California has a big, recession-caused budget problem, but its true dimensions are open to debate.
The first step to effectively deal with any problem is defining it accurately — and the recession-battered state budget is a case in point.
There’s no doubt that the pandemic-induced recession is one of the worst in California history and that its negative fiscal effects — both increased spending and reduced revenues — are many billions of dollars.
There is, however, much uncertainty about the dimensions of the budget crisis, and therefore what might be required to “meet the moment,” to use one of Gov. Gavin Newsom’s favorite phrases.
The revised budget that Newsom released last week appears to maximize the gap between income and outgo during the fiscal year that ends on June 30 and the 2020-21 fiscal year that begins on July 1. He pegs the gap at $54.3 billion and is proposing a potpourri of spending reductions, particularly in education, as well as deferrals, new revenues, allocations from the state’s rainy-day reserve fund, and federal aid to cover it.
That daunting number, however, is based on his initial budget proposal unveiled in January. At the time, everything appeared to be economically rosy, so Newsom proposed many billions of dollars in new programs and expansions of old ones. The revision oddly assumes that the inability to spend more in the forthcoming year represents a chunk of the deficit.
Moreover, it does not entirely account for federal disaster relief that would offset, in large measure, an estimated $7 billion in spending directly on the pandemic that Newsom counts as a negative component of his deficit projection.
When those and other factors are added to the calculations, the potential deficit shrinks to more manageable levels, as the Legislature’s budget analyst, Gabe Petek, points out. As Petek sees it, were the economy to recover relatively quickly, the state would have a net $18 billion problem to solve, and even if recovery were slower, it might rise to about $31 billion.
“In effect, the administration’s estimates largely reflect gross changes in the budget’s bottom line while our estimate includes the net effects of current law,” Petek wrote.
So why would Newsom maximize the deficit and thus the spending reductions — especially in education — that his budget would impose to cover them? He indirectly told us why during his presentation to reporters on Thursday: to provide political ammunition for his plea, and that of other state and local officials across the nation, for trillions of dollars in new federal relief.
Speaker Nancy Pelosi and other Democrats in the House are pushing for a $3 trillion relief package, including about $1 trillion for state governments that could mean $100 billion for California. So far, it’s been dead-on-arrival in the Republican-controlled Senate.
Accordingly, Newsom’s budget, if adopted by the Legislature, specifically and automatically rescinds the cuts to education and other popular services if what Pelosi has dubbed the Heroes Act becomes reality and California gets the hoped-for money.
“The Heroes Act is the best approach,” Newsom said. “We need the federal government. We need that support.”
There’s no doubt that the recession is serious. Our unemployment rate, which topped out at just over 12% during the Great Recession a decade ago, could easily reach twice that level. The state, indeed, faces a very serious budget problem but how serious is by no means a settled fact.
It now falls to legislative leaders to either go along with Newsom’s seemingly inflated deficit number or take the advice of their own budget experts that the real deficit may only be a third as large and deal with it accordingly.