California lawmakers have been forced to make some difficult decisions in light of the state’s record deficit. The initial budget shortfall estimate of $38 billion provided by Gov. Gavin Newsom was increased to $73 billion by the Legislative Analyst’s Office in February. This prompted lawmakers to take action, resulting in a $17.3 billion cut in spending. The agreement reached by Newsom, Senate President Pro Tempore Mike McGuire, and Assembly Speaker Robert Rivas outlines a plan to address the deficit through a combination of cuts and new revenue sources.
The revised budget proposal includes various measures to address the deficit, including $5.2 billion in new revenue, $5.2 billion in internal borrowing, and funding delays, as well as $3.4 billion in shifts of costs from the general fund to other state funds. Some of the specific cuts included in the proposal are the elimination of vacant positions, cutting $500 million from the school facilities aid program, and delaying funding for transit and inner-city rail. Additionally, the proposal involves shifting funds from the greenhouse gas-reduction fund and cutting pre-funding for pensions.
Lawmakers emphasized the importance of delivering an on-time balanced budget and viewed the early action agreement as a critical first step in addressing the state’s shortfall. The package will be included in a budget bill that will undergo vetting by legislative budget committees in the coming days. If all goes according to plan, a budget bill could reach the Assembly and Senate floors for a vote on April 11.
Moody’s Ratings revised California’s outlook to negative from stable, citing a weakened revenue environment that could exert pressure on the state’s budget. Despite the negative outlook, Moody’s assigned an Aa2 rating to the state’s various purpose general obligation bonds. Fitch Ratings and S&P Global Ratings also reaffirmed existing ratings, with both agencies highlighting the state’s current revenue shortfall as a key concern. However, they expressed confidence that the governor’s budget proposal, if adopted, could enhance the state’s resilience to future economic downturns.
The budget proposal plans to utilize $12 billion from the budget stabilization account to close the deficit. Although the state faces significant revenue challenges, California’s strong liquidity position and ability to issue external cash-flow notes provide it with flexibility to navigate through the fiscal year. S&P analysts noted that California has approximately $94.7 billion of unused, internally borrowable resources, which could help the state manage its financial obligations effectively.
The state of California is grappling with a severe budget crisis that necessitates decisive action from lawmakers. The revised budget proposal reflects a coordinated effort to address the deficit through a mix of spending cuts and revenue-generating measures. While the challenges ahead are significant, California’s strong financial foundation and available resources offer a glimmer of hope in navigating through these turbulent times. By taking proactive steps to address the budget shortfall, lawmakers are demonstrating their commitment to securing the state’s fiscal future.