How is Gavin Newsom dealing with a $22.5 billion deficit? Four things to know about his budget

Gov. Gavin Newsom faces a precarious budget season as he tries to pursue his agenda while juggling a projected $22.5 billion deficit and uncertain economic times.

In a Tuesday briefing, where he unveiled his $297 spending plan for the 2023-24 fiscal year, he vowed to protect certain past budget commitments while proposing cuts to transit projects and climate initiatives. He also deferred spending on capital projects and proposed additional “trigger” reductions to programs he could potentially restore if financial conditions improve.

The governor’s proposal signals the start of a six-month cycle of negotiations with legislators and revisions in the spring before a balanced budget must be passed by June 15. The state’s cloudy economic forecast will likely change during that time and force Newsom to update his plan and make concessions to lawmakers.

In the meantime, here’s four takeaways from the governor’s first-round proposal for the new fiscal year, which will begin July 1.

1. Newsom’s January budget proposal included cuts for the first time

Since Newsom took office in 2019, he has been blessed with record revenues and historic budget surpluses that have granted him the freedom to pour money into some of his most ambitious policies.

But the budget for the upcoming fiscal year presents Newsom with challenges he has largely been able to avoid to this point.

Despite fears in 2020 that the global COVID-19 pandemic would torpedo the state’s economic prosperity, the worst predictions never came to pass and state revenues soared. While that could happen again, it appears unlikely, leaving Newsom and the legislature to figure out the best way to balance the budget.

Newsom calls for a combination of funding cuts, deferred spending on capitol projects and childcare offerings and borrowing cash. He has held off on tapping into the state’s budgetary reserves and rainy day fund in case the country enters a recession.

2. Transportation and climate funding take the biggest cuts

Although Newsom proposed cuts and spending deferrals across a variety of interest areas, climate and transportation bear the brunt of the suggested hits.

His plan would pare back $2 billion in funding for local transit capital infrastructure projects.

He also put forward for a $6 billion cut to a handful of California’s top climate initiatives. They include subsidies for zero-emission vehicles, incentives for solar panel installation and money to help low-income residents cope with heat waves and run appliances with clean energy.

Asked why he was trimming back climate programs he celebrated just a few months ago, Newsom stressed that the state’s investments were still substantial. His plan preserves $48 billion of the record $54 billion set aside for environmental programs last summer.

“Why climate and transportation? Because of the magnitude of those budgets: unprecedented,” Newsom said.

His spending plan also leaves open the possibility for restoration. About $3.1 billion in cuts to climate and transportation are part of group of “triggers” that Newsom emphasized could be restored next year if additional funds became available.

3. California’s economic condition could worsen

Newsom’s budget does not account for a recession. Instead, it assumed “continued but slowing economic growth.”

The 155-page summary, however, acknowledges a handful of unknowns that could change the forecast and lead to a mild or moderate recession in the months ahead. Those uncertainties include decisions by the Federal Reserve Board on inflation rates, the potential for inflation to drop more slowly than expected and conditions in China that could disrupt the global economy.

According to the administration’s forecasts, a mild recession could cause revenue losses up to $40 billion more than projected.

When the governor revises his budget in May, policymakers will have the option to tap into their reserves.

Since 2015, California has stashed away billions of dollars in a rainy-day account to prepare for an economic downturn. Newsom refrained for using the state’s coffers to fill the projected deficit in his initial proposal. But that decision would likely be revisited if the state’s economic circumstances worsen.

4. Newsom’s spending plan reinforces his top priorities

The first budget proposal of Newsom’s second gubernatorial term seeks to bolster the commitments he made during his first four years in office.

“We’re not backing away,” Newsom repeated as he touted anticipated investments in education, homelessness and other social services.

Despite the projected shortfall, the governor made sure to highlight his ongoing commitment to offer universal transitional kindergarten to all 4-year-olds in California, expand free health care for undocumented residents and launch CARE Court, a court-ordered treatment program for Californians struggling with mental illness. Newsom’s proposal does not reduce funding or extend the timeline for those initiatives.

He also called for local leaders to receive an additional $1 billion for homeless initiatives in the 2023-24 fiscal year, though he emphasized that the release of such funds would be dependent on results.

“We’ll fund success,” he said, “not failure.”

This story was originally published January 11, 2023 at 5:00 AM with the headline "How is Gavin Newsom dealing with a $22.5 billion deficit? Four things to know about his budget."