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Balancing act: Newsom's plan to cover California's ballooning budget deficit

Gov. Gavin Newsom says his plan to cover a budget shortfall that has grown by $9 billion protects investments in education, health care and housing. But it also relies on more borrowing and doesn’t include what advocates wanted for child care and public transit.
newsom-budget-proposal
Gov. Gavin Newsom unveils his revised budget proposal for 2023-24 during a press briefing at the state Natural Resources Agency in Sacramento on May 12, 2023.

California's estimated budget deficit has grown by $9 billion since January, Gov. Gavin Newsom announced May 12, though the governor downplayed the severity of its potential impact on critical government services and programs.

During a press conference at the California Natural Resources Agency in downtown Sacramento, Newsom unveiled a revised spending plan that will rely on some additional fiscal maneuvers including shifting funding sources and internal borrowing to address a projected $31.5 billion gap in the 2023-24 state budget.

"We have a $31.5 billion challenge, which is well within the margin of expectation and well within our capacity to address," Newsom said.

Despite the growing shortfall, California's overall budget is now expected to be $306 billion, including special funds, less than a 1% decline from a record $308 billion in the current fiscal year.

Newsom proposes to close the deficit by shifting an additional $3.3 billion in existing commitments out of the general fund, including paying for $1.1 billion in climate spending and $1.1 billion in college student housing projects with bonds, and pulling back another $1 billion in unused money from programs such as middle class tax refunds and utility bill support for low-income residents.

Under the governor's plan, the state would also borrow $1.2 billion from special funds and increase by $2.5 billion a tax on managed care health plans to address the spending gap. Extensive savings would remain largely untouched, though Newsom did propose to make a $450 million withdrawal from one reserve account.

California's fiscal picture has largely worsened since January, when finance officials projected the state would face a deficit of $22.5 billion. Newsom called it a "modest shortfall" and proposed to delay billions of dollars in spending commitments, reverse recent steps to shore up the state's fiscal health and shift around funding sources to limit program cuts.

Enduring high inflation, turmoil in the regional banking sector and a showdown in Washington, D.C., over raising the federal debt limit have all deepened the economic headwinds. California relies heavily on income taxes from its wealthiest residents, whose earnings have taken a hit with drops in the stock market.

Monthly tax revenues came in billions of dollars below forecasts this spring, and fears of a recession continue to loom, which Newsom said could reduce state revenues by tens of billions of dollars even in the mildest scenario.

"That is an uncertainty that we must take very seriously and very soberly," he said.

Adding to the unpredictability, most Californians don't have to file their income taxes until October because of the intense damage and disruption from winter storms. Officials estimate that $42 billion in payments will be delayed until the new deadline.

The governor's updated budget proposal kicks off a month of negotiations with the Legislature, which must pass a budget by June 15 to get paid, though some items may remain unresolved after the July 1 start of the fiscal year.

Legislative leaders have been largely optimistic about the budget situation, noting that the deficit is less drastic than during the last recession more than a decade ago and arguing that they have plenty of fiscal tools at their disposal to avoid deep spending cuts. Last month, Senate Democrats pitched increasing taxes on large corporations and suspending a major business tax credit to raise new funds, an idea that Newsom quickly rejected.

The governor reiterated on May 12 that it was not "the right time to raise taxes and I was crystal clear on that." He also also took off the table at least for now dipping deeper into the state's reserves, which he said should be maintained while the state weathers the broader economic uncertainties.

"No one can be wedded ideologically to conditions that may present themselves, but right now, we're able to submit a budget that we think is prudent and it's balanced," he said. "Those are conversations for another day."

Newsom closed his remarks by encouraging the Legislature to show restraint, both in what it seeks in a budget deal and with costly proposals that lawmakers may try to advance to the governor's desk later this year, which he said he would have to veto.

"You don't have to be profligate to be progressive," Newsom said, trotting out what has become a favorite turn of phrase. "We tend to write checks that we can't keep and then we let people down."

Aside from a brief economic downturn at the start of the coronavirus pandemic, most legislators have faced only budget surpluses and growing revenues during their tenures. Because of term limits, just a handful were around as California's economy tanked in 2008, forcing deep spending cuts.

With less money available next fiscal year, the challenge is getting everyone to agree about what should take the hit. Some lawmakers have already raised objections to potential cuts for climate programs and public transit funding that the governor proposed in January. Assembly Democrats are pushing to raise funding for subsidized child care because of complaints from providers that reimbursement rates are less than their costs.

"To continue our path toward improving the well-being of Californians, we want to protect the progress we've made in strengthening education, healthcare and safety net programs," Assembly Budget Chairperson Phil Ting, a San Francisco Democrat, said in a statement. "At the same time, we should also support the economy by stabilizing the child care industry and restoring the infrastructure funding agreed to last year for public transit. Investing in both sectors will help people go to work."

Republicans, who represent a superminority in the Legislature and whose votes are not needed to pass a state budget, dismissed Newsom's approach to the deficit as irresponsible. In a statement, state Sen. Roger Niello of Fair Oaks, who serves as vice chairperson of the Senate Budget Committee, said the governor should not count on avoiding a recession.

"We are concerned that his crystal ball may be cloudy," Niello said. "We would recommend that the state take a more sustainable path on spending, and reduce the desire to borrow during this time of high and increasing interest rates."

Public schools: Equity funding, less for arts

Proposition 98 funding for public K-12 schools and community colleges dipped from $108.8 billion to $106.9 billion between the January budget and the May revision. Overall per-pupil funding dropped by about $14, to $23,706.

California's public schools can expect a hefty 8.2% cost-of-living adjustment up from 8.13% in January to help them carry the burden of inflation.

The Newsom administration remained committed to its controversial "equity multiplier" in its May budget. The $300 million will target schools serving high percentages of low-income families. This proposal evolved from a 2022 bill authored by Assemblymember Akilah Weber that would have given more money to schools for the state's lowest-performing student group, which is currently Black students.

According to a CalMatters analysis, the equity multiplier would only benefit about 26% of Black students in California. The Legislative Analyst's Office suggested that the $300 million might not be enough to make a difference in closing historical achievement gaps. Advocates criticized the equity multiplier for shifting the focus away from Black students, but the California Legislative Black Caucus applauded the equity multiplier in a May 12 statement.

In another move, Newsom proposed deeper cuts to arts, music, and instructional materials grants. His January budget shrank the size from $3.5 billion to $2.3 billion. The May version reduced it further, to $1.8 billion.

Newsom argued these cuts would be offset by Proposition 28, which passed in November and is expected to generate $933 million in funding for arts and music education. But school district officials say voters expected the proposition to generate new money, framing Newsom's cuts as a betrayal of what voters wanted. Officials from Los Angeles Unified, the state's largest district, urged Newsom to restore the grant.

Finally, the May revision scales back funding for transitional kindergarten in response to smaller-than-expected enrollment. Newsom dedicated $604 million in his January budget but trimmed the investment to about $357 million. Additionally, $337 million for staffing universal transitional kindergarten dropped to $283 million.

-- Joe Hong

More money on homelessness, with strings attached

Newsom summed up his administration's spending strategy on both homelessness and housing policy with a single word: "Accountability."

On homelessness, the governor emphasized that the $15.3 billion he proposed to spend last January remains untouched, even as the overall deficit has grown.

That adds on to the $10.2 billion the state spent last year and the $7.3 billion the year before.

But all that new cash comes with strings attached. The $3 billion set aside in grants for local governments is conditional on agencies submitting specific "action plans."

Newsom harped on local governments failing to get people off the streets and into shelters and homes -- and specifically for not "cleaning up these damn encampments."

It's a frustration shared by many lawmakers in the state Capitol. Earlier this year a bipartisan group of lawmakers ordered the state auditor to get to the bottom of how the state's homelessness dollars are being spent.

Local government officials and low-income housing developers say they welcome the administration's proposed accountability measures, at least in public. But earlier this week they also once again called on the governor to carve out a permanent stream of money to tackle the issue. Ongoing funding would allow for the kind of long-term planning and program building required to actually fix the problem, they argued in a Thursday, May 11, letter. But based on the governor's revised budget proposal, they aren't likely to get their wish this year.

Accountability was also the governor's word of the day on broader housing policy.

In March, the administration took the Orange County beach town of Huntington Beach to court for refusing to abide by state laws that let homeowners split up their houses into duplexes and build backyard accessory units. Last month, the state filed another suit against the Sacramento suburb of Elk Grove for denying an affordable housing project.

The governor held back on naming names, but apparently more legal hammers are about to fall.

"I don't want to get ahead of myself, so if you ask I won't answer," the governor said after citing the two lawsuits. "There are others on that list."

Because of the deficit, Newsom wants to hold back some spending on a $500 million program that was supposed to purchase foreclosed properties and turn them into affordable housing. He wants to spread the money out over four years rather than dedicate the full amount in the budget year beginning July 1.

All things considered, Melanie Morelos, a program director with the Greenlining Institute, a racial justice nonprofit focused on environmental, economic and housing policy, said the proposal could be a lot worse.

"We've had two years of a healthy, meaty budget where we didn't even know where to put all our candy," Morelos said. But on housing, she applauded the fact that "the commitment is there from both the Legislature and the governor's office."

--Ben Christopher

UC, CSU, student housing and financial aid

Despite the larger budget hole, Newsom continues to support a 5% growth in state funding for University of California and California State University for 2023-24.

"These are conveyor belts for talent," he said.

The 5% growth reflects a multi-year promise Newsom made to the UC and Cal State systems in exchange for enrolling and graduating more California students and other commitments.

But other aspects of the higher education terrain would get major facelifts under the governor's budget.

A $500 million education grant for workers displaced during the pandemic would be cut if Newsom had his way, his budget said. Legislative advisors also recommended nixing the program. So far the state financial aid agency has doled out $24 million in grants from this program, an official told CalMatters.

Other financial aid programs remain largely unchanged. His administration remains mindful of a much-watched plan to add more students next year to the state's marquee financial aid program, the Cal Grant, if the state can afford it.

The governor is also leaning much more on the UC and Cal State's ability to borrow money for construction projects instead of receiving state cash upfront. For example, rather than the UC getting $498 million for campus expansion projects, Newsom wants the system to borrow that money. In exchange, the state would cover the annual $33 million in debt payments.

Doing so frees up state money now while the state is facing a budget shortfall but may limit how much the universities can borrow for future projects.

Newsom is using the same strategy for California's new, unprecedented multi-billion dollar down payment on affordable student housing. Previous budget deals said the UC and Cal State systems would receive cash upfront to build student homes across several years. Instead, Newsom wants the two systems to borrow $1.1 billion, with the state sending the systems $75 million annually to cover the debt repayments. Community colleges would continue to get housing grant cash upfront.

The governor's spending plan falls short of what Senate Democrats want for 2023-24, previewing the budget negotiations to come. Last month the Senate unveiled a spending outline that called for an additional $463 million to the UC, CSU and community colleges for a slew of program infusions.

Those include added mental health services, emergency housing and financial aid to students; a college debt-free path for former foster youth; and added money for services meant to help students with disabilities a priority for student advocates at the UC.

But core to the Senate's proposal for that and other funding increases across the whole government was a new business tax, something Newsom swatted down almost immediately.

--Mikhail Zinshteyn

Community colleges face cuts

The budget surplus from 2021 bolstered community colleges, but with the deficit, those pandemic-era programs are in danger of getting cut.

The governor's May budget proposal decreases funding for building maintenance at community colleges by $452 million, more than double what community college leaders had expected. That's "problematic," especially for colleges that are still reeling from the impact of recent storms, said Evan Hawkins, executive director of the Faculty Association for California Community Colleges.

Cutting those dollars could "jeopardize" projects that California community colleges have already started, or lead to funding challenges for completed projects, Assemblymember Mike Fong, a Monterey Park Democrat and chairperson of the Assembly Higher Education Committee, said in a statement.

Colleges will also see fewer dollars to offset enrollment declines and deal with lingering effects of the COVID-19 pandemic.

Despite the budget deficit, the state is keeping the biggest ticket item, the per-student funding amount, steady. Community colleges have the lowest funding rate per student out of any public education system in the state.

--Adam Echelman

More prison closings on the way?

For a state looking to close its budget deficit, a $14.1 billion prison system with a falling inmate population is an obvious starting point.

Newsom is pushing ahead with a decade-long plan to reduce the state's prison population by proposing to trim the California Department of Corrections and Rehabilitation budget by more than $100 million in his May proposal, or about 0.6% of the prison system's budget.

The bad news for residents of prison towns: The plan is still to close the correctional facilities in Blythe and California City by 2025. In Blythe especially, city leaders have lobbied the governor to close a nearby prison in Norco and leave theirs open.

But the prison system's population forecast predicts inmate numbers will continue to drop in the most recent forecast, the inmate population was predicted to drop below 90,000 in the 2025-26 budget year, for the first time since 1989.

At the peak in 2006, California incarcerated 165,000 people in state prisons.

A report this year from the Legislative Analyst's Office found that the state can close as many as nine of its 33 prisons and eight yards within operating prisons while still complying with a federal court order that caps the system's capacity at 137.5%.

Newsom's budget proposal notes that recent closures of prisons in Tracy and Susanville each save about $150 million a year from the general fund.

--Nigel Duara

No rescue for public transit

Newsom acknowledged the dire financial situation that many public transit agencies face, but said the state isn't in a position to step in. Instead, he deferred to actions local agencies are taking.

"I'm open to solving every problem that exists, to the extent I can," he said. "But you can't do everything. It's about balancing other priorities."

Since the pandemic, some of the state's largest transit systems have seen a dramatic decrease in ridership that caused operating revenues to plummet. The "fiscal cliff" due also to federal emergency funds starting to run out could lead agencies to cut service or increase fares, which would hurt lower income people who may not have an option other than transit.

But there's no promise of funds in the budget, despite a push over the past few months from the California Transit Association, which represents agencies, and its primary ally in the Legislature, Sen. Scott Wiener, a Democrat from San Francisco.

Wiener said he was disappointed, but pledged to keep pushing.

"Public transportation isn't optional, and failing to address the massive budget shortfalls our transit systems face would be disastrous for our state's climate goals and Californians' ability to get around," he said in a statement.

Assembly Speaker Anthony Rendon also committed to the effort in a statement. "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," he said.

--Sameea Kamal

Safety net and child care

For the most part, the governor's revised budget continues to spare social service programs from cuts.

But unlike Newsom's January plan, this plan proposes dipping into reserves the state sets aside for social safety net programs. The revised budget would spend $450 million, half of the reserves.

The withdrawal would be a small portion of the state's $37 billion in overall reserves; the rest would remain untouched. The Legislative Analyst Office has urged the state not to touch reserves yet, in case of a deeper recession.

Newsom said on May 12 he needs the safety net reserves primarily to cover increasing enrollment in programs such as Medi-Cal, which expanded last year to include older undocumented immigrants and next year will cover low-income immigrants of all ages.

Enrollment in CalWORKs, the cash aid program, and CalFresh, the food stamps program, also is on the rise. County welfare directors praised the governor for including $406 million to help county social service agencies keep up with the costs of administering the programs.

Meanwhile, information technology upgrades continue to change the timelines on the state's implementation of new safety net programs. Advocates for food aid for older undocumented immigrants originally expected that aid to roll out this year, but Newsom's January budget delayed it to 2027. In the revised budget, it is scheduled to begin in October 2025.

Newsom may clash with lawmakers over some new spending they have backed but he has left out of his budget, such as the proposed expansion of food aid and unemployment benefits to immigrants.

Among proposals Democratic leadership highlighted on May 12 is a significant raise for child care providers. For some care providers for young children, state reimbursements account for 25% to 30% of the costs to provide the service, according to a state-commissioned study.

Child care providers and their advocates have asked this year for a 25% increase in reimbursement rates and a revamped pay formula that better reflects their costs. Newsom's budget provides 8% as a cost-of-living raise.

Child care worker shortages have resulted in some of the state's new subsidized child care slots not getting filled, leaving $588 million of funding on the table this year. The administration in January proposed delaying funding for 20,000 of next year's new child care slots.

Stacy Lee, of the advocacy group Children Now, said Newsom's slower timeframe for payment increases is "not going to work for a lot of people in the field. They're not going to survive that long."

-- Jeanne Kuang

More for some Medi-Cal providers, plus public health money

Newsom's revised budget proposes a bigger tax on health insurance plans that will allow the state to dedicate more money to the Medi-Cal program. It would also increase pay for some providers that treat low-income patients.

The tax on managed care organizations, which is used to draw on federal dollars, is projected to bring in $3.7 billion in 2023-24, more than the approximately $2 billion a year the tax has yielded in the past. The increased tax is projected to result in $19 billion from April 2023 through the end of 2026.

This MCO tax, as it is often referred to, expired in December, and in his January budget Newsom proposed to bring it back. This proposal needs federal approval.

More revenue means the state can plan to not only offset any potential cuts to the Medi-Cal program, but enhance it. Protecting and improving access to the program is critical, Newsom said during his budget presentation, as Medi-Cal covers a whopping 15 million people a third of the state's population.

Part of the $19 billion would be used to increase reimbursement rates starting next year for providers in primary care, maternity care and non-specialty mental health care in outpatient settings.

Health care providers have long criticized Medi-Cal's low reimbursement rates, in which the base pay is often lower than that of private insurance and Medicare.

The state proposes to set a new floor for reimbursements for these providers and pay them at least 87.5% of what Medicare pays. Typically for primary care and non-specialty mental health services, Medi-Cal currently pays anywhere from 70% to 100% of what Medicare pays, according to Lindy Harrington, the assistant state Medicaid director at the Department of Health Care Services. Meanwhile, maternity care services are reimbursed on average 60% to 70% of Medicare rates.

Although Newsom acknowledged the plight of financially struggling hospitals, they did not get the $1.5 billion in immediate relief they had been seeking. The budget does, however, allocate the $150 million the state will need to enact a bill that directs the state to establish a loan program for distressed hospitals that the Legislature approved last week and the governor said he will sign soon.

Newsom's revised budget also restores $50 million for public health workforce training programs that were cut in his January proposal. Since January, public health officials and health advocates have pushed back on this planned cut, arguing that this money is urgently needed to help rebuild a hurting public health workforce in preparation for the next health emergency.

Adding to the $100 million the state had already set aside to create its own, more affordable generic insulin under the CalRx label, the governor's May budget allocates another $30 million so that the state can also develop its own naloxone, a medication used to reverse opioid overdoses.

-- Ana B. Ibarra

A cloudy picture on climate

Environmental groups sounded the alarm in January, when Newsom proposed cutting $6 billion from the $54 billion five-year climate package approved last year.
In his May budget, facing a bigger deficit, the governor said that if a future "climate bond" isn't approved, it could mean the shift of an additional $1.1 billion from climate resilience programs, including water recycling, the Salton Sea restoration and the statewide parks program.

Newsom didn't discuss details of the bond, including its amount. But he said the climate programs remain a high priority, and his proposal does maintain funding for programs such as wildfire and forest resilience, coastal resilience and extreme heat programs,

Advocacy group California Environmental Voters pushed back on any further cuts, saying the state "cannot afford to backslide" on its climate commitments.

"We can preserve the climate budget by cutting subsidies for the oil and gas industries and ending corporate handouts, similar to the Senate's budget proposal to restore corporate taxes," Mary Creasman said in a statement. "The money is there, especially when oil companies have raked in record profits from price-gouging and profiteering this year."

But other groups that expected more severe cuts to climate programs given the financial outlook were relieved.

"To see the governor prioritize what remained of the climate budget in January is, I think, a statement of his values and the administration's values, and a very welcome one at that," said Jamie Pew, a climate policy fellow with NextGen California.

Newsom, himself, emphasized the fiscal impact of the changing climate. On May 11, he announced a proposal to add $290 million for flood protection including backtracking on a $40 million cut in San Joaquin County floodplain restoration after last winter's devastating storms. Nearly half that money would come from programs to address what had been a deep drought.

--Sameea Kamal

Fallout from oil special session

California may end up paying for a program to tamp down on high gasoline prices by raising electricity bills.

In March, Newsom signed a law to target what he deemed excessive profits by oil companies, creating a new watchdog division in the California Energy Commission that will investigate alleged price gouging by the industry and could recommend that regulators establish a profit threshold above which companies would be assessed a financial penalty.

The governor's revised budget proposes 14 positions for the division, funded by $5.9 million from the Energy Resources Programs Account, a pot of money collected from a surcharge on electricity sales.

At the same time, Newsom is seeking to increase that surcharge, which is paid by utility customers, and extend it to additional ratepayers to raise $6 million more annually. Finance officials say the increase is needed because of ongoing structural shortfalls in the account, the main source of funding for the energy commission.

--Alexei Koseff

CalMatters.org is a nonprofit, nonpartisan media venture explaining California's policies and politics. Read more state news from CalMatters here.

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