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Newsom offers slimmer budget amid tax revenue decline

The governor promised many funding commitments will not be slashed despite the Golden State's substantial revenue shortfall.

SACRAMENTO, Calif. (CN) — California Governor Gavin Newsom’s budget for the coming fiscal year highlights how the state is tackling urgent climate change impacts and economic burdens with some striking cuts, despite reporting a record surplus during 2022. 

Newsom released his $297 billion budget to the Legislature on Tuesday, a drop from last year’s $308 billion budget with a $72.4 billion surplus. The new proposal includes a $223.6 general fund, with $35.6 billion in total budgetary reserves -- given a projected $22.5 billion tax revenue shortfall. 

Newsom noted with tech in recession for a year and a federal interest rate that could go up to 5.4%, "that makes us very mindful of the uncertainty of this coming year.” That’s why he said he rejected $22 billion in proposed bills from lawmakers in 2022. 

To meet the rest of the shortfall, Newsom’s budget contains about $7.4 billion in funding delays and $5.7 billion in reductions. He said the state can afford $3.9 billion reductions in climate and transportation because those sectors had some of the largest budgets in previous years. The budget for transitioning from fossil fuels totals $48 billion, while the transportation budget is currently around $12.8 billion before federal grants. 

"We're not touching the reserves, because we have a wait and see approach to this budget,” he said. “We’re in a very volatile moment that I’ve never been in, that few of us have ever been in.”

Keeping funding commitments

Despite the cuts, Newsom presented what is being kept in the budget and promised the state will protect “the most vulnerable Californians” by not touching funds for education, homelessness and housing, health care and wildfire and drought responses. Some funding will be delayed due to regulatory issues and timing that often naturally happen, he said. 

There will be no cuts in the $15.3 billion homelessness package, including $3 billion in flexible aid to local governments and $3 billion in Project Homekey funding — a program to move people through transitional housing to permanent housing. Newsom said his Care Court plan will help this effort to “get people that need help off the street” while looking for more accountability from how cities and counties use funding.

“There's never been more resources ever to support these efforts,” he said. “We want to see things materialize at the local level, and we look forward to clearing whatever regulatory hurdles.” 

Newsom said the state is also funding a focus on affordable housing, with a goal to build 2.5 million units with one million being affordable. But he added that he is “exhausted” with questions about why the state invests so much in homelessness. “If we can’t solve this encampment issue, I’m going to be hard pressed to make a case to the Legislature to get them one cent more," he said. 

“This homeless crisis is out of control. We need to see progress and that means we have to have a higher level of accountability. We’re not just going to hand out another billion dollars in discretionary funds … unless it aligns with our vision. People are dying on the streets in the name of compassion and these stale arguments.”

The budget will also continue advancing the highest ever state education funding per pupil with free universal meals and transitional kindergarten, more than $8 billion in rainy day funding for public school needs and $12.5 billion for learning loss mitigation. 

The state will also spend $10.7 billion on Medi-Cal, more than $8 billion on behavioral health and housing and $97 million on investing in tackling the state’s opioid crisis. 

On Monday, the governor also promised that the new budget would contain an additional $202 million for new flood investments to protect urban areas, improve levees in the delta region and support projects in the Central Valley. Newsom said they also have $8.6 billion for a statewide water and drought response, including $3.9 million for addressing clean drinking water needs. They will spend about $2.7 billion on wildfire management, including landscape work in forests and community hardening efforts. 

The budget will head to state lawmakers next, who have a monumental task to meet by May. The Legislative Analyst's Office said in a November report that the coming draft budget would have to address declining revenue driving an estimated budget deficit of more than $20 billion. This decline is attributed to inflation, with revenue estimates dropping by $41 billion.

The analyst's report advised lawmakers designing the 2023-2024 budget to balance the risks of adopting overly optimistic revenues "which fail to account for the potential of an economic downturn," and the fact that a recession is not certain. They also recommended that lawmakers identify recent funding increases that could be paused. 

The governor also said the state will have to see what happens as the federal government wrestles over further spending cuts, anticipating a loss of momentum with the Republican-led House of Representatives.

“With our state and nation facing economic headwinds, this budget keeps the state on solid economic footing while continuing to invest in Californians — including transformative funding to deliver on universal preschool, expand health care access to all and protect our communities,” Newsom in his presentation Tuesday. “In partnership with the Legislature, we’ll continue to prioritize the issues that matter most to Californians while building a strong fiscal foundation for the state’s future.”

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