May Revise sets up California for painful spending choices and tax increases

Budgets have consequences

Giving credit where it is due, Gov. Newsom’s “May Revise” budget proposal recognizes the seriousness of the situation. He proposes real cuts, opposes tax increases, and suggests some efficiency improvements – which are all positive steps.

Unfortunately, the proposal still relies on too many budget gimmicksand fund shifts. The Newsom plan also underestimates the severity of the current budget shortfall that must be addressed. Making matters worse, growing economic headwinds, including the tech industry laying off over 81,000 people and California’s subpar personal income growth, raises concerns that the deficit will continue to widenthroughout the year.

The focus on budget responsibility obscures some troubling trends. For example, while focusing on administrative efficiencies, the Governor fails to demand efficiencies in the programs that can yield substantial long-term budgetary savings.

Consider the Administration’s own admission at an Assembly Budget Committee hearing this week that they have no idea whether billions in Project Homekey homelessness expenditures have worked. Taxpayers deserve better with California facing a massive shortfall.

The May Revise also focuses too much on one-time budgetary savings, budget gimmicks, and fund shifts in the hope of restoringspending once revenues have returned to “normal.” But what Gov. Newsom calls normal are the unsustainable revenue surges that are inevitably followed by revenue crashes.

Spending these revenue surges has caused the growth in state expenditures to outpace growth in residents’ incomes. A budget that temporarily reduces spending and plays budgetary games only to continue the Governor’s profligate spending ways sets the state budget up for a future budget crisis.

This approach also wastes the important breathing room that the rainy-day fund reserve is supposed to provide – blowing through half the fund’s balance this year and next while failing to put the state on a sustainable budget path.

Basic budget arithmetic demonstrates that there are three options going forward – greater spending restraint, increased borrowing, or higher taxes.

There are many other ways to reduce spending including making more proposed one-time spending cuts permanent and further reducing Proposition 98 education spending. These reductions are by no means easy or costless, although the sheer amount of ineffective spending by the state (such as Project Homekey spending) demonstrates the many opportunities for the state to do better with less.

More budgetary borrowing, which took the state years to pay off when widely used in the 2000’s, is simply another way of kicking the problem down the road.  Nor is now the time to embrace billions in new borrowing for housing, the environment, schools, or other priorities we cannot afford.

This leaves the tax increase option. While he rejects tax increases this year, not making sufficient additional cuts this year makes future tax increases more likely.

Remember the 2009 budget crisis.  Politicians of both parties embraced budgets during the 2007-09 economic meltdown thatavoided tough spending choices and set the state up for a devastating 2009 budget that included billions in painful cuts to important programs and billions in tax increases.  

Like today, problems were evident well before the 2008-09 budget crisis. The failure to take sufficient actions caused credit rating agencies to downgrade California’s rating five times. Lower credit ratings increased borrowing costs, making addressing the problem more expensive.

Only after the crisis was undeniable, did politicians finally implement actual painful budget solutions that included nearly $60 billion in budget actions. These efforts required actual declines in year over year spending in excess of 15 percent relative to 2007.

Now action on the Newsom budget turns to the Legislature.  One major question looms – will liberal lawmakers who never met a spending increase they didn’t like embrace cuts – even temporary ones – to CalWORKs, childcare and environmental programs?  Not likely.

Californians are now watching to see if Gov. Newsom and legislative leaders have learned their lesson and will pass a final state budget that reins in the state’s excessive spending sooner rather than later.

Dr. Wayne Winegarden is a senior fellow in business and economics at the Pacific Research Institute.