California’s Budget 2010–2018

Fast Revenue Growth — But Even Faster Expense Growth

California’s annual General Fund revenues grew a fast 46 percent during Jerry Brown’s eight-year tenure as governor. That makes sense given the stock market more than doubled over that period and the state raised tax rates in 2012. But three costs grew as fast or faster:

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California also became more reliant on personal income tax (PIT) revenues:

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And doubled its reliance on capital gain realizations to nearly 10 percent of revenues:

Because tax revenues from capital gain realizations are unpredictable:

Governor Brown wisely asked voters to approve a rainy day fund (RDF), which they did. But that fund is limited in size and even though the governor and legislature also wisely chose to create some additional reserves, the combination of the RDF and those additional reserves is equal to less than one-third of the deficits Brown predicted the state will face during the next bear market or recession. Net of the benefits from the RDF and additional reserves, that means more than $40 billion of cuts would be necessary during that bear market or recession.

Meanwhile, over the same period of time the state doubled its Medi-Cal population and added more than $100 billion in liabilities for pensions and retired employee health insurance. Unlike the state’s revenues, expenditures related to those liabilities are not correlated with the stock market. Medi-Cal is an entitlement, pensions are a contractual right (the terms of which are currently being evaluated by the state Supreme Court), and subsidies for retiree health insurance are the result of collective bargaining negotiations. That means the only ways to reduce those expenditures are to make Medi-Cal more productive or reduce the terms of its entitlement, modify pensions to the extent permitted by law, and modify or eliminate retiree health insurance subsidies during contract negotiations.

As a review of any other 8-year period would demonstrate, California’s revenues are tidal in nature but because not all of its expenses are tidal, when the revenue tide goes out, cruel cuts to discretionary programs (eg, UC, CSU, courts, social services) and tax increases that don’t generate new services are the result. As an example, the 2012 tax rate increase was sold as a boost for K-12 education but faster-growing fixed costs in schools have offset those revenues, as explained here and demonstrated here.

Later today California’s new governor Gavin Newsom will release his first proposed budget. From his public statements it’s clear that Governor Newsom knows all the facts posted above and has hired a team with experience navigating California’s fiscal tides.

Warren Buffett points out that one only learns who has been swimming naked when the tide goes out. State legislators should work with Governor Newsom to keep Californians clothed.

Written by

Lecturer at Stanford University and president of Govern For California

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