With California’s budget deficit now surpassing $73 billion according to the latest estimates from the nonpartisan Legislative Analyst’s office, it’s clear that legislators will have to make significant mid-year budget adjustments even before the Governor’s May Revise is released.
As PRI has written before, a budget problem of this magnitude requires more than fund shifts, delays, and adjustments that exist on paper only. Lawmakers will have to act quickly and make real cuts in addition to using the other tools in the budget toolbox.
On Thursday, Senate Democrats released their mid-year budget plan, which they term as “step one” to “shrink the shortfall.”
While any mid-year budget plan will not realize $73 billion in budget solutions, the Senate Democrat plan falls far short of what the situation requires.
The plan is rooted in Gov. Newsom’s original budget fantasyland of a $38 billion budget deficit projection, which has been widely panned across the political spectrum. While they concede the deficit could range between $38 and $53 billion, they don’t take into account the LAO’s updated $73 billion figure.
Senate Democrats tout their plan as implementing $17.1 billion in solutions, which, when the rainy day fund contributions are included, they argue “shrink the shortfall from a projected $38 to $53 billion to a more manageable $9-$24 billion.”
They also proclaim their approach “maximiz(es) the time and energy spent focusing on the most challenge solutions to close the remaining budget shortfall during the critical time period leading up to June 15.” But it really just kicks the tough choices off to another day.
Among the specifics in their plan:
- It would use $12.2 billion from the Rainy Day Fund reserve.
- Just 19.3 percent of their $17.1 billion proposed solutions are spending cuts, or around $3.3 billion.
- Nearly 81 percent of their solutions are gimmicks that avoid real solutions – borrowing, fund shifts, delays and deferrals.
The unwillingness to cut spending demonstrates a complete misunderstanding of the problem, which is why the Senate plan to “shrink the shortfall” is destined to fail. The budget games the Senators are proposing only make sense if current expenditure levels were affordable and the shortfall was a one-time event. Neither condition holds.
Total state expenditures are still elevated and are about 10 percent of personal income, which is well above the long-run average of 7.9 percent. The extreme, but temporary, surge in tax revenues that arose because of California’s uniquely volatile revenue system coupled with the recovery from the Covid-19 pandemic created an illusion of affordability of higher spending. As the figure below illustrates, historical experience clearly warns that this spending surge was unsustainable and that revenues were going to fall back to their long-term average. Expenditures well above 8 percent are just as unsustainable and will eventually necessitate spending control. That day has arrived.
If history is a reliable guide, then the current budget crisis will persist until spending returns to (or below) its long-term average of 8 percent of personal income. This can best be achieved through a combination of strict spending control and effective deregulations. Expenditure controls are necessary because the current level of state spending is simply unsustainable. The longer the legislature denies this reality, the lengthier the budget crisis will be.
Sensible deregulation can enhance the strict fiscal discipline. Whether it is building and zoning regulations, environmental regulations, or labor regulations, California’s byzantine collection of rules diminishes economic growth. Easing these burdens will help stimulate personal income growth and make spending more affordable by increasing Californians’ incomes and generating more tax revenue.
The reaction under the Capitol dome has been cool to the Senate Democrat plan, as it should be. Assembly Budget Committee Chairman Jesse Gabriel told reporters on Friday that the Assembly will be releasing its own mid-year budget plan next month, and that the lower house won’t support raising taxes in the budget.
“We think our residents want us to look at how we’re spending first,” he said.
We look forward to reading their plan when it is released. The public statements from Assembly Democrats give us hope that fiscal realism will ultimately carry the day in resolving our budget crisis.
Dr. Wayne Winegarden is a senior fellow in business and economics at the Pacific Research Institute. Tim Anaya is the Pacific Research Institute’s vice president of marketing and communications.
