Newsom, legislators opt for gimmicks and wishful thinking to close California’s budget deficit

Gov. Gavin Newsom and his fellow Democrats in the Legislature spent their way into a massive state budget deficit by assuming that a one-time surge in revenues would become a permanent cornucopia of money to expand medical and social services.

As revenues flattened, particularly all-important personal income taxes, the gap between income and outgo could no longer be ignored. In January, Newsom pegged the deficit at $38 billion as he proposed a 2024-25 budget.

The Legislature’s budget analyst, Gabe Petek, calculated that the real deficit over the remainder of the current fiscal year and through 2024-25 is many billions of dollars higher, perhaps as much as $70 billion, and warned legislators that the state faces annual deficits in the $30 billion range for the remaining three years of Newsom’s governorship.

“The state faces significant operating deficits in the coming years, which are the result of lower revenue estimates, as well as increased cost pressures,” Petek said in his analysis of Newsom’s budget. “These deficits are somewhat compounded by the governor’s budget proposals to delay spending to future years and add billions in new discretionary proposals. State revenues in the out-years would need to exceed the administration’s forecast by roughly $50 billion per year in order to sustain the spending proposed by the governor’s budget.”

So far, Newsom and legislative leaders are ignoring Petek’s advice and are using wishful thinking, accounting gimmicks and borrowed money to fashion a budget they will portray as balanced, but would, as Petek says, make the state’s fiscal predicament even worse in future years.

The duplicity begins with assuming that the deficit is billions of dollars smaller than Petek’s estimate. It continues with an agreement to enact “budget solutions worth $12 to $18 billion to address the shortfall” this spring.

Those “solutions” are laid out in Newsom’s budget and a “Shrink the Shortfall” proposal from state Senate leaders. They consist largely of temporarily suspending some of the appropriations in the 2023-24 budget that was adopted last June, shifting some spending from the general fund into special funds, borrowing from various pots of money and tapping into reserves.

Newsom termed it “a balanced approach that will take a significant chunk out of the projected shortfall.”

They are the sort of things that California’s politicians have embraced during previous budget crises to avoid either concrete reductions of spending or new taxes, akin to financially stressed families running up their credit cards, stiffing some creditors and tapping relatives for loans.

Were California experiencing only as temporary gap due to recession, a case could be made for a jerry-rigged budget to minimize impacts on those who depend on money flowing from Sacramento. However, the state faces what budget mavens call a “structural deficit,” meaning there is a fundamental imbalance disconnected from the state’s overall economy.

The deficit is born of Newsom’s 2022 declaration that the state was enjoying a $97.5 billion surplus, thanks largely to a $54.8 billion projected uptick in revenues. “No other state in American history has ever experienced a surplus as large as this,” Newsom bragged.

The surplus never materialized. It was an illusion stemming from an overly enthusiastic response to tens of billions of one-time dollars pumped into the state’s economy by federal pandemic relief programs. The bubble quickly burst but politicians had already spent many of the phantom dollars.

The deficit is a gut-check for Newsom and legislators. They could summon the political courage to deal with it as a serious fiscal crisis, or they could – and probably will – pretend to close the gap on paper and kick the can down the road.