California Governor Projects $22.5 Billion Budget Deficit
SACRAMENTO, Calif. (AP) — California faces a projected $22.5 billion budget shortfall for the upcoming fiscal year, Gov. Gavin Newsom announced Tuesday, just days into his second term. That’s a sharp turnaround from last year’s $98 billion surplus.
The deficit, while unsurprising, could signal the end of a decade of economic growth in the country’s most populous state.
Newsom, a Democrat, proposes to fill the hole by delaying spending in some areas and changing how others are funded. His budget appears to avoid major cuts to most major programs, though it cuts proposed spending on climate change initiatives by about $6 billion. The state hopes to restore those expenses in 2024 or offset them with federal money.
Among his climate maneuvers: he will shift $4.3 billion in spending on zero-emission vehicles from the general fund funded by state taxpayers to a special fund paid by polluters. It also delays $3.1 billion in climate and transport funding by one year.
The state still has about $35.6 billion in reserves.
Newsom stressed that California will continue its heavy spending on public and higher education, climate change, health care, and drought and wildfire response.
“We keep our promises,” he said.
Newsom’s presentation offers a first look at his spending and political priorities as he launches his second term, but it’s not the final word on how the state will distribute the money. He will reassess state finances in May after tax revenues come in, and he will sign off on a final budget in June.
The California Republican Party quickly lambasted the proposal, saying Newsom had failed for years to adequately address issues such as homelessness and wildfires despite record spending.
“Now, with a massive budget deficit projected, it’s time for Gavin Newsom to finally look at smarter spending to address the many issues plaguing our state and keeping longtime residents away,” the party chair said. Jessica Millan Patterson, in a statement.
Newsom’s proposed cuts in climate spending, including in programs designed to boost zero-emission vehicles, have drawn criticism from some of his traditional environmental allies. Budget slashes hundreds of millions of dollars in spending on programs to expand zero-emissions vehicle infrastructure in low-income neighborhoods and move delivery trucks, planes, railroads and other sources away transport of greenhouse gases.
“Investing in climate solutions is the only way to ensure a better California for everyone who lives here,” said David Weiskopf, senior policy advisor for climate group NextGen California.
His proposed budget isn’t all cuts — Newsom wants to give an extra $1 billion to local governments to tackle homelessness, though he wants greater accountability from local leaders. In the fall, he threatened to cut funding for such programs. He also proposed spending more on cash assistance programs for low-income and disabled Californians.
Other ways to fill the spending hole, including withdrawing $3 billion intended to help the state deal with inflation.
Newsom has been warning of a potential budget shortfall for more than a year, and the Office of the Legislative Analyst said in November the shortfall could be around $25 billion.
In September, Newsom publicly chastised lawmakers for sending him dozens of bills that, when added together, would have enabled billions in new spending. Newsom vetoed those bills, saying it “made it clear that we are seeing economic headwinds.”
Facing a deficit will be a change of pace for the state, where spending has more than doubled in the 10 years since the last recession. Authorities have launched a dizzying array of new programs and services, including pledging to pay for all 4-year-olds to attend kindergarten and agreeing to cover the health expenses of all low-income immigrants who live in the country without legal permission.
The money is mostly coming from a booming stock market that has kicked off a parade of California-based tech companies. These companies – including Uber, Airbnb, Lyft and Pinterest – have made many people very rich, creating a new class of millionaires and billionaires in a state with a progressive tax code where nearly half of all income taxes come from the top 1% of employees.
Since then, numerous economic factors – led by runaway inflation, supply chain disruptions and Russia’s invasion of Ukraine – have had a crippling effect on the economy. The S&P 500, a key indicator of the health of US stock markets, has fallen more than 18% since its peak in late 2021.
The rich don’t make as much money, so they pay less tax in the state of California. So far this year, California’s tax revenue has been $4.6 billion below expectations, not including some one-time corporate tax payments that state officials say they can’t count on. .
Money from capital gains taxes is expected to make up about 5.5% of state revenue, up from 9.75% last year, Newsom said.
Still, California appears to be well positioned to weather an economic downturn. Of the $131 billion in general fund surpluses the state has had over the past four years, the bulk – about $80 billion – has paid for things that don’t require ongoing funding, like building projects. According to the Office of the Legislative Analyst, only $10 billion of overspending paid for outstanding commitments.
Constitutional limits prevent lawmakers from draining reserves to cover a deficit. And unlike the federal government, California’s budget must be balanced. Newsom and lawmakers will have to tighten state spending to cover all the shortfall — something Senate Budget Committee Chair Nancy Skinner said is doable.
“We’ve funded things at record highs, and a lot of the programs we’ve funded haven’t even started yet, so we still have room to make some adjustments if needed,” she said. “I am very optimistic because we are in good shape.”
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