After a painful 2020, California’s next budget will have far more cash than anticipated

Just months ago, California officials expected this year’s budget would be another bloodbath of cuts to schools and services. But instead, Gov. Gavin Newsom and lawmakers find themselves in an unexpected budget oasis, practically swimming in money.

Newsom on Friday released a $227 billion budget proposal loaded with new spending to reopen schools, distribute vaccines, provide cash aid directly to taxpayers and restore wages to state workers who accepted pay cuts last year.

The state has so much money it might actually have to send some back to taxpayers for the first time since 1986 years under a law that aims to restrict government spending.

It’s all possible because the state is on track to accumulate a $15 billion surplus, reflecting a dramatic shift in projections from less than a year ago, when Newsom and lawmakers passed a budget with cuts and deferrals to plug an estimated $54 billion deficit created by the coronavirus pandemic.

But the worst hasn’t happened. That’s because tax revenue has come in consistently higher than expected since the start of the fiscal year in July.

“We are on a much better fiscal footing than anyone could have imagined even a few months ago,” Newsom said Friday during a his budget presentation.

The higher-than-expected tax revenue is partly due to the state’s uneven recovery from the pandemic-induced recession, with high-income earners continuing to prosper and low-income workers facing the worst consequences.

The limited effect on high wage earners has kept California’s revenue up as those workers have kept their jobs and continued to work from home. California’s budget relies heavily on those high earners because of the state’s progressive income taxes.

The state also set a record this year for capital gains: $185 billion that resulted in $18.5 billion in tax revenue for the state, California Finance Director Keely Bosler said.

“We got it wrong in April about how deep the recession was going to be,” Bosler said, referring to the month when the Governor’s Offices finalizes byudget forecasts. “We also got it wrong that there was more inequality in the impacts of this pandemic than we expected, and then the third thing is that the stock market has just got up and up and up, which was not in our forecast.”

Call for fast coronavirus relief

Newsom wants to put much of the surplus money into lifting Californians out of the economic havoc brought on by the pandemic. And, despite the surplus, he’s urging the incoming Biden administration to send more economic relief to local and state governments. Although California has a surplus this year, his office is projecting deficits will return as soon as next year.

“Our forecast in terms of the future is very, very, very tenuous,” he said, “on the basis of all the macro-economic headwinds, on the basis of this recent surge of COVID-19, and the realities of uncertainty that mark this moment.”

Newsom is asking state lawmakers to consider most of his proposal through the traditional budget process, a months-long undertaking during which he and lawmakers will hash out a comprehensive spending plan in time for the July 1 start of the next fiscal year.

But Newsom wants to use some of the surplus funds sooner. As part of what he’s calling an immediate action proposal, Newsom is asking lawmakers to quickly approve $5 billion dollars for school reopenings, struggling small businesses and direct aid for low-income families.

Newsom’s early action proposals include:

▪ $2.4 billion to send $600 payments to low-income families

▪ $2 billion to reopen schools

▪ Nearly $650 million for businesses hurt by the pandemic

Newsom also plans to quickly spend an estimated $372 million on COVID-19 vaccine distribution, a proposal that doesn’t need legislative approval because he plans to use money from an emergency fund.

Record spending on schools

The rosier revenue projections also mean this budget will steer more money to schools. In total, Newsom’s budget includes a record $85.8 billion for k-14 education, the vast majority of which is constitutionally required to go to schools under state law. Newsom said the money will help finance COVID-19 testing and summer school programs to make up for lost learning during the pandemic.

Democratic lawmakers largely applauded the governor’s budget proposal, saying that many of his priorities are aligned with their own.

“I’m excited that we aren’t facing a cuts budget,” said Sen. Nancy Skinner, who leads the Senate Budget Committee.

Skinner added that while the budget focuses on immediate needs like getting kids back into classrooms and supporting low-income families hard hit by the virus, lawmakers will negotiate with Newsom on how to allocate federal money that Congress recently approved, including rental assistance that the state must distribute.

Republican lawmakers said Newsom’s budget plan is a start, but more money should be focused on protecting small businesses from the impact of the pandemic, as well as addressing affordability and unemployment in the state.

Assemblyman Vince Fong, the top Republican on the Assembly Budget Committee, said the state needs to focus more on fixing foundational issues including the affordability crisis, power shut offs, problems with the state’s unemployment system and small businesses.

“We need to be focusing on those things in this budget,” said Fong, who represents Bakersfield. “If we don’t then California businesses and families are going to continue to leave the state and Californians will continue to suffer under Sacramento’s failed leadership.”

Sen. Jim Nielsen, Fong’s counterpart in the Senate, said he’ll watch closely to make sure the state honors the 1979 law that requires the state to send rebates to taxpayers if it spends too much, known as the Gann limit in honor of taxpayer watchdog Paul Gann.

“Whenever we reach it, we shouldn’t say ‘oh, gosh, we’re going to meet the Gann limit, we’re going to do something to escape or to get around that limit,’” said Nielsen, R-Gerber. “No, that’s important. That is restraint on state government spending.”