State’s budget deficit may be even larger than predicted

Eight months ago, energized by projections of a nearly a $100 billion surplus, Gov. Gavin Newsom and the Legislature wrote a $307 billion budget that lavished money on new and expanded services and rebated billions of dollars back to taxpayers. Newsom crowed that “no other state in American history has ever experienced a surplus as large as this.”

Last month, Newsom had to eat those words because the immense – on paper – surplus had suddenly morphed into what he said was a $22.5 billion deficit due to sharp declines in tax revenues. He proposed a $297 billion budget for the 2023-24 fiscal year that clawed back some of the money that had not yet been spent.

Predictably, advocates for programs and services that wouldn’t receive the extra spending the previous budget had promised began complaining and demanding restoration. Environmentalists and leaders of the state’s financially perilous transit systems were among the loudest.

Political fallout from the sudden reversal of fortunes promises to make this year’s version of the annual budget process much more contentious than last year’s euphoria. Legislative allies of the aggrieved stakeholders are being squeezed between their demands and fiscal reality.

As difficult as this year’s budget process may be, the situation is likely worse than what Newsom projects in his proposed budget.

Last week, the Legislature’s budget analyst, Gabe Patek, declared that revenues will probably be markedly lower than what Newsom assumed, and the governor’s budget is “likely unaffordable in future years.”

“In particular, using recent revenue collections and economic data, we estimate there is a two-in-three chance that state revenues will be lower than the governor’s budget estimates for 2022-23 and 2023-24,” Patek wrote in a new analysis. “Our best estimate is that revenues for these two years will be roughly $10 billion lower – implying a larger budget problem by about $7 billion.”

Basically, Patek was saying, as tough as the spending cuts Newsom proposes may be, he and the Legislature need to tighten more to cover an even larger deficit.

There is another option that would ease the political pressure on lawmakers: Dipping into the state’s “rainy day” reserves.

Newsom’s proposal doesn’t tap the reserves, agreeing with Patek that it would be imprudent because no one knows whether the state will experience a serious recession in the near future.

The Federal Reserve System has been hiking interest rates in hopes of cooling off the economy and damping inflation without triggering a recession, but economists differ on whether it will succeed.

The shortfalls projected by Newsom and Patek assume the state will avoid recession, but if it strikes, the budget deficit could increase by many billions of dollars and the reserves would be needed to maintain basic services.

“Although state revenues are moderating from a historic peak, they are not yet consistent with recessionary levels,” Patek told the Legislature. “Using reserves now to maintain the recent spending peak would mean the state would have less reserves available to pay for its core services if revenues declined further or in the event of a recession.”

The annual budget exercise is still in its early phases. Affected interest groups are making their pitches, privately and publicly, for exemption from the reductions that would be needed to balance the budget. Over the next few months, the budget committees of both legislative houses will be reviewing what the governor wants and what Patek is advising.

The crunch will hit in May when Newsom releases a revised budget, one that likely to be starkly different from last May’s version which projected the much-vaunted but illusory $97.5 billion surplus.

CalMatters is a public interest journalism venture committed to explaining how California’s state Capitol works and why it matters. For more columns by Dan Walters, go to Commentary.

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On The Left

Why are we in the culture wars?

John McCain’s last official words came after his last Senate vote when he voted to uphold Obamacare. “We have to return to regular order.”

What’s “regular order”?

When a bill is proposed, it goes to a bipartisan committee for discussion and “improvement.” Then it is sent for a bipartisan chamber’s approval after which is goes into bipartisan conference between the House and Senate, and finally it’s passed by the bipartisan Congress. It still must avoid a presidential veto and a Supreme Court look-see.

This is a complex, delicate system but it worked reasonably well for more than 200 years. It’s obvious to everyone the system requires some cordiality between the parties. The members need to joke and smooze together somehow if you want our rattletrap system to work.

Can you sense where I’m going?

Let’s consider the recent State of the Union address. We saw a reasonably effective president ask repeatedly for bipartisanship to address our nation’s many problems. He received cat calls and adolescent expletives from too many GOP members.

How did this disaster (and it is a disaster) happen?

Easy: Newt Gingrich. Consider his famous war cry made in 1978: “The reason why the GOP hasn’t been successful recently is that we’re not nasty enough.” Let’s ask the old anarchist, “Nasty enough for you now, Newt?”

And, ultimately it’s all about nothing. A big nothing. The GOP

The Right Stuff

agenda is an empty box. Let me explain. They say they’re hot to cut spending and lower the national debt.

No, they’re not. If that’s true, why did Presidents Ronald Reagan, George W. Bush and Donald Trump each run huge deficits? There was not a peep from a Republican when Trump added almost 33% to the entire national debt.

Congress raised the debt limit three times for Trump. Not a Republican peep. Part of the empty box is outrage. Holler only when Democrats do it.

Want to cut our deficits, really?

You can cut spending or raise taxes, period.

No Republican (or Democratic) president has ever cut spending. Why? Because there’s nothing cuttable that’s significant enough to make a difference. The big pools of “waste, fraud and corruption” all have huge constituencies who think their program is essential.

The nation’s wealthy folks hate the three safety-net programs. They don’t need Social Security and they can buy their own health care. Their parents don’t need financial help in their declining years. But they see tax increases on the horizon directed into those huge programs. Horrors!

So they tell their Republicans in Congress to fight against those three using such popular adages as, “Americans show character when they buy their own support services, not rely on socialistic government handouts.”

Then rowdies like me whisper, “Easy for you to say, billionaire.”

I wonder if billionaire Sen. Rick Scott regrets advocating “sunsetting” the social safety net.

Or, House Republicans can cut the defense budget. They’re interested in cutting support to Ukraine. Support international thuggery: vote Republican. Sound like a popular plan?

There are no responsible cuts to be made. Empty box.

Or we can raise taxes. Before you begin hissing and booing, remember that the proposal is to increase taxes only on those who make taxable income above $400,000 per year.

So that person probably made, say, $700,000 and found deductions to reach $400,000. They can easily afford a small tax increase, with larger increases for those wealthier.

Remember, President Bill Clinton raised income taxes and we ran three years of surpluses. The money’s there. But the GOP won’t do it. It’s all sound and fury signifying nothing.

Next program in the GOP basket: ban abortion. It’s unpopular and will ultimately fail.

After that, immigration. But the GOP won’t sit down with Democrats to work out a reform. Better to flog the Dems than fix the problem.

After that: a list of conspiracies. Betrayals everywhere, just like conservatives saw in the McCarthy era but again without substance. In fact, without a return to bipartisanship, the GOP has nothing of substance to offer other than the “culture wars.”

They have nothing else.

Thanks, Newt.

Jack Batson is a former member of the Fairfield City Council. Reach him by email at jsbatson@prodigy.net.