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‘Everything is on the table’ to fix $68 billion California budget gap — even a fiscal emergency

California lawmakers will return to Sacramento next month to deal with a looming problem — a $68 billion budget gap that may require an emergency declaration to fix.

A report the Legislative Analyst’s Office released on Thursday showed a tax revenue shortfall has created a “serious budget deficit” for the 2024-2025 fiscal year. California’s projected $14 billion spending gap has grown substantially as higher interest rates and stock market uncertainty have lowered tax payments from wealthy residents with earnings that come from capital gains and dividends.

The LAO suggested the increased budget gap could merit Gov. Gavin Newsom declaring a fiscal emergency, which would give lawmakers access to a portion of the state’s reserves. It could also prompt leaders to pull back on some hard-fought but costly initiatives they won last year.

Some lawmakers have also raised the possibility of reconfiguring the 2023-2024 budget they passed last year, even as others want to prioritize preserving social safety net programs.

“I think everything is on the table right now as we consider how to get to where we want to be and where we need to be,” said newly-appointed Assembly Budget Chair Jesse Gabriel, D-Woodland Hills.

Declaring a fiscal emergency?

This year, Newsom and lawmakers used a combination of cuts and deferred spending, as well as borrowing, to close a $31.5 billion spending gap. But in November, tax revenues delayed months by winter storms came in $26 billion under projections, compounding the gap expected in 2024-2025.

Legislators will have their first floor session of the new year on Jan. 3, and Newsom must submit his proposed budget by Jan. 10.

In 2023, the state avoided dipping into reserves. This budget cycle, that might be necessary, according to the LAO.

“Given the state faces a serious budget problem, using general purpose reserves this year is merited,” the LAO reported. “That said, we suggest the Legislature exercise some caution when deploying tools like reserves and cost shifts.”

If Newsom declares a fiscal emergency, the LAO reported, that would give the Legislature access to $24 billion in general purpose reserves.

The governor has not taken that sort of action since June 2020, when California was in the thick of the COVID-19 pandemic and facing a $54.3 billion budget gap.

“No final decision has been made regarding the reserves as they’re going to be used to close the shortfall,” said H.D. Palmer, a Department of Finance spokesman.

Legislative budget priorities

Lawmakers currently planning their 2024 bills will need to think carefully about legislation that will require the state to spend more money. And they will likely face even tougher economic decisions than they did last year, Gabriel said.

“Anything that costs money is going to have a huge uphill path this coming year,” Gabriel said. “People really need to recalibrate their expectations and understand the gravity of the moment that we’re in, the gravity of the challenges that we’re facing.”

The assemblyman is new to the budget chair position, as Assembly Speaker Robert Rivas, D-Hollister, appointed him in November. He will officially take over from Assemblyman Phil Ting, D-San Francisco, on Jan. 22.

Gabriel declined to say whether he supports specific strategies to close the spending gap, such as opening up the 2023-2024 budget or making use of a fiscal emergency. He said the Assembly Democratic Caucus will need to discuss the direction it would like to take.

“The top priorities here are to avoid cuts to safety net services for our most vulnerable,” Gabriel said. “That’s absolutely the last thing that we want to do. To protect classroom funding, to protect a lot of the progress that we’ve made over recent years, but we’re going to have to make some difficult choices.”

One such choice may involve the hard-fought $25 health care worker minimum wage bill Newsom signed in October.

The Los Angeles Times on Thursday reported Newsom and Democratic leaders have been working on changes to the bill that were “all part of an understanding” the governor reached with labor advocates before he signed it.

“SEIU California has committed to working with the administration and the Legislature to ensure safeguards are in place to guarantee that this critical measure is taken in a way that preserves California’s fiscal health, just as we did when negotiating the last statewide minimum wage increase,” said Tia Orr, SEIU California executive director, in a statement.

Sen. Roger Niello, R-Fair Oaks, who serves as vice-chair of the Senate Budget Committee, said he would like to see the Legislature consider opening the 2023-2024 budget and “adjusting some of our current year spending to make it easier for subsequent years.”

Niello also said he would like to “avoid reduction in expenditures in in the education area,” but he sees other parts of the budget that leaders could curtail. The senator believes the state could draw money away from high-speed rail, exercise “much wiser spending” around homelessness and cut back on efforts to expand Medi-Cal for undocumented Californians.

Any messaging around avoiding budget cuts entirely is misguided, Niello said.

“I don’t see this budget being solved without some reductions in spending,” he said. “And to suggest that that doesn’t have to happen, necessarily, is creating expectations that I think are not wise.”