Gov. Gavin Newsom announces his 2024-2025 state budget proposal, including his plans to deal with a projected $68 billion deficit, at the Secretary of State Auditorium in Sacramento on Jan. 10.
In a few weeks, Gov. Gavin Newsom will unveil his updated budget plan for the fiscal year that begins July 1.
Pray for the best but expect the worst.
After several years of unprecedented budget surpluses — buoyed by federal stimulus funds and a stock market on steroids — California’s financial outlook has turned grim. This may seem counterintuitive: the stock market recently soared to record highs. But California is suffering from a unique combination of factors. It significantly overestimated its revenues last year — largely because the Internal Revenue Service pushed back by seven months the deadline for most Californians to file their 2022 tax returns due to intense winter storms — and now has to course-correct. And it’s still reeling from high interest rates, which depressed investment in the tech industry and start-up companies on which California’s economy heavily depends.
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When Newsom presented his budget draft in January, his administration estimated the state faced a $38 billion shortfall. The nonpartisan Legislative Analyst’s Office, which advises state lawmakers on financial issues, projected a deficit of $73 billion. The actual shortfall will largely depend on how much revenue California collected last week when personal income taxes were due.
Although receipts are still being tallied, the state appears to be on track to reach Newsom’s estimate for April personal income tax revenue — but corporate tax revenue is lagging behind projections. Newsom and lawmakers need to proceed with caution and fiscal restraint.
California’s budget problem is big — and it isn’t going away anytime soon.
The Newsom administration and the Legislative Analyst’s Office project that California will face deficits in the tens of billions of dollars for at least the next few fiscal years. The state has the nation’s highest unemployment rate, at 5.3%, and is struggling to pay off its growing debt to the federal government, from which it borrowed tens of billions of dollars to pay jobless claims during the pandemic. And significant economic uncertainty looms, not least from the upcoming presidential election.
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Yet there are significant political incentives for Newsom and lawmakers to minimize the risk of these threats.
Cutting funding for programs is never popular, but it’s especially contentious in a high-stakes election year.
Longtime Sacramento lobbyist Chris Micheli described to me an ongoing “insatiable appetite to spend” among the state’s interest groups. Just this week state lawmakers advanced legislation to create a single-payer health care system, which analysts estimate could cost as much as $391 billion annually — about $100 billion more than the entire state budget in Newsom’s January plan. They also faced demands from the mayors of some of California’s biggest cities to establish an ongoing source of state funding for homelessness programs. Ironically, that ask came just days after a scathing state audit found that California failed to measure the effectiveness of the $24 billion it spent on housing and homelessness programs over the past five fiscal years.
And the steps Newsom and lawmakers have taken to address California’s budget woes largely amount to moving deck chairs around on a sinking ship.
For example, a grab bag of mostly one-time tricks reduced the deficit by $17 billion. On top of some cuts, this includes borrowing money internally from special state accounts, shifting $1.6 billion in state employee wages to the next fiscal year by postponing payroll by one day and delaying billions in payments, most of which were approved during the recent budget bonanzas but haven’t yet actually gone out the door.
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Such accounting maneuvers may help close the budget gap on paper, but many are gimmicks, not long-term solutions.
H.D. Palmer, a spokesperson for Newsom’s Department of Finance, acknowledged this criticism but asked, “If you choose not to do that … where would you reduce spending?”
It’s a question the state can’t afford to put off any longer.
Luckily, California is better positioned to weather this economic downturn than it was during the Great Recession, when it had basically no money in its reserves and was forced to make devastating cuts to critical safety-net programs. In 2014, voters approved a ballot measure that, among other things, increased the maximum size of the state’s reserves and required it to pay down debts faster.
The state now has more than $20 billion in its main reserve account. One big question facing Newsom and lawmakers is whether to tap into these savings to close the deficit — and, if so, how much. In January, Newsom proposed using about half the reserve funds, but he hasn’t yet reached a consensus with legislators.
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But this also delays a reckoning with the inevitable.
“Our estimates imply that it’s more likely than not that they won’t have enough funding to pay for all of the current obligations that are planned,” Brian Uhler, a deputy legislative analyst at the Legislative Analyst’s Office, told me.
Indeed, the office found that California would need to bring in roughly $50 billion more per year in tax revenue than forecasted by the Newsom administration to sustain current proposed spending levels.
This leaves Newsom and lawmakers with two difficult and politically unappealing options: cut spending or increase revenues. And as Newsom has vowed not to raise taxes, that means the state needs to reduce expenditures.
“The more hard choices we make this year, the less hard it’ll be this year and the following year,” state Sen. Scott Wiener, D-San Francisco, who leads the Senate Budget Committee, told me.
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Legislators have until June 15 to pass a balanced budget, and Newsom must sign it before July 1. As negotiations continue, Newsom and lawmakers need to be honest with themselves — and with us — about the state’s financial situation. Delaying pain for too long will only hurt worse later.
Reach Emily Hoeven: emily.hoeven@sfchronicle.com; Twitter: @emily_hoeven
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