California Politics: The decade that rescued the state budget

Ten years ago this week, the dire predictions made by state budget analysts prompted a frank, terse response by the administration of then-Gov. Jerry Brown.

“California’s budget gap is the result of a decade of poor fiscal choices and a global recession,” Gil Duran, Brown’s press secretary, said in a statement. “This year, we cut the problem in half. Next year, we’ll continue to make the tough choices necessary until the problem is solved.”

Ten years later, the same annual fiscal review could not be more different.

The report released Wednesday by the nonpartisan Legislative Analyst’s Office projects a sky-high $31-billion budget surplus and a state government so flush with cash that tax cuts or broad-based rebates — or maybe both — are a distinct possibility.

It’s easy to forget how we got here, how California climbed out of a deep budget abyss that had forced cuts in vital services and tarnished its reputation. Stepping back to take the wider view, it’s clear that we’ve just lived through the decade that rescued California’s state budget.

From the abyss to the apex

The main character in this government rags-to-riches story is the cash.

The analysis that prompted Brown’s insistence on “strong medicine” in 2011 warned that lawmakers would have to solve a $13-billion deficit by the following summer with multi-billion-dollar shortfalls in the budget years after that. It noted there were “few easy options left for balancing California’s budget.”

But one year later, a transformation was underway. LAO researchers noted in the November 2012 report that the short-term deficit was now likely less than $1 billion, along with an observation that proved prescient:

“If, however, a steady economic recovery continues and the Legislature and the Governor keep a tight rein on state spending in the next couple of years, there is a strong likelihood that the state will have budgetary surpluses in subsequent years.”

In 2013, the LAO report projected a modest reserve by the end of the fiscal year. In 2014, the annual snapshot concluded a $1.5-billion reserve was on the horizon. And from there, things became so good that they seemed surreal to the legislators, lobbyists and journalists who had lived through the depths of the crisis. The analysts began offering multiple scenarios, perhaps not believing what they were seeing.

“It is difficult to overstate how good the budget’s condition is today,” they wrote in their November 2018 report.

Higher taxes, stronger reserves

Data compiled by the California Department of Finance offers a comprehensive look at the final results. In the 2011-12 budget year, the state collected $87 billion in general fund revenues. Two years later, the total had grown by more than $16.3 billion. Two years after that, it had grown by another $12.3 billion — that’s more than $28.5 billion in tax revenue growth from July 1, 2011 to June 30, 2016.

From 2011 through this summer (and the more recent numbers are likely to be adjusted as receipts are sorted), the state’s general fund revenues grew by more than 50%. If not for the COVID-19 pandemic, the growth probably would have been even higher.

Legislative Analyst Gabriel Petek, who leads the team that distributes the annual fiscal outlook, points to the experience of the Great Recession that began in 2008 as sparking “a decade-long increased emphasis on structural budget alignment.”

Tax increases were part of that process. Brown convinced voters in 2012 to approve Proposition 30, raising income taxes on the state’s wealthiest taxpayers for seven years and sales taxes on everyone for four years. A coalition of his political allies led by teachers unions went back to voters in 2016 with Proposition 55, extending the higher tax bracket rates through 2030.

In between those two campaigns was an additional building block in 2014: Proposition 2, crafted by Brown’s budget team and Democratic lawmakers and strengthening the state “rainy day” fund championed in 2004 by then-Gov. Arnold Schwarzenegger. The new system was more robust and less susceptible to lawmakers who might have wanted to skip a deposit in some years.

“The required deposits take some revenues off the table,” Petek said. “Since the passage of Prop. 2 in 2014, reserves have increased from essentially zero to over 10% of the budget — that’s a huge improvement.”

‘One time’ revenue, less debt, more luck

The state’s tax revenue bonanza didn’t result in as much new spending as some lawmakers might have wanted, in part because Brown insisted on a conservative approach to fiscal forecasting that allowed him to categorize billions of dollars in taxes as a one-time windfall.

It’s a mindset that Gov. Gavin Newsom has tried to follow too, though impartial budget watchers should be forgiven for chuckling at how many successive “this year only” pronouncements have been made in the past half-decade. Regardless, the approach has forced the Legislature to treat sizable portions of the revenue growth as off-limits to long-term growth in a variety of programs — even, at times, likely limiting how many of those dollars could be counted as part of the year-to-year growth in public school funding mandated by the California Constitution.

Lawmakers also dipped into the growing tax revenues to pay off huge debts amassed by the use of budget-balancing gimmicks during the deficit years of the past. And they made larger-than-required payments to public employee pension plans, choosing to expand some government programs through delayed implementation efforts that allowed costs to come online concurrent with sustained growth in revenues.

And let’s not forget about a little luck that helped rescue California’s hobbled budget. As the home to some of the world’s most successful technology companies and the men and women who work in those firms, profits earned by employees from initial public offerings and stock sales meant higher capital gains and more taxes paid. Strong trends in the national economy played out here too.

“From June 2009 until March 2020, we experienced the longest period of uninterrupted economic growth and a sustained bull market for equities in the post World War II era,” Petek said.

This year’s budget task: how to handle 1979

So what does the next decade look like for California’s state budget? One place for elected officials to start is in deciding how all of this historic growth in tax revenue works with something crafted back when the Sony Walkman was the cool new thing on the scene.

California voters approved a constitutional amendment in 1979 that uses a somewhat complex calculation to limit growth in state and local government spending. The ballot measure was championed by Paul Gann, the often overlooked partner of the iconic Howard Jarvis who shook the political world the year before with the tax-cutting Proposition 13.

The so-called “Gann limit” has left ample room for state spending growth through most of its four decades in existence. But the Legislative Analyst’s Office sounded the alarm in this week’s budget report about how the law might affect spending choices next year.

The LAO report estimated the spending limit could force lawmakers to shed some $26 billion from their spending priorities by using the money on some specific, long-term items or divvying it up between schools and taxpayer refunds. Changes to the system will also affect local governments — both in their own spending limits and how they receive money from the state — and any significant changes would, most likely, have to be approved by the voters next November.

California politics lightning round

— Bay Area Rep. Jackie Speier says she will not run for reelection next year, the latest House Democrat to retire in the face of what could be a difficult election cycle for the party.

— Amazon has agreed to pay $500,000 to better enforce state workplace protection laws after California Atty. Gen. Rob Bonta said the company had concealed COVID-19 case numbers.

— Eserick “TJ” Watkins, a member of the Medical Board of California, has filed a whistleblower complaint urging an investigation of the inner workings of the board and its decisions, which are largely cloaked under the law.

— Will Kevin Faulconer make another go of it in a race for governor? Mark Z. Barabak went looking for some answers.