Newsom’s $18 billion budget gap has roots in pandemic aid ending

When Gov. Gavin Newsom unveils his first draft of the state’s 2026-27 budget next month, he’ll reveal whether he intends to deal squarely with its chronic, multi-billion-dollar deficit or punt the shortfall to his successor.

Legislative Analyst Gabe Petek, the Legislature’s independent fiscal advisor, estimates the state faces an $18 billion gap between projected spending and likely revenues next year and, if left unaddressed, the deficit will grow to $35 billion a year.

Meanwhile, Petek says, the state has rung up $21.6 billion in off-the-books debt to cover deficits in recent fiscal years.

Petek and others have warned about the possibility of a serious recession afflicting the national economy which would exacerbate the budget’s imbalance and strain California’s emergency reserves, which have already been tapped to cover shortfalls.

Even without a recession, California’s economy is, in Petek’s words, “sluggish.” Jobs are shrinking, and at 5.6% of the labor force, California’s unemployment rate remains the highest of any state.

The recent history of papering over deficits with gimmicks and borrowed money is not an encouraging signal of a forthright approach. However, perhaps Newsom will opt to balance California’s books before embarking on a near-certain presidential campaign.

Unfortunately, the state is not alone in being plagued by yawning gaps between income and outgo. Throughout California, school districts, cities, counties and other units of local government are facing deficits rooted in the same dynamics that led to red ink in state finances — immense injections of federal relief funds during the COVID-19 pandemic.

It’s been estimated that the feds pumped as much as $600 billion into California through state and local governments to counteract the pandemic’s economic impacts, not counting many other billions that businesses and individuals received directly.

The federal aid gave officials cash to spend with few safeguards and fueled a short-lived jolt of taxes, particularly income taxes.

The Newsom administration interpreted the windfall as a permanent increase in revenue that led the governor to declare, in 2022, a $97.5 billion surplus. He and the Legislature immediately ramped up spending. But the surplus never materialized, and eventually the administration acknowledged that it had over-estimated revenues by $165 billion four years.

By then, however, the additional spending, especially for an expansion of medical care, was lodged in state law, and the state was left with what is termed a “structural deficit” in the $20 billion range.

Meanwhile, local governments and school districts were using their pandemic aid to satisfy the demands by employee unions for salary increases, which often could not be covered once the federal aid vanished. Inflation in living costs ratcheted up union salary demands even further.

A new report by the Fiscal Crisis & Management Assistance Team, which monitors California school district finances, examined the chronically troubled Sacramento City Unified School District and described how federal aid led to its financial quicksand.

The report catalogued the district’s history of overspending revenues and said, “This (federal) funding masked the district’s existing structural deficit, delaying the necessary actions to be taken to address it.”

Even after the federal aid stopped, the district continued to sign union contracts calling for raises that it could not afford. And it failed to implement the cost-saving steps it had pledged to balance its budget, the analysis found.

The budget problems in other school districts — Oakland Unified is a notorious example — and in local governments such as the City of Los Angeles have a similar ring. School trustees and city council members, elected with union support, squandered federal aid. Then they approved unsustainable contracts and blamed the resulting deficits on insufficient revenue.