How California, once booming, found itself stuck with a budget deficit

California’s state budget exceeds the gross domestic product of some countries, supporting the nation’s most populous state and the world’s fifth-largest economy. When Golden State’s finances fluctuate, there’s an impact — and they can vary wildly. Two years ago, the state projected a record surplus; Today, participating states find themselves facing tens of billions of dollars of red ink.

State law requires lawmakers to pass a balanced budget by June 15 each year or risk losing their pay and expenses. It is generally a fruit process. Negotiations this year have focused largely on the size of cuts in state welfare spending and whether the state should delay the minimum wage increase that was signed into law last year for almost all health care workers, many of whom work in public hospitals and clinics or in facilities whose patients are reimbursed through California’s version of Medicaid.

On Thursday, the Legislature passed interim legislation that allows the proposals to technically meet the deadline during discussions with the governor. Gavin Newsom continues on some of the remaining sticking points. A final agreement, which will be broken down into a few additional bills, is expected in a few days. The budgetary effect takes effect on July 1.

Volatility is a natural byproduct of the California tax system. Designed to be progressive and fairer to low-income taxpayers, it relies largely on personal income and capital gains taxes.

When wealthy taxpayers have a good year, state government pushes back a windfall. But when IPOs collapse or the stock market reverses, revenues collapse. And the state has limited flexibility to raise revenue in times of deficit because, in most cases, the law requires a two-thirds supermajority in Parliament to pass a tax increase.

Californians have for some time been reducing the state’s fiscal dysfunction, which was once much worse. In 2004, voters passed a constitutional amendment requiring the state to set aside 3 percent of general fund revenue each year, regardless of the state’s economic performance. But the reserve fund barely got off the ground before the 2008 financial collapse hit the state.

The consequences of the recession gave rise to a number of budgetary reforms. In 2010, for example, we successfully introduced a ballot measure that strengthened the reserve fund. Voters also approved a ballot measure that streamlined the budget-making process, lowering the two-thirds supermajority threshold for budget adoption to a simple majority vote.

As the economy rebounded, Gov. Jerry Brown and the state capitalized on these reforms to further stabilize the state’s finances, persuading voters to increase the reserve fund, demanding that even more money be pumped into it when tax revenues over capital gains are booming and tightening the rules for using money in tough times.

As recent fluctuations have proven, the system can still be improved. But California hopes to tap into that healthier reserve fund to help balance the budget this year.

In 2021, a strong stock market boosted government revenues, only to drop them when the market crashed the following year. As the Federal Reserve has raised interest rates in an effort to curb post-pandemic inflation, rising borrowing costs for businesses have led to higher unemployment and fewer IPOs and startups , which reduced capital gains tax revenues.

The economy rebounded in 2023, but write-offs from the previous year dampened the state’s rebound. Additionally, winter storms have prompted the Internal Revenue Service to extend the tax filing deadline for most California taxpayers, making it difficult for the state to accurately project its own tax revenue.

Lawmakers had to pass the current state budget before knowing exactly how much money was coming in, and they were overly optimistic. When the state’s financial situation finally became clear, it showed that the state’s tax revenues were 22 percent lower than expected.

In December, the state’s nonpartisan budget analyst projected a deficit of about $68 billion for the 2024-25 fiscal year. A month later, the governor’s financial experts, using different methods, put the deficit at about $38 billion, which was slightly more manageable.

Governor Newsom and state contractors made early cuts, changes, delays and other spending maneuvers that, in the governor’s estimation, narrowed the gap for the coming year at approximately $27.6 billion.

In May, the governor proposed a series of solutions that included no new taxes but would cancel some planned spending, spread the pain across a series of state programs, suspend some tax breaks for businesses and tap state reserves. ‘State. His proposal also omitted funding for a planned increase in the minimum wage for health care workers to $25 an hour.

Lawmakers responded by planning to further cut funding for the state’s prisons and accelerate the suspension of corporate tax breaks, leaving more money for the social safety net, including child care and health care. Otherwise, their plan is largely aligned with Mr. Newsom’s, including cutting about 10,000 unfilled government jobs.

It could. Both current budget proposals call for two fiscal years instead of just one, allowing work to begin earlier on projections that revenues will still fall short next year. The governor and lawmakers also want to gradually increase the size of the state’s emergency fund. And both would create a temporary account that would prevent a portion of future surpluses from being spent until the money was actually in hand.

Lawmakers say they are close to a deal and plan to announce one soon. State law requires final legislation to be printed for 72 hours before being voted on.

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