responsibility to Kids (CalWORKs, cash assistance for low‑income families)—together represent just over $24 billion in General Fund spending in 2019‑20. The figure shows the index through September 2019. Two Expenditure Scenarios Displayed in This Section. Tom Girardi and his firm were sued more than a hundred times between the 1980s and last year, with at least half of those cases asserting misconduct in his law practice. In our baseline expenditure scenario, the state has $3 billion for new ongoing commitments. In addition, as much as $3 billion is expected in a less restrictive reserve account that can be used much more quickly and almost $1 billion more in a special fund to support social “safety net” programs. Economic changes and their ensuing revenue implications are not the only source of uncertainty for the Legislature as it considers the longer‑term condition of the state budget. Now, a little more than 10 weeks later, there are threats to all three of the state’s biggest sources of tax revenue: personal income taxes, corporate taxes and sales taxes. Importantly, this scenario assumes the federal government approves the MCO tax and the state faces no major disasters over the next few years. When the index is high, revenues tend to be high compared to historical norms. It does not mean, however, that the state is prepared to weather any possible recession. Economic slowdowns mean less money for health and human services programs — the same services that see higher demand when millions find themselves with less work or no work at all. That fund should total $16 billion by this summer. The first aim of the Fiscal Outlook is to answer whether the state will have sufficient resources to pay for its existing commitments in the upcoming budget year (in this case, 2020‑21). The Department of Developmental Services (DDS) provides individuals with qualifying developmental disabilities with services to meet their needs. (These recessions varied substantially in length and severity.) California will have a budget shortfall of $54.3 billion because of the economic devastation wrought by the coronavirus, Gov. The state’s economy is complex and major events that shift the economy—such as drops in stock market and real estate prices or changes in relations with trade partners—can be difficult to foresee. South L.A. residents can take free Uber rides to new USC vaccination site. That is because the calculation considers only projected revenues from each individual fiscal year and not resources carried over from prior years (in the entering fund balance). Under Near‑Term Outlook, Proposition 98 Guarantee Grows $3.4 Billion. In September, the Legislature passed a measure to place a $15 billion education facilities bond on the 2020 primary ballot. And the district’s leaders, along with school officials in San Diego, have said their long-term budgets are no longer in balance. Additional $500 Million Available From One‑Time Funds. We then discuss the budget’s overall condition in 2020‑21 under these estimates. There are other factors California will need to overcome to pay back their debt and realize we do not have a budget surplus. Moreover, as we will discuss in “Chapter 2,” the budget’s capacity for more ongoing commitments depends—in large part—on a number of factors that are outside of the Legislature’s control. The Federal Reserve recently took actions to stimulate the economy by reducing borrowing costs for consumers and businesses. Sign up for the latest news, best stories and what they mean for you, plus answers to your questions. As of this writing, we are now nearly halfway through the 2019‑20 budget. In “Chapter 2,” we assessed how much of that $7 billion surplus would be available for ongoing purposes under two expenditure scenarios. Nonetheless, there likely is greater risk in the economic outlook for 2020‑21 than in previous budget cycles. Newsom signed a $202.1 billion state budget Monday, June 29, in Sacramento, Calif. Californians may have missed one of … Proposition 2 (2014) requires the state to make annual deposits into reserves, additional payments toward certain state debts, and—under certain conditions—spend more funds on infrastructure. You may occasionally receive promotional content from the Los Angeles Times. Organization of this Section. But those costs, while likely to be underwritten by the federal government, will also require more state tax revenue spending. That changed in 2014, when voters approved a constitutional amendment that substantially increased the size of the reserve fund and created new rules on how the excess cash could be used. This is helped by the state's record low unemployment rate of 4.0% for 2019. Near‑Term Outlook. Under our assumption that the economy starts to recover in 2022, revenues grow slowly in 2022‑23 and more robustly in 2023‑24. Moreover, we find that the budget has an estimated, additional $7 billion surplus available in 2020‑21. Over the course of the recession, the lowest rate of growth in gross domestic product (GDP) is ‑0.6 percent and the S&P 500 loses about 30 percent of its value, dropping to a low of 2200. L.A. and Orange counties’ decline in the coronavirus spread paves the way for Disneyland and other Southern California theme parks to reopen soon. Despite a surplus in the budget, California still has debt. Of this amount, roughly $250 million is required to be spent on schools and community colleges (under the rules of Proposition 98 [1988]). In “Chapter 1” we estimated that the budget has $7 billion to allocate in 2020‑21, indicative of a good budget condition. On the one hand, a decline in the inmate population as a result of sentencing changes is lowering state costs by reducing the number of inmates that must be housed in contract prisons. Note: Amounts in this table reflect current law and policy. These formulas establish a minimum funding requirement for K‑14 education, commonly known as the minimum guarantee. Compared to November 2017, our projection of out‑year annual General Fund cost growth for schools and community colleges has slowed from 3.5 percent to 2.8 percent. But aside from a meager “rainy day” fund established in 2004, there were few mandates to prioritize savings. Based on this analysis, we recommend the Legislature plan to dedicate a sizable portion of the $7 billion surplus toward building more reserves and paying down debts, no more than $1 billion to ongoing commitments, and focus the remainder on one‑time flexible commitments that can be changed midyear if needed. As such, we think there are reasons for the Legislature to be cautious in allocating these funds. We are projecting revenues to continue to grow from 2019‑20 to 2020‑21, but we expect growth in revenues to slow compared to recent years. Unique Conditions of Future Recession Will Result in Different Revenue Implications. Few budget needs will be more closely watched than healthcare. Over the longer term, does the budget have capacity to take on new commitments, such as spending increases or tax reductions (and if so, how much)? California State Teachers’ Retirement System Growth Has Declined Substantially. The budget surplus is a rare good news development for Gov. Under the statute, if the budget does not have sufficient resources to pay for all expenditures without suspensions, the suspensions become operative for all affected programs. Uncertainty is inherent to every economic forecast. BSA Balance Reaches $18.3 Billion in 2020‑21. CDCR Cost Growth Has Declined Slightly. On Tuesday, advisors to Gov. School and Community College Spending in 2020‑21, Trends in Projected Cost Growth of Major General Fund Programs. Because the vast majority of this increase in state costs has already taken place, remaining associated cost growth in Medi‑Cal is lower going forward. . “The good news is, thanks to 10 years of responsible budgeting, we have never been more prepared than we are today to face tough budget times,” Senate President Pro Tem Toni Atkins (D-San Diego) said. In total, K‑14 education accounts for $7.1 billion of the increase. If DOF determines revenues do exceed expenditures, then the programs’ ongoing expenses will continue. We expect slower growth in state costs associated with teachers’ pensions for two reasons. It has taken most of the last decade for debts incurred to schools during the last recession to be repaid. The index remained relatively high in September, above 95 percent of months in our historical record. Lawmakers could be asked to extend their work beyond the traditional end of legislative action in August, taking budget actions related to the coronavirus response into the fall — even as many of them are up for reelection in November. No part of the state budget is bigger or more subject to strict rules about spending than K-12 schools. We think there are reasons for the Legislature to be cautious in allocating the estimated $7 billion surplus. “That’s a safety next that didn’t exist before,” Wright said. In‑Home Supportive Services (IHSS) Growth Has Increased Slightly. Suggest Caution in Allocating Available Surplus. Other sources of uncertainty include decisions by the voters and federal government, which could leave the budget in better or worse condition by billions of dollars over the multiyear period. MCO Tax Not Approved by Federal Government. Using recent information from state departments, our Fiscal Outlook examines trends in caseload for various programs relative to budget assumptions. First, we describe the economic assumptions that underpin our revenue projections through 2020‑21. Stock price fluctuations have an outsized impact on state revenues because a large portion of PIT is collected from higher‑income earners who tend to earn significant income from these sources. Additionally, the state’s supplemental payments—payments above what is required by CalPERS—approved in recent budgets have lowered the state’s contribution rates from what they otherwise were projected to be. The 2019‑20 budget package made a number of ongoing expenditures subject to suspension on December 31, 2021. Biden reaches pivotal moment in pandemic and presidency. As the figure shows, in nearly all cases, our projections of spending growth in these areas has slowed. Here's What California's Revenue And Budget Look Like During COVID-19 During the coronavirus pandemic, states have struggled with staggering revenue losses and budget … . When we show operating surpluses under our economic growth scenario it suggests the budget has capacity to take on new ongoing commitments, such as multiyear program expansions or tax reductions. This is an important marker of budgetary strength and shows the significant progress California has made in preparing for a recession. $2.1 Billion Available After Covering Cost‑of‑Living Adjustment (COLA) and Reserve Deposit. In the baseline expenditure scenario, we make assumptions typical to our Fiscal Outlook historically. Gov. The formulas determining school and community college funding tend to result in lower spending when revenues and personal income are declining and higher spending when the opposite is true. This does not necessarily mean a broader economic slowdown is imminent in the near term. When the minimum guarantee is growing, the state typically funds a statutory COLA for certain school and community college programs. This shows the significant progress California has made in preparing for a downturn. ... 2020 … A number of the state’s most experienced budget watchers now expect that California might need to use the entire cash surplus, and possibly much more money, to prop up vital government services that could be severely underfunded by a quickly collapsing economy. More Reserves Available With Suspensions. The recession scenario displayed in this section roughly averages the severity of the historical changes in the economic conditions that occurred in the dozen recessions following WWII. The recall mechanism was never meant to be used as an everyday tool. Circles below the line have lower projected growth now relative to 2017. We find the budget continues to be in good condition with an estimated $7 billion surplus in 2020-21. A collapse in state tax revenue projections would trickle down to local governments too. Economic Growth Scenario Shows State Has Capacity for New Commitments . In this case, slower projected growth in General Fund expenditures means the budget’s condition is significantly improved over the multiyear period despite slowing revenue growth. COVID case rates are low enough for Los Angeles and Orange counties to escape the purple tier, but the timing of reopenings hinges on vaccine rollout. Year over year, we expect growth in the state’s three major General Fund revenue sources—PIT, corporation tax, and sales and use tax—to be $5 billion, representing a growth rate of 3.5 percent. Separate from the increase in the 2020‑21 guarantee, we estimate the state has about $500 million available in one‑time funds. Scenario Assumes California Enters Recession in January 2021. Finally, this scenario does not include any potential—but unpredictable—events with significant costs to the state, such as an extraordinarily bad wildfire season (similar to ones the state has experienced in recent years). Gavin Newsom with a chart showing the growth of the state’s rainy-day fund as he discusses his proposed 2020-21 budget in Sacramento on Jan. 10. Who gets a $1,400 check, and other ways the COVID-19 relief bill may affect your pocketbook, the $1 billion in spending approved by the Legislature last week, Girardi used cash and clout to forge powerful political connections, Oprah clarifies Harry and Meghan’s comments about racism in royal family, Editorial: Instead of Meghan invigorating the royal family, it drove her to thoughts of suicide. We expect a federal decision on this matter is likely in the coming months. The Budget continues progress in paying down the state’s retirement liabilities and reflects $3 billion in additional payments required by Proposition 2 in 2021-22 and nearly $6.5 billion over the next three years. Millions of Golden State workers are staring down a pandemic with no clear access to an economic safety net if they take time off, after emergency sick-leave laws requiring two weeks’ paid leave expired in January. For much of the 1990s and 2000s, analysts often compared California’s budget to a roller coaster ride of sky-high revenue collections followed by harrowing shortfalls and then back again. As such, lack of approval of the tax presents a significant risk to the state’s budget condition. For example, this alternative scenario excludes any potential changes in state policy related to the state’s energy grid or PG&E bankruptcy proceedings. The Los Angeles Unified School District said it’s spending $100 million in cash reserves to provide the technology needed for remote learning by students from low-income families. Consequently, much of the state’s outstanding debt now carries a lower interest rate resulting in lower annual costs. In fact, many of the nation’s post‑war recessions were milder than more recent recessions have been. We Currently Estimate a Nearly $7 Billion Surplus Will Be Available in 2020‑21. close to wider reopening of economy as COVID-19 vaccinations climb. Rich Pedroncelli / Associated Press. All three revenue sources in the figure are below the line—meaning that we are now projecting those revenues to grow more slowly than we did two years ago. Yet, Girardi’s record with the State Bar of California remained pristine. This scenario assumes a relatively flat stock market. Net Improvement of $2.6 Billion in Budget Bottom Line Condition. State Faces at Least One Major Natural Disaster. Jerry Brown exploited loopholes to structure the state budget so that the money would not have to be returned. A cautious approach to allocating this surplus would be to dedicate most—or all—of it to reserve deposits and one‑time purposes. Surplus. Medi‑Cal Growth Declines Somewhat. California Gov. Because minimum wage increases are scheduled to slow significantly after 2022, annual cost growth in DDS also slows. As a result, relative to the growth scenario, the state’s revenue losses are offset by nearly $7 billion in lower Proposition 2 requirements over the period. Education Bond Approved by Voters. With new rules for vaccinated Americans and a relief plan pending congressional approval, President Biden has reached a turning point in the pandemic. Under our outlook, the state would allocate about 40 percent of General Fund revenue toward meeting the guarantee each year of the period. Similarly, in general, our recent. Figure 7 displays the budget’s condition under our recession scenario. The city is partnering with Uber to offer 15,000 free rides and 20,000 others at half-price to bring South L.A. residents to the new site. For the remaining surplus, we recommend the Legislature focus on one‑time, flexible commitments that can be changed mid‑year if economic conditions change. (In addition, our estimates of required BSA deposits are lower than those assumed at the budget act due to lower estimates of capital gains revenues.) In our recession scenario, in which revenues decline, the minimum funding level for K‑14 education also declines. Figure 3 shows the General Fund near‑term condition under our assumptions and estimates. We find the state has: Consequently, assuming the economy continues to grow, the state has capacity to take on new, ongoing commitments. L.A., Orange counties dramatically improve COVID rates, await word on major reopenings. Our assumptions of future growth have not changed substantially in the past few years. LAO Estimate of Near‑Term Budget Condition. The key reason the state has relatively substantial operating surpluses under this scenario—despite the fact that projected revenue growth has slowed compared to recent outlooks—is that we are also projecting slower expenditure growth in a variety of programs (as discussed earlier). An operating deficit occurs when the reverse is true and annual expenditures exceed revenues, causing a decline in the SFEU. Assume That Reauthorization of the Managed Care Organization (MCO) Tax Provides Nearly $900 Million in General Fund Benefit. But Recommend Caution in Allocating Surplus. Our analysis of trends in revenues and expenditures suggests that the Legislature will have a nearly $7 billion General Fund surplus available to allocate in the 2020‑21 budget process. To answer this question, we compare our projections of revenues to spending under current law and policy. However, we recommend the Legislature be cautious in allocating this surplus. . The rules for using the state’s rainy-day fund state that only half of the money, perhaps around $8 billion, could be used in any single fiscal year. Even the global recession that began in 2008, generally seen as the most quickly unfolding crisis, gave lawmakers time to take corrective measures.

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