SACRAMENTO, Calif. (CN) – Gavin Newsom’s budget for California, looking leaner this year in the face of a revenue shortfall, must be trimmed by lawmakers to avoid deepening the deficit, the independent Legislative Analyst's Office said Friday.
The analyst released its initial assessment of the proposed budget, which Newsom presented this week. The governor promised no cuts in key areas such as education, homelessness and housing, health care and wildfire and drought responses.
But he did present a slimmer $297 billion budget proposal, compared to last year’s $308 billion budget with a $72.4 billion surplus. The LAO said in a November report that the draft budget would have to address declining revenue attributed to inflation, with estimates putting the drop at $41 billion.
The report found the governor largely addresses a “manageable” budget problem with spending-related solutions, without using any reserves. The analyst found this approach prudent given the risk of lower revenues than expected and a possible recession. But the office estimated Newsom has solved an $18 billion budget problem despite the $24 billion estimated deficit projected by the analyst this past November.
Newsom’s interpretation of baseline spending includes $3 billion in unallocated set‑asides for inflation‑related costs and shifting $1.4 billion in authorized capital outlay projects from lease revenue bonds to cash.
“We do not consider withdrawing the inflation set‑aside or shifting back to lease revenue bonds from cash to be budget solutions,” the analyst said.
Newsom's proposal puts revenue $13.6 billion higher than the LAO’s estimate. He also calls for $2.6 billion more in estimated required General Fund spending on K-14 education, nearly $4 billion set aside in the special fund for economic uncertainties and $2 billion in discretionary spending proposals — most for health programs. The proposed budget also includes $4.3 billion in cost shifts, or nearly one‑quarter of the total.
Cost shifts
Among the major shifts Newsom calls for are moving $1.5 billion in costs for zero‑emission vehicles to the Greenhouse Gas Reduction Fund, $850 million in loans from special funds to the General Fund, $300 million from the health care affordability reserve fund to the General Fund and $500 million in transportation‑related costs from the General Fund to transportation‑related special funds.
Newsom did not make big cuts to health and human services programs, concentrating instead in the natural resources, environmental protection and transportation sectors which had received large one‑time and temporary augmentations in recent budgets.
Under the governor’s estimates, general purpose reserves would total $27 billion by the end of the 2024 fiscal year. The state would also have $8.5 billion in the School Reserve for school and community college programs and continue to make constitutionally required deposits.
The state faces operating deficits of $9 billion in 2024‑2025, likely dropping to $4 billion by 2026‑2027. The analyst said there is a good chance that revenues will be lower than the administration’s projections for the budget window, but the governor’s budget trigger restoration proposals “implicitly place more emphasis on revenue upside — suggesting the administration anticipates that revenues are more likely to be higher, not lower, than their current projections.”
Recommendations
The analyst recommends the Legislature plan for a greater budget problem by reducing more one-time and temporary spending by more than $6 billion — without including future deficits. To maintain a balanced budget, the Legislature could convert some spending delays to reductions or add new out‑year trigger reductions.
Lawmakers should consider different spending solutions from the governor’s proposal since prior budgets have allocated tens of billions of dollars for temporary purposes, according to the report. The Legislature should review planned augmentations that have not yet been disbursed to departments or local governments, as pausing those would not impact ongoing services. Then lawmakers should reevaluate prior years' augmentations to find cases where funding has not yet been disbursed or may be less than anticipated.
“We recommend the Legislature identify more than $14 billion in spending reductions and delays,” the analyst advised.
“In the coming weeks, we will analyze the plan in more detail and release several additional budget analyses.”
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