THE GOVERNOR PROJECTS A $38 BILLION SHORTFALL (Really a $68 Billion Deficit)
THE GOVERNOR PROJECTS A $38 BILLION SHORTFALL
This perspective contrasts with the more cautious forecast by
the nonpartisan Legislative Analyst’s Office, which anticipated
a $68 billion deficit for the 2024-25 fiscal year.
On January 10th, California Governor Gavin Newsom released his 2024-25 State budget, confronting a stark $38 billion deficit. Specifically, the proposed state budget is $291.5 billion. While we all may be wondering what this means for the year(s) to come, the Governor seems unfazed describing his budget proposal as “a story of correction, a story of normalization after a period of tremendous amount of distortion.”
Still, to address this deficit, the Governor had to be creative to make sure that the budget was made whole. Specifically:
Reserves: The budget utilizes $13.1 billion from the state’s reserves, including a $10.4 billion withdrawal from the Mandatory Budget Stabilization Account (BSA) Balance and Transfer Suspension, $1.8 billion from the Discretionary BSA Balance, and $900 million from the Safety Net Reserve.
Reductions: Funding reductions amounting to $8.5 billion are planned across various sectors. This includes $2.9 billion in climate reductions, $1.2 billion in cuts to housing programs, and additional reductions in areas such as state vacant position funding, school facilities aid, student housing, legislative requests, the UCLA Institute of Immunology and Immunotherapy, and the Middle-Class Scholarship Program.
Revenue/Internal Borrowing: The budget seeks to generate $5.7 billion through increased revenue and internal borrowing. Key measures include boosting the Managed Care Organization Tax for Medi-Cal support by $3.8 billion and conforming to the Tax Cuts and Jobs Act’s Net Operating Loss Limitation, yielding $300 million.
Delays: Funding delays totaling $5.1 billion are planned, to be spread over a three-year period starting from 2025-26. Significant areas of delay include the Transit and Intercity Rail Capital Program, DDS Service Provider Rate Reform, and programs for preschool, transitional kindergarten, full-day kindergarten facilities, clean energy reliability investment, behavioral health bridge housing, and toxic cleanup in vulnerable communities.
Fund Shifts: The budget proposes shifting $3.4 billion in expenditures from the General Fund to other funds. This includes $1.8 billion in shifts to the Greenhouse Gas Reduction Fund, reducing state plans’ retirement contributions using Prop 2 Debt Repayment Funding, and allocating $100 million for Unemployment Insurance Interest Payment.
Deferrals: To manage fiscal constraints, the budget defers $2.1 billion in specific obligations to the fiscal year 2025-26. This includes deferring the June to July payroll and commitments to the University of California and California State University systems.
It is important to note that initial January plans often undergo significant revisions when the Legislature responds to the Governor’s proposal. Essentially, we are at the starting block; the announcement of the Governor’s Budget is the first step in the budget race to June 15th, and even longer in the case of some budget trailer bills and budget bill juniors. The jockeying for more scarce resources has just begun and members of the legislature are already outlining their priorities and signaling their messages to the Governor and the wider public. The same goes for interested stakeholders through their associations and key political voices.
Statements from leaders in the Senate and Assembly:
“Welcome to year six of ‘Gavinomics’ where his budgets turn surpluses into deficits and his policies push Californians to flee. As the Governor pulls revenue gimmicks and accounting tricks, it’s impossible to bury the truth: California is bleeding because of a decade of Democrats’ one-party rule and reckless spending. For years, Senate Republicans’ call for fiscal responsibility fell on deaf ears meanwhile spending more than doubled. Still, we stand ready to work towards a balanced budget that helps, not hinders Californians.”
Senate Republican Leader Brian Jones
“After years of ignoring Republican warnings about unsustainable spending, legislative Democrats and Gavin Newsom now have to deal with a massive deficit. It’s time to bring California’s budget under control, but not through accounting gimmicks or cuts to education. Our government needs to get back to basics and stop wasting tax dollars on an ineffective and unaccountable bureaucracy.”
Assembly Republican Leader James Gallagher
POCKET AWARENESS
Newsom’s team creatively formed this budget by dipping into the state’s $24 billion Rainy Day Fund. Although he stopped short of calling California’s budget deficit a “crisis,” the proposal to pull more than $13 billion from the state’s reserves would require him to declare a “fiscal emergency.” Newsom effectively has created a placeholder budget in the event that further market decline hits the state coffers. It will be important to monitor state revenues to see if this will predicate dipping into the emergency funds, or if the Legislature resists the kind of restraint the Governor has put forward and seeks to soften the cuts already in the proposed budget.
Some information is obtained from: Capital Report from Capitol Advocacy
MADDY COOPER, CAMERON DEMETRE, LINDSAY GULLAHORN, CLAIRE LATIMER, AND JENNIFER ROE