Gavin Newsom has navigated ups and downs of California’s finances. Another test lies ahead

California Gov. Gavin Newsom is navigating one of his biggest budget shortfalls since taking office in 2019.

Tackling the state’s finances – with an economy that is the fifth largest in the world – is a tall order and Newsom is at the threshold of a critical moment in his political journey, a sliver of time that will be closely watched to see how the governor threads the needle as he oversees this year’s budget.

The current deficit, ranging anywhere from $38 billion to $73 billion, stems from a revenue decline in fiscal year 2022-23, with the latest state tax receipts bringing in revenues below the expectations of Newsom’s Department of Finance. Looking at how the governor has handled previous budgets is instructive.

The governor is set to present his budget revisions Friday. He and lawmakers have already agreed to shave $17.3 billion off the original deficit figures, with the Legislature approving a bill with $1.6 billion in budget fixes.

The task of balancing this year’s budget “will be the steepest hill to climb in four years,” says H.D. Palmer, a Department of Finance spokesman. “The Legislature and the governor have made significant progress by their adoption of the early action package.”

To be sure, Newsom has been there before. So, let’s rewind.

Previous deficit

In 2020, in just his second year in office, with the coronavirus pandemic in full swing wreaking havoc on the economy, California faced a $54 billion shortfall.

Lawmakers avoided deep cuts in sending Newsom a $202.1 billion budget just months after the governor issued his stay-at-home order to slow the spread of the virus.

The blow dealt by the economic slowdown in California, the country and the globe eviscerated a projected state $5.6 billion surplus in January 2020 and turned it into the $54 billion deficit.

Newsom revealed in a May memo that year that the state’s unemployment rate would go well above its peak of 12% during the Great Recession. His Finance Department estimated that the state’s unemployment rate would rise to 18%.

The governor, who had been urging the federal government to help by sending more money to states, noted that without the assistance, substantial cuts to the budget would be needed.

Among other measures, lawmakers sent Newsom a budget that delayed some payments and used reserves, after the governor declared a budget emergency allowing the state to use money from its rainy day fund. State employee pay, public universities, state courts and other areas saw some trims to the budget, which also delayed billions of dollars in payments to K-12 schools and community colleges, while allowing them to postpone cuts to their programs.

In the end, Newsom signed the budget that year with emergency pandemic funding, expanded unemployment aid and billions of dollars in cuts forced by the recession.

“In the face of a global pandemic that has also caused a recession across the world and here in California, our state has passed a budget that is balanced, responsible and protects public safety and health, education, and services to Californians facing the greatest hardships,” Newsom said at the time.

The state still was expecting a projected deficit of about $8.7 billion the following year.

The pendulum swings

California’s fortunes turned in 2021 with an unprecedented rebound from the economic turmoil of the pandemic, and the state’s budget picture was golden.

Stimulus checks for middle-income Californians and expanded funding for homeless aid would be on the way, thanks to a surplus of about $80 billion.

The state’s top earners did well during the pandemic and with California’s heavy reliance on them, so did the state, allowing Newsom and lawmakers to dramatically increase spending on the social safety net and add a new grade to California public schools called transitional kindergarten.

“This is one hell of a budget signing,” Newsom noted at a rally in Los Angeles alongside supporters, celebrating the package of budget bills he signed as part of the $262 billion budget and touting the budget’s record spending on education, homelessness and reserves.. “We are doing things we only dreamt of and we’re getting them done this year.”

Later that year, the governor would handily beat back a recall effort.

Then, in 2022, came a bumper surplus of $97.5 billion. Californians received inflation relief money as part of a $300 billion budget agreement state leaders reached that year. The rosy budget largely reflected a continued surge in tax revenue driven by income gains in high-earning households.

“No other state in American history has ever experienced a surplus as large as this,” Newsom noted that year.

While recognizing the windfall, the governor was introspective as he looked forward, anticipating economic headwinds, noting inflation and the war in Ukraine. It prompted Newsom to put much of the state’s surplus in one-time spending, so as to avoid ongoing expenditures that it might not be able to continue in the future.

Republicans warned of a “fiscal cliff” and labeled Democrats “oblivious and arrogant.”

“Thanks to radical regressive policies, Californians today pay more for nearly everything they buy, while rising homelessness, failing schools, raging wildfires and a devastating drought continue to get worse,” the California Republican Party said.

With an eye toward the state’s future finances, Newsom was already vetoing some bills that summer. By November 2022, the California Legislative Analyst’s Office issued dire warnings about state revenues falling short, by as much as $24 billion below target for that year’s approved budget.

Newsom did not back away from some of his top priorities, including plans to offer universal transitional kindergarten to all 4-year-olds across the state, expanding free healthcare for undocumented residents, addressing homelessness and launching CARE Court, court-ordered treatment for Californians struggling with mental illness he championed.

Economic headwinds

As anticipated, the state’s economic picture grew duller and Newsom was considering cuts by the time 2023 rolled around. The governor unveiled a $297 billion spending proposal that trimmed money for climate initiatives, deferred spending on capital improvement projects and borrowed funds to close a projected $22.5 billion budget deficit for the ongoing fiscal year.

By May of last year, the shortfall climbed to $31.5 billion, a dramatic turn of fortunes from just a year earlier for the Golden State, and the governor released a $306.5 billion budget, addressing the deficit by shifting money and retaining previously-proposed cuts and deferrals but maintaining social safety net programs and other policy priorities.

“We are walking into a budget where we need to maintain our prudence,” Newsom said then. “And we need to prepare not just for the short term, but the medium and long term.”

That was then. This is now:

The Legislative Analyst’s Office has pegged the current deficit at $73 billion, while the Department of Finance puts it at $38 billion. Historically, the Legislature has gone with the shortfall and revised estimates provided by the administrations.

As the governor is at the threshold of releasing a revised budget this month, the financial picture is decidedly gloomy.

Chris Hoene, executive director of the California Budget & Policy Center, said the governor is facing a major budget deficit, compared with previous years in his tenure, when revenues mostly were increasing.

“The reality of having a substantial budget deficit is the tough decisions that have to be made,” Hoene said, adding that the governor has been vocal on not raising taxes, so “that means there are going to be reductions somewhere.”

“If (he) has to make cuts to close the deficit, those cuts are going to affect the lives of Californians in some ways,” Hoene said. “I think the budget we will see him release on Friday will be making the best effort to minimize the effects on Californians’ day-to-day lives.”