When Gov. Gavin Newsom releases his revised budget proposal next week, it will paint an even gloomier picture than the multi-billion-dollar deficit projected just four months ago.
State revenue as of March was $4.7 billion below the governor's January forecast, according to the latest data from the California Department of Finance. In addition to lagging revenue, a handful of issues at the national level pose elevated risks that could further widen the state's budget gap.
Those include an unresolved standoff over the federal debt limit, a significantly delayed tax filing deadline and rising interest rates. Any of which could tip the direction of the U.S. economy, implicating credit card debt, car and home loans and the purchasing power of consumers.
This means that the governor and legislature will need to identify new fixes. These could involve additional delays in funding or outright cuts to programs. The state could also shift cash between accounts, close prisons, or raise taxes.
"While we're still finalizing the numbers, it's clear that the problem the governor and the legislature will need to solve is larger than the January estimate," said H.D. Palmer, spokesperson for the California Department of Finance.
Rising interest rates and a delayed tax deadline create uncertainty
Newsom in January released a $297 billion spending plan for 2023-24 that projected a $22.5 billion deficit, a sharp swing away from last year's $100 billion surplus. A week later, the Legislative Analyst's Office warned of "a good chance" that California revenues would come in lower than the governor forecast and that additional cuts would be needed to fill the gap.
Since then, the Federal Reserve hiked interest rates and moved up the expected date that the U.S. will reach its debt limit. The Federal Reserve on Wednesday raised its key interest rate to the highest level in 16 years.
California also extended its tax filing deadline to Oct. 16 to align with the Biden Administration and ease burdens on Californians hit by major winter storms.
Those factors all make it more difficult for California's budget officials to accurately predict the state's fiscal future.
In a typical tax year, the governor and legislature rely on the traditional April tax deadline to get a solid sense of state income tax revenue and develop a state budget around that in June. But this year, the state won't have a full picture of its revenue until mid-October, making projections cloudier than normal.
If the budget passed in June overestimates state revenue, the governor and legislature will have to make mid-year adjustments, meaning additional cuts or deferred spending to put finances back in balance.
"The governor is continuing to finalize his decisions in the coming days," Palmer said. "But given those realities, we need to give that a clear-eyed recognition that these are risks to the budget and economy that we do not have control over."
The U.S. federal debt crisis
Some experts warn that failure to raise the debt ceiling would trigger a global economic collapse.
"There will be seismic repercussions if the federal government isn't able to meet their obligations and pay its bills," Palmer said, pointing to a new analysis from White House economists that said an extended breach of the nation's borrowing limit could eliminate 8 million jobs and cause "severe damage" to the U.S. economy.
The U.S. government has never defaulted, and predictions vary widely about what could happen.
"Because the debt ceiling has never not been extended and the U.S. government has never been in default, we really know what would happen to the country, let alone a single state," said Mark Schniepp, director of the California Economic Forecast in Santa Barbara.
Gokce Soydemir, professor of business economics at California State University, Stanislaus, was more pessimistic.
"Investors do not like uncertainty, when there is uncertainty present, investors will not invest," he said. He foresaw higher unemployment and a deep recession.
President Joe Biden and congressional leaders plan to meet Tuesday to discuss the debt limit crisis. Treasury Secretary Janet Yellen said this week that the government is expected to reach the $31.38 trillion ceiling by June 1.
House Republicans approved a plan last week to reduce federal spending, which they say in turn would help California and the rest of the country. A less expensive government would help keep taxes down, and ease inflation, the GOP maintains.
The plan is a "necessary course correction," said Rep. Kevin Kiley, R-Rocklin, saving trillions of dollars "by restraining Washington's spending habits, spurring economic growth, and setting our nation on a sustainable fiscal path."
Democrats, though, contend the GOP plan would be disastrous. "All across California, these reckless cuts would raise costs for hardworking families, set back economic growth, and hurt children, families, seniors, veterans, students, and more," a White House statement says.
The administration estimates California would stand to lose about $494 million in funding for transit and highway infrastructure projects all across the state, including more than $99 million for projects in Los Angeles, Long Beach and Anaheim, $34 million for projects in Fresno, and $10 million for Sacramento.
It also says the plan would mean that as many as 17,000 families across California who are homeless or at risk, or are domestic violence victims, would have a difficult time getting help with emergency housing.
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