California Gov. Newsom to reveal new spending plan, public school budget could take major hit

California Gov. Gavin Newsom on Wednesday will reveal his plan to cover a staggering budget deficit as the nation's most populous state weathers a revenue downturn that could have major consequences for 5.8 million public school children.

Just two years ago, California had a budget surplus of more than $100 billion because of a surging stock market and a bounty of federal coronavirus aid. That came to an end last year as inflation slowed the economy down, resulting in a $32 billion deficit. This year, the deficit could be as large as $68 billion, according to the most recent estimate from the nonpartisan Legislative Analyst's Office.

Unlike the federal government, California law says the state must pass a balanced budget — meaning it can't spend more money than it has. Newsom and lawmakers were able to avoid major spending cuts last year through a combination of making smaller cuts, borrowing and pushing some expenses to future years. But as the deficit continues to grow, Newsom and lawmakers could be forced to make tough choices to balance the budget.

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Those decisions will be particularly fraught given this year's election, when many lawmakers will ask voters to keep them in Sacramento. Every decision Newsom makes, meanwhile, will be viewed through the lens of his future political ambitions. The Democratic governor's term goes through 2026, and he could run for president in 2028.

The deficit could mean bad news for the state's public schools. Cuts to schools are hard to avoid during a downturn because a voter-approved law requires the state to spend about 40% of its budget on public education in most years. During the Great Recession, public schools weathered deep cuts, leading to layoffs and school closures that many districts are still recovering from.

The minimum amount California is required to spend on public schools has dropped by $16.7 billion over the past two years, according to the Legislative Analyst’s Office. That means lawmakers could cut public schools by that much to help balance the budget.

It's also a particularly precarious moment for public schools. Billions of dollars of federal coronavirus aid will be expiring in September, and districts that have come to rely on that spending will have to find ways to replace that money in their budgets.

In Los Angeles, the nation's second-largest school district has begun to wean itself off of pandemic funding. But its budget still relies on about $900 million — down from $1.8 billion last year — which helps pay for 1,800 full-time jobs, according to Alberto Carvalho, superintendent of the Los Angeles Unified School District.

Carvalho said cuts to schools "could be quite catastrophic," noting that many of the state's districts signed new contracts with labor unions in the last year that include pay raises reflecting inflation. California’s public school funding usually receives a cost-of-living adjustment each year. Last year, it amounted to an increase of more than 8%. This year, it could be less than 2%, according to the Legislative Analyst’s Office.

"That is significant," he said.

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But Carvalho and other school officials and education advocates say they are optimistic that lawmakers will avoid dramatic cuts for public schools this year. New Assembly Speaker Robert Rivas, who is presiding over his first budget negotiations, said last month he was committed to protecting classroom funding.

"With a $68 billion problem, there’s going to be some kind of cuts. It would be foolish to think otherwise," said Kevin Gordon, a lobbyist who represents school districts. "I actually think they are going to do everything they can to find ways to protect school funding."

Lawmakers now have resources they didn't have during the Great Recession. In 2014, voters approved a special savings account for public schools. Newsom and lawmakers could cut schools’ budgets and use $7.7 billion from that savings account to replace that spending, according to the Legislative Analyst's Office.

That would help avoid the most dramatic cuts. For more savings, lawmakers could cut one-time spending — money set aside in previous budgets that has not yet been spent.

Also, it’s possible California’s budget deficit could be much smaller than the $68 billion the Legislative Analyst’s Office estimated in early December. The stock market has rebounded some. Income tax withholdings — the amount of money employers take out of workers’ wages each month and send to the state — is up slightly from last year, but still slightly below previous estimates, according to the Legislative Analyst’s Office.

Still, it’s enough to give Democrats hope that things will be much more manageable by May — once Californians have filed their tax returns and state officials have a better idea of how much money they have.

"We know we’re going to have to make difficult choices," said Assemblymember Jesse Gabriel, a Democrat from Los Angeles and chair of the Assembly Budget Committee. "We just don’t know how difficult they’re going to be yet."