California’s Deficit: Bring Your Alibis
Dear John,
In the summer of 2022, California governor Gavin Newsom, apparently high on the smell of cash, announced that California had just smashed through the state-budget equivalent of the first four-minute mile: a one-year surplus of $100 billion. Calling it “simply without precedent,” Newsom bragged, “No other state in American history has ever experienced a surplus as large as this.”
“Neither the governor nor the Legislative Analyst’s Office acknowledged how precarious that ‘surplus’ was,” says Mark Moses, author of The Municipal Financial Crisis: A Framework for Understanding and Fixing Government Budgeting.
Just one year later, in 2023, Newsom announced — this time without the trumpet blasts, chest-thumping and press tour — that California was $32 billion in the red. Today, the governor is staring into the business end of a $73 billion deficit.
You didn’t have to be a prophet to see the financial chaos coming. In this state’s notoriously mercurial tax system, which depends largely on revenue from just 150,000 wealthy Californians and massive, occasional paydays to investors in the state’s tech sector, what went up in 2022 was certain to fall hard, fast, and soon.
Nor did the governor acknowledge the troubling fact that there was never a surplus: Even in the go-go days of 2022, California’s state and local debt was accelerating toward $1.6 trillion, about 17 times Newsom’s one-year “surplus,” which included unfunded retirement benefits for government employees.
The bottom line: The bad news was a surprise only to those who took Newsom seriously.
For those people, the first red flag popped up in December, when the independent Legislative Analyst’s Office (LAO) pegged the deficit at $68 billion. With the doomsday clock ticking, the governor’s finance office issued a bland but candid “budget letter” to all state agencies, urging them to throw overboard anything not nailed to the state constitution.
“It is vitally important that state government is efficient, effective, and only expends funds that are necessary to the critical operation and security of the state,” the finance office declared. “As such, all state entities must take immediate action to reduce expenditures and identify all operational savings achieved.”
That would be sound guidance in all circumstances. But this is California, and back in 2022, when Newsom was still feeling like the casino’s biggest whale, he spent as if there’d be money forever, boosting spending to $308 billion, more than double Jerry Brown’s last, 2019 budget of $140 billion.
In the Year of the Historic Surplus, there were gifts for almost everyone and a soundtrack of Vegas slots paying off. Offering ten wonderful ways he’d spend $100 billion, the governor’s June 30, 2022, press release led with, “Cha-ching! You just received a deposit!” — a one-time payment of up to $1,050 to 23 million Californians, for a total of $9.5 billion. The reason for this populist largesse? “Global inflation. Rising costs. It’s hard out there and we know it.”
In a state where even people working at the highest levels of government don’t appear to understand the relationship between massive government cash infusions and inflation — or the dangers of misreading one-time bumps in tax revenue — expensive “surprises” are to be expected, especially when so many California reporters love the governor as much as they hate math and “the rich.”
Earlier this year, Newsom continued to assert that the deficit is just $38 billion, despite the LAO’s $68 billion estimate. Confronted with that disparity, Newsom-aligned, arithmophobic media retreated to more comfortable reportage, superficially characterizing the deficit as a mere political fight between a powerful governor and the constitutionally independent LAO. Those few reporters who asked Newsom to defend his sunnier (but still dire) projection got a Kamala Harris–style word salad:
This deficit projected number $37.86 billion . . . that we’re looking to close . . . those of you who’ve been writing about a different number, I hope you’re immediately correcting that number. We have been pretty damn transparent with you . . . by making the point publicly, not just privately, that that number was not the number but continues to be reported as gospel.
More recently, the state controller has come back with more bad news: “Fiscal year-to-date receipts underperformed estimates contained in the 2024-25 Governor’s Budget by more than $6.7 billion, or 5.3 percent.”
So, the real deficit is not $37.86 billion (as estimated by Newsom), or even $68 billion (per the LAO’s first estimate), but a whopping $73 billion, as the LAO now says. This is far higher than the previous state-deficit record of $54 billion, set in the Covid year of 2020. It is — Newsom could but will not say — “simply without precedent.”
But Newsom has tried to make the deficit sound like a good thing, “a story of correction,” he called it, “a story of normalization after a period of tremendous amount of distortion.” Thinking of the budget as a tale in which a historic surplus is a “distortion” and a crisis is “normalization” might seem like standard operating procedure to the governor, a man with a politician’s firm grip on theater and an open marriage to facts.
Newsom’s habit of ignoring — or masking — reality runs through his entire administration. In 2020, his secretary of labor brushed off multiple warnings — from the federal government and the state’s own auditor — that California’s unemployment system was vulnerable to hackers. But enhancing security checks on unemployment recipients might, the administration argued, limit the access of marginalized people to government funds that were rightly theirs.
And so the alerts went unheeded.
And then the deluge: When Covid hit, the federal government loaned billions of dollars to the states. When the dust cleared, California had lost $33 billion of that federal loan to fraudsters, including international criminal gangs and people in prison. Per CalMatters, “California now bears the unhappy distinction of having about as much unemployment debt as all other states combined.”
Newsom might have demanded budget cuts to pay off that federal loan. Or he might have raised taxes. Either option was politically charged, and so Newsom left the dirty work to the feds: He let the loan repayment lapse — triggering an automatic spike in federal payroll taxes paid by California businesses.
In dealing with the deficit, we’re also seeing Newsom perform as he imagines a budget hawk might.
First, he discounted to $38 billion the actual $73 billion loss and vilified those with more dire assessments. Second, he tapped the state’s rainy-day fund for $13 billion, cutting that reserve in half with just one executive order. In doing so, it seems he also violated state law which allows the fund's use only in a recession. Third, as longtime California columnist Dan Walters observed, Newsom “dug deep into the bag of tools that the state has historically used to paper over deficits, including spending deferrals, loans from special funds and accounting tricks, such as a maneuver involving school aid.”
In one instance, Newsom pushed this June’s payroll costs to July, which is the beginning of the next fiscal year. The additional drag will make next year’s budget challenges, already looming on the horizon, even worse.
In the meantime, he embarked on remarkable new spending. He announced that the state will pay $5 billion to cover health-care insurance for illegal immigrants. And though he has already spent a remarkable $20 billion to reduce homelessness — while the number of people on the street continues to grow — Newsom asked voters on March 5 to approve a $6.4 billion bond program that would feed California’s voracious homelessness–industrial complex but almost no one else. With interest payments on that bond, Californians for the next three decades will be making annual payments of more than $330 million to satisfy our current love affair with government debt.
The effects of these sleights of hand will be more clearly revealed with the governor’s annual “May revise.” That’s when Newsom will lay his cards on the table, showing the 120 members of the state legislature his opening bid in negotiations to balance the budget. Reductions in government services are off the table: A majority of those 120 men and women — and Newsom himself — owe their seats to political campaigns financed by powerful government unions with no interest in job cuts, pay cuts, or haircuts.
The lawmakers will have until June 30 to balance the biggest budget deficit in the state’s history. By then, the deficit may be larger still, so enormous that Newsom might envy Ronald Reagan, who said that he never worried much about the federal deficit: “It is big enough to take care of itself.”
— A longer version of this article by CPC president Will Swaim was originally published by National Review.
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