CAG Update: Governor's Budget Projections to Reduce Prop 98 by $18B

This morning the Governor's Department of Finance (DOF) provided a Fiscal Update that anticipates a drop in state revenue of $54 billion and a corresponding reduction to the Proposition 98 guarantee for schools of $18 billion. 
The update also acts as a preview of the Governor's May Revision of his budget proposal, which is due to the Legislature by next week. The DOF document states that, "COVID-19 has caused a national recession, a precipitous decline in income, rapidly rising health and human services caseloads and substantial COVID-19 driven costs." 
Specifically, DOF is projecting that General Fund (GF) revenues will decline by a total of $41.2 billion below the projections provided in the January Governor's Budget, as follows:
·    2018-19: +$0.7 billion
·    2019-20: -$9.7 billion
·    2020-21: -$32.2 billion
 
This amounts to a total $33.4 decline in GF revenues below what was in the final budget for the current 2019-20 fiscal year. The bulk of this decline is due to a projected 25.5% decrease in personal income tax (PIT) revenues. Given that PIT generates almost 70% of GF revenues, it is no surprise that this decrease brings down the projected total for GF tax revenue.
 
In addition to the projected revenue declines, DOF is also citing a $7.1 billion increase in costs associated with caseload increases supporting health and human services programs (these increases are driven by the COVID-19 induced recession), and other expenditures (primarily in response to the COVID-19 crisis) of approximately $6 billion. In total this leads to a projected deficit over the three budget years (2018-19, 2019-20 and 2020-21) of $54.3 billion.
 
There are some silver linings in that the state has over $16 billion in its Proposition 2 Rainy Day fund (half of which can be used to mediate a budget crisis such as this in any one year), as well as smaller amounts in other reserve funds, and in that the state has and will be receiving some funding relief from the federal government. However, the magnitude of the projected budget shortfall facing the state swamps those reserves and relief funds.
 
Proposition 98 Impact 
 
Particularly concerning for the education community is that the projected decrease in GF revenues would likely generate roughly a $18.3 billion decline in the Proposition 98 Guarantee (Prop 98) from what was proposed in the January budget (approximately $15.9 less than Prop 98 in the current year). For context, Prop 98 declined by $7.4 billion from 2007-08 to 2008-09 as we headed into the Great Recession. This is underlined by DOF when they state that, "The widespread economic interruption caused by the global pandemic is unprecedented in modern history."
 
It has been clear, and the DOF update makes it even clearer, that we are in for a couple of rough budget years. However, we have been told by the Governor's staff that the Governor acknowledges that K-14 schools cannot withstand cuts of that depth, and that he has a desire to make schools whole, at least for the current year. It is also clear, however, that staff at DOF, at the non-partisan Legislative Analyst's Office, and in the Legislature have been reviewing the use of every budget tool that has been used in the past, including deferrals, base funding reductions, inter-fund borrowing, reduced COLA used during the Great Recession.
 
We will continue to keep you advised as the May Revision is released next week, and as budget discussion progress through the Legislature. We will have some idea about next year when the Legislature passes its budget by June 15, but we also know that the June 15 budget will not be the last word. As happened in 2008-09, we expect to see later budget revisions as more information becomes available with respect to both revenues and costs. Stay tuned for more information over the coming months.
 
Please feel free to contact staff at Capitol Advisors if you have any questions on this information or any other issues that you are dealing with.