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

This story appeared on CalMatters

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. Photo by Rahul Lal, CalMatters

In summary

Gov. Gavin Newsom unveils his plan to cover a California budget deficit now projected at $31.5 billion, up from $22.5 billion in January. He says his plan protects investments in climate, economic development, education, health care and housing.

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 moves — 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 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, arguing that they have plenty of fiscal tools at their disposal to avoid deep spending cuts. Last month, Senate Democrats pitched raising taxes on large corporations, an idea that Newsom quickly rejected.

With less money to go around, however, 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.

It will be the first budget process for many of them; nearly a third of the entire Legislature was newly elected in November. And aside from a brief downturn at the start of the coronavirus pandemic, most have faced only surpluses and growing revenues during their tenures. Because of term limits, there are only a handful of legislators who were around during the last recession more than a decade ago.

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

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

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