California Gov. Gavin Newsom (D) on Friday proposed a series of cuts and pauses in new spending to close the state’s remaining $56 billion budget gap over the next two years, citing a volatile revenue system that disproportionately relies on capital gains taxes.
Speaking Friday in Sacramento, Newsom said the state faces a $27.6 billion shortfall in the coming fiscal year and a similar $28.4 billion shortfall next year. He said his budget would ask the legislature to make cuts to existing programs, though he pledged to protect existing, core government services.
“These are programs, these are propositions that I’ve long advanced, many of them,” Newsom said. “None of this is work you enjoy doing, but you’ve got to do it.”
California faces a staggering deficit thanks to delayed tax payments last year, a downturn in the tech industry, and slumping capital gains earnings as the state’s wealthiest residents earn less from stock market earnings and initial public offerings. No other state faces such a significant budget gap.
“Markets disproportionately impact — benefit or burden — the state of California,” Newsom said.
Newsom’s much-anticipated May revision to his January budget would spend $288.1 billion to fund state government in Fiscal Year 2025, which starts July 1. That’s about $3 billion less than he proposed spending in January, and about 7% less than the state spent in Fiscal Year 2024, which ends on June 30.
The slimmer budget comes as tax collections lag the Newsom administration’s initial FY 2024 estimates by $5.8 billion, or 4%, according to the latest data from the state Department of Finance.
California, like other states, built up substantial savings during the pandemic-era revenue boom that can help Newsom and Democratic legislative leaders address budget problems now. Newsom said the state would draw $4.2 billion in reserves in the coming fiscal year, and $8.9 billion in the next fiscal year.
Newsom said he would ask legislators to make $15 billion in budget reductions, and to pause or shift about $15 billion in planned spending into the future. He said government offices would find $3 billion in efficiencies, including $2.2 billion in “belt-tightening” and leaving open hundreds of vacant state jobs.
The state will pause a commitment to spend $1.4 billion on expanded access to childcare that was meant to open 119,000 new slots for young children.
“There are hundreds and hundreds and hundreds of actions we are taking” to address the deficit, Newsom said. “Not just one or two.”
But Newsom said programs expanding health care access, low-income food assistance programs and tax credits for low-income families will remain untouched.
Newsom and legislative leaders last month agreed to $17 billion in spending delays, deferrals and other money-saving maneuvers as a first step toward shrinking the deficit. Key lawmakers signaled then that they would support Newsom’s plans to pull about $12 billion from the state’s core emergency fund.
Now California leaders have about a month to figure out how to close the rest of the gap. The state constitution requires lawmakers to approve a budget by June 15.