Newsom, Legislature Flying Blind on State Budget Deficit as Deadline Looms

Gov. Gavin Newsom and legislative leaders are flying blind as they attempt to fashion a new state budget for the fiscal year that begins July 1.

They know the state faces a multi-billion-dollar deficit that the budget will attempt to close – at least on paper – but they really don’t know how big it could be because they don’t really know how much revenue the state’s tax system will generate.

Not only have revenues stagnated over the last year, thanks to gyrations in the stock market and the larger economy, but the unprecedented six-month delay in the deadline for filing federal and state income tax returns creates even more uncertainty about how much money politicians have to spend.

Newsom picked a number – a guess, really – and declared in May that the state has a $31.5 billion deficit to close. The Legislature’s budget analyst, Gabe Petek, then declared that revenues would fall short of Newsom’s assumption and raised the projected deficit by several billion dollars.

This week, legislative leaders published their joint version of the budget, planning to pass it on Thursday to meet the constitutional deadline. It uses Newsom’s more optimistic revenue projection, rather than Petek’s, and would boost spending from $306.5 billion in Newsom’s budget to $311.7 billion.

After this week’s pro forma budget action – essentially a drill to protect legislators’ pay from being docked if the June 15 deadline was ignored – Newsom and legislative leaders will finalize a revised version.

However, whatever they adopt as a “final” budget will not be truly final, given the vast uncertainty over revenues, and additional revisions could continue for months.

There are some genuine differences to be resolved, along with the macro issue of potentially chronic deficits in the remainder of Newsom’s second and last term as governor.

One of the highest profile conflicts is whether the state will give local transit systems the billions of dollars they say they need to avoid a “fiscal cliff” that would compel cutbacks in service or fare increases. Newsom’s budget provides virtually nothing new for transit systems, while the legislative budget would give them $5.1 billion over the next few years – a major factor in the Legislature’s markedly higher overall spending.

Another biggie is the demand of local governments for billions of dollars in ongoing aid to support homelessness programs – something that neither Newsom nor the Legislature is willing, so far, to provide. Newsom has been critical of what he calls lackluster efforts by local officials while they say they need dependable streams of revenue to be more effective.

Prospect of Chronic Fiscal Problems Ahead

Underscoring this year’s wrangling over budget details is the prospect of chronic fiscal problems in future years.

In a recent report on the state’s fiscal issues, Petek projected that continuing the spending in Newsom’s 2023-24 budget to the following year would cost $30 billion more for the two-year period. Moreover, Petek projected annual deficits averaging $18 billion over the next three years.

“This means that, if the Legislature adopts the governor’s May revision proposals, the state very likely will face more budget problems over the next few years,” Petek warned.

Since the Legislature want to spend billions more than Newsom seeks, its version would increase projected shortfalls even more.

Finally, all of the deficit-ridden budget scenarios floating around the Capitol assume that the state does not experience a recession, which some economists believe is still possible as the Federal Reserve System raises interest rates to battle inflation.

Even a moderate recession would decrease revenues by tens of billions of dollars and quickly exhaust the state’s “rainy day” reserves.

About the Author

Dan Walters has been a journalist for nearly 60 years, spending all but a few of those years working for California newspapers. He began his professional career in 1960, at age 16, at the Humboldt Times. For more columns by Walters, go to calmatters.org/commentary.

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