California has a $68 billion deficit. Here are 5 ways Gavin Newsom could address the budget

Gov. Gavin Newsom on Wednesday morning will detail his proposed budget for the 2024-25 fiscal year, but the unveiling looms as a somber affair as he delivers it with a $68 billion deficit.

A December report from the Legislative Analyst’s Office showed a tax revenue shortfall in 2023 that created a “serious budget deficit” that may require the state to dip into spending reserves.

The legislature has been back in session for just a week, and state spending has already incited intra-party squabbling among lawmakers — particularly over Medi-Cal expansion covering California’s undocumented immigrants.

Newsom will have the first half of the year to revise whatever he proposes on Wednesday, and he’ll work with Assembly Speaker Robert Rivas and Senate leaders Toni Atkins and Mike McGuire. He’ll unveil his revised budget in June. The budget year begins July 1, and the legislature has to approve any plan.

For now, here are five things to look for when Newsom’s office releases the initial proposed budget.

Will Newsom declare a fiscal emergency?

In its December report, the LAO’s guidelines for working with such a large deficit suggest that Newsom will declare a fiscal emergency, which will allow lawmakers to dip into $24 billion in the reserve fund.

“Given the state faces a serious budget problem, using general purpose reserves this year is merited,” Gabriel Petek, legislative analyst, wrote in December. Newsom must declare a fiscal emergency to access reserves.

“That said, we suggest the Legislature exercise some caution when deploying tools like reserves and cost shifts.”

The LAO recommends that, should Newsom make the declaration, Newsom and lawmakers should only dip into half of the rainy day fund (roughly $14 billion). This would still leave a cushion for future budget shortfalls.

Assembly Republicans urged the Governor on Monday to make the declaration.

“You have chosen to do nothing but deflect instead of addressing the gravity of this problem,” wrote Assemblyman Vince Fong, R-Bakersfield and Assemblyman James Gallagher, R-Yuba City. Fong is the Vice Chair of the Assembly Budget Committee, and Gallagher is the Assembly Republican Leader.

“Now, we urge you to declare a fiscal emergency to enable your administration and the Legislature to proactively engage in solving the massive budget gap your administration created.”

Less than expected for schools and community college

In the 2023-24 budget, K-12 education and higher education accounted for more than 45% of state spending.

This year, there is nearly $19 million less in the general fund for schools and community colleges than was estimated in June 2023, according to the LAO report. Newsom, who campaigned as a champion of early childhood education and more recently announced a school-to-career master plan for high school students, may have to make cuts.

Education funding is guided by Proposition 98, which establishes a minimum amount from the General Fund to go toward education. The state could cut education spending by $16.7 billion and still meet the Prop 98 minimum, according to the report.

In past budget crises, Petek wrote, the state made across-the-board cuts to per-pupil allocations (the amount the state spends per student) and deferred payments.

“These options, however, tend to be disruptive for school operations, particularly when the state announces them on short notice,” Petek said.

A debate over Medi-Cal expansion

As of Jan. 1, undocumented residents in California can now access Medi-Cal health care — an expansion that will cost about $3.1 billion per year.

Conservatives have already started fighting about the merits of such spending.

“As the son of immigrant parents who came to this country by legal means, I was outraged our state government would earmark billions in funding for the healthcare of foreign nationals when our own citizens cannot afford their healthcare amid skyrocketing insurance premiums, historic inflation, and the highest cost of living in the nation,” said Republican Assemblyman Bill Essayli, R-Riverside, in an op-ed on Monday.

Essayli last week introduced Assembly Bill 1783, which would repeal taxpayer funding going toward health care for undocumented immigrants.

“It is not controversial to demand our politicians take care of our citizens before trying to care for the citizens of other nations,” he wrote. “It’s common sense.”

Another Republican, however, supported the measure on the merits of economic common sense in a SacBee op-ed.

“The best we can do in the State Legislature is to make our health-care system more efficient and fiscally responsible, which is exactly what expanding health-care eligibility to undocumented immigrants does,” wrote Republican Assemblyman Devon Mathis, R-Visalia.

Essayli and Mathis had a heated exchange on X, formerly known as Twitter, over their opposing views on the issue.

But expanding coverage to undocumented immigrants is not something Newsom is likely to walk back; the Governor made history when California became the first state to offer coverage to all undocumented immigrants in the state.

“In California, we believe everyone deserves access to quality, affordable health care coverage – regardless of income or immigration status,” Newsom’s said in a statement last week.

“Through this expansion, we’re making sure families and communities across California are healthier, stronger, and able to get the care they need when they need it.”

More cuts to climate change?

Newsom and California lawmakers made historic investments in combating climate change in 2021 and 2022, when they set aside $54 billion for such programs to be rolled out over a five-year period.

“We’re not only doubling down, we’re just getting started,” Newsom said in 2022 after signing “some of the nation’s most aggressive climate measures” that would cut air pollution by 60% and reduce oil consumption by 91%.

But last year, facing a major deficit, Newsom pared that amount to $48 billion, cutting costs to programs that would support zero-emission vehicles and rail projects, residential solar, and energy storage. He hoped that federal money could help offset last year’s cuts.

Those cuts could be reinstated — but it’s unlikely given that the budget deficit has more than doubled what it was last year. In fact, even bigger cuts may be on the horizon. And in Washington, federal lawmakers are struggling with their budgets and cuts to popular programs are possible.

Making cuts to last year’s budget

One potential cost-saving scenario could involve tweaking the budget lawmakers passed last year to bring spending more into line with existing revenue conditions.

This is a possibility because lawmakers and Newsom passed the 2023-2024 budget using financial projections that turned out to be overly optimistic. This left the state with a big gap between spending commitments and actual funding.

Republicans, especially, may agree with this approach.

Sen. Roger Niello, R-Fair Oaks, who serves as vice chair of the Senate Budget Committee, told The Sacramento Bee in December it may be a good idea to re-open the previous year’s budget and consider “adjusting some of our current year spending to make it easier for subsequent years.”

The Bee’s Stephen Hobbs and Lindsey Holden contributed to this story