Newsom Signs Budget Closing $54 Billion Deficit

The California Capitol building in Sacramento. (Courthouse News photo / William Dotinga)

(CN) — California Governor Gavin Newsom has inked his signature on a $202 billion budget deal that plucks billions from the state’s rainy-day fund, cuts state workers’ pay and freezes business tax breaks to close a record $54 billion budget gap.

The finalized budget signed by the governor late Monday ends months of heated negotiations between Newsom and the Democratic-controlled Legislature, which rejected across-the-board cuts to education and social programs that Newsom had proposed in May.

“In the face of a global pandemic that has also caused a recession across the world and here in California, our state has passed a budget that is balanced, responsible and protects public safety and health, education, and services to Californians facing the greatest hardships,” Newsom said in a statement Monday night.

The spending plan fills a mammoth budget gap by deferring state funding intended for schools to future years and allowing districts to dip into their own reserves or borrow for the 2020-2021 session. The budget avoids major cuts for K-12 education and community colleges, but public universities and colleges stand to lose nearly $1 billion.

California expects to bring in an extra $4 billion in new taxes by pausing a popular program that allows qualifying businesses to claim net operating losses. The fiscal plan cuts $150 million from the judiciary budget and nearly $3 billion in delayed raises or salary reductions for state employees. The closure of two yet to-be-determined prisons are also outlined in the spending plan.

The budget includes a provision that allows for most cuts to be restored if additional pandemic relief is approved this summer by the federal government.

The state Senate passed the main budget bill on June 25 in a 29-10 vote. Senate President Toni Atkins called the plan “pragmatic” and said lawmakers were able to craft it thanks to wise budgeting decisions made during the last several years when the state’s finances were in healthy shape.

“This budget reflects compromise on all sides, but protects critical priorities, such as education and health and human services programs, while maintaining significant reserves,” said Atkins, D-San Diego.

Like most states, California fell off a fiscal cliff after shutting down large sectors of its economy in March to help stop the spread of the Covid-19 virus. 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.

“Numbers like this haven’t been felt like this since the Great Depression,” Newsom said in May of spiking unemployment and tax revenue decreases.

To patch a projected $54 billion budget hole, Newsom initially proposed cutting billions to social programs and education. He said those cuts would be necessary unless the federal government stepped up to provide aid. The $54 billion shortfall is based on an assumed 22% drop in revenue, a stark departure from the $5.6 billion surplus predicted in Newsom’s January budget proposal.

Newsom introduced a major revision to his spending plan in May, seeking a 10% cut to state workers’ pay and a 13% decrease in K-12 education funding.

Lawmakers countered with an alternate plan that sought to avoid deep cuts to schools and programs that assist low-income Californians. The counteroffer delayed cuts until Oct. 1 and included new spending on a variety of social and anti-homelessness programs.

The 2020-21 budget includes $300 million for cities to fight homelessness along with $550 million to bolster ongoing efforts to lease hotel rooms for homeless people. Meanwhile, the state will revive a $330 million homeowner mortgage relief program it nixed during the last recession, after a state appeals court in 2019 found the money was “unlawfully diverted.”

Programs benefitting seniors and the state’s disabled residents are spared in the budget. They will be paid for in part by dipping into the state’s coffers. Newsom declared a budget emergency on June 25, allowing lawmakers to draw $8 billion from the state’s rainy-day reserve account.

“We had to bridge two versions,” said Assemblyman Kevin McCarty, D-Sacramento. “The governor’s May revise would have been a disaster for us reopening our state.”

Lawmakers allocated $5.7 billion in Covid-19 pandemic response funding. That money will pay for personal protective equipment, hospital surge preparation, and efforts to support communities at greater risk of Covid-19 infection. Under federal law, at least 75% of those costs must be reimbursed by the federal government.

The fiscal plan also provides funding for wildfire prevention and response, including $85.6 million for firefighting and $50 million to provide backup power for communities affected by public safety power shutoffs.

The state’s minority party united against the budget package and claimed they were left out of negotiations. Republicans, who hold less than a third of seats in both the Senate and Assembly, warned the budget was built on flimsy ground and would bite taxpayers down the line.

“This budget is still structurally irresponsible and it’s something that we’re going to have to deal with on Main Street as well as Wall Street in the future,” said Jay Obernolte, Republican and vice chair of the Assembly Budget Committee. “I know that cuts are painful to make, but our failure to make those difficult decisions this year will have dire consequences in future years.”

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