How Newsom's $291 Billion Spending Plan Aims to Tackle California's Formidable Budget Shortfall

California Gov. Gavin Newsom unveiled his plan on Wednesday to close an estimated $37.9 billion budget shortfall by drawing down on state reserves and cutting some previous investments in climate and housing programs.

Newsom’s proposal — a $291.5 billion spending plan that kicks off the year’s budget process at the capitol — estimates a smaller deficit than earlier projections from state analysts. Nevertheless, the governor offered a sober assessment of the toll the inflation-battered economy has taken on state finances.

“For decades and decades, we’ve come to expect the unexpected as it relates to the volatility of our tax system,” Newsom said at a press conference in Sacramento, calling the fiscal problems “a story of correction, a story of normalization” after record surpluses during his first term.

Further complicating matters, much of the revenue shortfall is in the budget year that ended last June. Delayed tax collection made it difficult for lawmakers to grasp how much revenue would arrive in state coffers when they negotiated the budget last summer.

“All of this uncertainty happened because we experienced something we’ve never experienced in the modern history in this state,” Newsom said. “We had a blindfold on.”

In response, Newsom’s budget taps $13.1 billion from the state’s reserves, cuts $8.5 billion in spending and pulls in $5.7 billion through internal borrowing and a tax on health care providers.

In December, the nonpartisan Legislative Analyst’s Office pegged the budget shortfall at $68 billion, as income tax collections fell 25% in the 2022–23 fiscal year.

Newsom said his administration’s smaller deficit projection was largely due to differing estimates of tax revenue in the coming year.

“We are just a little less pessimistic than they are about the next year,” he said.

Going forward, Newsom said he wants to increase the amount of money the state can stash in reserves during surplus years, which is currently capped at 10% of the general fund.

“Ten percent is not adequate,” Newsom said. “We’ve got to reconcile the volatility of the capital gains [tax revenue] … and it’s really important to capture more going forward.”

Senate leader Toni Atkins said the rainy-day savings over the last decade have put the state in a stronger position to weather this deficit than in the years following the Great Recession.

“Now, because of more than a decade of responsible budgeting, we’re better prepared to protect the path of progress we’ve made,” Atkins said in a statement.

Some Republicans called for Newsom to enact further cuts before tapping state reserves.

“Years of out-of-control spending by the governor and the legislative Democrats have added billions of dollars of new ongoing costs,” said Assemblymember Vince Fong (R-Bakersfield) the vice chair of the Assembly Budget Committee. “Until the governor takes control of the unsustainable spending, it is premature to tap the rainy day fund.”

Throughout his press conference, Newsom bristled at calls for new taxes, suggesting that even discussing ideas such as a “wealth tax” plan damage the state’s reputation.

That proposal, which would tax the net worth of high-income residents, is expected to receive an initial hearing in the Legislature on Wednesday afternoon.

“There’s no wealth tax, there’s no income tax,” Newsom said.

The cuts in Newsom’s budget are centered on reductions on climate programs, with investments dropping from $54 billion to $48.3 billion, by trimming investments in biking and walking projects, along with fire prevention programs such as home hardening and prescribed fires.

Water and energy are the largest climate reductions of more than a billion dollars. At the same time, there are nearly $160 million in new investments for flood protection, levee repair and the restoration of the Salton Sea.

Some environmental groups said they are glad the cuts aren’t deep into the climate sector.

“But, the climate crisis and the corporations who are causing it will not pause while we wait for another budget surplus — and neither can we,” said David Weiskopf, senior policy advisor with NextGen California.

Newsom said the Biden administration’s investments in transportation and climate projects through the Bipartisan Infrastructure Act and the Inflation Reduction Act “helped supplement some of the modest cuts we’re making in this space.”

But Laura Deehan, state director at Environment California, said she was disappointed in the cuts to clean car and rooftop solar incentives.

“Clean energy and climate programs are investments we make for our kids and grandkids,” Deehan said in a statement. “If we cut now, they pay more later in health and in their environment as well as money.”

Newsom’s budget proposal also pauses funding to implement all newly signed laws — including the Climate Accountability Package made up of two laws that would require large corporations to publicly disclose their greenhouse gas emissions, carbon embedded in supply chains and climate risks — until the state’s finances are clear in May.

“It’s critical that the May budget include funding to implement these laws so that businesses have the certainty they need to prepare to make these new disclosures,” Sen. Scott Wiener (D-San Francisco) said.

Elsewhere in the budget, Newsom proposed $1.2 billion in cuts to housing programs supporting rental housing development, infill development and homeownership, along with a modest drop in per-pupil spending and deferred some funding for higher education and capital transit projects.

Matt Schwartz, CEO of the California Housing Partnership, expressed dismay with the cuts to housing programs. “They will result in some short-term savings,” he said, “and they will have long-term costs that will exceed the savings.

According to his analysis, the proposed cuts could lead to 6,400 fewer affordable homes built, including many reserved for people exiting homelessness. “The state has been only producing about 20,000 new affordable homes a year. So we’re talking about a reduction of about a third,” he said.

The governor’s budget aims to protect spending on homelessness, including $1 billion for local homelessness funding.

“We’re seeing more and more people fall into homelessness, and a reversal of those funding streams would be dangerous at a time when folks are really struggling,” said Christopher Martin, policy director for Housing California.

Newsom’s plan also seeks to maintain investments in high-profile health services commitments, including $3.4 billion to expand access to Medi-Cal coverage to all low-income immigrant adults, regardless of their legal status. The budget also includes $234 million to build the infrastructure for Newsom’s CARE Courts, which aim to help people with serious psychotic illnesses into treatment.

The budget “prioritizes what we learned during the pandemic, that our health is dependent on the health and wellness of our community members, from our neighbors to the essential workers we rely on,” said Anthony Wright, executive director of the consumer group, Health Access California.

The governor said he would honor the bill he signed into law last year to raise the minimum wage for health care workers to $25 an hour, but his budget plan did not include funding for it, raising some concerns that negotiations between labor and industry might need to resume.

The Legislature will hold hearings on Newsom’s proposal in the coming months, and the governor will propose a revised budget in May.

KQED’s Ezra David Romero, Vanessa Rancaño,  April Dembosky and Marisa Lagos contributed to this story.