LAO Publishes Budget Report Detailing 2020-21 Fiscal Outlook, Estimates $7 Billion Surplus

On Wednesday, the California Legislative Analyst’s Office (LAO) released its report, “The 2020-21 Budget: California’s Fiscal Outlook.” The report is released annually in anticipation of the upcoming state budget process and details key economic assumptions, expected revenues, and subject area-specific reports, including health and human services. The outlook report examines whether the state has enough resources to pay for next year’s budgetary commitments, whether the state has capacity to take on new, ongoing commitments, and whether the state has enough revenues to cover revenue shortfalls in the event of a recession.

In its report, the LAO anticipates that the risk to this year’s economic outlook has increased compared to recent years, particularly due to weakening housing markets, trade activity, new car sales, and business startup funding. Still, the LAO projects that revenues will continue to grow from 2019-20 to 2020-21 at a rate of 3.5 percent, which is slower than recent years.

The LAO further estimates that California will have a budget surplus of $7 billion for 2020-21. Notably, the LAO indicates that a portion of the $7 billion surplus would be available for one-time commitments and a portion would be available for new, ongoing commitments. The LAO does note that if the recently submitted managed care organization (MCO) tax is not approved by the federal government, the state’s budget surplus would be $4 billion.

Should the economy continue to grow, the LAO expects the state to have sufficient capacity to take on new, ongoing budgetary commitments. Under current laws and policies, the LAO expects $3 billion to be available for ongoing commitments. Less than $1 billion is expected to be available for ongoing commitments if the federal government does not approve the MCO tax and delays cuts to hospitals serving higher shares of Medi-Cal patients, there is at least one major wildfire season within the next few years, and the voters approve the education facilities bond in 2020.

The LAO further determines that the state is in good overall fiscal condition and would be able to weather a recession typical of the post-World War II era. However, the LAO importantly points out that this does not mean the state is prepared to weather any possible recession.

Related to Medi-Cal, the LAO estimates the state will spend about $22 billion from the General Fund on Medi-Cal in 2019-20, representing a roughly $1.1 billion reduction relative to what was assumed in the 2019-20 Budget Act. This reduction is largely due to the LAO’s assumption that the federal government will approve the MCO tax renewal, as well as updated projections of lower Medi-Cal caseload. From the revised 2019-20 amount, the LAO projects that General Fund spending in Medi-Cal in 2020-21 will increase by $1.5 billion (seven percent) to a total of $23.5 billion. 

In its commentary and recommendations to the California Legislature, the LAO notes that the state has made significant progress in preparing for an economic downturn as a result of more than a decade of economic expansion and deliberate legislative action to place the budget on better footing. The LAO recommends the Legislature dedicate no more than $1 billion to ongoing purposes, a significant share toward building reserves and paying down debt, and the remainder toward one-time flexible commitments that can be changed midyear, if necessary.

In reacting to the LAO’s report, Governor Gavin Newsom highlighted the state’s work in ensuring a strong economy and providing opportunities to all Californians. In a statement, Newsom expressed, “Out state is proving what big-hearted, progressive governance can look like – all without breaking the bank. … As Washington soaks Americans with a trillion dollars in debt to pay for tax cuts that benefit the wealthy and destroys the social safety net, our state is now doing more than ever to provide opportunity to California families, especially those who are not equally sharing in our nation’s prosperity. As our state and nation face uncertain economic headwinds, the federal government would be wise to look to California as a model for how to get its fiscal house in order.”

The full LAO fiscal outlook report is available here. The Medi-Cal fiscal outlook is available here.