California’s roller coaster budget will hit a big dip in this fiscal year according to the non-partisan Legislative Analyst’s Office.
The report predicts a $25 billion shortfall in the current year’s budget based upon trends in the year that started July 1. When Gov. Gavin Newsom and the Legislature reached the budget deal, the state was gushing cash. The combination of billions in federal funds—all borrowed on the backs on future generations it should be noted—plus tech employees cashing out stock options in a good year for initial public offerings—left the debate in Sacramento about how to spend the largess.
The current year budget is $308 billion that included a record $97 billion surplus year-over-year. Some of that is being sent to taxpayers in rebates that have been arriving since month—nicely timed around election day. Democrats in Sacramento were somewhat restrained in long term spending—the universal pre-kindergarten program not withstanding. That’s ongoing money being spent with no demonstrated proof that it makes a difference in education outcomes—we’re talking high school graduation and academic proficiency as the key measures, not 2nd grade achievement.
The state has built its rainy day fund to $23 billion with a total of $38 billion in reserve. That could handle the shortfall when coupled with some cuts.
What’s of greater concern is that the report does not take into account the impact of inflation and the potential of a recession. Major layoffs are rippling through technology companies from hardware companies such as Intel and Cisco to Twitter and many others such as Facebook that announced major layoffs this quarter. The number of initial public offerings this year is down.
Remember that the state’s revenue has a very shaky foundation—the top 1% of income earners provide about half of the revenue. That sector has a hiccup and the state is needing budget surgery. The trend of wealthy folks saying enough already and leaving the state is well documented because the state hit is 13.3% that is on top of the federal rate 37% and the state tax hit has federal deduction limited to $10,000.
It’s unlikely that economic trend shifts positive—it’s likely to continue a downward spiral. Throw in the high interest rates and their impact on purchasing power when it comes to real estate and it’s not a pretty picture—the governor’s smiley face notwithstanding—you can say the same for the president’s. Their attitudes are completely out-of-touch with public opinions and the actions of business leaders.
Buckle up. The next six months or more will not be pretty.