Yesterday, Governor Gavin Newsom unveiled his fifth January budget proposal, which would authorize $223.6 billion in general fund spending, a 3.6% decrease from current-year spending.
The Governor’s budget forecasts a $22.5 billion deficit, which is roughly consistent with forecasts from other sources projecting declining state revenues. The Governor cited the decline in personal income tax withholding and capital gains taxes as the main drivers of the projected deficit going into the state’s 2023–24 fiscal year.
The Governor proposes to bridge this budget deficit by taking the following actions:
- Funding Delays – $7.4 billion: The Governor is proposing delaying funding for multiple items, primarily capital projects. He stated these delays should not result in service delays.
- Reductions/Pullbacks – $5.7 billion: The Governor is proposing reducing spending for various items enacted over the past two fiscal years, including the $3 billion provided as an inflationary adjustment. He also proposes withdrawing a previously approved $750 million payment to the Unemployment Insurance Trust Fund.
- Trigger Reductions – $3.9 billion: The Governor proposes to reduce funding for certain items and make them subject to a trigger that would restore these reductions next year if sufficient funds are available.
- Limited Revenue Generation and Borrowing – $1.2 billion: Most projected revenue generation is to be derived from a long-expected renewal of the state’s managed care organization (MCO) tax.
State Reserves to Remain Untouched
Despite the deficit, the Governor does not propose to tap into state reserves to bridge the financial gap. Indeed, the state’s main reserve account, the Budget Stabilization Account, is proposed to reach its constitutional maximum amount of $22.4 billion. Together with other budget reserves, the Governor is proposing total reserves of $35.6 billion.
- Health and Human Services (HHS): The Governor proposes to maintain funding to expand full-scope Medi-Cal eligibility for all income-eligible Californians regardless of immigration status and to sustain a multibillion-dollar commitment to continue the CalAIM project. The budget also maintains over $8 billion in total funds across various HHS departments to expand the continuum of behavioral health treatment and infrastructure capacity. The budget proposes the renewal of the MCO tax with minor modifications to help maintain Medi-Cal program funding for the Medi-Cal expansion. The proposal delays $130 million in general funding for Community Health Worker Initiative Grants until 2024–25.
- Homelessness and Housing Investments: The budget proposal maintains approximately $17 billion allocated over the past two years to support a strategy to combat homelessness, including long-term permanent housing options, services and supports for individuals experiencing homelessness. While the budget does not propose any reductions to current homelessness programs, it states the Governor’s intention to seek legislation to condition eligibility for any future homeless-related grants on compliance with state housing law. On housing, the proposal includes $350 million in reductions relating to housing programs, including a reduction in the Dream for All program (which helps low- and moderate-income first-time homebuyers), CalHome (grants to local agencies and nonprofits to assist low-income homebuyers) and the Accessory Dwelling Unit program.
- Workforce Development: The 2022–23 budget invested about $2.2 billion in workforce training and development programs. The Governor proposes reducing this amount by a comparatively modest $55 million, which is to be restored if general fund revenues meet a January 2024 target.
- Water: The Governor proposes a 2% reduction ($194 million out of $8.7 billion) in previously committed funding to minimize the impact of drought, subject to restoration if revenues improve. The cuts include a $24 million reduction for watershed resilience, a $70 million reduction for PFAS cleanup and a $15 million reduction to support aqueduct solar panel pilot studies.
- Infrastructure Investments: The budget proposal maintains a $44 billion commitment for various statewide infrastructure projects, including programs to help the transition to zero-emission vehicles (ZEVs), to promote energy innovation and reliability, and to increase access to broadband connectivity.
- Climate Agenda Trigger: The Governor is proposing to reduce approximately 10% of recently enacted spending on climate, subject to automatic restoration if revenues improve. The state will also pursue additional federal funding through the Inflation Reduction Act and the Infrastructure Investment and Jobs Act. The proposal also includes a $2.5 billion reduction across various ZEV programs, some of which would be offset by funding from the state’s Cap-and-Trade Program.
- Energy: The budget proposal includes over $1 billion in reductions in spending in current and future years, subject to a revenue-based reinstatement trigger. These proposals include a $400 million reversion of the California Arrearage Payment Program, as well as a reduction of $270 million for the Residential Solar and Storage program.
- Transportation: The Governor proposes a $2.7 billion reduction for transportation programs and projects. This includes a total reduction of $2 billion over multiple years to the Transit and Intercity Rail Capital Program that could be restored if general fund revenues improve.
- Gas Price Gouging “Penalty”: The budget proposal references the special session of the Legislature that has been called to enact a price gouging penalty on excess oil refiner profits, but it does not project a revenue figure tied to the proposal.
- Transitional Kindergarten: The budget proposal maintains funding for expanded eligibility for transitional kindergarten (TK). This year’s budget includes $690 million to implement the second year of TK, which will increase access to approximately 46,000 children across the state.
- Higher Education: The budget proposal increases both the University of California (UC) budget by $215 million and the California State University system by $227 million. The Governor is proposing to delay several capital outlay projects, including $83 million for campus expansion projects at UC Riverside and UC Merced. For the California Community Colleges, the Governor proposes $200 million in one-time funding to help address declining enrollment.
- Childcare Slots: The budget proposal maintains over $2 billion in annualized spending to expand childcare slots.
What Comes Next?
The Governor recently named longtime Senate Budget Committee staffer Joe Stephenshaw as the director of the Department of Finance. Working in conjunction with Legislative Affairs Secretary Christy Bouma and her team, the Governor’s budget is introduced as legislation together with other bills reflecting his budget and policy priorities—commonly known as budget trailer bills. (See below for links to the initial legislative package.) In the coming weeks, the Assembly and Senate Budget Committees will begin the process of holding hearings and getting stakeholder input on these budget proposals.
Governor Newsom will issue a “May Revise” in the spring, based on updated revenue totals, and the Legislature will have until June 15 to pass a budget for the Governor to act on before July 1.
Additional budget information: