California is a STATE, not a SPAC

Dear Legislators,

With your deliberations over the 2021–22 Budget, you are about to make a most consequential decision. Below is a chart of General Fund Revenues and Transfers from the beginning of the last decade. The blue columns are closed fiscal years. The green column is for the current fiscal year, which closes June 30. The yellow column is the amount projected by the Department of Finance for the next fiscal year, which starts July 1.

Until the current fiscal year, R&T rose at an annual rate of 5.9 percent, itself a high rate on which to project revenue growth. But 2020–21 revenue growth is off the charts, driven primarily by a 35 percent rise in the stock market. Dangerously, DOF is projecting that revenues this next fiscal year will be nearly — 95 percent — as high as the current year. That’s the equivalent of predicting the stock market will rise another 30 percent and projecting revenues using a growth rate that’s 25 percent higher just because of a single year. Worse, projected reserves are just one-quarter of the amount needed to offset another stock market decline like those suffered in 2001 and 2008. Your budget last June — when reserves were sufficient for just 16 percent of the deficit solution — should be evidence enough that reserves were insufficient to protect an even smaller level of spending. To make matters worse, schools are not required to save nearly enough of the Proposition 98 share of this year’s explosive revenues.

We are a STATE, not a SPAC. While SPAC investors voluntarily accept outlandish revenue projections, your constituents are not even aware of the risks they would be taking if you base spending on such projections and reserve insufficiently. To protect existing programs and taxpayers, you should reserve this year’s giant gains and future revenues in excess of long term trend lines.

David Crane

Originally published at