Gov. Gavin Newsom says the new California state budget is balanced, but in reality it has a huge deficit that will be covered by indirect borrowing.
Last month, Gov. Gavin Newsom signed a 2020-21 state budget he described as “balanced, responsible and protects public safety and health, education, and services to Californians facing the greatest hardships.”
Whatever its other virtues may be, the budget is far from “balanced,” at least as most folks outside the Capitol would define it.
The 2020-21 budget spends far more — at least $20 billion more — than projected revenues, even including billions of dollars from the state’s emergency reserve.
The gap is closed, at least on paper, by running up the state’s credit card with debt of one kind or another, the most spectacular example being how it treats the budget’s largest single expenditure, state aid to school districts for the education of about 6 million kids.
It authorizes those districts to spend more or less what they would spend if the state wasn’t being battered by the COVID-19 pandemic, if its economy wasn’t in recession, and if the state’s revenues aren’t in a nosedive.
However, in actual money, the budget will give them at least $11 billion less than the authorized spending and assumes that local school officials will close the gap from their own reserves or by going into debt themselves. Under the constitution, the deferments must be made up in subsequent years, so in reality the state is borrowing money from the schools.
Billions more dollars counted as revenues in the budget are actually loans from dozens of state special funds — money collected for specific purposes, such as licensing fees — that also must be repaid eventually with interest.
The most interesting special fund raid is money set aside to rebuild the east wing of the state Capitol, which houses Newsom’s own office and those of legislators, as well as committee hearing rooms. The budget grabs $734 million and authorizes the issuance of bonds — borrowed money — for the construction project.
The budget counts about $4.5 billion in revenue from suspending a couple of corporate income tax breaks. But the suspension will be in effect for several years, generating about $9 billion for the budget. It’s really a massive loan from the affected corporations that would have to be repaid when they claim the accumulated tax credits after the suspension expires.
The sneakiest bit of borrowing is an assumption that the budget will save $2.8 billion, half in the general fund, by reducing the pay of state workers via deals negotiated with their unions. The details differ from union to union, but generally, workers will be required to work two days each month without pay, offset somewhat by reducing their contributions for fringe benefits.
The kicker is that those unpaid work days will go onto the books as time-off to be taken with pay later and doubles the ceiling on accumulated time-off. So eventually the state will be repaying workers, and probably at hourly rates substantially higher than their current salaries.
The budget declares that the extra time-off must be taken before an employee retires or resigns, but that’s a polite fiction. A smart worker will use up the extra time-off first and bank other vacation or time-off days, which will then become larger lump-sum payments when employment ends.
When the reduced fringe benefit contributions are included in the equation, it’s really a multi-billion-dollar, high-interest loan from workers.
All of these loans assume that the state’s economy and tax revenues will recover in subsequent years, so they can be easily repaid. It’s a multi-billion-dollar wager, with taxpayers on the hook if it’s a loser.