The state budget is in good enough shape to weather a mild recession without requiring spending reductions or tax increases, the legislative analyst reported November 16. The analyst assessed the condition of the California economy and budget for the period of fiscal year 2016-17 through fiscal year 2020-21, and found:
State Shouldn’t Need Tax Increases to Keep Budget in Good Shape, Analyst Finds
- Outlook Subject to Considerable Uncertainty. The condition of the state’s budget depends on many volatile and unpredictable economic conditions, including fluctuations in the stock market. Even in the short term, these conditions cannot be predicted with precision.
- Positive 2017-18 Budget Outlook. For the near term, under the analyst’s current economic projections and assuming that the state makes no additional budget commitments, the state would end the 2017-18 fiscal year with an estimated $11.5 billion in total reserves. This includes $2.8 billion in discretionary reserves, which the Legislature can appropriate for any purpose, and $8.7 billion in required reserves, which will be available for a future budget emergency. “These reserve levels reflect the continued progress California has made in improving its budget situation,” the analyst said.
- State Is Increasingly Prepared to Weather a Mild Recession. For the longer term, the analyst estimates the condition of the state budget under two different economic scenarios: one that assumes the economy will continue to grow, and one that assumes that the state will experience a mild economic downturn beginning in the middle of 2018. Under the growth scenario, the analyst estimates that the budget remains in surplus over the outlook period. Under the recession scenario, the analyst found that the state would have enough reserves to cover almost all of its operating deficits through 2020-21. “This means, under our assumptions, the state could weather a mild recession without cutting spending or raising taxes through 2020-21,” the analyst stated.
- New Commitments or Policy Changes Would Affect Outlook. “Importantly, these estimates assume the state does not make any changes in any year during the outlook period to its current policies and programs,” the analyst stated. The outlook also assumes no new changes in federal policy, “even though the recent election results suggest some such changes are now likely.” State or federal policy changes could have a significant impact on the state budget, the analyst noted.
- Pension Costs Rising. The analyst warned that both the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) costs will continue to rise in the near term. The analyst estimates that annual general fund payments to CalPERS will climb to $1 billion by 2020, and state contributions to CalSTRS will climb to $3 billion by 2020.
November 22, 2016
« Return to CalTax Homepage
© 2016 California Taxpayers
Association. All Rights Reserved.