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California pact reduces $73 billion deficit by $12 billion, hints at coming cuts

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(The Center Square) – California Governor Gavin Newsom and leaders of the state legislature reached an agreement to reduce the $73 billion budget deficit from $12-18 billion dollars while hinting this is just the start of major cuts to come.

“Thanks to leadership in the Assembly and Senate, California is stepping up with a balanced approach that will take a significant chunk out of the projected shortfall,” Newsom said. “Despite the uncertainty due to the federal tax deadline delay last year, historic reserves and fiscal responsibility will assure a balanced budget that meets California’s needs.”

Based on the statements issued by Newsom, Senate President pro Tempore Mike McGuire, D-North Coast, and Assembly Speaker Robert Rivas, D-Salinas, the budget agreement seems to be based, at least in part, on the State Senate’s “Shrink the Shortfall” proposal to reduce this year’s shortfall by anywhere between $8.6 billion to $23.6 billion.

The “Shrink the Shortfall” plan would have cut spending by $2.1 billion, deployed $12.2 billion from the state’s rainy day fund, shifted $3.2 billion in spending, delayed $2.5 billion in spending, deferred $2.1 billion in spending, and borrowed money or increased taxes by $3.6 billion.

“The deficit is serious and it’s grown by billions since January, which is why we must move with speed to shrink the shortfall immediately,” said McGuire in a statement. “The Senate stands ready to take votes to get this initial job done, and I’m grateful to Budget Chair Wiener and all Senators for their continued focus on this tough challenge.”

The state constitution requires the state to pass a balanced budget and prohibits the use of taking on debt to finance deficits. Due to these requirements, the state must cut spending and/or raise taxes significantly to fill the $73 billion budget deficit for this year.

“There are tough choices on the horizon, which is why our process is so critical,” said Rivas, hinting at the challenges the state will face in the coming months.

With rising unemployment and the number of added jobs last year “revised” from 325,000 to just 50,000 — with added jobs mostly in government and healthcare, and largely lost in high-paying professional service industries such as tech, finance, and consulting — the state faces significant fiscal headwinds.

The state’s just-released financial statement on fiscal year 2021-2022, a year of enormous prosperity for California, found the state owes $55 billion more than it had available. Given the state’s likely increase in liabilities and decrease in revenue and assets since then due to growth of new programs and continued outmigration of working individuals, the state may be in an even worse position now.