California lawmakers face a ballooning budget deficit

The biggest challenge facing lawmakers and Gov. Gavin Newsom is the state budget deficit — and it just got bigger.

Today, the Legislative Analyst’s Office projected the shortfall as $15 billion higher, or $73 billion.

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The analyst’s office had pegged the 2024-25 deficit at $58 billion in January, using Newsom’s revenue estimates when he presented his initial budget proposal of $292 billion. 

On Friday, Newsom’s Department of Finance reported that preliminary General Fund cash receipts in January were $5 billion below (or nearly 20%) the governor’s budget forecast. Unless state tax revenues pick up significantly, the bigger number will make it more difficult to balance the state budget just through dipping into reserves and targeted spending cuts. 

But exactly how the state can dig its way out — at least in the Assembly — remains to be seen. Speaker Robert Rivas told reporters today that the budget has been at the forefront of conversations among Assembly Democrats and that he is very concerned with the growing deficit.

He praised the governor’s commitment to preserving classroom funding, and said he didn’t see a way to avoid dipping into the state’s reserves, as the governor’s January budget plan proposed — though the speaker urged a prudent approach to using rainy day savings in case the budget picture worsens in future years. 

“We are very concerned about short-term fixes for long-term problems,” said Rivas, who took over as speaker last summer, just days after the Legislature and Newsom reached a deal on the 2023-24 budget that covered a $30 billion deficit after two years of record surpluses.  

“Clearly, we need to prioritize oversight and curb spending and our investments,” Rivas added.

In the coming weeks, Rivas’ plan calls for an oversight budget subcommittee he formed in December to review the state’s spending on housing, he said. 

Click here to read the full article in CalMatters

Walters: Newsom budgets have a lousy track record forecasting California’s tax revenues

A review of recent state budgets and Gov. Gavin Newsom’s newly released 2024-25 budget proposal reveals truly monumental errors in revenue estimates by his fiscal advisors, particularly personal income taxes.

Photo by Miguel Gutierrez Jr., CalMatters

The stark differences between estimates and reality, if continued, will affect the state budget’s solvency for at least the remaining years of Newsom’s governorship.

Newsom’s latest budget acknowledges that income taxes, which are mostly paid by those in upper income brackets, are $44 billion less than previously projected for the three-year “budget window” from 2022-23 through 2024-25. But the shortfall is actually billions of dollars more.

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When Newsom and the Legislature enacted a 2022-23 budget in June 2022, it assumed that income taxes would bring in $129 billion. Later, that projection dropped to $122.8 billion and Newsom’s latest budget set it even lower at $101.8 billion, as state officials close the books on that fiscal year.

The 2023-24 budget adopted last year projected $118.2 billion in income tax revenues, but it’s since been revised to $113.8 billion. And Newsom’s newest budget assumes that income taxes will bring in $114.7 billion for the fiscal year 2024-25, a $4 billion drop from last year’s assumption.

Over the three-year period, Newsom pegs the revenue shortfall at $44 billion, but it’s more likely $51 billion if one begins with the original numbers from 2022-23 – when Newsom famously bragged about the state’s having a $98 billion surplus.

“No other state in American history has ever experienced a surplus as large as this,” Newsom said as he unveiled a $300-plus billion budget that the Legislature eagerly adopted with a few tweaks.

Newsom’s budget for 2024-25 assumes that the freefall in income tax receipts will end and revenues will actually pick up a bit next year. However, the Legislature’s budget analyst, Gabe Petek sees continued revenue weakness and pegs the three-year shortfall at $58 billion. Their differing projections are the main reason their estimates of the overall budget deficit are $30 billion apart.

Although Newsom’s budget was unveiled just two weeks ago, income taxes – the largest single source of state revenue – are already falling behind. So far in January they are running $3 billion behind the new budget’s assumption.

This is no small matter. Newsom will revise his budget in May, and he and the Legislature will enact a budget in June that will be based on a revenue figure of some kind. Legislators will be tempted to adopt a rosy figure from Newsom rather than Petek’s lower number to minimize how much spending must be reduced to close the gap. It will particularly affect state support for K-12 schools, the state’s largest single budget obligation, which is largely determined by a revenue-based formula.

However, if the Legislature does go for a higher revenue number, as it has it years past, and it proves to be as off the mark as other recent estimates have been, the effect will be traumatic for programs that depend on state financing.

Newsom blames the seven-month delay in the deadline for filing 2022 income tax returns, from April 2023 to November, for masking the sharp drop in revenue, and that contributed to the huge disparity. However, he and the Legislature could – and should – have been much more conservative in their guesswork.

Click here to read the full article in CalMatters

As California closes prisons, the cost of locking someone up hits new record at $132,860

The cost of imprisoning one person in California has increased by more than 90% in the past decade, reaching a record-breaking $132,860 annually, according to state finance documents.

Photo by Larry Valenzuela, CalMatters/CatchLight Local

That’s nearly twice as expensive as the annual undergraduate tuition — $66,640 — at the University of Southern California, the most costly private university in the state.

California’s spending per inmate jumped steeply during the COVID-19 pandemic and it continued to increase despite recent cost-cutting moves, including Gov. Gavin Newsom’s recent move to close three state prisons. 

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It’s propelled by lucrative employee compensation deals and costly mandates to improve health care behind bars, according to fiscal analyses by the nonpartisan Legislative Analyst’s Office. Newsom’s most recent budget proposal includes $18.1 billion for the Department of Corrections and Rehabilitation, up from $15.7 billion when he took office in 2019.

Some lawmakers and advocates have argued California should focus on rehabilitation and shut down additional prisons to save money in the face of what the governor’s office projects to be a $38 billion deficit. 

Last year, the Legislative Analyst’s Office suggested the state could close as many as five more state prisons because of California’s declining inmate population.

That would stand to save upwards of $1 billion in operating costs, and even more money on unfunded capital improvement projects, the report said.

Newsom’s three closures and the cancellation of a contract for a fourth privately run prison save the state an estimated $667 million over the next year, according to the Department of Finance, but the savings are not enough to offset increased operational and employee costs. 

The California Correctional Peace Officers Association, which represents 26,000 prison guards, last summer negotiated a contract with successive 3% raises and other perks that will cost the state roughly $1 billion over the next three years. The prison doctors’ union, which represents 1,700 employees, also negotiated a two-year contract with a combined 5.5% general salary increase and a range of other incentives. The Newsom administration estimates it will cost $234 million over three years.

But Newsom, at least for now, is not recommending any additional prison closures.  Instead, his state budget proposal recommends keeping prisons open with fewer inmates in them to provide more space for rehabilitative programs.

“The administration is not currently proposing any additional prison closures,” H.D. Palmer, spokesperson for the Department of Finance, said in a statement. “We remain committed to meeting the needs of staff and the incarcerated population while right-sizing California’s prison system as the prison population declines over time, and to addressing space needs as the state transforms the carceral system to one more focused on rehabilitation.”

Opponents of mass incarceration say the administration’s argument for keeping empty prison beds open doesn’t align with how the money is spent.

“This is a cash grab by (the corrections department),” said Brian Kaneda, deputy director of the prison abolitionist group Californians United for a Responsible Budget. Newsom has touted transforming San Quentin State Prison into a rehabilitation center, but advocates like Kaneda and state advisory groups say the plan is vague.

Rehabilitation costs, which currently include prisoner education and activities, only make up a fraction of total correctional spending — roughly 3% — over the past decade, according to state budget documents.

In a written statement, the corrections department said its spending plan “judiciously uses taxpayer dollars in a manner that balances the need for cost-efficiency while maximizing public safety, the wellbeing of incarcerated people and successful rehabilitation.”

Costs in California prisons

The actual cost to house a prisoner is much closer to $15,000, said Caitlin O’Neil, a criminal justice analyst for the nonpartisan Legislative Analyst’s Office. Direct costs include things such as food and clothing while the remaining 91% of spending per prisoner comes from fixed costs like salaries and facility upkeep

She found that compensation for employees at the corrections department increased by 43% between 2010 and 2019 — from $110,000 to $158,000 — nearly triple the rate of inflation.

Last summer, the state prison guard contract included $10,000 bonuses for officers at certain prisons and a new guaranteed 401k contribution in addition to regular pension benefits.

The state’s current savings from prison closures, about $200 million per facility, is not nearly enough to offset those pay and benefits boosts.

“We would have to close one or more prisons per year just to offset employee compensation increases that happen regularly,” O’Neil said.

The peace officers’ union did not respond to requests for comment. Prison labor advocates often argue that jobs are dangerous and difficult to staff, warranting high compensation benefits.

The union can be a force in the Capitol. It has contributed $2.2 million to the campaigns of current state legislators and it gave $1.75 million to help Newsom defeat a 2021 recall campaign. It also recently contributed $1 million to support Proposition 1, the measure Newsom placed on the March ballot to build housing and treatment facilities for people with serious mental health conditions.

Despite a precipitous decline in prison populations, corrections spending has remained relatively stable. In 2018, the average daily prison population topped 120,000 compared to a projected 90,240 people in 2024. That’s a 25% decrease. In contrast, correctional spending as a share of the total state budget has barely dropped in the same time period from 7% to 6%.

What should be good news to opponents of mass incarceration — decreasing populations — has not resulted in a leaner criminal justice system. 

“If you have $700 million in annual savings from prison closure, but you’re spending hundreds of millions of dollars on new prison infrastructure and giving prison guards a billion dollar raise (over three years), that starts to show why the math isn’t mathing,” Kaneda said.

But wholesale cuts to correctional spending don’t necessarily always equate to better prison conditions, said John Pfaff, a law professor at Fordham University.

“If you don’t cut (budgets) carefully, that makes prisons worse places to be. It makes them more dangerous, more traumatic,” Pfaff said. “I say that as someone who is not a fan at all of prisons as a general institution.”

Prison medical costs soar

Medical care is one area of increased spending where the state, under court order, is trying to improve prison conditions.

The average cost per person for medical care has more than doubled in the past 10 years, and total health care spending by the corrections department has increased by about 67%. Although the recent prison closures have cut about 2,700 correctional positions, medical spending has eaten up those savings.

Click here to read the full article in CalMatters

Voters say California’s budget deficit is an ‘extremely serious’ problem, poll finds

Half of California registered voters consider the state budget deficit an “extremely serious” problem, and 57% believe the state is headed in the wrong direction, according to a new UC Berkeley Institute of Governmental Studies poll co-sponsored by the Los Angeles Times.

California Gov. Gavin Newsom discusses his proposed state budget for the 2024-2025 fiscal year in Sacramento.

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California Gov. Gavin Newsom discusses his proposed state budget for the 2024-2025 fiscal year in Sacramento.
 (Rich Pedroncelli / Associated Press)

The survey was conducted days before Gov. Gavin Newsom unveiled an outline of his $291.5-billion spending plan for the next fiscal year and plans to address the $37.9-billion deficit projected by his administration. However grim, Newsom’s shortfall estimate is rosier than a December projection from the Legislative Analyst’s Office of a $68-billion budget hole.

“Voters are concerned about it, and they’re going to hold it against the governor and the Legislature to do something about it,” said Mark DiCamillo, director of the Berkeley poll and a longtime California pollster.

The state budget relies heavily on capital gains taxes paid by California’s highest earners, making state revenues prone to volatility in the stock market.

Lower-than-expected revenues, delayed tax deadlines and overspending based on inaccurate budget projections created California’s grim financial picture.

The governor’s proposed solution includes declaring a budget emergency to dip into the state’s rainy day reserves; cutting $8.5 billion in spending from programs that support climate change efforts, housing and other services; and reconsidering a minimum wage increase for healthcare workers.

When asked how they think California should offset the deficit, a majority of voters, 51%, support cuts to government services, and 35% want to use the rainy day fund. Among less popular savings measures, 17% of voters want to borrow from special funds.

The governor and voters appear in agreement in their opposition to raising taxes, which only 13% backed in the Berkeley poll.

California Assembly member Alex Lee (D-San Jose) has proposed raising taxes under his proposed Wealth Tax Act, which would impose a 1.5% tax on net worth above $1 billion in 2024 and 2025; and a 1% tax on net worth exceeding $50 million and an additional 0.5% tax on net worth over $1 billion as of 2026.

The governor has repeatedly rejected the idea of raising state taxes to offset the deficit.

Support for taxes on the wealthy have laid the foundation for California’s progressive tax structure, which leads to the state’s wild revenue swings, DiCamillo said.

Newsom’s 46% approval rating in the January poll remains largely unchanged from late October when voters gave him historic low marks. The latest poll found that 47% disapprove of his job performance as governor. Newsom terms out of office in 2026, so he doesn’t have a reelection to worry about.

The shortfall creates a new political dilemma for Newsom as he’s forced to make difficult spending decisions during budget negotiations with lawmakers over the next few months that could frustrate his allies and voters.

Environmental groups pushed back on the governor’s nearly $3 billion in proposed cuts for climate change programs. Other groups, such as the County Welfare Directors Assn., were concerned about reductions in funding for social services.

Overall, voters demonstrated little confidence in the direction of the state: 57% said California is headed the wrong way and only one-third said things are going right, the poll found.

Click here to read the full article in the LA Times

Legislature’s analyst gives mixed review of Newsom budget

Gov. Gavin Newsom’s recipe for digging the state out of a multi-billion dollar budget hole has “strengths and weaknesses” while his revenue projections are “plausible, but optimistic,” the nonpartisan analyst’s office representing the Legislature said today.

Gov. Gavin Newsom addresses the media during a press conference unveiling his 2024-25 January budget proposal at the Secretary of State Auditorium in Sacramento on Jan. 10, 2024. Photo by Miguel Gutierrez Jr., CalMatters

The size of the budget deficit is up for debate: Newsom put the number at $38 billion while the analyst’s office says Newsom’s own math suggests the hole is deeper — $58 billion — for the 2024-25 fiscal year, which starts July 1.

Worse, both the governor and Legislative Analyst’s Office predict large deficits of about $30 billion annually through 2027-28. But while California has large reserves and a number of spending plans that don’t affect the state’s core social and public services, “future deficits are likely to require more difficult decisions, like ongoing spending cuts and revenue increases,” the analyst’s office said in its initial review of Newsom’s $291.5 billion spending plan.

Newsom so far has balked at raising taxes on the super wealthy, bristling at the suggestion during his budget press conference on Wednesday. His fellow Democrats in the Legislature are split. One progressive lawmaker sought again to pass a wealth tax for Californians with net assets of at least $50 million, but a committee chairperson shelved that proposal. 

In a statement responding to the analyst’s report, a Newsom spokesperson said today that it “outlines one perspective on California’s budget shortfall and revenue projections.”

“The state can produce a prudent, balanced budget that preserves key investments for education, public safety, addressing homelessness, mental health care reform, climate action, and other priorities without a ‘wealth tax’ or any other broad-based revenue increases,” said Brandon Richards, the spokesperson. 

Fueling the Legislative Analyst’s Office’s worry is disagreement with Newsom over just how much more tax revenue the state can collect. Last fiscal year state tax collections fell 20%. Newsom’s 2024-25 proposed budget projects an 8% increase in 2023-24, the current budget year. “Halfway through the current year, we are yet to see clear signs of such a rebound,” the analyst’s office wrote. And while the stock market is experiencing a rebound — a vital source for state revenues — it can just as quickly reserve course.

The analyst’s office writes Newsom is right to pull $13 billion from the state’s reserves. Doing so leaves about $11 billion in California’s rainy day fund; leaving a sizable chunk of cash in reserves is “prudent given the continued budget problems likely for future years,” the office wrote. For Newsom to legally raid the rainy day fund, he’d have to declare a “budget emergency” — a move the analyst’s office said would be justified.

However, Newsom’s plan to also pull $900 million from another reserve account may not be consistent with legislative intent, the office wrote. This is a fund meant to support health insurance and cash aid programs for low-income residents. The office wrote that “economic conditions likely do not yet match what the Legislature envisioned when it created the reserve.” 

The office recommends that Newsom and Legislature make more cuts to existing short-term programs that aren’t part of the state’s core, ongoing educational or social service commitments. Doing so may mean pulling less money from reserves to have more emergency cash on hand for future deficits.

The swirl of competing assessments and early prognostications is par for the course for a budget process that lasts at least through June and often spills into September. The analyst’s office, the state’s main check on the governor’s state-spending math, plans several more detailed reviews of Newsom’s plan as legislative budget committees hold dozens of public hearings assessing the governor’s proposals. 

Newsom will release a revision to his 2024-25 spending plan in May, after the state sees just how much it collected from taxpayers in April to better forecast its revenue picture. By early June, the lawmakers will propose their own budget for 2024-25, setting in motion a furious few weeks of negotiations between Newsom and the Legislature to finalize a budget plan by around June 27.

Legislative Republicans have criticized Newsom’s plan as based on gimmicks and accounting tricks. Today, Sen. Roger Niello, vice chairperson of the Senate budget committee, posted on social media that he puts “much more faith in this analysis than the Governor’s proposal.” 

Leaders of the Democratic supermajority, who can pass a budget without any Republican votes, have been generally supportive of the Democratic governor’s proposals, however. 

Some complicated math

Even though Newsom said his plan solves a $38 billion budget shortfall for the coming year, the analyst’s office said the governor’s proposal actually covers closer to $58 billion, underscoring the difficulty in arriving at a precise estimate of how deeply buried the state is fiscally.

That’s a point Richards reiterated in his response today, adding that “the budget is often subject to wild swings in revenue year to year — why the Governor has called for reforming how the state captures future surpluses for our reserves.”

A major difference between Newsom’s numbers and those of the analyst’s office? The governor’s proposal didn’t count $15 billion in funding reductions to K-12 education and community colleges as actual reductions in his $38 billion tally, the analyst’s office wrote.

Factor in some other changes in spending in Newsom’s proposal that should have been considered part of the deficit picture, and the analyst’s office says Newsom’s team is dealing with a $58 billion budget problem. This revises the analyst’s office’s December estimate of California’s fiscal woes, when it said the state had to shore up a $68 billion budget hole. 

What does this mean for students, teachers and parents? That’s hard to assess. State budgets reflect a three-year window. The analyst’s office said most of the education-related reductions in Newsom’s plan from this week apply to the 2022-23 year — $8 billion.

But the analyst’s office said Newsom’s team “has not explained how its proposal could achieve $8 billion in savings, given the administration also indicates the proposal would not impact school and community college budgets,” it wrote. “The Legislature will need significantly more information before it can assess the proposal — including its potential effects on the state budget after 2024‑25.”

Click here to read the full article in CalMatters

Newsom unveils plan to cut California climate funding 

Three years ago, Gov. Gavin Newsom sensed an opportunity as California emerged from the pandemic with record budget surpluses after a series of calamitous wildfires and drought years.

A flooded road just east of Highway 43 on March 20, 2023. Photo by Larry Valenzuela, CalMatters/CatchLight Local

The governor set aside a bigger chunk of the surplus billions for two consecutive years to combat climate change — an issue close to the heart of many Democratic voters — and then, facing deficits, had to cut it back last year, to $52.3 billion.

But today, Newsom proposed scaling climate funding back by about 7% compared to last year’s budget, to $48.3 billion, while spreading that money out over seven years, up from six last year. The cuts, unveiled in the first draft of his new budget, follow last year’s 3% cut to climate programs, and triggered criticism today from environmental groups.

California programs to tackle and adapt to the changing climate include a vast array of programs, including subsidies for electric cars, funds for making the coast more resilient, programs to prepare for wildfires and secure water supplies, and efforts to build solar and wind projects.

Newsom’s proposal offers a look at how viable the state’s commitments to tackling climate change will be as the state’s historic surpluses turn to deficits. Newsom, in a budget presentation in Sacramento, detailed a preliminary budget meant to fill what his administration said was a huge, $37.9 billion projected statewide budget hole.

“We can’t backslide or slow down while the climate crisis speeds up. We need our state leadership to do more, not less.”MARY CREASMAN, CALIFORNIA ENVIRONMENTAL VOTERS

Newsom said some of the climate cuts would be buttressed by more than $10 billion in federal money from the Biden administration. He said his budget still included “unprecedented commitments on climate that actually will grow because of the support of the federal government.”

The governor’s proposal delayed $600 million in spending on zero emission cars and trucks by three years, including to the electric car rebate program, the Clean Cars 4 All program aimed at getting more lower-income Californians to purchase zero emissions cars. Also delayed by three years is money to build charging stations. An ambitious transition to electric cars is considered critical to meeting the state’s zero-carbon mandate to slash climate-warming greenhouse gases.

“These delays suggest a bumpy road ahead for an equitable ZEV transition amid a deficit,” Jamie Pew, climate policy advisor with the nonprofit group NextGen, wrote in an email to CalMatters.

The governor’s proposal is the first step in a months-long negotiation with the Legislature that will include his revised plan in May and a June 15 legislative deadline. 

Lauren Sanchez, the governor’s senior climate advisor, called the state’s $48.3 billion climate budget “a world-leading figure that exceeds many nations’” investments.

“In the face of a $37.9 billion budget deficit, the governor’s budget protects 89% of our original $54 billion climate budget,” she said. “The year ahead will be crucial, and our climate commitment will continue to make the state resilient.”

But climate groups criticized Newsom’s proposal, saying cutting back on state spending now would cost the state more down the line.

“We can’t backslide or slow down while the climate crisis speeds up. We need our state leadership to do more, not less,” said Mary Creasman, chief executive of California Environmental Voters in a statement. “We look forward to working with the governor and Legislature to make 2024 a year of innovative and courageous climate leadership.”

Newsom’s proposal included $2.9 billion in climate program cuts, $1.9 billion in spending delays and $1.8 billion shifts in funding from spending general fund dollars to other sources of revenue.

Most of the shift will be made to the state’s Greenhouse Gas Reduction Fund, which is paid for by the controversial cap-and-trade carbon market, in which oil refineries, power plants and manufacturers pay for their excess carbon dioxide emissions. Last quarter’s auction brought in $1.4 billion.

The plan pauses spending on staff costs to implement two climate laws signed last year that required large corporations to disclose greenhouse gas emissions and financial risks from climate change. Newsom, when he signed the bills last year, said he might seek delays in their implementation.

Out of a $10 billion package to encourage adoption of zero emission cars and trucks, the governor proposed $38.1 million in cuts and replaced $475.3 million in general fund dollars with money from the greenhouse gas fund.

Yana Garcia, Newsom’s secretary for environmental protection, said in a press conference today that “we’re moving swiftly to meet and surpass California’s ambitious climate goals,” pointing to the state achieving its clean car and truck goals two years ahead of schedule.

“In the face of a $37.9 billion budget deficit, the governor’s budget protects 89% of our original $54 billion climate budget. (It’s) a world-leading figure that exceeds many nations.”LAUREN SANCHEZ, THE GOVERNOR’S SENIOR CLIMATE ADVISOR

Last year, Newsom left funds for the transition to electric vehicles largely in place, though he made $910 million meant for zero emissions transit available to support public transit agencies.

Newsom’s transportation secretary, Toks Omishakin, said today that “while the budget proposal for transportation contains significant funding shifts and delays, we’re able to maintain roughly 99% of funding in the governor’s historic clean transportation infrastructure package.”

Cuts to coastal, water programs, too

This year’s proposal also would make some cuts and delays in clean energy, as well as wildfire and forest resilience, water recycling and other programs. The 2021 and 2022 budgets included $2.8 billion for forest and wildfire resilience; the new proposal maintains $2.7 billion of that over five years.

Funding for coastal resilience programs was cut in half, from $1.3 billion to $660 million, reducing money set aside to protect communities and infrastructure against sea level rise, coastal protection work and the state’s Ocean Protection Council budget for safeguarding coastal waters.

While noting the cuts, Resource Secretary Wade Crowfoot told reporters that funds for assisting local communities in preparing sea level rise planning documents remained intact.

Mark Gold, formerly Newsom’s deputy secretary for oceans and coastal policy, said it was a bad day for climate programs.

“Coastal funding got devastated,” said Gold, who is now with the environmental group Natural Resources Defense Council. “We talk about how important it is for California to be a global climate leader, but the budget does not back up those statements at all, especially when it comes to the coast.”

Organizations that advocate for water safety and affordability applauded Newsom for preserving funding for drinking water programs, but raised concerns about his proposal to cut more than $100 million from a program aimed at addressing forever chemical contamination, which have been linked to serious health effects. 

Water recycling, too, would see cuts under Newsom’s proposal, despite his emphasis on water recycling in his August 2022 strategy to bolster the state’s water supply for a hotter, drier future. 

Though Newsom called for keeping $348 million previously set aside for water recycling and groundwater cleanup, he proposed returning about $174.4 million of unspent money to the general fund and delaying another $100 million until the budget year beginning July 2025.

This follows a $278 million cut for water recycling and groundwater cleanup in the 2023–2024 spending plan, as well.

Rachel Ehlers, a deputy legislative analyst covering environment and transportation, said one critical question will be how quickly programs are using the money they have received.

“How are we doing on getting that money out the door? On getting it in the hands of consumers looking to buy vehicles? To entities who are building the charging infrastructure?” she said. “And how quickly are we spending that money? … That’s going to be a key question.”

Click here to read the full article in CalMatters

California Gov. Newsom expected to announce proposed budget this week amid $68 billion deficit

The serious budget deficit has many concerned about what spending cuts could be coming.

SACRAMENTO, Calif. — California Gov. Gavin Newsom is expected to present his proposed budget this week as the state faces an estimated $68 billion shortfall. The serious budget deficit has many concerned about what spending cuts could be coming.

“We knew there was going to be a deficit, but the magnitude of that deficit, I think, took everyone by surprise,” said Troy Flint, a spokesperson for the California School Boards Association.

Wednesday is the deadline for the governor to announce his 2024-2025 budget. In anticipation of his proposal and the months of budget negotiations ahead at the State Capitol, CSBA is weighing in on the options the Legislative Analyst’s Office outlined for education funding in its December fiscal outlook report.

“They mentioned the possibility of cuts, but we appreciated that they also mentioned that there are other avenues, other ways, other areas that we can explore to try and make ends meet in the budget without direct cuts,” Flint said.

The report suggested that lawmakers consider dipping into the reserve for education, which has a balance of more than $8 billion, and cutting program funding that has not yet been allocated to schools.

Assembly Budget Committee Chair Jesse Gabriel, D-Encino, has said he is confident lawmakers can craft a budget that preserves classroom funding.

Senate Budget Vice-Chair Roger Niello, R-Fair Oaks, is hopeful that will be the case, too.

“I would hope that the impact on education would be the very minimum. We do have a $68 billion deficit, so it has to come from somewhere. To the extent that it doesn’t come from some of the education spending, it would have to come from somewhere else, and we’ll see how the governor views those priorities,” Niello said.

About $26 billion of the deficit is from the 2022-23 budget year, which the LAO called an “unprecedented prior-year revenue shortfall.”

Lawmakers did not have all the tax revenue counted up when they put together their spending plan last summer because of tax filing extensions after severe winter storms.

Click here to read the full article at KCRA

John Seiler: How to fix California’s budget woes (if you really wanted to)

California’s biggest challenge in 2024 is the estimated $68 billion budget deficit. Here’s how to fix it. 

Spending has to be cut – a lot. There’s no choice. Twenty years ago while at the Orange County Register I came up with what I called the “6.2% solution” to the wild budget swings. Looking at state data, I noticed the state got into trouble whenever general-fund spending rose above 6.2% of the personal income. That’s the maximum the state’s residents can pay. Above that and budget deficits hit during the next slump.

I’ve updated the analysis periodically. The Legislative Analyst produced a similar analysis for its Feb. 15, 2023 Multiyear Assessment for the budget, although not crediting me.

On Jan. 10 Gov. Gavin Newsom will release his budget proposal for fiscal year 2024-25, which begins on July 1, including the latest estimates. For this article, I’ll use Schedule 6 of his 2023-24 proposal. The state spent 7.9% of personal income in 2022-23, a wildly high number. And it will spend a projected 7.1% for 2023-24, the current fiscal year. 

For the latter number, spending was 0.9 percentage points above the 6.2% limit. The need for a cut in the general-fund budget is 0.9/7.1% of spending, or 13%. 

Next, the LAO’s latest budget analysis from Dec. 7 estimated spending currently at $223 billion for 2024-25. A budget cut of 13% would be $29 billion. Do that for two years and we come to $58 billion. Take $10 billion from the estimated $24 billion budget reserve and we come to $68 billion.

Tax increases? Any attempt would backfire. Income taxes are already going up Jan. 1, including from 9.3% to 10.4% on the middle class and 13.3% to 14.4% on millionaires. When Gov. Pete Wilson signed a record $7 billion tax increase in 1991, revenues actually declined from $40 billion to $42 billion two years later. 

Gov. Arnold Schwarzenegger raised taxes in 2009. But as Rep. Tom McClintock pointed out the next year, “The taxes were supposed to produce $13 billion in additional revenue. But after nine months, California’s sales tax collections are down $270 million; income tax collections are down $10 billion.”

In the long term, California needs reforms that finally end the surplus-deficit rollercoaster. First, it should enact economist Art Laffer’s 5.8% flat state income tax, with no deductions except for a home. It would produce a steady flow of revenues and encourage rich people to stay here, or come back, and pay taxes again. Nine states already have flat taxes, including most recently Arizona.

Second, the Gann Limit needs to be reformed. Passed in 1978 as Proposition 4, it limited state spending to the increase in population plus inflation; with surpluses sent back to taxpayers. It was eviscerated by Proposition 111 in 1990.

But the residual Gann Limit produced the embarrassment two years ago of a nearly $100 billion surplus being used partly as tax refunds, but mostly as new spending – a nice slush fund as the governor and legislators faced re-election.

A better idea: Enact a strong Gann Limit 2.0 that caps spending at 6.2% of personal income, with any excess triggering across-the-board cuts in all departments. 

The $68 billion deficit is an opportunity to put these two reforms before voters next Nov. 5. Previous budget crises were wasted with the 1991 and 2009 tax increases; and in 2004 with Schwarzenegger’s foolish $15 billion bond from Proposition 57, a stopgap that came back to shock him in 2009.

Finally, let’s look to new Argentine President Javier Milei. He ordered an extraordinary session of Congress lasting until Jan. 31 “to discuss his controversial sweeping economic reform package,” reported the Buenos Aires Times. The reforms also would “change or scrap more than 300 regulations and rules,” including rent control.

Click here to read the full article in the OC Register

Senate Republicans say Newsom should take ‘early action’ to address $68 billion deficit


Top Senate Republicans, including Senate Minority Leader Brian Jones, R-Santee, and Senate Budget and Fiscal Review Committee Vice-Chair Roger Niello, R-Fair Oaks, called on Gov. Gavin Newsom to act fast to deal with the state’s anticipated $68 billion deficit for the 2024-25 budget year.

“With recent budget revenues failing to meet projections and the Legislative Analyst’s forecast of a $68 billion deficit for 2024-25, we urge you to consider early action to improve the state’s finances.

Making prudent adjustments to the current year’s General Fund budget would help prevent the fiscal condition of the state’s finances from getting worse,” Jones and Niello wrote in a letter to the governor. The letter notes the state spending freeze that was announced last week, but says that doesn’t go far enough.

“However, without broader, accelerated actions to the current year’s budget, the amount of available solutions will be limited and have a disproportionate impact on the 2024-25 budget years,” the letter reads. “Failing to act now will lead to increased instability in future budgets and impact the functions and services the state provides. Including accelerated action proposals in your January budget will help the state achieve this aim.”

The letter does not disclose what early action Jones and Niello want Newsom to take.

This letter follows one sent last week by Assembly Republican Leader James Gallagher, R-Yuba City, and Assembly Budget Committee Vice-Chair Vince Fong, which called on Newsom to order a special session to tackle the budget problem.

Click here to read the full article in the Sacramento Bee

California Budget Deficit Climbs To $68 Billion

‘Our economy is still good’ said Democrat Senate President Pro Tem Toni Atkins

The Legislative Analyst’s Office (LAO) announced on Thursday that the state budget deficit now stands at $68 billion for the 2024-2025 fiscal year, $10 billion higher than initial projections showed earlier this month.

California’s state budget has fluctuated wildly in the past several years. During the COVID-19 pandemic, California saw the largest surpluses in state history, including an unprecedented $31 billion surplus in 2022-2023. However a weakening economy, a massive loss of the state population and companies moving out of state, delayed tax changes and numerous other factors led to a severe deficit the next year. An initial deficit of $25 billion, which was later changed in May to $31.5 billion, rocked the state. While the state managed to continue on with a reduced budget, experts warned that the situation would likely grow worse with continued tax shortcomings.

Last week, the LAO announced that the state would be facing a $58 billion budget deficit for at least the next few years. However, with lower than expected tax revenues coming in because of taxes delayed by atmospheric river storms from earlier this year, as well as recent losses in the tech sector, the amount was adjusted to $68 billion for the upcoming 2024-2025 fiscal year. However, according to the LAO, unlike the budget crisis that struck California during the Great Recession, California’s economic success in the 2010’s put the state in an economically better position today than where it was in 2008.

Notably, the LAO pointed out that a high amount of cash reserves, as well as a flexible education budget, would likely help relieve the deficit figure in the coming years.

“While addressing a deficit of this scope will be challenging, the Legislature has a number of options available to do so,” said the LAO in their report on Thursday. “In particular, the state has nearly $24 billion in reserves to address the budget problem. In addition, there are options to reduce spending on schools and community colleges that could address nearly $17 billion of the budget problem. Further adjustments to other areas of the budget, such as reductions to one‑time spending, could address at least an additional $10 billion or so. These options and some others, like cost shifts, would allow the Legislature to solve most of the deficit largely without impacting the state’s core ongoing service level.”

A looming $68 billion deficit

At a press conference, LAO analyst Gabriel Petek added that “The state remains in a good cash position, and that really wasn’t the case back at the start of the Great Recession. We don’t face the same kind of liquidity challenges that we had at that time, and so I would stop short of describing it as a crisis.”

Nonetheless, the LAO report did say that longer term solutions were needed, and that fixes such as using state financial reserves would only be a one-time-use only solution. Overall spending reductions and new methods of revenue increases would  needed past the 2024-2025 fiscal year with the LAO also noting that the state should keep at least half their fiscal reserves for use in later years to help bridge the spending gap.

“Given the state faces a serious budget problem, using general purpose reserves this year is merited,” added the LAO. “That said, we suggest the Legislature exercise some caution when deploying tools like reserves and cost shifts. The state’s reserves are unlikely to be sufficient to cover the state’s multiyear deficits—which average $30 billion per year under our estimates. These deficits likely necessitate ongoing spending reductions, revenue increases, or both. As a result, preserving a substantial portion—potentially up to half—of reserves would provide a helpful cushion in light of the anticipated shortfalls that lie ahead.”

Faced with slightly more dire news than initially found last week, many lawmakers, including Democrats who had been in favor of more spending on social programs in the past, said on Thursday that new and existing spending would need to be shrunk considerably in the coming years because of the new deficit that the state is facing.

“Our economy is still good, but what we need to do is be incredibly cautious here,” said Senate President Pro Tem Toni Atkins (D-San Diego). “We are in a deficit, and therefore, new programs, new spending — in fact, existing spending — we’re going to have to slow down over time.”

However, many financial experts told the Globe on Thursday that big cuts are now almost essential to keep the state afloat while they adjust to the new tax level reality.

“We were $54 billion in the hole in 2020,” said accountant Lee Greenman, a California-based accountant who helps city and other regional entities fix budget problems. “Then we had a surplus, another surplus, then a deficit. Everyone wants money going somewhere, so the state always compensates financially in weird ways to stay on the road. During the last few surpluses, a lot of money went to new programs rather than to the state reserve, and now look where we are. Now we have to make cuts to things that we shouldn’t have made in the first place.

Click here to read the full article in the California Globe