Reversal of fortune: Gov. 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 at the California Natural Resources Agency in Sacramento on Jan. 10, 2023. Photo by Miguel Gutierrez Jr., CalMatters

By Alexei Koseff 
CalMatters Government Writer 

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 said. 

“We’re keeping our promises,” Newsom said during a press 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 only take effect 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. 

“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 re-evaluate 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 Californians’ 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. 

Cuts in key climate programs 

Newsom’s proposed budget slashes $6 billion for climate initiatives, including reduced spending on one of his top climate priorities — ramping up zero emission vehicles.  

More than half of the spending designated for climate — $3.3 billion — comes from the state’s clean transportation initiatives. Newsom is proposing to cut $2.5 billion from zero emission vehicle infrastructure build-out and transfer $1.4 billion to the state’s cap-and-trade fund paid into by fossil fuel companies. The cuts from these programs would also affect the construction of heavy-duty vehicle infrastructure, a much-needed investment as the state considers another ambitious proposal to ban sales of high-polluting diesel trucks and phase in zero-emission models. Another $2.2 billion in funds would be gutted from transportation that includes spending for rail and transit projects. 

While Newsom hopes to offset those reductions with federal funds and a potential bond reserve, the move comes just five months after the state imposed a historic mandate for electrifying cars. Newsom, who has branded himself as a global climate leader, helped push a $54 billion climate package approved by the Legislature during last year’s session. The massive clean energy investment aims to meet the state’s aggressive decarbonization goals. But now, the budget deficit is getting in his way. 

Full speed ahead on pre-K 

A combination of new funding sources and declining enrollment helped soften the blow to the state’s K-12 education budget in the governor’s proposal. The net result: slightly higher per-pupil spending but less spending power due to inflation. 

Newsom’s budget provides schools $108.8 billion in Proposition 98 funding for K-12 schools and community colleges, a $1.5 billion decrease from last year’s budget. Prop. 98, which passed in 1988, guarantees a percentage of the state’s general fund goes to K-14 schools. 

But the K-12 education budget also reflects a cost-of-living adjustment of about 8%. This means another record-breaking year for per-pupil funding in California: $23,723 overall with $17,519 coming from Prop. 98 dollars.  

Newsom said he remains committed to implementing flagship education programs, notably universal transitional kindergarten. The proposed budget, as a part of ongoing investments, will add $690 million to help districts build capacity until they’re required to offer transitional kindergarten to all students by the 2025-26 school year. 

But it’s not a pretty picture for arts education. Despite new funding sources for art and music instruction, the state’s public schools will be getting less money to teach these subjects. 

Thanks to Proposition 28, which voters approved in November, the state will provide an amount equal to 1% of the Proposition 98 guarantee for arts and music education. In 2023, that comes out to about $941 million. But that won’t be enough to offset a $1.2 billion cut to arts, music and instructional materials discretionary block grant introduced in last year’s budget.  

Safety net expansions mostly maintained 

Newsom’s proposal preserves a signature plan to expand free health care to low-income undocumented immigrants of all ages by next January, at the cost of $844 million in the next fiscal year. And it includes increases to CalWORKs, the state’s cash aid program for low-income families with children, and to State Supplementary Payments, which provides benefits for seniors and the disabled.  

But the proposal has disappointed immigrants’ advocates in delaying a first-in-the-nation plan to expand food assistance to older undocumented immigrants. Benefits were expected to be paid late this year; Newsom’s budget would push them off to 2027.  

Related: Wilk budget reaction: Spend smart on critical budget priorities to fix California 

Related: Schiavo issues statement on governor’s budget proposal

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