Record spending in the 2021-22 state budget is prompting questions about the sustainability of such funding levels in the future without reducing services or raising taxes.
California already spends, on a per capita basis, significantly more than the average state, and too much of that money is already spent unwisely, Tim Anaya, senior director of communications at the Pacific Research Institute and director of PRI’s Sacramento office, told the Northern California Record by email.
“This budget will widen that gap further, with dire consequences for economic growth and prosperity in the state,” Anaya said.
The roughly $260 billion budget represents about a 30% increase over last year.
“While negotiations with his fellow Democrats in the Legislature turned out to be much more complicated than one might imagine, Gov. Newsom succeeded in his goal of enacting, in his words, a ‘generational budget’ that ‘doesn’t play small ball,’” Anaya said. “Funding his budget plan – which includes a record level of total state spending – places a big bet that the good times will continue to roll, and that California will continue to rake in record amounts of tax revenue each year to fund the big spending in his plan.”
And Anaya, who worked at the State Capitol for 18 years, noted that the budget roller coaster of the past two decades has shown California still faces boom-bust budget cycles due to its volatile tax system. “A modest downturn in the coming years could put the state on track for painful cuts or massive tax increases,” Anaya said.
“Thankfully, the state has wisely socked away billions in the rainy day fund reserve, which ironically was long a priority for Republicans fought by Democrats, but ultimately became a reality in 2014 thanks to the leadership of former Assembly Republican Leader Connie Conway.”
The current budget only takes small steps to address the state’s unfunded public employee retirement debt, Anaya said.
“Lawmakers must get serious about reforms to tame California’s ‘public pension monster’ – pegged at nearly $1 trillion in 2018 PRI study – to protect funding for priorities like education and public safety being crowded out to fund public pensions,” Anaya said.
After lawmakers return from summer recess, the budget may see additional legislative action.
“Nearly four dozen budget bills and trailer bills – the statutory changes required to implement the budget – were enacted by the Legislature and signed into law between mid-June and mid-July,” Anaya said. “The Legislature’s Democratic leaders and Gov. Newsom released a statement on July 12 saying that the ‘overall architecture of the budget agreement' had now been enacted.”
But Anaya noted there are still some major budget issues that are outstanding, particularly on transportation funding.
“The Governor and the Legislature continue to work on a transportation infrastructure package, including the Administration’s plans to issue $4.2 billion in bonds for the controversial High Speed Rail project,” Anaya said.
Funding for the Unemployment Insurance (UI) fund debt also appears unresolved.
“According to the nonpartisan Legislative Analyst’s office, the state’s unemployment insurance trust fund became insolvent shortly after the Covid-19 pandemic began; California and other states borrow money from the federal government to pay for unemployment benefits when the trust funds run out of money,” Anaya said.
“The final 2021-22 state budget estimates that California will have a $24.3 billion unemployment insurance deficit at the end of 2021, and projects annual debt service payments between $500 and $600 million starting in 2023. It includes $36 million for the payments anticipated in 2021,” Anaya said.
Because unemployment insurance benefits are paid through state and federal payroll taxes, Anaya noted that ultimately businesses would bear the costs of paying back the loans through a federal payroll tax increase that rises each year until the loan is paid off.
“This could be a major tax increase for California employers, and significantly hinder our economic recovery efforts as job creators could be hit with up to $20 billion in higher payroll taxes through 2030,” Anaya said. “Lawmakers should consider using more of the surplus funds to pay down the unemployment insurance debt and relieve the pressure on small businesses so entrepreneurs can continue to invest in innovation and hire more out-of-work Californians.”
Concerns also persist about measures to address wildfires.
“The public is demanding answers from the Newsom Administration as to whether California is indeed doing enough – and doing what was promised – to protect the state against future deadly wildfires,” Anaya said. “As Capital Public Radio uncovered in a blockbuster story, the Newsom Administration misled the public about the effectiveness of more than 30 wildfire prevention projects that were supposed to treat 90,000 acres, but really only treated under 12,000 acres, and they pushed back the completion date for a state fire reduction fuel plan for 500,000 acres from 2023 to 2025.
“The budget includes just $458 million in fiscal year 2021-22 for a ‘wildfire and forest resilience strategy,’ which was less than the $1 billion that lawmakers sought to include,” Anaya said. “Given the recent scandal, Californians are naturally wondering – is this just throwing money at a problem, or will it fund significant protection efforts against future wildfires?”
California’s sharp rise in its homeless population has led to increasing calls for solutions. Anaya noted Newsom’s $12 billion budget plan to combat homelessness includes funding for housing units, placements, and stability in order to build on what the administration has described as two revolutionary programs. – Project Roomkey and Homekey.
“Within a year, these two programs did more to address the homelessness and affordable housing crisis than anything that’s been done in decades,” a state news release said.
“Most Californians who today see more rampant homelessness than ever before would probably quibble with Newsom’s assessment,” Anaya said. “It’s just spending billions more on status quo homeless programs that haven’t really delivered to date.”
Anaya noted that Newsom’s Democratic predecessor has called for reining in the budget spending.
“Former Gov. Jerry Brown said it best, telling NBC Los Angeles in a recent interview that, ‘the state is now spending money, it's not sustainable. We need a more frugal, sustainable, more prudent way of doing business. I would predict that certainly within two years, we're going to see fiscal stress.’”