Reversal of fortune: Newsom outlines plan to deal with budget deficit

Gov. Gavin Newsom unveils his budget proposal for the 2023-24 fiscal year during a press briefing
Gov. Gavin Newsom unveils his budget proposal for the 2023-24 fiscal year Tuesday during a media briefing in Sacramento.
(Miguel Gutierrez Jr. / CalMatters)

After years of record California budget surpluses, Gov. Gavin Newsom has a plan to deal with a deficit he projects at $22.5 billion. He says he can keep his big promises despite the “modest shortfall.”

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California will delay some spending commitments, reverse recent budget resiliency measures and shift funding sources to limit the amount of cuts it has to make to close a projected $22.5 billion deficit, Gov. Gavin Newsom said Tuesday.

The shortfall, slightly less than the $24 billion that financial analysts for the Legislature estimated in November, will not prevent the state from fulfilling its promises to education, transportation and climate programs, the governor insisted.

“We’re keeping our promises,” Newsom said during a news conference in Sacramento, where he unveiled a $297 billion spending plan, about 3.6% smaller than last year’s record budget. “In spite of this modest shortfall, we’re continuing to make transformative investments.”

It’s a swift reversal of fortune.

Six months ago, Newsom and legislative leaders were crowing about a surplus of nearly $100 billion — equivalent to the entire annual expenditures of the Czech Republic — half of it available for discretionary purposes.

Negotiations dragged on for weeks as they deliberated over how to spend the massive windfall, ultimately agreeing to expand the social safety net to more undocumented immigrants, create a new court system to compel some homeless and severely mentally ill people into treatment, and provide refunds to most taxpayers in the state.

But many of the appropriations were one-time allotments or funding increases that would take effect only in future years if revenue estimates held up — commitments that are now at the greatest risk as the state puzzles over how to balance its books.

Newsom said Tuesday that the state would not tap into its cash reserves to address the deficit, in order to maintain those funds in case of a greater economic downturn in the future, though his administration is not expecting a recession.

Instead, the governor has proposed to delay $7.4 billion in spending to future budget years and shift $4.3 billion in appropriations to other sources, such as construction projects on California State University campuses that will now be paid for with bonds.

The budget proposal would also enact $5.7 billion in reductions for previously funded programs, with another $3.9 billion in “trigger” cuts that could be reversed next year if the state has enough money.

Those are largely concentrated on climate and transportation: Zero-emission vehicle credits and infrastructure programs are set to receive $2.5 billion less from the general fund in the coming years, with about half of those reductions offset with money from fees on major greenhouse gas emitters. The plan proposes to pull back $2 billion from local rail projects and $350 million from housing programs.

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“Why climate and transportation? Because of the magnitudes of those budgets,” Newsom said.

Despite concerns raised by advocates for the poor, social services are largely untouched in his budget proposal, though about $250 million for a behavioral health bridge housing program would be delayed. Newsom also said some of his priorities, including the rollout of universal transitional kindergarten, are “full-speed ahead.”

The budget process will now pause for the next several months as the state waits to get a clearer picture of its financial health. In May, after income taxes are filed, Newsom will offer a revised spending plan based on the updated revenue figures, at which point negotiations with the Legislature will begin. Lawmakers must pass a balanced budget by June 15 in order to get paid.

Senate Republicans, who as a super-minority play almost no role in crafting California’s budget, preceded Newsom’s announcement Monday with a letter urging the governor to reevaluate past spending increases to find a “prudent path forward.”

“It is likely that we can balance the budget by cutting ineffective spending, or by halting previously approved funds that have not yet been actually spent, and thus balance the budget without negatively affecting the people of California,” Senate Republican Leader Brian Jones of Santee and the seven members of his caucus wrote.

They did not point to any specific programs that should be reduced, though they did make several requests for new funding for a renter’s tax credit, water storage and forest management.

New investments in flood protection

With flooding on our minds, it’s also in the governor’s proposed budget, which includes new investments in flood preparedness and response. It includes a two-year, $135 million General Fund allocation for “local agencies working to reduce urban flood risk.”
Delta levees will get a boost, too, with a pot of $40.6 million available for repairs and upgrades. This cash pool will also support habitat restoration and infrastructure projects that protect Delta water supplies from saltwater intrusion — one threat of rising sea levels. The budget also supports Central Valley flood protection with a $25 million investment, specifically to flood risk reduction for communities, ecosystem restoration and sustainable agriculture.


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