Gavin Newsom’s $307 billion California budget has a bigger shortfall. Here’s what he’ll cut

Gov. Gavin Newsom on Friday released a $306.5 billion California budget with a growing shortfall he plans to address by shifting money and retaining previously-proposed cuts and deferrals — all with the goal of maintaining social safety net programs and other policy priorities.

In January, Newsom announced the state faced an estimated $22.5 billion budget gap after years of being flush with surpluses. That shortfall has ballooned to reach $31.5 billion during the past four months.

As a result, the governor’s budget revision struck a markedly more sober tone than his presentation in May 2022, when he cheered a $97.5 billion surplus as “simply without precedent.” This year, he emphasized themes of resilience, restraint and protection of planned investments.

“We are walking into a budget where we need to maintain our prudence,” Newsom said on Friday during a news briefing in Sacramento. “And we need to prepare not just for the short term, but the medium and long term.”

The governor’s revised spending plan opens what is expected to be an intense month of negotiations with the Legislature.

It’s the first time Newsom and many lawmakers have confronted a financial shortfall. The Legislature must pass the budget by June 15, and the governor must sign budget-related bills by July 1, the start of the new fiscal year.

Addressing California’s budget gap

Legislative leaders and the governor have been weighing different options for keeping the state’s commitments to fund healthcare, poverty, homelessness and infrastructure while fixing the so-called “budget problem.”

The governor in January proposed a $297 billion plan with a combination of cuts, spending deferrals and borrowing to close the gap. On Friday, he announced he wants to continue much of that strategy.

The May budget revision builds on his planned $5.7 billion in reductions from different sources, including housing, climate and workforce initiatives. It pares back an additional $1.1 billion in spending, in part by moving unused money into the general fund. That includes unspent dollars from the Middle Class Tax Refunds, the Utility Arrearages Program and the CalWORKs county administration and services.

Newsom wants to add to the $7.4 billion in deferred spending for child care, transportation and education capital improvements. He plans to delay $695 million more, including pushing $295 million from the Foreclosure Intervention Housing Prevention Program to later years.

The governor plans to maintain $3.9 billion in “trigger reductions,” or budget cuts he would restore if the state sees better financial conditions down the road.

Newsom’s budget revision also contains $4.9 billion in borrowing and new revenue and $7.5 billion in funding shifts.

In addition, the state will withdraw $450 million from its safety net reserves, leaving an additional $450 million remaining. Newsom, however, remains stubbornly opposed to taking money from California’s rainy day fund, due to economic uncertainty related to interest rates, the stock market and “the prospect of even a mild recession.”

Adding to California’s financial uncertainty is $42 billion in anticipated tax receipts delayed until October because some residents were allowed to file later due to winter storms. If those taxes come in under expectations, Newsom’s administration may have to reconfigure its budget and make further spending adjustments.

Maintaining policy priorities

Newsom’s revised budget largely keeps in place funding promised in January for homelessness, education and healthcare.

He plans to maintain his homelessness investment of more than $3 billion, with $1 billion in one-time funding for a fifth round of local Homeless Housing, Assistance and Prevention Program grants.

The governor also plans to continue funding his mental health court program, the Community Assistance, Recovery and Empowerment Act, or CARE Court, with annual allocations through the 2026-2027 fiscal year “and annually thereafter.” His budget revision adds $43 million to $54.5 million annually “to account for refined county behavioral health department cost assumptions based on engagement with county stakeholders.”

Los Angeles County, which is among the first cohort of counties implementing CARE Court, will get an extra one-time $15 million to fund start-up expenses.

On the education front, Newsom plans to spend $127.2 billion on K-12 schools. To maintain his administration’s priorities, he wants to “repurpose modest portions” of funding from block grants for arts, music and instructional materials and learning recovery emergency.

He also plans to continue fully funding the first two years of expanded transitional kindergarten and the state’s universal school meals program.

In terms of social safety net spending, Newsom’s revised budget still contains the money needed to expand Medi-Cal eligibility for undocumented Californians by Jan. 1, 2024.

The governor’s updated spending plan expedites the timeline for expanding the California Food Assistance Program, which provides food benefits for undocumented immigrants over 55.

His January budget proposal would have delayed the program’s implementation until 2027, which drew criticism from advocates. The program is now expected to start in October 2025.

Ahead of Newsom’s revised budget presentation, the governor’s administration announced plans to shift more money to flood protection, taking away funds slated for drought response.

But climate activists remain frustrated that the governor plans to retain cuts to energy and transportation he proposed in January. And they remain unimpressed by Newsom’s plan to shift funding for some initiatives to a $6 billion climate resilience bond, which the Legislature and voters will need to approve.

“The details of this bond remain uncertain,” said Brandon Dawson, director of Sierra Club California. “And are subject to negotiation with the Legislature.”

Legislative leaders react to revised budget

Lawmakers have floated their own ideas for fixing the budget. Senate Democrats in April released “Protect Our Progress,” a plan that proposed a tax cut for small businesses and a hike for the biggest corporations doing business in the state, including Coca Cola and Walmart.

Senate Budget Chair Nancy Skinner, D-Berkeley, said the corporate tax increases would be a partial reversal of federal cuts former President Donald Trump signed into law in 2017.

The plan would raise billions of dollars every year. However, Newsom quickly expressed his disapproval of raising taxes, which he reiterated on Friday.

Senate President Pro Tem Toni Atkins, D-San Diego, and Assembly Speaker Anthony Rendon, D-Lakewood, both said they look forward to negotiating a budget with the governor.

Both said they wanted to see a spending plan with transit and infrastructure funding, as well as dollars for child care and homelessness.

“Public transit is the vanguard of California’s fight against climate change, and it will be important to restore the transit capital funding the Governor and Legislature approved last year,” Rendon said in a statement. “The Assembly also prioritizes improving rates for child care providers. Improving child care rates helps children and the economy. Boosting California’s child care system has been a priority of my Speakership.”

Atkins emphasized the need for ongoing funds for child care and homelessness.

“We appreciate the revised proposal reflecting many of the Senate’s key values,” Atkins said in a statement. “Which includes avoiding ongoing cuts to core programs, preserving our primary Rainy Day Fund, and expanding responsible borrowing — including a new Climate Bond — to avoid cuts to climate and infrastructure projects.”

Republican leaders blasted Newsom for the growing budget gap and criticized his spending priorities.

“We applaud the governor’s restraint in not depleting the reserves, but would offer quite a different set of priorities to meet the needs of the state,” said Senate Budget Commitee Vice Chair Roger Niello, R-Fair Oaks. “Our caucus looks forward to the opportunity to work with the governor and legislative colleagues on a sustainable budget plan.”

Assembly Republican Leader James Gallagher of Yuba City said Newsom’s revised budget “cuts critical programs while wasting money on ineffective pork projects.”

“Only Gavin Newsom could turn a $100 billion surplus into a $31 billion deficit in less than a year,” Gallagher said in a statement. “His approach to closing this budget gap is more of the same. His cuts to drought programs are dangerous, his ‘fiscal gimmicks’ are shortsighted, and his words about good government and efficiency are yet another empty promise. Californians deserve better.”

This is a developing story; check back with sacbee.com for updates.