California’s independent Legislative Analyst’s Office issued its annual warning that budget projections made in January may not be accurate come December because the volatile stock market can change everything.

With that disclaimer out of the way, the Analyst projected $1 billion or $2 billion more in state revenues during the coming fiscal year, beginning in June, than the governor indicated in his budget last week. “Even bigger gains of a few billion dollars more are possible,” he wrote.

In the executive summary, one of the three data points pats the governor on the back for his priorities being “Generally Prudent Ones.” The other two points emphasize “Higher Revenue Projections and Spending Increases” and “Even Higher Revenues Likely.”    

“History tells us that the current strength of state revenues, bolstered by a soaring stock market last year, may not continue for long,” the Analyst cautioned. He needn’t mention the 20-year bull run that drove the Dow Jones Average from around 2,000 in 1982 up to 15,000 in 1999, down to 10,000 in 2003, up to nearly 16,000 in 2007, down to 7,800 in 2009 and up to 17,000 now.

A booming stock market hides many faults. Just ask the folks at the California Public Employees’ Retirement System (CalPERS). A report by the $300-billion pension fund showed an annual return of 18.4% in fiscal year 2013-14, more than doubling projections of 7.5%. That fourth double-digit return in five years boosted CalPERS’ funding level to 77% from 69.8%.  

The Analyst was supportive of the governor holding the line on spending in his $113-billion budget for the General Fund and lauded the announced intention of addressing the state’s long-term liability for retiree health benefits. It’s a great plan, except for one thing: “The Governor, however, proposes no additional funds to implement the plan.”  

In cautioning against making any promises today the state might not want to keep tomorrow, he pointed out that most of any windfall is already committed to education through Proposition 98 and lawmakers should be wary of making commitments outside of that. With that in mind, he recommended lawmakers begin discussing now how it would spend additional Prop. 98 K-12 money generated by a booming economy.

“History tells us that strong revenue periods like now are ones that require cautious budgetary decision making,” the report says. But combing through back issues of Analyst budget reviews does not find a call for less caution during weak revenue periods. The Analyst always recommends caution.

–Ken Broder

To Learn More:

Analyst: Jerry Brown Underestimates State Revenues by $2 Billion (by Don Thompson, Associated Press)

Legislative Analysts Have Praise, Warnings for California Budget (by Chris Megerian, Los Angeles Times)

The 2015-16 Budget: Overview of the Governor's Budget (Legislative Analyst’s Office)