Newsom, Democrats face impossible choices as California could be placed on rocky footing in coming years

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California’s Democratic state leadership, under Governor Gavin Newsom, faces several urgent issues, including a serious migrant crisis, house insurance crisis, inflation, and rising housing prices. Adding to these challenges, the state is dealing with a massive budget deficit, which is not easily fixable. The proposed budget cuts in May are unlikely to be implemented as planned due to mounting pressure on Newsom.

On Tuesday, an agreement was reached between Governor Gavin Newsom’s office and the California Teachers Association (CTA) regarding the state education budget. This agreement follows a TV attack ad paid for by the CTA targeting the governor. According to the Governor’s Office, California’s students, educators, and families will not experience classroom cuts this year. This resolution comes after the CTA threatened to file a lawsuit against the state over the proposed school cuts. However, the CTA is not the only group opposing the spending cuts; other organizations are preparing similar actions, which could further complicate things for Newsom.

Proposed budget still falls short

According to the independent and non-partisan Legislative Analyst’s Office, California Governor Gavin Newsom’s latest budget proposal for the 2024-2025 fiscal year is still $7 billion away from achieving balance. This proposal, known as the May Revision, significantly narrows what was previously a potential $73 billion deficit as initially estimated by the LAO.

“The May Revision puts the state on better fiscal footing and makes substantial progress toward structural balance. By pulling back substantially on one-time and temporary spending, as well as making some ongoing reductions, the Governor’s May Revision shrinks the state’s projected deficits from around $30 billion (our December 2023 estimates) to an average of less than $10 billion (our estimates today),” wrote the LAO in its multi-year budget report released today.

In this updated budget, Governor Newsom suggests several financial strategies to address the shortfall. He plans to cut spending by $15.2 billion, withdraw $4.2 billion from state reserves, delay or adjust $14.8 billion in program expansions, and incorporate $7.5 billion through borrowing and other non-tax revenues. These measures, Newsom’s office asserts, will not only cover the deficit but also result in a projected surplus of $3.4 billion for the state.

“Under our office’s revenue and spending projections, and assuming the Governor’s May Revision policies are adopted, the budget problem for this year is $7 billion larger. Put another way, the Legislature would need to take $7 billion in additional budget actions to balance the budget,” the LAO disagreed.

Newsom and the Democratic state leadership must navigate through difficult tasks and find a way to reduce spending cuts while balancing the state's significant budget shortfall
Gov. Gavin Newsom, courtesy of California Governor X

More spending cuts on the horizon

If the legislature decides not to make deeper cuts than those proposed by the governor, it could opt to use more of the state’s $22.5 billion reserves to fill this year’s budget gap. However, such a move might lead to financial instability in future years. The Legislative Analyst’s Office (LAO) projects that by the fiscal year 2026-2027, state revenues need to exceed the May Revision’s estimates by at least $11 billion to achieve a balanced budget. While the budget appears stable for the next few years, the likelihood of fiscal challenges increases as we look further ahead.

New tax rates unlikely

Governor Newsom has assured that the new budget will not introduce any new taxes. However, any potential tax increases would face significant hurdles. Statewide tax hikes need either a two-thirds majority in both legislative chambers or approval by a majority of voters. At the local level, while general taxes require a simple majority of voter approval, special taxes usually need a two-thirds majority. Yet, due to a legal loophole, courts have sometimes allowed special taxes initiated by citizens to be passed with just a simple majority instead of the usual two-thirds.

Despite these challenges, Newsom and the Democratic state leadership must navigate through difficult tasks and find a way to reduce spending cuts while balancing the state’s significant budget shortfall. Tough times are ahead!

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