As California lawmakers wrestle with a now-$73 billion deficit in next year’s budget, the Legislative Analyst’s Office is warning about a “trailer bill” proposed by Gov. Gavin Newsom related to the previous budget. It’s an $8 billion maneuver that amounts to an interest-free loan to hide a revenue shortfall affecting school funding.
The problem stems from last year’s tax-filing extension. Lawmakers typically have accurate revenue numbers from April when they begin to make budget decisions in May, but last year’s filing deadline was moved to the fall, so budget decisions were made based on projections. Then the real numbers came in. Total income tax collections were 25% below expectations.
This created what the LAO called “an unprecedented prior-year reduction to the minimum funding requirement for schools and community colleges.”
Under the state constitution, specifically Proposition 98 from 1988, schools and community colleges receive about 40% of the state’s General Fund revenue. Because revenue was lower than projected, education funding in the 2022-23 budget was $8 billion too high.
Newsom’s “novel proposal,” in the LAO’s words, would allow the schools to keep this funding without counting it as education spending in the budget. “The state would generate budget savings by not recognizing a budgetary expenditure, despite the fact that the cash has gone out the door,” the analyst’s report said.
Although the budget has a revenue shortfall, the state’s cash balance is positive. That money may be committed to reserve accounts or future spending, but it’s still in the treasury for now.
Newsom’s maneuver amounts to an interest-free loan of $8 billion from the state’s cash balance to cover the extra education spending.
“We have major concerns,” the LAO wrote.
By not acknowledging the $8 billion in cash disbursements to education in 2022-23, the state is creating an outstanding “principal” due from the state’s cash resources, the analyst’s office explained, “The state would make ‘repayments’ on this principal balance beginning in 2025-26 as it acknowledges the cash disbursement on a budgetary basis.”
So the extra education spending would effectively be funded by non-education programs and agencies in future budgets. The maneuver “obfuscates the budget’s true condition,” the LAO wrote, by creating a new budget obligation in future years that is “virtually invisible.”
The state’s budgets for future years are already in trouble. There’s general agreement that California is looking at projected $30 billion annual deficits on the horizon for the next several years. Past surpluses are spent and the party’s over. There will be difficult decisions ahead about cuts to state programs or tax increases.
The LAO also voiced concern about the precedent this “novel” maneuver would set: “It would likely create an expectation that the state would continue to use maneuvers like this to pay for spending in the presence of budget deficits.”
In other words, as long as there’s cash on hand, lawmakers could grab it for any purpose and pass a budget trailer bill that says it’s a loan to be paid back in future budgets.
Eventually “the bill comes due,” the LAO warned. “This proposed maneuver is bad fiscal policy, sets a problematic precedent, and creates a binding obligation on the state that will worsen out-year deficits and require more difficult decisions. We strongly recommend that the Legislature reject the proposal.
That sounds like good advice to us.