Gov. Gavin Newsom said Wednesday the state’s budget deficit — projected just last month at a staggering $68 billion — has been revised to $37.9 billion, and will be solved without drastic cuts to core programs.
Newsom attributed the rosier deficit outlook in Wednesday’s proposed budget to his office using more optimistic revenue expectations than the legislative analysts who estimated last month’s higher figure.
With that shrunken shortfall, Newsom unveiled a proposed $291.5 billion budget for 2024-25, including a $208.7 billion general fund that covers operating expenses for most programs including education, health and human services, criminal justice and transportation. But the gap is still daunting.
“For decades and decades we’ve come to expect the volatility in our tax system,” Newsom said, where revenue “goes up during good times, goes down very badly in the bad times.
“This is a story of correction and normalcy, and one that we in some respects anticipated, and one we’re certainly prepared to work through.”
The governor said his proposed budget maintains promised multi-year funding commitments, including $15.3 billion to tackle homelessness, $8.7 billion for mental health, $109.1 billion for transitional kindergarten through community college and $1.1 billion for public safety.
The plan calls for “modest but not significant cuts to the vast majority of those programs,” Newsom said, without new taxes like a “wealth tax” on rich California residents that some lawmakers have proposed.
Among the moves the governor’s budget proposes to fill the $37.9 billion deficit:
- $13.1 billion from reserve funds
- $8.5 billion in reduced spending for things like climate and housing programs and school facilities, and freezing new contracts, cell phones, technology equipment and nonessential fleet purchases and travel.
- $5.1 billion in funding delays, including $1 billion for transit and inter-city rail projects and $550 million in kindergarten facilities grants.
- $2.1 billion in spending deferrals, including $499 million for the University of California and California State University systems.
Republican leaders who have criticized the state’s spending were skeptical.
“Welcome to year six of ‘Gavinomics’ where his budgets turn surpluses into deficits and his policies push Californians to flee,” said Senate Minority Leader Brian W. Jones, a San Diego Republican and vice chair of the Senate Budget and Fiscal Review Committee.
Democrats countered that their caution in socking away reserves has paid off.
“In anticipation of an inevitable downturn, we have diligently prepared for leaner times, accumulating record level budget reserves that will allow us to adopt a budget that protects the gains we’ve made over the last decade,” said Assemblyman Marc Berman, a Menlo Park Democrat.
California’s budget is subject to wild fluctuations in revenues because of the state’s heavy reliance on income taxes, particularly from the wealthy whose taxable earnings are largely driven by investment returns. Personal income tax provides about two-thirds of the state’s general fund revenues, with 1% of tax returns — 180,000 — accounting for half of income taxes paid.
A year ago, California saw an unprecedented $97.5 billion budget surplus flip into a $22.5 billion deficit, a figure that swelled to $31.5 billion by May when the governor released his revised proposal for the budget lawmakers had to approve in June.
But even that figure proved wildly off. Due to an unusual delay in tax filings — winter storm disaster declarations prompted the IRS last year to extend 2022 tax filing deadlines into November — state leaders didn’t get a clear picture of income tax revenue filings until December.
The non-partisan Legislative Analyst’s Office reported Dec. 1 that revenues were $58 billion below assumptions for the 2022‑23 through 2024‑25 budget years. A few days later, the LAO projected a $68 billion deficit for the 2024‑25 budget, with additional yearly shortfalls of around $30 billion through 2027-2028.
Legislative Analyst Gabriel Petek said Wednesday that about half the difference between the two deficit projections involves assumptions about minimum school funding requirements under 1988’s Proposition 98, and the other half is revenue projections. The governor’s office, he said, assumes legislative action on school funding and is more optimistic on revenues.
But Petek said there is no “correct” deficit estimate, and that “both are almost certain to be wrong to some extent.”
The governor will revise the budget in May after income taxes are filed and the legislature must approve it in June.
The state’s Republicans, whose votes the Democratic majority hasn’t needed to pass a budget, say Democrats are overspending, noting the state budget has more than doubled in a decade, from $152 billion to $311 billion last year, an increase from $108 billion to $226 billion in the general fund.
While homeless advocates were relieved Newsom declined to propose significant cuts to homelessness spending, service providers “still face an uncertain future when it comes to funding services and affordable housing development,” Bring CA Home, a coalition of advocates and providers, said in a statement.
The proposed budget keeps funding levels flat for transitional kindergarten through junior college education, the single largest state program, and above Prop 98 guaranteed levels, including the transitional kindergarten rollout, student mental health and special education.
Albert Gonzalez, president of the California School Boards Association, said that while they were “concerned to see a reduction in school facilities funding and a cost-of-living adjustment below 1 percent,” school boards “understand a $38 billion deficit demands tradeoffs.”
Environmentalists were disappointed that many of the cuts are coming from programs to address climate change, particularly after this past year, which is expected to rank as the hottest in recorded history.
Newsom committed in 2021 to a landmark $54 billion on climate programs over five years — including expanding electric car charging stations, boosting solar and wind power incentives, and thinning forests to reduce wildfire risk. His proposed Wednesday budget trimmed that to $48 billion over seven years, with the hopes that some funding will come from the federal government.
“We had hoped for a more courageous proposal,” said Mary Creasman, CEO of California Environmental Voters, a non-profit group in Sacramento. “Every penny we pinch now is going to have exponential costs for Californians in wildfires, floods and other disasters.”
Staff Writer Ethan Varian contributed.