SACRAMENTO, Calif. (AP) — California has a budget deficit of $27.6 billion, Gov. Gavin Newsom announced Friday.
The Democratic governor outlined the deficit Friday as part of his proposed $288 billion state budget for the fiscal year that starts July 1. Cutting 10,000 vacant state jobs and suspending some business tax deductions are some of the ways he’s looking to use to close the gap in the largest budget of any state.
“These are programs, propositions that I’ve long advanced — many of them,” Newsom said. “But you’ve got to do it. We have to be responsible. We have to be accountable.”
The deficit is smaller than the $38 billion Newsom predicted in January, but that’s because it doesn’t include $17.3 billion in cuts and other actions he and lawmakers already agreed on to help close it. Otherwise, it would be closer to $45 billion.
This is the second year in a row the nation’s most populous state is facing a multi-billion dollar shortfall. State revenues have continued to fall amid increasing inflation and a slow-down in the state’s normally robust technology industry. Collections from the state’s three major taxes were more than $6 billion below previous estimates through the end of April.
Newsom says his plan will address both this year’s deficit and a projected $28.4 billion deficit for the following year. He plans to outline more than $32 billion in cuts to make that happen.
The state Legislature must pass a spending plan by June 15.
Newsom and the non-partisan Legislative Analyst’s Office have disagreed on the true size of the state’s deficit this year. The LAO will release its own estimate next week, which will likely be larger.
THIS IS A BREAKING NEWS UPDATE. AP’s earlier story follows below.
SACRAMENTO, Calif. (AP) — California Gov. Gavin Newsom will update his budget proposal on Friday, and the news likely won’t be good.
Newsom, in his last term as governor and widely seen as a future presidential candidate, announced a nearly $38 billion deficit in January, driven by declining revenues. Days later, the nonpartisan Legislative Analyst’s Office said the deficit was actually $58 billion when including some reductions in public education spending.
State officials needed a big rebound in tax collections to improve things, but it hasn’t happened. Through the end of April, state tax collections from its three biggest sources — personal income, corporations and sales — dropped more than $6 billion below the previous estimate.
That means the deficit has likely gotten larger, and Newsom will have to propose more ways to fix it. This is the second year in a row California has had a deficit, and so far the state has avoided the most painful cuts to major ongoing programs and services. Instead, Newsom and lawmakers have slashed one-time spending, delayed other spending and borrowed from other accounts.
A bigger deficit could force tougher choices. In January, Newsom floated the possibility of delaying a minimum wage increase for health care workers that Newsom signed into law to much fanfare just last year.
“We still have a shortfall. We will manage it and we’ll manage it, yes, without general tax increases,” Newsom said on Wednesday during an event held by the California Chamber of Commerce. “We’re not just going to try to solve for this year. I want to solve for next year. I think it’s too important. We have got to be more disciplined.”
State budgeting is a guessing game, particularly in California, where a progressive tax system means the state gets the bulk of its tax collections from rich people. About half of the state’s income tax collections came from just 1% of the population in 2021. This makes the state more vulnerable to swings in the stock market.
If lawmakers and Newsom get revenue projections wrong and the state takes in less than they thought, there’s a shortfall. And unlike the federal government, the California Constitution requires the state to have a balanced budget.
Last year, their predictions were way off after a series of destructive storms in January 2023 prompted lengthy delays in tax filing deadlines. Instead of filing their taxes in April, most Californians could wait until November. Lawmakers still had to pass a budget by June, despite not knowing how much money they had.
This January, Newsom said the state’s revenues for 2022-23 to 2024-25 have been coming in $42.9 billion lower than they estimated.
Newsom and lawmakers have already agreed to about $17 billion in reductions and deferrals to reduce the deficit. Plus, Newsom has said he wants to take $13 billion from the state’s various savings accounts to help balance the budget.
But these won’t close the gap, and California appears headed toward more deficits in the future.
Corporate tax collections are down 15% from last year, the fourth largest drop in the past 40 years, according to the LAO. And while income taxes are growing thanks to a 20% increase in the stock market since October that’s driving an increase of 8% in total income tax collections this year, the LAO said growth is unlikely to continue. That’s because the broader state economy has not improved — the unemployment rate has risen and investments in California businesses have declined.
After Newsom reveals his proposal on Friday, state lawmakers will have until June 15 to pass a balanced budget. The new fiscal year begins July 1.