Newsom called it a “gimmick.” Now he’s using this trick to reduce California’s massive budget deficit

(Rich Pedroncelli/Associated Press)

Newsom called it a “gimmick.” Now he’s using this trick to reduce California’s massive budget deficit

California politics, immigration and the border

Taryn Luna

April 11, 2024

In a stroke of luck five years ago, Gov. Newsom said he was doing away with a state budget “gimmick” that one of his predecessors relied on to trim about $800 million from a budget deficit during the Great Recession.

The accounting trick, implemented in 2009, delayed state workers’ payrolls from the end of one fiscal year on June 30 to the beginning of the next on July 1. Ten years later, Newsom spent nearly $1 billion to end this subterfuge, with one caveat.

If I use it six years from now, during a recession, forgive me, Newsom said.

At his request, Newsom and lawmakers agreed to use the budget gimmick next year even though California is not in a recession.

The tactic is one of several maneuvers Democrats are relying on to reduce a historic budget deficit of at least $37.9 billion by pushing their spending problem out another year.

Of the $17.3 billion in cuts Newsom and Democrats have agreed to so far, only $3.6 billion are actual cuts.

Lawmakers made the first of those cuts Thursday, passing a bill that reduces unused funding allocations by $1.6 billion in 2022-23 and 2023-24. Although Newsom touted the changes as part of an early action deal to reduce the deficit in April, many of the reductions won’t be reflected in legislation until June or later.

So far, Newsom and lawmakers are largely relying on mechanisms other than spending cuts to reduce the deficit: Borrowing $5.2 billion, deferring $5.2 billion in funding for state-sponsored programs and deferring them to subsequent years and 3 Tapping $.4 billion from separate state funds. Democrats also agreed to take at least another $12.2 billion from the Rain Day Fund to cover their expenses.

Budget watchers and Republicans criticized the strategy, saying that turning to smart accounting now and tapping California’s savings accounts while the economy remains strong will make the state more vulnerable to drastic cuts if a recession hits in the coming years and revenues fall.

Newsom’s critics blame the governor and Democrats for overspending and causing the budget deficit. The “gimmick” is an example of what his critics see as Democrats failing to make the kind of tough choices California households must weigh when they spend more money than they bring in.

“They’re doing things you normally do in a recession and there’s no recession here,” said David Crane, president of the U.S.


Govern for California, a nonprofit organization that aims to oppose union influence over state government. “You shouldn’t have to draw on reserves to cover a budget deficit if your revenues are 50% higher than when you came to power.”

General fund revenues, which the state uses to pay for most public services, were $140 billion when Newsom took office in 2018-19. The governor’s January budget projects revenues of more than $214 billion, a 53% increase, for the upcoming budget year, when Democrats plan to cut the rainy day fund in half.

According to the March UCLA Anderson Forecast, California’s economy is growing faster than the rest of the country and the possibility of a U.S. recession is declining. Newsom regularly touts the strength of the state’s economy.

“While there are still challenges ahead, particularly funding for state and local governments, homelessness and outmigration, the forces driving California’s economy remain robust,” UCLA economists wrote.

H.D. Palmer, a spokesman for the governor’s Treasury Department, said the cuts Democrats have agreed to so far are part but not the entire solution to the budget problems, as more decisions will follow in June . He also pointed to the fact that more than 70% of the general funds


is spent on primary and secondary education, health care and human services.

“If you disagree with these solutions, that’s fine. What specific proposals would you make to offset that in terms of programmatic reductions?” he asked budget critics.

Republican Leader James Gallagher of Yuba City said he would start by funding the basics, such as education, infrastructure and public safety, and then decide what else the state has resources for.

Newsom often promoted all-one-time funding in his previous budgets, which he said would be easy to cut if the state moved from a surplus to a deficit. But he has continued to support many of his expensive political priorities, such as expanding Medi-Cal to all eligible low-income immigrants regardless of legal status. A state audit also found that California has failed to monitor the effectiveness of its costly homelessness programs, on which Newsom and lawmakers have spent $20 billion over the past five years.

“A $73 billion deficit is no joke,” Gallagher said. “It’s a serious problem that we need to address. I think the governor just wants to wait this problem out until the end of his term and just leave this problem to someone else.”

A combination of delayed tax deadlines and overspending based on inaccurate budget forecasts created the budget deficit, which occurs when spending exceeds projected revenue.

Newsom and lawmakers expected revenues to fall below projections due to a declining stock market, high interest rates and increased inflation.


the deficit is much larger than what the state took into account last June. The Newsom administration last estimated the deficit at $37.9 billion in January, though a more recent estimate from the Legislative Analyst’s Office suggests it could rise to $73 billion by the time the governor unveils his revised budget proposal in mid-May .

California’s state budget depends largely on income taxes paid by the highest earners. Revenues are prone to volatility, depending on capital gains from investments, executive bonuses and windfalls from new share issues, and are notoriously difficult for the state to predict.

The governor repeatedly blamed the deficit problem on a federal government decision to delay the deadline for filing 2022 income tax returns from April to November last year due to winter storms.

In a normal budget year, the state government has tax revenue in hand before the governor unveils a revised budget proposal in mid-May and before reaching a final spending deal with the Legislature in June. The tax deferral forced lawmakers and the governor to set the current budget in July based on estimates of how much money the state would collect in tax revenue by the November deadline. Those estimates were way off.

The legislation approved Thursday rolls back and reduces unused funding in the previous and current budget years. The changes include a $45 million cut for community wildfire protection, $88 million for watershed resilience and a $34 million reduction in funding to expand broadband internet access, among other cuts. ”

The bill was part of lawmakers’ “early action” and the governor announced they would take action in April to reduce the budget deficit by $17.3 billion before the May overhaul. But only $3.3 billion of the cuts he claimed he would make can now be passed into law, and the majority will be included in the final budget deal along with other cuts approved this summer.

“We advanced this early action plan to protect our progress and safeguard core programs so we can focus time and energy on the more challenging decisions to responsibly close the remaining budget gap,” said Senate President Pro Tem Mike McGuire ( D-Healdsburg) during floor debates in the Senate on Thursday. “And that’s what we’re going to do.”

Democrats are trying to offset the budget crisis before May, when an updated estimate could show an even bigger deficit. Democrats also took an unusual step by requiring the Treasury Department to subtract the $17.3 billion from the estimated deficit before the May budget review, making the deficit appear smaller before many of the changes in law take effect. reflected.

“This budget is nothing but smoke and mirrors, backroom deals done by the party in control,” said Sen. Brian Dahle (R-Bieber).

Postponement of payroll administration from June 30, 2025 to July 1, 2025

his is

of the changes Democrats agreed to, but won’t vote on until this summer.

While Crane, a political donor to House Speaker Robert Rivas and dozens of other lawmakers, opposes Newsom’s decision to use the budget gimmick again, he said the “greatest sin” is the unprecedented decision to dip into state reserves when there is no recession comes. . Newsom wants to declare a budget emergency to do this under state law.

“My only hope is that by the time the May review comes around, he can say I no longer need to dip into the reserves,” Crane said.


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