California

State Budget Practice Report Cards and Budget Resource Guide

California had to pay bills with IOUs when it was unable to pass a budget after the end of the Great Recession in 2009. It eventually balanced the budget, repaid the IOUs, and went on to earn an average grade of A for fiscal 2016 through 2018 for policies and practices that have fortified its reserve funds and left the state with cash to weather the next economic downturn.

The A mark shows how America’s most populous state has not only benefited from a near-record US recovery but also learned how to use its rainy day fund and other fiscal reserves to help offset its volatile revenue streams. These result from extremely progressive income tax rates, a concentration of high-income taxpayers, and strict educational spending mandates that limit overall spending flexibility.

Helping the Golden State manage the effects of revenue volatility was a 2014 ballot measure requiring that a portion of capital gains tax revenue be deposited into the rainy day fund when income from the levy exceeds 8 percent of general revenue. This helps California amass cash when financial markets are strong and keeps it from spending capital gains revenue that may be reduced if the economy weakens. 

California is not without shortcomings. In 2018 the state got a D-minus in legacy costs, the lowest grade possible, down from a D in 2017 and a C in 2016. (California received a D average in the category for the three years studied.) The category covers funding of public employee pensions and other postemployment benefits, principally health care. The most recent grade drop followed the state’s failure to set aside actuarially determined contributions for the teacher pension plan in 2018. A California law pertaining to that pension system does not allow contribution increases of more than 0.5 percent of payroll in any year and prevented the state from meeting recommended funding in 2018.

Download Printable State Report Card

To emphasize the need for clear and comprehensible budgets to inform citizens, promote responsible policymaking, and improve fiscal stability, the Volcker Alliance in 2016 began a study of budgetary and financial reporting practices of all fifty states. The Volcker Alliance’s mission is to improve the effectiveness of the administration of government at all levels. Making state budgeting more transparent and accountable is an important part of that goal.

The report cards presented here are taken from the 2018 Volcker Alliance report, Truth and Integrity in State Budgeting: Preventing the Next Fiscal Crisis which proposes a set of best practices for policymakers. For those wishing to gain greater insight into state fiscal issues, the accompanying budget resource guide is derived from the Alliance publication State Budget Sources: An Annotated Guide to State Budgets, Financial Reports, and Fiscal Analyses (2016). 

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