LAO’s Impossible Task

Dear Legislators,

The Legislative Analyst’s Office is filled with talented people who occasionally take on impossible tasks. Take LAO’s recent Fiscal Outlook for Schools in which it boldly predicts that “capital gains revenue [will be] strong in 2022-23.” I can’t predict the stock market next week much less next year but unlike the state I’m not depending on it to finance schools that require stable annual funding. If I did, I’d keep loads of cash on hand. That’s because the annual performance of stock markets looks like this:

But the state doesn’t keep loads of cash on hand. Reserves are only $25 billion even though the Governor’s Budget tells us that revenue losses from a recession such as that suffered in 2001-03 would total more than $100 billion. Worse, schools have insufficient reserves of their own and if as in 2001-03 a recession affected only capital-gain-dependent states like ours we could expect little federal help.

Schools can’t take stock market predictions to the bank. The annual performance of stock markets is not predictable. You should build reserves up to at least $100 billion.