Governor Solved Budget Deficit Twice as Large as Reported in May Revision, Analysts Calculate

Governor Solved Budget Deficit Twice as Large as Reported in May Revision, Analysts Calculate

California Gov. Gavin Newsom announces the state’s revised budget in Sacramento on May 10, 2024. (Office of California Governor Gavin Newsom)

Travis Gillmore

Travis Gillmore

5/22/2024

Updated: 5/28/2024

0

California lawmakers have identified about $73 billion in solutions to balance the state’s fiscal year 2024–2025 budget in the past months, according to a report published by the nonpartisan Legislative Analyst’s Office on May 17.
According to the report, Gov. Gavin Newsom proposed about $55 billion in fixes in his budget revision released on May 10, and the Legislature approved an early action plan solving $17.3 billion in a measure that was signed into law on April 15.
Together, the two approximately equaled the analysts’ February estimate of a $73 billion shortfall.

Improving Fiscal Health

Analysts concluded that the governor’s approach of adjusting spending—nearly 90 percent of solutions he offered—will improve the state’s current fiscal situation, including $16 billion in spending reductions, to help get the state back on even footing.
“By further reducing one-time and temporary spending, the Governor leverages a ‘use it or lose it’ tool that improves budget resilience,” the report said.
Also of note is that the governor wants to use less of the state’s so-called rainy day fund to solve the problem. Previously, in January, he suggested using $13 billion of such reserves, which have now been reduced to about $4 billion for the upcoming fiscal year, which begins on July 1.
“By proposing the state use less in reserves, the governor preserves an important tool to address budget problems,” the analyst’s office wrote. “Although this means making more difficult decisions this year, using less in reserves now also gives the Legislature more tools to address more budget problems that are quite likely to continue to emerge in the coming years.”
Analysts also agreed with the governor’s plan to adjust state law to allow for saving more money during years with budget surpluses to better manage the state’s finances during down years.
Such an adjustment would require statutory changes enacted by the Legislature, as existing law limits the percentage of revenues that can be set aside for reserves.
“While executing this proposal would be technically complex, we think the underlying idea is meritorious,” the report said.

Concerns Noted

Some proposals, however, caused concern among analysts—including the suggestion that carrying over net operating losses, for private businesses in relation to their tax payments to the state, be limited.
As businesses use such losses to balance their tax liabilities from one year to the next, a cap could cause some to go out of business in the event of large losses, according to some critics.
Although the maneuver—known as suspensions—has been used repeatedly by the state since the Great Recession in 2008, analysts say that doing away with net operating loss allowances is happening too often, negatively affecting businesses, and the tactic may be losing its overall effectiveness.
“At this rate, it seems reasonable to ask whether suspensions have begun to meaningfully undermine the purpose of allowing [net operating loss] deductions in the first place,” the analysts wrote.
Another area of concern is the 8 percent reduction in state operations—such as streamlining to reduce redundancies across all departments—proposed by Mr. Newsom, which according to his plan would not affect wages, personnel, or salaries.
The governor’s proposal leaves the specifics of such reductions to be determined by his Department of Finance this fall.
The analysts said in their report that such an idea could be hard to achieve, for a number of reasons, including a lack of specifics on how such savings would be accomplished.
“While we think it is a meritorious endeavor for the Department of Finance to identify efficiencies in state government, we think this proposal is flawed for a couple reasons,” the analysts wrote. “First, the administration has not articulated a strategy for achieving efficiencies ... [and] it is difficult to imagine how this level of savings could be achieved.”
Analysts project the delayed timing to determine such would-be savings could actually backfire.
“Waiting to identify savings until the fiscal year has already begun is likely to result in a significant erosion to assumed savings,” the report said. “To the extent that the administration cannot achieve the full level of assumed savings, a budgetary shortfall will carry into future years.”

Discrepancies Exist

Revenues are another area in which the governor and analysts disagree, with the administration expecting higher collections for personal, corporate, and sales taxes and analysts suggesting the opposite, which could cause additional shortfalls next year.
Uncertainty regarding the depth of the deficit has loomed, with the governor estimating it at $27.6 billion and the analyst’s office offering widely differing estimates due to differences in calculations and revenue projections.
One point of discrepancy is $22 billion in changes that pertains to school and community college spending.
Mr. Newsom’s proposal assumes spending related to Proposition 98—passed by voters in 1998 and requiring minimum expenditures for schools based on revenue calculations—would be reduced for prior budget years because revenues were revised downward and now can be adjusted in future budgets.
Analysts, on the other hand, see the move as a policy choice and suggest it could be in violation of existing law that prohibits reducing prior-year education funding.
This one area accounts for the majority of the two sides’ calculations.
“We would maintain that our approach more accurately reflects current law,” the analyst’s office wrote.

Differing Viewpoints

A budget expert said that differences always exist between the two camps’ figures and noted that such discrepancies prevent deeper understanding and limit discussions for solutions.
“This year ... the large differences in the LAO and administration deficit estimates have obscured, rather than revealed, the reality of the state’s budget picture,” Jason Sisney, budget director for Assembly Speaker Robert Rivas, said in a May 17 Substack post. “The differences have consumed far too much time and attention, effectively distracting from the substantive issues in the annual budget.”
He suggested the two sides come together to identify differences and work toward cooperative reporting.
“Ideally, in the future, the [legislative analyst’s] and administration offices will work to make their deficit and surplus numbers more comparable—that is, ‘apples to apples’—while continuing to provide important, independent, and often differing views on projected state costs and revenues,” Mr. Sisney said.
The governor suggested in his May 10 press conference that the difference of opinions lies in $13.2 billion in revenue projections and about $15 billion in Prop 98 spending, among other things, while rejecting the notion that the deficit amounts to $73 billion.
“We never anticipated that number to be accurate,” Mr. Newsom said in response to a question from The Epoch Times. “And our numbers suggest something radically different.”
However, the analysts’ most recent report suggests their initial projection was seemingly accurate.
He acknowledged the work done by the analyst’s office and said his administration has an excellent working relationship with their team.
“They will have, and they continue to have, their point of view, and we respect them and have a great working relationship with the LAO,” Mr. Newsom said. “We learn a lot from their insights and thoughts, and we have outstanding dialogues, and we hope they learn from the finance team.”
One Republican lawmaker said Mr. Newsom’s May budget revision is a step in the right direction, especially because it is forward-thinking.
“The May revise is a significant improvement over the January proposal, and it’s good that he’s taking a look at the year after this budget year, also,” state Sen. Roger Niello, vice chair of the Senate Budget Committee, told The Epoch Times on May 17.
He called for more clarity and said that transparency and clear communication are important aspects of budget discussions.
“What confuses me is why he continues to present his budget in a way that is impossible for a layperson to square that with what the LAO is saying,” Mr. Niello said. “It just seems to me that he is intentionally obfuscating the issue, and I don’t understand that.”
Additionally, he suggested the Legislature should rein in spending and keep more money in reserves to help improve the state’s financial situation, as historically, budget cycles involve several years of positive revenues followed by significant declines.
“We had a couple of budget cycles prior to the current budget that we’re in that were flush with money—huge surpluses,” Mr. Niello said. “Anybody who has followed state budgeting ... we know that over time, we will see four, five, six, seven, decent budget years, but they are always followed by complete disasters, eventually.”
Copy
facebooktwitterlinkedintelegram
Travis Gillmore

Travis Gillmore

Author

Travis Gillmore is an avid reader and journalism connoisseur based in California covering finance, politics, the State Capitol, and breaking news for The Epoch Times.

Author's Selected Articles
California Insider
Sign up here for our email newsletter!
©2024 California Insider All Rights Reserved. California Insider is a part of Epoch Media Group.