By MADISON HIRNEISEN
THE CENTER SQUARE
(The Center Square) – As the June 15 deadline for Gov. Gavin Newsom and lawmakers to agree on the state’s budget fast approaches, top credit rating agencies have highlighted California’s strong revenues but warn of future uncertainty.
Gov. Newsom unveiled his $300 billion revised budget proposal in May, which includes a $97.5 billion surplus. About $49 billion of the surplus is discretionary, with the rest going toward education as required by law.
The governor’s proposal uses 94% of the discretionary surplus on one-time spending, including an inflation relief package with rebates for taxpayers and additional money to fight COVID-19.
With a record surplus and fiscal year 2022 revenues coming in $41 billion higher than the enacted budget estimate in June 2021, Fitch Ratings said the Gov. Newsom’s budget proposal “reflects the continued economic and revenue rebound from the pandemic and continues the state’s policy of prudently allocating higher available revenue to maintaining budgetary resilience while also increasing programmatic spending.”
Fitch said Gov. Newsom “takes a fairly conservative approach to using increased revenue” by building reserves, paying down liabilities and limiting ongoing spending commitments.
According to Fitch, the revised budget proposal has a $3 billion increase in ongoing spending commitments, including proposals to expand healthcare access and address homelessness. When accounting for these increases, Fitch maintained that “the multi-year forecast…is structurally balanced.”
“This analysis reinforces the fact that Governor Newsom has put forth a prudent budget that plans for the future while addressing some of our state’s most pressing, immediate challenges,” a spokesperson for the governor’s office said.
Despite Gov. Newsom’s limited increase in ongoing spending commitments, future projections anticipate that California’s general fund revenue will likely decline in fiscal year 2023. Specifically, the state projects a 4.3% general fund revenue decline in 2023 from a peak in 2022, according to a rating report from S&P Global Ratings.
In a report released last month, the nonpartisan Legislative Analyst’s Office warned that California could be headed for a fiscal cliff of $25 billion as soon as 2023-2024. The LAO recommended the state pump more into its reserves in anticipation of slower revenue growth in the coming years due to the increased risk of recession.
Within its rating, S&P noted that California “is extremely dependent on its top taxpayers and their capital gains tax,” noting that “the top 1% of taxpayers contributed 49% of personal income taxes, which are responsible for 59% of general fund revenue.
“While the state is forecasting 4%-5% annual decline in capital gains tax through fiscal 2026, there is a potential for much greater decline based on recent stock market activity, which is not incorporated in the current forecast.”
The S&P’s report also noted that Gov. Newsom’s proposal to allocate billions in one-time spending “could aid creditworthiness” and help preserve “structural budget balance if revenues decline, as projected in fiscal 2023.”
