SACRAMENTO, Calif. (CN) — California's legislative and budgetary watchdog called Governor Gavin Newsom “optimistic” about anticipated revenue in his 2024-25 budget, but cautioned the Legislature to plan for lower tax receipts when preparing for the next fiscal year.
The budget overview, issued over the holiday weekend by the state Legislative Analyst’s Office, differs in its prognostications from the governor’s budget. In December, the office estimated the Legislature would have to address a $68 billion deficit across the current fiscal year and the next one. Newsom, unveiling his $291.5 billion budget last week, anticipated a deficit of only $38 billion.
Analysts explain that these deficits are point-in-time estimates, based in part on information available when they were made, as well as forecasts about future revenues and spending.
Newsom’s office said much the same in a statement responding to the budget overview.
“The LAO’s overview outlines one perspective on California’s budget shortfall and revenue projections,” said Brandon Richards, the governor’s deputy director of communications. “What is consistent is that the governor and LAO have repeatedly noted the state’s revenues are somewhat difficult to predict and that the budget is often subject to wild swings in revenue year to year.”
The deficit is mutable depending on which lens is used to view the numbers. Analysts write that the two deficits differ mainly because of whether an item is a baseline change — for example, a reduction in spending when compared to the prior fiscal year — or the item would require legislative action, making it a policy choice.
Viewing a reduction in school and community college spending as a policy choice, not a baseline change, is one of several factors that lead analysts to state there is, in fact, a third potential deficit: $58 billion.
Regardless of the lens, Newsom’s budget offers solutions to bridge the financial gap. Reducing spending by $41 billion, as well as pulling $13 billion from reserves, $4 billion in shifting costs and some $400 billion in revenue makes a balanced budget.
State Senator Nancy Skinner — an East Bay Democrat and chair of the Budget and Fiscal Review Committee — said in a statement last week that the Legislature is ready for the challenge the budget will bring.
“The Senate Budget Committee looks forward to fully examining the governor’s January proposal over the coming months, attentive to budget realities,” Skinner said.
Assemblymember James Gallagher — a Yuba City Republican and the Assembly's minority leader — called the governor’s budget anything but realistic.
“The LAO said in a nice way that the governor’s budget is a joke,” Gallagher said in an interview Tuesday. “It’s way overly optimistic.”
Gallagher noted the analyst said California will face significant deficits in the future, which are exacerbated by Newsom’s move to delay certain spending into future fiscal years. State revenue would need to exceed the governor’s predictions by $50 billion a year to keep pace with the proposed spending.
Newsom’s reduction in school and community college spending is another concern of Gallagher’s.
Analysts state that the governor hasn’t explained how the reduction will reach $8 billion in savings for fiscal year 2022-23, noting that Newsom’s budget indicates this won’t impact school and community college budgets.
“I think that’s a problem,” Gallagher said.
Additionally, Gallagher slammed a proposal in Newsom’s budget that would narrow the ability of a business to lower its taxes by counting prior losses against current income. That would produce about $300 million in new revenue.
In their overview, analysts say that the governor’s budget could understate the financial pressures California will face in future years. They recommend lawmakers anticipate that Newsom’s revised May budget will show lower receipts and start work now on potential budget solutions.
The analysts said the state expects deficits totaling $95 billion in the fiscal years from 2025 to 2028.
They also advised the Legislature against exceeding what Newsom already has suggested pulling from reserves.
“Given the state is likely to continue to face significant budget problems in the coming years, depleting reserves now would make reductions to ongoing programs and/or ongoing revenue increases more likely,” analysts state.
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