How Newsom's $291 Billion Spending Plan Aims to Tackle California's Formidable Budget Shortfall

California Gov. Gavin Newsom unveiled his plan on Wednesday to close an estimated $37.9 billion budget shortfall by drawing down on state reserves and cutting some previous investments in climate and housing programs.

Newsom’s proposal — a $291.5 billion spending plan that kicks off the year’s budget process at the capitol — estimates a smaller deficit than earlier projections from state analysts. Nevertheless, the governor offered a sober assessment of the toll the inflation-battered economy has taken on state finances.

“For decades and decades, we’ve come to expect the unexpected as it relates to the volatility of our tax system,” Newsom said at a press conference in Sacramento, calling the fiscal problems “a story of correction, a story of normalization” after record surpluses during his first term.

Further complicating matters, much of the revenue shortfall is in the budget year that ended last June. Delayed tax collection made it difficult for lawmakers to grasp how much revenue would arrive in state coffers when they negotiated the budget last summer.

“All of this uncertainty happened because we experienced something we’ve never experienced in the modern history in this state,” Newsom said. “We had a blindfold on.”

In response, Newsom’s budget taps $13.1 billion from the state’s reserves, cuts $8.5 billion in spending and pulls in $5.7 billion through internal borrowing and a tax on health care providers.

In December, the nonpartisan Legislative Analyst’s Office pegged the budget shortfall at $68 billion, as income tax collections fell 25% in the 2022–23 fiscal year.

Newsom said his administration’s smaller deficit projection was largely due to differing estimates of tax revenue in the coming year.

“We are just a little less pessimistic than they are about the next year,” he said.

Going forward, Newsom said he wants to increase the amount of money the state can stash in reserves during surplus years, which is currently capped at 10% of the general fund.

“Ten percent is not adequate,” Newsom said. “We’ve got to reconcile the volatility of the capital gains [tax revenue] … and it’s really important to capture more going forward.”

Senate leader Toni Atkins said the rainy-day savings over the last decade have put the state in a stronger position to weather this deficit than in the years following the Great Recession.

Matt Schwartz, CEO of the California Housing Partnership, expressed dismay with the cuts to housing programs. “They will result in some short-term savings,” he said, “and they will have long-term costs that will exceed the savings.

According to his analysis, the proposed cuts could lead to 6,400 fewer affordable homes built, including many reserved for people exiting homelessness. “The state has been only producing about 20,000 new affordable homes a year. So we’re talking about a reduction of about a third,” he said.

The governor’s budget aims to protect spending on homelessness, including $1 billion for local homelessness funding.

“We’re seeing more and more people fall into homelessness, and a reversal of those funding streams would be dangerous at a time when folks are really struggling,” said Christopher Martin, policy director for Housing California.

Newsom’s plan also seeks to maintain investments in high-profile health services commitments, including $3.4 billion to expand access to Medi-Cal coverage to all low-income immigrant adults, regardless of their legal status. The budget also includes $234 million to build the infrastructure for Newsom’s CARE Courts, which aim to help people with serious psychotic illnesses into treatment.

The budget “prioritizes what we learned during the pandemic, that our health is dependent on the health and wellness of our community members, from our neighbors to the essential workers we rely on,” said Anthony Wright, executive director of the consumer group, Health Access California.

The governor said he would honor the bill he signed into law last year to raise the minimum wage for health care workers to $25 an hour, but his budget plan did not include funding for it, raising some concerns that negotiations between labor and industry might need to resume.

The Legislature will hold hearings on Newsom’s proposal in the coming months, and the governor will propose a revised budget in May.

KQED’s Ezra David Romero, Vanessa Rancaño,  April Dembosky and Marisa Lagos contributed to this story.