States are flush with cash, but none more than California. According to the Governor, “No other state in American history has ever experienced a surplus as large as this.” Even while many other states are giving out tax rebates, The Golden State stands alone, reporting an estimated surplus last week of $97.5 billion. Of that windfall, lawmakers can tap $49.2 billion for any purpose. Comparing that record amount to other states’ expenditures provides some sense of the magnitude.

Based on estimated fiscal 2021 expenditures, California’s surplus exceeds every other state’s general fund spending and all of the New England states combined. When looking at all expenditures, including federal and bond funds, only Texas, New York, and Pennsylvania report higher expenditures.

The surplus in the Governor’s May revision is a stark difference from two years ago. In the early months of the pandemic the state estimated it would have a budget shortfall of $54.3 billion.

California’s tale of surging tax revenues is like many others; where the money goes (one-time v. recurring expenditures) and what outcomes it produces will be closely watched. It also comes with a cautionary tale from the Legislative Analyst’s Office that revenue growth could increase the state’s constitutional funding obligations in the future, creating future deficits.

IN FOCUS

Reporting on the Surplus

• Tax windfall pushes California’s budget surplus to nearly $100bn Financial Times

• California’s massive budget surplus highlights gaping income divide San Francisco Chronicle

• California Expects a Record Budget Surplus of Nearly $100 Billion New York Times

• California flush with cash amid unprecedented $97.5 billion surplus, Newsom says The Mercury News

How to Spend the Surplus

• How will California handle a huge budget surplus? Cal Matters

• What California’s massive budget surplus could mean Politico

• Abortion, inflation and crime: How Newsom would spend record-setting California surplus LA Times

• Expected historic surplus causing issues for California lawmakers KTLA

Some Top Issues Facing the State

• Overpriced, Overwhelmed, Over it! Investigating California's Crazy Housing NBC Bay Area

• Climate Change Is Straining California’s Energy System, Officials Say NY Times

• In the capital of Blue State America, a new ferment over homelessness The Washington Post

CHART OF THE WEEK

Governor Newsom released his proposed 2022-23 state budget on January 10, well before the recent news of surging revenues — when the budget was proposed the state was expecting a mere $29 billion surplus. The proposed allocation of funds was mostly to one-time expenditures. But that number has more than tripled as of last week, allowing even more spending. Here are some highlights:

Gavin Newsom @GavinNewsom

Global inflation, war in Ukraine driving up costs, climate change impacts… everyone is feeling the weight. So, we’re putting $18.1 BILLION on the table to help lower costs for Californians - tax refunds, $$ for healthcare, rent, utility bills, public transit & more.

5:13 PM ∙ May 13, 2022

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8,288Likes1,601Retweets

• $11.5 billion to every eligible registered vehicle owner, capped at two $400 checks per individual

• $2.7 billion for emergency rental assistance

• $2 billion for affordable housing production

• $1.4 billion for overdue utility bills

• $933 million for hospital and nursing home staff

• $750 million for free public transit

• $125 million for expanding access to abortion services, a change from the January budget blueprint

In addition to new spending priorities, the May revision provides for $37.1 billion in reserves, including:

• $23.3 billion in the state’s rainy day fund,

• $9.5 billion in a school stabilization fund,

• $3.4 billion in an operating reserve, and

• $900 million in a social services safety net

The wealthiest in California have reaped the benefits of strengthening stock prices and steady employment, despite the fact that many low-income individuals were laid off during the epidemic. According to budget documents, California expects to collect a record $291 billion in capital gains realizations for 2021 alone.

This concentration of taxpayers -- the top 1% of earners pay nearly half of personal income-tax collections -- creates revenue volatility, and could plummet severely in an economic downturn. According to Bloomberg, "capital gains as a share of the personal income collections are at levels last seen shortly before the dot-com bust."

INTERESTING READS

Strong Tax Collections Belie California's Challenging Fiscal Outlook Legislative Analyst’s Office

The Issue: “it may come as a surprise that California’s General Fund likely faces a budget problem in the coming years”

Key Finding:

continued revenue growth could increase the state’s constitutional funding obligations enough to cause large recurring budget deficits … for every dollar of tax revenue above the SAL [state appropriations limit], the state faces approximately $1.60 in constitutional funding obligations. Based on our scenario analyses, if revenues exceed median expected growth, SAL requirements very plausibly could reach $20 billion to $45 billion by 2025-26

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