Gavin Newsom’s new budget is already leaking red ink as revenues fall behind

While Gov. Gavin Newsom gallivants around the country as a campaign surrogate for President Joe Biden – and to burnish his own national image – the state budget he proposed just six weeks ago is falling apart at the seams.

Last week, his Department of Finance indirectly acknowledged the budget’s problems, reporting that through January revenues were running $5.9 billion behind the new budget’s assumption for the current fiscal year.

On Tuesday, the Legislative Analyst’s Office, which advises the Legislature, increased its estimate of the budget’s deficit, which Newsom had originally pegged at $38 billion, to an eye-popping $73 billion after toting up Newsom’s proposals and decreasing its revenue estimate.

If the downward revenue trend continues, the 2023-24 budget could wind up in a deep hole and there will be much less money available for the 2024-25 fiscal year that begins on July 1.

The shortfall was particularly acute in January, a key month on the fiscal calendar because quarterly payments for personal income taxes were due. The month’s income tax payments were $5 billion below the $20.4 billion the administration expected to collect.

When he unveiled his 2024-25 budget in January, Newsom proposed a series of fiscal maneuvers to close the gap, very few of which were actual spending reductions.

He tapped the state’s emergency reserve and dug deeply into the bag of tools that the state has historically used to paper over deficits, including spending deferrals, loans from special funds and accounting tricks, such as a maneuver involving school aid.

The Legislature’s budget analyst, Gabe Petek, had originally estimated the deficit at $68 billion, largely due to revenue projections about $15 billion lower than the governor’s over the three-year “budget window,” from 2022-23 through 2024-25. He later declared that Newsom’s action could offset a $58 billion shortfall. On Tuesday, however, Petek’s staff added $15 billion to the estimated deficit, bringing it to $73 billion.

The new revenue numbers and projections imply that Petek’s scenario is much closer to reality than Newsom’s. They also imply that, if Newsom is trying to skate through the final three years of his governorship without making some basic fiscal adjustments, he’ll leave a big mess for his successor.

The deficit, whatever its true dimensions, appears to be detached from California’s underlying economy, and is rather what fiscal mavens call a “structural deficit” – one in which baseline revenues and baseline spending are fundamentally imbalanced. And in fact both Newsom’s budget and Petek’s analysis agree that the state faces deficits of roughly $30 billion a year at least for the remainder of his governorship.

The state’s economy may not be booming, but it is generally positive, with low unemployment. Nevertheless, Newsom wants to tap the “rainy day” reserves that are meant to offset a serious economic downturn.

Using reserves now and employing other short-term actions would merely postpone the day of reckoning and worsen its impact.

That danger is illustrated by the aforementioned school aid maneuver, which would, Petek’s office says, “allow schools to keep $8 billion in cash disbursement above the minimum requirement without recognizing the budgetary impact of those payments.”

“This proposed maneuver is bad fiscal policy,” the analysis continues, saying it “creates a binding obligation that will worsen out‑year deficits and require more difficult decisions in the future.”

If revenues continue to fall behind the Newsom budget’s relatively rosy projections, avoiding hard decisions to cut spending and/or raise taxes would require even more elaborate budgetary tricks like the school finance sleight-of-hand that would make future budgets even more imbalanced.

Petek wants his bosses in the Legislature to get real with true cuts in spending, particularly money for items that had been budgeted but not yet spent. But doing so means they would have to reduce spending that their allies, such as public employee unions and advocates for educational, health care or social services, want to preserve, or raise taxes that are already among the nation’s highest.

That’s why they will be tempted to adopt a bag of tricks, regardless of future impact.