As California faces a projected $22.5 billion deficit, state government watchdogs are raising questions about how Gov. Gavin Newsom and state leaders will use cost reductions to help address new economic realities in the newly proposed budget.
The nonpartisan Legislative Analyst’s office report should prompt a review of spending line by line, said Wayne Winegarden, senior fellow in business and economics at the Pacific Research Institute (PRI), in an email response to the Northern California Record.
“The Legislative Analyst’s Office is correct that Gov. Newsom and lawmakers must plan for a larger budget problem this year by taking action to identify and make more spending cuts,” Winegarden said. “While Gov. Newsom’s budget plan wisely pays down some public pension debt, and includes nearly $6 billion in cuts and nearly $4 billion in ’trigger cuts’ that will happen if revenue doesn’t materialize, many of the tough budget necessary choices these uncertain fiscal times require have been avoided so far.”
Winegarden noted that California’s tax system is heavily reliant upon capital gains tax revenue from a stock market that has been on a wild ride in recent months.
“The S&P 500 dropped 19.4 percent last year and Silicon Valley companies laid off 20,000 employees as the economy declined,” Winegarden said. “Gov. Newsom’s January budget, while built around a state facing a slowing economy, does not officially project that California is in a recession. However, global business think tank The Conference Board forecasts a mild recession in 2023, with ‘three quarters of negative GDP growth starting in Q1 2023.’ Given that so much of the revenue we rely upon to fund critical priorities is extremely volatile, a real recession could lead to a very sharp drop in state tax revenue very quickly.”
Winegarden said it’s important for the state legislature and the governor to allocate funds cautiously as the state could be facing a budget Armageddon very quickly if the state's economy enters an official recession.
“The Governor was smart to heed the Legislative Analyst’s warning not to tap into the state’s Rainy Day Fund reserve, which has about $23 billion in funds that can be used for a budget downturn,” Winegarden said. “However, Capitol Democrats have signaled that they are open to spending some of the reserve funding this year to protect their expensive budget priorities. This would be a mistake. California may need that money very soon if the bottom soon falls out from under state tax revenue in a recession.”
Residents and businesses are impacted by budget deficits when funding for critical programs they rely on gets cut or eliminated. Taxpayers can also pay more money to cover hikes in taxes or fees that result from growing shortfalls.
“However large a budget deficit we’re facing, one thing that lawmakers and Gov. Newsom should prioritize is meaningful program evaluation and oversight,” Winegarden said. “In these tough budget times, every dollar must be stretched to the limit. No matter how well intentioned the spending may be, ineffective spending is wasteful spending and takes away funds that can be used to support other critical priorities of Californians.”
One example of inefficient spending is the billions on the Project Homekey program to combat homelessness, he said.
“The state spent $7.3 billion last year, and is spending $10.2 billion this year, yet homelessness continues to grow in California based on the preliminary point-in-time homeless counts,” Winegarden said. “By taking the time this spring to evaluate current state spending program by program, we can identify those that aren’t effective and can be cut or suspended, with the savings used to close the deficit or redirected to fund other, more pressing budget priorities.”
He also noted that while inflation is a problem created by national policies and must be addressed by federal action, from California’s perspective, inflation worsens the state’s unaffordability problems that families must already cope with and makes the already difficult budget situation worse.
“Given these realities, California’s priority should be managing these consequences of inflation,” Winegarden said. “Part of managing inflation’s adverse consequences requires the same policies as managing the state’s budget difficulties – identifying budgetary savings opportunities and cutting wasteful programs. From an affordability perspective, California should examine the regulatory policies that drive up costs for families. Policies such as CEQA and electric vehicle mandates are driving up costs for residents. Removing these policies will exert downward pressure on costs.”
And it will offset the pain caused by the recent surge in inflation, he added.
“California has paid down what Gov. Jerry Brown once called the ‘wall of debt,’ which was $35 billion in budget borrowing that politicians at the State Capitol ran up in the 2000’s when they refused to make tough budget choices,” Winegarden said.
Some of the budget choices now also could be painful.
“The worst thing that Sacramento could do would be to punt tough choices to the future and embrace more budgetary borrowing, as Assembly Democrats have talked about in their budget blueprint and which Gov. Newsom’s budget plan embraces to a small degree,” Winegarden said. “If lawmakers and the Governor go down the path of borrowing and budget gimmicks, we could easily return to the type of budget meltdown like we experienced in 2008-09 and from which we are only beginning to recover.”