By Alexei Koseff | CalMatters
Faced with ongoing weaknesses in state finances, Gov. Gavin Newsom put forward a revised budget plan today that he said aims to stabilize California in the longer term by addressing a “sizable deficit” estimated at $56 billion over the next two fiscal years.
Looking beyond the typical annual budget cycle, Newsom proposed more than $30 billion in ongoing and one-time spending cuts, including to education and climate objectives that have been among the governor’s own priorities, though he promised that “core programs” providing social services to needy Californians would be mostly untouched.
“These are propositions that I’ve long advanced, many of them. These are things that I’ve supported,” Newsom said during a press conference in Sacramento. “But you’ve got to do it. We have to be responsible. We have to be accountable. We have to balance the budget.”
The governor’s proposal is an opening offer to the Legislature, which faces a June 15 deadline to pass a balanced budget or forgo its pay. That leaves a little more than a month for members to sort through Newsom’s solutions and negotiate a compromise that reflects their own concerns amid what is certain to be a fever pitch of lobbying from outside groups hoping to stave off cuts to their preferred programs.
The immediate reaction from Democratic leaders in the Assembly and Senate, who will negotiate a deal with the governor, was cautious and addressed few specifics.
“We are encouraged that the Governor’s May Revision improves budget prospects for future years and saves rainy-day reserves,” Assembly Speaker Robert Rivas of Salinas and Budget Committee chairperson Jesse Gabriel of Encino, said in a joint statement, but they added they “will continue to fight to protect core programs for California’s most vulnerable residents and essential classroom funding.”
Senate President Pro Tem Mike McGuire of Healdsburg and Budget Committee chairperson Scott Wiener of San Francisco, in a joint statement, said their past budgets “have uplifted communities and Californians — this year will be no different.”
Here are some key numbers from Newsom’s revised budget for the 2024-25 fiscal year, which begins July 1:
-7.3%
With tax revenues coming in below expectations — about $7 billion lower than even the governor’s January projections — this revised budget proposal is substantially smaller than the $310.8 billion spending plan for the current fiscal year. Including the general fund, special funds and bonds, Newsom is proposing to spend $288.1 billion on state programs next year, down about 7.3%.
$27.6 billion
This is the remaining deficit that the Newsom administration projects for the upcoming fiscal year. Officials have known since last fall that the fiscal picture was bad, but estimates of just how deep the hole would be varied widely — from a more optimistic $38 billion by Newsom’s Department of Finance in January to a dire $73 billion by the nonpartisan Legislative Analyst’s Office.
That prompted Newsom and the Legislature to take “early action” last month to reduce the deficit by more than $17 billion ahead of the regular budget process. Their plan included some program cuts, but mostly relied on new revenue, internal borrowing and funding delays and shifts for savings, earning criticism from Republican lawmakers for being “gimmicky” and “balanced on hopes and prayers.”
In addition to closing the remaining $27.6 billion shortfall for 2024-25, Newsom wants to get a jump start on addressing another projected $28.4 billion deficit in 2025-26.
Why does California have such a financial problem? The reasons go back two years. A downturn in the stock market in 2022 hit capital gains, while high inflation pinched the housing market and the tech industry pulled back on initial public offerings as investments dropped. Those blows have continued as wealthy taxpayers carried forward their losses.
But the drops in revenue were not fully reflected in the spending plan that Newsom and legislators adopted last summer. Severe winter storms prompted the federal government to delay the income tax filing deadline for most Californians from April until November, and the state followed suit, giving an incomplete picture during the budget process. The state committed to funding programs that it subsequently realized it cannot afford.
$21.5 billion
The governor’s budget proposal relies on dipping into state reserve accounts, including $12.2 billion from the rainy-day fund and $900 million from a safety net reserve, spread out over two years. Separately, Newsom wants to use $8.4 billion from a schools reserve account next year to stabilize funding for K-12 education that would otherwise drop.
Newsom also announced that he will ask the Legislature to create another new budget reserve account to help balance California’s volatile revenue picture from year-to-year. Under this plan, the state would set aside projected revenue above historical trends and hold off on spending it until it actually materializes. Newsom said this is easier than amending the existing rainy-day fund to capture more money, which would require approval from the voters.
$19.1 billion
A large part of how Newsom wants to solve California’s deficit involves clawing back $19.1 billion in unspent funding that was promised just a few years ago, during brighter days when the state had a record surplus. Substantial cuts to one-time spending include $2 billion for expanding broadband internet, $820 million for health care workforce development, more than $700 million for housing development, $550 million for early education facilities, $500 million for water storage, $450 million for behavioral health infrastructure and $136 million for cleaning up toxic substances in vulnerable communities.
$13.7 billion
Even more painful may be $13.7 billion in proposed cuts to ongoing programs, including shrinking the Middle Class Scholarship program for college students by $510 million annually and eliminating $300 million for state and local public health programs. Newsom wants to take an additional 4,600 prison beds out of commission, which could save nearly $81 million per year.
The governor proposed an overall reduction of nearly 8% to state operations, which he estimated would save $2.2 billion in 2024-25 and more in the years ahead, though exactly how government agencies would absorb those cuts is still to be determined. Newsom is pushing to eliminate 10,000 vacant state government positions on top of that, which could save $763 million annually.
Gov. Gavin Newsom addresses the media during a press conference unveiling his revised 2024-25 budget proposal at the Capitol Annex Swing Space in Sacramento on May 10, 2024.Fred Greaves, CalMatters
Social services programs such as supplemental income for elderly and disabled Californians, welfare and the earned income tax credit will be untouched, Newsom emphasized. That includes the recent expansion of health coverage to low-income undocumented immigrants of all ages.
“I just think that’s foundational,” Newsom said. “It’s something I believe in. It’s a core of, I think, who we are as a state.”
Other programs will — for now — merely be delayed. The governor proposed to pause an expansion of tens of thousands of subsidized child care slots until fiscal conditions improve, in part so that the state can instead continue to increase pay for child care workers.
$0
As he has several times in recent years, Newsom reiterated that he will not rely on tax hikes to close California’s budget gap, despite calls from many liberal lawmakers and interest groups.
“There are no new taxes. I’ve not been one of those promoting taxes,” the governor said, adding later, “No, I’m not prepared to increase taxes.”
But he did concede once again that he believes a broader overhaul of California’s volatile tax system is necessary, even if he was not willing to publicly share any of his ideas for the best way to do that.
“Should we reform the tax system? The answer is ‘yes,’” Newsom said. “How we do that is a more difficult and challenging conversation.”
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