California Governor Signs Budget Act, Declares Fiscal Emergency

‘The state’s economy has behaved in ways that have defied traditional forecasts and historical precedent,’ Gov. Gavin Newsom said in the emergency declaration.

MATHER, CALIFORNIA - SEPTEMBER 13: California Gov. Gavin Newsom delivers remarks to reporters after a helicopter tour with U.S. President Joe Biden of the Caldor Fire area, at Mather Airport on September 13, 2021 in Mather, California. Biden toured the wildfire-damaged area near Sacramento with Newsom before heading to Los Angeles to participate in a No on Recall campaign event. Photo by Justin Sullivan/Getty Images

With the state facing a significant budget deficit, California Gov. Gavin Newsom signed the Legislature’s budget act into law June 26 and issued a proclamation of a fiscal emergency—thus allowing the state to tap reserves to help cover the shortfall.

“I have determined that estimated resources are inadequate to fund General Fund expenditures for the current or ensuing fiscal year, which constitutes a budget emergency,” Mr. Newsom said in the emergency declaration.

Capital gains receipts set a record in 2021 at $349 billion, but subsequently fell to about $156 billion in 2022 and $137 billion in 2023. The drop is blamed on stock market volatility, according to the governor.

Budgets passed in 2021 and 2022 anticipated higher revenues, resulting now in “a misalignment between expenditures and revenues in the last two fiscal years that will continue unless corrective action is taken,” the governor said in his proclamation.

“The state’s economy has behaved in ways that have defied traditional forecasts and historical precedent,” Mr. Newsom said.

He said all tax revenues failed to meet expenditures by “tens of billions of dollars” for this and the upcoming fiscal year.

One lawmaker said the fiscal emergency declaration is a sign the state’s economy is struggling under the weight of high taxes and strict regulations and suggested more needs to be done to protect families and businesses.

“Newsom needs to make up his mind—either the economy is in great shape, or we are in a budget emergency that requires draining half our reserves,” Assembly Minority Leader James Gallagher told The Epoch Times by email June 27. “He can’t have it both ways.”

Fiscal emergencies have occurred several times over the past two decades, most recently in 2020 during the pandemic and in 2009–2011—with multiple years of deficits following the Great Recession in 2008.

Some lawmakers point to a rapid increase in spending—jumping 158 percent over the past decade—as a primary reason the state is experiencing fiscal distress. Since 2011, general fund spending has risen from $86 billion to $222 billion.

After declaring a budget emergency in December 2003, former Gov. Arnold Schwarzenegger’s budget report for the 2004-05 fiscal year noted similar concerns about spending.

“If government had simply spent at the same rate that California’s economy has grown, the state’s budget would be balanced today,” the report reads. “If state government had not spent the extraordinary tax revenues from the one-time surge in capital gains and stock options on ongoing programs, the State budget would not be in the crisis it is in today.”

One lawmaker critical of the budget said the plan could prove detrimental to the state.

State Sen. Brian Dahle in a June 26 press release took exception to reduced tax credits for businesses, higher fees, reductions for veterans’ programs, and cuts to the California Department of Corrections of more than $800 million, saying the latter will “further [exacerbate] California’s public safety crisis.”

The Democratic leader in the Senate acknowledged the difficult decisions made to balance the budget—while noting a goal of investing in schools, protecting services and programs, and addressing wildfire, public safety, and homelessness, among other things.

“It’s no secret that this is a tough budget that takes tough decisions to get across the finish line,” Sen. President Pro Tem Mike McGuire said in a June 13 press release when the Legislature passed the budget bill. “That’s why so many have been working long and hard on solutions to pass a responsible, balanced budget that reflects California values.”

While the budget act is now law, the governor has until July 1 to sign or veto budget trailer bills currently under consideration by the Legislature. The trailer bills define changes to the new budget act agreed to by the governor and some lawmakers June 22.

One such measure—Senate Bill 154, suspending some mandated education funding—was signed by Mr. Newsom June 26, and another—Senate Bill 167 related to taxes and recycling fees—was signed by Lt. Gov. Eleni Kounalakis June 27 because the governor was out of state to attend the debate between President Joe Biden and former President Donald Trump.

One Republican lawmaker, Assemblywoman Diane Dixon said some of the trailer bills amount to “gimmicks” while costing $298 billion.

She suggested deficits could increase in future fiscal years.

“The reality is: Californians and business owners are leaving the state to less regulated, more tax-friendly states around the country,” Ms. Dixon said in a June 27 press release. “To truly address our fiscal strains, we need structural change to solve the affordability crisis and reduce regulations for small businesses to encourage Californians to stay.”

“The numbers were deftly manipulated to balance the budget, but the devil is in the details,” state Sen. Brian Dahle said in a June 26 press release.