Gov. Newsom’s Revised Budget Still Doesn’t Add Up

California Gov. Gavin Newsom meets with delegates from Norway in Larkspur, Calif., on April 17, 2024. Travis Gillmore/The Epoch Times

Commentary

Gov. Gavin Newsom raised his estimate of the state’s budget deficit from $38 billion in his January budget proposal to $44.9 billion in his May Revision released May 10. The plan would spend $187 billion from the general fund for fiscal year 2024–25, which begins on July 1. The California Constitution mandates the budget must be passed by lawmakers by June 15.

But the $44.9 billion immediately is reduced by $17.3 billion, the revised budget explains, thanks to a deal he made a month ago with Assembly Speaker Robert Rivas (D-Hollister) and Senate President pro Tem Mike McGuire (D-Healdsburg).

That leaves $27.6 billion. We’ll have to wait until the nonpartisan Legislative Analyst’s Office releases its own analysis next week to get a more accurate picture. In February, the analyst’s office pegged the deficit at $73 billion. Whatever the actual enormity of the deficit, it’s a shocking flip from the $97 billion surplus two years ago.

The new budget proposal includes numerous cuts over two years. Here are some of them:

• $510 million from the Middle Class Scholarship Program
• $550 million from the California Preschool, Transitional Kindergarten and Full-Day Kindergarten Facilities Grant Program
• $72.3 million in 2023–24, $348.6 million in 2024–25, and $5 million in 2025–26 from the Children and Youth Behavioral Health Initiative
• $80.6 million from California Department of Corrections and Rehabilitation Housing Unit Deactivations

The governor also plans to cut “state operations” by about 8 percent beginning in the upcoming fiscal year to “nearly all department budgets.”

“The planned reduction involves all categories, including personnel, operating costs, and contracting. The Department of Finance will work with agencies and departments in the fall on the appropriate budget reductions,” the budget summary reads.

There also are numerous “gimmicks,” as they’re called in Sacramento parlance: fund “delays and pauses” and “revenue/internal borrowing.”

He’s also tapping the rainy day funds, which are supposed to be used only during a depression—not a time of prosperity like now.

“The May Revision proposes to withdraw $3.3 billion from the [Budget Stabilization Account] in 2024–25 and $8.9 billion in 2025–26,” in addition to “withdrawals from the Public School System Stabilization Account of approximately $8.4 billion to maintain predictable support for local educational agencies and community college districts.”

The budget blames the deficit on the big spike in revenues not continuing. Revenues soared from $139 billion in 2019–20 to $215 billion in 2021–22. That was a 55 percent increase in two years, much of it from federal injections of cash during COVID-19. The number then fell back to $170 billion in 2022–23.

Here’s the chart from the budget. Note the spike above the trend line.

Courtesy of California Department of Finance

Well, any responsible business or family would take into account a revenue spike likely was temporary. The governor and Legislature treated that money, which produced the $97 billion surplus, like one of those California Lottery winners who blow a multibillion jackpot in five months.

I warned about this when I first started writing for The Epoch Times in July 2021 in “Despite Alleged Surplus, California Budget Is Late and Unbalanced.” I quoted former state Sen. John Moorlach (R-Costa Mesa), a CPA who was called the Fiscal Conscience of the Legislature. I had served as Mr. Moorlach’s press secretary until November 2020 when innumerate voters ousted him.

“Not setting more aside, not more aggressively reducing existing high-interest debt obligations, and creating new annual programs is a recipe for a fiscal train wreck,” he told me then. “Economies operate in cycles. With a huge boom in personal income tax revenues, the state’s new budget does not adequately account for a potential bust or down cycle.”

Well, here we are almost three years later and definitely in a down cycle. How different things would be if spending had been kept under control so it didn’t need to be cut—and cut probably a lot more than what Mr. Newsom is proposing.

Moreover, not responsibly using the COVID money from President Biden wasn’t the only spike in income. Mr. Newsom’s new proposal includes this graph showing the sharp recent drop in capital gains as a share of personal income.

Courtesy of California Department of Finance

Again, just look at the graph. It’s been known for decades good times bring in extra revenues as rich people cash in capital gains profits. Look at the spikes during the dot-com boom of the late 1990s, the real-estate boom of the mid-2000s, and the 2020–22 boom.

Then look at the big drops: the dot-com crash of 2001–02, when the deficit under Gov. Gray Davis soared to $23 billion, the subprime meltdown of 2007–10, when the deficit under Gov. Arnold Schwarzenegger spiked to $19 billion, and the current deficit of $44.9 billion or $73 billion.

A big problem this time is so many rich people are leaving the state to avoid the high taxes. The top rate just rose again, to 14.4 percent on January 1 from 13.3 percent. Moneywise headlined in March, “‘We’re leaving!’: Rich Americans are ditching California and ‘taking their tax dollars with them’ — and now the tax rates they’re fleeing have been raised even higher.”

After the analyst’s office comes out with its analysis, the Legislature will get its crack at solving the deficit its own polices caused.

In sum, this budget mess is the result of five years of profligate spending by Mr. Newsom and the Legislature. But in the end, we have to blame voters, who preferred the wild spending to the prudent budgets Mr. Moorlach urged. You reap what you sow.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.