After back-to-back historic budget surpluses, California analysts forecast on Wednesday that Gov. Gavin Newsom and state lawmakers could be forced to manage a $25 billion budget deficit next year.
That shortfall, according to a new report from the Independent Office of the State Legislative Analyst, could be followed by persistent annual budget gaps between $17 billion and $8 billion for the next three years.
If the forecast holds true through June, when the next state budget is due to pass, Newsom and lawmakers may have to make some tough decisions. These include how much to dip into state reserves, where to make potential spending cuts, and which projects and programs to slow down. Fortunately, the state has hidden billions of dollars in reserves in recent years to help deal with this.
The slowdown is because government revenue is growing more slowly than spending — a possible precursor to a recession, the report says. The revenue estimates, if accurate, would represent the weakest economic performance California has seen since the Great Recession of 2007 to 2009.
The grim 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 income, sales and corporation tax levies.
Today, the state faces a host of economic headwinds, including high interest rates and difficulties in global stock markets. The estimate released Wednesday will help the governor and lawmakers begin crafting their budget proposals for the upcoming fiscal year.
Economy Warning Signs
The projection confirms earlier warning signals. One was raised in September by Governor Gavin Newsom when he emphasized fiscal discipline in his veto signatures. Then last month, the state finance ministry revealed that general fund cash inflows were significantly lower than projected.
The new forecast also coincides with some of California’s tech giants laying off double-digit percentages of their workers, citing pandemic-fueled excessive hiring drives, slowing e-commerce and deteriorating productivity. economy.
California’s finances are particularly prone to waves of capital gains and losses, as the state relies heavily on tax revenues from its wealthiest residents. The top 1% of Californians pay nearly half of state income taxes, according to the state’s franchise tax board.
HD Palmer, spokesman for the state Department of Finance, on Wednesday called the analyst’s forecast “a realistic and reasonable assessment of the work ahead of us.”
While the state is in a good position to manage the economic downturn, Palmer acknowledged that “that doesn’t mean decisions to close the next fiscal 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 budget season. Preparing for a pandemic-induced recession in 2020, Newsom’s administration imposed salary cuts up to 9.23% across state government. But gloomy projections on the financial health of the state never materializedand the governor was saved from initiating further cuts.
Fearing a future economic downturn, Newsom and legislative leaders have been cautious about spending his windfall billions of dollars to pay for ongoing programs. Instead, they tried to use the surpluses for one-time spending on things like inflation-fighting checks and infrastructure projects.
Even so, Newsom and the Legislative Assembly poured some state money into ongoing priorities. These include launching new homelessness and housing programs, pursuing ambitious climate goals, and expanding early childhood education and Medi-Cal medical coverage for undocumented Californians. .
Assemblyman Phil Ting, D-San Francisco, chairman of the Assembly Budget Committee, said the state is well positioned to maintain these critical investments.
California has a long history of dealing with financial crises and, in many ways, is better prepared than ever. Since 2015, the state has hid billions of dollars in a bad weather account in the general fund and has accumulated cash reserves in other areas to prepare for an economic downturn.
“We made sure we didn’t overcommit in terms of running costs for exactly that reason,” Ting said Wednesday. “…And we’re ready to make sure we don’t have to make those cuts that we had to make, unfortunately, over 12 years ago during the last Great Recession.”
Lawmakers prepare for an economic transition
In their annual report released Wednesday, state budget analysts recommended that the governor and lawmakers reassess spending and look for programs to suspend or delay rather than patch holes using state reserves. Analysts have advised state officials to save its reserves for a possible recession down the line.
Ting said lawmakers would consider all of those options.
Assemblyman Vince Fong of R-Kern County, vice chairman of the Assembly Budget Committee, called Wednesday’s report “a wake-up call” for state lawmakers “to refocus on budgetary responsibility”.
“It’s time to put precious tax dollars first and invest in the critical issues that affect all Californians – necessary water storage, affordable home energy production, a reliable supply chain, and improving our business climate – to rebuild a healthy economy,” Fong said in a statement.
Senate Speaker Pro Tem Toni Atkins, D-San Diego, said similarly bleak forecasts may have forced tax increases or program cuts in the past, but that needn’t be the case in this situation.
“Through our responsible approach, we are confident that we can protect our progress and craft a state budget without continued cuts to schools and other basic programs or taxing middle-class families,” Atkins said in a statement. communicated. “The bottom line is simple: we’re ready to keep the gains we’ve made and pick up where we left off once our economy and incomes rebound. »
This story was originally published November 16, 2022 12:31 p.m.