California’s Legislative Analyst: More State Budget Deficits to Come

California’s Legislative Analyst: More State Budget Deficits to Come

The California State Capitol building in Sacramento, Calif., on April 18, 2022. (John Fredricks/The Epoch Times)

John Seiler

John Seiler

5/30/2024

Updated: 5/30/2024

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Commentary
When I came to California in 1987 to write about state politics, one of the pleasant surprises was the Legislative Analyst’s Office. I like using data in my articles. And they provide analyses that truly live up to their “nonpartisan” label. That has happened even as the state has shifted away from a two-party system as the Democrats have achieved supermajority status in both houses of the Legislature, meaning more than two-thirds of votes.
I have disagreed with them whenever they have called for tax increases to solve “budget problems,” Sacramento parlance for deficits, because Californians already are taxed way too much. But it’s always good to work with objective numbers.
Their latest report, “The 2024‑25 Budget: Multiyear Budget Outlook,” projects “modest” deficits continuing through fiscal year 2027-28, which ends on June 30, 2028. That’s past when Gov. Gavin Newsom’s term ends in January 2027. Which, if it happens, would cut his time in office in half by fiscal condition. The first term, 2019-22, enjoyed massive surpluses. The second half, 2023-26, suffered stubborn deficits.
Their chart follows. It includes both the LAO’s forecasts, in blue, and projections of the governor’s Finance Department, in brown.
(Legislative Analyst’s Office)

(Legislative Analyst’s Office)

The report notes: “The main reason that our estimates of the state’s operating deficits are slightly smaller than the administration’s is that our estimate of General Fund spending is lower than the administration’s estimates. Specifically, our estimates of spending (excluding spending on schools and community colleges) are about $5 billion lower in 2025-26, $4 billion lower in 2026-27, and $3 billion lower in 2027-28. These differences are almost entirely driven by our lower spending estimates for Health and Human Services (HHS) programs.”
That’s noteworthy because a governor, whether Mr. Newsom or a previous one, usually tries to downplay spending, while the LAO is more realistic. For example, last year’s “Multiyear Budget Outlook” noted, “The operating deficits under our forecast are slightly larger—ranging from $14 billion to $20 billion—compared to those under the administration’s forecast—ranging from $14 billion to $17 billion.”
The main points are: The forecasts are pretty close. And last year’s forecasts actually were too high under both the LAO and the Department of Finance. Below is my chart comparing last year’s LAO projections to this year’s.
It’s always better to overestimate a fiscal problem than to underestimate it. That way, future problems can be reduced. And if a surplus comes about, it can be spent on one-time projects or—shocker!—returned to the taxpayers.

Hedging Projections

A projection is just a bunch of numbers dependent on future events. The LAO’s outlook sensibly takes into account budget cuts since the governor’s May Revision was released on May 14, and notes, “While the budget is undeniably on better fiscal footing under the May Revision, there are some key fiscal risks to the budget’s out-year condition. Specifically, our forecast assumes the implementation of all of the Governor’s May Revision proposals. Although our forecast includes our best estimates of the Governor’s proposals, due to the nature of forecasting our assessment of the proposals also is subject to some uncertainty.”
Then there are the voters in the Nov. 5 election. The LAO explains, “The state’s fiscal condition also faces other uncertainties. This includes, for example, tax proposals that have interactions with measures potentially appearing on the November ballot. These proposals specifically could present downside pressure on the budget picture.”
As of May 27, Ballotpedia tallied 12 initiatives currently slated for the Nov. 5 ballot. There are no ballot numbers yet for them. Those affecting the fiscal picture include: As these important initiatives show, the large potential changes themselves sow doubt among investors. Worse, every two years more initiatives appear on the ballot, either helping or hurting the business climate. And the Legislature itself adds to the cloudiness, such as last year increasing the fast-food minimum wage by $20 with Assembly Bill 1228.
Economist Lee Ohanian described in the Independent Institute how it already killed nearly 10,000 jobs even before the April 1 implementation. Those now are former taxpayers drawing unemployment checks until they find new jobs—or leave the state.

Federal Policy

Then there’s the federal government. State politicians love to boast, “California is the fifth largest economy in the world,” as Attorney General Rob Bonta just did on May 26. But it’s really just a subsection of the giant U.S. economy. Meaning it’s directly affected by federal tax rates, trade policies, regulations, inflation, and especially, Federal Reserve interest-rate policy.
Then of course there’s the Nov. 5 election in which U.S. voters will choose between two different fiscal futures under either President Joe Biden or former President Donald Trump.
That means all the projections by the LAO and the Finance Department depend on factors beyond the state’s control, although influenced by California members of the U.S. Senate and House of Representatives.
The problem remains what it has been for decades: California both spends too much and depends too much on the income taxes paid by millionaires and billionaires, especially those in Silicon Valley. The nearly $100 billion surplus of two years ago was a Golden State opportunity to transition to a more sensible taxation system, such as a flat tax. Doing so would have evened out the revenue rollercoaster, while encouraging more investment to create the high-paying jobs needed just to survive in this expensive state. But the chance was lost.
What it comes down to is crafting this year’s budget numbers once again is like throwing darts at a shifting dartboard.
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John Seiler

John Seiler

Author

John Seiler is a veteran California opinion writer. Mr. Seiler has written editorials for The Orange County Register for almost 30 years. He is a U.S. Army veteran and former press secretary for California state Sen. John Moorlach. He blogs at JohnSeiler.Substack.com and his email is writejohnseiler@gmail.com

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