Partying Even Harder Than 1999

The CA Legislature must pass a budget by June 15. Based upon the Legislature’s Version of the State Budget submitted by Budget Committee chairs, as of now it is on track to make a big mistake.

This is a chart of the S&P 500 Index from January 1 1991 through June 4:

CA General Fund Revenues rise and fall with stock markets, and not only because of capital gains but also stock grants, restricted stock units and other stock-related compensation reported on W-2 statements. Accordingly, page 245 of the Governor’s January Budget predicts revenue losses would exceed $100 billion from a market dip no worse than 2001 or 2008:

Revenue losses . . . would total over $100 billion (an average of over $30 billion per year) for three years, continue with more years of revenue declines in the range of $30 billion, and lead to a permanently lower revenue base compared to the current forecast.

And that estimate was delivered before the May Revised Budget predicted the current fiscal year will close with even higher revenues than anticipated in January, implying an even greater revenue loss when markets decline. Yet the Legislature’s Version reserves less than one-quarter of that revenue loss. $25 billion is better than the $24 billion proposed by the governor but sizable only in relation to much smaller General Funds, which have doubled in size in the last decade. Worse, schools funded by Proposition 98 reserve insufficiently, so state reserves should also be sufficient to protect them.

In 1999 — another year of surging tax revenues — the Legislature and Governor Gray Davis reserved insufficiently and enacted new spending. Residents and elected officials got stung when markets fell. Today’s markets are even hotter and state revenues even more correlated with them. Reserves should be sufficient to protect current levels of spending and under-reserved schools. $25 billion is not nearly enough. The CA Legislature should save every penny it can.

Lecturer at Stanford University and president of Govern For California