Budget proposal taps reserves to address smaller-than-expected deficit. Read More →

Several issues around climate, energy, insurance remain hot topics

Gov. Gavin Newsom kicked off what’s expected to be a contentious year in the Legislature with a $209 billion general fund budget proposal that would address a shortfall he says is about half as large as the $68 billion gap projected by the Legislature’s fiscal experts.

Newsom’s proposal comes as lawmakers begin introducing legislation for the coming year, which is expected to feature fights over homeowners insurance, artificial intelligence, energy and climate change, including the state’s ability to sustain its shift from gas-powered to electric vehicles.

Newsom said he wants to erase the estimated $38 billion shortfall with a combination of budget cuts, spending delays, narrow tax increases, borrowing and – most of all – tapping into budget reserves.

The governor said his spending plan maintains commitments to his highest priorities, including homelessness, mental health, education and training and climate change. But there would still be belt tightening as schools would see a freeze in the dollars per student they receive, while other commitments made in recent years are stretched into the future.

The shortfall is mostly the result of a projected drop in income tax collections driven by declines in the stock market and other investments returns. Those gains typically fuel big collections in capital gains taxes – but their volatility also leads to California’s infamous revenue rollercoaster. The decline in capital gains tax collections alone accounts for $25 billion of the shortfall Newsom and legislators are facing.

Despite something of a crisis atmosphere in the Capitol, Newsom at times sought to downplay the scale of the problem. He said the difference between his estimates of the shortfall and those of the Legislative Analyst’s Office was due mainly to his team’s greater optimism in the economy’s ability to recover quickly from last year’s slowdown.

“We were prepared for this,” he told reporters. “We’ll manage it.”

The budget proposal drops into a Legislature that is undergoing considerable turnover among both rank and file and leadership. Nearly a third of the current lawmakers are serving their first terms and have never confronted a deficit of this magnitude. The Assembly Speaker – Robert Rivas – took over his post last summer while a new Senate Leader – Mike McGuire – is due to take the helm February 5.

But Newsom said he has “deep respect and admiration” for both men and added he would love to move as quickly as the Legislature is prepared to act, noting, “I want to hit the ground running,” and that “there’s some tough stuff” in his proposal.

While the budget is likely to dominate the Legislature’s focus in the coming months, it’s not the only major issue on the table.


Hot topics include:

Energy and Climate.

Nearly $3 billion in spending on climate programs would be cut to fill the budget deficit. The governor’s proposed budget also did not include funding for implementation of the two corporate emissions disclosure laws (SB 253 and SB 261) passed last year. Newsom expects more than $10 billion in federal funding, however, to bring his climate spending over fiscal years 2022-2027 to $58 billion.

Retail theft.

Several legislators are pressing to crack down on shoplifting and organized retail theft, perhaps by trying to amend a ballot measure voters passed several years ago that reduced prison sentences for some offenses. But Newsom has proposed an alternative that he says can be enacted more quickly and without the need to ask voters to reform Proposition 47.

Insurance.

More Californians are finding it increasingly difficult to obtain traditional insurance coverage. Insurers have pointed to the state’s climate-fueled wildfires and a lack of adequate rates to provide the coverage that homeowners need. So far, the issue is largely being addressed through regulations at the Department of Insurance, but the coming year could see legislation focused on the crisis.

Artificial Intelligence.

The rapid spread of the new technology has prompted concerns about privacy, copyright infringement and misinformation. Expect to see legislation on these issues.

Reparations.

A state task force recently recommended reparations payments for Black Californians descended from enslaved people. While that’s unlikely in the short term given the budget deficit, Capitol insiders expect the discussion to move forward in the coming year, including a focus on how to calculate amounts paid, a formal apology and a new standard curriculum on African American history.