California is expected to have a $7 billion budget surplus next year, but lawmakers were urged Wednesday not to spend all of it because a sizable chunk depends on an upcoming decision by the Trump administration as it feuds with state Democratic leaders.
A report from the bipartisan Legislative Analyst’s Office says California’s savings account could grow to more than $18 billion by the end of 2021.
That’s enough to make it through a typical recession, although the state would likely have to slash public education spending in the event of a downturn, the report said.
However, nearly $2 billion of the initial $7 billion projected surplus depends on whether the Trump administration lets California tax organizations that manage the state’s Medicaid plans.
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California needs permission from the federal government to continue the tax. But the federal government recently proposed new rules that likely would not allow it.
It’s unclear when those rules would take effect.
“The state is not in this alone,” Democratic Assembly Speaker Anthony Rendon said. “Federal actions may hurt our budget in three ways: by damaging the economy as a whole, by hurling fiscal threats at our revenues, and by withholding funds for programs that benefit Californians.”
California’s strained relationship with the Trump administration includes disputes over emission standards for cars and protections for endangered species.
“President Trump talks a lot about America’s economic growth under his presidency, but when you look behind the numbers, you see it’s California’s growth that has provided the economic rocket fuel for the nation,” Democratic Gov. Gavin Newsom said in response to the budget estimate. “The federal government would be wise to look to California as a model for how to get its fiscal house in order.”
Democratic legislative leaders viewed the estimate as proof of their responsible stewardship of the world’s fifth-largest economy, with Democratic Senate President Pro Tempore Toni Atkins declaring “the days of the perennial budget crisis — even during good economic times — are thankfully behind us.”
Still, the legislative analyst warned that risks of an economic slowdown are higher than normal, pointing to weaknesses in housing markets, trade activity, new car sales and business startup funding.
Lawmakers were urged not to commit more than $1 billion of the projected surplus to ongoing spending.
“This does not necessarily mean a broader economic slowdown is imminent in the near term,” the report said. “Nonetheless, there likely is greater risk in the economic outlook for 2020-21 than in previous budget cycles.”
California’s tax revenue has soared since 2012. Unemployment dipped below 4% last month, and the scarcity of jobs has caused employers to increase wages to attract workers. From 2012 to 2017, California wages increased 4% a year on average when adjusted for inflation.
California had a record $21.5 billion surplus in the state budget last year. Newsom and the Democratic-controlled state Legislature spent more than half of that money on paying down debts and boosting reserves.
About $4 billion of it went to support ongoing programs while the rest was used for one-time projects.
The analyst’s office expects wage growth to slow over the next few years. That would affect the state’s personal income tax collections, which is the largest source of the state’s money.
Newsom must present his budget proposal to the state Legislature no later than Jan. 10. Lawmakers must pass an operating budget by June 15.