California needs to rein in spending

Last year's $100 billion surplus will be carried out to sea with the Santa Ana winds. That is the warning published in last week's “California's Fiscal Outlook” from the nonpartisan Legislative Analyst's Office, which advises state government.

“Specifically, lower revenues are expected to lead to a deficit of $25 billion” for that fiscal year,” the LAO reported. But even that “understates the actual budget problem in inflation-adjusted terms.”

If that scenario comes to fruition, the state's rainy day fund of $23 billion would be depleted. To make matters worse, the above numbers are being projected even under the assumption that there wouldn't be a recession.

“Based on historical experience, should a recession occur soon, revenues could be $30 billion to $50 billion below our revenue outlook” for fiscal 2023-24,” the LAO explains.

“One word: Oops! We tried to tell them,” former state Sen. John Moorlach told us. “Even Gov. Jerry Brown took a pretty cautious approach to his budgets,” during his tenure from 2011-19. “If I had been governor and had a magic wand, that $100 billion surplus would have gone into paying down the state pension plans,” which currently are running $150 billion in the red.

Moorlach said the biggest issue with the budget is a state tax structure “totally dependent on the wellbeing of the economy” because it depends heavily on personal income tax revenue. “When there's a downturn, the Silicon Valley stocks go down in value and we don't have capital gains. People get nervous about investing. Taxes just drop precipitously,” Moorlach said.

To that point, the stocks of big name companies like Facebook have crashed by more than two-thirds in value in the past 15 months. Facebook just laid off 11,000 workers, more than 2,300 of them in California.

The question now is how the Legislature and Gov. Gavin Newsom will respond. The last major downturn, the subprime meltdown of 200710, led in 2009 to Gov. Arnold Schwarzenegger signing a record $13 billion tax increase.

Tax hikes now would be the worst idea as many businesses in recent years have been fleeing the state's ultra-high-tax environment. California voters have also proven resistant in recent years to big tax increases, with recent proposals to create a split-roll property tax system and hiking taxes on the wealthy to subsidize electric vehicle purchases going down in flames.

Moorlach also remembered how, during that last recession when he was an Orange County supervisor, the state poached revenues from county and city governments and never paid them back. That easily could happen again. “That's very dysfunctional,” he said. “They're building their reserve funds, but have them taken by the state. We don't get to share in the fortune, but we do get to share in the misfortune.”

Even if the recession is short, there's going to be a lot of misfortune.

Sacramento needs to stop overextending itself and needs to learn how to exercise some degree of fiscal discipline moving forward.