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For context, recall that the deficit in the Governor’s January Budget was well over $50 billion if you count the reduction to Proposition 98 spending. Governor Newsom proposed dipping into the Prop 98 reserve, an unusual maneuver to reduce the prior-year Prop 98 Guarantee without reducing actual funding, and other adjustments and delays to avoid making cuts to ongoing K-14 programs. The Governor’s Budget, however, was based on revenue estimates as of late November 2023, and revenue collections quickly fell far below those estimates for the months of December 2023 and January 2024. Various revenue and economic data led the LAO to predict in February and March publications that revenue for 2023-24 and 2024-25 could be $25 billion lower than the estimates used by the Governor in January.
More recently, the news has been better. Setting aside the last week or so, the stock market has seen a sustained rally. And while the personal income tax (PIT) revenue losses in December and January may not be recouped, PIT receipts have exceeded January Budget expectations in February and March. Revenues from these months is, of course, far less important than what happens in April, the biggest revenue collection month of the year. While the data is still coming in, it looks like April PIT collections so far reported by the Franchise Tax Board are close to the January forecast, but corporate tax collections are a few hundred million below. In all, it appears that revenues are pretty much on track for April, and that February and March collections were slightly above forecast. The bottom-line is that while revenues are still likely lower over the three-year budget period than the estimates in the Governor’s January Budget, the shortfall is likely more modest than the $25 billion projected by the LAO last month.
The part of this that is most relevant to public schools relates to the Prop 98 Guarantee, and the amount of money in the next budget available to fund school programs and services. There is still a great deal of uncertainty here, particularly regarding any adjustment to the Prop 98 Guarantee for the prior year. However, if the Prop 98 funding shortfall that needs to be dealt with at May Revision is relatively modest, we can advocate for using Prop 98 reserves and some funding allocation mechanisms to mitigate or perhaps entirely avoid cuts to ongoing K-14 programs. Given the massive deficit announced in January, and the dire revenue collection data released in February and March, we are certainly in a better than expected position going into May Revision. All of this with the very big caveat that until we know more about April revenue collections, this is very much speculation.
Join us for a much deeper discussion about the state budget at our May Revision Budget Perspectives Workshops. You can register here.
Abe Hajela
Partner, Capitol Advisors Group
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