With recession looming, state estimates $25 billion deficit next year

Driven by high inflation and the threat of a recession, the state faces a potential $25 billion budget shortfall next year that could at least dampen some recent increases in spending on critical safety net programs. that help Californians most in need.

The state’s Office of Legislative Analysts, which advises lawmakers on California’s budget outlook, announced the sad news on Wednesday. It comes months after an estimated historic budget surplus provided Governor Gavin Newsom and the Democratic-led Legislature with an abundance of wealth to expand government aid.

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

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

LAO’s forecast indicated that a significant portion of the projected revenue shortfall could be offset by reduced spending, including on transportation and accommodation. With declining public school enrollment, education spending could also decline.

The forecasts also warned, however, that falling state revenues – and the need to cut spending – could be significantly worse if a major recession envelops the country.

Along with government spending, the outlook is largely influenced by the underlying economic currents affecting the country, namely the sharp rise in inflation and the subsequent rise in interest rates.

“The longer inflation persists and the more the Federal Reserve raises interest rates in response, the greater the risk to the economy,” the legislative analyst’s office said in its forecast. “The chances that the Federal Reserve can control inflation without causing a recession are slim.

“Reflecting the threat of a recession, our revenue estimates represent the weakest performance the state has seen since the Great Recession” in 2008 and 2009.

HD Palmer, spokesman for the state Department of Finance, called the estimated shortfall a “realistic and reasonable assessment of the work ahead of us.” He said the Newsom administration had anticipated the economic downturn and planned for it, putting California in a good position to weather its impact.

“That’s precisely why the governor made it clear that the state needed to be smart with the surplus — which we did,” Palmer said. “Use it to build our fiscal reserves, pay down debt, and target the balance to one-time spending — like the $9.5 billion in inflation relief payments that continue to flow to millions of Californians. – and not rack up higher ongoing expenses that can’t be sustained.

The governor and legislature could still face tough decisions to close the budget shortfall, particularly if economic conditions deteriorate, he said. All of this is factored in as Newsom prepares his budget proposal, which will likely be released in January.

Republican House Leader James Gallagher of Yuba City blamed the state’s financial situation on Democratic leaders, who he said ‘overtaxed Californians and expanded government while ignoring infrastructure investment such as new water storage”.

He said the legislature should focus on policies that will help the economy grow and reduce costs for Californians.

The state is expected to have $22 billion in general reserves by the end of the 2023-24 fiscal year to fill budget shortfalls, and legislative leaders pointed out Wednesday that in recent years the state has devoted the major portion of its revenue surpluses to one-time expenditures, rather than creating or expanding costly programs that require annual funding.

“Through our responsible approach, we are confident that we can protect our progress and craft a state budget without continued cuts to schools and other basic programs or taxing middle-class families,” the president said. Senate, Pro Tem Toni Atkins (D-San Diego). in a written statement. “The bottom line is simple: we’re ready to keep the gains we’ve made and pick up where we left off once our economy and incomes rebound. »

Yet under state law, funding for education is automatically tied to state budget revenue, which means Wednesday’s report put public schools and community colleges on hold. alert.

Just months after celebrating record funding for higher education, LAO’s latest analysis lays out a plan for the Governor and Legislature to work with potentially billions of dollars less.

Despite an estimated drop of more than $2 billion in required funding, the state could still fully fund schools with some adjustments, according to LAO, and schools are better off than other programs in a downturn. The state constitution guarantees that they generally receive about 40% of the total budget.

Maintaining normalcy will be possible, in part, by reducing some spending to reflect declines in student attendance and by making withdrawals from a rainy day fund created specifically for education – reserves that have increased in due to the deposits required thanks to the good fortune of the state in recent years. .

According to LAO, any shortfall in school funding could be minimal and short-term, and “by historical standards, the school funding picture remains strong.”

But the report also warns against “precarious” budgetary balancing of schools in the years to come, depending on economic health.

The report comes a week after voters overwhelmingly approved Proposition 28, which commits nearly $1 billion to music and arts education starting next year.

Expect teachers’ unions and school advocates to fight for more than the minimum required for schools, even in a recession, said Kevin Gordon, an education lobbyist in Sacramento.

“The idea of ​​following a year of dramatic new investments in education, seeing circumstances that could undermine some of these really important investments, is disappointing but a reality that we have to come to grips with,” Gordon said.

The California Teachers Association. said in a statement that he was optimistic, thanks to “collaborative budgeting and healthy reserves.”

“The state remains in a strong position to continue to prioritize equitable teaching and learning conditions and address the critical shortage of educators,” union spokeswoman Lisa Gardiner said.

Los Angeles Times

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