Newsom urges fiscal ‘prudence’ amid $31.5 billion shortfall

SACRAMENTO, Calif. (CN) — California Governor Gavin Newsom presented a revised state budget Friday that he says emphasizes “resilience and restraint” as the state reels from a revenue shortfall that has ballooned to nearly $32 billion.

Newsom’s amended $306 billion proposed 2023-2024 budget reflects that since January, the projected income tax revenue shortfall — half coming from 1% of the state’s population — has grown from $22.5 billion to $31.5 billion. And while the state is not expecting a recession, even a moderate one could create a revenue dip of $40 billion. 

“We’re walking into a budget where we need to maintain our prudence,” the visibly somber governor said. 

It's a big shift from his original $297 billion budget, presented to the Legislature in January – with a $223.6 general fund and $35.6 billion in total budgetary reserves, and $7.4 billion in funding delays and $5.7 billion in reductions. Last year’s final budget was $308 billion with a $72.4 billion surplus. 

Newsom blamed part of the shortfall on the federal debt ceiling crisis and an authorized filing delay for taxpayers affected by this winter's storms. About $42 billion is expected to be counted after the new tax filing deadline in October. 

Lawmakers, lobbyists and advocates have spent five months debating the proposed budget, but it is now crunch time to finalize the plan before the constitutional deadline of June 15. While state Senate Democrats proposed a plan this month to tax big business and avoid using reserve funds, Newsom shot that idea down. He also noted he rejected $22 billion in proposed bills from lawmakers in 2022 with the coming shortfall in mind.

But the governor faces pressure to make good on promises to battle corporate profiteers like Big Oil.

On Monday, more than 30 groups including the Coalition for Clean Air, Consumer Watchdog and Environment California sent a letter demanding that Newsom cut tax subsidies for oil and gas while maintaining funding in the state budget for clean transportation and clean energy programs. They protested his January proposal that would cut $6 billion in investments meant to stave off the worst effects of the climate crisis

“Ending subsidies for the oil and gas industry is consistent with the state’s climate goals and could provide an important alternate source of revenue to continue to ensure California leads the way in staving off the worst impacts of climate change. Now more than ever, we must maintain our commitment to programs that safeguard communities from the impacts of climate change while building a clean energy economy,” the groups said.

While Newsom’s revised budget mentioned funding to support transitioning oil and gas workers over to clean energy programs, it does not mention cutting tax subsidies. He added he does not think it would be wise to start raising corporate taxes. 

The budget does contain nearly $500 million in new funds to address flooding within an $8.6 billion statewide drought response effort, and $48 billion to address the effects of climate change.

“California is facing unprecedented weather whiplash — we just experienced the driest three years on record, and now we’re dealing with historic flooding,” Newsom said. “Our investments must match this reality of climate-driven extremes.”

The governor emphasized maintaining investments in public education with $106.8 billion in total spending, with $5.4 billion for remedying K-12 learning loss. 

He is also proposing maintaining the $15.3 billion homeless package and noted the state is suing cities like Huntington Beach for circumventing state housing laws. “This is all about accountability," he said.

He also wants to float a behavioral health bond to modernize the Mental Health Services Act and expand wraparound housing services to treat people. 

The biggest changes to address the shortfall include shifting  $3.3 billion from the general fund and using $1.1 billion in unspent funds. Newsom said in the coming week he will lay out a legislative package to cut permitting timelines by three years and save hundreds of million dollars in permitting costs for many infrastructure processes. 

“The question for us is, are we going to get out of our own way?” Newsom said. “The only way to do that is to reform our permitting process in California.” 

While a projected shortfall in 2020 did not materialize, Newsom doubted the state would be so lucky again. He said he has made it clear that lawmakers should only pass bills that cost money during the budget process, not after. 

“We tend to write checks we can’t meet, and then we let people down,” Newsom said. “I don’t think that’s always right.” 

Some supported the revised proposal.

“Governor Newsom’s May revision continues the state’s leadership in dedicating needed funding directly to California’s cities to address homelessness," San Diego Mayor Todd Gloria, chair of the Big City Mayors — a bipartisan coalition of the mayors of California’s 13 largest cities — said. "We urge the governor and Legislature to provide increased and ongoing funding for the Homeless Housing Assistance and Prevention program and additional resources for Homekey to get struggling Californians off the streets and into housing."

But state Senator Josh Becker, a Democrat of Menlo Park and chair of the Budget & Fiscal Review Committee’s subcommittee, said he thinks the revised proposal does not adequately support the state's investment in clean energy infrastructure. 

He said it will delay funds for building decarbonization and climate technologies, and lacks investments to match federal funding matching requirements, such as for developing community solar. The revised proposal also recommends cutting various programs, shifting them into a climate resilience bond.

“I am worried about the state’s ability to meet its climate targets with the current levels of investment,” said Becker. “The state needs to reduce its greenhouse gas emissions to 40% below 1990 levels by 2030, which we are not currently on track to meet. We need urgent action to get back on track.”

Assemblymember Vince Wong, a Republican from the Central Valley, said in a statement that the revision shows a need for more fiscal responsibility.

"Contrary to the governor's rhetoric, success is not defined by the amount of money spent; it is defined by measurable results," Wong said. "This cannot be said enough: state programs must be evaluated on their real-world results and not just by the amount of money spent."

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