Legislature’s adviser tries budget tough love to get California politicians to close huge deficits

Since 1941, California’s Legislature has had an independent budget adviser to monitor the ebb and flow of state finances — particularly the governor’s budget — and suggest ways they could be improved.

Traditionally, the Legislative Analyst’s Office ignores politics and provides its advice in neutral —even bland — language, implicitly telling politicians that they are free to either accept or reject its findings, but at least they cannot claim ignorance.

Recently, however, Legislative Analyst Gabe Petek, just the sixth person to hold the position over the last 85 years, has adopted a more emphatic tone, warning Gov. Gavin Newsom and legislators that they must close their chronic, multibillion-dollar deficits.

For the past four years — when Newsom declared that the state had a $97.5 billion surplus that turned out to be an illusion based on an erroneous revenue projection — he and legislators have been overspending revenues, creating $125 billion in deficits that were papered over with on- and off-the-books loans, deferrals and creative bookkeeping, such as shifting the state payroll from one fiscal year into another.

Petek’s latest cautionary report, issued this week, ramps up the language even more, detailing how general fund spending has increased by over $100 billion a year, outstripping revenues, since 2019, the year Newsom took office.

“Both our office and the administration have estimated the state faces structural deficits ranging from $20 billion to $30 billion annually,” Petek reiterates. “While recent revenue gains — driven by a strong stock market and investor enthusiasm surrounding artificial intelligence — have buoyed the state’s near-term budget picture, long-term imbalance will likely persist without significant policy changes.”

That passage may be aimed at indications that politicians may rely on another expansive revenue projection, ala 2022, to postpone the day of reckoning.

Newsom has promised that his revised budget will not only close current gaps between income and outgo, but it will ensure his successor won’t be stuck with a budget leaking red ink.

Newsom recently told Democratic legislators, “My obligation is to also have the back of the next governor and the next Legislature,” according to Politico, adding that he would do whatever is necessary to balance the budget, including spending reductions, but remains averse to new taxes.

Petek says most of the increased spending since 2019 has been essentially automatic, driven by cost-of-living adjustments, caseloads in health and welfare services and, in education, formulas locked into the state constitution.

However, a substantial portion has been what officials call “discretionary,” meaning it was not required by current law. “In retrospect, the state could not afford to sustain its existing services while funding the chosen suite of expansions and new programs under the same tax revenue structure,” Petek says.

The analyst characterizes his new report as “a first step in making fiscally sound evidence-based policy decisions” and tells politicians they “will need to make difficult budgetary decisions in the years ahead. Near-term revenue gains may temporarily mask structural imbalances, but in the coming years, the fiscal realities are likely to be undeniable. Addressing the budget gaps will require sustained and consequential action — through revenue increases, spending reductions, or likely both.”

So what about a tax increase?

Some legislative leaders have suggested tax hikes, probably on corporations, to not only cover chronic deficits but offset reductions in federal support. With Newsom generally averse to that option, Petek warns “eliminating deficits through tax increases alone would require substantially more in new revenues than the deficit itself — potentially $30 billion to $60 billion per year,” noting that education automatically claims 40 to 50 cents of every new revenue dollar.

We’ll see if Petek’s tough love advice finally gets Newsom and legislators to pull their heads out of the sand.