The Legislative Analyst’s Office tried to do its best with the impossible—layout a budget forecast for the next four years in uncertain times. The budget estimates offered yesterday assumed state and federal laws and policies remain in place . But policy changes from a new administration in Washington will come and probably produce counter policy moves in Sacramento, all affecting the budget.
One huge potential budget change could deal with health care if federal money supporting the Affordable Care Act is reduced in a major way. If California legislators decide to maintain those health care services for the people now using them how will they be paid for?
What if the Trump administration cuts off money to sanctuary cities? California city officials have vowed to oppose that move. How will the cities make up for the money lost? Turn to Sacramento lawmakers?
Given the unusual national election, its surprising result, and the rhetoric since election day, there will be changes that affect budget projections. But since no one knows what the changes will be, the LAO completed the report assuming the status quo.
However, the LAO report did consider actions by voters in the state election.
California voters extended the highest income tax rates in the country until 2030. According to the LAO’s report 70-percent of the state’s general fund revenue comes from the income tax. Could it possibly go higher—and if so, what if that recession hits? The LAO report says we can deal with a mild recession considering $8.7 billion in the rainy day fund and an additional $2.8 billion in discretionary reserves. But a larger recession or extensive budget demands because of policy choices would strain or cause damage to the budget.
On the optimistic side, maybe there won’t be a recession. As the LAO report notes, “economic expansions do not die of old age. (Australia, for example, just marked 25 years of its current expansion—now the longest in the developed world).”
The LAO’s report contained upbeat news on the California economy. Incomes are up, job growth has outpaced the rest of the nation and even the poverty rate is down. Well, the official poverty rate is down but still above the national average. However, when you consider the supplemental poverty measure that includes California’s high housing costs and other forms of public assistance, California’s poverty rate soars to 20.6%, well above the 14.4% national average.
In preparing the report, the LAO used what they know and what economists perceive will happen in this economy. Unfortunately, the effort could be a wasted exercise if policy disruptions change the course of the state’s fiscal plans. And, it appears big changes will come.