The Governor’s Pattern of Underestimating State Revenues Continues for a Fourth Year

This year, as in previous years, Governor Brown’s budget summary reveals that his initial revenue projections have turned out to be billions of dollars below the actual revenue numbers. As we discussed last July, projecting low revenues has consequences.

Specifically, revenues for 2014-15 have turned out in the final count to be more than $3 billion higher than the Governor had anticipated last January, making the Governor’s original projection more than twice as far, or $6 billion, below the mark than expected a year ago.

The chart below shows how the Governor has underestimated General Fund revenues by billions in each of the past four years. The 2015-16 fiscal year is still in progress (it ends June 30), and exactly how the Governor’s and the nonpartisan Legislative Analyst’s Office’s (LAO) projections will compare against actual revenues in the end remains to be seen. As the LAO notes, “By May, normal stock market volatility and relatively modest changes in the direction of the economy and tax collections could easily increase or decrease 2015-16 revenue estimates by a billion or two.”

The Governor Has Underestimated General Fund Revenues by Billions in Each of the Past Four Years 01.2016

But it’s not as though the higher actual revenues were completely a surprise. Each year the Governor and Legislature must come to an agreement on the level of revenues they expect for the coming fiscal year. In recent years, the LAO has produced revenue projections that have been several billion dollars higher than the Governor’s and, ultimately, closer to actual revenues (see chart above) — while notably still coming in below actual revenues by several billion themselves.

What’s more, the Governor’s pattern of underestimating revenues extends beyond General Fund revenues. In its Overview of the Governor’s Budget, the LAO comments that they believe the Governor’s estimates of local property tax revenue counting toward Proposition 98 are “about $1 billion too low across the two-year period [of 2015-16 and 2016-17].” Because local property tax revenues are used before General Fund revenues to fulfill the Proposition 98 minimum funding guarantee for K-14 education, higher local property tax revenues directly offset the amount of General Fund revenues needed to fill this requirement. So if the LAO is right and the Governor’s estimates of local property tax revenues over 2015-16 and 2016-17 turn out to be too low, “Proposition 98 General Fund costs will be correspondingly lower and available non-Proposition 98 General Fund will be higher.” This would mean more room in the budget for other state priorities outside of Proposition 98.

At the same time, as we discussed in our “first look” at the Governor’s proposed budget, the Administration wants to set aside $2 billion more in the rainy day fund for 2016-17 than required by Proposition 2, a ballot measure approved by voters in 2014. While it’s important to have a strong budget reserve, preparing our state for the potential ups and downs of the economy must also include investing in its people, for example through making larger funding increases for higher education and reinvesting more in child care and preschool and California’s welfare-to-work program, CalWORKS, which are still below pre-recession levels of funding.

In sum, the Governor has shown a pattern of projecting low revenues in the previous four fiscal years, is showing signs of continuing that pattern in the coming fiscal year, and now proposes to put a lot more funding away this year for future use than is constitutionally called for. All this fits in with the Governor’s focus on protecting the state budget from a potential economic downturn. However, California individuals and families also need a boost now to get themselves in a better position for the future, whether the economy continues growing or encounters another setback.

— William Chen