Newsom’s $18 billion budget deficit is rooted in pandemic aid

from Dan WaltersCalMatters

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When Gov. Gavin Newsom presents his first draft of the state’s 2026-27 budget next month, he will reveal whether he intends to tackle his chronic multibillion-dollar deficit directly or pass the shortfall to his successor.

Legislative analyst Gabe Petek, the Legislature’s independent fiscal adviser, estimates the state faces an $18 billion shortfall between projected spending and likely revenue next year and, if left unchecked, the deficit will grow to $35 billion a year.

In the meantime, Petek says, the state has called $21.6 billion in off-book debt to cover deficits in recent fiscal years.

Petek and others have warned of the possibility of a severe recession hitting the national economy, exacerbating the budget imbalance and straining California’s emergency reserves, which are already being used to cover deficits.

Even without a recession, California’s economy is, in Petek’s words, “sluggish.” Jobs are shrinkingand 5.6% of the labor force in California the unemployment rate remains the highest of any country.

The recent history of covering up deficits with gimmicks and borrowed money is not an encouraging sign of an outright approach. But perhaps Newsom will choose to balance California’s books before launching a near-certain presidential campaign.

Unfortunately, the state is not the only one plagued by the gaping gap between revenue and expenditure. Across California, school districts, cities, counties and other units of local government are facing deficits rooted in the same dynamic that led to red ink in state finances — massive injections of federal relief funds during the COVID-19 pandemic.

It is estimated that the feds pumping as much as $600 billion into California through state and local governments to counter the economic impacts of the pandemic, not counting the many other billions that businesses and individuals have received directly.

The federal bailout gave officials money to spend with few safeguards and fueled a short-lived shock to taxes, especially income taxes.

The Newsom administration interpreted the windfall as a permanent increase in revenue, prompting the governor to announce in 2022. surplus of $97.5 billion. He and the Legislature immediately increased spending. But the surplus never materialized, and the administration eventually admitted it had overstated revenue by $165 billion over four years.

By then, however, the additional costs, especially for health care expansion, were written into state law, and the state was left with what’s called a “structural deficit” in the $20 billion range.

Meanwhile, local governments and school districts used their pandemic aid to satisfy employee union demands for wage increases that often could not be met after federal aid disappeared. Inflation in the cost of living further increased demands for union wages.

A new report from the Fiscal Crisis and Management Support Team, which oversees California school district finances, examines the chronically struggling Sacramento City Unified School District and describes how federal aid led to its financial quicksand.

The report describes the district’s history of revenue overspending and says, “This (federal) funding masks the district’s existing structural deficit, delaying the necessary actions that must be taken to address it.”

Even after federal aid stopped, the county continued to sign union contracts requiring raises it could not afford. And he failed to implement the cost-saving measures he had promised to balance his budget, the analysis found.

Budget issues in other school districts — Oakland Unified is a famous example — and in local authorities as City of Los Angeles have a similar ring to them. School trustees and city council members elected with union support squandered federal aid. They then approved unsustainable contracts and blamed the resulting deficits on insufficient revenue.

This article was originally published on CalMatters and is republished under Creative Commons Attribution-NonCommercial-No Derivatives license.