California Is Reckoning With Its Huge Budget Deficits

Gavin Newsom’s big plans for the year have been shelved in favor of a desperate effort to make ends meet. Photo: Carolyn Cole-Pool/Getty Images

At this fraught stage of the coronavirus pandemic, a lot of state government officials are either honestly or dishonestly withholding judgment about how the public-health crisis and its economic consequences are going to affect their own budgets in the near term. Nobody, of course, really knows exactly how the pandemic will play out in the months ahead. Aside from these legitimate doubts, however, many Republican officials around the country are invested (perhaps knowing better) in the Trumpian idea that we are on the brink of a dazzling economic recovery that will be so awesome that Americans in the millions will snake-dance to the polls in November to Keep America Great. So these Trump allies are deliberately putting on blinders before looking very far ahead.

The largest and least Trump-y state, California, has no reason to entertain such unlikely hopes. So word from Governor Gavin Newsom’s advisers is already going out that the budget picture in the Golden State is growing dark, as the Los Angeles Times reports:

California’s government faces a $54.3-billion budget deficit through next summer, according to an analysis released Thursday by advisors to Gov. Gavin Newsom, the deepest projected fiscal hole in state history …

Newsom’s budget team forecasts a $41.2-billion drop in tax revenues compared to their estimates from just four months ago. Most of that — $32.2 billion — would appear in the fiscal year that begins in July. Current year tax revenues, according to the report, are expected to miss the mark by $9.7 billion, even though most of the state’s budget year had already passed by the time the virus became an immediate concern in March.

Expenses are also projected to skyrocket. The fiscal report released Thursday assumes some $13 billion in higher state costs due to the pandemic, with a combined $7 billion in higher-than-expected caseloads for programs such as Medi-Cal, which provides free healthcare, and CalWorks, the state’s welfare assistance program. As much as $6 billion in expenses are assumed to be the result of the state’s COVID-19 response.

As CalMatters notes, this budget ignores any happy-talk assumptions of a quick economic (and revenue) comeback in the days ahead:

It’s an about-face for a state that began the year with ambitions of expanding child care for working parents and health care for undocumented seniors.

Compared to the expansive budget Newsom released in January, this one has shrunk to reflect decreases in the general fund’s main revenue sources: a 25% drop in personal income taxes, 27% drop in sales taxes and 23% drop in corporate taxes.

When Newsom releases an official budget revision next week, we’ll see how his administration proposes to deal with the sudden fiscal crisis, and where spending cuts might fall. He’ll also certainly echo the pleas of other state and local officials for federal assistance — not that the Trump administration will be among the sympathetic listeners to this particular state’s problems.

Before you hear any Republican kvetching about California being a typically profligate Democrat-run state that’s in trouble because of its big-spending ways, it is important to note that most of the problem is on the revenue side of the ledger, reflecting Newsom’s decision not to hope or lie his way into stronger economic assumptions. This is a state, moreover, that built up a $16 billion rainy-day reserve — more than enough to deal with any non-catastrophic set of circumstances — since the Great Recession. It’s not, of course, adequate to the kind of public-health earthquake and economic wildfires California’s dealing with now, despite what is generally regarded as a smart and aggressive response to COVID-19.

Perhaps Newsom’s estimates will turn out to be excessively grim. But we could see a return to what all but the youngest Californians likely remember as a long period of budget gridlock in the state that finally ended when Democrats achieved enough political power to recast the state’s fiscal policies along the lines they preferred. An early test of how voters respond to the new climate could occur in November, when a long-awaited initiative to remove commercial real estate from the protections created in the famed (or some would say infamous) 1978 Proposition 13 — sharply limiting property tax increases so long as a single owner (or family) held a given parcel — is expected to be on the ballot. Without question, state government will need the additional revenue. But corporate and real-estate lobbies will argue it’s time to starve, not feed, state government. Despite the distractions of disease, recession, and a presidential contest, the so-called “split-roll” initiative could create an epic battle, as I noted last summer:

While this will mostly be a classic left-right, business–versus–unions and governments battle, California’s progressive tilt doesn’t guarantee victory for split-roll. As noted above, corporate types will offer a slippery-slope claim that once the taxman has feasted on commercial property taxes, homeowners will inevitably be next. And there are some affordable-housing advocates who fear split-roll will perversely incentivize commercial real-estate development by making it a larger revenue generator for local governments.

Preliminary polling shows split-roll commanding a sparse majority of popular support. But by the time this expensive slugfest comes to a close, anything could happen.

That’s particularly true now that the state’s bleak fiscal future has been exposed for all to see.

California Is Reckoning With Its Huge Budget Deficits