Facing Fiscal Cliff, Newsom Proposes Billions in Cuts as Virus Torches Economy

Slashing billions from his preliminary budget amid a projected $54 billion shortfall due to the Covid-19 pandemic, California Governor Gavin Newsom also asked state workers to take a 10% pay cut to plug the drain in the state coffers.

California Gov. Gavin Newsom. (AP Photo/Rich Pedroncelli, Pool, File)

SACRAMENTO, Calif. (CN) — Steering a suddenly divebombing economy in just his second year in office, California Governor Gavin Newsom revealed a lean revised budget Thursday and signaled the end of the state’s record stretch of economic growth.  

To begin slicing into what his office believes could be a record-high deficit, Newsom wants to slash state worker salaries by 10%, drain the state’s $16 billion rainy-day fund over the next three years and continue pressing Congress and the Trump administration for relief.    

“These are not ordinary times, and as a consequence this will not be an ordinary budget presentation,” Newsom said somberly.

Thursday’s $203 billion budget represents a dramatic turnaround from the stocked $222 billion spending plan the Democratic governor rolled out in January. The revised document carries a 9% drop in general fund spending and 5% overall, along with a potential 13% decrease in K-12 funding.

The initial version assumed tax collections would continue their torrid pace and banked on a $5.6 billion surplus. Expecting wiggle room, Newsom in January proposed addressing the state’s homelessness crisis by spending billions on housing and mental health services, expanding subsidized medical care to undocumented immigrants and $523 million to help pay for a minimum wage increase.

Not only did Newsom propose the largest budget in state history on that January morning when most of the world had never heard the word “Covid-19,” he said the state would additionally ask voters to pass a $4 billion bond to ward against the ongoing effects of climate change.

Four months later, the budget-busting pandemic and an eight-week statewide lockdown have combined to torch Newsom’s vision, halt 118 months of consecutive job growth and jeopardize the record surplus Newsom inherited in 2019.

According to Newsom’s financial team, Thursday’s so-called “May Revise” assumes the state has abruptly plunged into a $54 billion hole. The tables have quickly turned in California, Newsom acknowledged.

“We were regaling folks about our economic growth, incredible economic vibrancy and economic output the state was enjoying,” Newsom said. “Of course, that was January.”

California, unlike the federal government, is of course required to pass balanced yearly budgets and Newsom along with other governors are turning to Washington for help. 

Newsom and California’s congressional delegation have been clamoring for more financial aid, insisting federal relief is needed to fill budget gaps and forgo massive layoffs and preserve public safety. Earlier this week, a collection of lawmakers and governors from Western states told congressional leaders that their states, cities and counties will need $1 trillion in federal money to weather the economic downturn created by the coronavirus pandemic. 

House Democrats are pushing a new $3 trillion coronavirus relief bill that could deliver California up to $50 billion in federal funding. Newsom said Congress and President Donald Trump could prevent California from making devastating cuts in areas like education and health care.

“We have been making crystal clear over the course of the last many weeks: these are cuts that can be triggered and eliminated with the stroke of a pen,” Newsom said. “The federal government, we need you; these cuts can be negated and dismissed with your support. This is your moment.”

Newsom’s updated spending bill now heads over to lawmakers, who have until June 15 to approve it via majority vote.

During a 75-minute press conference, Newsom rattled off the factors contributing to California’s budget woes, namely “jaw-dropping” unemployment and sweeping revenue losses that have contributed to the $60 billion swing in fortunes.

Since California counties began sheltering in place in March, 4.6 million residents have filed jobless claims. Newsom predicted unemployment rates could peak at 24.5% this calendar year and slowly decrease to 10% by the end of 2023.

In January, the state was preparing to pay out $5.8 billion in unemployment claims, a figure that is now expected to skyrocket by more than 650%. To backfill the suddenly strapped unemployment insurance reserves, California — as it did during the Great Recession — will have to take out federal loans.

“I want folks to know we’re not walking away from our commitments,” Newsom assured California’s ballooning number of unemployed residents.

The rapid job losses and mandated business closures have taken a major toll on the state’s main sources of revenue in corporate, sales and personal income taxes.

Due to the pandemic, California extended filing deadlines for businesses and residents and forced Newsom’s administration to patch together the revised budget without a full picture of available tax revenue. As a result, Thursday’s budget assumes a 22% drop in revenue compared to the January proposal, driven by a 27% drop in sales tax.

To shield the sudden hit to the coffers, Newsom hopes to stimulate the economy by extending sales tax exemptions for diapers and menstrual products through 2023, continuing a program that allows first-year businesses to pay reduced taxes, implement a new tax on e-cigarettes and suspend net operating losses for medium and large businesses for the next three years. He predicts the measures could add $9 billion over the next three years to the world’s fifth largest economy.

“Numbers like this haven’t been felt like this since the Great Depression,” Newsom said solemnly.

Newsom is also gearing up for a fight with California’s influential public employee unions, as he delivered crushing news that he expects over 200,000 state workers to take a 10% salary reduction. Furthermore, he’s directing state agencies like the Department of Motor Vehicles to shift to online services and enhance teleworking capabilities.

“None of us in state government will be immune from tightening our belts,” said Newsom, adding that he and his cabinet will take pay cuts.

With the revised proposal in hand, lawmakers sounded off on the bleak forecast that cost nearly all the new spending programs touted in the January proposal.

State Sen. Holly Mitchell, D-Los Angeles, said the budget was “grounded in harsh realities” and echoed Newsom’s plea for federal assistance.

“Now more than ever, we need the federal government to build those bridges that will allow us to cross the troubled waters we are in before additional cuts are made,” said Mitchell, chair of the Senate Budget Committee.

Republican Devon Mathis sits on the Assembly Budget Committee and said Newsom’s speech made him “very nervous.” While he agreed in the need for federal aid, Mathis urged the governor to trim from ongoing projects like the beleaguered plan to build a statewide high-speed rail network.

“I have an idea, eliminating high-speed rail would save a half billion dollars. I have been calling for the end to this project for years. A hypothetical train is not worth real jobs for teachers and first responders,” said Mathis, R-Visalia.

Several members of Newsom’s cabinet, including the secretaries of the Environmental Protection Agency, Department of Food and Agriculture and Natural Resources Agency held a joint teleconference Thursday to discuss the budgetary blows to ambitious environmental projects aimed at combatting climate change.

Notably, the May revise withdrew over 94% of general fund dollars allocated toward the state EPA, which will receive $42 million from the general fund as opposed to the $723 million in general fund dollars allocated to the agency in the last fiscal year.

The agency will receive $3.8 billion in special funds and over $18 million in bond funds, however.

Cal-EPA Secretary Jared Blumenfeld emphasized on the call with reporters that revenue generated from California’s cap-and-trade emissions program remains uncertain, though lower proceeds than previously estimated are likely as statewide emissions of greenhouse gases have decreased significantly.

Initial cap-and-trade dollars will go to air quality projects, forest health and fire prevention and safe drinking water projects, Blumenfeld said.

The Climate Catalyst Fund — which had earmarked $250 million for more than 700 climate-related projects up and down the state — was also axed in the revised budget, though Blumenfeld emphasized the state is looking to get private investors to fund some of the projects.

He said California’s status as a world leader on climate change would not be threatened by budget cuts necessary during the pandemic.

“All the leaders around the world are suffering similar economic fates, we’re prioritizing California values,” Blumenfeld said.

Not all environmental and natural resources priorities faced cuts, however, with flood control, river pollution and air quality projects in Sacramento, Calexico and Imperial Valley’s Salton Sea surviving the budget ax.

Looking ahead, Newsom told reporters despite the state’s finances crashing “in the blink of an eye,” the Golden State is better positioned than it was in previous downturns. He applauded the fiscal prudence of his predecessor Jerry Brown and said the state was able to increase its bond rating twice in the last year, making it easier to borrow during the ongoing recession.

Newsom said though the numbers are dreary and will lead to a multiyear recovery, he’s confidently optimistic.

“We will get through it stronger, more nimble, more capable and more resilient than ever. We’re not in a permanent state,” Newsom concluded.

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