California鈥檚 estimated budget deficit has grown by $9 billion since January, Gov. Gavin Newsom announced today, though the governor downplayed the severity of its potential impact on critical government services and programs.
During a press conference at the California Natural Resources Agency in downtown Sacramento, Newsom unveiled a revised spending plan that will rely on some additional fiscal maneuvers 鈥� including shifting funding sources and internal borrowing 鈥� to address a projected $31.5 billion gap in the 2023-24 state budget.
鈥淲e have a $31.5 billion challenge, which is well within the margin of expectation and well within our capacity to address,鈥� Newsom said.
Despite the growing shortfall, California鈥檚 overall budget is now expected to be $306 billion, including special funds, less than a 1% decline from in the current fiscal year.
by shifting an additional $3.3 billion in existing commitments out of the general fund, including paying for $1.1 billion in climate spending and $1.1 billion in college student housing projects with bonds, and pulling back another $1 billion in unused money from programs such as middle class tax refunds and utility bill support for low-income residents.
Under the governor鈥檚 plan, the state would also borrow $1.2 billion from special funds and extend a $2.5 billion tax on managed care health plans to address the spending gap. Extensive savings would remain largely untouched, though Newsom did propose to make a $450 million withdrawal from one reserve account.
California鈥檚 fiscal picture has largely worsened since January, when finance officials projected the state would face a . Newsom called it a 鈥渕odest shortfall鈥� and proposed to delay billions of dollars in spending commitments, reverse recent steps to shore up the state鈥檚 fiscal health and shift around funding sources to limit program cuts.
Enduring high inflation, turmoil in the regional banking sector and a showdown in Washington, D.C., over raising the federal debt limit have all deepened the economic headwinds. California relies heavily on income taxes from its wealthiest residents, whose earnings have taken a hit with drops in the stock market.
Monthly tax revenues came in billions of dollars below forecasts this spring, and fears of a recession continue to loom, which Newsom said could reduce state revenues by tens of billions of dollars even in the mildest scenario.
鈥淭hat is an uncertainty that we must take very seriously and very soberly,鈥� he said.
Adding to the unpredictability, most Californians don鈥檛 have to file their income taxes until October because of the intense damage and disruption from winter storms. Officials estimate that $42 billion in payments will be delayed until the new deadline.
The governor鈥檚 updated budget proposal kicks off a month of negotiations with the Legislature, which must pass a budget by June 15 to get paid, though some items may remain unresolved after the July 1 start of the fiscal year.
Legislative leaders have been largely optimistic about the budget situation, noting that the deficit is less drastic than during the last recession more than a decade ago and arguing that they have plenty of fiscal tools at their disposal to avoid deep spending cuts. Last month, Senate Democrats pitched increasing taxes on large corporations and suspending a major business tax credit to raise new funds, an idea that .
The governor reiterated today that it was not 鈥渢he right time to raise taxes and I was crystal clear on that.鈥� He also also took off the table 鈥� at least for now 鈥� dipping deeper into the state鈥檚 reserves, which he said should be maintained while the state weathers the broader economic uncertainties.
鈥淣o one can be wedded ideologically to conditions that may present themselves, but right now, we鈥檙e able to submit a budget that we think is prudent and it鈥檚 balanced,鈥� he said. 鈥淭hose are conversations for another day.鈥�
Newsom closed his remarks by encouraging the Legislature to show restraint, both in what it seeks in a budget deal and with costly proposals that lawmakers may try to advance to the governor鈥檚 desk later this year, which he said he would have to veto.
鈥淵ou don鈥檛 have to be profligate to be progressive,鈥� Newsom said, trotting out what has become a favorite turn of phrase. 鈥淲e tend to write checks that we can鈥檛 keep and then we let people down.鈥�
Aside from a brief economic downturn at the start of the coronavirus pandemic, most legislators have faced only budget surpluses and growing revenues during their tenures. Because of term limits, just a handful were around as California鈥檚 economy tanked in 2008, forcing deep spending cuts.
With less money available next fiscal year, the challenge is getting everyone to agree about what should take the hit. Some lawmakers have already raised objections to potential cuts for climate programs and public transit funding that the governor proposed in January. Assembly Democrats are because of complaints from providers that reimbursement rates are less than their costs.
鈥淭o continue our path toward improving the well-being of Californians, we want to protect the progress we鈥檝e made in strengthening education, healthcare and safety net programs,鈥� Assembly Budget Chairperson , a San Francisco Democrat, said in a statement. 鈥淎t the same time, we should also support the economy by stabilizing the child care industry and restoring the infrastructure funding agreed to last year for public transit. Investing in both sectors will help people go to work.鈥�
Republicans, who represent a superminority in the Legislature and whose votes are not needed to pass a state budget, dismissed Newsom鈥檚 approach to the deficit as irresponsible. In a statement, state Sen. of Fair Oaks, who serves as vice chairperson of the Senate Budget Committee, said the governor should not count on avoiding a recession.
鈥淲e are concerned that his crystal ball may be cloudy,鈥� Niello said. 鈥淲e would recommend that the state take a more sustainable path on spending, and reduce the desire to borrow during this time of high and increasing interest rates.鈥�
Public schools: Equity funding, less for arts
Proposition 98 funding for public K-12 schools and community colleges dipped from $108.8 billion to $106.9 billion between the January budget and the May revision. Overall per-pupil funding dropped by about $14, to $23,706.
California鈥檚 public schools can expect a hefty 8.2% cost-of-living adjustment 鈥� up from 8.13% in January 鈥� to help them carry the burden of inflation.
The Newsom administration remained committed to its controversial in its May budget. The $300 million will target schools serving high percentages of low-income families. This proposal evolved from a authored by Assemblymember that would have given more money to schools for the state鈥檚 lowest-performing student group, which is currently Black students.
According to a CalMatters analysis, the equity multiplier would only benefit about 26% of Black students in California. The Legislative Analyst鈥檚 Office suggested that the $300 million to make a difference in closing historical . Advocates criticized the equity multiplier for shifting the focus away from Black students, but the California Legislative Black Caucus applauded the equity multiplier in a .
In another move, Newsom proposed deeper cuts to arts, music, and instructional materials grants. His January budget shrank the size from $3.5 billion to $2.3 billion. The May version reduced it further, to $1.8 billion.
Newsom argued these cuts would be offset by , which passed in November and is expected to generate $933 million in funding for arts and music education. But school district officials say voters expected the proposition to generate new money, framing Newsom鈥檚 cuts as a betrayal of what voters wanted. , the state鈥檚 largest district, urged Newsom to restore the grant.
Finally, the May revision scales back funding for transitional kindergarten in response to smaller-than-expected enrollment. Newsom dedicated $604 million in his January budget but trimmed the investment to about $357 million. Additionally, $337 million for staffing universal transitional kindergarten dropped to $283 million.
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More money on homelessness, with strings attached
Newsom summed up his administration鈥檚 spending strategy on both homelessness and housing policy with a single word: 鈥淎ccountability.鈥�
On homelessness, the governor emphasized that the $15.3 billion he proposed to spend last January remains untouched, even as the overall deficit has grown. That adds on to the $10.2 billion the state spent last year and the $7.3 billion the year before.
But all that new cash comes with strings attached. The $3 billion set aside in grants for local governments is conditional on agencies submitting specific 鈥渁ction plans.鈥�
Newsom harped on local governments failing to get people off the streets and into shelters and homes 鈥� and specifically for not 鈥渃leaning up these damn encampments.鈥�
It鈥檚 a frustration shared by many lawmakers in the state Capitol. Earlier this year a ordered the state auditor to get to the bottom of how the state鈥檚 homelessness dollars are being spent.
Local government officials and low-income housing developers say they welcome the administration鈥檚 proposed accountability measures, at least in public. But earlier this week they also once again called on the governor to carve out a permanent stream of money to tackle the issue. Ongoing funding would required to actually fix the problem, they argued in a Thursday letter. But based on the governor鈥檚 revised budget proposal, they aren鈥檛 likely to get their wish this year.
Accountability was also the governor鈥檚 word of the day on broader housing policy.
In March, the administration took the Orange County beach town of for refusing to abide by state laws that let homeowners split up their houses into duplexes and build backyard accessory units. Last month, the state filed another suit against the Sacramento suburb of Elk Grove for.
The governor held back on naming names, but apparently more legal hammers are about to fall.
鈥淚 don鈥檛 want to get ahead of myself, so if you ask I won鈥檛 answer,鈥� the governor said after citing the two lawsuits. 鈥淭here are others on that list.鈥�
Because of the deficit, Newsom wants to hold back some spending on a $500 million program that was supposed to purchase foreclosed properties and turn them into affordable housing. He wants to spread the money out over four years rather than dedicate the full amount in the budget year beginning July 1.
All things considered, Melanie Morelos, a program director with the Greenlining Institute, a racial justice nonprofit focused on environmental, economic and housing policy, said the proposal could be a lot worse.
鈥淲e鈥檝e had two years of a healthy, meaty budget where we didn鈥檛 even know where to put all our candy,鈥� Morelos said. But on housing, she applauded the fact that 鈥渢he commitment is there from both the Legislature and the governor鈥檚 office.鈥�
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UC, CSU, student housing and financial aid
Despite the larger budget hole, Newsom in state funding forUniversity of California and California State University for 2023-24.
鈥淭hese are conveyor belts for talent,鈥� he said.
The 5% growth reflects a multi-year promise Newsom made and systems in exchange for enrolling and graduating more California students and other commitments.
But other aspects of the higher education terrain would get major facelifts under the governor鈥檚 budget.
A $500 million education would be cut if Newsom had his way, . Legislative advisors . So far the state financial aid agency has doled out $24 million in grants from this program, an official told CalMatters.
Other financial aid programs remain largely unchanged. His administration of a much-watched plan to add more students next year to the state鈥檚 marquee financial aid program, the Cal Grant, if the state can afford it.
The governor is also leaning much more on the UC and Cal State鈥檚 ability to borrow money for construction projects instead of receiving state cash upfront. For example, for campus expansion projects, Newsom wants the system to borrow that money. In exchange, the state would cover the annual $33 million in debt payments.
Doing so frees up state money now while the state is facing a budget shortfall but may limit how much the universities can borrow for future projects.
Newsom is using the same strategy for California鈥檚 new, unprecedented multi-billion dollar . Previous budget deals said the UC and Cal State systems would receive cash upfront to build student homes across several years. Instead, Newsom wants the two systems to borrow $1.1 billion, to cover the debt repayments. Community colleges would continue to get housing grant cash upfront.
The governor鈥檚 spending plan falls short of what Senate Democrats want for 2023-24, previewing the budget negotiations to come. Last month the Senate unveiled a spending outline that called for for a slew of program infusions. Those range from added mental health and emergency housing and financial aid to students, a college debt-free path for former foster youth and added money for services meant to help students with disabilities 鈥� .
But core to the Senate鈥檚 proposal for that and other funding increases across the whole government was a new business tax, .
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Community colleges face cuts
The budget surplus from 2021 bolstered community colleges, but with the deficit, those pandemic-era programs are in danger of getting cut.
The governor鈥檚 May budget proposal decreases funding for building maintenance at community colleges by $452 million, more than double what community college leaders had expected. That鈥檚 鈥減roblematic,鈥� especially for colleges that are still reeling from the impact of recent storms, said Evan Hawkins, executive director of the Faculty Association for California Community Colleges.
Colleges will also see fewer dollars to offset enrollment declines and deal with lingering effects of the COVID-19 pandemic.
Despite the budget deficit, the state is keeping the biggest ticket item, the per-student funding amount, steady. Community colleges have the lowest funding rate per student out of any public education system in the state.
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More prison closings on the way?
For a state looking to close its budget deficit, a $14.1 billion prison system with a falling inmate population is an obvious starting point.
Newsom is pushing ahead with a decade-long plan to reduce the state鈥檚 prison population by proposing to trim the California Department of Corrections and Rehabilitation budget by more than $100 million in his May proposal, or about 0.6% of the prison system鈥檚 budget.
The bad news for residents of prison towns: The plan is still to close the In Blythe especially, city leaders have lobbied the governor to close a nearby prison in Norco and leave theirs open.
But the prison system鈥檚 population forecast predicts inmate numbers will continue to drop 鈥� in the most recent forecast, the inmate population was predicted to drop below 90,000 in the 2025-26 budget year, for the first time
At the peak in 2006, California incarcerated 165,000 people in state prisons.
A from the Legislative Analyst鈥檚 Office found that the state can close as many as nine of its 33 prisons and eight yards within operating prisons while still complying with a federal court order that caps the system鈥檚 capacity at 137.5%.
Newsom鈥檚 budget proposal notes that recent closures of prisons in Tracy and Susanville each save about $150 million a year from the general fund.
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No rescue for public transit
Newsom acknowledged the , but said the state isn鈥檛 in a position to step in. Instead, he deferred to actions local agencies are taking.
鈥淚鈥檓 open to solving every problem that exists, to the extent I can,鈥� he said. 鈥淏ut you can鈥檛 do everything. It鈥檚 about balancing other priorities.鈥�
Since the pandemic, some of the state鈥檚 largest transit systems have seen a dramatic decrease in ridership that caused operating revenues to plummet. The 鈥渇iscal cliff鈥� 鈥� due also to federal emergency funds starting to run out 鈥� could lead agencies to cut service or increase fares, which would hurt lower income people who may not have an option other than transit.
But there鈥檚 no promise of funds in the budget, despite a push over the past few months from the California Transit Association, which represents agencies, and its primary ally in the Legislature, Sen. , a Democrat from San Francisco.
Wiener said he was disappointed, but pledged to keep pushing.
鈥淧ublic transportation isn鈥檛 optional, and failing to address the massive budget shortfalls our transit systems face would be disastrous for our state鈥檚 climate goals and Californians鈥� ability to get around,鈥� he said in a statement.
Assembly Speaker also committed to the effort in a statement. 鈥淧ublic transit is the vanguard of California鈥檚 fight against climate change, and it will be important to restore the transit capital funding the Governor and Legislature approved last year,鈥� he said.
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Fallout from oil special session
California may end up paying for a program to tamp down on high gasoline prices by raising electricity bills.
In March, to target what he deemed excessive profits by oil companies, creating a new watchdog division in the California Energy Commission that will investigate alleged price gouging by the industry and could recommend that regulators establish a profit threshold above which companies would be assessed a financial penalty.
The governor鈥檚 revised budget proposes 14 positions for the division, funded by $5.9 million from the Energy Resources Programs Account, a pot of money collected from a surcharge on electricity sales. At the same time, Newsom is seeking to increase that surcharge, which is paid by utility customers, to raise an additional $6 million annually. Finance officials say the increase is needed because of ongoing structural shortfalls in the account, the main source of funding for the energy commission.
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