With the state teetering on the brink of a recession, California is poised for a dizzying reversal that could see us plummet from a record $100 billion surplus to a projected $25 billion deficit this week. next year, according to sobering new data from the state budget analyst.
The grim news isn’t as shocking as the numbers – the entire nation is grappling with inflation and soaring interest rates, and Governor Gavin Newsom has warned a downturn is ahead. But the grim predictions — which, if true, would reflect the state’s weakest performance since the Great Recession — could impact everything from homelessness and climate change efforts to capacity of the state to complete key transportation projects for Newsom’s political future.
“The numbers are pretty stark,” said Matt Regan, senior vice president of public policy for the Bay Area Council. “25 billion dollars is a very, very large sum of money.”
And the deficit is not expected to disappear anytime soon. Following a projected budget deficit of $25 billion in fiscal year 2023-24, the state will likely miss $17 billion the following year — and deficits will continue through the fiscal year at least. 2026-27, according to the state legislator’s report. Analyst’s office.
On the bright side, California has $23 billion in general fund reserves — but the report doesn’t recommend tapping into it yet. Indeed, if a recession hits, state finances could end up being even worse than current projections. So for now, the report suggests lawmakers re-examine current budget funds that have been allocated but not yet distributed and look for places where funds can be cut or suspended.
With those reserves, the state is in its “best” position to weather a downturn, said HD Palmer, deputy director of external affairs at the state Department of Finance.
“But while we’re actually better prepared, that doesn’t mean decisions to close the fiscal gap ahead won’t be difficult, particularly if the economic conditions that have slowed the economy continue or worsen.” , did he declare. in an emailed statement.
The current outlook marks a big change from last year, with California posting an unprecedented surplus of about $100 billion. Half of this money was to be allocated to education and other defined areas. But the rest has allowed Newsom — who signed a budget totaling more than $300 billion this year — to give Californians money back in the form of tax refunds, invest in new programs designed to stem the homelessness and climate change and to fund infrastructure projects.
Almost all of this has taken the form of one-time spending, rather than ongoing investment – a move that has drawn backlash, but may now prove to be wise. Housing and homelessness service providers, for example, said they could not fund the kind of long-term solutions that would alleviate the homelessness crisis with nothing but grants. punctual and punctual. But experts say it was a fiscally responsible decision that helped prepare the state for the coming crisis.
“If the governor had been less careful, we would be in big trouble,” Regan said.
The decline stems from the massive inflation the United States has suffered as it emerged from the COVID-19 pandemic – consumer prices have risen 8% over the past year, the report said. The Federal Reserve responded by raising interest rates to fight inflation, making everything from buying a home to getting a car loan more expensive. Now, home and car sales have plummeted, stock prices have plummeted, and Bay Area tech titans are laying off people en masse.
And it will probably get worse. At this point, the odds that the Federal Reserve will dampen inflation without causing a full-blown recession are “slim,” according to the AJO report.
California is particularly sensitive to the boom and bust of the economy: when housing and stock markets roar, capital gains fuel the state budget. During a downturn, this source of income dries up.
It could hamper Newsom’s attempts to reduce the homelessness crisis he has made one of his top priorities, spending around $15 billion on housing, services and camp cleanups over the past two years. . As the money dries up, it could slow the progress of the state.
“I think this is a time when the rubber really meets the road,” said Ray Bramson, chief operating officer of Santa Clara County-based Destination: Home. “In a downturn, will we be able to continue investing? And I hope the answer is yes, because this is the crisis of our time.
A worsening deficit could also spell hardship for megaprojects and Bay Area transit agencies. In last year’s budget, $4 billion was promised for public transit infrastructure through 2025, although that money was not allocated. Lawmakers could seek to recoup those funds, possibly delaying Caltrain and BART’s near-complete electrification project to Silicon Valley.
Beyond the megaprojects, transit agencies are also looking to the state to help fill a nearly $2 billion shortfall in their costs to keep buses, ferries and subways running across the country. over the next five years.
The slowdown could even impact the political future of the governor, who easily secured a second term this month and who experts say likely has presidential ambitions. Praising the strength of California’s economy during the campaign will be more difficult as the state struggles with a deficit.
Newsom is responsible for proposing an initial budget in January, followed by a revised version in May based on updated economic forecasts. The legislature then makes its changes, and the governor will sign a final version this summer.
Writer Eliyahu Kamisher contributed to this report.