https://www.nytimes.com/2023/12/07/us/california-budget-deficit.

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California Faces $68 Billion Deficit Amid Steep Revenue Decline

The state heads into next year with projections of one of its worst budget deficits since the early 1990s recession. Reserves
should help cushion the blow.

By Shawn Hubler
Reporting from Sacramento

Dec. 7, 2023

California is facing a $68 billion budget deficit, the state’s nonpartisan fiscal analyst announced on Thursday, signaling a
“serious” financial challenge for the Democratic-led government heading into an election year.

The Legislative Analyst’s Office said a revenue decline this year “similar to those seen during the Great Recession and
dot‑com bust” was largely responsible for the sobering projection. Absent a sudden turnaround, Gov. Gavin Newsom and his
fellow Democrats in the Legislature would face the state’s biggest budget challenge since the early 1990s, undercutting
national messaging by the governor, who has depicted California’s emergence from the Covid-19 pandemic largely as an
economic success.

California has been in a downturn since 2022, and state finance officials had been warning of a darkening fiscal outlook, the
report noted. But the state was late to recognize the full extent of the plummeting revenues because of a decision to delay its
tax filing deadline until mid-November of this year to give residents leeway as they recovered from a series of catastrophic
storms last winter.

The state’s tax system is prone to wide swings because of a heavy reliance on the taxation of capital gains and the personal
income of high earners. For those residents, a steep 2022 decline in the stock markets resulted in heavy losses, which
translated into lower tax revenues in returns filed through last month.

Also partly to blame, the legislative analyst found, is the federal government’s effort to control inflation. As the Federal
Reserve has increased key interest rates, borrowing has become significantly, and abruptly, more expensive for businesses
and home buyers, which in turn has worsened unemployment and depressed business startups in California.

“Home sales are down by half,” the legislative analyst reported, “largely because the monthly mortgage to purchase a typical
California home has gone from $3,500 to $5,400.” Tech companies have also been hit hard, the report found, with an 80
percent drop since 2021 in the number of California companies that have gone public. (In past years, initial public offerings
have provided a noticeable boost to state coffers.)

As a result, the report found, the state has added nearly 200,000 workers to its jobless ranks since last year, and the
unemployment rate has risen to 4.8 percent from 3.8 percent, nearly a full percentage point higher than the national
unemployment rate.

The $68 billion deficit projection is a California record in terms of raw dollars, though the state faced a larger gap during a
recession in the early 1990s when measured as a share of overall spending. State leaders passed a $225.9 billion overall
spending budget this summer, and the projected deficit represents roughly a 30 percent hit.

The prevalence of remote work in California initially helped the state weather the pandemic with less financial pain than had
been expected; in early 2022, analysts predicted that the state would bring in nearly $100 billion more than it was committed
to spend.
In June, however, the governor cautioned that the state faced a revenue downturn and that its full scope would not be clear
until late fall, after the postponed tax receipt deadline. H.D. Palmer, the spokesman for the California Department of Finance,
said that the state would face “a significant challenge with the 2024 budget.”

Mr. Newsom is required to send his budget proposal to state legislators next month.

As California’s fiscal doldrums were becoming apparent last week, legislative leaders said the state was prepared to deal
with the projected deficit without cutting core programs. Toni G. Atkins, the Senate president pro tem, noted that the forecast
was “not welcome news,” but that the state also had “record reserves” to cover the shortfall.

The cuts should be manageable if the state dips into the substantial reserves that it has amassed during flush times, cuts
one-time spending and trims some major line items such as school funding, the legislative analyst suggested. But the
Legislature will be forced to make some difficult choices, as deficit years often compel an array of interest groups in
Sacramento to jostle with each other to protect their own funding — or to avoid additional fees or taxes on their members.

The deficit is likely to force significant cuts in an election year and challenge the state’s national image.

“California dominates,” Mr. Newsom told Gov. Ron DeSantis of Florida last week in a debate on Fox News. “It’s the fifth-
largest economy in the world.”

Shawn Hubler is based in Sacramento and covers California news, policy trends and personalities. She has been a journalist for more than four decades. More about
Shawn Hubler

A version of this article appears in print on , Section A, Page 21 of the New York edition with the headline: Deficit Grows To $68 Billion In California