California is facing a $68 billion budget deficit, the nonpartisan Legislative Analyst’s Office said Thursday.
Most of the deficit comes from lower than expected tax revenues this year, the office said.
NEW CALIFORNIA BUDGET PLAN TO COVER STATE’S $32 BILLION DEFICIT WITHOUT TOUCHING STATE RESERVES
California delayed its tax filing deadline to November this year because a series of damaging storms. That forced Democratic Gov. Gavin Newsom to come up with a spending plan without knowing how much money the state would have.
The Legislative Analyst’s Office says revenues for the 2022-23 budget year ended up $26 billion below previous estimates. The office says the state could cut spending on education and take money from the state’s savings account to help balance the budget.
GOV. NEWSOM ANNOUNCES $32 BILLION BUDGET DEFICIT, $10 BILLION MORE THAN PREVIOUSLY ESTIMATED
The state’s budget topped $300 billion last year.
The projected $68 billion deficit is a record in terms of a dollar figure. But the state has seen deficits that represent a larger share of the budget in the past.
It’s the second year in a row tax collections in the nation’s most populous state likely won’t be enough to cover expenses — potentially leading to some hard choices for Newsom and his allies in the Legislature.
The problem is inflation and how the U.S. government is trying to control it. The Federal Reserve has been increasing a key interest rate that makes it more expensive for people and businesses to borrow money. That means fewer people are buying homes and fewer businesses are hiring workers.
In California, that means the number of unemployed workers has risen by nearly 200,000 since last year, enough to increase the state’s unemployment rate to 4.8% from 3.8%. The national unemployment rate is 3.9%
Layoffs have hit the tech sector particularly hard, which has an outsized impact on California given the industry’s concentration in Silicon Valley. IT has been the backbone of the state's economic growth and revenue, said Sung Won Sohn, an economics professor at Loyola Marymount University.
"They expanded greatly during the pandemic and now they are finding that they have too many people and they need to cut back expenses," Sohn said.
Home sales in California have been cut in half compared to two years ago as average monthly mortgage payments have jumped to more than $5,500 from $3,700, according to Oscar Wei, deputy chief economist for the California Association of Realtors.
Wei said he expects interest rates to fall slightly in 2024 to around 6.5% — still well above the 3% rates seen during the pandemic.
"We’re still going to have higher mortgage payments for many of the homebuyers," he said.
California revenues soared to record highs during the pandemic on the back of a strong stock market. The state had budget surpluses in excess of $100 billion, allowing Democratic leaders to greatly expand government services — including guaranteeing free lunch for all public school students and offering government-funded health insurance to all eligible adults regardless of their immigration status.
That revenue growth stopped last year as the state had a $32 billion budget deficit. Newsom and the Democrats who control the state Legislature covered that shortfall through a combination of delaying some spending, cutting some spending and borrowing.
Still, Newsom and legislative Democrats continued to expand government. In October, Newsom signed a law to gradually raise the minimum wage for health care workers to $25 per hour. That law will cost the state about $2 billion this year in increased labor costs and Medicaid payments to hospitals.
