Thanks to a financial windfall five years ago, Gov. Newsom said he was eliminating a state budget “gimmick” that one of his predecessors relied on to cut about $800 million from a deficit during the Great Recession.
The accounting trick, adopted in 2009, delayed civil servants’ pay from the end of one financial year, June 30, to the start of the next, July 1. A decade later, Newsom spent nearly $1 billion to end the subterfuge, with one caveat.
“If I use it six years from now, in a recession, forgive me,” Newsom said.
At his request, Newsom and lawmakers agreed to use the budget ploy next year, even if California is not in a recession.
The tactic is one of several maneuvers Democrats are relying on to reduce a historic budget deficit of at least $37.9 billion by pushing out their spending problem for another year.
Of the $17.3 billion in budget cuts agreed to so far by Newsom and Democrats, only $3.6 billion are actual cuts.
Lawmakers made the first of those cuts Thursday and passed a budget bill that reduces unspent funding allocations in 2022-23 and 2023-24 by $1.6 billion. Although Newsom presented the changes as part of a “rapid action” deal to reduce the deficit in April, many of the reductions won’t be reflected in legislation until June or later.
At least so far, Newsom and lawmakers are relying largely on mechanisms other than cuts to reduce the deficit: borrowing $5.2 billion, delaying and deferring $5.2 billion in funding for government-sponsored programs. the state in subsequent years and draw $3.4 billion from separate public funds. Democrats also agreed to take at least $12.2 billion more from the rainy day fund to cover their expenses.
Budget watchers and Republican lawmakers have criticized the strategy, saying resorting to smart accounting now and dipping into California’s savings account while the economy remains strong would make the state more vulnerable to budget cuts drastic if a recession occurs in the coming years and incomes decline.
Newsom’s critics accuse the governor and Democrats of spending too much money and causing the deficit. The “gimmick” is an example of what its critics say is Democrats’ inability to make the kind of tough choices that California households are forced to weigh when they spend more money than they bring in.
“They’re doing things you normally do in a recession and there’s no recession here,” said David Crane, president of Govern for California, a nonprofit organization that seeks to oppose to the influence of unions on state government. “You shouldn’t have to dip into reserves to cover a budget deficit if your revenues are 50% higher than they were when you took power.”
General fund revenue, which the state uses to pay for most public services, was $140 billion when Newsom took office in 2018-19. The governor’s January budget projects revenue of more than $214 billion, a 53 percent increase, for the next fiscal year as Democrats consider cutting the rainy day fund in half.
According to UCLA’s Anderson Forecast released in March, California’s economy is growing faster than the rest of the country and the possibility of a U.S. recession is fading. Newsom regularly trumpets the strength of the state’s economy.
“While there are still challenges ahead – including state and local finances, homelessness and out-migration – the forces driving California’s economy remain robust,” write the UCLA economists .
HD Palmer, a spokesperson for the governor’s Department of Finance, said the cuts Democrats have agreed to so far are only part, but not all, of the solution to the budget problems, along with other decisions coming in June. He also highlighted the fact that more than 70 percent of the general fund is dedicated to K-12 education, health care and social services.
“If you don’t agree with these solutions, that’s okay. What specific proposals would you propose to offset this in terms of programmatic reductions? » he asked budget critics.
Assembly Republican Leader James Gallagher of Yuba City said he would start by funding the basics, such as education, infrastructure and public safety, then decide what else the state would need has resources.
Newsom often promotes any one-time funding in his previous budgets, which he said would be easy to stop if the state went from a surplus to a deficit. But he continued to support many of his costly policy priorities, such as expanding Medi-Cal to all eligible low-income immigrants, regardless of their legal status. A state audit also found that California failed to monitor the effectiveness of its costly homelessness programs, on which Newsom and lawmakers have spent $20 billion over the past five years.
“A $73 billion deficit is no joke,” Gallagher said. “This is a serious problem that we need to resolve. This makes me think that the governor just wants to fix this until the end of his term and leave this problem to someone else.
A combination of delayed tax deadlines and excessive spending based on inaccurate budget projections has created a budget deficit, which occurs when spending exceeds projected revenue.
Newsom and lawmakers expected revenues to be lower than forecast due to a falling stock market, high interest rates and increased inflation, but the deficit is far worse than forecast. State explained last June. The Newsom administration last pegged the deficit at $37.9 billion in January, although a more recent estimate from the Legislative Analyst’s Office suggests it could reach $73 billion by the time the governor unveils its revised budget proposal in mid-May.
California’s state budget depends largely on income taxes paid by top earners. Revenues are subject to volatility, dependent on capital gains on investments, executive bonuses and windfall profits from new stock offerings, and notoriously difficult for the state to predict.
The governor repeatedly blames the deficit problem on the federal government’s decision to delay the 2022 tax filing deadline from April to November last year due to winter storms.
In a typical budget year, state government has tax receipts before the governor unveils a revised budget proposal in mid-May and before reaching a final spending agreement with lawmakers in June . The fiscal delay forced lawmakers and the governor to pass the current budget in July based on estimates of how much the state would collect in tax revenue by the November deadline. These estimates were extremely wrong.
The legislation approved Thursday goes back and cuts unspent funds from previous and current budget years. The changes include a $45 million cut for protecting communities from wildfires, $88 million for watershed resilience, and a $34 million reduction in funding to expand high-speed Internet access. flow, among others. ”
The bill was part of “early action” by lawmakers and the governor said they would take April to reduce the deficit by $17.3 billion before the May overhaul. But only $3.3 billion of the cuts he claimed to make can now be passed into law, and the majority will be included in the final budget deal, with other cuts, approved this summer.
“We have presented this early action plan to protect our progress and safeguard our core programs so that we can devote time and energy to the most difficult decisions to responsibly close the remaining budget gap,” he said. said Senate President Pro Tem Mike McGuire (D-Healdsburg). during debates in the Senate on Thursday. “And that’s exactly what we’re going to do.”
Democrats are trying to offset the budget crisis before May, when an updated estimate could reveal an even larger deficit. Democrats also took the unusual step of demanding that the state Department of Finance subtract the $17.3 billion from the estimated deficit before the budget overhaul in May, making the deficit appear smaller before many changes are reflected in the law.
“This budget is all smoke and mirrors, backroom deals made by the party in control,” said Sen. Brian Dahle (R-Bieber).
The postponement of payroll from June 30, 2025 to July 1, 2025 is one of the changes accepted by Democrats, but on which they will not vote until this summer.
While Crane, a political donor to Assembly Speaker Robert Rivas and dozens of other lawmakers, opposes Newsom’s decision to use the budget ploy again, he said the “greatest sin” is the unprecedented decision to draw on state reserves in the absence of a recession. . Newsom will have to declare a budget emergency to do so, according to state law.
“My only hope is that by the May review, he will be able to say that I will no longer have to dip into the reserves,” Crane said.
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