California’s Budget Blues: LAO Raises Concerns Over $7 Billion Budget Hole after Newsom Revision

California's Budget Blues: LAO Raises Concerns Over $7 Billion Budget Hole after Newsom Revision

The state-funded, nonpartisan Legislative Analyst’s Office says that California Gov. Gavin Newsom’s budget plan from May is still $7 billion short of a balanced budget for fiscal year 2024–2025. The LAO had earlier said that the deficit for 2024–2025 could be as high as $73 billion. This new budget, called the May Revision, is a big increase.

“The May Revision sets the state’s finances in a better position and makes big steps toward structural balance.” The Governor’s May Revision lowers the state’s projected deficits from around $30 billion (our estimates in December 2023) to an average of less than $10 billion (our estimates today). It does this by cutting back on one-time and temporary spending as well as some ongoing spending. The LAO wrote this in a multi-year budget report that was released today.

That’s what Newsom’s May Revision says should happen: $15.2 billion in cuts, $4.2 billion from reserves, $14.8 billion in pauses and shifts in program growth, and $7.5 billion from borrowing and non-tax revenues. This will give the state what his office calls a $3.4 billion surplus for the fiscal year 2024-2025.

While the LAO slightly disagrees, they say, “Based on our office’s revenue and spending projections and assuming the Governor’s May Revision policies are put into place, this year’s budget problem is $7 billion bigger.” To put it another way, the Legislature would have to do $7 billion more in budgetary work to make the budget balanced.

If the assembly doesn’t want to make more cuts than the governor wants, it could use more of the state’s $22.5 billion in reserves to cover this year’s deficit. However, this could put the state on shaky ground in the years to come.

At the end of its report, the LAO said that raising taxes might be hard for reasons other than politics. Newsom had promised “no new taxes” to fix the current budget shortfall.

“The state’s finances are also uncertain in other ways.” This includes tax plans that might affect measures that might be on the November ballot, for example, the LAO wrote. “Just these proposals could put downward pressure on the budget picture.”

The LAO seems to be talking about the Taxpayer Protection and Government Accountability Act, or TPA. Newsom and other Democrats in California are fighting to keep the TPA from appearing on the November ballot.

The TPA would close a court-made loophole in 2017 that has been used to pass and propose local taxes by citizens’ groups instead of local governments. It would also require that statewide tax increases get two-thirds of the votes in each house of the state legislature and a majority of votes from voters, and it would only allow governments to charge fees that are necessary to provide the service. The TPA would also apply to taxes and fees that were put in place after January 1, 2022. Governments would have one year to ask voters to accept new taxes that were put in place after that date, but at the higher level.

Right now, a two-thirds vote from both houses of the legislature or a majority vote by people are needed to raise taxes across the whole state. At the local level, general taxes need to be passed by two-thirds of voters and special taxes by a majority of voters. However, courts have been using the above loophole to let citizens’ proposed special taxes pass with only a simple majority, not two-thirds of votes.

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