Lawmakers in California will soon decide how to spend the state’s record $68 billion budget surplus.  Determining the best use of this excess funding will require great financial prudence from the state’s leaders.  As prices continue to rise in one of the most expensive states in the nation, the legislature should focus on providing relief to taxpayers and shoring up the state’s reserves to prepare for the next pandemic and future economic downturns, which will include the potential recession that many economists believe is on the horizon.

The surplus comes after the state experienced higher than expected tax revenue receipts and a massive influx of federal COVID “relief” funds.  Lawmakers will be tempted to pour money into programs that the state could not otherwise afford to support without the budgetary surplus.  But once the surplus dries up, lawmakers would have to find new ways to fund these programs, creating even more harm to Golden State taxpayers.  Lawmakers must be careful to avoid this pitfall while they choose how to manage the constitutionally mandated spending restrictions.

The use of surplus funds is governed by the Gann Limit, which was approved by taxpayers under Proposition 4 in 1979.  It sets a constitutional spending cap which provides that any revenue beyond a limit set at 1978-1979 levels adjusted for population and inflation must be either returned to taxpayers or spent on education or infrastructure.

Gov. Gavin Newsom (D) has proposed using some of the surplus to fund a $9 billion plan that would both distribute $800 checks to car owners to help combat surging gas prices and provide free rides on public transit for three months.

An alternative proposal from Senate President Pro Tempore Toni Atkins (D-San Diego) and Budget Chair Nancy Skinner (D-Berkeley) would send $200 to qualified taxpayers with an additional $200 per dependent to help combat rising costs caused by inflation.  This plan also calls for the state to move $43 billion of the surplus funds into the state’s reserves to prepare for future downturns.  Increasing reserves was one of the recommendations CAGW made to state governments during the pandemic.  Reserve accounts enable states to better position themselves to weather future downturns and reduce their reliance on aid from the federal government.  With fears of a recession on the rise, shifting budget surpluses to the state’s reserves could prove to be a prescient decision.

A March 30, 2022, report from the state’s Legislative Analyst’s Office (LAO) underscores the need for a prudent allocation of surplus funds.  If the state continues to spend at its projected rate, the LAO predicts the legislature will face a budget deficit by 2025-2026.  If lawmakers invest in a myriad of unsustainable programs, they will worsen the situation and force future legislatures to make tough decisions on which programs to cut down the road, of which taxes to increase.  Instead of placing taxpayers on the hook for wasteful and unstainable programs, lawmakers should adopt a plan that returns surplus funding to taxpayers and prepares the state for the future. The LAO’s warning of a looming debt underscores the need for wise decisions at the statehouse.

Faced with a large surplus, California lawmakers are left with a choice.  They may either elect to pour the money into programs that will have to be cut a few years down the road, or they can help alleviate the economic burdens taxpayers are currently feeling while also securing the state’s future by setting aside some of the funding.  It should be an easy decision but given the inclination of legislators at all levels to solve problems by creating programs and spending money regardless of the effectiveness of those expenditures, it seems more likely than not that the California legislature will fail to do what is best for taxpayers.