California’s Surplus Myth and Fiscal Cliff

With Governor Newsom announcing a $97 billion “surplus,” California lawmakers are falling over each other to buy voter favor as elections come near. Chief among these new proposals is Newsom’s $11 billion plan to send $400 gas rebates to every vehicle owner — not now, but in October, right when mail-in ballots arrive and early voting begins. 

Sadly, not only does California’s $97 billion “surplus” not exist, Newsom’s proposal to indiscriminately send out $400 or more to every vehicle owner misses the point: Tesla-driving elites don’t need any kind of gas rebate, and California’s lower and middle class families need more than one-time cash payments to survive. Instead of trying to buy votes before his nearly inevitable presidential run, Newsom must pay down California’s debt, cut spending, and commence with regulatory reform as fiscal armageddon looms. 

While Newsom loves to tout his $97 billion “surplus,” the fact remains this money is what’s left over after minimally meeting the state’s financial obligations due this year; in reality, California has anywhere from $300 billion to over $1 trillion in unfunded pension liabilities, not to mention hundreds of billions of dollars more due in bond obligations and deferred maintenance on essential infrastructure. Thus, saying California has a “surplus” in need of spending is like having millions of dollars in credit card debt, making only the minimum payment, and then deciding to spend the rest of one’s paycheck on clubbing and Ubers. 

Making matters worse, the State of California has among the highest state treasury income volatility in the country due to its reliance on capital gains from the top percentile of income earners. Given this revenue volatility, this so-called “surplus” — the product of $151 billion in federal funding in 2021 and record-breaking stock market returns — is more of a once-a-decade boon than a regular, reliable occurrence. 

Further compounding revenue volatility is California’s demographics; the state’s population has declined for the second year in a row, and working age Californians constitute 85% of those leaving the state. This means as California grows older, a shrinking working population is left paying for the trillions of dollars in benefits promised to California’s surging retirees, who represent the state’s fastest growing demographic. 

Even if California’s population weren’t declining, a projected “lost decade” for stocks spells fiscal trouble. As stock valuations adjust to the reality of the Federal Reserve ending its easy-money policies to combat inflation, it’s unlikely California’s top earners will continue to make the capital gains that power the state’s finances, and impossible for the state retirement system to meet the 7% growth rate it needs to remain “only” hundreds of billions of dollars short of being funded — without significant capital reallocation today, insolvency is guaranteed. 

As a result, the state’s Legislative Analyst Office projects with 95% certainty the state will hit a “fiscal cliff” by 2025, the point at which the State of California will have no choice but to slash spending and/or raise taxes to meet its basic financial commitments — and this would only accelerate the flood of Californians leaving for greener (better managed) pastures. 

Meanwhile, instead of addressing this bleak reality by cutting spending now, Newsom has decided to spend 95% of the state’s “surplus” on elective vote-buying measures, the most expensive of which is an $11 billion “gas rebate” plan to hand out $400 for each registered vehicle. 

This plan isn’t just short-sighted — it does nothing to address why the cost of gas is hitting middle and lower class Californians so hard. Due to the high cost of housing and concentration of jobs in affluent, coastal regions, middle and lower class Californians have to live far from their jobs to afford rent. With lower incomes, commuters are unlikely to be able to afford electric vehicles that would insulate them from rising gas prices or the shorter commutes that would reduce the traffic that is making California cities unlivable. However, housing remains exceedingly expensive in California because of endless building regulations and environmental oversight laws that perpetuate a mismatch between where housing is being built and where the jobs are. 

Thus, rather than hand out $400 for each vehicle owned, especially to wealthy EV owners who barely even drive, California Democrats should temporarily suspend what are the nation’s highest gas taxes for immediate relief. To drive down living and transportation costs in the long term, California Democrats should cut minimum unit size and parking requirements at the local level for the already high-density communities where jobs are plentiful but land and labor are scarce.

If anything, the current frothing-at-the-mouth fervor by California Democrats to spend the state’s last bounty on vote-buying boondoggles is emblematic of the challenge California faces. Rather than carefully adjusting spending to reflect fiscal reality, California Democrats have spent decades maximizing spending (and thereby votes) for short term gain (re-election) any way they can — promised cushy sinecures like private-sector lobbying jobs and board seats, they’ll be insulated from our state’s fiscal armageddon anyway. With the 95% certainty California falls off the fiscal cliff in 2025, Californians will finally bear the consequences for adopting three decades of Democratic, one-party rule. But what comes next? Can the California Republican Party pull itself together to provide a viable alternative to voters? Or do high-profile independent candidates like Michael Shellenberger and Anne Marie Schubert herald the arrival of a new era in California politics? Only time will tell.