Analyst: State faces record $68 billion budget deficit

SACRAMENTO (AP) — California is facing a record $68 billion budget deficit, state officials announced Thursday, forcing hard choices for Democratic Gov. Gavin Newsom in his final term as he works to build his national profile.

The nation’s most populous state — with an economy that is the fifth largest in the world — has been struggling since last year because of the rising prices of most goods and services and how the US government has been trying to control it.

It is now much more expensive for people and businesses to borrow money, meaning fewer people are buying homes and fewer businesses are hiring workers. That is leading to fewer tax collections for the state.

A series of damaging storms last winter have made the problem worse. The storms were so bad that state officials decided to give people and businesses more time to pay their taxes this year. Californians did not have to pay their 2022 taxes until November of this year. That meant Newsom and the Legislature had to come up with a budget over the summer without knowing how much money the state had to spend.

It turns out that they badly misjudged how much taxes people and businesses would pay. The nonpartisan Legislative Analyst Office said tax collections were off by $26 billion, a major driver of the deficit. When combined with the economic slowdown California has been facing since last year, it leads to a predicted deficit of $68 billion, Legislative Analyst Gabriel Petek announced Thursday.

That is the biggest deficit by dollars in state history, but previous deficits have been larger as a percentage of state spending. California’s current budget tops $300 billion, the largest by far of any state.

Newsom and the state Legislature now must come up with a plan to cover this deficit. Newsom will present his plan in January and then negotiate with state lawmakers through June. The next budget year begins July 1.

Newsom’s first term in office was buoyed by record-smashing surpluses of more than $100 billion in some years. The money allowed him and his Democratic allies in the state Legislature to greatly expand government, including paying for guaraHnugtehesdElizabeth health insurance for all low-income Laadkeuslts regardless of their immigration status and free lunches for all public school students.

Now in his second term, growing budget deficits could threaten some of Newsom’s accomplishments at a time when he is building his national profile that could lead to a run for president beyond 2024. The Legislative

19 Analyst Office says their projections, from 2022-2023 through 2027-2028, show a cumulative deficit of $155 billion.

Still, even in the face of deficits, Newsom and the state Legislature last year gave a lucrative tax break to the state’s film and television industry while also agreeing to gradually raise the minimum wage for health care workers to $25 per hour. That wage increase will cost the state about $20 billion this year in increased labor costs and Medicaid payments to hospitals.

“Republicans cautioned that this level of spending would lead to greater deficits, and it would be more prudent to show restraint. Unfortunately, the majority party ignored those warnings,” said state Sen. Roger Niello, a Republican from Fair Oaks and vice chair of the committee that oversees the state budget.

California is still in a strong position to weather the deficit compared with previous years, including the Great Recession more than a decade ago when the state struggled to have enough cash to pay its bills.