State must be cautious, even with surplus

Thanks to what it calls “unprecedented growth in revenues,” California’s nonpartisan Legislative Analyst’s Office is projecting state government will have a $31 billion surplus to allocate in 2022-23. We encourage the governor and Legislature to proceed cautiously and responsibly.

While it is certainly enviable to be in position to benefit form “unprecedented growth in revenues,” one problem with “unprecedented” growth is that it’s hard to reasonably gauge how sustainable or unsustainable it is.

Accordingly, the LAO’s estimate is a middle-ground forecast, due to the fact that “a reasonable concern remains that the current level of revenues may be unsustainable.”

Economic and revenue trajectories can change quickly. After all, times were good right up until the end of the dot-com bubble.

As long as it has extra money to spare, state leaders must be prudent and not assume the good times will continue indefinitely.

Budgeting off of overly rosy assumptions risks overextending the state and therefore taxpayers, who are ultimately the ones on the hook.

The state should be particularly cautious given recent inflation. The LAO notes that inflation “could create instability in financial markets or the economy broadly, which could depress revenues,” while also putting pressure on the state to spend more on things like employee compensation. Given the vast power of public employee unions, one can be sure that’s just around the corner.

Assemblyman Vince Fong, R-Kern County, who is also vice chair of the Assembly’s Budget Committee rightly noted in response to the report that, “California’s healthy fiscal outlook does not mean our economy is doing well.”

Indeed, many Californians remain unemployed or underemployed. Vast numbers of small businesses across the state have closed for good.

A recent report from the Ludwig Institute for Shared Economic Prosperity estimates that 25.7% of California workers are “functionally unemployed,” meaning they can’t get a job that pays them above the poverty level.

“There’s something wrong when the state is flush with extra cash — $750 for every man, woman and child — while ordinary people have to choose between putting food on the table and filling their gas tank,” said Assembly Republican Leader Marie Waldron in a statement. “If California won’t give this money back, let’s at least spend it in a way that brings down the cost of living and improves people’s quality of life.”

That’s right.

Sacramento politicians can’t treat the surplus like a slush fund. They have to approach it as an opportunity to guard against uncertainty, address practical issues like infrastructure maintenance or water storage, and fulfill obligations without further tax increases.