In January the Department Of Finance will issue the Governor’s Budget for 2022-23. No section will be more important than the Stress Test, which forecasts revenue losses in the event of a stock market decline such as in 2001-3 and 2008-9.
Last January, the Governor’s Budget forecast revenue losses of $100 billion. Just two years earlier, the 2019-20 Governor’s Budget forecast losses of $50 billion. That makes sense because, as DOF explains, “the higher levels and valuations in the stock market increase the risk of a large stock market drop leading to a large decline in capital gains revenues” on which California is extraordinarily dependent.
The market has climbed 23 percent since the last Stress Test.
And tax receipts for the current fiscal year that commenced just last July 1 are 26% higher than forecast.
Hence, the Governor’s Budget in January is likely to forecast losses in the event of a stock market decline of well over $100 billion. But as the Enacted Budget disclosed last June, the state carries only $25 billion in reserves:
Worse, schools have insufficient reserves of their own and a market decline that uniquely hurts California’s capital-gains-dependent tax revenues will not always attract federal support.
Schools and other services need predictable annual funding. You should build reserves to the levels predicted by stress tests.