When $20 billion in reserve might not be enough?

When $20 billion in reserve might not be enough?

(Calif.) Although Gov. Gavin Newsom has won praise for plans to save a significant amount of a windfall in revenues next year, the non-partisan Legislative Analyst has raised concerns that those reserves may not be enough.

In an initial response to Newsom’s revised May budget, released last Thursday, the LAO noted that the governor would set aside about half of the discretionary resources next year to pay down debts—including $3 billion to help reduce the pension burden on school districts.

As proposed, Newsom’s May budget calls for the state to end the 2019-20 fiscal year with $19.5 billion in reserve—which would consist of $16.5 billion in the budget rainy day account, and another $3 billion in special fund and other savings accounts.

That would seem like a lot of money, given the condition of state coffers in the not so distant past. But the LAO suggests it might actually be a little light.

“Based on the experience of recent recessions, we estimate the state would need about $20 billion in reserves to cover a budget problem associated with a mild recession and $40 billion to cover a moderate recession,” the LAO said in its report to lawmakers Monday.

“As such, we advise the Legislature consider building more reserves than currently proposed by the Governor,” the analyst suggested. “Given the extraordinary scale of the surplus currently available, we think the state should seize this unique opportunity to robustly prepare for a recession now.”

With the publication of the May spending plan, negotiations between the administration and legislative leaders will become more serious as they close in on a June 15 deadline for adoption of a new state budget.

The LAO noted that overall the fiscal outlook for the state has improved even since January—largely because of capital gains taxes on Wall Street profits.

New estimates suggests that the state will receive $3.2 billion in additional revenue over the three year budget period ending in 2019-20. More than half of that amount—an estimated $1.9 billion—will come in the form of personal income taxes.

Although state law requires the Legislature and governor to share half of all new money with K-12 schools and community colleges under Proposition 98, the LAO noted that Newsom has earmarked only a small amount of the windfall to go to new education programs.

The largest new spending for schools is a nearly $700 million grant program to help early learners with disabilities—a proposal that the LAO has already warned lawmakers may not work as intended.

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