Gov. Newsom’s budget plan shrinks deficit to $37.9 billion, solves without major cuts, tax hikes

Gov. Newsom’s budget plan shrinks deficit to $37.9 billion, solves without major cuts, tax hikes

Governor Gavin Newsom said Wednesday the state’s budget deficit — projected just last month at a staggering $68 billion — has been revised to $37.9 billion, and will be solved without drastic cuts to core programs.

Newsom unveiled a proposed $291.5 billion budget, including a $208.7 billion general fund that covers operating expenses for most programs including education, health and human services, criminal justice and transportation.

“For decades and decades we’ve come to expect the volatility in our tax system,” Newsom said, where revenue “goes up during good times goes down very badly in the bad times.”

“This is a story of correction and normalcy, and one that we in some respects anticipated, and one we’re certainly prepared to work through,” Newsom said.

The governor attributed the difference in his administration’s lower deficit projection and last month’s $68 million figure from the Legislative Analyst’s Office to a difference in optimism about near-term revenues.

“I value their work,” Newsom said, “we just are a little less pessimistic about the next year than they are.”

The governor’s budget proposes to fill the $37.9 billion deficit with a combination of tapping reserves, delaying some promised spending and modest “belt-tightening.” That includes $18.8 billion mostly from reserve funds, and $11.9 billion in belt tightening moves including freezing new contracts, no new cell phones or IT equipment, pausing nonessential fleet purchases and travel. It also includes $7.2 billion in delays such as funding for transit improvement projects.

But the governor said the proposed budget maintains promised multi-year funding commitments including $15.3 billion to tackle homelessness, $8.7 billion for mental health, $109.1 billion for transitional kindergarten through junior college and $1.1 billion for public safety.

The plan calls for “modest but not significant cuts to the vast majority of those programs,” Newsom said, without new taxes like a “wealth tax” on rich California residents that some lawmakers have proposed.

Republican leaders who have criticized the state’s spending were skeptical.

“Welcome to year six of ‘Gavinomics’ where his budgets turn surpluses into deficits and his policies push Californians to flee,” said Senate Minority Leader Brian W. Jones, a San Diego Republican and vice chair of the Senate Budget and Fiscal Review Committee. “As the governor pulls revenue gimmicks and accounting tricks, it’s impossible to bury the truth: California is bleeding because of a decade of Democrats’ one-party rule and reckless spending.”

Democrats countered that their caution in socking away reserves has paid off.

“In anticipation of an inevitable downturn, we have diligently prepared for leaner times, accumulating record level budget reserves that will allow us to adopt a budget that protects the gains we’ve made over the last decade,” said Assemblyman Marc Berman, a Menlo Park Democrat. “I applaud the governor for his work to introduce a balanced budget that preserves funding for key commitments such as homelessness, mental health, schools, and safer communities during these challenging times.”

California’s budget is subject to wild fluctuations in revenues because of the state’s heavy reliance on income taxes, particularly from the wealthy whose taxable earnings are largely driven by investment returns.

A year ago, California saw an unprecedented $97.5 billion budget surplus flip into a $22.5 billion deficit, a figure that swelled to $31.5 billion by May when the governor released his revised proposal for the budget lawmakers had to approve in June.

But even that figure proved wildly off. Due to an unusual delay in tax filings — winter storm disaster declarations prompted the IRS last year to extend 2022 tax filing deadlines into November — state leaders didn’t get a clear picture of income tax revenue filings until December.

The non-partisan Legislative Analyst’s Office reported Dec. 1 that revenues were $58 billion below assumptions for the 2022‑23 through 2024‑25 budget years. A few days later, the LAO projected a $68 billion deficit for the 2024‑25 budget, with additional yearly shortfalls of around $30 billion through 2027-2028.

The state’s Republicans, whose votes the Democratic majority hasn’t needed to pass a budget, have complained the problem is overspending, noting the state budget has more than doubled in a decade, from $152 billion to $311 billion. That includes an increase from $108 billion to $226 billion in the general fund.