By Will Swaim
Monday,
March 18, 2024
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, 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 $78 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 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 $38 billion (as estimated by Newsom), or even $68
billion (per the LAO’s first estimate), but a whopping $78 billion. 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. Also familiar to Newsom is control of the
information space: Last fall, without explanation, his department of finance
suddenly ceased publication of California’s city finances: too
much bad news. Similarly, the Newsom administration has been remarkably slow to
file legally required financial statements: The 2022 Annual Comprehensive
Financial Report is MIA, leading former state senator John Moorlach (my
colleague at California Policy Center) to grumble, “The annual comprehensive financial reports for
the next few years will be sad reading. The best we can hope for is that they
will at least be timely.”
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’s 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. 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 on
next year’s deficit will be some other Newsom’s problem.
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. The vote is
nearly even, and thanks to California’s notoriously open-ended system of
counting ballots, a final result on that initiative is still uncertain.
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.”
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