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California’s budget deficit is $58 billion—bigger than governor estimated—key analyst says

A man in a suit gestures while speaking, flanked by the US and California flags.
Gov. Gavin Newsom speaks during a meeting with Canadian Prime Minister Justin Trudeau at the Asia-Pacific Economic Cooperation summit in San Francisco in November. | Source: Stephen Lam/SF Chronicle/POOL

California Gov. Gavin Newsom’s recipe for digging the state out of a multibillion dollar budget hole has “strengths and weaknesses” while his revenue projections are “plausible, but optimistic,” the nonpartisan analyst’s office representing the Legislature said.

The size of the budget deficit is up for debate: Newsom put the number at $38 billion while the analyst’s office says Newsom’s own math suggests the hole is deeper—$58 billion—for the 2024-25 fiscal year, which starts July 1.

Worse, both the governor and Legislative Analyst’s Office predict large deficits of about $30 billion annually through 2027-28. But while California has large reserves and a number of spending plans that don’t affect the state’s core social and public services, “future deficits are likely to require more difficult decisions, like ongoing spending cuts and revenue increases,” the analyst’s office said this weekend in its initial review of Newsom’s $291.5 billion spending plan.

Newsom so far has balked at raising taxes on the super-wealthy, bristling at the suggestion during his budget press conference on Wednesday. His fellow Democrats in the Legislature are split. One progressive lawmaker sought again to pass a wealth tax for Californians with net assets of at least $50 million, but a committee chairperson shelved that proposal. 

In a statement responding to the analyst’s report, a Newsom spokesperson said that it “outlines one perspective on California’s budget shortfall and revenue projections.”

“The state can produce a prudent, balanced budget that preserves key investments for education, public safety, addressing homelessness, mental health care reform, climate action, and other priorities without a ‘wealth tax’ or any other broad-based revenue increases,” said Brandon Richards, the spokesperson. 

Fueling the Legislative Analyst’s Office’s worry is disagreement with Newsom over just how much more tax revenue the state can collect. In the last fiscal year, state tax collections fell 20%. Newsom’s 2024-25 proposed budget projects an 8% increase in 2023-24, the current budget year. “Halfway through the current year, we are yet to see clear signs of such a rebound,” the analyst’s office wrote. And while the stock market is experiencing a rebound—a vital source for state revenue—it can just as quickly reserve course.

The analyst’s office said Newsom was right to pull $13 billion from the state’s reserves. Doing so leaves about $11 billion in California’s rainy day fund; leaving a sizable chunk of cash in reserves is “prudent given the continued budget problems likely for future years,” the office wrote. For Newsom to legally raid the rainy day fund, he’d have to declare a “budget emergency”—a move the analyst’s office said would be justified.

However, Newsom’s plan to also pull $900 million from another reserve account may not be consistent with legislative intent, the office wrote. This is a fund meant to support health insurance and cash aid programs for low-income residents. The office wrote that “economic conditions likely do not yet match what the Legislature envisioned when it created the reserve.”

The office recommended that Newsom and the Legislature make more cuts to existing short-term programs that aren’t part of the state’s core, ongoing educational or social service commitments. Doing so may mean pulling less money from reserves to have more emergency cash on hand for future deficits.

The swirl of competing assessments and early prognostications is par for the course for a budget process that lasts at least through June and often spills into September. The analyst’s office, the state’s main check on the governor’s state-spending math, plans several more detailed reviews of Newsom’s plan as legislative budget committees hold dozens of public hearings assessing the governor’s proposals. 

Newsom will release a revision to his 2024-25 spending plan in May, after the state sees just how much it collected from taxpayers in April to better forecast its revenue picture. By early June, the lawmakers will propose their own budget for 2024-25, setting in motion a furious few weeks of negotiations between Newsom and the Legislature to finalize a budget plan by around June 27.

Legislative Republicans have criticized Newsom’s plan as based on gimmicks and accounting tricks. Sen. Roger Niello, vice chairperson of the Senate budget committee, posted on social media that he puts “much more faith in this analysis than the Governor’s proposal.”

Leaders of the Democratic supermajority, who can pass a budget without any Republican votes, have been generally supportive of the Democratic governor’s proposals, however.

Some Complicated Math

Even though Newsom said his plan solves a $38 billion budget shortfall for the coming year, the analyst’s office said the governor’s proposal actually covers closer to $58 billion, underscoring the difficulty in arriving at a precise estimate of how deeply buried the state is fiscally.

That’s a point Richards reiterated in his response, adding that “the budget is often subject to wild swings in revenue year to year—why the Governor has called for reforming how the state captures future surpluses for our reserves.”

A major difference between Newsom’s numbers and those of the analyst’s office? The governor’s proposal didn’t count $15 billion in funding reductions to K-12 education and community colleges as actual reductions in his $38 billion tally, the analyst’s office wrote.

Factor in some other changes in spending in Newsom’s proposal that should have been considered part of the deficit picture, and the analyst’s office says Newsom’s team is dealing with a $58 billion budget problem. This revises the analyst’s office’s December estimate of California’s fiscal woes, when it said the state had to shore up a $68 billion budget hole. 

What does this mean for students, teachers and parents? That’s hard to assess. State budgets reflect a three-year window. The analyst’s office said most of the education-related reductions in Newsom’s plan from last week apply to the 2022-23 year—$8 billion.

But the analyst’s office said Newsom’s team “has not explained how its proposal could achieve $8 billion in savings, given the administration also indicates the proposal would not impact school and community college budgets,” it wrote. “The Legislature will need significantly more information before it can assess the proposal—including its potential effects on the state budget after 2024‑25.”

Elsewhere in education, Newsom’s plan to shift a promised $499 million in state support for the University of California and California State University to 2025-26 may hamstring the state even more, according to the analyst’s office. Newsom tried to paint a rosy picture of this delay, saying the universities could borrow money in 2024-25 based on the promise that they’ll get state cash the following year. 

But the analyst’s office wrote: “Not only would this proposal increase the pressure on the state to provide these payments next year—despite continued deficits—but it also would shift fiscal risk to these entities in the event the state does not ultimately make these payments.”