Last week, Gov. Gavin Newsom announced his May revision for the coming
fiscal year (FY) budget. For FY 2024-25, beginning July 1, Newsom’s
revised total expenditures, including federal, special and bond funds,
will be nearly $288 billion, of which $201 billion will be for the
General Fund accounts. This is about $25 billion less than available for
the current FY, which ends June 30.

From the beginning of the news conference, Newsom acknowledged a deficit
as a result of capital gains being such a large percentage of
California’s revenues. Capital gains vary greatly from year to year. The
economy, interest rates and other reasons influence when and how much of
their portfolio an individual may sell.

In 2021, the state collected nearly $350 billion from capital gains.
That declined nearly $200 billion in 2022 and was $137 billion in 2023.

Nevertheless, he did not consider this situation a crisis. “We need to
right size expenditures in relationship to revenue,” he began. “Our
approach is not looking at just the budget year, but looking at the next
two years … We’ve got to be accountable. I’m submitting a balance
budget.”

The governor and legislators have been working to address the deficit
problem almost from the day after his initial budget proposal.

The January proposal assumed a deficit of $37.9 billion. The Legislature
took some actions in April to pare it by $17.3 billion. The deficit
balance of $20.6 billion grew another $7 billion with the May revision.

Thus, Newsom and his financial staff needed to reduce the $27.6 billion
imbalance. Furthermore, Newsom said the initial budget estimates for FY
2025-26 resulted in a $28.4 billion deficit.

As he began explaining the details of his proposals, Newsom emphasized,
“This is not just a short-term strategy It is appropriate and prudent
for us not only to solve just this year, but also solve it for next
year.”

If the legislators agree with Newsom’s proposals, he said the FY 2024-25
would end with a $3.4 billion surplus and a $650 million surplus in FY
2025-26.

His news release stressed, “Governor Newsom is balancing the budget by
getting state spending under control — cutting costs, not proposing new
taxes on hardworking Californians and small businesses — and reducing
the reliance on the state’s ‘Rainy Day’ reserves this year.”

In developing his plan, Newsom was not an enthusiastic budget cutter.
Reductions are just $15.2 billion of the solution. He proposes to use
$4.2 billion of reserves, $7.5 billion from some additional revenues and
borrowing, $14.8 billion from pausing some new programs or growth of
programs and shifting funding sources, and $3 billion from achieving
state efficiencies.

The efficiencies come from several directions. More than $750 million
will be elimination of state vacant positions. The rest will come from
changes to state business such as use of artificial intelligence for
some programs and elimination of landline phones in many offices.

The reductions include one-time cuts as well as ongoing reductions.
Examples of the one-time cuts include $426 million from the Children and
Youth Behavioral Health program, $500 million from water storage and
$620 from health care workforce. Ongoing reductions will include $300
million from the state and local public health and $500 million from
Middle Class scholarships.

Program pauses include deferring the start of the California Food
Assistance Program for two years from October 2025. Also, the Childcare
Assistance program that has already employed 119,000 individuals will be
maintained at this level rather than expanded to 200,000.

Many of the program shifts will move program funding from the General
Fund to the Cap and Trade Fund. This includes many transit and
zero-emission vehicle programs.

Specific Proposition 98 funding for schools decreases about $150 per
pupil to $17,500, the overall per pupil funding will increase to
$23,940.

In a joint statement, Speaker of the Assembly Robert Rivas (D-Salinas)
and Assembly Budget Committee Chair Jesse Gabriel (D-Encino) said, “… We
are encouraged that the Governor’s May Revision improves budget
prospects for future years and saves rainy-day reserves. Nobody knows
what challenges California may face, so we must always stay prepared.”

Senate Majority Leader Lena Gonzalez (D-Long Beach) released the
following statement: “Today, the Governor’s May Revise marks another
step in the process toward delivering an on-time and balanced budget for
the people of California. As early forecasts last year indicated a
budget deficit, discussions between the Legislature and the Governor
have been ongoing to safeguard essential programs and services while
making strides to reduce the deficit.”

The Republicans were less kind to Newsom’s proposals, Sen. Roger Niello
(R-Fair Oaks), vice chair of the Senate Budget & Fiscal Review Committee
issued the following statement, “At first glance, as I’ve heard kids say
these days, the math is not mathing. The governor is in denial with
these partial and unverified numbers.”

Senate Minority Leader Brian W. Jones (R-San Diego) listed several
concerns in his statement, including a fear that revenue projections
were continuing to be overly optimist.

Assembly Republican Leader James Gallagher (Yuba City) slammed the plan
“as wasteful and irresponsible. Despite warnings from Republicans, the
governor has unsurprisingly failed to propose a budget that meets the
moment … Newsom’s plan includes draining billions from the rainy day
fund, leaving our state (and the next governor) dangerously unprepared
for even a moderate recession. It cuts resources from water storage and
youth mental health programs, while funding money-incinerating projects
like the bullet train.”

Not only as he began his news conference, but as he concluded it, Newsom
emphasized that the state’s budget is highly dependent on a very
volatile revenue stream — capital gains taxes. The difference between
revenue in 2021 and 2023 was nearly $200 billion.

He would like to see some legislative changes to moderate this
volatility. He suggests establishing a new budget account for that would
be available for expenditure if the actual revenue collections achieved
the projections. The intent would be to hold aside a portion of revenues
greater than the historical trends.

As he concluded his conference, Newsom said with pride, “No new taxes.
I’m not proposing new taxes. We can achieve all without cutting core
service or a tax increase.”