Golden State no more? California budget deficit balloons to $68 billion

In a brutal December surprise, California faces a $68 billion budget 
deficit, the state’s Legislative Analyst reported Thursday, blaming a 
severe drop in tax revenues in the current 2022-23 fiscal year.

The daunting estimates came later than usual this year, delayed by 
extensions that pushed federal income tax filings into November. Now, with 
just over a month to go before Gov. Gavin Newsom must propose the 2023-24 
budget, tough decisions are ahead as the governor and lawmakers begin the 
grueling work of figuring out how to plug the chasm — without imperiling 
the state’s finances for years to come.

Potential spending cuts to education and other programs and dipping into 
the state’s piggy bank of billions of dollars in reserves are likely on 
the way. New taxes also could be on the table.

“I would stop short of calling it a crisis,” Legislative Analyst Gabriel 
Petek said Thursday, noting the state has available reserves, one-time 
funding commitments that can be put on hold and better cash flow than it 
did during the 2008 Great Recession. “I would go with the word serious, 
serious budget problem.”

Newsom had no immediate comment. But his communications director, Erin 
Mellon, said the governor will introduce a balanced budget proposal next 
month that “protects vital services and public safety, and brings 
increased focus on how the state’s investments are being implemented.”

California has been whiplashed by a series of massive surpluses and 
deficits over the years as it relies heavily on income taxes, particularly 
high rates on the wealthy whose taxable income can gyrate wildly with 
shifts in the economy and investment returns.

Petek said one of the main drivers of this year’s deficit is that taxable 
earnings are lower than expected. Higher interest rates driven by 
inflation have cooled the state’s economy, with layoffs and unemployment 
up, venture capital and public stock offerings down.

Despite the staggering new deficit figure, it’s unclear whether it will 
force cutbacks in core services such as education or health services, at 
least in the near term. State leaders have learned to manage California’s 
fluctuating revenues by socking away reserves and deploying a menu of 
accounting maneuvers.

But the state’s Republicans blasted Newsom and his “overspending” fellow 
Democrats who dominate the Legislature. They said Thursday that 
California’s budget has swelled to $311 billion thanks to “boondoggles” 
such as high-speed rail, bailouts of failing transit systems such as BART 
and $20 billion spent on a worsening homelessness problem.

“Governor Newsom and Democrat lawmakers turned a $100 billion surplus into 
a $68 billion deficit in just two years,” Senate Minority Leader Brian W. 
Jones, of San Diego, said in a statement.

The non-partisan LAO forecasted the bad news Dec. 1 with a report 
indicating revenues are down $26 billion in just the current 2022-2023 
budget year and will be $58 billion short of projections through the 2024-
2025 fiscal year.

Newsom had been touting the Golden State’s economy as “booming” just the 
night before during a nationally televised debate with Florida Gov. Ron 
DeSantis.

The California School Boards Association in response to the revenue 
shortfall news urged lawmakers not to gouge education to cover the 
shortfall.

“While some belt tightening is required, it can’t come at the expense of 
public schools that are facing enormous challenges in the areas of 
learning recovery, student health and well-being, staffing shortages, 
school safety, facilities and the expiration of one-time COVID relief 
funds,” said CSBA Executive Director Vernon M. Billy. “If we use schools 
to balance the budget, we jeopardize efforts at the local level to boost 
achievement and address issues like student mental health.”

The legislative analyst said comparisons with previous deficits are 
difficult because of the way the current one has unfolded as well as the 
growing size of the overall budget.

Typically, the budget process does not involve large changes in revenue in 
the prior year, the LAO said, because prior-year taxes usually have been 
filed and associated revenues collected. But because of federal tax filing 
extensions this year, the Legislature only now is gaining a complete 
picture of 2022-23 tax collections after the fiscal year has already 
ended.

“This creates unique and difficult challenges — including limiting the 
Legislature’s options for addressing the budget problem,” the LAO 
reported.

For the near term, the shortfall “will be challenging,” the report said, 
but the Legislature has options:

Tap nearly $24 billion in reserves to help tackle the budget problem.
Reduce spending on schools and community colleges to take care of nearly 
$17 billion of the budget problem.
Adjust other areas of the budget, such as reductions to one-time spending, 
to address an additional $10 billion or so.
“These options and some others, like cost shifts, would allow the 
Legislature to solve most of the deficit largely without impacting the 
state’s core ongoing service level,” the LAO said.

But the LAO said the Legislature will have fewer options to deal with 
multiyear deficits in coming years that could average $30 billion a year.

“These deficits likely necessitate ongoing spending reductions, revenue 
increases, or both,” the report said. “As a result, preserving a 
substantial portion — potentially up to half — of reserves would provide a 
helpful cushion in light of the anticipated shortfalls that lie ahead.”

https://www.mercurynews.com/2023/12/07/golden-state-no-more-california-
budget-deficit-balloons-to-68-billion/?itm_source=parsely-api