Gavin Newsom unveils $297 billion California budget with a deficit after years of surplus

California Gov. Gavin Newsom on Tuesday proposed cutting funds for climate initiatives, deferring spending on capital improvement projects and borrowing funds in order to close a projected $22.5 billion budget deficit in the upcoming fiscal year.

The retrenchments, part of his $297 billion spending plan for 2023-24, mark a striking shift in the state’s economic position after two years of historic budget surpluses. It is the first time since Newsom took office in 2019 that he has been forced to consider cuts in his January budget proposal.

In spite of the shortfall, Newsom said he deployed a combination of strategies to avoid drastic cuts to social services and leave funding commitments for some of his biggest priorities “untouched.”

“We are protecting the most vulnerable Californians despite the situational challenges,” he said during a news briefing in Sacramento. “We are continuing unprecedented long-term investments.”

The governor’s proposal kicks off six months of revisions and negotiations with legislators to pass a balanced budget the start of the fiscal year on July 1. As with any budget forecast, the state’s fiscal outlook and the actions needed to address it are likely to change in the months ahead, especially since Newsom’s forecast does not account for a recession.

Based on current economic forecasts, Newsom proposed to close the budget gap by cutting $5.7 billion from a variety of areas, including climate, workforce and housing programs. His plan would also defer $7.4 billion in spending on other initiatives, such as funding for 20,000 new childcare slots and transportation and education-related capital improvement projects. It would borrow or shift $5.5 billion to cover other costs, like California State University capital projects.

Additionally, the governor is pursuing $3.9 billion in “trigger reductions,” or cuts from the budget he would restore in the future if economic conditions improve. The largest portion of those funding cuts come from climate and transportation, because of how hefty previous allocations were for those programs, Newsom said.

Newsom remains determined to avoid tapping the state’s reserves to cover the deficit and emphasized that even if funding for certain needs is delayed, “that does not mean they’re denied,” he said.

The governor’s somber forecast was wholly expected, though slightly more modest than recent projections.

Newsom anticipated a potential budget shortfall and the need for spending discipline in late summer when he vetoed a series of bills. California Legislative Analyst Gabe Petek issued a similar warning in November by predicting that California’s revenue could come in $24 billion below targets set when lawmakers passed the current $300 billion budget last summer.

The state’s progressive income tax structure and the prosperity of its wealthiest residents in recent years left California swimming in money, awarding policymakers the satisfying opportunity to invest billions of additional dollars into their top priorities. But national economic headwinds — propelled, in part, by the Federal Reserve raising interest rates — clouded the revenue outlook.

Budget maintains education, healthcare spending

The governor’s new spending plan calls for $108.8 billion for K-12 education and community colleges — representing the highest per-pupil funding total in state history, according to Newsom. He also announced plans to devote $3.5 million for middle and high school campuses to stock overdose medications like Narcan.

“This is a top priority,” Newsom said. “There’s not a parent out there that doesn’t understand the significance of this fentanyl crisis.”

Kevin Gordon, a prominent California education lobbyist, said the degree to which Newsom managed the shortfall while protecting education funds was “more impressive” than he expected.

”The Governor remarkably preserves the education rainy-day reserves, maintains most of the commitment to school facilities and most importantly, protects some of the most crucial new investments in education in 50 years,” Gordon said.

Although the state must bridge the anticipated budget gap, Newsom emphasized that he was “not backing away” from some of his top priorities, including plans to offer universal transitional kindergarten to all 4-year-olds across the state, expand free healthcare for undocumented residents, address homelessness and launch CARE Court, his idea to provide court-ordered treatment for Californians struggling with mental illness.

Newsom wants to invest an additional $1 billion in local initiatives to curb homelessness. California’s homelessness crisis remains one of the state’s most pressing issues, with the governor acknowledging during his inaugural remarks just days ago that more needed to be done to get more people housed and encampments cleaned up.

The budget also aims to address other long-standing problems, such as an additional $2.7 billion for wildfire mitigation and forest management and $758 million for public safety plans. And, it puts additional dollars toward addressing some urgent problems afflicting the state.

Ahead of his full announcement Tuesday, Newsom previewed plans to set aside $202 million in the budget for flood safety improvements specifically focused on levees and urban areas. He announced that spending proposal Sunday amid a series of winter storms that flooded roadways and homes, uprooted trees, triggered widespread power outages and forced neighborhoods to evacuate.

Newsom’s budget proposal draws criticism

While some legislators and lawmakers celebrated Newsom’s spending blueprint, others took issue with how the governor planned to address the anticipated deficit.

Sen. Nancy Skinner, D-Berkeley, chair of the Senate Budget and Fiscal Review Committee, commended the governor for his “emphasis on maintaining essential services, including schools, health care, and support for those who need it most, and addressing much of the shortfall through achievable delays.”

But not everyone was as enthusiastic about the proposal.

Newsom called for slashing a total of $6 billion from his historic $54 billion climate package, unveiled last summer to much fanfare. The cuts would trim funding for the state’s zero-emission vehicle programs, solar incentive initiative and investments to decarbonize homes, schools, and community centers.

Environmental advocates quickly spoke out against the proposed cuts, saying that the state was going in the wrong direction.

David Weiskopf, a climate advisor for the nonprofit NextGen Policy, said in a statement that losing that climate funding “unquestionably hurts the state more in the long term than it saves in the near term.”

Sen. Scott Wiener, D-San Francisco, criticized the governor for deferring and trimming back transit funding while many of the state’s public transportation systems are strapped for cash.

“While I fully understand the tough choices we have to make, we must not let our public transportation systems go over the impending fiscal cliff and enter a death spiral — where budget shortfalls lead to service cuts that lead to ridership drops that lead to further budget shortfalls and service cuts,” he said in a statement.

Republican lawmakers called Newsom’s budget “not sustainable,” but praised his decision to avoid making use of California’s reserves.

“Republicans fought to fill the rainy day fund, and we applaud today’s commitment to not tap into it,” said Senate Budget Vice Chair Roger Niello, R-Fair Oaks, in a statement. “Recent ongoing spending by the governor must be re-evaluated. The governor continues to celebrate how much he spends, but California has yet to see the results.”

This story was originally published January 10, 2023 at 9:21 AM.