Editor’s note: This is the second in a series of articles dedicated to examining the Governor’s proposed budget.
California will delay some spending commitments, reverse recent steps to shore up its fiscal health and shift funding sources to limit the cuts it must make to close a projected $22.5 billion budget deficit, Gov. Gavin Newsom said today.
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 ambitions of transforming education, homelessness, housing affordability and health care, the Democratic governor insisted.
“We’re keeping our promises,” Newsom said during a press conference in Sacramento, where he unveiled his proposed $297 billion spending plan, about 3.6% smaller than last year’s record budget. “Regardless of this modest shortfall, we’re continuing to make unprecedented 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 spiraling inflation and a weakening stock market, particularly in the California-based tech sector, has clouded the economic forecast for the state, which depends heavily on capital gains from its wealthiest residents. The Department of Finance now expects that tax revenues will total $29.5 billion, or 9.6%, less than what was assumed in last year’s budget.
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 today that the state would not tap into its cash reserves to address the deficit, citing “the uncertainty of this next calendar year” and the need to maintain those funds in case of a greater downturn in the future, though his administration is not expecting a recession.
“We’re in a very volatile moment,” he said. “As a consequence of that, we’re not touching the reserves, because we have a wait-and-see approach to this budget.”
That could create some conflict with the overwhelmingly Democratic Legislature as negotiations begin in the months ahead. Newsom will offer a revised spending plan in May, after income tax filings provide a clearer financial picture, and lawmakers must pass a balanced budget by June 15 in order to get paid.
Noting that business trends could drive revenues even lower, Assembly Speaker Anthony Rendon, a Lakewood Democrat, said in a statement that “the large reserves built over the last decade may be important for protecting California’s progressive investments.”
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 would now be paid for with bonds.
His budget proposal would also eliminate $5.7 billion in previously funded expenditures, including $3 billion to address inflation and $750 million to pay down unemployment insurance debt, 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, Newsom said, “because of the magnitude of those budgets”: 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.
Environmental groups quickly slammed the move, especially as historic rainstorms blanketing the state have further exposed its vulnerabilities to climate change.
“California can’t afford a short-sighted budget,” Mary Creasman, CEO of California Environmental Voters, said in a statement. “To further delay these investments will further compound the climate crisis and the cost of inaction will be far worse.”
Despite concerns raised by advocates for the poor, social services are largely untouched in the governor’s budget proposal, though spokesperson Anthony York said that “nothing is off the table if things go south.” Newsom also said some of his priorities, including the rollout of universal transitional kindergarten, are “full-speed ahead.”
Accelerated payments to California’s underfunded public pension programs would continue. And there is even some new spending proposed in the plan, including $1 billion to help local governments address homelessness, $202 million for flood safety improvements, $97 million to combat fentanyl trafficking and $3.5 million to purchase opioid overdose reversal medication for every middle and high school in the state.
Legislative Republicans, who as a super-minority in both houses play almost no role in crafting California’s budget, applauded Newsom for leaving reserve funds untouched but sharply criticized his priorities. Many noted that his budget proposal included no additional money for water storage projects as the state struggles to navigate the constant whiplash of drought and flood.
“California is not on a sustainable path,” state Sen. Roger Niello, a Fair Oaks Republican who serves as vice chairperson of the budget committee, said in a statement. “The state must take pause and address the real needs of Californians.”
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 would get a boost, too, with a pot of $40.6 million available for repairs and upgrades. This cash pool would 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 cuts for climate — $3.3 billion — would come from the state’s clean transportation initiatives. Newsom is proposing to cut $2.5 billion from zero emission vehicle infrastructure build-out, and about $1.4 billion of that amount would be shifted 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.
