Gavin Newsom addresses state deficit in revised budget, proposing tackling 2-year budgets going forward

California Gov. Gavin Newsom on Friday in a revised $288 billion budget proposed eliminating budget deficits for this year and also the next saying it would set the state on a “sound and fiscally responsible path” following the tumult of the pandemic years.

In his much anticipated revised budget, Newsom aims to fill the remaining current fiscal year gap of $27.6 billion -- following some early action -- that must still be closed in negotiations with lawmakers. And, he went on to propose working ahead to deal with an anticipated $28.4 billion deficit in the 2025-26 fiscal year.

The proposal maintains current service levels for several housing, food, health care, and other assistance programs that Californians rely on while pausing the expansion of some programs and trimming multiple one-time and ongoing investments.

“By making tough and responsible decisions now, the state is projected to have a positive operating reserve balance over the next two fiscal years,” Newsom noted in a statement issued before the start of his revised budget presentation at the state Capitol.

Newsom budget revisions came as he navigated one of the biggest shortfalls since taking office with the state facing a deficit.

The current deficit, which the administration on Friday bumped up by about $7 billion from $38 billion to nearly $45 billion, stemmed from a revenue decline in fiscal year 2022-23, with the latest state tax receipts bringing in revenues below the expectations of Newsom’s Department of Finance. A larger $73 billion deficit was projected by the nonpartisan Legislative Analyst’s Office.

Newsom and lawmakers have already agreed to shave $17.3 billion off the original deficit figures from the administration, with the Legislature approving a bill with $1.6 billion in budget fixes.

Newsom’s revised balanced state budget cuts one-time spending by $19.1 billion and ongoing spending by $13.7 billion through 2025-26, including trimming nearly 8% cut out of state operations and a planned elimination of 10,000 unfilled state positions.

Newsom said some of the cuts need to be made, including a one-time $426 million trim to children and youth behavioral health initiatives.

“These are things that I supported and worked closely with the Legislature,” he said.

Newsom hammered on the message he has sent previously, including as early as Thursday during a CalChamber conversation, that it is time for correction in a budget with distortions brought on by the unprecedented bounty of surpluses California reaped in the past two years, in large part due to taxes collected on booming capital gains and strong tax receipts from high earner during the coronavirus pandemic.

Having to trim the budget following a cumulative $177.5 billion surplus over two years is a correction that needs to be made, the governor said.

“We want a leaner government,” Newsom said. “There are hundreds and hundreds of actions that we’re taking. there’s not just one or two.”

For instance, deactivating 46 housing units at 13 prisons will bring an $80 million savings, Newsom noted.

In the end, Newsom sounded themes of still being able to deliver on the important needs of the state with proposed trims to the budget over a wide swath of programs and services but not to the point that it would be debilitating.

The governor struck an optimistic tone in his budget revision presentation despite the steep hill of the deficit to climb over. Newsom went to some lengths to manage expectations about future budgets, while assuring Californians that a prudent way forward is to recognize that distortions will happen but deft corrections -- including planning for two budget years going forward -- can steady the state financially.

Newsom noted California’s population is increasing and it has record high tourism.

“Our values continue to allow us to thrive and those values foundationally, I believe, are intact” despite the budget adjustments being made. And ”we’ll continue to do nation leading work.”