Petek paints mixed portrait of California state finances

California Legislative Analyst Gabriel Petek delivered a good news-bad news scenario about the state government’s finances Thursday at The Bond Buyer’s Public Finance conference in San Francisco.

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On the bright side, Petek said in a fireside chat with The Bond Buyer’s Lynne Funk, the state has not had to issue revenue anticipation notes since 2011, but on a more somber note the state has been in the position of closing a deficit each budget year for several years even as the stock market rallied.

As to what is driving the state’s structural deficits, Petek said “actually, about 70% of the increase in the general fund, according to our analysis, was driven by sustaining existing commitments.” The analysis found the programs were just growing faster than had been anticipated, he said.

According to Petek, that means some hard choices are facing state government, and the new administration that takes office next year.

“It might be a good time to do it, to have sort of that fundamental conversation with the legislature and the electorate about what do we really want from our state government,” he said. “How much state government do we want? Because the one we have right now, we really can’t afford.”

Though lawmakers and Gov. Gavin Newsom discussed program cuts in the budget, because revenues continued to grow, they ended up restoring funding to programs they had planned to cut, he said. That just deferred some hard decisions, he said.

In recent years, Petek said the state has gone back to having what former Gov. Jerry Brown called a “wall of debt,” even if it has not had to issue RANs. The wall of debt, Petek said, comes from internal borrowing.

“California has now borrowed $29 billion during years the stock market has rallied,” he said.

It’s concerning the state has done this during a stock market boom, he said, because the prior wall of debt ahead of the 2008 crash was accumulated to cover recessionary shortfalls.

He also emphasized that the state only has $16 billion in reserves, a number he said should be higher given where the stock market has been at the past several years.

California’s three big revenue sources are personal income tax, corporate taxes and sales and use tax; and personal income taxes play a large role in state revenues, because of individual taxpayers affluence and because the state’s tax structure is influenced by capital gains.

The state is in good shape from a cash flow perspective, Petek said, but the budget structure is not good.

“I think this suggests we need to have an important, but fundamental conversation about the size and scope of California government,” he said.

With a new governor coming in to replace the termed-out Newsom, and a fresh set of lawmakers, Petek said the next legislative session might be a good time to have that conversation.