LAO Gets It Partly Right

The first sentence of Multi-Year Budget Outlook published recently by California’s Legislative Analyst’s Office comes with an important disclaimer [emphasis added]:

This report presents our office’s independent assessment of the condition of the state General Fund budget through 2024‑25 assuming the economy continues to grow.

With that assumption in mind, LAO counsels legislators to add $12 billion to reserves:

To protect against future recessions, we recommend the Legislature restore the $12 billion in outstanding budget tools used in last year’s budget package.

But $12 billion is not nearly enough for a state like California that’s uniquely dependent upon stock markets for revenues. As the Department of Finance wrote in the Governor’s Budget about the consequences of 45 percent stock market correction, no greater than the 2001 and 2008 corrections:

Revenue losses would total over $100 billion (an average of over $30 billion per year) for three years.

Adding $12 billion would lift reserves to just a fraction of the amount needed to protect programs during such a correction.

With the federal government providing an additional $27 billion of one-time funds to us under the American Rescue Plan even though we have a surplus, there has never been a better time to save the state’s own revenues. Because not all states are as reliant as we are on stock markets for tax revenues, we are uniquely situated to save now — and uniquely at risk when the stock market declines.