On May 11 California Governor Jerry Brown released the May Revision to his proposed budget for the next fiscal year, which starts July 1. It’s a must-read for anyone who wants to understand California’s budgets.
State budgets are never perfect. That’s because states employ cash-basis budgeting, which excludes accrued but unpaid expenses. That’s how states are able to record surpluses when under generally accepted accounting principles they would record deficits. Unrecorded expenses automatically turn into unfunded liabilities that, with interest, get paid off down the road. But Brown’s document makes clear what cash-basis budgets do not: billions of dollars will be needed down the road to meet unfunded liabilities that Brown tells readers grew “by $15 billion since the January budget alone.” Then Brown adds that state revenues are highly dependent upon capital gains and that a bear market “will drop state revenues by over $20 billion annually for several years.” During his press conference he added that 25 percent of state income tax revenues are provided by just 15,000 tax filers. Those problems will persist until California reforms the “Big Three” costs consuming ever-greater shares of the budget and adopts a tax system less dependent upon capital gains. But until then, Brown’s admonition to legislators is that now is the time to save money.
The document also contains a reminder to legislators that the state’s unemployment rate stubbornly remains above the national rate, as it has since the 1980’s. That problem is also addressable by the legislature, starting with knocking down unnecessary licensing barriers.
