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Balancing act: Newsom’s plan to cover California’s ballooning budget deficit

Gov. Gavin Newsom unveils his revised budget proposal for 2023-24 during a press briefing at the state Natural Resources Agency in Sacramento on May 12, 2023.
Rahul Lal
Gov. Gavin Newsom unveils his revised budget proposal for 2023-24 during a press briefing at the state Natural Resources Agency in Sacramento on May 12, 2023.

Gov. Gavin Newsom says his plan to cover a budget shortfall that has grown by $9 billion protects investments in education, health care and housing. But it also relies on more borrowing and doesn’t include asks for child care and public transit.

California’s 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 — including shifting funding sources and internal borrowing — to address a projected $31.5 billion gap in the 2023-24 state budget.

“We have a $31.5 billion challenge, which is well within the margin of expectation and well within our capacity to address,” Newsom said.

Despite the growing shortfall, California’s overall budget is now expected to be $306 billion, including special funds, less than a 1% decline from a record $308 billion in the current fiscal year.

Newsom proposes to close the deficit 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’s 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’s fiscal picture has largely worsened since January, when finance officials projected the state would face a deficit of $22.5 billion. Newsom called it a “modest shortfall” and proposed to delay billions of dollars in spending commitments, reverse recent steps to shore up the state’s 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.

“That is an uncertainty that we must take very seriously and very soberly,” he said.

Adding to the unpredictability, most Californians don’t 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’s 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 Newsom quickly rejected.

The governor reiterated today that it was not “the right time to raise taxes and I was crystal clear on that.” He also also took off the table — at least for now — dipping deeper into the state’s reserves, which he said should be maintained while the state weathers the broader economic uncertainties.

“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,” he said. “Those are conversations for another day.”

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’s desk later this year, which he said he would have to veto.

“You don’t have to be profligate to be progressive,” Newsom said, trotting out what has become a favorite turn of phrase. “We tend to write checks that we can’t keep and then we let people down.”

A screen displays “Governor’s Budget May Revision 2023-2024” before Gov. Gavin Newsom arrives to unveil his revised budget proposal at the state Natural Resources Agency in Sacramento on May 12, 2023.
Rahul Lal
A screen displays “Governor’s Budget May Revision 2023-2024” before Gov. Gavin Newsom arrives to unveil his revised budget proposal at the state Natural Resources Agency in Sacramento on May 12, 2023.

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’s 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 pushing to raise funding for subsidized child care because of complaints from providers that reimbursement rates are less than their costs.

“To continue our path toward improving the well-being of Californians, we want to protect the progress we’ve made in strengthening education, healthcare and safety net programs,” Assembly Budget Chairperson Phil Ting, a San Francisco Democrat, said in a statement. “At 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.”

Republicans, who represent a superminority in the Legislature and whose votes are not needed to pass a state budget, dismissed Newsom’s approach to the deficit as irresponsible. In a statement, state Sen. Roger Niello of Fair Oaks, who serves as vice chairperson of the Senate Budget Committee, said the governor should not count on avoiding a recession.

“We are concerned that his crystal ball may be cloudy,” Niello said. “We 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.”

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’s public schools can expect a hefty 8.2% cost-of-living adjustment — up from 8.13% in January — to help them carry the burden of inflation.

Students collaborate on solving additional problems inside Bridgette Donald-Blue’s classroom at Coliseum Street Elementary in Los Angeles on Feb. 28, 2023.
Pablo Unzueta
Students collaborate on solving additional problems inside Bridgette Donald-Blue’s classroom at Coliseum Street Elementary in Los Angeles on Feb. 28, 2023.

The Newsom administration remained committed to its controversial “equity multiplier” in its May budget. The $300 million will target schools serving high percentages of low-income families. This proposal evolved from a 2022 bill authored by Assemblymember Akilah Weber that would have given more money to schools for the state’s 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’s Office suggested that the $300 million might not be enough to make a difference in closing historical achievement gaps. 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 statement today.

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 Proposition 28, 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’s cuts as a betrayal of what voters wanted. Officials from Los Angeles Unified, the state’s 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.

— Joe Hong

More money on homelessness, with strings attached

Newsom summed up his administration’s spending strategy on both homelessness and housing policy with a single word: “Accountability.”

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 “action plans.”

Newsom harped on local governments failing to get people off the streets and into shelters and homes — and specifically for not “cleaning up these damn encampments.”

A homeless encampment at W Street and Alhambra Boulevard in Sacramento on April 11, 2023.
Rahul Lal
A homeless encampment at W Street and Alhambra Boulevard in Sacramento on April 11, 2023.

It’s a frustration shared by many lawmakers in the state Capitol. Earlier this year abipartisan group of lawmakers ordered the state auditor to get to the bottom of how the state’s homelessness dollars are being spent.

Local government officials and low-income housing developers say they welcome the administration’s 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 allow for the kind of long-term planning and program building required to actually fix the problem, they argued in a Thursday letter. But based on the governor’s revised budget proposal, they aren’t likely to get their wish this year.

Accountability was also the governor’s word of the day on broader housing policy.

In March, the administration took the Orange County beach town ofHuntington Beach to court 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 fordenying an affordable housing project.

The governor held back on naming names, but apparently more legal hammers are about to fall.

“I don’t want to get ahead of myself, so if you ask I won’t answer,” the governor said after citing the two lawsuits. “There are others on that list.”

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.

“We’ve had two years of a healthy, meaty budget where we didn’t even know where to put all our candy,” Morelos said. But on housing, she applauded the fact that “the commitment is there from both the Legislature and the governor’s office.”

— Ben Christopher

UC, CSU, student housing and financial aid

Despite the larger budget hole, Newsom continues to support a 5% growth in state funding forUniversity of California and California State University for 2023-24.

“These are conveyor belts for talent,” he said.

The 5% growth reflects a multi-year promise Newsom made to the UCand Cal State 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’s budget.

A $500 million education grant for workers displaced during the pandemic would be cut if Newsom had his way, his budget said. Legislative advisors also recommended nixing the program. 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 remains mindful of a much-watched plan to add more students next year to the state’s 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’s ability to borrow money for construction projects instead of receiving state cash upfront. For example,rather than the UC getting $498 million 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’s new, unprecedented multi-billion dollar down payment on affordable student housing. 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, with the state sending the systems $75 million annually to cover the debt repayments. Community colleges would continue to get housing grant cash upfront.

The governor’s 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 an additional $463 million to the UC, CSU and community colleges 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 — a priority for student advocates at the UC.

But core to the Senate’s proposal for that and other funding increases across the whole government was a new business tax, something Newsom swatted down almost immediately.

— Mikhail Zinshteyn 

Students leaving the Fresno City College library on Oct. 3, 2022.
Larry Valenzuela
CalMatters/CatchLight Local
Students leaving the Fresno City College library on Oct. 3, 2022.

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’s May budget proposal decreases funding for building maintenance at community colleges by $452 million, more than double what community college leaders had expected. That’s “problematic,” 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.

— Adam Echelman

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’s 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’s budget.

The bad news for residents of prison towns: The plan is still to close the correctional facilities in Blythe and California City by 2025. In Blythe especially, city leaders have lobbied the governor to close a nearby prison in Norco and leave theirs open.

But the prison system’s population forecast predicts inmate numbers will continue to drop — 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 since 1989.

At the peak in 2006, California incarcerated 165,000 people in state prisons.

A report this year from the Legislative Analyst’s 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’s capacity at 137.5%.

Newsom’s budget proposal notes that recent closures of prisons in Tracy and Susanville each save about $150 million a year from the general fund.

— Nigel Duara

No rescue for public transit

Newsom acknowledged the dire financial situation that many public transit agencies face, but said the state isn’t in a position to step in. Instead, he deferred to actions local agencies are taking.

“I’m open to solving every problem that exists, to the extent I can,” he said. “But you can’t do everything. It’s about balancing other priorities.”

Buses at the Norwalk Green Line Station in Norwalk on April 3, 2023.
Pablo Unzueta
Buses at the Norwalk Green Line Station in Norwalk on April 3, 2023.

Since the pandemic, some of the state’s largest transit systems have seen a dramatic decrease in ridership that caused operating revenues to plummet. The “fiscal cliff” — due also to federal emergency funds starting to run out — 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’s 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. Scott Wiener, a Democrat from San Francisco.

Wiener said he was disappointed, but pledged to keep pushing.

“Public transportation isn’t optional, and failing to address the massive budget shortfalls our transit systems face would be disastrous for our state’s climate goals and Californians’ ability to get around,” he said in a statement.

Assembly Speaker Anthony Rendon also committed to the effort in a statement. “Public transit is the vanguard of California’s fight against climate change, and it will be important to restore the transit capital funding the Governor and Legislature approved last year,” he said.

— Sameea Kamal

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, Newsom signed a law 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’s 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.

— Alexei Koseff

CalMatters is a nonprofit, nonpartisan media venture explaining California policies and politics.