Walters: Pressure on California’s already shaky budget keeps on growing

A month from now, Gov. Gavin Newsom must reveal a revised version of the $322.3 billion budget for the 2025-26 fiscal year that he proposed in January,

It’s not likely to be a pretty picture.

The current budget is already billions of dollars in the hole, thanks to soaring expenses for the destructive and deadly wildfires that were sweeping through Los Angeles County as Newsom unveiled his January budget and a massive increase in outlays for medical care for the poor.

Moreover, President Donald Trump’s heavy tariffs on imported goods and retaliatory tariffs on U.S. exports are already depressing stock values, which could decrease income taxes from California’s wealthiest residents, the most important source of state revenues. If continued, the tariffs would likely have negative effects on the overall economy, which also would adversely affect corporate and personal income taxes.

California’s economy has not fully recovered from the effects of pandemic. It has more than a million unemployed workers and its jobless rate, 5.4% of the labor force, is tied with Michigan as the second highest among the states.

If anything, California’s employment picture is even darker than the raw numbers indicate.

The Center for Jobs and the Economy, an arm of the California Business Roundtable trade group, observes in an analysis of the latest employment data that “Jobs growth remains concentrated in government and government supported health care and social services while other private industries in total continue to shed jobs. California’s economy continues to depend on using public funds to buy jobs rather than maintaining competitive policies enabling the private sector to create them.”

As if these headwinds aren’t daunting enough, when Newsom declared that the 2024-25 budget was “balanced,” the details revealed that it was counting direct and indirect loans, accounting gimmicks and diversions from emergency reserves as revenue.

Thus, as the underlying economic and fiscal trends threaten to deepen the state’s budget hole, its reserves will be less capable of offsetting deficits.

The unanticipated increase in spending for Medi-Cal, California’s health care program for 15 million low-income residents, is the most eye-popping of the many negative factors. Last year, with the budget already leaking red ink, Newsom and the Legislature expanded Medi-Cal benefits to virtually everyone not already covered.

Newsom characterized it as fulfilling his 2018 campaign promise for universal health care, although his precise pledge was to create a single-payer system similar to those in Western Europe and Canada.

The expanded coverage, mostly benefiting undocumented immigrants, was supposed to cost about $6 billion. However, since the first of the year the administration has asked for a $3.4 billion loan and an additional $2.8 billion appropriation to cover the program’s costs.

In other words the cost has largely doubled in just a few months, officials said, because they underestimated how many people would be enrolled.

That, unfortunately, continues Capitol politicians’ tendency to enact some new program without fully understanding its parameters and costs.

The explosion in Medi-Cal outlays this year will, of course, carry over into the next budget. It also adds to what budget mavens call a “structural deficit,” meaning that expenditures already written into law outstrip reasonable revenue projections.

Newsom’s Department of Finance and the Legislature’s budget analyst, Gabe Petek, agree that the structural deficit, at least $10 billion a year and as much as $30 billion, will continue at least through the remainder of Newsom’s governorship.

Recent developments on both the revenue and expenditure sides of the budget indicate that it’s likely to be in the upper levels of the range, one of the legacies of Newsom’s time in office.

Dan Walters is a CalMatters columnist.