How Newsom solves California budget that went from a $97.5 billion surplus to $31.5 billion deficit

Gov. Gavin Newsom, who a year ago was extolling an unprecedented $97.5 billion budget surplus, said Friday that California must close a projected deficit that has grown since January to $31.5 billion, about 10% of his proposed $306.5 billion spending plan.

But Newsom said that although the deficit has swelled by $9 billion since he unveiled his preliminary budget in January, most that will be absorbed through accounting maneuvers that won’t require significant program or service cuts beyond those he proposed five months ago, saying it was “well within our capacity to address.” He credited “prudent” budgeting that avoided committing windfall surplus revenues to ongoing program spending.

“We don’t get ahead of our skis,” Newsom said. “This was not an easy budget. We try to do the best to hold the line, take care of the needy. You don’t have to be profligate to be progressive.”

The California Chamber of Commerce praised the governor for pushing back on a state Senate proposal to cover the shortfall by raising taxes on large corporations, while maintaining funding for education and public safety.

“California businesses particularly appreciate the Governor’s comments emphasizing that tax increases are not the right thing to do and this is not the right time to consider them,” California Chamber of Commerce President Jennifer Barrera said.

Newsom trimmed numerous programs he rolled out last year with fanfare, among the largest, a plan to spend $54 billion over the next five years on climate change programs, including electric vehicle charging stations, rebates for electric cars and solar farms, forest thinning programs and others, to $48 billion.

Newsom officials noted that California still has the largest commitment of any state to reducing emissions that cause smog and heat the planet. The governor said Friday he will help push a new “climate bond” ballot measure through the Legislature this year for voters to consider next year.

But environmentalists wanted him to increase taxes on the oil and gas industry instead.

“California is home to the dirtiest air in the nation, with transportation being our state’s leading source of climate- and health-harming air pollution,” said Chris Chavez, deputy policy director at the Coalition for Clean Air, based in Sacramento.

The budget even included increases in some areas, including flood control. After damaging storms this winter ended California’s drought and filled reservoirs, flood risk remains high in the Southern San Joaquin Valley and Tulare Basin between Fresno and Bakersfield as the massive Sierra Nevada snowpack melts.

The revised budget bumps that funding to $492 million, up from $290 million in the January budget proposal. Some of that new money will come from drought funding shifted to flood projects. It will help aid farmers whose fields are flooded, emergency response, and work to strengthen and raise levees, although Newsom said local taxpayers in areas like Corcoran must do more to maintain their local levees.

The California Farm Bureau thanked Newsom’s budget on Friday for “important investments in flood-protection measures and in agricultural business grants.”

Newsom’s budget $306.5 billion budget includes $224.1 billion for the general fund that pays for most state programs and operations.

So how did the budget go from a $97.5 billion surplus to a $31.5 billion deficit in a year and end up with a spending plan that minimizes program cutbacks?

Newsom said it’s mainly because the state’s steeply progressive personal income tax, with a 13% rate on high earners whose income is highly dependent upon investment performance. After last year’s May revenue forecasts were finalized personal income tax withholding declined dramatically in the second half of 2022, which tracked with the 19.4-percent decline in the S&P 500 for the year. That translated into lower tax revenue from wealthy California taxpayers whose income fluctuates greatly with financial market conditions.

Add to that the combination of high inflation and more restrictive monetary policy by the Federal Reserve, and that turned into a projected shortfall of $22.5 billion in January that has since swelled to $31.5 billion.

How is that gap filled? It cuts $1 billion more than Newsom’s January proposal, for at total $6.7 billion, mostly by keeping $200 million in unallocated Middle Class Tax Refunds, $149.4 million in unused Utility Arrearages funds and $280 million of unspent CalWORKS aid funds.

Newsom’s budget maintains — but doesn’t add to — the $3.9 billion in “trigger cuts” that would be implemented if needed in various programs, primarily in climate and transportation ($3.1 billion), housing ($600 million) parks ($106 million) and workforce training ($55 million).

It increases from $7.4 billion to $8.1 billion delays in multi-year spending commitments such as for the Foreclosure Intervention Housing Prevention Program, which still will receive $205 million in the current budget.

It shifts more general fund spending to other sources of money, from $4.3 billion in January to $7.5 billion, moving $1.1 billion in climate spending and another $1.1 billion for student housing projects to bonds, and $635 million for zero emission vehicles to a Greenhouse Gas Reduction Fund.

It doubles the $1.2 billion in borrowing from special funds and increases revenue from a January proposal reintroducing the Managed Care Organization Tax on health insurance plans to $2.5 billion. The governor’s staff said consumers shouldn’t see pass-through costs from that tax in their premiums.

And finally it pulls out $450 million, half of the total, from the state’s Safety Net Reserve.

Republicans, who don’t hold enough seats in the legislature to compel negotiations for budget approval with Newsom and his fellow Democrats in the statehouse, blamed the California’s yawning budget gap on Democratic tax-and-spend policies that chase away businesses and wealthy entrepreneurs.

“There are endless consequences for Gavin Newsom and California Democrats’ reckless policies that have resulted in Californians fleeing the state by the hundreds of thousands, taking their tens of billions in tax dollars with them,” said California Republican Party Chairwoman Jessica Millan Patterson said Friday.

“Today’s massive $32 billion budget deficit should be a wakeup call to all Democrats that after years of increased spending, they should have better results to point to than an outrageous cost of living, surging crime, rampant homelessness, a fentanyl crisis, failing schools and inadequate water storage,” Patterson said.

Newsom also declined to offer any bailout to transit agencies, which have seen big ridership declines due to COVID and more people continuing to work from home. As federal COVID funding has begun to run out, the agencies, and Sen. Scott Weiner, D-San Francisco, have asked Newsom to provide $5.1 billion to help agencies like BART, VTA and Caltrain avoid cuts to service.

“We’re just not in a position to solve for their short term needs at the moment,” Newsom said.