EDITORIAL: State should handle surplus cautiously

Jan. 7--California lawmakers are back in Sacramento and facing their own version of the New Year's challenge.

You know what we're talking about -- finding the willpower to stick with the pledge to lose a few pounds after the holiday.

For the Democratic supermajorities in the state Senate and Assembly, the temptation isn't indulging in seconds or a rich dessert. They're looking at another hefty state budget surplus, this one estimated at $7 billion.

There's no shortage of ideas for spending the election-year windfall.

Gabriel Petek, the nonpartisan legislative analyst, is urging lawmakers to avoid costly new commitments or big cash infusions for existing programs.

Petek works for the Legislature, not the other way around, so lawmakers are under no obligation to follow his advice. But they ought to listen to their budget adviser. Here's why:

At 127 months, the present expansion is the longest in U.S. history. No one is suggesting that a recession is imminent, but the state budget already is approaching $215 billion a year, the projected surplus is the smallest in three years, and growth rates are tapering off.

Looking ahead, the legislative analyst projects slower growth in employment, wages and state tax revenue. His budget forecast also cited weakening in the housing market, auto sales, trade activity and business startups.

Those are good reasons for caution. And Petek's report was published before rising tensions between the U.S. and Iran created new concerns about oil prices and the stock markets.

An economic downturn isn't the only threat to the state's surplus. California stands to lose as much as $1.5 billion in revenue unless the Trump administration waives federal rules so the state can maintain its tax on enrollment in managed-care organizations.

The tax is a funding source for Medi-Cal, the state's health insurance program for low-income residents. While the Trump administration approved a similar tax for Michigan, it has yet to act on California's request. Given the antagonism between Trump and the Golden State, would anyone be surprised if a waiver wasn't approved?

Newsom will release his budget proposal later this week. Petek recommends that no more than $1 billion of the projected surplus go to new and expanded programs.

The rest, he said, should be used to pay down debts, build up reserves or earmarked for flexible one-time expenditures that can be quickly adjusted if economic conditions change.

There are some obvious possibilities, beginning with paying down unfunded liabilities in the California Public Employees Retirement System and the California State Teachers Retirement System and building up to the state's $16.5 billion rainy day reserve fund.

Here's another one: helping cities and counties provide shelter and services for the homeless. This year's budget included $650 million in "one-time" grant funding for counties and large cities to combat homeless.

The crisis is unabated -- and solutions are too costly for most cities and counties. Extending the grant program for a second year, with mid-sized cities eligible for funding, would be a smart investment of the state's budget surplus.

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