California faces projected deficits next year even as the U.S. avoids recession. Despite the expected shortfall, politicians say they will keep spending on social programs even as advocates demand more.

The Legislative Auditor’s Office recently said in its annual forecast that Gov. Gavin Newsom and the Democratic-controlled Legislature face a projected deficit of $24 billion in the next fiscal year.

If the state enters a recession, the outlook is even worse, with revenue expected to decline by $30 billion to $50 billion. The governor signed a $308 billion budget in June.

Legislative analysts point to a lack of predictability in California’s reliance on those whose income often ebbs and flows in the price of stocks, real estate and other investments.

“These are the only people who make a lot of money from financial investments,” said Gabriel Petek, a legislative analyst. “That volatility is transmitted directly to the state budget.”

The governor will present a proposed budget in January and then an update in May. The budget, which must be approved by the legislature, will fund the state government for the fiscal year beginning July 1.

HD Palmer, a spokesman for the Treasury Department, declined to comment on the proposed cuts to social spending.

He said, however, that the governor’s priority is not to cancel programs that people rely on, or to start new ones. Some program expansions in the next fiscal year may be delayed if there is not enough revenue to support them, he said. The goal is to avoid the kind of drastic program cuts enacted during the Great Recession that took years for the state to restore.

Warehouse

Democratic state legislative leaders have said they are not inclined to cut recent programs, such as expanding free health care to undocumented immigrants, that began in adults this year and is slated to open to all ages in January. 2024. Expansion is expected to exceed $2 billion per year.

The budget is in a stronger position than it was during the state’s last financial crisis, said Phil Ting, chairman of San Francisco’s budget committee.

“We have a lot of money, both in terms of reserves, but also in terms of liquidity,” Ting said. “So this is a very different situation than what the state faced in 2008-2009, where we ran out of money.”

However, the governor indicated that he is cautious. Newsom in October said he vetoed House Bill 169 and saved taxpayers billions. 75 of these vetoes are directly related to the budget, and many include the boilerplate language that the state is facing “lower than expected revenue” and “it is important to remain in control of spending, especially spending that goes on.”

Among the bills passed by the governor earlier this year were proposals to expand government-funded care for new mothers, expand a free transportation program for students in California and will create a grant for graduate students in mental health who volunteer to work at certain private companies in California.

Newsom, who was re-elected by voters to another four-year term, used surpluses to pay down debt, build savings and provide cash directly to millions of Californians.

Recently, Moody’s Analytics ranked California as one of the most prepared states for recession, citing its reserves.

However, California’s budget released in June 2021 committed to $3.4 billion in new ongoing spending and is expected to increase to $12 billion in fiscal year 2025. The released budget in June of this year it provided an additional $2.3 billion, which is expected to increase to $5 billion in fiscal year 2026, the Legislative Review Office said.

The state has $37 billion in special funds. This includes the $23 billion in rain funds that voters approved to strengthen in 2014 at the urging of Gov. Jerry Brown. The state also has $900 million in a savings account for the safety net program. The rest of these funds are in the special fund for the school and in general.

But, Palmer noted, the state can draw only half of its rainy day funds in any given year. The Office of Legislative Review has advised the Senate to slow or stop the expansion of the program before it goes into storage.

Ting’s office says the state has billions of dollars of unused federal and state money in its coffers that could address the potential deficit. The use of this money will prevent program interruptions but delay other projects.

Is it time to spend?

Anti-poverty advocates said in an interview that they plan to continue expanding the program, saying the recession is the time to boost social spending, not cut it.

Nearly 30% of Californians live in or near poverty, according to the Public Policy Institute of California. Experts expect the poverty rate to increase after the end of the increase in federal financial aid, which came in 2021 in the form of tax credits for children included in the American Rescue Plan Act.

Advocates suggest that California emulate this federal expansion by opening up the state’s child loan program, currently a $1,000 annual loan for families with children under 6 years of age, to include all children in low-income households.

They estimate that 1 million children live in families that qualify, at an additional cost of $700 million per year.

Extra credit can make a difference for people like Santa Rosa physician assistant Ivonne Sonato-Vega.

Last year, she used some of the $4,000 in federal child tax dollars on school supplies and clothing for the four children she is raising and her boyfriend, she said. Due to the increase in the cost of living this year, he could not spare this help.

Ivonne Sonato-Vega at her home in Santa Rosa.
Ivonne Sonato-Vega at her home in Santa Rosa. (Photo: Brian Frank/For CalMatters)

If the credit is an annual payment, she said, it might allow her to plan expenses, maybe use it as a “mini savings account” to draw on when the kids outgrow their clothes or save it as collateral if the family needs to move.

“It’s like a joke,” he said of the credits. “It was here and then it wasn’t.”

Advocates say they also want the state to create an unemployment benefits program for undocumented immigrants and include all low-income immigrants, regardless of immigration status. immigration, in the food assistance program.

“We know that the lack of a projected budget makes it more difficult, but the last few years have highlighted why such things are important,” said Sasha Feldstein, policy manager for economic justice at the California Immigrant Policy Center. “People excluded from our safety net have been hit hardest by the COVID-19 pandemic and hit hardest during the economic downturn.”

Legislators and Newsom this year appropriated funds to expand the California Food Assistance Program, the state’s version of food stamps, to include undocumented immigrants age 55 and older. ; benefits are expected to be realized late next year. Newsom vetoed a bill that would have attempted an unemployment benefit program for undocumented immigrants, citing costs.

Creating budget problems

The projected shortfall is the first major fiscal challenge for the state since Newsom’s office predicted it would be $54 billion in May 2020, while the nation was in the midst of the COVID-19 pandemic. . After the stock market rebounded and the federal government provided unprecedented stimulus, the expected deficit created a surplus..

The Federal Reserve began raising interest rates in March 2022 to moderate inflation. After that, real estate sales, the first government job offer and the stock market declined. All are important sources of personal income.

In California, self-employment income retention declined even as the labor market rebounded.

For the last decade, California has relied on some of the state’s highest earners to fund its budget, which, among other things, targets poverty and some of its inequities. largest financial institution in the country.

Most of the state’s general fund is paid for by the personal income tax, which voters raised in 2012 at the highest rate in the state after Brown’s warning about cuts to health and education. In 2016, voters extended the top income tax rate through 2030 and allowed the temporary sales tax to expire. The increase, meant for education and health spending, also paid for increased spending on social networks.

About 49% of personal income taxes paid in California in 2020 came from the top 1% of taxpayers, according to the state Department of Finance. And in the past decade, taxes collected from the most volatile form of revenue — corporate profits — have doubled to account for a larger share of government revenue and tie up the government budget in the most unstable economic cycle.

To address this, voters approved changes to the state budget in 2014. These changes act as spending checks, leading California to take extra dollars from savings when revenue is high. the tax.

Building enough reserves for a state in a recession is difficult, said Donald Boyd, a public finance expert at the University of Albany in New York.

“Essentially, it’s very difficult to build up a rainy day fund that’s enough to get you through the rainy season,” Boyd said. “You need a lot of money to offset the impact of a small recession.”



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