SACRAMENTO, Calif. — Facing a projected $22.5 billion budget deficit in the upcoming fiscal year, Gov. Gavin Newsom on Tuesday announced plans to reduce investments in the state’s move to zero-emission vehicles, make cuts to other climate change programs and delay funding for 20,000 new child-care slots as California transitions from a time of economic surplus to shortage.
The governor’s administration blamed high inflation, the Federal Reserve raising interest rates and volatility in the stock market as the major forces causing state revenues to drop well below projections from last summer when he anticipated an $100 billion surplus in the current budget year.
His $297 billion budget plan for 2023-24 relies on delaying multiyear investments and shifting funding to bonds to offset the shortfall. Newsom said he was careful to preserve the state’s rainy day fund and its other budgetary reserves given warnings about a nationwide recession and possibility that California’s financial problems could become more dire in the months and years ahead.
“That makes us very mindful of the uncertainty of this next calendar year, and as a consequence of that we’re not touching the reserves because we have a wait and see approach to this budget,” Newsom said, adding that he felt confident that California will be better positioned “than most other states to weather what’s to come, to weather a recession.”
The governor’s January budget proposal serves as a starting point for months of negotiations at the state Capitol as advocates push for money for their causes and leaders of the Assembly and Senate pursue their spending priorities.
More consequential budget decisions will come in May, when Newsom will issue a revised budget. That spending plan will reflect updated economic forecasts and launch more intense negotiations ahead of the June 15 deadline for the Legislature to pass a final state budget for the 2023-2024 fiscal year.
The annual ritual will play out amid political headwinds that could make negotiations more difficult: the switch in Washington from a Democratic- to a Republican-controlled House that will likely seek to slash federal spending, and turnover in Sacramento that makes the current Legislature inexperienced and unpredictable, with about one-third of lawmakers newly elected.
Newsom’s proposal marks the first time the Democratic governor has been forced to consider major reductions in his January budget proposal since taking office in 2019.
His first budget topped $214 billion and broke records as the largest in state history. Though his administration feared the COVID-19 pandemic could force California off a fiscal cliff the following year, positive economic trends and revenue growth largely continued throughout his first term.
The flush state revenues allowed Newsom to pass a progressive wish list of policies to boost the safety net, such as plans to expand Medi-Cal (California's Medicaid program) eligibility to all low-income immigrants, provide free preschool for all 4-year-olds and offer an additional two weeks of paid family leave. The governor and Democratic Legislature sprinkled gas refunds and stimulus payments on Californians and still had enough funding to stash away money for an economic downturn.
Now facing the possibility of a revenue crisis, the governor who repeatedly describes the state budget as a statement of values is being forced to make difficult decisions about what he truly stands for.
He promised no “defeatist attitude” in light of a potential recession, saying addressing homelessness remains the state’s top priority.
“People are dying on the streets all across this state,” he said “The encampments, we’ve got to clean them up, we’ve got to take ownership, we’ve got to take responsibility.”
The governor said he was hopeful that federal funding would supplant the cuts proposed to climate programs and he promised that those reductions would be restored in the future if the state’s revenues turn around.
Despite vetoing legislation last year that would have made kindergarten mandatory, citing the cost, Newsom’s budget proposal continues planned investments toward implementing universal transitional kindergarten by 2025-26. Another $690 million will increase access to the program, a key tenant to his early childhood goals.
Education lobbyist Kevin Gordon, who represents California superintendents, called Newsom’s K-12 budget “surprisingly more impressive than expected” in the face of revenue declines.
But the child care industry received a significant blow, with 20,000 new slots for children that would have been funded in 2023-24 instead to be funded in 2024-25.
“Slowing the expansion of slots only serves to hurt California’s neediest families,” said Max Arias, chairperson of the union Child Care Providers United. “The state’s focus shouldn’t be on slowing expansion but on removing existing impediments because we know that California’s poorest families still can’t access the quality, affordable child care they need.”
He blamed the Newsom administration for shortfalls, saying that the delay in funding slots announced Tuesday is due in part to the state’s failure to increase provider pay and attract more workers.
“It’s something that’s unnerving,” said Assembly Speaker Anthony Rendon, D-Lakewood, about the deficit after Newsom’s inauguration last week.
Rendon noted, however, that the state projected a massive deficit in 2020 due to the pandemic that ended with a surplus.
“So these things are fluid, to say the least,” he said. “We are as prepared as we’ve ever been.”
Assemblyman Robert Rivas, a Democrat poised to replace Rendon as speaker after the budget process concludes this summer, shared some of the same concerns.
“Now that we are dealing with a forecasted deficit, those are some challenges we are going to have to work through,” Rivas said.
Newsom and Democrats anticipated the possibility of a budget shortfall last year and were careful to restrict much of the money in the current budget for new programs to one-time funding.
Similar to the governor’s administration, legislative budget analysts warned that the deficit could grow if the U.S. economy plunged into a full-blown recession and advised lawmakers to seek to pause, delay and reassess certain budget priorities.
Though California’s shortfall is significant compared with earlier projections, Newsom’s overall spending plan is only $10.9 billion less than what was allocated in the current budget year and much greater than historic averages. That drop also comes after the governor and Legislature committed to costly new programs in better economic times.
Chris Hoene, executive director of the California Budget and Policy Center, said one-time funding projects are an obvious place to make cuts, but those effects will still be felt across California.
“That sounds smart,” Hoene said. “But those commitments largely sit in two categories: infrastructure funding and the one-time expansion of social services programs and ways to provide aide to people who can’t afford to live here as easily. It might sound like good budget practice, but there are real implications.”
