Reversal of fortune: Gov. Newsom outlines plan to deal with budget deficit
Updated Tuesday, January 10, 2023 at 2:42 p.m.
California will delay some spending commitments, reverse recent budget resiliency measures and shift funding sources to limit the amount of cuts it has to make to close a projected $22.5 billion deficit, Gov. Gavin Newsom said today.
The shortfall, slightly less than the $24 billion that financial analysts for the Legislature estimated in November, will not prevent the state from fulfilling its promises to education, transportation and climate programs, the governor insisted.
“We’re keeping our promises,” Newsom said during a press conference in Sacramento, where he unveiled a $297 billion spending plan, about 3.6% smaller than last year’s record budget. “In spite of this modest shortfall, we’re continuing to make transformative investments.”
It’s a swift reversal of fortune.
Six months ago, Newsom and legislative leaders were crowing about a surplus of nearly $100 billion — equivalent to the entire annual expenditures of the Czech Republic — half of it available for discretionary purposes.
Negotiations dragged on for weeks as they deliberated over how to spend the massive windfall, ultimately agreeing to expand the social safety net to more undocumented immigrants, create a new court system to compel some homeless and severely mentally ill people into treatment, and provide refunds to most taxpayers in the state.
But many of the appropriations were one-time allotments or funding increases that would only take effect in future years if revenue estimates held up — commitments that are now at the greatest risk as the state puzzles over how to balance its books.
Newsom said today that the state would not tap into its cash reserves to address the deficit, in order to maintain those funds in case of a greater economic downturn in the future, though his administration is not expecting a recession.
Instead, the governor has proposed to delay $7.4 billion in spending to future budget years and shift $4.3 billion in appropriations to other sources, such as construction projects on California State University campuses that will now be paid for with bonds.
The budget proposal would also enact $5.7 billion in reductions for previously funded programs, with another $3.9 billion in “trigger” cuts that could be reversed next year if the state has enough money.
Those are largely concentrated on climate and transportation: Zero-emission vehicle credits and infrastructure programs are set to receive $2.5 billion less from the general fund in the coming years, with about half of those reductions offset with money from fees on major greenhouse gas emitters. The plan proposes to pull back $2 billion from local rail projects and $350 million from housing programs.
“Why climate and transportation? Because of the magnitudes of those budgets,” Newsom said.
Despite concerns raised by advocates for the poor, social services are largely untouched in his budget proposal, though about $250 million for a behavioral health bridge housing program would be delayed. Newsom also said some of his priorities, including the rollout of universal transitional kindergarten, are “full-speed ahead.”
The budget process will now pause for the next several months as the state waits to get a clearer picture of its financial health. In May, after income taxes are filed, Newsom will offer a revised spending plan based on the updated revenue figures, at which point negotiations with the Legislature will begin. Lawmakers must pass a balanced budget by June 15 in order to get paid.
Senate Republicans, who as a super-minority play almost no role in crafting California’s budget, preceded Newsom’s announcement Monday with a letter urging the governor to re-evaluate past spending increases to find a “prudent path forward.”
“It is likely that we can balance the budget by cutting ineffective spending, or by halting previously approved funds that have not yet been actually spent, and thus balance the budget without negatively affecting the people of California,” Senate Republican Leader Brian Jones of Santee and the seven members of his caucus wrote.
They did not point to any specific programs that should be reduced, though they did make several requests for new funding for a renter’s tax credit, water storage and forest management.
New investments in flood protection
With flooding on our minds, it’s also in the governor’s proposed budget, which includes new investments in flood preparedness and response. It includes a two-year, $135 million General Fund allocation for “local agencies working to reduce urban flood risk.”
Delta levees will get a boost, too, with a pot of $40.6 million available for repairs and upgrades. This cash pool will also support habitat restoration and infrastructure projects that protect Delta water supplies from saltwater intrusion — one threat of rising sea levels. The budget also supports Central Valley flood protection with a $25 million investment, specifically to flood risk reduction for communities, ecosystem restoration and sustainable agriculture.
Cuts in key climate programs
Newsom’s proposed budget slashes $6 billion for climate initiatives, including reduced spending on one of his top climate priorities — ramping up zero emission vehicles.
More than half of the cuts for climate — $3.3 billion — comes from the state’s clean transportation initiatives. Newsom is proposing to cut $2.5 billion from zero emission vehicle infrastructure build-out, and about $1.4 billion of that amount would be shifted to the state’s cap-and-trade fund paid into by fossil fuel companies. The cuts from these programs would also affect the construction of heavy-duty vehicle infrastructure, a much-needed investment as the state considers another ambitious proposal to ban sales of high-polluting diesel trucks and phase in zero-emission models. Another $2.2 billion in funds would be gutted from transportation that includes spending for rail and transit projects.
While Newsom hopes to offset those reductions with federal funds and a potential bond reserve, the move comes just five months after the state imposed a historic mandate for electrifying cars. Newsom, who has branded himself as a global climate leader, helped push a $54 billion climate package approved by the Legislature during last year’s session. The massive clean energy investment aims to meet the state’s aggressive decarbonization goals. But now, the budget deficit is getting in his way.
Full speed ahead on pre-K
A combination of new funding sources and declining enrollment helped soften the blow to the state’s K-12 education budget in the governor’s proposal. The net result: slightly higher per-pupil spending but less spending power due to inflation.
Newsom’s budget provides schools $108.8 billion in Proposition 98 funding for K-12 schools and community colleges, a $1.5 billion decrease from last year’s budget. Prop. 98, which passed in 1988, guarantees a percentage of the state’s general fund goes to K-14 schools.
But the K-12 education budget also reflects a cost-of-living adjustment of about 8%. This means another record-breaking year for per-pupil funding in California: $23,723 overall with $17,519 coming from Prop. 98 dollars.
Newsom said he remains committed to implementing flagship education programs, notably universal transitional kindergarten. The proposed budget, as a part of ongoing investments, will add $690 million to help districts build capacity until they’re required to offer transitional kindergarten to all students by the 2025-26 school year.
But it’s not a pretty picture for arts education. Despite new funding sources for art and music instruction, the state’s public schools will be getting less money to teach these subjects.
Thanks to Proposition 28, which voters approved in November, the state will provide an amount equal to 1% of the Proposition 98 guarantee for arts and music education. In 2023, that comes out to about $941 million. But that won’t be enough to offset a $1.2 billion cut to arts, music and instructional materials discretionary block grant introduced in last year’s budget.
And while one of the main criticisms of Prop. 28 was that it didn’t create a new revenue source, it was never meant to be used as a buffer for budget cuts. Richard Barrera, a school board member at San Diego Unified, said he hopes to see at least some of that funding restored in Newsom’s May revised budget proposal.
“As a budget and accounting strategy, it’s not surprising,” he said. “But I think it’s clear Californians want to see increased funding for arts and music education.”
— Joe Hong
More for higher education
Belt-tightening? Not so much in higher education.
The University of California and the California State University system would each receive 5% more in state support for their core educational commitments, consistent with a promise Newsom made last year that he’d push for annual growth of 5% for five years provided that each system makes good on various graduation goals. The UC would also receive $30 million to enroll fewer non-resident students to make room for Californians.
Community colleges would see an influx of roughly $750 million in new, ongoing funding. The confederation of 116 colleges would also share $200 million to reverse a sharp 16% enrollment decline since the start of the COVID-19 pandemic. However, Newsom warned colleges that if they don’t start showing enrollment growth soon, his administration may “adjust” district budgets by 2024-25.
Financial aid is also unscathed; in fact, the governor is promising to honor a deal last year to grow the new “debt-free” Middle Class Scholarship by $227 million in 2023-24 for a total of $859 million.
But some major legislative priorities of past years would take a hit if this budget is approved.
Notably, Newsom is proposing to delay $1.15 billion in new affordable student housing money for the state’s public colleges and universities. This move underscores how often budget plans that promise future funding get delayed or axed. Still, under Newsom’s plan, $500 million in new housing grant money would remain in the 2023-24 budget, while the planned $900 million for an interest-free loan to campuses to build housing would instead be funded in 2025-26. Most of the loans planned for 2024-25 would remain intact.
Newsom also proposes to delay highly coveted campus construction money — including $83 million for UC Merced and UC Riverside, campuses that have long argued they’re underfunded compared to the rest of the UC. The campuses would instead receive that money in 2024-25 under Newsom’s plan.
Safety net expansions mostly maintained
Newsom’s proposal preserves a signature plan to expand free health care to low-income undocumented immigrants of all ages by next January, at the cost of $844 million in the next fiscal year. And it includes increases to CalWORKs, the state’s cash aid program for low-income families with children, and to State Supplementary Payments, which provides benefits for seniors and the disabled.
But the proposal has disappointed immigrants’ advocates in delaying a first-in-the-nation plan to expand food assistance to older undocumented immigrants. Benefits were expected to be paid late this year; Newsom’s budget would push them off to 2027.
Homelessness still a top priority
Housing and homelessness remain among the state’s top concerns, and Newsom is budgeting accordingly — projected budget deficit notwithstanding. In the last two years,the administration has shoveled billions of dollars toward subsidizing affordable housing construction, rolling out interim shelter for people living on the streets, encouraging local governments to disperse and clean up encampments andenforcing state housing laws over the objections of some development-averse local governments.
This year’s proposal spares most of that spending from the chopping block. The proposed outlay on homelessness alone adds up to $15.3 billion. That includes an additional $1 billion in grants for local governments over the last year.
“We’re following through on that — no cuts,” Newsom said.
That wasn’t sufficient for some tenant and anti-poverty activists. Christina Livingston, executive director of the Alliance of Californians for Community Empowerment called the governor’s spending plan a “slap in the face” that “falls woefully short of addressing the crisis.”
The governor went out of his way to emphasize that the money would come with strings attached: “We want more accountability. People have just had it. We want to see these encampments cleaned up.”
This isn’t the first time Newsom has blamed local governments for thestate’s dismal track record in getting people off of the streets and into shelters or more permanent housing. Just before Election Day, the governorbriefly threatened to withhold $1 billion in funding to local governments over what he said was their inability to “deliver damn results” on homelessness.
In his administration’s new spending plan, the governor said that new homeless-related grants would only be awarded to local governments that are compliant with state housing law. The administration also wants to push for new legislation that would force locals seeking these funds to provide more detail on how they plan to spend the money, the budget document said.
That rhetorical approach wasn’t appreciated by some in local government, including Emeryville Mayor John Bauters, who criticized the governor for failing to appoint a homelessness “czar” — a 2018 campaign pledge. It “makes you look silly to now point fingers,” he tweeted at Newsom.
But Michael Lane, state policy director for SPUR, a pro-development urban planning nonprofit, said he welcomed Newsom’s position. “We still have local jurisdictions dragging their feet and yet yelling for billions of dollars,” he said. “We want the accountability with the money and those need to go together. That’s the only way we’re going to address the humanitarian crisis.”
Housing ambitions scaled back
Newsom’s proposed budget also removed $350 million to housing programs aimed at boosting affordable housing — and repeated a cut in his goal of new units from 3.5 million by 2030 to 2.5 million, including 1 million affordable — and helping California’s first-time homebuyers. That included taking $200 million out of a previously budgeted $500 million from the state’s newly created “Dream for All” program.
That program was pitched last year by state Senate President Pro Tem Toni Atkins as a $1-billion-a-year down payment program for first-time buyers, though it only received half that spread over two years. The program, which has not launched, is intended to provide first-time buyers either all of the money they need for a down payment, or very close to it, in exchange for partial ownership stakes in those properties.
The governor’s proposed reductions also include a $100 million from the state’s CalHome Program, which provides grants to local agencies and nonprofits assisting low income homebuyers. The governor’s proposal also removes $50 million in funding from a program that provides grants for the construction of granny flats, in-law units, backyard cottages and secondary units.
A new focus on fentanyl crisis
Criminal justice is often the part of the budget that is most responsive to what people see on the local nightly news. Last year, those concerns centered on railroad and organized retail theft. Viewers were inundated with nightly images of commercial goods strewn around railyards and surveillance footage of flash mob theft rings at Bay Area department stores.
This year, the focus is fentanyl. Newsom said he is assigning 113 members of the California National Guard to fentanyl interdiction at the U.S.-Mexico border and throughout the state. Attorney General Rob Bonta, sworn into his first full term this month, would also create a fentanyl task force at the Justice Department under the proposal.
More prison closures
After a legislative session in which new approaches to prisoner welfare were considered and discarded amid opposition from county sheriffs and the union representing prison guards, the California Department of Corrections and Rehabilitation proceeded apace with plans to lower the state’s overall prison population. Some of those proposed reductions will come from closures of individual wings within six state prisons while the state continues its attempts to close the California Correctional Center in Susanville and end its lease at the California City Correctional Facility, the state’s last privately-owned prison facility. Newsom said the proposed closures would save the state $150 million in this budget cycle.
The budget proposal also includes $11.6 million for fixed and body-worn cameras at several institutions, a prospect the state has fought for years in court.
Economic uncertainty ahead
What will the next year hold for California’s economy? Newsom oscillated between optimism — saying that California was better prepared to weather a recession than other states and that he had “absolutely no trepidation around California’s fate and future” — and recognizing the economic uncertainty of the coming year, pointing to tech industry layoffs and rising credit card debts.
Economic uncertainty, Newsom said, is the reason his budget proposal didn’t involve dipping into the state’s rainy day reserve to close the budget deficit.
One item on the chopping block: Money from the state to help pay down California’s $18.7 billion dollar unemployment benefits debt. That’s a debt the state owes to the federal government, which swooped in with a loan when Californians turned to unemployment benefits in droves early in the pandemic and the system quickly ran out of money. The debt is set to be paid off by an federal tax increase on California employers, but last year, the state government kicked in some money to chip away at the debt, and at the time promised it would contribute another $750 million reduce the overall debt plus $500 million to offset the cost of the tax increase for small businesses this year. Now, Newsom proposes cutting both.
The governor also proposed some smaller snips to workforce programs, including cutting a planned $25 million investment in outreach to workers and employers in industries with high COVID risk and a $40 million budget reduction over the next two years for non-traditional apprenticeships.
But it wasn’t all cuts: Newsom proposed hiring more workers for the understaffed Department of Industrial relations to hear a backlog of unpaid wage claims. And he proposed continued funding for efforts to modernize California’s beleaguered Employment Development Department, which is charged with paying out unemployment benefits, as well as continuing to invest in fraud detection.
– Grace Gedye