On brink of recession, Newsom and lawmakers must budget cautiously

Gov. Newsom on Tuesday proposed a roughly $297 billion state budget plan for the 2023-24 fiscal year.  In contrast to last year’s nearly $100 billion surplus, the administration projects $29.5 billion in lower than estimated revenues and a $22.5 billion shortfall.

The Newsom spending plan does some good things – including paying down public pension debt, making $5.7 billion in cuts and $3.9 billion in trigger cuts if revenue doesn’t materialize, and suspending new ongoing spending.  Unfortunately, it avoids some of the tough budget choices these uncertain economic times requires to get our fiscal challenges under control and prevent painful future cuts.

As the budget debate officially kicks off at the State Capitol, here are three key priorities policymakers should embrace in crafting a final state spending plan:

Evaluate Current Programs And Cut What Isn’t Working

Newsom’s budget talks of “sustaining key investments” in things like climate change programs and transitional kindergarten.  Despite the spin, investment is typical government speak for higher spending.  No matter its grandiose purpose, ineffective spending is wasteful spending.

Sacramento rarely demands results in how tax dollars are spent. Consider Gov. Newsom’s proposal to maintain the administration’s current “investment” in the Project Homekey initiative for homeless housing. The state spent $7.3 billion in the 2021 fiscal year and is spending $10.2 billion this year.  As a recent Pacific Research Institute report documents, Homekey has proven costly and ineffectual, with preliminary point-in-time homeless counts showing homeless populations continue to grow in much of California.

Particularly in these tough times, every budget dollar must be stretched far. Meaningful program evaluation and oversight must guide this year’s budget debate. Programs that aren’t effective should be cut or suspended, with savings used to close the deficit or boost other needs.

Debt Remains A Big Problem

California has wisely paid down what former Gov. Jerry Brown called the “wall of debt”, which grew to $35 billion when previous politicians embraced budgetary borrowing and punted painful budget choices to another day.

Yet Assembly Democrats in their budget blueprint urge Newsom to “consider low-cost borrowing from special funds.”  Rising interest rates, of course, will make this supposed cheap borrowing more expensive for taxpayers.

Unfortunately, the Newsom budget embraces some of these budget smoke and mirrors, proposing $4.3 billion in fund shifts and $1.2 billion in borrowing and new revenue. Sacramento should resist this type of rampant borrowing and budget gimmickry that led to the state’s 2008-09 budget meltdown, and instead summon the courage to prioritize spending and cuts this year.

Paying down unfunded public employee pension debt must also be a priority.  Newsom’s budget wisely allocates an additional $1.9 billion toward pension debt in 2023-34 and $5.3 billion over the next three years. PRI’s research has documented that California’s “pension monster” grew to roughly $1 trillion before the pandemic.  Last summer, CalPERS posted a negative 6.1 percent return on investments, and markets have fallen since then.  Politico recently reported that “the stock market’s plunge battered public retirement systems in 2022 (and) the outlook for 2023 is even more grim.”

The Economy Will Likely Fall Into Recession – Lawmakers Should Budget Accordingly

California’s economy declined in 2022.  The S&P 500 dropped 19.4 percent last year.  In November, Silicon Valley companies laid off 20,000 employees, which the Washington Post called “the end of an era for Big Tech.”  This is bad news for a state that is heavily dependent upon capital gains tax revenue to balance the budget.

Global business think tank The Conference Board forecasts a mild recession in 2023, with “three quarters of negative GDP growth starting in Q1 2023.”  A divided federal government means California’s can’t count on new money from Washington.

With the state’s revenue problem likely to grow worse in 2023, Sacramento must budget cautiously.  This means heeding the warning of the nonpartisan Legislative Analyst’s office to not tap into the nearly $23 billion saved in the state Rainy Day Fund, and $35.6 billion total in all the state’s budgetary reserves.

Newsom’s proposed budget wisely does not tap into the reserve, but lawmakers will certainly increase pressure to use some of the reserve to save their favorite programs. Things will likely get worse this year, and California may need that money to prevent budget Armageddon when we’re officially in, not on the brink of, a recession.

Wayne Winegarden writes extensively on the economy, government spending, and public pensions, and is a senior fellow in business and economics at the Pacific Research Institute.

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