Stock sell off came after Newsom finalized budget
(Calif.) Just as state coffers benefitted from the roaring bear market on Wall Street, the recent collapse will result in less money coming in next year—but probably not significantly less.
According to a new report from the non-partisan Legislative Analyst, the governor’s budget is based on revenue estimates calculated before the slide in stocks began in early December. Assuming the market doesn’t retreat further, the loss to state revenues will probably end up between $1 billion to $2 billion, the LAO said.
“Our review of historical stock performances suggests that the required growth in stock prices needed to meet revenue estimates occurred in 29 of the last 70 years,” the LAO said in an early review of the governor’s budget released this week. “If stock prices instead grow modestly in 2019—as suggested by the December consensus forecast of professional economists complied by Moody’s Analytics—capital gains are likely to fall below expectations by $1 billion to $2 billion.”
Overall, the LAO found Gov. Gavin Newsom’s initial budget plan sound, with cost estimates for next year aligned as best as possible with expected resources.
The LAO notes that of the $20.6 billion in discretionary money Newsom had to spend, he is proposing is use nearly half of it—$9.7 billion—to pay down state liabilities, unfunded pension requirements and other budgetary debt.
The biggest share of that money would go toward shoring up the state’s two largest public employee pensions—the California Public Employee Retirement System, or CalPERS, and the California State Teacher’s Retirement System, or CalSTRS.
Under Newsom’s plan, he would make a supplemental $3 billion payment to CalPERS in 2018-19. The governor would also help reduce school district pension liability by making a $2.3 billion payment to CalSTRS also in 2018-19.
In addition, the governor would pay $1.1 billion to CalSTRS in 2019-20 to further reduce the pension’s unfunded liability.
The LAO also noted that the downturn in Wall Street profits and subsequent dip in capital gains taxes paid to the state may end up being mitigated by “lower constitutional required spending” and reserve deposits.
“As a result, under current conditions, the net effect on discretionary resources would be less than the full revenue decline. Current financial market and economic conditions can change significantly between now and May, however, leading to greater revenue effects,” the LAO said.
The LAO warns, however, that schools face an imminent threat if economic conditions deteriorate into recession. They point out that Newsom’s plan includes no one-time spending proposals for schools in 2019-20, which would boost the minimum funding guarantee and thus soften the impact of falling revenues.
“In each of the past six years, the state has purposefully provided such a cushion,” the LAO said. “From 2013-14 through 2018-19, the state set aside an average of about $700 million per year inside the guarantee for one-time purposes. This one-time spending provides a buffer that reduces the likelihood of cuts to ongoing programs if the guarantee experiences a year-over-year decline. The Governor’s budget not only has no such cushion, it supports roughly $100 million ongoing program costs with one-time funding, leaving a small ongoing shortfall in the 2020-21 budget.”