California faces $22 billion deficit in initial Newsom budget proposal

Updated 4:05 p.m.

California Governor Gavin Newsom unveiled a $297 billion spending proposal Tuesday morning, which includes plans to patch a projected shortfall of $22.5 billion through a mix of cuts, funding delays and shifting how certain projects are paid for.

Despite lower-than-expected revenues, the governor says he plans to “keep promises” on many of his ambitious multi-year priorities including universal pre-kindergarten, reducing homelessness and health care for undocumented workers. 

It’s “full speed ahead” on those programs, the governor said, pledging to fund them this year despite economic uncertainty. 

“They are principles that I campaigned on my reelection [bid] to supporting and things that we recognize are multi-year investments. We’re here to follow through and make sure we get them done,” he said. 

The projected deficit and lingering uncertainty about whether the state’s revenues will worsen or improve by the budget’s June 30 deadline “sums up the boom-bust” of California’s tax revenue system, Newsom said. 

“No one should be surprised by anything in this presentation,” he said, including that he is opting to leave the $23 billion in the state’s rainy day fund untouched unless a recession develops. 

The spending plan kicks off a six-month budget process during which Newsom and legislative leaders will decide how to spend the state’s tax dollars. In May, the governor will present a revised spending plan using clearer budget numbers. In the subsequent weeks, he will negotiate over fine details and potential sticking points with Assembly and Senate leaders.

Lawmakers are required to pass a budget bill by June 15 and the governor must sign it by June 30. 

Here’s a look at top-line items in Newsom’s preliminary budget proposal. 

Filling the deficit

After two years of plum surplus that allowed lawmakers to spend more on items like free school meals, state revenues have fallen below expectations in recent months.

In November, the nonpartisan Legislative Analyst’s Office projected a $24 billion budget deficit. Newsom’s budget proposal cites a $22.5 billion shortfall estimated by his administration’s Department of Finance. 

Newsom proposes to fill the deficit through a variety of measures, including:

• $7.4 billion in funding delays across multiple parts of the budget, which could impact climate programs, campus construction and behavioral health. 
• $5.7 billion in pullbacks, or cuts, to initiatives including $750 million state leaders had hoped to pre-pay in unemployment debt prepayment and $400 million in utility arrearages that went unclaimed last year. 
• $4.3 billion in funding shifts, including some California State University projects and reverting certain bonds from last year into cash projects.
• $3.9 billion in trigger cuts, largely aimed at climate and transportation initiatives.
• $1.2 billion in new revenue from loans and renewal of a tax on Medi-Cal insurers.

Education

Schools would be spared from cuts under Newsom’s budget proposal. It includes nearly $109 billion in Prop 98 funding, which requires a minimum percentage of state spending for education. Newsom said that amounts to $23,723 in per-student spending, an increase of $830 per-student over the current year. 

The spending plan would maintain $4.7 billion in funding for behavioral health for students and only slightly reduce investments to Newsom’s universal transitional kindergarten program, which was based on updated enrollment data.

The governor also wants to include more than $3 million for schools to stock naloxone to address a growing crisis of fentanyl deaths among young people. “All the middle and all the high schools in the state of California who need overdose medication will be provided overdose medication,” he said. 

Homelessness

Newsom used massive state surpluses in 2021 and 2022 to funnel more than $15 billion to local governments to address homelessness. He’s proposing an additional $1 billion this year — despite the deficit — in hopes of getting more people off the streets. 

The governor said he would continue to “demand accountability” from cities and counties on the issue and hinted at legislation that would tie funding to their follow-through on state housing laws. 

 “People just have had it and want to see these encampments cleaned up,” he said. "They demand results. I want to see results. I demand results.”

The governor grew visibly impatient when asked about concerns from local officials about the absence of an ongoing funding mechanism for homeless services, which he called “stale arguments I’ve been hearing my entire life.”

Healthcare

Newsom is pledging to move ahead with expanding Medi-Cal coverage for all low-income workers, regardless of immigration status, which would cost roughly $844 million this year and up to $2.5 billion in ongoing funds when fully implemented. 

“We’re committed. We're not touching that. We're going to get that done,” he said. 

His budget proposal maintains $8 billion in behavioral health funding for adults and students, as well as money to get his CARE Court program up and running in seven counties later this year.

It also includes a proposed $200 million for reproductive care, which could be used for underinsured patients, clinical infrastructure and incentives for providers including scholarships and loan repayment. 

Climate

Newsom says his budget proposal would protect 89% of previous commitments to climate change, but environmental advocates raised concern about $6 billion in potential cuts to climate initiatives including electric vehicle infrastructure.

“To further delay these investments will further compound the climate crisis and the cost of inaction will be far worse,” said Mary Creasman, CEO of California Environmental Voters. “California can’t afford a short-sighted budget.”

The governor said many of the potential cuts to environmental programs would only be implemented if the state’s budget picture worsens due to falling revenues or a recession. If state finances improve, some funding could be restored in 2024. 

As the state responds to devastating flooding from atmospheric rivers that have left at least 17 dead as of Tuesday, Newsom said his budget proposal will include a request for $202 million to spend on urban flood protection and levees. More than $40 million of that would go to levees in the Sacramento Delta area.

The budget would make modest cuts to wildfire mitigation practices, including a $5 million reduction in monitoring, $5 million in forest inspection and $10 million in state forest stewardship. 

Correction: A previous version of this story incorrectly identified the amount of people killed during recent storms. It has since been updated.