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Sunday, June 23, 2024 | Back issues
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California watchdog has praise, some quibbles for Newsom budget

A $55 billion deficit is less worrisome because Governor Gavin Newsom's proposed budget is on the right track, according to the state's Legislative Analyst’s Office.

SAN DIEGO (CN) — California has a budget deficit more than twice as big as Governor Gavin Newsom said it was this month, but that’s not a big deal because his budget proposals will actually improve the state’s fiscal health according to the state’s Legislative Analyst’s Office.

“The governor cites a budget problem of $27 billion. Based on the administration’s revenue estimates and proposals, we estimate the governor addressed a larger deficit than this — $55 billion,” the legislative and budgetary watchdog writes in their comments on the governor’s May revision to the state’s 2024-2025 budget, published on Friday. 

A few months ago, the analyst pegged the deficit at closer to $73 billion.

A big part of the difference between the analyst's estimate and the one Newsom announced last week boils down to calculating how state law mandates spending for schools and community colleges. 

The state constitution sets a minimum baseline for funding schools and community colleges, which is paid for from the state’s general fund and local property taxes. When the general fund declines, the minimum requirement for funding is supposed to decline as well, but it doesn’t automatically align school spending with drops in the general fund.     

“Due to lower general fund revenues, the amount of authorized school and community college spending exceeds the minimum requirements for 2022-23 and 2023-24. The May revision aligns school and community college spending to the minimum required level in each year of the budget window. This reduces total general fund spending on schools and community colleges by $22 billion," the analyst wrote.

The differences, though, “do not reflect substantive differences in our views of the state’s fiscal position," the analyst added.

Newsom’s revisions solve the state’s main budgetary problem by adjusting spending, including $22 billion in school funding changes and $16 billion in reductions, the analyst said. The revised budget also reduces the state’s reliance on reserves by using only $4 billion, not $13 billion as was originally proposed.  

Some of the cuts in the revised budget include $1 billion in provider rate increases in the Managed Care Organization package, a $325 million reduction in funding for the multifamily housing program, and $5 billion in ongoing spending reductions to programs like the multiyear child care slot expansion plan and a reduction to foster care permanent rates.

Given a decline in state revenue, the LAO suggests that during the last phase of budget deliberations the Legislature should think about how to address issues in prior-year funding for public schools and community colleges, whether cutting so much from newer state programs will affect “core service levels,” and whether other tradeoffs being floated are worth it.

Newsom's budget revision includes a proposal to bar businesses with more than $1 million in income from claiming net operating loss deductions on their taxes for the next three years. It’s projected to provide $900 million in revenue for the state in 2024-25 and over $5 billion in the future.

The analyst describes the deductions as allowing “businesses to smooth profits and losses such that businesses with similar profits over time pay similar taxes. Without this smoothing, businesses in riskier or more innovative industries — such as the technology, motion picture, and transportation sectors — could end up paying more taxes than businesses with similar but more stable profits. As such, suspending NOL deductions would lead to a less equitable tax system.”

Given that its revenue forecast is below the governor’s, the analyst suggests that the Legislature “consider whether or not it is comfortable with this downside risk to the state’s budget picture. This risk might be acceptable, however, particularly if the Legislature adopts the May revision budget structure.

While praising the analyst for pinpointing the key features of the governor’s budget proposal, California Department of Finance spokesperson H.D. Palmer wrote in an email that “challenging decisions will be required in the coming weeks to land on a budget agreement that reflects the principles that both we and the LAO recognize. The governor is ready to work with the legislature to achieve this.”

But state Senator Brian Jones, the minority leader from El Cajon, said Newsom "needs a reality check."

"Gavin-omics uses delusional math and numbers to falsify the facts of the state budget," the Republican said. "If families took the same approach with their budget as the governor has over the last several years, their homes would be foreclosed and their cars would be repossessed. When Newsom returns from overseas, he needs to sit down with both Democrat and Republican legislators to craft a budget that addresses the true severity of the deficit and ensure the state is living within its means.”

When Newsom unveiled his $288.1 billion budget last week, he said it would maintain core services by using reserves, improving efficiencies, reducing program funding, pausing the expansion of existing programs, and pulling from revenue and borrowing.

Some $762.5 million in savings would come from leaving about 10,000 state jobs unfilled along with $260 million in cuts to the state’s homeless housing assistance and prevention program and pausing expansions of the state’s food assistance and child care programs.

“We have to be responsible,” Newsom said. “We have to be accountable. We have to balance the budget.”

Categories / Economy, Government, Politics, Regional

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