State financial experts said Gov. Gavin Newsom’s proposed budget for the upcoming year is unsustainable.
The Independent Legislative Analyst Office is warning budget deficits in the billions could be on the way if Newsom’s spending plan is approved as currently proposed, and they said coupled with a budget surplus it will trigger the state appropriations limit, also known as the Gann Limit.
As Newsom prepares his updated state budget, he and the legislature will need to balance it in a way that avoids a big budget problem.
The LAO helps the legislature in its financial decisions.
“The legislature may want to consider rejecting around $10 billion of the proposed spending in the governor’s budget,” said Gabe Patek, California legislative analyst.
If the state having budget problems when it’s over collecting money seems confusing, the LAO has an explanation. The office said each time the state over collects and triggers the limit, each extra dollar coming in over the Gann Limit becomes associated with a $1.60 in required spending.
“It’s very counterintuitive, but we’re actually in a situation where each additional dollar of revenue over the limit worsens our budget outlook,” Patek said.
The LAO said that over time the state won’t be able to handle it, even if the economy continues to grow or if it heads into a downturn.
Gov. Newsom’s Department of Finance said it’s aware of the LAO’s warning, noting his proposed spending plan will change next month.
“The governor is mindful of what the state’s fiscal picture is going to look like two, three, four years down the road. And that’s one of the reasons why we’ve seen a relatively good revenue picture in recent months. He’s being very cautious and judicious about it,” said H.D. Palmer, with the Department of Finance.
But the LAO said rejecting the governor’s proposal for new spending is a short-term solution to the concern that will be ongoing for the state.
The LAO said there are two long-term solutions: The first is cutting taxes over time. Republican Assembly Budget Vice Chairman Vince Fong has been pushing for that.
“When the state surpasses the state spending limit, there’s a requirement that revenue, that money is returned back to the taxpayers. We need to do that on a permanent basis,” said Assembly Member Fong, R-Bakersfield.
Another option is asking voters to change the state appropriations limit, a calculation that was set in the 70.
“I’m not going to get ahead of what the governor’s decision is going to be or the legislature for that matter, but I think it’s pretty clear that things are a world of difference in the California economy since the limit was put into place,” Palmer said.
Governor Newsom’s revised version of his state spending plan is due mid-May.