California could face $25B budget deficit
SACRAMENTO — After back-to-back historic budget surpluses, California analysts on Wednesday projected that Gov. Gavin Newsom and state legislators could be forced to navigate a $25 billion budget deficit next year.
That shortfall, according to a new report from the state’s independent Legislative Analyst’s Office, could be followed by continued annual budgetary gaps between $17 billion and $8 billion for the subsequent three years.
If the forecast holds true through June, when the state’s next budget must be passed, Newsom and legisla
“It is time to prioritize precious tax dollars and invest in the critical issues that are impacting all Californians — needed water storage, affordable domestic energy production, a reliable supply chain and improving our business climate — to rebuild a healthy economy.”
— Assemblyman Vince Fong, R-kern County, vice chairman of the Assembly’s budget committee
tors may have to make some tough calls. Those include how far to dip into the state’s reserves, where to make potential spending cuts and what projects and programs to slow down. Luckily, the state has stashed away billions of dollars in reserves in recent years to help cope with it.
The downturn is due to state revenues growing slower than spending — a possible precursor to a recession, the report indicated. The revenue estimates, if accurate, would represent the weakest economic performance California has experienced since the Great Recession of 2007 to 2009.
The gloomy projections follow nearly a decade of growth, including during the COVID-19 pandemic. The state was overflowing with cash, thanks to a historic surge in tax collections on incomes, sales and corporations.
Now, the state faces a slew of economic headwinds, including high interest rates and global stock market woes. The estimate released Wednesday will help the governor and lawmakers begin to craft their budget proposals for the upcoming fiscal year.
Economic warning signs
The projection confirms earlier warning signals. One was raised in September by Newsom when he emphasized budgetary discipline in his veto signings. Then last month, the state Department of Finance disclosed that general fund cash receipts were falling significantly short of projections.
The new forecast also coincides with some of California’s tech giants laying off double-digit percentages of their workers, citing excessive pandemic-fueled hiring blitzes, a slowdown in online commerce and a worsening economy.
California’s finances are especially prone to waves of capitol gains and losses, because the state’s relies so heavily on tax revenues of its wealthiest residents. The top 1% of income-earning Californian’s pay nearly half of the state’s income taxes, according to the state’s franchise tax board.
H.D. Palmer, a spokesperson for the state’s Department of Finance, on Wednesday called the analyst’s forecast “a realistic and reasonable assessment of the work that lies ahead.”
While the state’s in a good position to the manage the economic downturn, Palmer acknowledged “that doesn’t mean that the decisions to close the coming budget gap won’t be difficult — particularly if the economic conditions that have slowed the economy continue, or get worse,” he said in a statement.
Budget spending cuts on the horizon?
In recent years, Newsom has largely avoided such contentious decisions during the budget season. Bracing for a pandemic-driven recession in 2020, Newsom’s administration imposed pay cuts of up to 9.23% across state government. But gloomy projections about the state’s financial health never materialized, and the governor was saved from initiating any further cuts.
Fearing a future economic downturn, Newsom and legislative leaders have been cautious about spending its billions of unexpected dollars to pay for ongoing programs. Instead, they have tried to use the surpluses for onetime spending on items such as inflation relief checks and infrastructure projects.
Even so, Newsom and the Legislature have poured some of the state’s money into ongoing priorities. These include starting new homeless and housing programs, pursuing ambitious climate goals and expanding early childhood education and Medi-cal health coverage for undocumented Californians.
Assemblyman Phil Ting, a San Francisco Democrat and chair of the Assembly Budget Committee, said the state is in a good position to maintain those critical investments.
California has a long history weathering financial crises, and, in many ways, is more prepared now than ever before. Since 2015, the state has stashed away billions of dollars in a rainy-day account in the general fund and has been accumulating cash reserves in other areas to prepare for an economic downturn.
“We ensured that we didn’t overcommit in terms of ongoing expenditure for exactly this reason,” Ting said Wednesday. “... And we are ready to ensure that we don’t have to make those cuts that we had to make, unfortunately, over 12 years ago during the last Great Recession.”
Lawmakers brace for economic shift
In their annual report released Wednesday, state budget analysts recommended that the the governor and legislators reevaluate expenditures and look for programs to pause or delay rather than patch up holes using the state’s reserves. The analysts advised state officials to save its reserves for a potential recession down the line.
Ting said legislators will consider all of those options.
Assemblyman Vince Fong, a Kern County Republican and vice chair of the Assembly’s budget committee, called Wednesday’s report a “wake-up call” for state lawmakers to “refocus on fiscal responsibility.”
“It is time to prioritize precious tax dollars and invest in the critical issues that are impacting all Californians — needed water storage, affordable domestic energy production, a reliable supply chain and improving our business climate — to rebuild a healthy economy,” Fong said in a statement.
Senate President Pro Tem Toni Atkins, a San Diego Democrat, said similarly dim forecasts may have forced tax increases or program cuts in the past, but that does not need to be the case in this situation.
“Thanks to our responsible approach, we are confident that we can protect our progress and craft a state budget without ongoing cuts to schools and other core programs or taxing middle class families,” Atkins said in a statement. “The bottom line is simple: We are prepared to hold onto the gains we’ve made and continue where we left off once our economy and revenues rebound.”