Are There 38 or 76 Angels Dancing On CA’s Pin?

The 2020 CA Budget Act enacted just 11 months ago forecast the S&P 500 to be at 2,060 in the first quarter of 2021. But because the S&P 500 closed the quarter at nearly twice that level and CA tax revenues are correlated with stock markets, revenues are way ahead of forecast. When it comes to revenue projections, no state flies more blindly than California.

That’s why a debate between LAO and DOF over whether there might be a $38 billion or $76 billion surplus is meaningless. Though technically LAO is correct that a portion of dollars received into the General Fund must be allocated to specified purposes so less than 100 percent of any excess revenues would be available for discretionary purposes, neither LAO, DOF nor anyone else knows what the stock market with which CA revenues are correlated will do over the last 41 days of the current fiscal year much less the 365 days of the next fiscal year.

What IS meaningful is DOF’s assessment of revenue consequences when stock markets decline. In that regard no one is flying blind. DOF updated its assessment in January, on page 245 here:*

“Revenue losses . . . would total over $100 billion (an average of over $30 billion per year) for three years [and] continue with more years of revenue declines in the range of $30 billion, . . ..”

That revenue decline is why CA must save money whenever the state obtains more revenue than expected. CA is woefully under-reserved relative to its revenue volatility, and this is a great year to save state monies since the federal government has appropriated CA an additional $25 billion of one-time pandemic-related funds.

Originally published at

Lecturer at Stanford University and president of Govern For California