3 Big Takeaways from California's $311 Billion Budget Deal

Gov. Gavin Newsom and the Democrats who control the California Legislature agreed late Monday on how to spend $310.8 billion over the next year, endorsing a plan that covers a nearly $32 billion budget deficit without raiding the state’s savings account.

The state has had combined budget surpluses of well over $100 billion in the past few years, using that money to greatly expand government programs. But this year, revenues slowed as inflation soared and the stock market struggled. California gets most of its revenue from taxes paid by the wealthy, making it more vulnerable to changes in the economy than other states. Last month, the Newsom administration estimated the state’s spending would exceed revenues by over $30 billion.

The final budget, which lawmakers are scheduled to vote on later this week, covers that deficit by cutting some spending — about $8 billion — while delaying other spending and shifting certain expenses to other funds. The plan would borrow $6.1 billion and set aside $37.8 billion in reserves, the most ever.

“In the face of continued global economic uncertainty, this budget increases our fiscal discipline by growing our budget reserves to a record $38 billion, while preserving historic investments in public education, health care, climate and public safety,” Newsom said.

However, Republicans criticized the budget plan as unsustainable, noting it would leave the state with projected multibillion-dollar deficits over the next few years.

Here are some big takeaways from the deal:

Closing the deficit

Chris Hoene, executive director of the California Budget and Policy Center, said lawmakers were able to balance the budget without tapping reserves or increasing taxes, by canceling some future spending plans.

“They took one-time investments that they had made commitments to in earlier budget years, big pots of funding that they had set aside for climate change investments and infrastructure investments — and they basically took some of that money back,” Hoene said.

The trims include over $5 billion targeted toward infrastructure to reduce climate change, such as electric vehicle chargers. However, Hoene said, there’s still $40 billion in earlier years’ surplus committed to investments in climate change.

“Given that the state is confronting a deficit of $30-plus billion, state leaders did an adequate job of protecting the investments that they’ve made over the past decade,” he said.

While the budget does not raise income taxes to cover the deficit, it does impose a new tax on managed-care organizations — private companies that contract with the state to administer Medicaid benefits. The tax would generate an estimated $32 billion over the next four years, some of which would go toward increasing how much money doctors get for treating Medicaid patients. It would also offer $150 million in loans to hospitals that are at risk of failing.

No fast track for Delta tunnel

More contentious than any single spending issue was Newsom’s proposal to reform state environmental laws in order to expedite the construction of major infrastructure projects.

The governor argued that new clean energy developments and upgrades to water infrastructure were being derailed by the California Environmental Quality Act, and would lead to the state missing out on future federal funding. His plan would have required all CEQA court challenges to be resolved within 270 days, among other changes.

Lawmakers, however, were wary of grappling with such major reforms against the rapidly-approaching budget deadline. And those representing the Sacramento Delta region feared the plan would fast-track approval of a giant tunnel to move Delta water to Southern California.

The final agreement threads the needle with a single line, which specifies that a project qualifying for streamlined approval “does not include the design or construction of through-Delta conveyance facilities of the Sacramento-San Joaquin Delta.”

State Sen. Bill Dodd, a Napa Democrat whose district includes Delta communities in Solano and Yolo counties, said although he largely agreed with the governor’s reforms, “I really worked hard to make sure [the tunnel plan] wasn’t included in the package.”

“It’s a highly problematic proposal that has incredible environmental implications and impact on the Delta communities that I serve,” Dodd said.

Survival funds for transit agencies

The budget agreement incorporates a long-debated emergency relief package for transit agencies across the state, including BART and Muni, that the Legislature passed earlier this month.

The funding is designed to help those agencies maintain current operating levels as they develop strategies to deal with a deepening pandemic-related financial crisis — a situation that’s come to be known as the “transit fiscal cliff.”

The deal includes $1.1 billion, from the state’s cap-and-trade program, that transit agencies can use over the next four years for day-to-day operating expenses like salaries, maintenance and supplies.

The pact also scraps Newsom’s proposed $2 billion cut to the state’s Transit and Intercity Rail Capital Program. Those funds are typically used for long-term system improvements and infrastructure projects.

The TIRCP deal restores $400 million to Bay Area projects, including the VTA-BART extension through downtown San José. The agreement allows transit operators to use their TIRCP funds for operating expenses under certain circumstances. But spending those capital dollars to keep systems running would carry a high cost in the loss of matching federal funds.

“We pulled a rabbit out of the hat by getting the transit money back,” said Assemblymember Phil Ting (D-San Francisco), chair of the Budget Committee. “We should hopefully help the transit operators from not falling over the ‘fiscal cliff.’ So that was a major win.”

State Sen. Scott Wiener (D-San Francisco) led the campaign to secure those transit survival funds, which he called “a critical lifeline that will help transit agencies maintain service while making critical improvements to cleanliness and safety.”

Those improvements are spelled out in an accompanying trailer bill listing “accountability” requirements for the Bay Area’s Metropolitan Transportation Commission and for transit operators who want a share of the state funding. The transit agencies must also detail plans to improve public safety and system cleanliness and simplify fare structures and payment systems.

Bay Area bus, rail and ferry operators still face a five-year deficit of $2.5 billion, according to MTC estimates, so the budget agreement is far from the last word the region will hear on transit funding.

On Monday, Wiener introduced SB 532, a bill that would tack on $1.50 to tolls on the region’s seven state-owned bridges and earmark the proceeds for transit operations. Under the proposal, which requires a two-thirds vote in the Legislature to pass, the toll increase would take effect next Jan. 1, and continue through the end of 2028.

Wiener said that the toll hike, along with the emergency state cash and other funding the MTC has identified, would still leave the region about $900 million short of closing its five-year transit deficit. That means a broad range of public transportation advocates will likely join in a push for a 2026 ballot measure aimed at providing stable long-term funding.

For a more detailed breakdown of the budget proposals — including how it will affect childcare subsidies, education spending, and programs for homebuyers: What You Need to Know in the California Budget Deal

This article includes reporting from Adam Beam of The Associated Press.