California audit finds state is broke: $55 billion more owed than available

California just filed its 2021-2022 audited financial statement, 350 days past the filing deadline. In its filing, the state admits that COVID-era unemployment fraud cost the state $29 billion that must be paid back to the federal government, and that in 2022, the state had $256 billion more in liabilities than it had in unrestricted resources.

After accounting for restricted resources, such as purpose-specific state trust funds and bonds, the state still owed $55 billion more than it had.

With massive stock market gains and unprecedented job growth in the high-earning tech field amid a post-pandemic recovery, 2022 was a year of great economic prosperity for California. However, for FY 2021-2022 the state nonetheless adopted a budget with $234 billion in spending from the general fund compared to $220 billion in revenue.

“If that’s the best in California we can do economically and the government is still not able to repay debt, what are we going to do now when we have a much worse financial situation and we’re looking into eating into our rainy day fund,” said Policy Analyst Marc Joffe, of the libertarian Cato Institute, to The Center Square.

California currently faces a $73 billion deficit for the 2024-2025 fiscal year, to which the Democratic legislature has responded with a proposal to cut this year’s budget by $2.1 billion and a proposal to spend $12 billion, or half the state’s rainy day fund. With the state reducing 2023 jobs growth from 325,000 to just 50,000, revenues are likely to be much lower than expected. With a significant expansion of benefits, including expanding taxpayer-funded MediCal to all illegal immigrants, and a major shift in illegal immigration from heavily-enforced Texas to California instead, state expenditures could end up being higher than expected.

An up-to-date report on state finances for the 2022-2023 fiscal year could prove invaluable for ongoing budget negotiations, but according to State Controller Malia Cohen, “The ACFR for the fiscal year ended June 30, 2022, will mark the fifth consecutive year that California has published its financial statements well beyond the regulatory deadline of nine months after the fiscal year end.”

This pattern suggests the 2022-2023 ACFR will not be out for some time. Without the detailed, audited financial picture provided by the ACFR, Joffe says voters and state leaders are lacking an essential tool to judge state finances.

“The audited financial statement gives you the whole picture. It’s not only looking at revenues and expenditures but also looking at the assets and liabilities of the state,” Joffe continued.

Lower revenues and higher expenditures could combine to leave California with a much greater than $73 billion deficit for the year. Due to constitutional requirements that the state pass a balanced budget each year, and a ban on taking on debt to finance deficits, the governor and legislature will likely have to cut tens of billions of dollars from the governor’s proposed $209 billion budget.