May Budget Revision: Amid Declining Revenue Growth, Governor Holds Line on Spending, Makes Saving a Priority

On Friday, Governor  Edmund G. Brown Jr. released his May Revision to the California state budget. In addition to the budget numbers, graphs and charts, the Governor provided reporters with a copy of Aesop’s fable of the ant and grasshopper.

“Like everything else, things don’t last forever,” Brown said in releasing his new projections.

“Right now the surging tide of revenue is beginning to turn as it always does. That’s why it’s very important and best to be prepared for a time of necessity.”

The CalChamber welcomed news that the May Revision to the budget continues to fund essential programs but also pays down debt and saves for anticipated future economic downturns.

“We are pleased with the Governor’s continued commitment to fiscal prudence,” said CalChamber President and CEO Allan Zaremberg. “California’s long-term economic stability and investment climate depend on saving for a rainy day and embracing the principle that we cannot fund ongoing programs with one-time money.”

Governor Brown revealed that California will collect fewer taxes on sales and income than forecast in January. Nonetheless, revenues will grow by an estimated $6 billion this year and by more than $4 billion next year.

However, since this overall growth is lower than originally estimated, to keep the budget in balance the Governor ordered $1.9 billion in spending reductions for 2016–2017. For the next two years, Brown said California would have no new spending to ensure that the state maintains balanced budgets. Even so, said Brown, by 2019 California could face a $4 billion deficit.

The key reason for the reduced revenue growth is the volatility of the personal income tax, which will fall short of estimates by nearly $2 billion. The Governor acknowledged that the income tax, especially with the high tax rates on the top 5% of income taxpayers, creates enormous revenue uncertainty from volatile capital gains proceeds.

Budget Highlights:
Proposition 30 Extension Discussed

The Governor indicated that he will not take a position on the extension to the Proposition 30 temporary tax rates. He did indicate that without the extension, the state would see additional program reductions in coming years. However, the Governor further indicated that even if the voters do extend the tax, the longer-term budget outlook would barely be balanced.

The May Revision reflects the principle that no significant new ongoing spending commitments should be made. The Governor also demurred on taking a position on the $9 billion school bond initiative, although he repeated his displeasure that the measure was placed on the November ballot at all.

Higher Education Funding

According to the Governor’s news release, the budget continues to invest in the state’s higher education system to “maintain the quality and affordability of one of California’s greatest strengths.”

The budget keeps tuition at 2011–12 levels and commits $25 million in new one-time funding for the California State University to reduce the time it takes a student to successfully complete a degree.

Reducing Housing Costs

The Governor also offered a commitment to improve the availability of housing in the state. The Governor’s press materials included this comment:

“Local land use permitting and review processes have lengthened the approval process and increased production costs. The May Revision proposes additional legislation requiring ministerial ‘by right’ land use entitlements for multifamily infill housing developments that include affordable housing. This would help constrain development costs, improve the pace of housing production and encourage an increase in housing supply.”

Strengthening Infrastructure

According to the Governor’s office, the May Revision continues to reflect a commitment to transportation by providing $36 billion over the next decade to improve the maintenance of highways and roads, expand public transit and improve critical trade routes. The funding would be coupled with Caltrans efficiencies, and streamlined project delivery and accountability measures.

The budget includes $737 million ($500 million General Fund) for critical deferred maintenance at levees, state parks, universities, community colleges, prisons, state hospitals and other state facilities.