Southern California wildfires could be a double whammy for the state’s shaky budget

Three weeks ago, Gov. Gavin Newsom proposed a $322 billion state budget for the fiscal year that begins on July 1, emphasizing that it would be balanced without new taxes and have a “modest” $363 million surplus.

The latter number is scarcely one-tenth of 1% of the overall budget, which makes one wonder how Newsom’s budget writers could calculate it so precisely. It may have been plucked from thin air so the first draft of the budget could be portrayed as balanced.

In fact, its purported balance assumes that at least $11 billion in drawdowns from emergency reserves, bookkeeping gimmicks and off-the-books loans can be counted as revenues. So by its own numbers, the proposed budget is actually leaking red ink.

Furthermore, the budget is already scrap paper because the deadly wildfires that were scorching Southern California as it was being released will clobber tax revenues while imposing massive new financial burdens. The $2.5 billion hastily appropriated by the Legislature is only a down payment on what the state may have to spend on fire suppression and recovery.

That would be true even if President Donald Trump supplied billions of dollars in federal disaster aid that Newsom and other officials are seeking. During his visit to the fire scene last week, Trump both promised to help the region recover and suggested that the state should change some of its environmental and immigration policies in return.

If federal aid is not forthcoming, or is markedly less than being sought, the impact on state finances — both in loss of revenue and new spending — could be immense, potentially encompassing all of the state’s emergency reserves and then some.

A hint of that potential impact is contained in a memo that Joe Stephenshaw, California’s finance director, sent to heads of state agencies last week, basically telling them to stifle any hopes for new or expanded programs.

Stephenshaw told the officials that “the recent devastating fires in southern California have resulted in the federal government delayed tax filings for Los Angeles and Ventura counties until November 15, introducing a level of uncertainty to the revenue forecast.”

Citing the “projected structural deficits in future years and fiscal uncertainty the state continues to face,” he said that the state will stay within a “workload budget,” defined as the current level of authorized spending, adjusted only for such inescapable factors as inflation, caseloads and federal or judicial requirements.

The phrase “projected structural deficits in future years” refers to calculations by both Stepenshaw’s staff and the Legislature’s budget analyst, Gabe Petek, that no matter how the 2025-26 budget turns out, the state faces annual multibillion-dollar gaps between income and outgo after Newsom’s governorship ends two years hence.

Petek sees annual deficits in the $25-30 billion range in the future, while the administration’s projected shortfalls are in the $15-20 billion range. Neither includes the potentially massive revenue and spending impacts of wildfires.

Petek, in his initial analysis of the budget, also warns that recent spikes in income taxes Newsom cited in his budget “are on shaky ground.”

“These gains are not tied to improvements in the state’s broader economy, which has been lackluster, with elevated unemployment, a stagnant job market outside of government and healthcare, and sluggish consumer spending,” Petek noted. “Instead, the gains appear largely tied to the booming stock market, a situation which can change rapidly and without warning.”

The meltdown in artificial intelligence stock values this week punctuates Petek’s admonition.

California has faced budget crises before, but this could be the perfect storm of a chronically unbalanced budget made infinitely worse by disaster.