Today, November 17, 2021, the Legislative Analyst’s Office (LAO) released their annual California’s Fiscal Outlook report, focused on addressing three key issues: historic state surplus, the constraints of the State Appropriations Limit on budget choices, and the state’s capacity to commit to new and ongoing spending or tax reductions. The report acknowledges that it does not account for yesterday’s passage of the Infrastructure Investment and Jobs Act and updated inflation information. 

2022-23 Budget Conditions 

Under the LAO’s revenue estimates, the state is anticipated to have a surplus of $31 billion in the 2022-23 fiscal year, as a result of: 

  1. Higher revenues of $28 billion across 2020-21 and 2021-22 compared to Budget Act estimates. 
  2. Higher spending on schools and community colleges by $11 billion in 2020-21 and 2021-22. 
  3. Lower spending of $5 billion statewide. 
  4. Operating surplus of $5.2 billion expected to exceed spending under current law. 

General Fund Condition Under Fiscal Outlook 

(In Millions) 

  202021  202122  202223 
Prior year fund balance  $5,556  $32,229  $29,195 
Revenues and transfers  193,757  197,944  202,288 
Expenditures  167,084  200,978  197,059 
Ending fund balance  32,229  29,195  34,424 
Encumbrances  3,175  3,175  3,175 
SFEU Balance Reserves $29,054  $26,020  $31,249 
BSA balance  $11,967  $16,825  $20,917 
Safety Net Reserve  900  900  900 
Total Reserves  $12,867  $17,725  $21,817 
SFEU = Special Fund for Economic Uncertainties and BSA = Budget Stabilization Account. 

       Source: Legislative Analyst’s Office 

Proposition 98 General Fund 

The LAO also released a separate education report titled, Fiscal Outlook for Schools and Community Colleges, that estimates the Proposition 98 minimum guarantee in 2022-23 to be $11.6 billion, 12.4% above the 2021-22 enacted budget level. The report projects that after accounting for a 5.35% cost-of-living (COLA) adjustment, backing out one-time expenditures, and making mandatory Reserve deposits, the state will have $9.5 billion for new commitments. Additionally, the LAO estimates that $10.2 billion in one-time funding will be available due to increases in the guarantee in 2020-21 and 2021-22. Overall, the LAO estimates $19.7 billion will be available in the upcoming fiscal year. 

For 2022-23, the LAO estimates Proposition 98 minimum guarantee at $105.3 billion, an increase of $2.6 billion (2.6%) to the revised 2021-22 level. The largest factor contributing to this growth is the increase in General Fund revenue. In a Test 1 environment, Proposition 98 receives 40 cents for each dollar of additional revenue. The LAO projects that local property tax estimates from assessed property values reflect growth ranging from 5.6% to 6% annually. 

Proposition 98 Reserve 

According to the LAO Fiscal Outlook, the state would need to deposit $3.1 billion into the Proposition 98 Reserve in 2022-23 and $1.1 billion in 2023-24, for a total balance of $9.4 billion. Under their forecast, the Proposition 98 Reserve balance would exceed 3% of the Proposition 98 funding allocated for schools in 2021-22, triggering the Reserve cap in 2022-23 to remain operating until 2025-26. 

COLA 

Under the LAO assumptions, they estimate the statutory COLA at 5.35% in 2022-23, which would cost $4.4 billion to provide to schools and community college programs. However, the COLA rate would taper down to 3.5% in 2023-24, 3% in 2024-25 and 2.6% in 2025-26. 

Ongoing Commitments Established in the 2021-22 Budget Act 

The LAO’s report indicates that the state will need to account for cost increases of $2.3 billion in 2022-23 and $8.2 billion by 2025-26 to support the five commitments created in the 2021-22 Budget Act. The five programs that have ongoing costs associated are: Transitional kindergarten (TK) beginning in 2022-23 (which requires rebenching Proposition 98 minimum guarantee), school meal reimbursements, special education, and the Expanded Learning Opportunities (ELO) Program. 

K-12 Attendance 

The LAO report assumes average daily attendance will be down about 170,000, or 3%, relative to the pre-pandemic levels of 5,897,000. Over the following four years, their outlook accounts for three trends impacting attendance: 

  1. Decline in school age population due to declining births in California. 
  2. Expansion of TK. 
  3. Assume a recovery of 140,000 students relative to the drop in 2021-22. 

LAO Recommendations 

The LAO report ends with a list of recommendations for the Legislature to consider as it will have nearly $20 billion to allocate, as follows: 

  • Determine a mix of one-time and ongoing funding that mitigates the risk from the higher inflation scenario to protect against a larger array of negative situations, while allocating a smaller portion for new ongoing commitment. 
  • Accelerate the funding allocation for the ELO Program to provide LEAs with more certainty about their funding levels to increase the ramp up of before/after school services and summer school programs for students in TK through grade 6. 
  • Equalize the funding provided through various Local Control Funding Formula add-ons in order to ensure that all districts receive a minimum amount per student, regardless of its previous allocation. 
  • Use one-time or ongoing funding to implement the most promising special education reform recommendations. 
  • Address pension liabilities and costs increases in order to smooth future growth in pension costs by setting aside funds districts would receive if their annual pension costs were to increase by more than a certain amount. 
  • Explore grant options to assist LEAs in assessing their vulnerability of climate change impacts and build resiliency and emergency preparedness. 
  • Provide an additional Proposition 98 Reserve deposit to protect resources for ongoing programs during an economic downtown, reducing the need for reductions or deferrals.