Several people have asked for our reactions to reports about the May Revised Budget. We won’t have a response until after we’ve read the official document to be released tomorrow. Meanwhile, two items should not come as a surprise to anyone familiar with California’s budgets. One is the projection of a large surplus, which reflects the tight relationship between capital gains and CA’s tax revenues. The other is the state’s anemic level of financial reserves, as demonstrated by the insufficient role they were able to play in solving the deficit a year ago when the state projected revenues to decline as a result of the pandemic. More than 80 percent of that solution had to come from cuts, borrowings, federal funds and other sources:
Even after a decade of nonstop rising revenues, a 30 percent income tax increase, and the filling of a Rainy Day Fund, the state’s reserves were unable to supply more than a small fraction of the solution to a large deficit. With state revenues more dependent than ever on unpredictable capital gains and state programs as dependent as ever on predictable funding, CA needs much larger reserves.
