California watchdog predicts deficit will grow to $73 billion

SACRAMENTO, Calif. (CN) — California’s deficit will likely get worse by the time Governor Gavin Newsom releases his revised budget in May.

The state Legislative Analyst’s Office said Tuesday its revenue forecasts indicate lawmakers will need to find another $15 billion to make ends meet. An estimated $58 billion deficit — forecast by the analyst’s office last month — has grown to $73 billion.

“Specifically, our forecast is about $24 billion below the governor’s budget across 2022‑23 to 2024‑25,” the analyst said in Tuesday’s report. “Roughly, a $24 billion erosion in revenues corresponds to a $15 billion increase in the budget problem. This would expand the $58 billion estimated deficit to $73 billion under our updated revenue forecast.”

The budget numbers are constantly in flux. Initially, the analyst’s office indicated legislators would face a $68 billion deficit across multiple fiscal years. Newsom’s estimates called for a deficit closer to $38 billion.

But the Newsom administration noted tax season has just begun.

"From now through April, more than $51 billion in income and corporate tax receipts are forecast to come in," said H.D. Palmer, deputy director for external affairs with the state Department of Finance, in an email. "No one can say today with certainty how those numbers may change the budget estimate of a $38 billion shortfall."

An amended budget will come from Newsom in May, when officials will have a better sense of tax collections.

“California is in one crisis after another, thanks to Democrat leadership,” said state Senator Brian Dahle, a Bieber Republican and former gubernatorial candidate against Newsom, in a statement. “Today's announcement isn't surprising at all. We've seen wasteful spending for years and Republicans have been sounding the alarm. Sadly, this deficit will continue for years to come as bad policies drive taxpayers out of this state. Newsom needs to stop campaigning for president and focus on serving the people of California.”

The analyst’s office in its report gives the Legislature some ideas on how to tackle the growing deficit. Pulling from financial reserves and shifting costs is one method. Pulling back, or reducing, one-time and temporary spending is another.

According to the analyst, reducing one-time and temporary spending means lawmakers can hold onto other possible budget deficit solutions for future problems.

“Other tools, like reserve withdrawals and cost shifts, also can be used only once, but at any time,” the analyst wrote. “Saving them to deploy in the future can help the Legislature avoid cuts to ongoing services — which involve very difficult decisions.”

The analyst pointed to a prior difficult decision: cutting the California Work Opportunity and Responsibility to Kids program during the Great Recession. The federal government requires a minimum level of state funding for the program, which California greatly exceeds. When cuts had to be made, lawmakers had no court-imposed or harsh federal restrictions.

“As such, maintaining other tools like reserves and cost shifts now could help mitigate reductions in these areas in the future,” the analyst said.

Unveiling his budget in January, Newsom said he’d bridge the financial gap by pulling from reserves, reducing spending and delaying or deferring some expenses.

Some $19 billion would come from reserves and he’d find another $12 billion from spending reductions. About $7.2 billion in savings would be from deferring expenditures.

The analyst’s office said another $16 billion in savings could be found by pulling back or reducing one-time and temporary spending across three fiscal years. Examples include overhauling the technology system for the Employment Development Department; the Homeless Housing, Assistance and Prevention Program; last-mile broadband infrastructure projects; and several grants.

Additionally, the analyst’s office notes that it only examined possible cuts starting in fiscal year 2023-24. Some unspent dollars remain from fiscal year 2022-23 and before.

The analyst said the estimates provided are based on the best information currently available. Tuesday's report should be seen as a starting point for legislators as they start work on the budget.

“That being said, there is still significant uncertainty about how much revenue the state ultimately will collect,” the analyst said in an early February report. “It is entirely possible that revenues could end up $10 billion higher or lower than our estimate for 2023-24 and $25 billion higher or lower for 2024-25.”

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