Newsom Faces Tough Budget Battle Ahead

Commentary

Governments run on money. So of course, the most important thing any government does is pass a budget.

For the first time since he became governor four years ago, Gov. Gavin Newsom is going to face a tough battle in the run-up to the June 15 constitutional deadline to pass a budget. Up until now, the situation was divvying up surpluses with the legislative bosses. Now, it’s going to be making cuts without—he hopes—tax increases.

The last big crunch came under Gov. Arnold Schwarzenegger in September 2008, when he signed the budget 85 days late, with major cuts to state programs. The next January, he signed a record $13 billion tax increase to pay for it.

Jerry Brown, who became governor the second time in January 2011, also faced deficits at the beginning. But his vast knowledge of state government and the Democratic Party, and his ability to negotiate, led him to avoid such a stalemate. His father had been Pat Brown, who served as attorney general, then governor. Jerry himself had been secretary of state, governor in the 1970s, attorney general, mayor of Oakland, and chairman of the California Democratic Party. Jerry also was congenial toward journalists.

Newsom, by contrast, has been aloof. When I was state Sen. John Moorlach’s press secretary, 2017-20, he said he almost never saw Newsom in the state Capitol, even though the Newsom’s office was directly below Moorlach’s. By contrast, Brown was known for circulating among the legislators, including Republicans.

In early May, Newsom will release what in Sacramento parlance is called the “May Revise” of his January budget proposal. At that time, he pegged the expected shortfall at $22.5 billion. The next month, the Legislative Analyst added another $7 billion. So the number two months ago was estimated at about $30 billion.

Since then, we’ve had the Silicon Valley Bank failure in early March. And the San Francisco Chronicle reported March 24, “San Francisco and Silicon Valley lost 11,300 tech jobs in January and February, major contractions fueled by widespread layoffs that helped push the unemployment rate up for two consecutive months.”

The deficit could be well above that $30 billion of two months ago.

The brighter among those laid off will start their own companies. But turning such companies into profitable enterprises takes years, if they even last that long. In the interim, those who lost their jobs will not be paying California’s high income tax rates, meaning more hits to the state and local treasuries.

Newsom’s January proposal (pdf) calculated, “The Budget reflects $35.6 billion in total budgetary reserves.” So a big question on the May Revise will be if he taps into any of that. He has said he won’t. But we’ll see.

As he’s obviously running for president, he is going to be reluctant to ask for a tax increase. Unlike previous governors who went that route, he easily could get one, because Democrats control more than two-thirds of the seats in both the Senate and the Assembly. They could pass a tax increase without a single Republican vote. That’s a contrast to the tax increases passed by Republican Govs. Pete Wilson in 1991 and Schwarzenegger in 2009, when they had to use various means to get one or two Republicans to go along.

Brown couldn’t pass a tax increase through the Legislature, because Republicans balked. Instead, he had to put on the ballot for voter approval the Proposition 30 tax increase of 2012.

The Legislature actually could pass a tax increase on its own, then override a potential Newsom veto. But that seems unlikely.

Meanwhile, as Moorlach likes to emphasize, a budget is not an accounting of the state’s actual fiscal condition. It’s just a spending plan that can go awry; or even, as in recent years, turn out to lowball actual receipts, allowing for even more spending.

As he wrote in The Epoch Times on April 5, the actual accounting of the state budget, its Annual Comprehensive Financial Report, finally was submitted for the fiscal year ending June 30, 2021—after almost two years. We still have no idea what the numbers are for the next fiscal year, which ended June 30, 2022. “This is supposed to be issued within 180 days, not 21 months,” he wrote. “We can assume that the June 2022 report will be available a year from now. Unbelievable!”

That means the governor and the Legislature—and journalists and citizens—have only a vague idea of the true fiscal condition of the state government. Every other state has submitted its ACFR for the most recent fiscal year. Even the highly troubled Los Angeles Unified School District submitted its last Dec. 14.

Going back to the state, for the fiscal year ending June 30, 2021, Moorlach ranked California’s fiscal condition 10th worst of the 50 states. On the positive side, he found, “There is some good news for Californians. The unrestricted net deficit was reduced by $33.5 billion. It looks like Gov. Newsom may just have allocated a good portion of his historic budget surplus toward reducing the state’s debts. Even after this overdue and necessary spending decision, California is still in 41st place.”

With the days of near-$100 billion surpluses gone, the state also missed another chance to reform its tax code to avoid the rollercoaster rises and pits of the PIT—the personal income tax. Even Brown couldn’t do it.

I’ve been writing about state budgets now for 36 years. The inability of the state to advance reforms is just another annoying feature of life in California. And a reason people keep fleeing paradise.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.