California lawmakers have made significant modifications to their budget proposal for March, aiming to reduce spending by $17.3 billion to address a record deficit. The plan involves a combination of new revenue, internal borrowing, funding delays, and shifts in costs to other state funds. The proposal includes various cuts, such as eliminating vacant positions, reducing school facilities aid, delaying funding for transit and broadband projects, and reallocating funds from different sources.
Impact on Various Programs
The budget proposal includes cuts of $762.5 million in savings from eliminating vacant positions and $500 million from the school facilities aid program. Additionally, it involves delaying $1 billion in funding for transit and inner-city rail and $100 million for last-mile broadband spending. The proposal also shifts $1.8 billion from the greenhouse gas-reduction fund and cuts $1.3 billion in pre-funding for pensions established by Proposition 2 in 2014. Moreover, it freezes one-time funding allocated in the 2021, 2022, and 2023 budgets.
Governor Gavin Newsom, Senate President Pro Tempore Mike McGuire, and Assembly Speaker Robert Rivas have expressed their commitment to delivering an on-time balanced budget. They believe that the early action agreement is a critical first step to address the state’s financial shortfall. The proposal is set to be included in a budget bill that will undergo review by legislative budget committees early the following week, with a potential floor vote by April 11.
Moody’s Ratings revised California’s outlook to negative from stable, considering the weakened revenue environment and potential prolonged budget pressure. Fitch Ratings assigned an AA rating with a stable outlook, expressing concerns about the state’s response to the revenue shortfall. S&P Global Ratings assigned an AA-minus rating with a stable outlook, noting the challenges faced by California due to its reliance on personal income taxes from wealthy taxpayers.
The budget proposal intends to utilize $12 billion from the budget stabilization account to help close the deficit, reducing the state’s buffer against future economic downturns. Although California currently has strong liquidity, concerns arise about the state’s ability to maintain its financial standing with declining revenues and increasing budget demands.
Despite California’s significant internal borrowing resources amounting to $94.7 billion, uncertainties loom regarding the state’s financial maneuverability for the rest of the fiscal year. The shift from surplus to deficit has put pressure on California’s credit profile, indicating the need for strategic financial management to navigate through the current economic challenges effectively.
California’s revised budget proposal reflects a proactive approach to address the state’s financial crisis. While the measures taken are aimed at mitigating the deficit, concerns remain about the long-term sustainability of the state’s financial health. State officials and rating agencies will closely monitor the implementation of the budget plan and its impact on California’s fiscal stability in the months ahead.