ARTICLE
Here we go again with another round of the Governor of California and the California State Legislature as they begin the annual state budget dance. Governor Newsom has unveiled his January budget proposal which authorizes $291.5 billion in spending, significantly less than the $310.9 billion budget plan enacted just six months ago. The nonpartisan Legislative Analyst’s Office says that Governor Gavin Newsom’s initial 2024-25 budget is “optimistic” on revenue and has strengths and weaknesses on spending. The LAO offers guidance to state lawmakers on their version. 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 on Monday. 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. Both sides use a different analysis process to arrive at their respective budget deficit numbers. What we do know is that the Governor’s office and the Legislative Analyst Office (LAO) predict large deficits will continue at about $30 billion annually through 2027-2028. 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. So far the Governor has stated he is not raising taxes on the wealthy. However, there is a mixed opinion in the Democratic-controlled legislature where some legislators want to include a wealth tax while others are quiet on the subject. Please note, that the minority party in Sacramento (the Republicans) has zero say in the outcome. The LAO’s concern is the 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 reverse course. Let’s turn our attention to the California economic outlook. Beacon Economic provided a quarterly outlook and states, “Although California’s large (some say massive) budget deficit has opened discussion about fears of a recession, Beacon Economics see a slower growth for 2024. Beacon uses the $58 billion deficit that the LAO cites. They predict home prices will be on the rebound as home prices rose 7.6% year-over-year in October. However, home sales continue to fall and are 35% below pre-pandemic peak in February 2020. Unemployment has a recent uptick to 4.8% from a year ago. California’s budget goes through these cycles (boom and bust) because of our reliance on income tax — especially the top 1% of income earners who provide nearly 31% of the state’s revenue. When stocks and capital gains take a tumble, the state’s budget suffers significantly. There is no remedy for the current budget process unless there is political will in Sacramento to modify that system — and that is unlikely. So what is the plan? To balance the proposed budget, the Governor asserts that the state will need to close an estimated $38 billion shortfall. The Governor attributes the deficit to two major economic developments from 2023: the substantial decline in the 2022 stock market (noted above) and the unprecedented delay in income tax collections in 2023 (the result of extensions granted by the IRS due to natural disasters). Tapping Into Reserves – $13.1 billion: The Governor’s budget proposes withdrawals from the Mandatory and Discretionary Budget Stabilization Account (BSA) and the Safety Net Reserve—which would leave approximately $18.4 billion in total budget reserves. Reductions – $8.5 billion: The Governor’s budget proposes a variety of cuts to several policy areas and programs. Some of the more significant cuts include $2.9 billion in various climate reductions and $1.2 billion in various housing program reductions. Internal Borrowing – $5.7 billion: The budget proposes one-time internal borrowing from specific dedicated revenue sources and special funds, to be repaid in future years. Most significantly, the Governor proposes increasing the recently reenacted managed care organization (MCO) tax, approved in late December by the federal government, to generate $3.8 billion in additional revenue. One interesting historical analysis — we are familiar with this exercise as the incumbent Governor leaves office, and his successor inherits the deficit. California governors tend to leave hefty budget deficits behind when they depart, forcing their successors to raise taxes, borrow money, or make big spending cuts to maintain solvency. It happened in 2003 when Democrat Gray Davis was recalled and Republican Arnold Schwarzenegger succeeded him, and again in 2011 when Schwarzenegger handed over the governorship to Democrat Jerry Brown. The example of whether California’s budget woes will continue beyond Governor Newsom is an economic guess based on the current analysis. If you are a potential candidate for Governor in 2026, you better be prepared to address looming deficits.
Here we go again with another round of the Governor of California and the California State Legislature as they begin the annual state budget dance.
Governor Newsom has unveiled his January budget proposal which authorizes $291.5 billion in spending, significantly less than the $310.9 billion budget plan enacted just six months ago.
The nonpartisan Legislative Analyst’s Office says that Governor Gavin Newsom’s initial 2024-25 budget is “optimistic” on revenue and has strengths and weaknesses on spending. The LAO offers guidance to state lawmakers on their version.
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 on Monday.
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. Both sides use a different analysis process to arrive at their respective budget deficit numbers.
What we do know is that the Governor’s office and the Legislative Analyst Office (LAO) predict large deficits will continue at about $30 billion annually through 2027-2028. 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. So far the Governor has stated he is not raising taxes on the wealthy. However, there is a mixed opinion in the Democratic-controlled legislature where some legislators want to include a wealth tax while others are quiet on the subject. Please note, that the minority party in Sacramento (the Republicans) has zero say in the outcome.
The LAO’s concern is the 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 reverse course.
Let’s turn our attention to the California economic outlook. Beacon Economic provided a quarterly outlook and states, “Although California’s large (some say massive) budget deficit has opened discussion about fears of a recession, Beacon Economics see a slower growth for 2024. Beacon uses the $58 billion deficit that the LAO cites. They predict home prices will be on the rebound as home prices rose 7.6% year-over-year in October. However, home sales continue to fall and are 35% below pre-pandemic peak in February 2020. Unemployment has a recent uptick to 4.8% from a year ago.
California’s budget goes through these cycles (boom and bust) because of our reliance on income tax — especially the top 1% of income earners who provide nearly 31% of the state’s revenue. When stocks and capital gains take a tumble, the state’s budget suffers significantly. There is no remedy for the current budget process unless there is political will in Sacramento to modify that system — and that is unlikely.
So what is the plan? To balance the proposed budget, the Governor asserts that the state will need to close an estimated $38 billion shortfall. The Governor attributes the deficit to two major economic developments from 2023: the substantial decline in the 2022 stock market (noted above) and the unprecedented delay in income tax collections in 2023 (the result of extensions granted by the IRS due to natural disasters).
Tapping Into Reserves – $13.1 billion: The Governor’s budget proposes withdrawals from the Mandatory and Discretionary Budget Stabilization Account (BSA) and the Safety Net Reserve—which would leave approximately $18.4 billion in total budget reserves.
Reductions – $8.5 billion: The Governor’s budget proposes a variety of cuts to several policy areas and programs. Some of the more significant cuts include $2.9 billion in various climate reductions and $1.2 billion in various housing program reductions.
Internal Borrowing – $5.7 billion: The budget proposes one-time internal borrowing from specific dedicated revenue sources and special funds, to be repaid in future years. Most significantly, the Governor proposes increasing the recently reenacted managed care organization (MCO) tax, approved in late December by the federal government, to generate $3.8 billion in additional revenue.
One interesting historical analysis — we are familiar with this exercise as the incumbent Governor leaves office, and his successor inherits the deficit. California governors tend to leave hefty budget deficits behind when they depart, forcing their successors to raise taxes, borrow money, or make big spending cuts to maintain solvency.
It happened in 2003 when Democrat Gray Davis was recalled and Republican Arnold Schwarzenegger succeeded him, and again in 2011 when Schwarzenegger handed over the governorship to Democrat Jerry Brown. The example of whether California’s budget woes will continue beyond Governor Newsom is an economic guess based on the current analysis. If you are a potential candidate for Governor in 2026, you better be prepared to address looming deficits.