California faces a $22.5 billion budget deficit, governor says

SACRAMENTO, Calif. (AP) – California faces a projected $22.5 billion budget deficit for the upcoming fiscal year, Gov. Gavin Newsom announced Tuesday, just days into his second term. This is a sharp turnaround compared to last year 98 billion dollars surplus.

the deficit, while not surprisingcould signal the end of a decade of economic growth in the nation’s most populous state.

Newsom, a Democrat, proposes closing the gap by delaying spending in some areas and changing how others are funded. His budget appears to avoid significant cuts to most major programs, although it lowers proposed spending on climate change initiatives by about $6 billion. The state hopes to restore those expenses by 2024 or offset them with federal money.

Among his climate maneuvers: He wants to shift $4.3 billion in spending on zero-emission vehicles from the state’s taxpayer-funded general fund to a special fund paid for by polluters. He is also delaying $3.1 billion in climate and transportation funding by a year.

The state still has about $35.6 billion in reserves.

Newsom emphasized that California would continue robust spending on public and higher education, climate change, health care and drought and wildfire response.

“We keep our promises,” he said.

Newsom’s presentation offers the first glimpse of his spending and policy priorities as he launches his second term, but it is not the final word on how the state will distribute money. He reviews the state’s finances in May after tax revenue comes in, and he signs a final budget in June.

The California Republican Party quickly blasted the proposal, saying Newsom has for years failed to adequately address issues like homelessness and wildfires despite record spending.

“Now with a massive budget deficit, it’s time for Gavin Newsom to finally address smarter spending to address the many problems plaguing our state and driving away longtime residents,” party chairwoman Jessica Millan Patterson said in a statement.

Newsom’s proposed cuts to climate spending, including in programs designed to boost zero-emission vehicles, drew criticism from some of his traditional environmental allies. The budget cuts hundreds of millions in spending on programs to expand zero-emission vehicle infrastructure in low-income neighborhoods and to shift vans, planes, rail lines and other transportation sources away from greenhouse gases.

“Investing in climate solutions is the only way to ensure a better California for everyone who lives here,” said David Weiskopf, senior policy advisor for the climate group NextGen California.

His proposed budget isn’t all cuts — Newsom wants to give an additional $1 billion to local governments to fight homelessness, though he wants more accountability from local leaders. In the fall, he threatened to withhold funding for such programs. He has also proposed spending more on cash assistance programs for low-income and disabled Californians.

Other ways he’s closing the spending gap include pulling back on $3 billion designed to help the state deal with inflation.

Newsom has warned of a potential budget shortfall for more than a year, and the Legislative Analyst’s Office said in November that the shortfall could be about $25 billion.

In September, Newsom publicly berated lawmakers for sending him dozens of bills that, when added together, would have authorized billions in new spending. Newsom vetoed those bills, saying he has “made it crystal clear that we are seeing economic headwinds.”

Dealing with a deficit will be a change of pace for the state, where spending has more than doubled in the 10 years since the last recession. Officials have launched a dizzying array of new programs and services — including pledging to pay for all 4-year-olds to attend kindergarten and agreeing to cover the health care costs of all low-income immigrants living in the country without legal permission.

The money has mostly come from a rising stock market that launched a parade of California-based technology companies. These companies — including Uber, Airbnb, Lyft and Pinterest — made many people very rich and created a new class of millionaires and billionaires in a state with a progressive tax code where nearly half of all income taxes come from the top 1% of earners.

Similarly, plenty of economic factors — led by runaway inflation, supply chain disruptions and Russia’s invasion of Ukraine — have had a chilling effect on the economy. The S&P 500, a key indicator of the health of US stock markets, has fallen more than 18% since its peak in late 2021.

Since rich people don’t make as much money, they pay less in California state taxes. So far this year, California’s tax revenue has been $4.6 billion below expectations — not including some one-time corporate tax payments that state officials say they can’t count on.

Money from the capital gains tax is expected to be about 5.5% of state revenue, down from 9.75% last year, Newsom said.

Still, California appears well-positioned to weather an economic downturn. Of the $131 billion in general fund surpluses the state has had over the past four years, most of it — about $80 billion — has paid for things that don’t require ongoing funding, like construction projects. Only $10 billion in surplus spending has paid for ongoing obligations, according to the Legislative Analyst’s Office.

Constitutional limits prevent lawmakers from depleting reserves to cover a deficit. And unlike the federal government, California’s budget must be balanced. Newsom and lawmakers would have to tighten state spending to cover the entire shortfall — something Senate Budget Committee Chairwoman Nancy Skinner said is doable.

“We funded things at such record levels, and many of the programs we funded haven’t even started yet, so we still have room to make some adjustments if needed,” she said. “I am very optimistic because we are in good shape.”

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