Gavin Newsom releases $288 billion revised budget for California. How he tackled the big deficit

California Gov. Gavin Newsom on Friday unveiled his revised $288 billion budget proposal with a $28 billion deficit that will require tough budget cuts — including eliminating 10,000 now-vacant state jobs — and a potentially bruising battle to enact them.

Among the strategies to get the budget balanced are an additional $10.7 billion in cuts, $2 billion in new revenue or borrowing, $520 million in delays and $3.9 billion in fund shifts.

Newsom’s plan would also spread the $13.1 billion in reserves the governor planned to use during the 2024-2025 fiscal year across two years. That means the state would use only $4.2 billion in reserves during the upcoming fiscal year, leaving an $8.9 billion gap the administration had to fill in other ways.

Among the most dramatic reductions is a nearly 8% cut to state operations that includes the unfilled positions. Housing and health and human services programs. also took a big hit.

Newsom would pause a state-subsidized child care program expansion that has already added about 119,000 slots. His budget plan would maintain the program at its current level indefinitely, “until fiscal conditions allow for resuming the expansion.”

The governor’s proposal would also cut $260 million from Homeless Housing, Assistance and Prevention, or HHAP, flexible grant funding that cities and counties rely on to pay for their homelessness services. His January budget proposal had delayed the money from fiscal year 2023-2024 to 2025-2026.

The budget plan would delay for two years a food assistance benefit program expansion to help undocumented immigrants ages 55.

The deficit has grown by about $7 billion since January’s budget plan was unveiled. The new true deficit number is closer to $45 billion, as the administration subtracted a $17.3 billion package of budget fixes Newsom, Assembly Speaker Robert Rivas, D-Hollister, and Senate President Pro Tem Mike McGuire, D-Healdsburg, agreed to in April.

Taxes and social safety net spending

Newsom in 2023 and in January committed to some cuts while preserving his major initiatives and social safety net programs. His revised budget keeps some of those programs, but it also made some deeper reductions.

It would maintain funds for the final piece of the Medi-Cal expansion the state enacted in January. California has spent years opening up its version of the federal Medicaid program to allow all those who income-qualify to enroll, regardless of immigration status.

Newsom insisted his budget fixes are “overwhelmingly supporting existing core programs without cuts.”

“And I say overwhelmingly, not exclusively, because I’m not naive,” he said. “There are areas where core services aren’t being impacted, but the vast majority are being protected.”

The governor continued to push back against suggestions that he consider corporate tax increases to help preserve social safety net programs.

“I’m not prepared to increase taxes,” he said. “We have among the highest tax rates in the United States of America for high wage earners. We have among the highest tax rates, as I noted, for corporate tax rates ... I feel strongly that we have to live within our means, within the framework of being more efficient and more effective.”

The governor’s revised budget announcement kicks off a month of negotiations involving his administration, Rivas and McGuire.

Rivas and Assembly Budget Chair Jesse Gabriel, D-Woodland Hills, seemed lukewarm on the governor’s budget, saying they “acknowledge the gravity of the proposed cuts” in a statement.

“The Assembly will continue to fight to protect core programs for California’s most vulnerable residents and essential classroom funding,” Rivas and Gabriel said.

The Legislature must pass a budget by June 15 for lawmakers to continue getting paid. The new fiscal year begins on July 1, meaning Newsom has to sign budget legislation by the end of next month.

Climate agenda change?

After slashing more than $4 billion from clean transportation and other environmental programs in January, Newsom said in his budget update there will be “no material cuts” to California’s climate agenda.

The governor’s plan instead shifted $2.5 billion in climate spending to a fund supplied by revenue generated by one of the state’s signature state climate programs, which charges industrial polluters for their planet heating emissions. (edited)

Earlier this week, the governor highlighted how cap-and-trade agenda has generated billions of dollars for state climate initiatives in the decade since auctions began for carbon credits issued by the California Air Resources Board.

The Greenhouse Gas Reduction Fund, which generates an average of $4 billion a year, has historically been spent on programs such as high-speed rail, low-carbon public transit and efforts to capture methane emitted by dairy cows.

This year, Newsom said the fund will include $1.3 billion in transit, $793 million in clean energy and $475 million in electric vehicle programs historically supported by the general fund. “It’s been 10 years, $11 billion invested and 76% of that in low income communities,” Newsom said. “This cap and trade program continues to be rightfully envied around the world, not just across the country.”

Surplus to deficit

Just two years ago, the governor was celebrating a budget with a large surplus. This allowed him to invest in a series of bigger policy initiatives, including transitional kindergarten, or pre-kindergarten, Medi-Cal coverage for undocumented immigrants and CARE Court to compel treatment for the seriously mentally ill.

But the post-COVID-19 pandemic economy hit California hard. That’s because the state is heavily dependent on its highest-income earners due to its graduated tax structure, the tourist industry was hit hard and supply chains were disrupted.

Federal efforts to ease inflation by raising interest rates have cooled industries sensitive to rate hikes. This has affected some activities, such as home buying and startup and tech investing.

Also hamstringing the state’s efforts to gauge the government’s economic condition — those involved in crafting the state’s 2023-2024 budget were unable to get the most accurate picture of the state’s finances until November, long after lawmakers and the governor had agreed to a spending plan.

The delay was caused by a large number of Californians who could delay filing their 2023 taxes until November due to deferrals the IRS granted to those affected by winter storms. The situation helped complicate the state’s financial outlook heading into 2024.