State Budget Update: The Calm Before the Budget Storm

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Earlier this month, the nonpartisan Legislative Analyst’s office released its delayed fiscal outlook for the year ahead, and the news was bleak.

“Largely as a result of a severe revenue decline in 2022-23 . . . we estimate the Legislature will need to solve a budget problem of $6 billion in the upcoming budget process,” the Analyst’s office wrote.

Christmastime is always the busiest time of the year at the Department of Finance.

With the state budget due to be released on January 10, department leadership is making the final decisions about spending priorities with the governor.

However, recent bad news about the state of California’s finances means that this year’s busy pre-budget release season is the calm before the budget storm that will erupt when lawmakers return in January.

Earlier this month, the nonpartisan Legislative Analyst’s office released its delayed fiscal outlook for the year ahead, and the news was bleak.

“Largely as a result of a severe revenue decline in 2022-23 . . . we estimate the Legislature will need to solve a budget problem of $6 billion in the upcoming budget process,” the Analyst’s office wrote.

In a separate forecast, the Analyst’s office noted that, “we now estimate 2022-23 revenues to be $26 billion below Budget Act projections (and) historical experience suggests this weakness is likely to carry into this fiscal year and next.”

The sharp revenue downturn will require significant current year budget changes and a major rewrite of Newsom’s upcoming state spending proposal.

In advance of January 10, the Department of Finance sent out a letter to all state departments this week ordering them to “take immediate action to reduce current-year General Fund expenditures.”

So, what else can we expect from Newsom and legislators in the new year?

Based on history, expect Newsom to issue a “shock and awe” budget, proposing a host of severe cuts.  While such a plan could prepare the public for the significant cuts that are inevitable to close a $68 billion deficit and show Newsom is on top of the crisis, liberal lawmakers and the spending lobby will howl.  However, an austerity budget may be a good starting place in negotiations to move lawmakers who never met a spending increase they didn’t like to actually cut.

As he and his predecessor Jerry Brown have done in the past, Newsom may also propose “trigger cuts” that will occur only if revenue doesn’t materialize.  While trigger cuts may soften somewhat Newsom’s image as a deep budget cutter (“I didn’t want to make these cuts but I had no choice”), trigger cuts also put pressure on Sacramento to raise taxes (remember Jerry Brown’s list of trigger cuts to K-12 and higher education that was used to successfully pass the Prop. 30 tax increases in 2012.)

While the state may need more revenue, Newsom knows that a tax increase is the worst thing the state could do with an economy in decline.  Liberal lawmakers will demand cuts and revenue be on the table,  but legislators running for re-election in 2024 would be loath to vote for higher taxes.

While we have seen Senate and Assembly Democrats propose more liberal spending plans than Newsom’s budgets in recent years and, it’s been 15 years since the Legislature faced a major budget crisis.  Only three current lawmakers – outgoing Senate President Pro Tem Toni Atkins, Sen. Anna Caballero, and Sen. Roger Niello – were around back then and can appreciate the gravity of the budget choices they’ll have to make this year.

While lawmakers have some tools available to them now that weren’t available then, such as nearly $24 billion in the stronger budget reserve that was championed by Republicans, phony solutions such as delays, cost shifts, and fund raids strongly contributed to the state’s 2008-09 fiscal crisis that nearly bankrupted the state.  And as the Legislative Analyst cautions, “these deficits likely necessitate ongoing spending reductions, revenue increases, or both.”

In 2008-09, legislators who negotiated the budget deal that saved the state from bankruptcy won the Profiles in Courage Award.  What will we see from lawmakers and Newsom in 2024 – profiles in courage or passing the buck?

Tim Anaya is the Pacific Research Institute’s vice president of marketing and communications.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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