by Dan Walters, CalMatters
January 10, 2025
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Fashioning a budget for a state as large and diverse as California is a fraught process under the best of circumstances, involving not only strictly financial aspects but demands from countless interest groups and the internal politics of the Capitol.
That said, what happened three years ago, as Gov. Gavin Newsom and legislators were finalizing a 2022-23 budget, remains one of the most egregious errors of fiscal judgment in state history, and looms over the budget process today.
As the state was emerging from the COVID-19 pandemic, it experienced a sharp uptick in revenues, particularly in personal income taxes, thanks largely to massive injections of federal relief funds and a big gain in taxable investment profits among high-income taxpayers.
Newsom and his budget advisors concluded that the much-higher general fund revenues would continue indefinitely — far surpassing the state’s core expenditures. The projection generated a monumental paper surplus Newsom tabbed at $97.5 billion, although the number never appeared in any documents.
“No other state in American history has ever experienced a surplus as large as this,” Newsom boasted as he unveiled what became a much-revised $308 billion budget, which was $22 billion higher than his original proposal.
It turned out to be a mirage. Revenues never reached the elevated level he had assumed. Last year, buried in the fine print, the 2024-25 budget acknowledged the error and estimated it to be $165.1 billion over four years. Newsom blamed the volatility of California’s tax system for the immense gap between expectations and reality — instead of a miscalculation.
Nevertheless, the damage was done. Much of the phantom surplus had already been baked into the spending side of the budget, leading to massive deficits.
Last year, to cover the yawning gap between income and outgo, Newsom and the Legislature resorted to tapping the state’s emergency reserves, bookkeeping gimmicks, direct loans from special funds, and indirect borrowing from school funds and corporations.
This bit of recent budgetary history is offered because a new state budget cycle began on Friday, when Newsom’s finance director, Joseph Stephenshaw, unveiled an initial $322.3 billion 2025-26 budget proposal, including a $228.9 billion general fund.
This article was originally published by CalMatters.
Dan Walters
Opinion Columnist
Dan Walters is one of most decorated and widely syndicated columnists in California history, authoring a column four times a week that offers his view and analysis of the state’s political, economic, social and demographic trends. He began covering California politics in 1975, just as Jerry Brown began his first stint as governor, and began writing his column in 1981, first for the Sacramento Union for three years, then for The Sacramento Bee for 33 years and now for CalMatters since 2017.
Dan is also the author or co-author of two books about California, “The New California: Facing the 21st Century” and “The Third House: Lobbyists, Money and Power in Sacramento.” He is a frequent radio show guest and occasionally appears on national television, commenting on California issues.
Walters began his career in 1960 at the Humboldt Times in Eureka, California, a month before his 17th birthday, first as a newsroom aide and later as a police beat reporter. Having found his calling, he not only turned down a National Merit college scholarship but dropped out of high school, lacking one required class – ironically civics – to qualify for a diploma. Before moving to Sacramento to cover politics, he was the managing editor of three small daily newspapers. He has two adult daughters and three grandsons.
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