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In summary
It’s been less than a month since California Gov. Gavin Newsom unveiled his state budget proposal, and its rosier assumptions are already falling apart.
Gov. Gavin Newsom proposed a 2024-25 state budget less than a month ago, but its structural deficiencies – overly optimistic revenue projections and a reliance on short-term fixes that don’t address a long-term problem – are already surfacing.
Most ominously, the budget’s revenue assumptions for the 2023-24 fiscal year, which still has nearly five months to run, are falling billions of dollars short.
Jason Sisney, the state Assembly’s budget maven, has looked at personal income tax withholding and estimated tax payments to date and concluded that revenues from just that source “may end January around $6 billion short” of Newsom’s projections.
If that trend continues, the state will close the 2023-24 fiscal year with much less money than Newsom’s budget assumes, and therefore a much-larger deficit than the $38 billion he has acknowledged.
The Legislature’s budget analyst, Gabe Petek, has already estimated that the deficit is $68 billion because he believes revenues will fall well short of Newsom’s assumptions, and so far the data has supported Petek’s gloomier picture.
The “solutions” Newsom proposed to close the deficit contain relatively few true spending reductions and are heavy on tapping reserves, borrowing money from other state funds outside the budget, accounting gimmicks and deferring some spending.
However, those tactics run the risk of increasing future deficits, as a new analysis of higher education spending by Petek’s office points out. The state is providing about $21 billion for community colleges, the University of California and the California State University system, and Newsom’s budget proposal would increase that amount slightly, mostly for community colleges.
The budget also would enact some spending deferrals. The net effect, Petek’s office concluded, would be self-defeating in the long run.
“Asking UC and CSU to operate their programs at a level the state currently cannot afford puts not only the state and the segments at risk but also other state programs that might be cut next year to make room for the added higher education spending,” the analysis warned.
Newsom’s relatively expansive assumptions about revenues and its reliance on short-term maneuvers, if adopted by the Legislature, could backfire badly by increasing deficits in the years following 2024-25. Petek has warned the Legislature that the state could see annual deficits in the $30 billion neighborhood for the remainder of Newsom’s governorship, which will end in 2027.
“Overall, the governor’s budget runs the risk of understating the degree of fiscal pressure facing the state in the future,” Petek said last month after Newsom introduced his budget. “The Legislature likely will face more difficult choices next year. To mitigate these challenges, we recommend the Legislature develop this year’s budget with a focus on future years.”
The fine print in Newsom’s own budget says the state’s finances could be $81 billion out of balance by 2027-28 as revenues stagnate, spending automatically increases on K-12 schools and community colleges due to a section of the state constitution, and the state’s reserves are exhausted.
The question posed by these trends is whether the Legislature is willing to bite the fiscal bullet now, as Petek recommends, to mitigate future shortfalls, or endorse Newsom’s strategy of avoiding difficult cuts in the hope that revenues will pick up sufficiently in the future.
Kicking the can down the road, as former Gov. Arnold Schwarzenegger characterized the latter option, is tempting. Politicians don’t like telling constituents that their stipends from Sacramento will be reduced or eliminated, nor do they like raising taxes.
It’s gut-check time.