The biggest losers in Gov. Newsom’s budget

With a $38 billion budget deficit to solve, there are more losers than winners in the plan put forward Wednesday by Gov. Gavin Newsom.

But it could be worse, much worse: By projecting higher revenues, Newsom estimates a deficit about half the size of the $68 billion figure last month from the Legislative Analyst’s Office. And by dipping into the state’s reserves to the tune of $13 billion, his proposed budget includes fewer significant spending cuts, explain CalMatters’ Mikhail Zinshteyn and Sameea Kamal. 

And advocacy groups for some state-funded programs expressed relief that they have been spared deep spending cuts, so far.

Still, there are some losers:

Climate action programs: Newsom proposed slashing funding for programs aimed at tackling or adapting to climate change to about $48.3 billion, or by 7% from last year, writes CalMatters climate reporter Alejandro Lazo. And despite ambitions for the state to reach zero emissions by 2035, the governor proposed delaying $600 million in spending on electric vehicles by three years, including the electric car rebate program aimed at getting more lower-income residents to purchase them. ​​ 

• Mary Creasman, California Environmental Voters chief executive, in a statement: “We can’t backslide or slow down while the climate crisis speeds up. We need our state leadership to do more, not less.”

Health care workers: One of the biggest wins labor notched this past session was passing legislation to raise the minimum wage to $25 for health care workers, with the first pay increases rolling out in June. But as CalMatters health reporter Ana B. Ibarra explains, the governor is proposing to delay those raises until the state’s fiscal outlook is better. Though his administration did not disclose this contingency when he signed the law last year, Newsom said the bill’s backers had agreed to tie the wage increase to the state’s budget prospects. Whenever the wage boost does go into effect, it is expected to boost close to 500,000 health care workers in California.

• David Huerta, Service Employees International Union California president, in a statement: “SEIU California looks forward to working with the Administration and the Legislature to ensure that these critically needed workforce investments are implemented while maximizing federal funds and holding the healthcare industry accountable for investing their resources in their workers and in patient care.”

Homelessness: For the fourth year in a row, pleas for ongoing funding to address homelessness programs would go unanswered. That’s something that has frustrated city and county leaders, as well as service providers, for years, according to CalMatters homelessness reporter Marisa Kendall. Relying on one-time grants makes it difficult to plan ahead and invest in long-term programs, they say.

• Sharon Rapport, director of California state policy for the Corporation for Supportive Housing: “Without ongoing consistent funding, it means we’re going to have a dysfunctional homeless response system because our homeless response system never knows how much funding is coming from the state.”

Migrant aid: Last year, Newsom and lawmakers planned to spend $150 million on humanitarian services for migrants who were released from short-term federal custody at the border. But none of that money remains in the governor’s budget proposal, leaving nonprofits in San Diego and Imperial counties continuing to struggle as they offer assistance to the influx of tens of thousands of people who have crossed the border.

• Masih Fouladi, California Immigrant Policy Center executive director: “We strongly encourage and advocate for state leaders to prioritize what’s happening (at the border) and the impact it’s having on the (non-governmental organizations) on the ground that are doing the work.”

For more analysis and reaction, read the budget overview story by Mikhail and Sameea.

A final reminder: What Newsom outlined Wednesday is only the first take on the budget. The Legislature will hold hearings and weigh in before the governor unveils his revised plan in May, after updated tax revenue numbers. The Legislature has until June 15 to pass a balanced budget, and legislators and Newsom have until July 1 to agree on a final 2024-25 spending plan.

One reason for the wild swings in tax revenue that the governor and legislators must account for in the budget: The amount that comes from Silicon Valley, where companies pay workers in stock options as well as cash.

Personal income taxes are crucial for the state’s revenue, and 40% of that revenue comes from the tech-heavy Bay Area, writes CalMatters economic reporter Levi Sumagaysay. But in addition to base wages, many tech companies offer stock options, too. For tax purposes, vested stock options that have matured and are owned by employees are treated like regular income. And companies must pay withholding taxes on part of that income to state and federal governments.

Why does that matter? Last year, four of California’s largest tech companies (Apple, Google, Meta and Nvidia) made up more than 6% of all of the state’s income-tax withholding — an amount that has quadrupled over the past decade. Those funds also helped offset the effects of fewer initial public offerings on the state’s revenue last year (195 companies went public in 2021 vs. only 30 in 2023).

But experts caution against the state’s overreliance on one region and one industry for its economic health. And it’s no surprise that business groups have urged the state to regulate — and spend — less.

• Brooke Armour, California Center for Jobs and the Economy president: “The problem is it really disguises the true economy of California. When you have one small part of the economy that carries the state, that papers over the affordability crisis.”

To temporarily shelter unhoused individuals living in encampments, Gov. Newsom in March announced plans to deliver 1,200 small homes to Los Angeles, San Diego County, San Jose and Sacramento. Ten months later, more details about who will be building those homes and what they will look like have been released, writes CalMatters’ Marisa Kendall.

Six companies have been chosen by the state to construct these homes, including Pallet, a Washington state company that constructs fiberglass cabins, and Factory OS, a Vallejo-based company that makes modular units that can be stacked into apartment buildings.

Tiny homes are small dwellings, typically smaller than 400 square feet, that have increasingly been used as part of California’s response to its homelessness crisis. They are less expensive and easier to build than traditional housing, and though they are more permanent than tents, they often lack either a kitchen or private bathroom.

The state requires each tiny home be at least 70 square feet for a single person and 120 square feet for two people. Though there are no details yet on how much the state will spend nor how many units each company will build, a standard 70-square-foot tiny home with no plumbing from Pallet costs $18,900. A 120-square-foot Pallet unit with a bathroom costs $48,500.

The governor’s office and the state Department of General Services did not provide information about when the homes will be installed nor when people can move in.

For more on these tiny homes and the four other companies contracted to build them, read Marisa’s story.

For circumventing California and national emission standards, one of the world’s largest engine manufacturers will have to pay big. 

Cummins Inc. has agreed to pay nearly $2 billion — the largest civil penalty in a Clean Air Act case and the second largest environmental penalty ever in the U.S. — for illegally equipping one million pickup trucks with devices that reduced the effectiveness of the trucks’ emissions controls, but ensured that the vehicles would pass federal and state environmental standards.

Of the $1.675 billion penalty, $1.48 billion will go to the federal government and $197 million to California. Cummins will also pay an additional $325 million to fund “emission mitigation projects,” including a lump sum of $175 million to California.

In a statement, Cummins said “the company has seen no evidence that anyone acted in bad faith and does not admit wrongdoing.” This contrasts with what California Attorney General Rob Bonta said — that the company “knowingly harmed people’s health and our environment when they skirted state emissions tests and requirements.”

The investigation into Cummins’ violations was conducted by the U.S. Environmental Protection Agency and the California Air Resources Board. Due to the level of air pollution in the state, California is the only state that can impose its own emission standards for vehicles through the Clean Air Act.

For more and to see what model pickup trucks were impacted by the settlement, read CalMatters’ story.