An uneven recession savaging low-income Californians, but a surprisingly fast economic rebound advantaging higher-income Californians, will create a huge unexpected state budget surplus that will provide an unexpected $13.1 billion in one-time revenue for K-12 schools and community colleges in the fiscal year starting July 1, 2021, the Legislative Analyst’s Office reported on Wednesday.
While tempering its forecast because of the pandemic’s unpredictability — “Despite being our best assessment, our main forecast will be wrong to some extent” — the LAO’s report documents what it calls a “remarkable” turnaround.
K-12 schools and community colleges are entitled to about 40% of General Fund revenue, which could exceed forecasts by $26 billion — or even a lot more — the LAO forecasts.
The projected $13.1 billion increase for Proposition 98, the formula that determines revenue for K-12 schools and community colleges, would be 18.5% next year. It would far surpass the previous record of $6.3 billion and 10.3% in 2014-15, the LAO said.
Districts shouldn’t assume that will result in pockets bulging with cash, however. To avoid budget cuts this year, the state issued $11 billion in IOUs, called deferrals, in which it’s forcing districts to borrow or use reserves, with the promise that the state will repay them next year for money owed.
Gov. Gavin Newsom and the Legislature could decide to end the deferrals and once again be on track with its payments next year.
Doing so could eat up part or nearly all the $13.1 billion. The LAO is endorsing that conservative budgeting approach.
The projected total state surplus is possible because the budget the Legislature passed in June assumed dire forecasts. While unemployment is still 16%, the highest since the Great Depression, the budget assumed 25%.
And while workers earning less than $20 per hour have borne the brunt of layoffs, high-wage Californians, particularly in the technology sector, have been relatively unaffected. With the stock market soaring, state revenue, primarily from personal income taxes and capital gains, is up 22% — $11 billion — after a little more than a third of the current fiscal year.