Newsom announces California budget deficit much larger than previously expected

California Gov. Gavin Newsom (D) unveiled a revised $306.5 billion budget proposal on Friday, while announcing the state’s budget deficit had grown to $31.5 billion.

This shortfall is about $9 billion more than the $22.5 billion gap he projected in his initial January budget proposal, which totaled about $297 billion. 

“We are walking into a budget where we need to maintain our prudence, and we need to prepare not just for the short term but the medium and long term,” Newsom said at a Friday press conference, where he presented the revised proposal.  

Recognizing the current environment of economic volatility, Newsom stressed the importance of taking that uncertainty “very soberly and seriously as it relates to macroeconomic headwinds.”

The total $306.5 billion budget includes $224.1 billion in general spending, $79.5 billion in special funds and $2.9 billion in bond funds.

The May revision estimates $37.3 billion in budgetary reserves — an increase from the $35.6 billion estimated in January.

Although Newsom indicated in January that he did not intend to tap into the reserves, he announced on Friday a $450 million withdrawal from the Safety Net Reserve. This represents about half the funds available within that reserve.

“We are sweeping $450 million from the safety net reserve to help offset costs associated with Medi-Cal and CalWorks,” Newsom said, referring to two family assistance programs. 

“We think it’s exactly why that fund in reserve was created and it will provide opportunity to continue to provide the services that we’ve come to expect and the services that the legislature championed over the course of last number of years,” the governor added.

While the May revision does not project a recession, it acknowledges that if a moderate recession occurs, revenues could decrease by $40 billion in 2023-2024 alone — due to losses in personal income tax.

To balance the budget, the May revision contains $3.3 billion in shifts of spending commitments from the state’s general fund to other funds.

This includes moving $1.1 billion in climate-related investments to a climate bond, $635 million to a greenhouse gas reduction fund and $1.1 billion for student housing projects to bonds, per the revision.

The May revision includes $3.7 billion in revenue and borrowing, including $2.5 billion from the state’s managed care organization tax and $1.2 billion in additional borrowing from special funds.

Although the May revision does not involve new “trigger reductions” — automatic cuts that are phased in — it does maintain most of the $3.9 billion in trigger reductions included in the January budget proposal.

The revised proposal also pulls back about $1.1 billion in spending that generally includes reductions in unused funds from middle-class tax refunds and from a utility assistance program for low-income residents.

The May revision — like the January proposal — contains a variety of hefty cuts in specific programs, such as billions of dollars of reductions in climate investments.  

Both versions maintain just $48 billion — 89 percent of last year’s $54 billion allocation — in climate investments over the next five years.

But within the climate portfolio, the May revision makes major improvements in regard to community flood protection. 

While the January budget had included an overall $202 million investment in flood mitigation measures, it eliminated $40 million for the flood plain restoration in Central California’s now inundated San Joaquin Valley.

Ahead of the May revision’s release, however, Newsom announced on Thursday he would propose restoring that $40 million for that flood plain, as part of an additional $290 million to protect communities from flooding. This would bring the total flood-related included in the proposed budget to $452 million.

The governor reiterated his commitment to flood protection Friday, describing an environment of weather “whiplash” and “the reality of how climate impacts us every way, shape or form.”

Despite the many budget cuts included in the May revision, Newsom emphasized the importance of maintaining and investing in different core programs.

The revised budget sustains many investments in K-12 education, higher education, health care, housing and homelessness and infrastructure.

“We are committed to preserving those investments,” Newsom said.

Touting California’s progress in education, the governor slammed states that are focusing instead on book banning and “the criminalization of free speech — criminalizing teachers and librarians.”

“We are making unprecedented 5 percent increase in the base investments in our institutions of higher learning,” the governor said.

“These are conveyor belts for talent. This is what separates our game from the game played everywhere else in the world,” he added.

Leading to the release of the May revision, there has been significant tension among California Democrats over whether many of the proposed cuts are the most effective way forward to balance the budget.

Late last month, California Senate Democrats released a “Protect Our Progress” plan that suggests ways to close the gap identified in the governor’s initial budget proposal released in January. 

Chief among the end-of-April Senate Democrat recommendations was an increase in taxes for the top 0.2 percent of corporations, which the lawmakers said could reverse “the federal Trump Tax cuts for Big Corporations at the state level.”

The senators suggested using that revenue to cut taxes for small businesses, renters, lower-income Californians and union workers, as well as implementing spending increases of about $1 billion each for schools, child care and homelessness reductions.

Newsom’s office immediately came out against the proposal, stressing that the governor “cannot support the new tax increases and massive ongoing spending proposed by the Senate,” according to the San Francisco Chronicle.

“It would be irresponsible to jeopardize the progress we’ve all made together over the last decade to protect the most vulnerable while putting our state on sound fiscal footing,” spokesperson Anthony York said in a statement at the time.

Asked about this issue at the Friday press conference, Newsom described the Protect Our Progress plan as “an interesting proposal,” but noted that the state is still handing out tax rebate checks and enjoying the fruits of an operating surplus.

“I highlighted the corporate tax reductions from January to May, $4.2 billion, and the economic uncertainty,” Newsom said. “I do not think it’s the right time to raise taxes, and I was crystal clear on that.”

Newsom questioned the possibility of continuing to “looking people in the eye” while handing out $18.1 billion in tax rebates and implementing such tax hikes.

“I don’t think it’s the right time. I don’t think it’s the right thing to do at this moment,” the governor said.

“No one can be wedded ideologically to conditions that may present themselves, but right now we’re able to submit a budget that we think is prudent and it’s balanced,” Newsom added.