When Gov. Gavin Newsom released his proposed $300 billion fiscal year
(FY) 2024-25 budget in Jan. , he acknowledged that there would likely be
a deficit.

Twice since then the Legislative Analysts’ Office (LAO) has advised the
Legislature of the deficit potential and the likelihood of it increasing
by May.

On March 14, the state’s Senate Democrats agreed with release of their
“Shrink the Shortfall” proposal to address the impending and increasing
deficit for the FY starting July 1.

Four days later, Newsom, Senate Leader Mike McGuire (D-North Coast) and
Assembly Speaker Robert Rivas (D-Salinas) announced that they had
collectively agreed to a plan to address the pending deficit.

“Thanks to leadership in the Assembly and Senate, California is stepping
up with a balanced approach that will take a significant chunk out of
the projected shortfall,” Newsom said in the news release announcing the
executive and legislative agreement. “Despite the uncertainty due to the
federal tax deadline delay last year, historic reserves and fiscal
responsibility will assure a balanced budget that meets California’s
needs.”

While the Senate had previously released its “Shrink the Shortfall”
plan, the Assembly has taken no action nor offered any alternatives
other than despair of the consequences of the expanding red ink. Neither
the speaker nor the Assembly Budget leaders have announced any specific
proposals.

“The Assembly is committed to a deliberative, transparent budget process
that protects hard-working Californians,” Rivas said in the press
release, without sharing any details. “I appreciate our partnership with
Governor Newsom and Pro Tem McGuire to finalize this preliminary and
initial budget package in early April, which is an important first step.
But the Assembly’s budget work continues, including more than two dozen
budget and oversight hearings scheduled next month. There are tough
choices on the horizon, which is why our process is so critical.”

However, not quite in accord with the Democratic leaders’ budget
actions, Senate Republican budget leader Roger Niello (R-Fair Oaks)
issued the following statement, “The budget process has been degraded in
the last several years with unilateral decision-making happening behind
closed doors by one political party. The fact remains that the state is
facing a major deficit that has continued to grow, and this process
should be open, transparent, and deliberative … Not allowing public
discussions or different viewpoints to weigh in is a disservice to the
millions of Californians we represent and erosion of democracy.”

Recognizing the deficit could exceed $53 billion, the Senate Democrats,
led by McGuire and Scott Wiener (D-San Francisco), chair of the Senate
Budget and Fiscal Review Committee, had earlier offered several areas to
make $17 billion in reductions now and in the future budget, which could
yield a more manageable and less intractable deficit.

“This is why the state must move quickly to reduce the deficit. There
are no easy options for closing this shortfall,” their report stated.

In the news release with the proposals, McGuire stated, “When times are
tight at home, people buckle down and do what needs to be done. That’s
what the Golden State has to do right now, too. The quicker we move, the
quicker we’ll be able to reduce the deficit, and we know we have to move
decisively because the budget shortfall is real and serious.

“The Senate’s plan to shrink the shortfall protects core programs,
includes no new tax increases for Californians, makes necessary
reductions, and takes a prudent approach to utilizing the Rainy Day Fund
so we can be prepared for any future tough times.”

Of the $17.1 billion in proposed cuts, $3.7 billion would occur during
the remainder of this FY. Then $13.4 billion is proposed for next FY.
With the use of $12.2 billion from the Rainy Day Fund, the remaining
potential deficit would be between $8.6 billion and $23.6 billion.

However, this proposal assumed the deficit would not be larger than $53
billion, but the latest LAO report warned of a deficit greater than $70
billion.

About a third of the proposed reductions occur in transportation and
public safety programs and another quarter in health and human services.

Most were in the range of $50 to $300 million. However, the largest
proposed reduction is actually a tax increase. The proposal endorses the
governor’s recommendation to impose a tax on managed care organizations.
This would reduce General Fund expenditures by about $2.8 billion. The
actual tax increase would be about $1.5 billion.

Thursday, March 21, the Legislature did approve this tax increase, which
is now awaiting Newsom’s signature.

Another proposed cut was a $1.7 billion shift of General Fund moneys for
climate and energy programs. Rather than actual cuts, the programs’
funding source would be the Greenhouse Gas Reduction Fund. The actual
programs will be determined later, according to the report.

The third largest “cut” was agreement with Newsom’s proposal to return
to a former payroll accounting plan, used from 2010 through 2019. This
would trim another $1.6 billion from the proposed budget.

The largest actual program cut was $1 billion from the Formula Transit
and Intercity Rail Program. The next largest was $500 million from the
School Facility Program.

The plan does include a proposed reduction of $9 million in this year’s
Cal Fire budget. This would affect the prescribed fire and hand crews,
Forest Legacy and Forest Data Hub programs.

“After years of strong progress to advance California values, we face a
huge budget challenge … Time is truly of the essence. The early actions
we’re proposing, including $17 billion in General Fund solutions, not
only reduce the size of the deficit in this budget year and the next,
but also give us more time to develop thoughtful solutions to address
the shortfall that will remain,” Weiner said in his release.

“Let’s be clear: Shrinking the shortfall early in the process is step
one. The Senate’s 2024-25 budget plan will be released later in the
spring and will provide a comprehensive proposal for a balanced,
responsible budget that protects core programs and services and
positions the Governor and the Legislature to best protect California’s
progress,” he added.

However, dissenting views have already been offered. “The unwillingness
to cut spending demonstrates a complete misunderstanding of the problem,
which is why the Senate plan to ‘shrink the shortfall’ is destined to
fail,” wrote Dr. Wayne Winegarden and Tim Anaya, both with the Pacific
Research Institute. “The budget games the Senators are proposing only
make sense if current expenditure levels were affordable and the
shortfall was a one-time event. Neither condition holds. Total state
expenditures are still elevated and are about 10 percent of personal
income, which is well above the long-run average of 7.9 percent.”