Newsom must be ready for more cuts

A budget is always about trade-offs. At least on paper, Gov. Gavin Newsom’s budget proposal for fiscal year 2024-25, which begins July 1, has some positive elements. Whether the numbers hold up through his May revision and the actual budget passed by June 15 is the question.

He first had to deal with the $68 billion projected last month by the Legislative Analyst’s Office. The Newsom budget noted $30 billion was for the previous fiscal year and mainly was from taxes declining $26 billion. The excuse, “The stock market runup through the end of 2021 led to the tax revenue surge that ended in 2022.” Capital gains revenues in 2021 were $36 billion, then dropped to about half that the next three years. But this volatility has long been a part of the state budget cycle and should have been anticipated with less spending.

Newsom expects a stronger economy will take care of the $30 billion problem for the current fiscal year.

At the press conference, he said of the LAO, “We are a little less pessimistic than they are about the next year.” Perhaps. But especially if the Federal Reserve fails to cut interest rates, the LAO’s pessimism was warranted.

For the remaining $38 billion, he takes $13 billion from the State Rainy Day fund, which actually is supposed to be used for an emergency, not to pay for overspending. And cuts in many areas would drop spending from $231 billion for the general fund in 2023-24 to $209 billion in 2024-25.

For example, environmental spending would be cut $2.9 billion, 7%. And he would suspend the justpassed stepped increase of the minimum wage for medical workers to $25 an hour.

Better yet, repeal the entire increase, which is projected to cost $4 billion a year, half from the state and half from the federal government, plus increases to private-sector medical care.

Significantly, there are no cuts in education spending. But the governor would delay a 5% increase for the Cal State and UC systems. “We are deferring but not delaying, and there’s a distinction in the law that will allow UC and CSU just for one year to be able to borrow against that commitment,” he said.

A positive is taxes are not increased in this already overtaxed state. But his fellow Democrats in the Legislature have other ideas and are advancing tax-increase bills.

One bright side of the governor’s budget presentation is that he made clear, when talking to the press, that he opposes a wealth tax. He must be prepared to push back on the progressives in his party for whom more taxes will always be the go-to solution.

A budget number we have used for two decades is Schedule 6 data showing any time state general-fund spending rises above about 6.2% of personal income, the state gets into fiscal problems.

The Legislative Analyst’s office now is using this number. It jumped to 7.21% in 2021-22, then 6.65% and

7.34% the next two years, indicating way too much spending. The new budget drops it back to 6.3%, still too high.

As predecessor Gov. Jerry Brown showed, when Democrats hold a supermajority in both houses of the Legislature, the only brake on fiscal profligacy is a tough Democratic governor.

Newsom’s budget is a start, but more cuts are needed. Neither Newsom nor the Legislation can afford to assume the rosiest of revenue projections.

One bright side of the governor’s budget presentation is that he made clear, when talking to the press, that he opposes a wealth tax.