Three years later, surplus spending casts a shadow over Newsom’s new state budget

Fashioning a budget for a state as large and diverse as California is a fraught process under the best of circumstances, involving not only strictly financial aspects but demands from countless interest groups and the internal politics of the Capitol.

That said, what happened three years ago, as Gov. Gavin Newsom and legislators were finalizing a 2022-23 budget, remains one of the most egregious errors of fiscal judgment in state history, and looms over the budget process today.

As the state was emerging from the COVID-19 pandemic, it experienced a sharp uptick in revenues, particularly in personal income taxes, thanks largely to massive injections of federal relief funds and a big gain in taxable investment profits among high-income taxpayers.

Newsom and his budget advisors concluded that the much-higher general fund revenues would continue indefinitely — far surpassing the state’s core expenditures. The projection generated a monumental paper surplus Newsom tabbed at $97.5 billion, although the number never appeared in any documents.

“No other state in American history has ever experienced a surplus as large as this,” Newsom boasted as he unveiled what became a much-revised $308 billion budget, which was $22 billion higher than his original proposal.

It turned out to be a mirage. Revenues never reached the elevated level he had assumed. Last year, buried in the fine print, the 2024-25 budget acknowledged the error and estimated it to be $165.1 billion over four years. Newsom blamed the volatility of California’s tax system for the immense gap between expectations and reality — instead of a miscalculation.

Nevertheless, the damage was done. Much of the phantom surplus had already been baked into the spending side of the budget, leading to massive deficits.

Last year, to cover the yawning gap between income and outgo, Newsom and the Legislature resorted to tapping the state’s emergency reserves, bookkeeping gimmicks, direct loans from special funds, and indirect borrowing from school funds and corporations.

This bit of recent budgetary history is offered because a new state budget cycle began on Friday, when Newsom’s finance director, Joseph Stephenshaw, unveiled an initial $322.3 billion 2025-26 budget proposal, including a $228.9 billion general fund.

Overall, it means that the $165.1 billion error still haunts the budget. Despite Newsom’s claims that the budget would be balanced, revenues still fall short of covering the additional spending that Newsom and legislators adopted three years ago on a mistaken assumption.

The proposed budget projects an increase in revenues from earlier estimates but essentially spends all the extra money. It continues the use of emergency reserves and other tactics that were employed last year.

It also means that despite the seemingly precise numbers of the proposed budget, there are many highly variable factors.

They include how President-elect Donald Trump and a Republican Congress might affect the many billions of dollars that the federal government contributes to education, health care and welfare programs; uncertainty about taxable income from capital gains and, most recently, the effects of the wildfires devastating Southern California communities.

The wildfire impact could be immense, particularly if Trump doesn’t honor outgoing President Joe Biden’s pledge of massive federal aid. Trump issued a fact-free blast faulting Newsom — one of his sharpest critics — for not giving Southern California enough water, but hasn’t said whether he intends to limit federal relief.

Even if Trump is generous with wildfire assistance, local governments will experience declines in property and sales tax revenues and will look to Sacramento for help.

The bottom line is that the January budget may bear only a passing resemblance to the version that must be enacted by June 15, and even less to the budget revisions that will surely follow after June 15.