Updated 3:03 p.m.
California’s expected budget deficit has grown to $31.5 billion, standing in stark contrast to $100 billion surpluses of the past two years. It’s driven largely by lagging tax revenue from high-income earners.
Governor Gavin Newsom is currently presenting his $306.5 billion spending plan. It includes plans for filling the deficit, which has grown from the $22.5 billion shortfall predicted in January.
The deficit is “well within our expectation and well within our capacity to address,” Newsom said.
The presentation known as the “May revise” takes place about a month after Tax Day, when the state typically has a clear picture of its tax revenues. But filing deadlines were delayed for most California taxpayers after severe winter storms, and Newsom said he expects $42 billion in income and corporate tax receipts would be delayed until the new October deadline.
Here are some key spending proposals from Newsom’s budget plan:
Covering a budget shortfall
Though the budget shortfall has grown to nearly $32 billion, Newsom said he does not plan to dip into the state’s rainy day fund, which currently has more than $22 billion in it.
“Not with all the uncertainty,” he said, pointing to a debate over the federal debt limit, delayed tax filings, rising interest rates and the possibility of an economic downturn.
Newsom has said he doesn’t want to crack into the rainy day fund unless the economy enters a recession.
He’s maintaining a mix of cuts, pullbacks and delayed spending to offset the shortfall. The revised budget proposal includes larger spending delays and new proposed borrowing. Here’s a breakdown:
- $8.1 billion in delayed spending, up from the $7.4 billion proposed in January. These delays would affect various climate, campus construction and behavioral health programs.
- $7.5 billion in shifting how projects are paid for, which is $3.3 billion more than what the governor originally proposed. That includes more than $1 billion in climate investments shifted to a climate bond and $635 million for zero emission vehicle investments moved to the Greenhouse Gas Reduction Fund.
- $6.7 billion in spending reductions and pullbacks, up from the $5.7 billion originally proposed in January. The new reductions “reflect reversions of unused funds, rather than cuts to programs,” according to the budget summary. For example, Newsom proposes pulling back $149 million in unused utility arrearages allocated in previous fiscal years.
- $3.9 billion in trigger cuts originally proposed in January, largely to climate and transit programs. Newsom did not propose any new trigger cuts.
- $3.7 billion in new revenue from a proposed renewal of the Managed Care Organization Tax, a tax on health insurers. The Department of Finance estimates renewing the MCO tax would bring in more than $19 billion over the next three years.
- $1.2 billion in borrowing from other state funds, including a $500 million withdrawal from the account for the Capitol Annex Project, which would be repaid in later budget years.
- A $450 million withdrawal from the state’s Safety Net Reserve fund, which would leave another $450 million in the account.
The governor’s proposed budget includes $106.8 billion in Proposition 98 funds, which guarantee a certain amount of state revenues be set aside for education.
While that translates to a slightly lower number for per-pupil spending than proposed several months ago, Newsom said it would still be the highest number in the state’s history at $23,706 per student.
“We’re still maintaining unprecedented and historic per-pupil investments,” Newsom said.
Despite a shortfall, the governor is proposing a 5% increase to higher education budgets and an 8.2% cost of living adjustment for K-12 and community college staff.
The governor earned applause from members of his cabinet for saying he wants to see more California students admitted to the University of California system.
His budget proposal includes funding to continue building out transitional kindergarten for every 4-year-old in the state. According to his budget, fewer children are participating in the program than are eligible.
Newsom wants to maintain $1.5 billion to provide two free school meals to all K-12 students in the state. Districts are also eligible to receive around $2.6 billion in federal reimbursements for school meal programs.
Housing and homelessness
Despite the state’s growing budget shortfall, Newsom told reporters his administration is “not backing away at all” on homelessness funding.
His revised budget would spend $3.7 billion on homelessness, up from the $3.4 billion he proposed in January.
Throughout his time as governor, Newsom has prioritized homelessness funding and holding local governments accountable for developing more aggressive plans to reduce their unsheltered populations. Past governors have deferred to cities and counties to address the problem.
A group of big city mayors — including Sacramento Mayor Darrell Steinberg — and advocates for unhoused residents have urged Newsom to provide permanent, ongoing homelessness funding to create greater certainty for local governments that rely on the money.
Asked about that on Friday, the governor declined to answer the question directly, saying he’s committed to addressing homelessness, while adding he’s also committed “to the cause of prudence.”
“We know that making a real impact on homelessness will require a multiyear commitment from the State,” San Diego Mayor Todd Gloria, who chairs the statewide mayors group, said in a written statement. “We urge the Governor and Legislature to provide increased and ongoing funding for the Homeless Housing Assistance and Prevention (HHAP) Program and additional resources for Homekey to get struggling Californians off the streets and into housing.”
Since 2019, the state has allocated more than $17 billion to local governments for homeless services and housing, according to the revised budget. That includes funds for the state’s Homekey initiative, which pays cities and counties to create permanent homeless housing by purchasing and renovating local hotels and motels.
While the May budget maintains homelessness funding, it calls for $367.5 million in spending cuts and $345 million in deferrals for the state’s housing budget, lowering spending to 88% of January’s housing proposal.
The May budget would defer $345 million of the $500 million allocated to the state’s Foreclosure Intervention Housing Prevention Program, which provides money to nonprofits to buy foreclosed property and operate as affordable housing.
The revisions maintain about $48 billion for projects related to climate change, which amounts to around 89% of the $54 billion that was previously promised. However, advocates say the cuts aren’t much different from what was first outlined in January.
Jamie Pew, a climate policy fellow for the nonprofit NextGen Policy, said he’d initially expected deeper cuts to climate change-related programs. But after Friday’s announcement, he said he’s relieved to see they didn’t go further.
“The cuts in January definitely hurt but the economic picture has only gotten more uncertain and more painful since then,” he said. “So to see that the administration is holding the line right now is, I think, a statement of their values — and from my perspective, it's a welcome one.”
Funding in all sectors related to climate change saw cuts. Investments toward projects related to extreme heat and coastal resilience saw particularly steep cuts. Other sectors, however, saw fewer; projects related to wildfire and forest resilience maintained 98% of investments and water-related projects maintained 97%.
Additionally, about $290 million was shifted from drought to flood protection, amounting to around $492 million for that sector. Newsom explained this shift was made because of the increased flood risks that have resulted from last winter’s extreme precipitation.
“California is facing unprecedented weather whiplash — we just experienced the driest three years on record, and now we’re dealing with historic flooding. Our investments must match this reality of climate-driven extremes,” Newsom said in a statement on Thursday.
Newsom also outlined plans to lean on federal funding and a proposed climate bond to fill in the gaps left by budget cuts. The fate of the bond would likely be decided by voters in 2024.
Raquel Mason, a policy manager for the California Environmental Justice Alliance, said she has some concerns about what waiting for funds from a bond could mean for climate resiliency projects in the state. Her organization has advocated for community resilience centers, which are meant to provide shelter to people during climate-related emergencies or other hazards. The revision states that $160 million for this program will be shifted to the bond proposal.
“Community Resilience Centers is a brand new program and it has received significant cuts from what was promised to it,” she said. “So it'll take that much longer for it to get off the ground and for communities to get the … things that they're asking for.”
Newsom’s proposed budget maintains previously-promised funds to health care initiatives, including reproductive health services, CARE Courts and CalRx, California’s own-brand prescription efforts.
The majority of the budget dedicated to health care services, about 62%, goes toward Medi-Cal, California’s health care insurance program for its lowest-income residents. The proposed Managed Care Organization (MCO) tax would generate about $5 billion to $6 billion per year until the end of 2026 to help pay for Medi-Cal, according to Health and Human Services Secretary Dr. Mark Ghaly.
That tax revenue is needed for the state to continue to invest in Medi-Cal’s expansion and reconfiguration, an initiative known as CalAIM. The May budget dedicates $15.8 billion more to the insurance program than last year’s budget did.
One part of the CalAIM expansion is extending Medi-Cal eligibility to non-citizens. Newsom said the state has de-facto coverage for all residents anyway, through emergency rooms, and needs to do more to allow for preventative care.
“Better to invest in a vaccination than in taking care of someone’s chronic disease,” Newsom said. “That’s our approach to health care. We believe [with] more people covered, it stabilizes that coverage and cost for everybody.”
Newsom also emphasized that his government is aiming to modernize the way California approaches behavioral health concerns. By making needed changes to the 19-year-old Mental Health Services Act, Newsom said the state can better address mental illness, substance use, and homelessness.
In regards to the opioid and fentanyl crisis, Newsom said the situation is “devastating,” and said the state has a lot more work to do. The budget proposes investing an additional $172 million dollars in naloxone distribution, as well as manufacturing a generic naloxone through CalRx.
“It’s not just about throwing a bigger numeric, it’s about actually making sure that we are driving successful initiatives and we’re accountable to delivering on them,” Newsom said of opioid crisis interventions.
The governor’s budget also maintains boosts to address food insecurity, a faltering in-home care system and independent-living needs of people with disabilities.
There’s good news for advocates calling for a quicker pace in expanding CalFresh benefits to all people over 55, regardless of immigration status. That program is now proposed to start in October 2025, instead of January 2027.
Some county health executives are praising the reversal of the governor’s proposal in January to cut public health training and workforce development funds. The May budget restores a previously-promised 49 million dollars for filling roles in fields such as epidemiology, microbiology, and lab work.
Here’s a timeline of California's annual budget adoption process:
- January: The governor submits a proposed spending plan to the Legislature by a constitutional deadline of Jan. 10. Here's what Newsom originally proposed.
- May: The governor refines the budget proposal using clearer revenue numbers provided by the Department of Finance. This is known as the “May Revise.”
- June: Lawmakers have until June 15 to pass a budget. The spending plan is generally spread out across multiple bills, including “trailer bills,” or smaller appropriations that can be passed after the June 15 deadline. The governor must sign a budget by June 30.
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