Governor Gavin Newsom has unveiled his January budget proposal, which authorizes $291.5 billion in spending, significantly less than the $310.9 billion budget plan enacted just six months ago.
To balance the proposed budget, the Governor asserts that the state will need to close an estimated $38 billion shortfall. The Governor attributes the deficit to two major economic developments from 2023: the substantial decline in the 2022 stock market and the unprecedented delay in income tax collections in 2023 (the result of extensions granted by the IRS due to natural disasters). While a $38 billion shortfall remains a significant budget problem for the Governor and legislature to address, it is considerably less than the well-publicized $68 billion deficit projected by the nonpartisan Legislative Analyst Office (LAO) in November. The LAO relied on different assumptions to forecast revenues and estimate mandatory/baseline state spending and in its initial response released over the weekend now estimates that the Governor’s proposal may still overestimate state revenues, but actually provides solutions to close a $58 billion gap – which would still be $10 billion shy of solving this year’s shortfall.
The Governor proposes to bridge the budget deficit by taking the following actions:
- Tapping Into Reserves – $13.1 billion: The Governor’s budget proposes withdrawals from the Mandatory and Discretionary Budget Stabilization Account (BSA) and the Safety Net Reserve—which would leave approximately $18.4 billion in total budget reserves.
- Reductions – $8.5 billion: The Governor’s budget proposes a variety of cuts to several policy areas and programs. Some of the more significant cuts include $2.9 billion in various climate reductions and $1.2 billion in various housing program reductions.
- Internal Borrowing – $5.7 billion: The budget proposes one-time internal borrowing from specific dedicated revenue sources and special funds, to be repaid in future years. Most significantly, the Governor proposes increasing the recently reenacted managed care organization (MCO) tax, approved in late December by the federal government, to generate $3.8 billion in additional revenue.
- Funding Delays – $5.1 billion: The budget delays funding for several previously approved spending items, deferring it across a three-year period, beginning in 2025–26. Most significantly in this category, the Governor is proposing to delay funding for the Transit and Intercity Rail Capital Program ($1 billion) and the Clean Energy Reliability Investment Plan ($400 million).
Notable New Proposals Included in Newsom’s January Budget Proposal
Health Care
Health Care Minimum Wage Changes: Newsom is proposing revisions to the recently enacted health care worker minimum wage law (SB 525), in response to the state’s growing budget deficit and higher-than-expected costs of implementation. His proposed budget adjustments aim to manage the $4 billion initial cost of SB 525 amid a $38 billion deficit. In his budget proposal, the Governor is proposing to add an annual trigger to make the wage increases subject to state funding availability. For now, the Governor’s budget includes no funding for state costs to implement SB 525 pending negotiations with the legislature and organized labor sponsors of the minimum wage bill.
Changes to New MCO Tax: The Governor is proposing significant changes to the recently approved MCO tax. As approved by the Centers for Medicare & Medicaid Services (CMS) in December 2023, this tax was set to run from April 1, 2023, to December 31, 2026. However, facing a substantial budget shortfall, the Governor is now seeking legislative support (early in the legislative session) to request federal approval for an amendment that would increase the tax to generate an additional $1.5 billion, bringing the total funding from the MCO tax to $20.9 billion.
Under the Governor’s proposed MCO tax increase, the budget sets aside $12.9 billion to support the Medi-Cal program, while the remaining $8 billion is for targeted rate increases and investments derived from the MCO tax. This approach is designed to maintain current services under the Medi-Cal program and reduce cuts by offsetting state costs.
For the fiscal years 2024–25 and 2025–26, the budget proposes an allocation of $2.8 billion and approximately $6.5 billion, respectively, for targeted provider rate increases and investments. These figures include funds from the Medi-Cal Provider Payment Reserve Fund ($1.2 billion in 2024–25 and $2.7 billion in 2025–26).
Business Climate
Retail Theft: In the days leading up to the release of the January budget proposal, the Governor announced his intention to seek legislation to combat organized retail theft, primarily aimed at strengthening the law and increasing penalties in response to a growing trend of organized theft rings.
Unemployment Insurance Interest Payment: The Governor’s budget proposal includes an allocation of $331 million to cover the annual interest payment on the state’s Unemployment Insurance (UI) loan balance. California’s UI program is solely funded by employer contributions through state and federal taxes on wages. The standard federal UI tax rate is 6% on wages up to $7,000 per employee annually but is typically reduced to 0.6% in states complying with federal UI laws. If a state’s UI fund remains insolvent for two consecutive years, the federal tax credit is reduced, incrementally increasing the tax burden on employers until solvency is restored. Accordingly, the Governor’s proposed UI interest payment could help avoid increased taxes on employers.
Other Notable Budget Proposals
Health and Human Services (HHS) and Medi-Cal: Despite the significant budget shortfall, the Governor’s budget for HHS remains unchanged from last year at $74 billion, largely due to fund shifts and funding delays. The Governor’s budget for Medi-Cal stands at $159.8 billion, marking a reduction of around $1.3 billion from the previous fiscal year (2023–24). This decrease largely results from the expected reduction in the number of enrollees through the redetermination process. Specifically, Medi-Cal’s average monthly enrollment is projected to drop from 14.76 million in 2023–24 to approximately 13.76 million in 2024–25.
Despite these changes, the administration remains committed to several critical health initiatives. The proposed HHS budget includes ongoing support for previously approved Medi-Cal service improvement and efficiency reforms (CalAIM), various behavioral health programs, and services aimed at children and youth, as well as Behavioral Health-CONNECT and housing initiatives for the unhoused. The proposal continues to prioritize the expansion of full-scope Medi-Cal eligibility to individuals without documentation.
It is important to note, however, that the implementation of several programs will be delayed by one year. Furthermore, some funding from the Department of Health Care Services (DHCS) will be redirected back to the General Fund, including revenue generated from the MCO tax.
Workforce Development: The budget proposal includes delays and reductions to previously budgeted dollars to support a number of California’s workforce programs. Of note, the Governor proposes delaying key health care workforce funding initiatives until 2025–26. This includes postponing $140.1 million from the General Fund for nursing and social work initiatives, and $189.4 million from the Mental Health Services Fund for various programs such as addiction psychiatry fellowships, grants for behavioral health professionals and expansion of social work education. This delay, prompted by lower-than-expected Mental Health Services Act revenue, affects several programs under the Department of Health Care Access and Information.
Water: The Governor proposes $7.3 billion (a reduction of $1.4 billion) to fund drought resilience and response programs. Additionally, the budget includes $93.9 million in one-time funds for various flood safety efforts, including $31.1 to support flood risk reduction projects in the Central Valley.
Climate Agenda: Under the Governor’s budget, climate-related investments are targeted for significant reductions and delays. The Governor proposes $6.7 billion in budget solutions, with $2.9 billion in cuts, $1.9 billion in funding delays and $1.8 billion in shifts to other funds (primarily the Greenhouse Gas Reduction Fund (GGRF)). Most notable in this category is a three-year delay of $600 million in GGRF funds across various programs such as the Clean Cars 4 All Program and Other Equity Projects ($45 million) and Equitable At-home Charging program ($80 million).
Energy: The budget proposes a reduction of $1.3 billion in planned energy investments from previous budgets. These cuts would be realized through several proposals such as delaying $200 million for the Residential Solar and Storage Program, a reversion of $35 million for the Hydrogen Grant Program at the California Energy Commission and a delay of $800 million for the Clean Energy Reliability Investment Plan (CERIP).
What Comes Next?
By mid-January, the Legislative Analyst’s Office will release its review of Newsom’s budget plan. This sets the stage for late January, when the legislative budget committees are scheduled to commence their hearings, marking the start of a more intensive examination and discussion phase that will include consideration of several “early action” proposals for which the Governor is seeking rapid approval, including changes in the recent minimum wage bill, and other legislation needed to reduce current-year spending.
As part of this process, the Governor’s budget, along with related budget trailer bills, will be introduced as legislation. These bills encompass both the budgetary framework and specific policy initiatives that will guide authorized program spending. In the following weeks, the Assembly Budget Committee and the Senate Budget Committee will engage in a detailed review of these proposals, including holding public hearings and soliciting public input from various stakeholders.
No later than May 15, the Governor will present an updated budget plan known as the “May Revise” that will reflect the most current revenue estimates and potentially adjust budgetary allocations and priorities accordingly. The legislature then has a crucial deadline of June 15 to send a balanced budget to the Governor—a requirement tied to their compensation—and avoid any delay in payments. Finally, the process culminates with a July 1 deadline for Newsom and the legislature to approve the final spending plan for the fiscal year 2024–25. Of course, after that date, nothing prevents the elected budget makers from enacting further midcourse corrections.