LAO Publishes Overview Report of Governor’s 2020-21 Budget

On Monday, the Legislative Analyst’s Office (LAO) published its report, “The 2020-21 Budget: Overview of the Governor’s Budget,” which details significant investments, examines the broader fiscal status of the state, and recommends considerations and actions to the Legislature. Recall, Governor Newsom proposed his $222.2 billion state budget on Friday of last week.

The LAO’s report examines the projected total reserves and discusses the importance of reserves in insulating various state programs from adverse effects of budget shortfalls. The Legislature over recent years, according to the LAO, has dedicated a sizeable number of available surpluses to building more discretionary reserves. The LAO indicates that the Governor’s proposed budget does not continue this practice and urges the Legislature to consider the overall budget structure, including a target level of reserves.

Further, the LAO determines that the Governor has a projected $5.9 billion surplus to allocate through the 2020-21 budget process. Of this total, the Governor proposes to allocate $2.5 billion to one-time spending, $1.6 billion to maintain the state’s discretionary reserve, and $1.4 billion to ongoing spending. The bulk of spending (one-time and ongoing) is proposed to be dedicated to human services, housing, and homelessness; natural resources, environment, and emergencies; criminal justice; education; and health. Simply put, the Governor’s budget, according to the LAO, includes a large array of proposals across many priorities with relatively small dollar amounts. The LAO recommends the Legislature consider whether to take this similar approach or to dedicate larger amounts to a smaller number of priorities.

While California continues to enjoy a healthy fiscal status, the LAO discusses looming uncertainty in coming years, particularly as it relates to broader economic performance and federal decisions around healthcare financing (e.g. managed care organization tax). These potential outcomes could make a significant impact on California’s budget status to the tune of billions of dollars. The LAO further discusses the Governor’s projections for state operating surpluses, finding that the Newsom Administration anticipates small operating surpluses in the out years of its forecast period. The Governor did not allocate the surplus to increasing discretionary years, and, as a result, the LAO encourages the Legislature to consider maintaining a positive operative balance in its multiyear budget plans.

Both the Assembly Budget Committee and the Senate Budget & Fiscal Review Committee will convene budget overview hearings on Wednesday and Thursday, respectively, next week where members will receive a high-level presentation of items included in the Governor’s January Budget. Budget subcommittees are then expected to begin their work over the coming weeks.

The LAO will continue to publish various budget-related reports and informational materials throughout the year as the Legislature begins its budget consideration process. The full LAO overview report is available here.