With recession looming, state estimates $25-billion deficit next 12 months


Driven by high inflation and the specter of a recession, the state faces a possible $25-billion budget deficit next 12 months that might at minimum curb some recent spending increases for essential safety-net programs that help Californians most in need.

The state’s Legislative Analysts Office, which advises lawmakers on California’s fiscal outlook, delivered the sober news Wednesday. It comes months after an estimated historic budget surplus provided Gov. Gavin Newsom and the Democratic-led Legislature with an abundance of riches to expand government assistance.

The previous projection — a $97-billion surplus — led to the expansion of Medi-Cal eligibility to all immigrants in 2024, paid family leave, free preschool for 4-year-olds and a lift within the earned income tax credit.

Newsom and lawmakers in June also approved a $17-billion relief package to assist families, seniors, low-income Californians and small businesses — including $9.5 billion in stimulus payments to Californians combating high gasoline prices and increased inflation.

The LAO forecast stated that a large portion of the projected revenue shortfall might be offset by lowering spending, including for transportation and housing. With lower enrollment in public schools, education spending could also decrease.

The forecast also warned, nevertheless, that the drop in state revenues — and want to cut back spending — might be substantially worse if a big recession envelopes the country.

Together with state spending, the outlook is being driven largely by economic undercurrents affecting the nation — namely the steep rise in inflation and subsequent increase in rates of interest.

“The longer inflation persists and the upper the Federal Reserve increases rates of interest in response, the greater the danger to the economy,” the legislative analyst’s office said in its forecast. “The possibilities that the Federal Reserve can tame inflation without inducing a recession are narrow.

“Reflecting the specter of a recession, our revenue estimates represent the weakest performance the state has experienced for the reason that Great Recession” in 2008 and 2009.

H.D. Palmer, a spokesperson for the state Department of Finance, called the estimated shortfall a “realistic and reasonable assessment of the work that lies ahead.” He said the Newsom administration anticipated the economic slowdown and planned accordingly, putting California in an excellent position to weather the impact.

“That is precisely why the governor made clear that the state needed to be smart with the excess — which we’ve done,” Palmer said. “Using it to accumulate our budget reserves, pay down debt, and goal the balance on onetime spending — just like the $9.5 billion in inflation relief payments that proceed to be delivered to tens of millions of Californians — and never increase higher ongoing spending that may’t be sustained.”

The governor and Legislature should still face difficult decisions to shut the budget gap, especially if economic conditions worsen, he said. All of that’s being regarded as Newsom prepares his budget proposal, which can likely be released in January.

Republican Assembly Leader James Gallagher of Yuba City blamed the state’s financial circumstances on Democratic leaders, who he said “overtaxed Californians and grew government while ignoring investments in critical infrastructure like recent water storage.”

He said the Legislature should deal with policies that can help the economy grow and lower costs for Californians.

The state is predicted to have $22 billion generally reserves by the top of the 2023-24 fiscal 12 months to deal with budget shortfalls, and legislative leaders Wednesday emphasized that lately the state has devoted most of its surplus revenue to one-time spending, quite than creating or expanding costly programs that require funding annually.

“Due to our responsible approach, we’re confident that we are able to protect our progress and craft a state budget without ongoing cuts to varsities and other core programs or taxing middle class families,” Senate President Pro Tem Toni Atkins (D-San Diego) said in a written statement. “The underside line is straightforward: we’re prepared to carry onto the gains we’ve made and proceed where we left off once our economy and revenues rebound.”

Still, under state law, education funding is mechanically tied to state budget revenue, which suggests Wednesday’s report put public schools and community colleges on high alert.

Just months after celebrating record highschool funding, the LAO’s latest evaluation lays out a plan for the governor and Legislature to work with potentially billions of dollars less in designated education funding.

Despite an estimated decline of greater than $2 billion in required school funding, the state could still fully fund education by making some adjustments, in response to the LAO, and schools are higher off than other programs if a recession hits. The state Structure guarantees that they typically receive a couple of 40% chunk of the overall budget.

Maintaining normalcy shall be possible, partly, by reducing some spending to reflect dips in student attendance and by making withdrawals from a rainy day fund specifically created for education — reserves which have grown due to required deposits because of the state’s luck lately.

Any school funding shortfalls might be small and short term, in response to the LAO, and “by historical standards, the varsity funding picture stays strong.”

However the report also warns of “precarious” school budget balancing in the approaching years, depending on economic health.

The report comes per week after voters overwhelmingly approved Proposition 28, which designates nearly $1 billion to music and humanities education in schools starting next 12 months.

Expect teachers unions and faculty advocates to fight for greater than just the required minimum for schools even in a recession, said Kevin Gordon, a Sacramento education lobbyist.

“The notion of following a 12 months of spectacular recent investments in education, to see circumstances that may undermine a few of those really vital investments, it’s disappointing but a reality now we have to grapple with,” Gordon said.

The California Teachers Assn. said in an announcement that it’s optimistic, because of “collaborative budgeting and healthy reserves.”

“The state stays in a powerful position to proceed prioritizing equitable teaching and learning conditions and addressing the critical educator shortage,” said union spokesperson Lisa Gardiner.

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