California Budget ChallengeAbout Next 10Budget Overview

Budget Basics

State Budget Trends

Income to the State's General Fund grew dramatically between 1998 and 2007 in large part due to an economic boom in technology and housing construction. Public spending kept pace and, in some years, even exceeded revenue.

The financial crisis of 2007-2008 and subsequent economic recession caused dramatic reductions in state income and state spending. In 2008, California’s budget gap was projected to be $40 billion as a result of the Recession and funding for most state programs was cut dramatically.

Proposition 30, passed by voters in 2012, raised tax rates on the wealthiest Californians and raised the sales tax by a quarter of a percent. Proposition 55 in 2016 expanded those income tax increases to 2030, but the sales tax increase expired at the end of 2016. The Proposition 30 income tax increase generated $6.7 billion in 2015-16, and the top 1% of families paid 77.2% of the total increase.

As the economy has recovered, California has largely restored funding to the programs that were cut and the state’s budgetary health has greatly improved. The Rainy Day Fund (mandated by Proposition 2 in 2014) is estimated to have $15.3 billion by the end of the 2019-20 fiscal year. As the state’s fiscal health has improved, the budget discussion has moved largely from which programs to cut to which programs to fund, while still preparing for an inevitable economic downturn. By the time the budget year starts in July 2019, the nation will have experienced 10 straight years of economic expansion—matching the longest economic expansion in modern history.

Despite high revenues, there are still significant outstanding liabilities for pensions and health care benefits for retired state employees. Prior to 2012, the state’s long-term retirement liabilities went unaddressed without a comprehensive plan or strategy for how these benefits would be funded. Given the large surplus this year, the 2019-20 proposed budget includes a number of proposals to reduce state debts. This includes $4 billion to eliminate outstanding budgetary debts and reverse the deferrals of past decades. The budget also proposes an unprecedented supplemental $3 billion supplemental contribution to pay down the state’s share of funded liabilities within CalPERS. The budget also allocates an additional $1.1 billion to CalSTRS in the budget year.

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