California’s estimated budget deficit has grown by $9 billion since January, Gov. Gavin Newsom announced Friday, 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 increase by $2.5 billion a 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 Friday 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.”
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.”
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