California's Historic Budget Surplus: Is It $76 Billion or $38 Billion?

Last week, Gov. Gavin Newsom embarked on a week-long parade of good news, budget-related press conferences across California, imparting a grand proclamation.

"I'm about to make an announcement no other governor in California history has ever made and I would argue no governor in American history has ever made," Newsom said at a stop in Oakland last Monday. "Today we're announcing a $75.7 billion budget surplus."

That mind-boggling number indicates that "California isn't just coming back. It's roaring back," he said.

"California Roars Back" has become the slogan of Newsom's campaign to beat the drive to recall him from office.

By any standard, it's a remarkable fiscal turnaround in a state that just one year ago was facing a $54 billion deficit, induced by rising expenditures and collapsing revenues due to the COVID-19 pandemic.

But when the respected nonpartisan California Legislative Analyst's Office (LAO) released its budget analysis Monday, stating that the actual surplus was only $38 billion — half what Newsom cited — it triggered an inevitable social media storm of accusations, mischaracterizations and worse.

So, how could there possibly be such a large discrepancy in the size of California's budget surplus?

In a tweet she would later delete, Bloomberg reporter Tiffany Stecker on Monday wrote, "@CAgovernor miscalculated the state's surplus by double -- it should be $38B, not $76B."

That set others in the Twitterverse off and running, lobbing accusations that Newsom "lied" — or at least misled — California voters. Some of the Republican candidates running to replace him as governor quickly jumped on the bandwagon.

"Newsom used smoke and mirrors to inflate the size of his budget surplus, misleading Californians by $38 billion," said Republican gubernatorial candidate Kevin Faulconer, the former mayor of San Diego, in an email to supporters. "If Newsom can't be honest when he's trying to sell good news, we can't trust him when he's dealing with the very real problems facing our state."

So what's the truth about the budget surplus? Not surprisingly, it's a bit complicated.

For starters, "the term surplus does not have a legal or even formal budgetary definition," said Ann Hollingshead, the LAO's principal fiscal and policy analyst. "So this is just an informal word that we use to describe the condition of the budget." 

What then explains the vast difference between the surplus number offered by the governor and the LAO?

"The primary difference between our estimate and the administration's estimate is just that we always exclude constitutional requirements from our definition of the surplus," Hollingshead said. "So any money that is constitutionally required to be spent on a specific purpose, we don't include that as part of the surplus. And it looks like the administration in this case did."

So this gets us to the meaning of the word "surplus." If by surplus you're thinking something along the lines of extra money you didn't anticipate previously having — like, say, a windfall — then the Newsom administration's $75.7 billion figure is accurate. It's how much additional revenue is estimated to be available to the state in the coming budget year that had not been anticipated just a few months earlier.

But nearly half of that pot is automatically required to be spent on K-12 schools and community colleges, per Proposition 98, with the small remainder committed to the state's rainy day fund and debt payments.

When you deduct those funds from the $76 billion "surplus" used by Newsom, you get the $38 billion figure referenced by the LAO.

In one of Newsom's previous budget proposals, unveiled in May 2019, he announced that the remaining "surplus" was $500 million higher than anticipated, but he also explicitly noted that the figure did not include the required funding for schools and budgetary reserves.

In other words, in the past he's used the same calculation the LAO used in its report this week, netting out constitutionally obligated funding.

Newsom's administration was quick to suggest that the LAO's calculation and the kerfuffle it sparked is really much ado about semantics.

"If you're looking at the $38 billion figure that the legislative analyst indicated was the non-school, non-reserve amount of money, and compared it to the governor's budget ... our surplus estimates are nearly the same," said Department of Finance spokesman H.D. Palmer.

"There's no disagreement or daylight between the administration and Legislative Analyst on that," Palmer added.

Bottom line: The governor chose to use the higher "surplus" figure even though that money is not entirely discretionary.

But no matter how you slice it, the budget is very good news for the millions of Californians set to benefit from tax rebates, rental assistance, small business relief, increased higher education funding and much more.

And it's not so bad for a governor facing a recall election, either.