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Newsom budget promises no new taxes but $15.2B in cuts against $80B deficit

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California Gov. Gavin Newsom promised “no new taxes” in his 2024-2025 budget as he announced the state’s shortfall is $7 billion worse than was expected in January, and proposed $15.2 billion in budget cuts against an up to $80 billion deficit. Newsom’s cuts include reducing water storage and reducing the state’s prison population by 4,600 inmates.

“The need to right-size in relationship those expenditures to revenue is self-evident as it relates to some of the projected shortfalls we announced in January,” said Newsom in his budget proposal press conference.

In January, Newsom announced he was expecting a $37.9 billion budget deficit, compared to up to $73 billion by the non-partisan, state-funded Legislative Analyst’s Office. Newsom claims new data says the state’s shortfall will be $7 billion worse than expected in January, suggesting the state’s deficit could be as high as $80 billion.

Once accounting for this figure and Newsom’s $17.3 billion “early action” bill that cut $3.6 billion in spending and shifted the remainder of the spending to later years, the governor’s reported deficit is now $27.6 billion for the 2024-2025 fiscal year.

In light of this, Newsom proposed $15.2 billion in cuts, $4.2 billion use of reserves, $14.8 billion in program expansion pauses and shifts, and $7.5 billion from borrowing and non-tax revenues to produce a $3.4 billion surplus for the 2024-2025 fiscal year.

It’s unclear what fiscal reason would rationalize drawing $4.2 billion from reserves to generate a $3.4 billion surplus, instead of taking out just $800 million instead.

“The Governor has recognized the seriousness of the situation and it is a positive sign that he is proposing real cuts and focusing on efficiencies. Unfortunately, the proposal still relies on too many gimmicks and fund shifts and the Governor is still underestimating the actual size of the budget shortfall that must be addressed,” said Pacific Research Institute Senior Fellow for Business and Economics Wayne Winegarden in an interview with The Center Square. “On net, the budget is still on an unsustainable path.”

Newsom also defended expanding the state’s expansion of Medi-Cal to all illegal immigrants in the state, which is expected to add 700,000 beneficiaries to the program at a cost of $3.4 billion, or nearly $5,000 per individual, in fiscal year 2024-2025.

“We also want to maintain our health care expansion across the board, regardless of ability to pay, regardless of pre-existing conditions and your immigration status,” Newsom said.

Newsom’s major one-time savings come from $2 billion in cuts to state-funded broadband investments, $500 million from water storage spending cuts, and $550 million from facility grants for building more “transitional kindergarten” spaces for the universal rollout of a new grade between preschool and kindergarten, and $1.4 billion from limiting the state childcare expansion to 119,000 slots, instead of the earlier 200,000.

Recurring annual savings include $80 million per year from reducing prison capacity by 4,600 inmates and closing other prisons early, and $510 million from the Middle Class Scholarship program for students pursuing a teaching credential with family income and assets up to $217,000.

Newsom’s May budget also proposed spending more per student over his January budget, at $23,940 in May compared to $23,519 in January.

Newsom also proposed creating a new account to prevent anticipated revenue in excess of historic levels from being spent before it arrives at the state treasury, as is currently done, which creates financial difficulties when the money does not arrive.

“It would capture this excess revenue and allow us on the basis of historic trends to set it aside until it materializes as opposed to assuming it’s coming in on the basis of the [Legislative Analyst Office] and [the Department of] Finance and experts saying we believe it will come in and then we appropriate it only to discover it didn’t come in a la what occurred over the last two fiscal years,” Newsom said.

Also, with home insurance rates continuing to rise as many insurers simply leave the state because they can’t raise rates fast enough to cover losses, Newsom proposed expediting the insurance rate filing process, which would enable more insurers to stay but do little to address the wildfires driving rate increases and losses in the first place.

After introducing a budget in January, the governor takes in more financial data and feedback from the legislature to produce a revised budget proposal in May. Under California law, legislators must pass a balanced budget by June 15 to keep getting paid.