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

It’s May Revision day, and Gov. Gavin Newsom dove into his budget proposal update for the next fiscal year by addressing an additional $9.3 billion shortfall since January without asking for deep new program cuts or tax increases.

Instead, the governor will ask the Legislature to approve additional fund shifts, delayed spending and borrowing to cover most of the shortfall. The only significant tax increase in his plan would restore a tax on managed care health plans that care for Medi-Cal patients, which the facilities might be able to recover from federal funds.

And while the proposal taps into one of the state’s several reserves to provide $450 million to reduce the need for cuts in safety net programs, California’s overall reserves would climb to more than $37 billion, providing a cushion against what Newsom described as uncertainty over a delay in the income tax deadline until October and volatility in the financial markets.

Newsom attributed the widening budget gap to lower revenue estimates of about $8.4 billion and higher expenditures of about $1 billion, mostly due to caseloads for health and social programs like in-home care and Medi-Cal exceeding earlier projections.

The new number for the total shortfall – $31.5 billion – is not an actual deficit. It represents a projection of the deficit that would exist at the end of the next budget year on June 30, 2024, if all spending currently authorized by law is allowed to continue unaltered and tax revenues meet the latest updated projections from the governor’s Department of Finance.

LPA’s Perspective

In the Capitol, the May Revision is typically seen as the starting point for serious budget negotiations among the governor and the Assembly and Senate leadership, which since January have been ongoing at a high level but will now get down to the details.

Notably, Newsom’s revised budget reflects his earlier declaration that he would not support the state Senate’s proposal for a $7 billion tax increase on the state’s largest corporations. The Senate plan would restore corporate tax rates cut by a federal measure enacted by Congress and former President Donald Trump and then use some of the revenue to offer tax cuts to small businesses and renters.

The Legislature is required to approve a budget by June 15 or forfeit its pay, but in recent years lawmakers have passed a placeholder budget to meet that deadline while continuing to negotiate until closer to the June 30 end of the fiscal year before sending the governor a complete spending plan. Even then, major portions of the budget – like the Greenhouse Gas Reduction Fund – often are not approved until later in the year.

The budget bill itself is simply a list of numbers – item by item spending – along with limited “budget language” that adds conditions to that spending. Significant policy changes, usually needed to implement the budget bill but sometimes independent of it, are contained in so-called “trailer bills” that are part of the overall budget package. All of it, except new fees and taxes, can be enacted on simple majority votes.

But outside of those negotiations, Newsom said he will continue to veto most if not all bills passed by the Legislature that require new spending that is not included in the budget deal. Last year he vetoed bills that would have committed the state to an additional $20 billion in spending.

The message for interest groups working with legislators to get new spending or to expand programs is to win those battles during the budget negotiations or face the likelihood that their proposals will be rejected by the governor later in the year.

“We’ve got to get this done in the budget,” he said. “We have all these amazing bills. I care about what they care about. But we have a collective responsibility. At the end, I guess I’m the backstop.”