LOS ANGELES— California's state budget watchdog released a forecast that predicts the state will have $11.5 billion in total reserves as of year-end fiscal 2017-18, while acknowledging uncertainties such as potential changes to federal policy.
"These reserve levels reflect the continued progress that California has made in improving its budget situation," state Legislative Analysts' Office wrote in the report. "The state budget remains on steady footing."
The outlook assumes no changes to state policy and doesn't account for changes in federal policy resulting from a new Congress and president. Jason Sisney, the chief deputy legislative analyst, acknowledges such changes could have a significant impact on the state's bottom line.
The LAO publishes the
The report always assumes a steady state and federal policy landscape – and it has for the 25 years the report has been in existence, Sisney said.
"There are also no details on what federal policy changes would be, so it would be premature to put any details on that whether it would be changes to healthcare funding, or anything else," Sisney said. "It will take a while for that to come out of the new Congress and be analyzed at the state level."
The state's Department of Finance also released its monthly
"This news comes on top of the loss of nearly $1 billion in revenue since June," said California Director of Finance Michael Cohen in an emailed response.
Revenues have come in $595 million below projections in monthly reports since the budget was finalized in May, plus the state ended last June $706 million below projections, according to H.D. Palmer, a DOF spokesman.
"So with what we know now, the outlook for the upcoming budget is concerning and will need to account for this declining revenue and the significant uncertainties that the Analyst has identified today – including stock market performance, the potential for recession, and changes in federal policy," Cohen said.
The uncertainties regarding what has happened with the stock market and potential for recession combined with the reduction in revenues since June warrants the concerns the director has expressed, Palmer said.
"The average length of economic expansion in California since World War II has been five years, and the state is coming up on two years past that five-year average," Palmer said. "And on top of that we have the known unknown policy changes coming out of the federal government."
The $11.5 billion in reserves anticipated in next year's fiscal budget by the LAO 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, according to the LAO's fiscal outlook report.
The state is expected to end the current fiscal year with $7.5 billion in reserves, which is $1 billion less than projected in the budget act.
More than half of the downward revision, the LAO attributed to $351 million in additional "settle up" payments to schools and community colleges and $159 million reduction in prior year revenue collections. The LAO also estimated that revenues for fiscal years 2015-16 and 2016-17 would be $1.7 billion lower than projected.
The report also acknowledges that the outlook is subject to "considerable uncertainty" as the state's budget depends on manay volatile and unpredictable economic conditions, including fluctuations in the stock market.
The report included two different estimates of the budget's condition in 2018-19 through 2020-21 in order to take that uncertainty into account, the report said. It evaluated the state under two different economic scenarios, one envisioning economic growth, and another anticipating a mild recession in mid-2018.
Under the growth scenario, the LAO forecast the budget remained in surplus. If a recession occurs the state would have enough reserves to cover almost all of its operating deficits through 2020-21 without cutting spending or raising taxes.
Since 70% of the state's General Fund revenues come from personal income tax and are dependent on the stock market, ordinary movement in the stock market over a period of weeks or months can result in billions of dollars in higher or lower revenues for the state, Sisney said.
The LAO projected that personal income taxes during the second half of the current fiscal year are going to come in $765 million above projections, making up for the current shortfall displayed in the DOF's figures.
