LAO Report Puts State Reserve Policy Under Microscope, Offers Recommendations

The Legislative Analyst’s Office (LAO) has published a report offering recommendations to improve upon the state’s budgetary reserve policy, a move it believes would smooth state operations during dramatic shifts between surpluses and deficits.

The budgetary swings of recent years are a prime example of these sorts of disruptive fluctuations, the LAO said in its report.

Gov. Gavin Newsom has proposed changes to the state’s reserve policy, which includes doubling the cap on constitutional deposits from 10 percent to 20 percent and making reserve deposits excludable from the state appropriations limit.

While the LAO report says the governor’s proposal would improve existing policy, it counters that the changes do not go far enough. It recommends raising the reserve cap to 50 percent by 2055 — essentially increasing it from 20 percent following the next statewide election, 25 percent in 2030 and 5 percent every five years until 2055. In addition, the LAO recommends increasing reserve deposits, especially in years where revenues are high.

“These problems are also clear when California’s reserves are compared to other states — California ranks near the top in terms of revenue volatility, but below average in terms of reserves. As such, our recommendations are an honest reflection of the volatility in the state’s tax system,” the report reads.

A link to the full report and recommendations can be found here.