How Newsom plans to solve California’s projected $37.9 billion budget deficit

(Jeff Chiu/Associated Press)

How Newsom plans to solve California’s projected $37.9 billion budget deficit

California politics, homepage news, mental health

Taryn Luna

January 10, 2024

Gov. Gavin Newsom on Wednesday asked California lawmakers to dip into the state’s rainy day reserves and signaled he may want to delay a minimum wage increase for health care workers as part of his plan to address an expected shortfall of $37.9 billion. A confluence of weaker-than-expected state revenues, delayed tax deadlines and overspending based on inaccurate budget forecasts caused the budget deficit. From running a $100 billion budget surplus during the COVID-19 pandemic, the state has now faced back-to-back deficits as uncertainty continues to loom over the U.S. economy. Newsom described the upcoming budget as an example of revenue “normalization after a period of tremendous amounts of distortion” during a presentation Wednesday as he outlined his $291.5 billion budget proposal for the 2024-2025 fiscal year in Sacramento. “All of this uncertainty happened because we experienced something that we have never experienced in modern history: In the state, we did not collect any taxes in April of last year,” Newsom said.

The deficit adds to the state government’s economic challenges and could spell political trouble for Newsom this year as he struggles with lawmakers and advocacy groups to cut $8.5 billion from planned spending, including on housing and climate programs.

His budget proposal

signals he wants to pursue legislation to add funding restrictions to a law he signed last year that would raise the minimum wage for health care workers to $25 an hour, which could delay the wage increase from taking effect if state revenues fall below a drop to a certain level.

The governor’s plan aims to do just that


funding for many of his expensive policy promises, including expanding Medi-Cal eligibility to all immigrants regardless of legal status.

But his decision to tap the $37.9 billion in budget reserves sounds a new alarm for the Golden State. So far, Newsom has rejected calls from Democratic lawmakers to tap the state’s rainy day fund and other reserves, which act as a piggy bank that can be opened during a financial crisis to prevent cuts to critical services and social safety net programs.

The governor is proposing to declare a budget emergency

this summer,

which is legally obliged to include the reserve accounts. His plan to spend $13.1 billion from reserves means there will be less money available to replenish spending if revenues continue to decline, which could lead to more painful and drastic cuts in coming years.

Newsom is also dipping into reserves at a time he suggests


annual expenses. The 2024-2025 budget

marks a drop of nearly $20 billion in spending from the budget Legislature passed in June. NEWSOM’s TK line on reserves

California’s state budget problems were exacerbated last year when California and the federal government postponed the deadline for filing 2022 income tax returns from April to November due to winter storms that battered California’s coast and flooded parts of the state. According to the Treasury Department, the extended deadline affected more than 99% of California taxpayers in 55 of the state’s 58 counties.

In a normal budget year, state government has its hands on state tax revenue before Newsom unveils his revised budget proposal in mid-May and before he reaches a final spending deal with the Legislature in June.

The delay

forced lawmakers and the governor to adopt the current budget in July based on estimates of how much money the state expected to collect in tax revenue by the November deadline.

The Treasury Department last year anticipated a deficit of nearly $32 billion in the current budget year that ends June 30, forcing lawmakers and the governor to cut their spending plans.

The state budget relies heavily on the income taxes paid by California’s highest earners. Earnings are prone to volatility, depending on capital gains from investments, executive bonuses and tax windfalls from new stock offerings.

Newsom and lawmakers expected additional revenue declines due to a declining stock market, high interest rates and increased inflation.

Now state leaders must cut spending in the coming fiscal year to make up for last year’s actual revenue shortfall and the projected shortfall for the coming year.

“The timing challenge associated with this deficit estimate is absolutely unique,” ​​said Gabriel Petek


the Legislative Analyst’s Office.

Despite the budget challenges, there is no evidence of a larger economic crisis in California.

“So so far, California has grown faster than the U.S., per capita, and has been one of the fastest growing states in the U.S.,” said Jerry Nickelsburg, director of the UCLA Anderson Forecast and professor of economics. . “And now it’s growing about as fast as the US, while basically everyone is slowing down a little bit.”

He noted that more geopolitical risks exist worldwide and that the presidential election could have an impact on US economic policy in the near future.

But Nickelsburg said the slow growth is expected to be short-lived, with economic growth accelerating again later this year and into 2025.

Newsom’s January budget proposal kicks off a six-month process of hearings and negotiations with the California Assembly and Senate, both of which will have new leaders by the time budget talks intensify. Hi

promised to provide a more complete budget plan in May, once the state has a better understanding of 2023 income tax collections.

Let’s keep this up until the first revision

The governor’s proposal hinted at possible changes to the “Gann limit.”

a spending cap approved by California voters in 1979 that would allow the state to put more revenue into reserves to offset revenue fluctuations. The law, which is enshrined in the state constitution, requires tax revenue above a certain threshold to be returned to taxpayers.

Newsom wants legislation to push changes to the November ballot that would exclude revenue placed in the state’s reserve accounts from the cap.

Susan Kennedy, former Chief of Staff of the Administration. Arnold Schwarzenegger and Gray Davis said changing the rules would allow the state to build its rainy day fund during good economic times to avoid major cuts in the future, eliminating the volatility that comes with relying on profits and losses in the stock market. The change, which would ask voters to let the state keep more of their excess tax revenue, could also be a tough political sell. “It’s a third rail,” Kennedy said. “If he takes that on because it’s the right policy to do so, that would be a pretty bold move.”


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