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Ratings agency: California budget gimmicks may “weaken fiscal resilience”

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(The Center Square) – Credit ratings agency Fitch Ratings said California Governor Gavin Newsom’s newly proposed budget could “weaken fiscal resilience” in future downturns. These include concerns that the governor is utilizing “a combination of structural and temporary budget adjustments, a number of which are more typically used in a downturn” to address what it says is “unusual in a slower, but still growing economy.”

California faces a $68 billion budget deficit for the 2024-2025 fiscal year, according to the state-run, non-partisan Legislative Analyst’s Office. Meanwhile, the governor plans only on cutting $8.5 billion in spending and spending delays, while also spending $12.2 billion, or more than half the state’s rainy day fund, to plug some of the gap.

Among the measures Fitch describes are shifting “one pay period from fiscal 2024 to fiscal 2025, deferring $1.6 billion in spending,” deferring “$499 million in payments to the state university systems” by allowing them to borrow against future payments,” and using “$1.3 billion of Proposition 2 debt repayment funding to make its regular pension contribution.”

“The magnitude and timing of California’s revenue shortfall, despite ongoing economic expansion, is leading the state to consider budgetary responses that could reduce its resilience to future downturns and limit rating upside,” wrote Fitch analysts in their report. “Employing such non-recurring measures is unusual in a slower, but still growing economy, and reflects the magnitude of the revenue gap and its mid-fiscal year timing.”

Meanwhile, new expenses are expected to significantly add to the state’s deficit this year. The state’s decision to phase in a $25 minimum wage for healthcare workers and provide taxpayer-financed public healthcare to all illegal immigrants between 18 and 55, an expected 700,000 individuals, will cost the state $4 billion and $3.4 billion this year respectively.

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