budget – Page 2

After Years of Surpluses, California Headed Toward a Deficit

January 11, 2023 By Adam Beam 5 Comments

SACRAMENTO, Calif. (AP) — From a budget perspective, the first four years of California Gov. Gavin Newsom’s time in office has been a fairy tale: A seemingly endless flow of money that paid to enact some of the country’s most progressive policies while acting as a bulwark against a tide of conservative rulings on abortion and guns from the U.S. Supreme Court.

But just days into his second term, that dream appeared to be ending. Tuesday, Newsom announced California likely won’t collect enough money in taxes to pay for all of its obligations, leaving a $22.5 billion hole in its budget.

The deficit was not a surprise. Newsom and the state’s budget writers have been signaling for well over a year that California was sailing into economic headwinds. The news on Tuesday was Newsom offering his first plan of what to do about it.

Notably, Newsom chose not to dip into the state’s $35.6 billion savings account. And he proposed no significant cuts to major programs and services, including vowing to protect programs that pay for all 4-year-olds to go to kindergarten and cover the health expenses for low-income immigrants living in the country without legal permission.

Instead, Newsom plans to delay some spending while shifting some expenses to other funding sources outside of the state’s general fund. He has proposed $9.6 billion in cuts, including canceling a planned $750 million payment on a federal loan the state took to cover unemployment benefits for people who lost their job during the pandemic.

Whether that plan holds will depend on what the state’s finances look like after April 15, when most residents file their state income tax returns. Newsom and legislative leaders don’t have to approve a spending plan until the end of June.

“We have a wait—and-see approach in this budget in terms of being cautious and being prepared,” Newsom said.

But Newsom appeared somewhat pessimistic about the future as he scaled back some of his ambitious climate proposals, cutting his much heralded five-year, $54 billion investment to $48 billion.

Newsom tried to downplay that cut, arguing the $48 billion is still one of the largest climate investments in the world and that the state would seek to recover some of that lost money from other sources.

Still, it was enough of a cut to anger some climate groups who had been heartened by the state’s commitment to combating climate change in recent budgets.

“We have to sustain our commitment to climate action every year. This proposed budget doesn’t do that,” said Mary Creasman, CEO of California Environmental Voters. “To further delay these investments will further compound the climate crisis and the cost of inaction will be far worse.”

Democrats control all of state government in California, leaving Republicans with little influence on policy and budget decisions. State Sen. Roger Niello, the top Republican on the state Senate’s budget-writing committee, said lawmakers need to focus on areas where the state is already spending lots of money with few results — like homelessness.

“Generally speaking, we wouldn’t suggest necessarily that we spend more but spend smarter,” Niello said.

Despite the looming deficit, Newsom wants to give local governments an extra $1 billion for homelessness programs — money he vowed would come with an extra dose of accountability after not being happy with how some locals have been spending state resources.

Public schools were mostly shielded from cuts in Newsom’s proposal, with one exception. Newsom cut $1.2 billion from a grant program that was aimed at paying for instruction in arts and music but which most districts had planed to use it to help pay down their pension obligations, according to Kevin Gordon, a lobbyist who represents most public school districts.

Still, Gordon said it was “stunning” that schools avoided deep cuts in a budget with a projected $22.5 billion deficit.

Other deficit actions were more subtle. California is one of five states and the District of Columbia that taxes people who refuse to purchase health insurance. The money from that tax goes into an account that was supposed to help low-income people pay their health insurance premiums. Newsom proposed taking the money in that account — $333.4 million — and sweeping it into the state’s general fund to help balance the budget.

“It’s exactly in economic downturns where this kind of help to afford coverage is even more urgent” said Anthony Wright, president of the consumer advocacy group Health Access. “We will be advocating with the Legislature to see if that can be continued.”

While the deficit got most of the attention on Tuesday, Newsom did propose some new spending. He wants to spend $93 million combating fentanyl, a synthetic drug similar to opioids that has caused countless overdose deaths. The money would come from the state’s share of legal settlement with pharmaceutical companies over opioids.

Newsom also wants to spend $3.5 million in education money to provide all middle schools and high schools with at least two doses of naloxone — a medicine used to reverse an opioid overdose.

“This is a top priority if you’re a parent,” Newsom said. “I don’t think there’s a parent that doesn’t understand the significance of this fentanyl crisis.”

California’s deficit is a sharp turnaround from the previous year, when California had a surplus of around $100 billion. That money that mostly came from a soaring stock market that made lots of Californians very rich, who then paid taxes on that new wealth.

Since then, the federal government’s attempts to reign in inflation have had a chilling effect on the economy, meaning rich people are not making as much money. That’s significant in California, where the top 1% of earners account for nearly half of all the state’s income taxes.

So far this year, California’s tax revenues have been well below expectations. If those declines continue, more action could be needed to cover the deficit.

Click here to read the full article in AP News

Filed Under: Trending News Tagged With: budget, California budget, California Politics

$24 Billion Projected Budget Deficit May Test California’s Resolve to Grow Safety Net Amid Recession

December 22, 2022 By Alejandro Luazo and Jeanne Kuang 7 Comments

California faces a projected deficit next year even if the U.S. avoids a recession. Despite the expected shortfall, policymakers say they’ll maintain spending on social programs though advocates are calling for more.

The Legislative Analyst’s Office recently said in its annual forecast that Gov. Gavin Newsom and the Democratic Party-controlled Legislature are facing a $24 billion projected budget deficit for the next fiscal year.

If the state enters a recession the outlook is even worse, with revenues predicted to fall short by $30 billion to $50 billion. The governor signed a record-breaking $308 billion budget in June.

The legislative analyst attributes the projected shortfall to California’s reliance on those whose incomes often ebb and flow with the price of stocks, real estate and other investments.

“Those are the same people who get a lot of their income from financial investments,” said Legislative Analyst Gabriel Petek. “That volatility then gets transmitted directly to the state budget.”

The governor will present a proposed budget in January and then a revision in May. The budget, which the Legislature must approve, will fund state government for the fiscal year beginning July 1.

H.D. Palmer, spokesperson for the state Department of Finance, declined to comment on whether social spending cuts might be proposed.

He did say, however, that the governor’s priority was to not scale back programs that people have come to depend on, or to begin new ones. Some program expansions in later fiscal years could be delayed if there isn’t enough revenue to support them, he said. The goal is to avoid the kind of drastic program reductions enacted during the Great Recession that took years for the state to restore.

Building reserves

The state’s Democratic legislative leaders have said they are not inclined to cut recently expanded programs, such as the extension of free health care to low-income undocumented immigrants, which began with older adults this year and is slated to open up to all ages in January 2024. The expansion is expected to cost more than $2 billion annually.

The budget is in a much stronger position than it was during the state’s last fiscal crisis, said Phil Ting, the Assembly budget committee chair from San Francisco.

“We have a significant amount of cash available, both in terms of reserves, but also in terms of liquidity,” Ting said. “So this is a very different situation than the state faced in 2008-2009, where they were running out of cash.”

The governor, nevertheless, has signaled he is being cautious. Newsom in October said he had vetoed 169 bills and saved taxpayers billions. Seventy-five of those vetoes were directly budget related, with many including boilerplate language that the state was facing “lower-than-expected revenues” and that it was “important to remain disciplined when it comes to spending, particularly spending that is ongoing.”

Among the bills vetoed by the governor earlier this year were proposals to expand government-funded care for new mothers, expand free transit programs for California students and create grants for graduate students in mental health who commit to working at certain California-based nonprofits.

Newsom, whom voters elected to another four-year term, has used surpluses to pay down debts, build reserves and provide direct payments to millions of Californians.

Recently Moody’s Analytics rated California one of the states most prepared for a recession, citing its reserves.

Nevertheless, California’s budget enacted in June 2021 committed to $3.4 billion in new ongoing spending and is expected to grow to $12 billion in the 2025 budget year. The budget enacted in June of this year committed an additional $2.3 billion, expected to grow to nearly $5 billion by the 2026 budget year, the Legislative Analyst’s Office said.

The state has $37 billion in specific reserve funds. That includes about $23 billion in a rainy day fund voters agreed to strengthen in 2014 at the urging of then-Gov. Jerry Brown. The state also has $900 million in a reserve account for safety net programs. The rest of those reserve funds are in school-specific and general operating reserves.

But, Palmer noted, the state can only draw down the rainy day fund by half in any year. The Legislative Analyst’s Office has advised the Legislature to slow down or pause program expansions before dipping into reserves.

Ting’s office contends the state has billions in unspent federal and state dollars in its coffers that could address a potential deficit. Using that money would avoid cuts to programs but delay other projects.

Is it time to spend?

Anti-poverty advocates said in interviews they plan to continue pushing for program expansions, arguing the precipice of a downturn is the time to bolster social spending, not cut it.

Nearly 30% of California residents live in or near poverty, according to the Public Policy Institute of California. Experts expect poverty rates to increase after the end of a boost in federal cash aid, which came in 2021 in the form of an expanded child tax credit included in the American Rescue Plan Act.

Advocates are proposing that California mimic that federal expansion by opening up the state’s Young Child Tax Credit, currently a $1,000-a-year credit for low-income families with children under age 6, to include all children in low-income households.

They estimate 1 million children live in families that would qualify, at an additional cost of $700 million a year.

Additional tax credits could make a difference to people like Ivonne Sonato-Vega, a medical assistant in Santa Rosa.

Last year she used some of the $4,000 in federal child tax credits on school supplies and clothes for the four children she and her boyfriend are raising, she said. With prices rising this year, she was unable to save any of that subsidy.

If the credits were an annual payment, she said, it would allow her to plan for expenses, maybe use it as “a little savings account” to draw on when the children grow out of their clothes or save it for a security deposit if the family needs to move.

“It was kind of like a tease,” she said of the credit. “It was here and then not.”

Advocates said they also want the state to create an unemployment benefits program for undocumented immigrants and to include all low-income immigrants, regardless of immigration status, in its food assistance program.

“We know the projected budget shortfalls make it more challenging, but the past few years highlighted why something like this is so important,” said Sasha Feldstein, economic justice policy manager at the California Immigrant Policy Center. “People who are excluded from our safety net have been the most adversely impacted from the COVID-19 pandemic and are the most harmed during times of economic downturn.”

Lawmakers and Newsom this year allocated money to expand the California Food Assistance Program, a state version of food stamps, to include undocumented immigrants age 55 and older; the benefits are expected to become available late next year. Newsom vetoed a bill that would have tested an unemployment benefits program for undocumented immigrants, citing costs.

The makings of a budget problem

The projected shortfall is the state’s first major fiscal challenge since Newsom’s office predicted a $54 billion shortfall in May 2020, when the country was in the grips of the COVID-19 pandemic. After financial markets rebounded and the federal government provided unprecedented stimulus, the anticipated shortfall resulted in surpluses.

The Federal Reserve began hiking interest rates in March 2022 to cool inflation. Then housing sales, initial public stock offerings and stock markets fell. All are important sources of personal income tax revenue.

In California, personal income withholding fell even as the job market recovered.

Over the last decade, California has increasingly relied on some of the state’s highest earners to fund its budget which, among other things, takes aim at poverty and some of the nation’s starkest income inequality.

Much of the state’s general fund is paid for by its progressive personal income tax, which voters in 2012 raised on the state’s highest earners after Brown warned of cuts to health and education. In 2016 voters extended those higher income tax rates through 2030 while also allowing a temporary sales tax to expire. The increases, meant for education and healthcare spending, have also paid for increased social safety net spending.

About 49% of the personal income tax paid in California in 2020 came from just 1% of tax filers, according to the state’s finance department. And in the past decade, taxes collected from the most volatile form of income — capital gains — have doubled, making up a larger share of the state’s revenue and tying the state’s budget to particularly unstable economic cycles.

To address that, voters approved changes to the state’s rainy day fund in 2014. The changes serve as a check on spending, directing California to capture additional dollars in reserve when capital gains tax receipts are high.

Building reserves large enough for a state to ride through a recession is difficult, said Donald Boyd, a state finance expert at the University of Albany in New York.

Click here to read the full article at the California Globe

Filed Under: Top Stories Tagged With: budget, California Politics, Gavin Newsom

Newsom Wants Tax Rebate, Touts ‘California Way’ Of Governing

March 10, 2022 By Adam Beam and Dan Thompson 7 Comments

SACRAMENTO, Calif. (AP) — California Gov. Gavin Newsom proposed sending money back to taxpayers to offset record-high gas prices but rejected calls to increase oil drilling, saying he wants to free the state “once and for all from the grasp of petro-dictators.”

The average price for a gallon of gas in California is the nation’s highest at $5.44, according to AAA — a number that is likely to increase after President Joe Biden banned Russian oil imports on Tuesday in response to the country’s invasion of Ukraine.

Newsom’s proposal, announced during his annual State of the State address, would likely come in the form of a tax rebate. But the governor gave no specifics, saying he will work with legislative leaders “to put money back in the pockets of Californians to address rising gas prices.”

Dee Dee Myers, Newsom’s senior adviser, told reporters one option is to send the rebate to California residents who have a car, including people who are living in the country illegally. The money could go out as soon as this spring, pending legislative approval.

In a wide-ranging address, Newsom also warned that authoritarianism isn’t just rising overseas, using his election-year speech to offer “a California Way” as the antidote to what he called the “agents of a national anger machine.”

Newsom, a Democrat who handily beat back a mid-term recall campaign last year, also touted his administration’s progress on homelessness, the economy, education and climate change in a speech to assembled lawmakers in an auditorium near the state Capitol. By contrast, last year’s speech — given mid-pandemic — was delivered outdoors in an empty Dodger Stadium, which was being used as a mass-testing site.

This year, coronavirus case numbers and hospitalizations are plummeting and the nation’s attention is drawn to the Russian invasion of Ukraine and the accompanying spiraling gas prices. Republicans nationally and in California want to see the Biden administration increase drilling. Newsom rejected that call.

“Drilling even more oil,” he said, “only leads to even more extreme weather, more extreme drought, more wildfire.”

“We need to be fighting polluters, not bolstering them,” Newsom said. “And in the process of so doing, freeing us once and for all from the grasp of petro-dictators.”

As he did throughout the speech, Newsom offered “California’s leadership” as the alternative, calling clean energy “this generation’s greatest economic opportunity.”

California is one of the nation’s most oil-rich states and Republicans, who are a small minority in the Legislature and hold no statewide offices, see high gas prices as an election year issue they can exploit. California taxes gasoline at 51.1 cents per gallon, second only to Pennsylvania, according to the Federation of Tax Administrators.

“Gas prices are out of control. Let’s suspend the gas tax, stop using foreign oil and focus on energy independence policies that don’t place new burdens on working families,” Assemblymember Suzette Martinez Valladares said in the Republican “prebuttal” to Newsom’s speech.

Newsom has additionally proposed pausing a slight increase in the state gas tax scheduled to take effect this summer. But Democratic leaders in the Legislature have balked at that proposal, arguing it would make it harder to maintain the state’s roads while only providing barely noticeable relief at the pump.

Assembly Republican Leader James Gallagher said Republicans, while critical of Newsom in other areas, can work with him on the tax rebate.

“If we have nearly a $60 billion surplus in the state, it means that people are overtaxed and we should be giving the voters and citizens of this state back some of their money, especially in the trying times that we’re in when the cost of living is through the roof,” Gallagher said.

The governor otherwise has been pushing to wean California, famous for its car culture, from the internal combustion engine.

Newsom has ordered the state to ban the sale of new gas-powered cars by 2035 and halt all in-state oil drilling by 2045.

The Newsom administration has issued 632 oil drilling permits in 2021 and so far this year, but about 300 of them have not been used yet, according to the governor’s office.

Several environmental groups said Newsom should impose an immediate moratorium on oil and gas development.

Click here to read the full story at AP News

Filed Under: Top Stories Tagged With: budget, Gavin Newsom, Newsome

California Throws More Money at COVID-19 Contact Tracing, But Is It Too Late?

January 19, 2022 By Teri Sforza 4 Comments

One expert says that because omicron spreads so quickly, the millions spent on contact tracing could be better spent on more effective masks and more testing

Intensive contact tracing has helped contain COVID-19 outbreaks in some Asian countries. People test positive, they quarantine, and the folks they’ve had contact with are tracked down and asked to — or, in some nations, forced to — quarantine as well.

The U.S. has spent billions on contact tracing, and California alone will have spent $300 million on it through the next fiscal year. But researchers have found that 2 of 3 people with confirmed COVID-19 in the U.S. were either not reached or wouldn’t name contacts when interviewed, and public health authorities haven’t been able to monitor enough cases to stem the tide.

Now, as the pandemic enters its third year, the highly contagious omicron variant spreads like fire through dry grass. The incubation period can be as short as two days. The Centers for Disease Control recommends isolation for as little as five days. More people are testing at home — cases authorities don’t even count in their tallies — and some officials are throwing their hands up and suspending contact tracing.

“(T)he sheer speed of omicron’s transmission means people are exposed, infected and then contagious before the local health department can even identify an outbreak, much less get word to those who are exposed,” said officials in Oregon’s Multnomah County. “Because of that dynamic, contact tracing has become much less effective at lowering COVID-19’s risk, especially when cases are surging so high and when spending time in any indoor public space is essentially considered an exposure for anyone who isn’t up-to-date on their vaccines.”

Financial commitment waning

The financial commitment to contact tracing in California appears to be waning, but remains. The governor’s proposed budget shows that $258.3 million was spent on contact tracing over the first two years of the pandemic, with another $38.9 million going forward through the end of the next fiscal year.

The current and future spending breaks down to a projected $20.6 million this fiscal year, and $18.3 million next fiscal year, said Sonja Petek, principal fiscal and policy analyst for the Legislative Analyst’s Office.

“Contact tracing remains one of our many key tools in responding to the spread of COVID-19,” said a statement from Gov. Gavin Newsom’s press office. “It’s also an important measure utilized in high-risk and congregate settings. Contact tracing assists with notifying exposed people for possible post-exposure treatment, testing, and quarantine in a timely manner.”

Overall, Newsom’s budget proposes $110 million to increase public health and humanitarian efforts at the California-Mexico border — including vaccinations, testing, isolation and quarantine services — “and expanded statewide contact tracing activities to help keep Californians safe and slow the spread.”

Currently, 268 state employees have been redirected to contact tracing efforts, the governor’s press office said. But experts aren’t sure the investment will bring great returns — at least not right now.

Click here to read the full article at the OC Register

Filed Under: Top Stories Tagged With: budget, contact tracing, Covid-19, Newsom

Newsom Budget: The Good, The Bad and The Ugly

January 18, 2022 By Jon Coupal 1 Comment

The governor’s budget is a tale of the good, the bad and the ugly. We won’t see a real state budget until it emerges from the smoke-filled backroom following the May revise, but that didn’t stop Gov. Gavin Newsom from gleefully announcing to reporters how he would like to spend the windfall of other people’s money in a 400-page “summary” presented last week.

Here’s the good, the bad and the ugly of his proposal.

The Good.

The governor’s budget puts more money into the reserve accounts, accelerates the paydown of state retirement liabilities, eliminates some budgetary debt, and allocates 86 percent of the discretionary surplus to one-time spending rather than ongoing liabilities that has so often happened in past years.

That’s good because the good times won’t go on forever. While the budget projects healthy returns for the next couple of years, it notes that “[s]tructural (non-pandemic) downside risks to the forecast remain, including the challenges of an aging population, declining migration flows, lower fertility rates, higher housing and living costs, increasing inequality, and stock market volatility.”

That’s important because the top 1% of California taxpayers pay more than 50% of the state’s income tax revenues. The state is currently riding high on the wealthy’s stock market gains, but as the Federal Reserve starts raising interest rates, the party could be coming to an end, and soon.

The Bad.

The bad is that an already bloated bureaucracy is getting even more bloated. Under the requirements of Proposition 98, increases in spending for public schools and community colleges will be dramatic and, as has been much talked about in these pages recently, California’s public schools aren’t hurting for cash as it is.

According to the federal government’s National Center for Education Statistics, in inflation-adjusted constant dollars, per-pupil spending in California for public elementary and secondary schools in 2017-18, the most recent year for which statistics are available, was $13,129, the highest ever.

Under the governor’s budget, schools would see more than $20,000 per student, putting California in the top five of states in education spending – with little to show for it.

Even worse is the fact that there is little in the budget to address waste, fraud and abuse generally, not just in education. There is nothing to prevent another fiasco like we saw with the $20 billion in fraudulent claims paid by the Employment Development Department; still no accountability with the bullet train project and, in fact, the boondoggle is getting billions more.

Click here to read the full article at OC Register

Filed Under: Top Stories Tagged With: budget, California Politics, Newsom

California’s budget process has devolved into a bad joke

June 24, 2019 By Jon Coupal 2 Comments

Let’s face it. California’s budget process has devolved into a bad joke. The record amount of spending coupled with massive expenditures for wasteful, pork-barrel projects is bad enough. But the more insidious problem is the lack of budget transparency. This is not the way it is supposed to be.

As usual, Sacramento politicians are patting themselves on the back for passing an “on time” budget. True, the main budget bill was passed on June 13, two days before the constitutional deadline. But citizens would be mistaken to believe that the passage of the budget bill completes the budget process.

Ever since 2010, it has become common to enact politically motivated legislation as so-called budget “trailer bills” as a means to avoid meaningful analysis and public hearings.

What happened in 2010 that caused the budget process to be corrupted was the passage of Proposition 25, entitled the “On-Time Budget Act of 2010.”

Voters were told three things about Prop. 25: Budgets would be passed on time; it would increase budget transparency; and that legislators would forfeit their pay if the budget was not passed on time. All three were lies. Moreover, because the primary goal of Prop. 25 was to reduce the vote threshold for passage of the budget bill from two-thirds to a simple majority, it deprives the minority party of any meaningful input.

To read the entire column, please click here.

Filed Under: Top Stories Tagged With: budget, HJTA, Jon Coupal

California’s Private Economy Fuels State Budget Surpluses

May 15, 2019 By Loren Kaye 4 Comments

Taxes continue to pour into the state treasury, like spring snowmelt into Lake Oroville. Thanks to the engine of California’s private economy – the creativity of business leaders and productivity of employees – and the wealth it creates, Governor Gavin Newsom last week announced that revenues exceeded earlier budget estimates by more than $3 billion, enabling him to propose bolstering reserves, paying down debt, and boosting education spending.

Californians have enjoyed nearly ten years of economic growth, and one of the biggest beneficiaries has been the state budget. Since the depths of the recession the state budget has increased by 82% – that’s more than $95 billion. Compare that to the recession years when the Governor and Legislature were forced to cut tens of billions of dollars in spending.

Today with a healthy budget and continuing prospects for growth, Governor Newsom has set aside $16.5 billion in a rainy-day reserve to hedge against the next economic downturn and continued to boost education spending. In addition he proposes spending more than $9 billion to pay down unfunded pension liabilities and pay off longstanding debts and deferrals.

But what goes up inevitably will come down, and a key responsibility for a chief executive is to look to the future – not only to spread the blessings of prosperity but to protect against shortfalls.

When he released his revised budget proposal last week, Governor Newsom recognized this, insisting that “We need to have a structurally balanced budget because we are entering the end of the beginning of a new phase of economic reality. The headwinds are real.”

The precarious condition of state finances is well known. The top one percent of earners pays nearly half of all income taxes and these taxes provide 70 percent of all General Fund revenues. The Administration forecasts that a moderate recession would reduce state revenues by $70 billion over three years.

The Governor and the Legislature should continue to insist on a savings strategy pioneered by Governor Brown. Top up the budget reserve, reject new taxes, and resist demands to build into the budget new, ongoing spending that will be painful to unwind when the economy slows.

The easiest money to save for a rainy day is money you haven’t committed to ongoing programs.

The good news is that the extra revenues the state receives once the reserve fund is filled are directed to infrastructure, which can be used to help create high paying jobs for skilled workers to improve and upgrade our highways, mass transit, public buildings and flood control facilities. This has the three-fold benefit of providing mobility, safety and public services for residents, creating well-paying jobs for Californians, and budgeting responsibly for the fiscal health of the state.

The budget windfalls should also allay the calls for new or higher taxes, which have proliferated in the early days of the legislative session. The existing state corporate tax rate, combined with the effects from federal tax reform, resulted in a surge of more than a billion dollars of new revenues this year.

Only a few members of the current Legislature were in Sacramento during the last recession, so it may be understandable that many members call for increases in ongoing programs. But nobody wants to return to the bad-old-days of deep cuts to education and safety net programs. We can help those in need if the private sector continues to thrive and generate tax revenue. Success of the private sector economy provides the foundation for a state budget to provide services to the people of California.

Loren Kaye president of the California Foundation for Commerce and Education.

This article was originally published by Fox and Hounds Daily

Filed Under: Top Stories Tagged With: budget, Gavin Newsom

Spending Plans Will Run Up Against Fiscal Reality

January 24, 2019 By Steven Greenhut 4 Comments

Gavin Newsom was recently inaugurated as California’s 40th governor, taking over a general-fund budget that is flush with cash and a state government that is in remarkably good shape — at least superficially — from a fiscal perspective. For all his flaws, outgoing Gov. Jerry Brown left Newsom with a $15 billion surplus and a rainy day fund that is nearly full. As an added plus, the economy that is humming along even though an erratic stock market points to storm clouds on the horizon.

The big question is whether Newsom will heed Brown’s advice and govern as if there’s always a recession around the corner — or ignore the former governor’s warnings about Democratic lawmakers who always say “yes” to any “harebrained” spending scheme. Unfortunately, based on Newsom’s inaugural words, initial budget and many of his early high-level administrative appointments, the safe money is on the latter. Newsom wants to spend big.

One need not read between the lines in Newsom’s introductory words. He spelled it out clearly. Newsom pointed to Brown’s inaugural address, which quoted from the Sermon on the Mount. There was the foolish man who built a house on sand and the wise man who built it on rock. “For eight years, California has built a foundation of rock,” Newsom said. “Our job now is not to rest on that foundation. It is to build our house upon it.”

So now that the state is on solid financial footing, the new governor envisions a rapid expansion of government social programs. “We will support parents so they can give their kids the love and care they need, especially in those critical early years when so much development occurs,” Newsom said. That speaks to the $1.8 billion in early childhood programs that the new governor is touting. The term “we,” of course, refers to California’s taxpayers.

“We will launch a Marshall Plan for affordable housing and lift up the fight against homelessness from a local matter to a state-wide mission,” he added. The term “Marshall Plan” is not subtle. That was the American financial assistance program to help Western Europe rebuild after the devastation of World War II, at a cost of $100 billion in current dollars.

Continuing the metaphor of California as a home, Newsom added that “In our home, every person should have access to quality, affordable health care.” He has long advocated for some type of universal healthcare coverage (although not necessarily the single-payer system that failed to make it through the Legislature in 2017), and some of his most noteworthy aides have a background in promoting government healthcare programs.

“Everyone in California should have a good job with fair pay,” he said. “Every child should have a great school and a teacher who is supported and respected. Every young person should be able to go to college without crushing debt or to get the training they need to compete and succeed. And every senior should be able to retire with security and live at home with dignity.” Those are vague, feel-good ideas that would garner few objections. But his ideas for implementing them, such as his bidget plan for free community college, will come with a hefty price tag.

There will be plenty of time to dissect the specific policy proposals that will move forward as the legislative session gets under way. For instance, the community college idea is a particularly bad one. California community colleges already are inexpensive. Making the second year of tuition “free” (the first year already is free for first-time California students) will only clog up the classrooms with free riders, thus making it tougher for those students who are serious about getting an education to get classes and improve their job prospects.

However, the main purpose of this article is to provide a warning amid the exuberance of a new gubernatorial administration. Basically, that financial foundation might be built less on rock and more on sand than many of us would like to believe.

There’s no complaining about the size of the budget surplus and rainy day fund, but there’s more to a budget than those items. As a comprehensive new California Policy Center report from Ed Ring and Marc Joffe points out, “We estimate that California’s total state and local government debt as of 6/30/2017 totaled just over $1.5 trillion. That total includes all outstanding bonds, loans, and other long-term liabilities, along with the officially reported unfunded liability for other post-employment benefits (primarily retiree healthcare), as well as unfunded pension liabilities.” That’s a 15-percent increase from two years ago—and a number that equals 54 percent of the gross state product.

The Brown administration had done little to deal with the unfunded liabilities. Its one major pension reform law, the Public Employees’ Pension Reform Act, was exceedingly modest. In the waning days of his administration, Brown’s attorneys argued before the state Supreme Court for changes in the “California Rule,” which restricts the ability of governments to reduce pension benefits going forward. That’s still unresolved and Newsom already has made clear his opposition to changes in pensions—and one of his top aides comes out of the California Labor Federation.

Bottom line: Just because the general-fund budget is in good shape does not mean that California’s overall fiscal picture is all that bright. A responsible new administration would attempt to fix those problems, which are crowding out public services at the local and state level, before engaging in a spending spree that will add to the state burden. Newsom’s early budget hits $209 billion overall and includes a grabbag of new programs, although he does send money to pay off some pension debt and is bolstering the rainy day fund.

The outgoing governor increased taxes early and often. It’s unwise to add new burdens on taxpayers, especially given that economic boom times always are followed by a bust and many Californians continue to flee the state’s high tax burden. Newsom already is proposing new fees on water and 911 service.

California’s most notorious public-policy disasters have come, counter-intuitively, during the best fiscal times, when revenues were swelling and budgets were flush with cash. The best example came in 1999, when Gov. Gray Davis signed a law that caused a pension-hiking frenzy and led directly to the state’s debt crisis. The stock market was riding high and the California Public Employees’ Retirement System (CalPERS) promised that increasing pensions by 50 percent retroactively wouldn’t cost taxpayers a dime because market returns would cover the costs.

It didn’t cost a dime, but cost billions of dollars annually in general-fund payments and added hundreds of billions of dollars in taxpayer-backed liabilities. The biggest danger to California is now a governor who believes that the state is in such great financial shape that he can start spending with wild abandon. He will not be restrained by the Legislature, which now has strong Democratic super-majorities that are itching to spend money. We don’t want to wish for an economic downturn, a stock-market crash or another busted housing bubble, but that appears to be the only hope right now to derail the coming spending train.

This column was first published by the California Policy Center.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

Filed Under: Top Stories Tagged With: budget, California budget, Gavin Newsom, Health care, Jerry Brown