Gov. Gavin Newsom has been dominating the headlines for the past week as he delivers bad news to lawmakers about the state’s fiscal condition.
But less in the news are the California chief executive’s efforts on making the case for reforms he hopes will finally end the state’s infamous revenue roller coaster – one that is notorious for showering California government with massive tax surpluses in good years and then crashing every time the economy takes a breather.
The difficult budget cuts on the horizon and the governor’s proposed path to fiscal stability were the subject of a panel discussion Monday night as Lucas Public Affairs hosted two experienced advocates from county government and public schools and one of the state’s savviest fiscal experts, moderated by a highly regarded former Capitol journalist.
Former California Finance Director Keely Martin Bosler, who founded Keely MB Strategies after leaving state government last year, provided keen insights on the nature of the problem and Newsom’s path forward. Graham Knaus, CEO of the California State Association of Counties, and Vernon Billy, Chief Executive Officer of the California School Boards Association, shared their thoughts on the governor’s budget proposals and potential consequences. The three fielded provocative questions from John Myers, former Los Angeles Times Capitol bureau chief, now public affairs chief of CalPERS.
Counties
Knaus acknowledged that “there is going to be pain” for the state’s most vulnerable residents but said counties will implore legislators to spare them from the worst of the cuts. “There’s always funding for the things that are most important,” he said. “That’s our starting point.”
Schools
Billy conveyed the education community’s consternation over Newsom’s plan to address nearly $9 billion that schools got this year as part of Proposition 98’s mind-bending constitutional formula, which gives education a minimum percentage of the state’s tax revenues each year. Newsom says this year’s allocation was based on anticipated state revenues that never materialized. He would let schools keep the money but wants to exclude it from the funding on which their future budgets would be based.
Billy said Newsom’s plan could set a dangerous precedent that could lead to the end of the education system’s constitutional protection, which was approved by voters in 1988. There are “other options” for resolving the problem, he said, including options that would delay but not reduce the state’s long-term obligation to the schools.
Taxes & Reserves
If these appeals sound familiar, it’s because California is once again in the midst of a fiscal crisis that has repeated itself at least five times since the 1980s, when the first signs of a historic transformation of the state’s tax revenues began to appear.
Martin Bosler noted that California’s enviable status as home to so many successful entrepreneurs also has a big downside.
“Innovators are changing the entire world economy,” she said. “They’re generating great wealth.”
They also pay lots of income tax, especially capital gains taxes on their investments. But that means California’s budget and its public services are increasingly dependent on the vagaries of the stock market and the success of the tech companies that are creating so many millionaires and billionaires.
Former Govs. Arnold Schwarzenegger and Jerry Brown tried to address the problem by getting voter approval to create mandatory budget reserves that use money saved in good times to cushion the blow during an economic slowdown. That’s helped, and record-high reserves will ease the pain in the coming year. But as the massive shortfall illustrates, the rainy-day funds have not solved the problem.
Now Newsom, among other reforms, is suggesting a plan that is relatively simple, and, he says, would not require voter approval. Currently the state estimates the coming year’s tax revenues and then bases spending on those projections. Under Newsom’s plan, the next time the state anticipates a big revenue spike it wouldn’t put that money into the budget until it materializes in the treasury.
Huh?
Think of a person whose income is largely determined by big but uncertain annual bonuses. If they buy a new house and commit to a mortgage based on their hope for a big bonus every year, they’ll quickly land in financial trouble when the bonus disappears. The solution: linking their commitments to their base salary and not planning to spend the bonus until it actually arrives.
Martin Bosler said she agreed with Newsom’s plan to stop relying on revenue projections that might prove too optimistic.
“Shaving off the peaks is certainly helpful,” she said.
On Tuesday, Gov. Newsom unveiled details a revised state budget proposal of $288.1 billion for FY 2024-25, projecting a shortfall of $27.6 billion after accounting for the Governor’s recommended $17.3 billion in solutions. The Governor’s May Revision includes:
- $5.2 billion in revenue and borrowing
- $5.2 billion in delays and deferrals
- $2.6 billion in reductions
- $3.4 billion in shifts
The full summary can be found here.
In the May Revision, the shortfall of $37.9 billion estimated in January increased by $7 billion, totaling $44.9 billion. This is still significantly less than the $73 billion projected by the Legislative Analyst’s Office in March. An ongoing deficit of around $30 billion per year is expected beginning in 2025. The Governor’s Budget attempts to address this fiscal year’s deficit as well as the 2025-26 shortfall with a multiyear strategy that moves a cumulative two-year deficit into an operating reserve surplus.