Projecting Low Revenues Has Consequences

The ink on California’s 2015-16 state budget has barely dried and already the Legislative Analyst’s Office (LAO) has reported that Governor Brown’s income and sales tax revenue estimates for 2014-15 (the fiscal year just ended, estimates for which are included in the budget package) were low by more than $650 million.* This is after the Administration revised revenue projections upward by several billion in January and then again in May.

This pattern of low revenue projections followed by higher actual revenues matters. It’s not merely a matter of getting the higher-than-expected money later to spend. When expectations for revenues are set at a certain level first, and then come in above projections later, these revenues naturally are viewed and treated differently than if expectations had been accurately set at the outset.

If a healthier revenue stream is projected, state policymakers can strike a more appropriate balance among building up the state’s reserves, one-time uses, and investing in Californians’ future, such as by boosting support for higher education, health and human services, and other key public systems and supports. The Governor’s history of conservatively projecting revenues – and the Legislature’s decision to accept those projections – means that the state’s leaders have underinvested in vital public supports over the last several years.

As we’ve previously discussed on this blog, taking precautions against future risks is good policy, but so is investing in Californians’ future. Thanks to Proposition 2, approved by California voters last November, the state already automatically contributes to the Budget Stabilization Account (BSA) – the state’s rainy day fund – and makes payments on budgetary debt, and scales these contributions and payments based on expected revenues. But one shouldn’t give undue weight to the possibility of future downturns at the expense of making investments today that have long-term benefits. We don’t forego sending our kids to college or taking out a mortgage on a home for fear that at some point an economic downturn might make the payments difficult. Californians make these investments all the time, despite risks associated with shorter-term economic fluctuations, because we know that they pay off in the longer term.  And as the LAO noted, neither they nor the Administration anticipates even a light recession during 2015-16.

This year, lawmakers – after first using the LAO’s higher revenue projections in their original 2015-16 budget – reversed course and accepted the Governor’s lower revenue projections for the actual budget package. In turn, this had various implications for the final spending plan. The lower revenues meant less automatic funding for schools and community colleges under the state’s minimum funding guarantee and fewer dollars set aside in the BSA. The lower revenues also meant less funding was available for reinvesting in child care and preschool programs, and recession-era cuts were maintained to California’s welfare-to-work program and cash assistance for seniors and people with disabilities.

When the discussion of how much money there will be to spend inevitably comes around again next year, for the 2016-17 budget, lawmakers should remember how underestimating the state’s revenues in prior years had constrained their ability to appropriately invest in California’s future.

— William Chen

*The LAO notes that June totals for other tax and revenue sources are not yet available, but will come out over the next couple weeks.