California lawmakers reach deficit-closing budget agreement

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California Gov. Gavin Newsom and lawmakers reached a budget agreement Saturday they say will close multi-year deficits by cutting $16 billion and declaring a statewide fiscal emergency to use reserves.

The deal maintains the multi-year fiscal structure proposed in Newsom’s May budget revision to balance the budget in both 2024-25 and 2025-26, based on current revenue and spending projections.

It also calls for a bill in August requiring the state to set aside a portion of future surplus funds and create a 2026 constitutional amendment to grow the state’s rainy day fund.

California Gov. Gavin Newsom is expected to talk about the state budget in a pre-recorded State of the State speech being released Tuesday.

Bloomberg News

Though the agreement was announced, further clean-up is expected in the days leading to the governor signing the budget before the new fiscal year begins July 1.

“This agreement sets the state on a path for long-term fiscal stability — addressing the current shortfall and strengthening budget resilience down the road,” Newsom said.

In order to tap reserves, Newsom is required by law to declare a statewide budget emergency. That action also fuels criticism by its Republican minority that the state’s Democrats have overspent and mismanaged the state’s finances.

The minority caucuses — the GOP only holds 25 seats of 120 in the legislature — blasted the budget approved by lawmakers on June 15 as irresponsible and unrealistic.

“Sadly, years of mismanagement coupled with this current spending plan will keep California on the path of deficits and unsustainable spending,” said Sen. Roger Niello, R-Fair Oaks, who is vice chair of the Senate Committee on Budget and Fiscal Review.

The budget takes $5.1 billion from the state’s rainy day fund in 2024-25 and proposes $7.1 billion be used in fiscal year 2025-26 from reserves. Lawmakers also plan to take $900 million from a safety-net reserve account next year. That leaves about $11 billion of the rainy day fund intact.

The agreement on the $297.7 billion spending plan comes after weeks of negotiations that strained relationships between Newsom and the legislature’s Democratic leaders after slowed revenues forced them to scale back ambitious social programs.

“Make no mistake: This is a tough budget year, but it also isn’t the budget situation we were originally fearing,” said Senate President pro Tempore Mike McGuire, D-North Coast. “Thanks to hard work, tough decisions, and early actions, we’ve been able to shrink the shortfall, protect our progress, and maintain responsible reserves.”

The governor also reached a school funding deal with the California Teachers Association. The governor’s original plan would have lowered the amount guaranteed to schools by $12 billion over two years. The budget agreement would add $5.5 billion over the next two fiscal years.

The agreement includes Democrats’ proposal from late May to restore $1 billion in a sixth round of additional Homeless, Assistance and Prevention grants to local governments that Newsom had proposed cutting in his May budget revisions. It also provides $150 million in next year’s budget to clean up encampments of homeless people, to cover the $100 million cut from this year’s budget toward that aim.

It largely maintains the level of climate and transportation spending as the governor’s proposed budget and preserves roughly $45 billion of the original $54 billion climate package. This was achieved largely by adopting a five-year Greenhouse Gas Reduction Fund plan that shifts $5.2 billion from the general fund to the Greenhouse Gas Reduction Fund.

The budget plan includes $750 million of reductions in the prison budget over the three-year “budget window” from fiscal 2023 through 2025, along with ongoing reductions of about $560 million per year. The cuts incorporate the governor’s proposal to deactivate 46 housing units comprising 4,600 beds in 13 prisons saving $82 million annually. Plans to cut vacant positions are also expected to save $400 million annually.

It delays $550 million in funding for “last mile” work in the state’s program created in 2020 to provide internet-for-all, which connects the network to homes, until the 2027 budget year. It still includes $250 million next year for a program to expand and improve the fiber-optic network under “middle-mile” projects, and $2 billion for last-mile work spread over multiple budget years.

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