California Governor Gavin Newsom has unveiled his May Revision to his January $297 billion spending proposal for FY2023-24. His new proposal totals $307 billion and addresses a projected $31.5 billion deficit, a $9 billion increase from the $22.5 billion deficit projected in January. Release of the proposal kicks off the annual budget negotiation between the Governor and Legislature, with a final budget constitutionally required to be in place by July 1.
Newsom is known for his significant expansion of safety-net programs and investment in climate initiatives, but less so for his fiscal restraint in other areas. His new proposal reflects his balanced approach, with the Governor mostly maintaining safety-net funding levels and climate protection-related spending, while curbing other spending and clawing back unspent funds from the current budget to overcome the deficit.
For close to two decades, governors’ May Revision budgets generally have survived the legislative budgeting process unchanged, making Newsom’s May Revision likely a very close-to-finished state budget.
Highlights from the Governor’s proposal include:
Addressing the $9.3 Billion Increased Budget Shortfall Since January
The Governor proposes to address the increased budget shortfall by capturing savings or revenues in the following ways:
- $2.5 Billion: Increased Revenues from a New Managed Care Organization Tax
- $4.7 Billion: Borrowing/New Bonds
- $1.1 Billion: Spending Reductions
- $695 million: Delaying Funding
- $450 Million: Withdrawal from $900 Million Safety Net Reserve Account
State Reserves
The Governor’s proposal does not utilize funds from the state’s $22 billion-plus Rainy Day Fund. His January Budget proposal would have maintained $35.6 billion in reserve funding. His new proposal would increase the reserves by a net $1.6 billion to $37.2 billion. The May Revise identifies the reserves as:
- $22.3 Billion: Rainy Day Fund
- $10.7 Billion: Public School Rainy Day Fund
- $3.8 Billion: Special Fund for Economic Uncertainty
- $450 Million: Safety Net Reserve
Programs
Governor Newsom’s May Revision maintains spending in most areas, including:
- Healthcare: Where Newsom proposes maintaining funding to expand full-scope Medi-Cal eligibility to all income-eligible Californians, regardless of citizenship status, and budgets $8 billion for behavioral health initiatives.
- Homelessness: Where Newsom proposes maintaining $3.4 billion in funding proposed for homelessness programs.
- Climate: Where Newsom proposes maintaining $2.7 billion in a multi-year wildfire and forest resilience package and adding $290 million for a flood risk reduction package.
- Infrastructure: Where the Governor emphasizes his commitment to maximizing the state’s share of the federal infrastructure spending package, and proposes to invest in streamlining project approvals to expedite the completion and implementation of projects to meet climate and other goals.
- Higher Education: Where the Governor proposes to honor the “5-year Compacts” negotiated with the University of California and the California State University (CSU) systems, which increases their state funding by 5-percent for 2023-24.
Context
For nearly two decades, governors of both parties’ respective May Revision budgets generally survived the legislative budgeting process intact, so the May Revision is always worthy of special attention.
Governor Newsom’s revised budget proposal is getting extra attention this year because of the roughly $32 billion deficit and because deficits are projected for at least two more years. This is the first budget deficit in California in nearly a decade.
The Governor attributed the growing budget shortfall to California’s volatile tax system which is heavily dependent on the personal incomes of the state’s top 10% of earners and is particularly vulnerable to tax fluctuations that result from capital gains or losses incurred by the top 1% of taxpayers. Newsom also identified increased utilization of state services and inflation in the costs to the state of providing them as factors in the shortfall. In addition, he cautioned against new program spending, citing concerns about the possibility of recession, continuing inflation and interest rate hikes, especially while the fate of the federal debt ceiling increase remains uncertain.
Newsom’s passing reference to increased use of services as a reason why the state has a budget shortfall is receiving special attention because in recent years he and the Legislature increased the state’s “baseline” budget costs annually by expanding access to safety net programs, including their unprecedented commitment to open up Medi-Cal enrollment, the state’s Medicaid program, to all income-qualifying residents of California regardless of immigration status and without federal funding to help cover the costs of extending coverage to undocumented residents. This expansion has been popular with California voters in times of plenty, but some legislators are concerned that support will weaken now that the state has a budget deficit.
In his revised budget, Governor Newsom continues to maintain his investments in “California values initiatives,” such as making healthcare available to all residents of the state and expanding access to behavioral health. But he pays for these and other safety-net investments by delaying or placing funding restrictions in other programs, such as transit funding, payments to reduce the state’s unemployment insurance debt balance, broadband expansion, originally committed when the state had record budget surpluses during his first term.
The Governor is also encouraging fiscal restraint for 2023-24 because the state is in the unprecedented position of enacting a budget before July 1 despite not knowing what its tax receipts will be. The tax filing and payment deadlines have been extended to October 15, 2023, by Washington and Sacramento because of the emergencies associated with the atmospheric rivers that soaked California in the first few months of the year
What the Legislative Leadership is Saying
Senate President pro Tempore Toni Atkins (D-San Diego) and Senate Budget Committee Chair Nancy Skinner (D-Berkeley) released the following statement about the May Revision:
“Despite state revenue projections being lower than previous forecasts and continued inflationary pressures, California remains strong. As the Governor’s revised budget proposal signals, the budget this year will be challenging, and we appreciate the revised proposal reflecting many of the Senate’s key values, which includes avoiding ongoing cuts to core programs, preserving our primary Rainy Day Fund, and expanding responsible borrowing – including a new Climate Bond – to avoid cuts to climate and infrastructure projects. We will be updating our ‘Protect Our Progress’ budget plan to take into account the latest economic data, and remain committed to preserving transit, broadband, and other infrastructure investments, and addressing our long-term child care and homelessness needs. We look forward to working with Governor Newsom and the Assembly to reach a final budget in the weeks ahead, and are confident that we will be able to deliver a responsible, equitable budget by June 15.”
Assembly Speaker Anthony Rendon (D-Lakewood) released the following statement:
“The Governor’s plan aims to protect budget progress of recent years in an environment of fiscal and economic uncertainty. I look forward to working with my legislative colleagues and collaborating with the Governor and Pro Tem Atkins on another budget to improve the lives of Californians.
Public transit is the vanguard of California’s fight against climate change, and it will be important to restore the transit capital funding the Governor and Legislature approved last year.
The Assembly also prioritizes improving rates for child care providers. Improving child care rates helps children and the economy. Boosting California’s child care system has been a priority of my Speakership.”
What Comes Next?
The Legislature now works to finalize their legislative proposal to submit to the Governor. The Legislature has until June 15th to pass a budget, and the Governor and Legislature must have a budget they both agree on approved and in place before July 1.