After years of surpluses, California headed toward a deficit

SACRAMENTO, Calif. (AP) — From a budget perspective, the first four years of California Gov. Gavin Newsom’s time in office has been a fairy tale: A seemingly endless flow of money that paid to enact some of the country’s most progressive policies while acting as a bulwark against a tide of conservative rulings on abortion and guns from the U.S. Supreme Court.

But just days into his second term, that dream appeared to be ending. Tuesday, Newsom announced California likely won’t collect enough money in taxes to pay for all of its obligations, leaving a $22.5 billion hole in its budget.

The deficit was not a surprise. Newsom and the state’s budget writers have been signaling for well over a year that California was sailing into economic headwinds. The news on Tuesday was Newsom offering his first plan of what to do about it.

Notably, Newsom chose not to dip into the state’s $35.6 billion savings account. And he proposed no significant cuts to major programs and services, including vowing to protect programs that pay for all 4-year-olds to go to kindergarten and cover the health expenses for low-income immigrants living in the country without legal permission.

Instead, Newsom plans to delay some spending while shifting some expenses to other funding sources outside of the state’s general fund. He has proposed $9.6 billion in cuts, including canceling a planned $750 million payment on a federal loan the state took to cover unemployment benefits for people who lost their job during the pandemic.

Whether that plan holds will depend on what the state’s finances look like after April 15, when most residents file their state income tax returns. Newsom and legislative leaders don’t have to approve a spending plan until the end of June.

“We have a wait—and-see approach in this budget in terms of being cautious and being prepared,” Newsom said.

But Newsom appeared somewhat pessimistic about the future as he scaled back some of his ambitious climate proposals, cutting his much heralded five-year, $54 billion investment to $48 billion.

Newsom tried to downplay that cut, arguing the $48 billion is still one of the largest climate investments in the world and that the state would seek to recover some of that lost money from other sources.

Still, it was enough of a cut to anger some climate groups who had been heartened by the state’s commitment to combating climate change in recent budgets.

“We have to sustain our commitment to climate action every year. This proposed budget doesn’t do that,” said Mary Creasman, CEO of California Environmental Voters. “To further delay these investments will further compound the climate crisis and the cost of inaction will be far worse.”

Democrats control all of state government in California, leaving Republicans with little influence on policy and budget decisions. State Sen. Roger Niello, the top Republican on the state Senate’s budget-writing committee, said lawmakers need to focus on areas where the state is already spending lots of money with few results — like homelessness.

“Generally speaking, we wouldn’t suggest necessarily that we spend more but spend smarter,” Niello said.

Despite the looming deficit, Newsom wants to give local governments an extra $1 billion for homelessness programs — money he vowed would come with an extra dose of accountability after not being happy with how some locals have been spending state resources.

Public schools were mostly shielded from cuts in Newsom’s proposal, with one exception. Newsom cut $1.2 billion from a grant program that was aimed at paying for instruction in arts and music but which most districts had planed to use it to help pay down their pension obligations, according to Kevin Gordon, a lobbyist who represents most public school districts.

Still, Gordon said it was “stunning” that schools avoided deep cuts in a budget with a projected $22.5 billion deficit.

Other deficit actions were more subtle. California is one of five states and the District of Columbia that taxes people who refuse to purchase health insurance. The money from that tax goes into an account that was supposed to help low-income people pay their health insurance premiums. Newsom proposed taking the money in that account — $333.4 million — and sweeping it into the state’s general fund to help balance the budget.

“It’s exactly in economic downturns where this kind of help to afford coverage is even more urgent” said Anthony Wright, president of the consumer advocacy group Health Access. “We will be advocating with the Legislature to see if that can be continued.”

While the deficit got most of the attention on Tuesday, Newsom did propose some new spending. He wants to spend $93 million combating fentanyl, a synthetic drug similar to opioids that has caused countless overdose deaths. The money would come from the state’s share of legal settlement with pharmaceutical companies over opioids.

Newsom also wants to spend $3.5 million in education money to provide all middle schools and high schools with at least two doses of naloxone — a medicine used to reverse an opioid overdose.

“This is a top priority if you’re a parent,” Newsom said. “I don’t think there’s a parent that doesn’t understand the significance of this fentanyl crisis.”

California’s deficit is a sharp turnaround from the previous year, when California had a surplus of around $100 billion. That money that mostly came from a soaring stock market that made lots of Californians very rich, who then paid taxes on that new wealth.

Since then, the federal government’s attempts to reign in inflation have had a chilling effect on the economy, meaning rich people are not making as much money. That’s significant in California, where the top 1% of earners account for nearly half of all the state’s income taxes.

So far this year, California’s tax revenues have been well below expectations. If those declines continue, more action could be needed to cover the deficit.

“Stock market and tech sector business trends are driving state revenues even lower,” Assembly Speaker Anthony Rendon said. “This June, the large reserves built over the last decade may be important for protecting California’s progressive investments.”

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Associated Press reporter Sophie Austin contributed to this report.