Gavin Newsom Unveils $291B California Budget Plan with $37.9B Deficit

Gavin Newsom Unveils $291B California Budget Plan with $37.9B Deficit

Updated Jan 10, 2024 1:47 p.m.Sophia Bollag

By: Sophia Bollag -SF Chronicle

 

SACRAMENTO — California likely faces a $37.9 billion deficit in the upcoming fiscal year, Gov. Gavin Newsom announced Wednesday as he unveiled his 2024-25 budget plan.

Newsom’s plan totals $291 billion, significantly smaller than the $310.8 billion budget he signed into law last year. Newsom’s proposal includes a $208 billion general fund, the part of the budget over which he and lawmakers generally have the most control.

Stock market declines and delayed tax collection last year because of winter storms have saddled Newsom and lawmakers with the problem of reducing state spending to balance the budget.

To do that, Newsom wants to withdraw $13 billion from the state’s reserve accounts. He’s also proposing $8.5 billion in cuts, including nearly $3 billion from climate programs, $1.2 billion in housing programs, $760 million from currently vacant state jobs and about half a billion each in funding for school facilities and student housing. His plan would also delay some previously proposed spending, including $1 billion for transit and intercity rail, roughly half a billion dollars in early education facilities and $400 million in clean energy spending.

He’s also proposing to balance the budget using internal borrowing and deferrals.

Assembly Member Vince Fong, the top Republican on the Assembly Budget Committee, criticized the governor’s plans to tap into reserves. 

“Years of out of control spending by the governor and the legislative Democrats have added billions of dollars of new ongoing costs,” the Bakersfield Republican wrote in a statement. “Until the Governor takes control of the unsustainable spending, it is premature to tap the Rainy Day Fund.” 

Newsom also suggested cutting funding for some of the bills he signed last year, including a measure to increase wages for health care workers and new laws that require corporations to disclose their carbon emissions.

“The bills that I signed that have new fiscal costs; I think it’s in all of our interest to review them on the basis of the shortfall, and make a determination together whether or not those are still the top priorities of the Legislature,” Newsom said.

Sen. Scott Wiener, D-San Francisco, criticized Newsom’s proposal to eliminate funding for the new corporate disclosure law and urged the governor to implement the law when he presents his updated budget plan in May.

“The global community is looking to California for a firm commitment to implementing our bold climate agenda, especially these world-leading climate action laws,” Wiener wrote in a statement. “It’s critical that the May budget include funding to implement these laws so that businesses have the certainty they need to prepare to make these new disclosures.”

Some of the proposed climate cuts would be offset by new funding from the Biden administration, Newsom said. Newsom, a top surrogate for the Biden campaign, also repeatedly highlighted funding from the Biden administration on climate and infrastructure, and pointed viewers to a new website where his office is mapping where federal money is funding new projects in the state.

Newsom said he would not cut funding from his homelessness and mental health programs to balance the budget.

Newsom described his budget plan as a “correction” after a period of flush budgets driven by big stock market wins by the state’s highest earners. During his presentation on Wednesday in Sacramento, he showed graphs charting factors affecting the state budget, including tax revenue and capital gains, which he noted look like “an EKG chart” because of their dramatic spikes. 

California’s budget outlook can fluctuate dramatically from year to year because the state relies heavily on taxes from its highest earners, whose income tends to rise and fall with changes in the stock market.

The nonpartisan Legislative Analyst’s Office, which makes budget predictions for state lawmakers, had estimated the state faced a $68 billion deficit next year. It’s typical for Newsom’s Department of Finance and the LAO to have different estimates of the state’s fiscal outlook at the start of budget negotiations. That’s partly because the LAO’s estimate comes out first, meaning the Finance Department estimate is based on additional tax collection data.

Newsom noted neither his Finance Department nor the LAO is predicting a recession in the next year, but that the LAO is still anticipating a gloomier economy in California.

“We are a little less pessimistic than they are about the next year,” Newsom said of his Finance Department’s estimate.

Either way, the deficit means the state will need to find ways to reduce spending after tax collection came in under the projections Newsom and lawmakers used to craft the 2023-24 budget.

Newsom’s budget proposal kicks off the start of budget negotiations with the Legislature. Lawmakers must pass a budget by June 15, ahead of the July 1 start of the next fiscal year.

HERE IS HOW IT GOT SO BAD
SACRAMENTO — Though the U.S. economy is, by many measures, doing well and has not dipped into a feared recession, Gov. Gavin Newsom and California lawmakers face a daunting budget deficit.

The nonpartisan Legislative Analyst’s Office, which makes budget predictions for state lawmakers, estimates that they will have to reduce planned spending by $68 billion. Newsom said he’s anticipating a smaller shortfall of $37.9 billion, based on calculations by his Department of Finance. The LAO estimate and the Department of Finance’s estimates always differ somewhat, in part because the department’s estimate comes later and therefore can factor in additional tax receipts that have come in since the LAO estimate.

Regardless of the exact number Newsom and lawmakers ultimately use to craft their budget, the projected deficit will require significant spending cuts. For context, the 2023-24 budget represents $310.8 billion in spending.

California can trace its budget woes all the way back to the winter storms around New Year’s Day 2023 — when communities up and down the state faced flooding and damage due to heavy rains. Those storms prompted the federal government to push back the deadline to file taxes on their 2022 income from April 18 to Nov. 16 for the vast majority of Californians.

California’s Constitution requires the governor and state lawmakers to craft a state budget based on how much they estimate the state will collect in taxes over the next year. The governor must sign the budget into law by the end of June, in time for the July 1 start of the state’s fiscal year.

By then, the state government usually has a very good idea of how much California residents and businesses paid in taxes for the previous year because the state budget deadline comes after the tax deadline. But last year, the extended tax deadlines meant the state budget experts at the LAO and the Department of Finance had to do a lot more guessing than usual. In the end, they estimated too high and projected the state would collect more in taxes than it ultimately did, which accounts for a big chunk of the projected deficit.

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Budget experts point to several factors in recent years that have pushed tax revenue down, including a declining stock market, high inflation, rising interest rates and job losses in the tech industry. Those factors are also contributing to the projected deficit.

California’s budget outlook can fluctuate dramatically from year to year because the state relies so heavily on taxes from its highest earners, whose income tends to be heavily influenced by changes in the stock market. In 2022, the stock market in general and many tech companies’ stocks in particular took a big hit. The S&P 500 stock index dropped 19% in 2022, while the Nasdaq composite dropped 33%.

Just two years ago, fiscal analysts predicted a $100 billion surplus, and the governor and lawmakers budgeted accordingly. State law required them to spend much of the projected surplus on public schools and reserve accounts. They chose to spend much of the remainder on shoring up the state’s social services programs and also sent some money back to Californians in the form of stimulus payments.

They also took some steps to prepare for future deficits, including by paying down debts and adding billions of dollars to reserve accounts beyond what was legally required. And they opted to make many one-time expenditures in areas like homelessness and infrastructure that didn’t commit the state to ongoing expenses, which make future deficits more likely.

Even so, the amount in the state’s rainy day fund and other reserve accounts isn’t enough to cover the projected deficit this year. Republicans argue that the Democrats who control state government should have been more fiscally prudent when they had a surplus.

“After ignoring my warnings of overspending at a time of economic uncertainty, the state is glaring at a $68 billion budget deficit,” Assembly Member Vince Fong of Bakersfield, the top Republican on the Assembly budget committee, said in a statement. “I have said for years, a slowing California economy coupled with unsustainable spending is a recipe for fiscal disaster.”

Reach Sophia Bollag: sophia.bollag@sfchronicle.com; Twitter: @SophiaBollag

President Joe Biden and Gov. Gavin Newsom tour damage to Seacliff Pier and Seacliff State Beach in Aptos on Jan. 19, 2023. Last winter’s storms prompted the federal government to push back the deadline for most Californians to file taxes on their 2022 income.

Jessica Christian/The Chronicle