A Legislative Analyst’s Office report released on Wednesday found that California revenue is $41 billion below expectations, likely resulting in a massive $25 billion shortfall in the upcoming 2023-2024 state budget. The LAO recommends lawmakers start cutting the budget when they begin the January session.
Minus a severely affected budget by the COVID-19 pandemic a few years ago that had a $54 billion deficit, California claimed budget surpluses in recent years. This includes last years’ massive $97.5 billion surplus, which was partially caused by previous cuts made, as well as an expanded tax base returning following the pandemic.
However, multiple factors slowly crept in during the last few hectic years. The California Department of Finance pointed out that revenue for those making $500,000 or above has gone down, with many either leaving the state or now making below that amount due to financial issues. In their report, the LAO said state personal income taxes were down below projections by billions, along with inflation and recession fears fueling losses even more. In addition, experts noted that Tech layoffs and hiring freezes, numerous large companies moving out of the state, the war in Ukraine, inflation, and changing Federal Reserve interest rates and also been grinding the projected deficit even further down.
“The longer inflation persists and the higher the Federal Reserve increases interest rates in response, the greater the risk to the economy,” said the LAO in the report. “The chances that the Federal Reserve can tame inflation without inducing a recession are narrow.”
Assembly Speaker Anthony Rendon (D-Lakewood) defended the spending strategy of Governor Gavin Newsom and Democratic lawmakers on Wednesday, noting that they have built a budget designed to withstand such revenue drops and that the state still has $37.2 billion in reserve as a cushion.
“We can and will protect the progress of recent years’ budgets,” said Rendon in a statement on Wednesday. “In particular, the Assembly will protect California’s historic school funding gains, as districts must continue to invest in retaining and recruiting staff to help kids advance and recover from the pandemic.”
Senate Pro Tem Toni Atkins (D-San Diego) also added that the state can avoid tax increases and program cuts this year and basically keep what they have had since last year, explaining that “In the past, tough forecasts like this would have meant painful program cuts and middle class tax increases – things that actually cause more economic harm. That does not have to be the case this year. Thanks to our responsible approach, we are confident that we can protect our progress and craft a state budget without ongoing cuts to schools and other core programs or taxing middle class families. The bottom line is simple: we are prepared to hold onto the gains we’ve made and continue where we left off once our economy and revenues rebound.”
Rendon’s budget keeper specifically showed in a tweet that the total budget would only drop down less than 4%, calling it “Quite manageable in historical terms”.
The Fiscal Outlook projects a $25 billion budget shortfall due to revenue losses over 3 years (21-22, 22-23, 23-24) where total General Fund spending still equals $700 billion. That is a 3.6% projected shortfall – quite manageable in historical terms, etc. https://t.co/CplNkYrlnh
— Jason Sisney (@jasonsisney) November 16, 2022
A $25 billion deficit
Conversely, Republican lawmakers and fiscal experts slammed Democrats and the state for spending so much surplus money without accountability, stressing fiscal responsibility and cutting back spending instead of using reserve cash to fix the hole in the budget.
“As the ruling party continues to spend and grow government programs without accountability, I have repeatedly warned that California’s budget was on an unsustainable path,” said Assemblyman Vince Fong (R-Bakersfield), in a separate statement on Wednesday. “Today’s report is another wake up call to those warnings. We must refocus on fiscal responsibility.”
Randolph Miller, an accountant who specializes in spending cuts on large budgets, including governmental budgets, added in a Globe interview, “This is what you get when a huge chunk of a surplus goes to pet projects and one-time only spending programs rather than saving or helping figure out where to trim the fat. Even worse are the new, longer term programs added that have added to the budget. Everyone knew it was going to be an odd several years of budget issues because of the pandemic, but the state just plain went back to full spending before they could see if it would then go back down.
“Now we have this deficit. The Democrats are playing it cool, like it is no big deal. But it is $25 billion. That’s not pocket change. We overspent last budget despite warnings, and now look where we are. The fiscal advisors to the Democrats either can’t rein in their spending or did not see the writing on the wall.”
As of Wednesday afternoon, Governor Newsom has not yet commented on the deficit, with neither party giving a more comprehensive way to combat the $25 billion hole in next year’s budget.
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