California Deficit Expands to $31.5 Billion, Newsom Proposes Broad Spending Cuts in Revised Budget

California Gov. Gavin Newsom announces the May budget revision in Sacramento on May 12, 2023. Newsom said the state's budget deficit has grown to nearly $32 billion, about $10 billion more than predicted in January when the governor offered his first budget proposal. (Hector Amezcua/The Sacramento Bee via AP)

California Gov. Gavin Newsom announced proposed revisions to the state’s 2023–24 fiscal budget on May 12 during a press conference at the state Capitol, with an additional $9 billion deficit added to prior estimates.

Uncertainty was a key talking point during the governor’s remarks, with inflation, rising interest rates, financial market jitters, and delayed tax payments this year due to winter storms.

The prior proposed budget projected a $22.5 billion shortfall, which Newsom now projects as $31.5 billion.

“This is a $31.5 billion challenge, which is well within the margin of expectation and well within our capacity to address,” Newsom said.

California Gov. Gavin Newsom announces the May budget revision in Sacramento on May 12, 2023. Newsom said the state's budget deficit has grown to nearly $32 billion, about $10 billion more than predicted in January when the governor offered his first budget proposal. (Hector Amezcua/The Sacramento Bee via AP)

The IRS recently reported a loss of $29.1 billion in tax base for the state following the exodus of more than 332,000 taxpayers from 2020 to 2021.

Loss of tax revenue was mentioned repeatedly by the governor and in the revised budget summary, but Newsom made no comments about the recent loss of taxpayers to other states.

The summary, however, does point to the state’s progressive tax structure that reaps approximately 50 percent of its revenues from the top 1 percent of wage earners as a key culprit for the deficit.

Of notable concern is the delay in tax payments until October of an estimated $42 billion, which leaves much of the budget inconclusive.

The budget projections are “not an exact science,” Newsom said.

Other projections in the revised budget with variable outcomes include the potential for recession, and while the modeling presented doesn’t include a downturn in the short or long term, financial estimates provided suggest a mild recession would result in an additional $20 billion shortfall, and a moderate downturn could double that amount.

Spending Cuts, Funding Delays

To meet the newly revised deficit figure, the governor is proposing to make a number of cuts to programs, with more slated for funding delays.

Agencies seeing the largest cuts by dollar amount include K–12 education, transportation, and natural resources departments, including state parks, forest and fire, and fish and wildlife. Percentage-wise, labor and workforce development led the way with a 29 percent cut.

Government operations, on the other hand, were the beneficiary of the largest increase, jumping more than 83 percent from the prior proposed budget—adding approximately $7.1 million—to further fund the agency responsible for coordinating and overseeing a number of state agencies.

Commitments to the state’s university systems were prioritized in the revision, with the state honoring its earlier guarantees to the University of California and California State University (CSU) and increasing funding by 5 percent.

“We are very grateful for the ongoing support of the CSU represented in the revised budget proposal, especially given the state’s worsening fiscal challenges,” Interim Chancellor Jolene Koester said in a statement released on May 12. “The administration has demonstrated its belief in the CSU’s mission and the transformative power of higher education for Californians from all backgrounds.”

Revenues, however, are expected to increase with the proposed renewal of the managed care organization tax—a tax applied to health care plans in California—which expired in 2019. The renewal is expected to generate more than $19 billion by 2026, according to the budget summary.

The growing fentanyl crisis was mentioned briefly in Newsom’s remarks, with funding allocated for education, overdose prevention, and outreach programs, but none earmarked for criminal justice enforcement.

A photo of the 14-year-old Alexander Neville who died after accidentally taking fentanyl is displayed at a news conference joined by Orange County officials in Irvine, Calif., on April 28, 2023. (John Fredricks/The Epoch Times)

When confronted with the lack of funding for enforcement in the budget by reporters, Newsom said he recognized the divide between lawmakers regarding fentanyl and highlighted the many task forces and agencies that are working on the issue, but noted the administration’s continued commitment to preventive measures.

“This consumes me. As a parent, it scares the hell out of me,” he said. “As a governor, I see it, and I recognize what’s happening on the streets.”

Discussion of Reparation Payments Avoided

With the announcement of a growing deficit, multiple questions were posed to the governor about cash payments following the Reparations Task Force’s recent recommendations that apologies and payments of $1.2 million are owed to millions of black descendants of slaves in the state.

Newsom avoided any discussion of payments, and on multiple occasions referred to his prior statements that he looks forward to reading the task force’s report once it’s released in June and working with the Legislature on the issue.

Newsom repeatedly told lawmakers during the nearly two hours he spoke at the press conference that fiscal restraint and honest dialogue are the best paths forward for California.

“We cannot be stacking more promises we can’t deliver in the future,” he said. “We have to be prudent, be prepared, and be in the position where we’re not misleading people.”

The distinction between false hopes and realistic goals was a recurring theme during the presentation.

“You don’t have to be profligate to be progressive,” Newsom said. “We tend to write checks we can’t keep, and then we’re letting the people down. It’s better to be honest with folks.”

The revised budget now awaits approval by the Assembly and Senate and is required by the state constitution to be passed and enacted by June 15, with the approved budget taking effect at the beginning of the fiscal year on July 1.