Reversal of fortune: Gov. Newsom outlines plan to deal with budget deficit

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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.

— Alastair Bland

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.

— Nadia Lopez

Full speed ahead on pre-K

A combination of new funding sources and declining enrollment helped soften the blow to the state’s K-12 education budget in the governor’s proposal. The net result: slightly higher per-pupil spending, but less spending power due to inflation.

Newsom’s budget would provide schools $108.8 billion in Proposition 98 funding for K-12 schools and community colleges, a $1.5 billion decrease from last year’s budget. Prop. 98, which passed in 1988, guarantees a percentage of the state’s general fund goes to K-14 schools.

But the K-12 education budget also reflects a cost-of-living adjustment of about 8%. This would mean another record-breaking year for per-pupil funding in California: $23,723 overall with $17,519 coming from Prop. 98 dollars. 

Newsom said he remains committed to implementing flagship education programs, notably universal transitional kindergarten. The proposed budget, as a part of ongoing investments, will add $690 million to help districts build capacity until they’re required to offer transitional kindergarten to all students by the 2025-26 school year.

But it’s not a pretty picture for arts education. Despite new funding sources for art and music instruction, the state’s public schools would get less money to teach these subjects.

Thanks to Proposition 28, which voters approved in November, the state will provide an amount equal to 1% of the Proposition 98 guarantee for arts and music education. In 2023, that comes out to about $941 million. But that won’t be enough to offset a $1.2 billion cut to arts, music and instructional materials discretionary block grant introduced in last year’s budget. 

And while one of the main criticisms of Prop. 28 was that it didn’t create a new revenue source, it was never meant to be used as a buffer for budget cuts. Richard Barrera, a school board member at San Diego Unified, said he hopes to see at least some of that funding restored in Newsom’s May revised budget proposal. 

“As a budget and accounting strategy, it’s not surprising,” he said. “But I think it’s clear Californians want to see increased funding for arts and music education.” 

— Joe Hong

More for higher education 

Belt-tightening? Not so much in higher education. 

The University of California and the California State University system would each receive 5% more in state support for their core educational commitments, consistent with a promise Newsom made last year that he’d push for annual growth of 5% for five years provided that each system makes good on various graduation goals. The UC would also receive $30 million to enroll fewer non-resident students to make room for Californians.

Community colleges would see an influx of roughly $750 million in new, ongoing funding. The confederation of 116 colleges would also share $200 million to reverse a sharp 16% enrollment decline since the start of the COVID-19 pandemic. However, Newsom warned colleges that if they don’t start showing enrollment growth soon, his administration may “adjust” district budgets by 2024-25.

Financial aid would also go unscathed; in fact, the governor is promising to honor a deal last year to grow the new “debt-free” Middle Class Scholarship by $227 million in 2023-24 for a total of $859 million.

But some major legislative priorities of past years would take a hit if this budget is approved. 

Notably, Newsom is proposing to delay $1.15 billion in new affordable student housing money for the state’s public colleges and universities. This move underscores how often budget plans that promise future funding get delayed or axed. Still, under Newsom’s plan, $500 million in new housing grant money would remain in the 2023-24 budget, while the planned $900 million for an interest-free loan to campuses to build housing would instead be funded in 2025-26. Most of the loans planned for 2024-25 would remain intact.

A key legislative proponent of the state’s entry into student housing said he’ll push for the full funding to remain in the 2023-24 budget in negotiations between lawmakers and the governor. “Two of the top agenda items for the Legislature have been housing and college affordability” and state-subsidized student housing “addresses both those two things,” said Assemblymember Kevin McCarty, a Democrat from Sacramento who’s chairperson of the Assembly budget subcommittee on education. 

Newsom also proposes to delay highly coveted campus construction money — including $83 million for UC Merced and UC Riverside, campuses that have long argued they’re underfunded compared to the rest of the UC. The campuses would instead receive that money in 2024-25 under Newsom’s plan. 

— Mikhail Zinshteyn

Safety net expansions mostly maintained

Newsom’s proposal preserves a signature plan to expand free health care to low-income undocumented immigrants of all ages by next January, at the cost of $844 million in the next fiscal year. And it includes increases to CalWORKs, the state’s cash aid program for low-income families with children, and to State Supplementary Payments, which provides benefits for seniors and the disabled. 

But the proposal has disappointed immigrants’ advocates in delaying a first-in-the-nation plan to expand food assistance to older undocumented immigrants. Benefits were expected to be paid late this year; Newsom’s budget would push them off to 2027. 

— Jeanne Kuang

Homelessness still a top priority 

Housing and homelessness remain among the state’s top concerns, and Newsom is budgeting accordingly — projected deficit notwithstanding. In the last two years, the administration has shoveled billions of dollars toward subsidizing affordable housing construction, providing temporary shelter for people living on the streets, encouraging local governments to disperse and clean up encampments and enforcing state housing laws over the objections of some local governments.

This year’s proposal spares most of that spending from the chopping block. The proposed outlay on homelessness alone adds up to $15.3 billion. That includes an additional $1 billion in grants for local governments.

“We’re following through on that — no cuts,” Newsom said. 

That wasn’t sufficient for some tenant and anti-poverty activists. Christina Livingston, executive director of the Alliance of Californians for Community Empowerment, called the governor’s spending plan a “slap in the face” that “falls woefully short of addressing the crisis.” 

The governor went out of his way to emphasize that the money would come with strings attached: “We want more accountability. People have just had it. We want to see these encampments cleaned up.”

This isn’t the first time Newsom has blamed local governments for the state’s dismal track record in getting people off the streets and into shelters or more permanent housing. Just before Election Day, the governor briefly threatened to withhold $1 billion in funding to local governments over what he called their inability to “deliver damn results.”

In his administration’s new spending plan, the governor said that new homeless-related grants would only be awarded to local governments that comply with state housing law. The administration also wants to push for new legislation that would force locals seeking these funds to provide more detail on how they plan to spend the money. 

That rhetorical approach wasn’t appreciated by some in local government, including Emeryville Mayor John Bauters, who criticized the governor for failing to appoint a homelessness “czar” — a 2018 campaign pledge. It “makes you look silly to now point fingers,” he tweeted at Newsom.

But Michael Lane, state policy director for SPUR, a pro-development urban planning nonprofit, said he welcomed Newsom’s position. “We still have local jurisdictions dragging their feet and yet yelling for billions of dollars,” he said. “We want the accountability with the money and those need to go together. That’s the only way we’re going to address the humanitarian crisis.” 

— Ben Christopher 

Housing ambitions scaled back

Newsom’s proposed budget would remove $350 million from housing programs aimed at helping first-time homebuyers and boosting affordable housing — and repeated the state’s edict for 2.5 million new units, including 1 million affordable, by 2030, down from 3.5 million total. That includes taking $200 million out of a previously budgeted $500 million from the state’s newly created “Dream for All” program.

That program was pitched last year by state Senate President Pro Tem Toni Atkins as a $1-billion-a-year down payment program for first-time buyers, though it only received half that spread over two years. The program, which has not launched, is intended to provide first-time buyers either all of the money they need for a down payment, or very close to it, in exchange for partial ownership stakes in those properties.

The governor’s proposed reductions also include a $100 million from the state’s CalHome Program, which provides grants to local agencies and nonprofits assisting low income homebuyers. The governor’s proposal also removes $50 million in funding from a program that provides grants for the construction of in-law units, backyard cottages and secondary units.

— Alejandro Lazo

Changes to Medi-Cal and Covered California

Medi-Cal, the state’s health insurance program for low-income Californians, is projected to cover more than one-third of the state’s population this year, and Newsom is proposing a renewed tax on health insurers to offset the cost of planned expansions. 

The Managed Care Organization Tax expired in December, and with it approximately $1.5 billion in annual general fund revenue. His proposed budget includes $1.3 billion in gap funding towards Medi-Cal’s total $138.9 billion budget while lawmakers work out a deal to reintroduce the tax, Newsom said. Renewing the tax on health plans would help prevent cuts to Newsom’s lauded insurance expansion to low-income undocumented immigrants of all ages that comes with a price tag of $844 million in the next fiscal year.

Lower than anticipated expenditures in 2022-23 and additional federal support for the state’s multi-year Medi-Cal transformation known as CalAIM, which includes health insurance for prisoners, also help soften the blow of a proposed $6.4 billion increased general fund investment.

Newsom also proposed temporarily transferring $333.4 million from a reserve fund intended to offset climbing health insurance premium costs for middle-income families who purchase insurance through Covered California. Federal subsidies were extended until 2025. The money will be returned when federal money runs out, Newsom said, but health advocates expressed dismay at the development. 

“Health care affordability help for middle-class Californians is more needed in an economic downturn, not less,” Diana Douglas, policy and legislative advocacy director for Health Access California, said in a statement. “The hundreds of millions raised in the Health Care Affordability Reserve Fund from those without coverage should go directly to lowering costs in Covered California, like cost-sharing and deductibles, to make sure more people are able to afford and use their coverage.” 

— Kristen Hwang

Public health takes a hit

Belt-tightening will lean on a well-worn strategy of slashing public health funding with a proposed $1.2 billion cut to the California Department of Public Health’s budget compared to last year’s funding of $6.7 billion, despite widespread criticism that decades of cuts and underfunding hamstrung early response to the COVID-19 pandemic.

Most of the decrease comes from a $614 million transfer of COVID-19 emergency relief dollars into the general fund. That money, which was allocated as part of the state’s $1.8 billion long-term COVID-19 strategy known as the SMARTER plan, has remained unspent, Health and Human Services Secretary Dr. Mark Ghaly said during a press briefing. This year’s budget proposes a much smaller price tag for the state’s COVID-19 response at $176.6 million. 

“This is not meant to be a statement about moving on from COVID in California,” Ghaly said. “We’ve highlighted over and over the focus on the SMARTER plan and how it’s going to guide our way as necessary and as needed.”

New public health workforce training programs would absorb a $50 million cut, leaving only $25.8 million to train microbiologists and epidemiologists and public health nurses. Over time, the programs would be defunded entirely, much to the dismay of local public health leaders who rallied last year for the money, citing dozens of vacancies across the state and too few training opportunities.

Harold Goldstein, executive director of Public Health Advocates, called the proposed cut “dangerously shortsighted.” “The most glaring lesson from the COVID pandemic is that cuts to the public health workforce might save a few dollars today, but they will cost the state a fortune — in money and in lives — in the years to come,” he added in a statement.

Newsom and officials emphasized that the state is continuing its public health investment through a $300 million infrastructure grant, most of which gets passed down to local health departments.

“Those dollars were hard fought because they are foundational dollars. A large number of those dollars are going to focus less on training but making sure good jobs are available at local public health,” Ghaly said.

— Kristen Hwang

A new focus on fentanyl crisis

Criminal justice is often the part of the budget that is most responsive to what people see on the local nightly news. Last year, those concerns centered on railroad and organized retail theft. Viewers were inundated with nightly images of commercial goods strewn around railyards and surveillance footage of flash mob theft rings at Bay Area department stores.

This year, the focus is fentanyl. Newsom said he is assigning 113 members of the California National Guard to fentanyl interdiction at the U.S.-Mexico border and throughout the state. Attorney General Rob Bonta, sworn into his first full term this month, would also create a fentanyl task force at the Justice Department under the proposal.

— Nigel Duara

More prison closures

After a legislative session in which new approaches to prisoner welfare were considered and discarded amid opposition from county sheriffs and the union representing prison guards, the California Department of Corrections and Rehabilitation proceeded apace with plans to lower the state’s overall prison population. Some of those proposed reductions will come from closures of individual wings within six state prisons while the state continues its attempts to close the California Correctional Center in Susanville and end its lease at the California City Correctional Facility, the state’s last privately-owned prison facility. Newsom said the proposed closures would save the state $150 million in this budget cycle. 

The budget proposal also includes $11.6 million for fixed and body-worn cameras at several institutions, a prospect the state has fought for years in court.

— Nigel Duara

Economic uncertainty ahead

What will the next year hold for California’s economy? Newsom oscillated between optimism — saying that California was better prepared to weather a recession than other states and that he had “absolutely no trepidation around California’s fate and future” — and recognizing the economic uncertainty of the coming year, pointing to tech industry layoffs and rising credit card debts. 

Economic uncertainty, Newsom said, is the reason his budget proposal doesn’t involve dipping into the state’s rainy day reserve to close the budget deficit. 

One item on the chopping block: Money from the state to help pay down California’s $18.7 billion dollar unemployment benefits debt. That’s a debt the state owes to the federal government, which swooped in with a loan when Californians turned to unemployment benefits in droves early in the pandemic and the system quickly ran out of money. The debt is set to be paid off by a federal tax increase on California employers, but last year the state government kicked in some money to chip away at the debt, and at the time promised it would contribute another $750 million reduce the overall debt plus $500 million to offset the cost of the tax increase for small businesses this year. Now, Newsom proposes cutting both. 

The governor also proposed some smaller snips to workforce programs, including cutting a planned $25 million investment in outreach to workers and employers in industries with high COVID risk and a $40 million budget reduction over the next two years for non-traditional apprenticeships.

But it wasn’t all cuts: Newsom proposed hiring more workers for the understaffed Department of Industrial relations to hear a backlog of unpaid wage claims. And he proposed continued funding for efforts to modernize California’s beleaguered Employment Development Department, which is charged with paying out unemployment benefits, as well as continuing to invest in fraud detection.

– Grace Gedye