The magically disappearing budget surplus
Dear John,
In May, Gov. Gavin Newsom made headlines for “unveiling a historic” $97.5 billion budget surplus. State lawmakers, giddy from the news, went on to approve a record-breaking $300 billion state budget in June, throwing money and promises at countless causes and constituencies heading into election season.
“No other state in American history has ever experienced a surplus as large as this,” Newsom crowed, with obliging media cheering him on.
Fast forward to November, when the week after the election — by sheer coincidence, of course — the state’s nonpartisan Legislative Analyst’s Office (LAO) released a report warning that the state is actually facing a $24 billion deficit.
The LAO recommends lawmakers consider budget cuts and putting the brakes on already-approved spending when they return to Sacramento.
“Last year, it was really fun to be in Sacramento,” Christopher Thornberg, a “forecasting expert” who has advised the state treasurer’s and controller’s offices, told reporters. “Everyone was trying to figure out how much money they could spend. This year, not so much.”
It’s clear that the state legislature’s blind ambition — to make sure that state spending sucked up every dollar of that one-time revenue growth — made it blissfully unaware of just how improbable and fleeting the gift was that they were squandering.
Now the LAO’s admits, “our revenue estimates represent the weakest performance the state has experienced since the Great Recession” — and it could get a whole lot worse. LAO’s projection is a baseline case, relying on several assumptions that could go sideways, tumbling the actual deficit into much more troubling territory.
For example, LAO acknowledges the likelihood of a deepening economic recession, but does not factor the impact of a recession into their tax revenue estimate. They write, “Were a recession to occur soon, revenue declines in the budget window very likely would be more severe than our outlook.”
And, in the section of their analysis where LAO presents worst case scenarios, they project general fund revenue dropping as low as $180 billion in 2024-25, which based on merely maintaining the current general fund budget reflects a deficit of $55 billion.
Of course, as CPC has warned repeatedly, these dismal numbers don’t include the mammoth pension obligations promised to government workers. The governor’s "historic surplus” was always a fantasy — state and local governments actually owed about $1.6 trillion when underfunded pensions and unfunded debt are factored in.
How did we get here?
The budget approved in June included a whopping $235 billion allocated to the state’s general fund to finance most of the state’s ongoing operations for the fiscal year ending June 2023. Only ten years ago, California’s general fund was $93 billion, which adjusted for inflation would be $118 billion in today’s dollars. Meanwhile, California’s population over the past ten years has only grown from 38 million to 39 million. This means that inflation adjusted per capita general fund spending in California has increased from $3,124 back in 2013 to $6,023 today.
California’s state government is spending twice as much money today per resident as it did just ten years ago.
And what have Californians reaped from this explosion in spending? By nearly every measure, things are worse off today in California. Obvious examples include expensive and unreliable energy and water, failing schools, rising crime, unaffordable housing and college tuition, and an exploding homeless population — but that’s hardly the entirety of the worsening challenges facing Californians.
The decade-long run of record tax revenue spawned an avalanche of new regulations, driving up prices, discouraging expansion of big business and crushing small businesses.
So the question before lawmakers today isn’t just how to cut spending or raise taxes in order to balance the budget. The prevailing question should be, how does California’s state legislature start to do the right thing instead of the wrong thing with taxpayers’ money?
They’ve doubled per capita spending in the last decade, yet ordinary hard working Californians can’t afford to live here any more. Clearly, so far they’re doing everything wrong.
As newly-elected legislators prepare to get sworn in next week, now is a good time to not only talk about how our state legislature is on the wrong course, but exactly how it can change its course.
If you want to realign the state’s politics, it isn’t enough to say taxes, crime, and prices for everything are too high, and educational achievement and the supply of housing are too low. Lawmakers have to propose concrete solutions.
Solutions exist, but California lacks politicians with the courage to promote them and the charisma to effectively convince voters of their efficacy.
New solutions. An entire new alternative vision. A prosperity budget. Not just how to balance the budget. Rather, how to allocate the budget, and how to deregulate the economy.
This is the real discussion that California needs.
Read more in the latest article from CPC senior fellow Edward Ring, "Looming Deficits Present Another Opportunity to Offer Solutions for California."
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