Because of a “severe revenue decline,” California is facing a $68 billion budget deficit that could accumulate to more than $155 billion over the next five years, according to the most updated projection released Dec. 7 by the nonpartisan Legislative Analyst’s Office.
A spokesperson for California Gov. Gavin Newsom suggested some of the state’s approximately $24 billion held in reserves could be used to address the growing deficit—an idea analysts agree will be necessary.
“The Governor has maintained strict fiscal responsibility since taking office, building up the state’s reserves to historic levels reaching the maximum allowed by the state constitution to be put in reserves and paying down debts—putting California in a strong position to deal with budget shortfalls,” Erin Mellon, communications director for Mr. Newsom’s office, told The Epoch Times by email Dec. 7.
Budget problems arose after income tax collections dropped 25 percent in the fiscal year 2022–2023—which ended June 30—compared to the year before, according to the report by the Legislative Analyst’s Office.
Moreover, tax receipts typically due in April were delayed until October this year due to federal and state exemptions granted after winter storms impacted the state, which made it difficult for state officials to determine the scale of the deficit earlier to define budget priorities accordingly.
“Federal delays in tax collection forced California to pass a budget based on projections instead of actual tax receipts,” Ms. Mellon said. “Now that we have a clearer picture of the state’s finances, we must now solve what would have been last year’s problem in this year’s budget.”
Noting the unusual dilemma presented by the timing and severity of the decline, analysts said the state has only faced such circumstances during the Great Recession and dotcom bust.
With a $68 billion shortfall for the fiscal year 2024–2025 projected, in addition to $30 billion operating deficits in following years, lawmakers will need to reduce spending, increase revenues, or both to fill the gap.
Cuts will be needed across programs, including education and other core services to resolve the problem. The report identified approximately $8 billion in temporary spending options in 2024–2025 to be considered for funding reductions, according to the report.
Lowering spending on employee compensation, higher education, and judicial systems are solutions utilized in the past to manage budgets, the report said.
Analysts noted that such dire conditions constitute a “fiscal budget emergency,” though the governor is required to make an official declaration to enact austerity measures. Mr. Newsom has not declared such as of press time.
Critics point to a growth in state spending as contributing to the budget issues.
“Governor Newsom and Democrat lawmakers turned a $100 billion surplus into a $68 billion deficit in just 2 years,” Senate Minority Leader Brian W. Jones (R-San Diego) said in a Dec. 7 press release. “Even more alarming, the five-year deficit forecast is an astounding $155 billion, thanks to the overspending Democrats jammed into the last few budgets.”
Financial market uncertainty in 2022 and early 2023—including Silicon Valley Bank’s implosion triggering instability—and higher interest rates are to blame, in part, the report suggests.
Higher borrowing costs slowed the housing market, as average monthly mortgage prices for homes purchased in California increased from $3,500 to $5,400 over the last year, according to the report.
“Overall, the experience of the last few years suggests California’s economy and revenues are uniquely sensitive to Federal Reserve actions,” analysts wrote.
Historically, similar downturns have been followed by years of economic weakness, according to the report.
“Whether the recent weakness will continue is difficult to say,” analysts said. “However, the odds do not appear to be in the state’s favor.”
The California State Capitol building in Sacramento, Calif., on April 18, 2022. John Fredricks/The Epoch Times
Calling the situation unique and challenging, the report suggested urgent action to identify potential solutions—emphasizing fewer options will be available if discussions are delayed.
“Given the scale of the budget problem, we suggest the Legislature immediately begin evaluating past spending to find monies that have been committed but not yet distributed,” analysts wrote. “Taking early action on these reductions could increase the choices available to the Legislature.”
Such work is currently underway, with proposed solutions to be introduced once the Legislature reconvenes next year, according to the governor’s office.
Mr. Newsom is expected to announce his budget proposal for the fiscal year 2024–2025 by the Jan. 10 deadline.
“In January, the Governor will introduce a balanced budget proposal that addresses our challenges, protects vital services and public safety, and brings increased focus on how the state’s investments are being implemented, while ensuring accountability and judicious use of taxpayer money,” said Ms. Mellon, spokeswoman for the governor’s office.
One lawmaker said the budget problems are not surprising, created after years of spending increases.
“California’s tax-and-spend majority has joined this governor in budget decisions that are based on unrealistic revenue estimates and budgeting gimmicks,” Sen. Roger Niello (R-Fair Oaks) told The Epoch Times. “Hopefully, the majority will see it is time for a more realistic budget strategy, instead of throwing money at a laundry list of projects that sounds nice on the national television debate stage.”
