California Budget Deficit Approaches $40 Billion

By Tom Sheehy

On May 12, Governor Newsom released his May budget revision, which revealed that the State of California's General Fund budget deficit had grown from $22 to $33 billion, largely due to less revenue showing up than anticipated.

Some of the difficulties in estimating revenue had to do with the fact that the Internal Revenue Service has extended the tax collection deadline to October, from the usual deadline of April 15 date, making it difficult for budget writers to foresee the state’s revenue flow.

But to further complicate things for Governor Newsom and his Department of Finance, the day after the governor's May revision was released on May 13, the Legislative Analyst's Office came out and said that the governor's revenue numbers were “plausible but unlikely.” The analyst estimates there is about $11 billion less in revenue than the governor's May revision originally calculated.

Now, that doesn't cause a dollar-for-dollar increase in the budget deficit, because you must account for constitutional spending requirements. When revenues go down, Prop 98 expenditures go down. But the bottom line is, with a look at the Legislative Analyst's Office revenue estimates, the budget deficit grows by over $6 billion.

California is now starting to approach about a $40 billion budget deficit. Of course, it's unfortunate but true that revenue forecasters are usually behind the curve when we're going into a recession, which means that a $40 billion budget deficit may be the best-case scenario. The number could grow considerably more, perhaps as high as $50 billion if we do go into a recession.

There is talk of the Federal Reserve further raising interest rates to get a handle on inflation, and in doing that, policymakers will slow the economy down that much more. Governor Newsom has his hands full trying to balance the budget, as the Legislature doesn't want to cut spending, and the governor has said he's not going to sign a tax increase.

It's looking more and more like their solution is going to be to drain the $30 billion-plus in budget reserves that they have been squirreling away for a rainy day, and it is probable that the state will end up using a large portion of that to balance the budget this year.

Tom Sheehy is former Chief Deputy Director of the California Department of Finance and Principal and Founder of Sheehy Strategy Group