The Department of Finance, in a press release, just projected a record surplus, which was widely reported without question by press around the country. Last year, I said there were warning signs of a problem. Interestingly enough, if you get past the press releases, the Rosy Scenario reported in the press releases are false, and the problems “unreported” or “hidden” by the “record surplus” language may spell disaster in November. WARNING: the following contains a lot of boring numbers, but it is worth understanding.
First, let’s look at the numbers. The Department of Finance (DOF) says we are looking at a $97.5 billion surplus on a $301 billion budget. But there is a problem. If you review the May Revise (the report on which the budget is usually based, which includes all of the April tax revenues), general fund revenues are projected to be $30 billion less in the budget year (2022-23) than in the current year (2021-22). How do you get a $97.5 billion surplus on a $30 billion revenue drop?
DOF, again in its press releases, says the surplus comes from high income earners paying a lot of taxes. However, the personal income tax revenue increase is projected to be less than one percent and DOF also projects a 17% decrease in corporate income taxes. Sales tax revenue will only be up by only one percent, and “other” revenue sources drop by 35%. Overall, a $10 billion or 4.3% drop in total revenue is projected. According to the charts, the surplus carryover from 2021-22 (current year budget) to 2022-3 budget year budget is $15 billion, meaning that the $20 billion of the $37.6 billion surplus remaining from the federal COVID bailout in 2020-21 was spent in the current year. Even Special Fund revenues are projected to increase by only $4 billion.
Part of the explanation for a surplus is that spending is down from the current year budget to the budget year budget by nearly $23 billion, but that is not the full explanation. It would make sense that when revenue drops by $30 billion that spending should drop by at least that much. It doesn’t, spending is still $7 billion more than the revenue drop. So where is the surplus in these numbers? Try as I may, I can’t find where the $97.5 billion comes from.
I don’t have the time or resources to research where the surplus number comes from, and I can tell you that the May Revise document from DOF doesn’t even try to find it. It just states that there is a $97.5 billion surplus in their press releases in the hopes the press won’t look too deep, and then publishes the numbers I have recited in this article in the actual backup material. None of those numbers fit the “record surplus” story. They cite a “$55 billion” increase in revenues over those estimated in January, but again, the numbers don’t fit the narrative. The January budget says current year overall revenues (minus the rainy day fund) would be $196 billion, but the May revise says that overall revenues in the current year are $219 billion), a $23 billion increase (not $55 billion). Overall revenues increase in from 2021-2 to 2022-3 is $234 billion to $289 billion from last year’s May Revise to this years May Revise. However, spending increases over the projections in those same budget documents during the exact same time to increase from $260 billion to $300 billion, meaning that in the current year, the state received (or will receive) $239 billion and spend $260 billion. In the budget year, the state is projected to receive $289 billion and spend $300 billion. In both cases, massive deficits.
Now some of this spending may be one time spending, to reduce other liabilities, like the pension and health care liabilities owed to state government worker retirees (which is a good thing) or general obligation bonds (also a good thing), but the numbers still don’t track the press release. Are we being lied to? My cursory review says I think so, but it would take me days to go through DOF and Legislative Analyst Office (LAO) documents, plus Controller revenue and spending documents, to figure it out.
I’d like to take the Democrats at their word, and regardless of these numbers, I still believe the working middle class should get a gas tax holiday (on both the gas tax itself, as well as the sales tax on gasoline) until retail prices drop in half, but all the other spending increases on the various health care and welfare programs need to be suspended.
DOF says there are warning signs, citing inflation and the Ukraine war as factors that can adversely affect the budget year economy and revenues. Those are “big” caveats. We are in trouble.
But it is an election year, and in order for our Arrogant Lazy Authoritarian in Charge, Gavin Newsom, and California’s Legislative Democrats to survive the 2022 election, they have to fudge the numbers, and maintain the illusion that their agenda works. We won’t know for sure until the end of November, and then the elections will be over. My advice to my Republican friends in the Legislature, BE CAREFUL. Insist on the gas tax holiday, campaign on that to prove the Democrats actually hate the working middle class, and be ready for a serious problem after the election. I really hope I’m wrong, it just doesn’t feel like it.