The Brief

California is in a budget hole, its depth measured not in feet, but in dollars.

How deep? A projected $38 billion deficit, according to Gov. Gavin Newsom, who said Wednesday he will declare a fiscal emergency if necessary and unveiled his initial plan to dig the state out of a fiscal chasm for the second year in a row.

But Newsom painted it as a return to a more normal budget, after recent spikes in revenue. He called it “a story of correction, a story of normalization after a period of tremendous amount of distortion.”

His deficit projection is far less dire than last month’s outlook from the nonpartisan legislative analysts, who projected that the state is eyeing a $68 billion deficit for the 2024-25 fiscal year, which starts July 1.

Crucially, Newsom’s team is assuming $15 billion more in revenues than the legislative analysts, explaining much of the difference in forecasts, based on the resilience of the economy.

“We’re just a little less pessimistic,” said Newsom, who repeatedly criticized the news media’s reporting on the Legislative Analyst’s Office’s figure. Basically, the administration is less concerned than the analyst’s office about an impending recession, added Joe Stephenshaw, Newsom’s budget director.

Newsom’s plan to close the deficit includes:

• Withdrawing $13.1 billion from the budget stabilization and safety net reserve accounts; 
• Cutting $8.5 billion from existing programs and services, including climate, housing and education; 
• Delaying $5.1 billion worth of spending, including on transit; 
• And deferring another $2.1 billion to 2025-26, including about $500 million in additional funding for University of California and California State University; 
• $5.7 billion in internal borrowing from special funds to support the tax on health care providers.
  

But he said he wants to protect investments in addressing homelessness, mental health reform, and public safety.

And major advocacy groups representing a range of interests — including public health, public school teachers, social service workers and regional transit agencies — thanked Newsom for recommending a spending plan that spares deep reductions to state services.

“We are relieved that Governor Newsom isn’t addressing the state budget deficit by mortgaging the futures of our students of color and multilingual learners,” Rachel Ruffalo, a senior director at the education advocacy group EdTrust-West, said in a statement.

However, some groups focused on climate and the environment are pushing back, criticizing Newsom’s proposed cuts and delays of $4.8 billion to various spending commitments.

“In this tight economic moment, we hoped for a more courageous proposal including solutions like a robust climate bond and ending corporate handouts,” Mary Creasman, CEO of California Environmental Voters, said in a statement.

All told, Newsom is proposing a total state budget of $291.5 billion — about $19 billion less than what he and lawmakers approved last June for 2023-24. But January plans are often revised considerably. Last year, Newsom proposed spending $297 billion; the final total in June was upped to $310 billion.
About 70% of California’s total state spending would go toward public schools, colleges and health and social services — a trend that’s held steady since the 1970s, according to a CalMatters review of state budget data.

Unlike the federal government, most state governments, including California, must approve balanced budgets — running a deficit isn’t an option. And California isn’t alone facing a shortfall — about half of Americans live in states now grappling with budget gaps, ongoing deficits, or both, according to an analysis by The Pew Charitable Trusts.

But many of the proposals outlined today will undoubtedly change in the months ahead. Following the usual process, lawmakers will hold dozens of hearings to evaluate the governor’s ideas and recommend their own before their June 15 deadline to pass a budget. The Legislative Analyst’s Office will produce independent revenue projections and policy suggestions as more data pours in. The state’s read on the budget starting July 1 will gain greater certainty in May when the governor will release updated revenue projections based on the personal income taxes Californians will have paid by April — and present revised spending proposals.

And while the deficit projected by the governor’s office is about 20% higher than what California faced last year ($32 billion, after two years of record surpluses credited to a healthy stock market and federal funds), experts say we’re not at crisis level just yet: The state is in a better position now to deal with the downturn compared to past deficits during the Great Recession after it put billions in reserves. Even after Newsom’s plan to pull from the state’s reserves, he says the state would have $18.4 billion remaining.

The state could also push for more savings through mid-year cuts in the current budget — something Newsom deferred to the Legislature. “Let’s have that conversation,” he said today.

Revenue misfire

In recent years, about 60% of the state’s general fund, the core source of government spending, was paid for by personal income taxes. And the top 1%, whose incomes swing wildly according to the vagaries of the stock market, have historically paid close to half of all income tax revenue for the state.

A main cause of the deficit is a $11.8 billion drop in 2023-24 revenues and transfers compared to what the governor and lawmakers expected when they finalized the current budget last June. The misfire is the result of both state and federal tax collectors giving nearly all Californians more time to file their income taxes due to last winter’s deadly storms.

That decision meant lawmakers and the governor lacked the usual data when they solidified the budget last year. As a result, they committed money they didn’t have to spending programs underway now.

Newsom had already signaled that California’s government needed more belt-tightening: On Dec. 12, his finance department directed state agencies to freeze spending, including new services contracts, IT equipment and vehicles. And last fall, he repeatedly cited the budget crunch in vetoing bills that he said would have added $19 billion in unaccounted costs.

The state budget is actually a multi-year math problem — with very real human consequences — that projects revenues for the year ahead and factors in surpluses or deficits in the current year and year before. One way to find savings is to delay, or outright cut, so-called one-time spending programs. These are typically trial runs of new social programs, construction projects, or experimental programs that last a few years. Last year’s budget projected that the 2024-25 fiscal year would include $12 billion in one-time spending; the Legislative Analyst’s Office said the figure is closer to $9 billion. The analyst’s office said those one-time projects, including $2.2 billion in transportation and $1.8 billion in education, could be on the chopping block.

Building the proposed budget is largely a closed-door exercise until the governor publishes his plan in January. Scott Graves, a budget expert with the California Budget & Policy Center, said that the governor’s office starts developing the January budget around May or June of the previous year.

“So advocates who want to influence what’s going to appear in the governor’s proposed budget will use whatever contacts they have within the administration to make their case for particular expenditures or policy changes that they would like to see included in the governor’s proposal in January,” Graves said in an interview.

That doesn’t mean the governor’s team will listen, but once a budget idea appears in the January draft, it has a strong chance of becoming law six months later when the Legislature and the governor finalize the state’s new spending plan.

Gov. Gavin Newsom discusses his initial 2024-25 budget proposal at the Secretary of State Auditorium in Sacramento on Jan. 10, 2025.

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Miguel Gutierrez Jr.

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CalMatters

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If the first six months of the budget process is largely out of public view, the period between now and June is the public’s chance to weigh in, especially as the Legislature begins its numerous budget and subcommittee hearings starting in February.

In anticipation of today’s budget release, some groups started their asks early: The League of California Cities — one of the highest spenders on lobbying the Legislature — asked the governor in a letter last week for a $3 billion funding stream to increase affordable housing and reduce homelessness. For three years in a row, Newsom has granted $1 billion for local homelessness programs. 

Once again, Newsom’s proposed budget does not include an ongoing source of homelessness funding, though local officials and service providers say that relying on one-time grants makes it difficult to plan ahead.

“Without ongoing consistent funding, it means we’re going to have a dysfunctional homeless response system because our homeless response system never knows how much funding is coming from the state,” said Sharon Rapport, director of California state policy for the Corporation for Supportive Housing and member of the Bring CA Home Coalition.

Newsom also warned that cities and counties will face heightened scrutiny this year as they apply for and spend state dollars on their homeless communities. “I want to see these encampments cleaned up,” he said, “and I have not seen it as aggressively as I want to see it.”

Praise and blowback

Democratic leaders in the Legislature, who will play a key role in negotiating the final budget with Newsom, had similar responses to Newsom’s plan.

Senate leader Toni Atkins said the state is much better prepared than in 2010, when it had to cut programs and raise taxes on the middle class. Senate Budget Committee Chairperson Nancy Skinner said she appreciates the governor’s focus on protecting social services for needy Californians, “particularly our children, students, seniors, and those who rely on the state’s safety net.”

Assembly Speaker Robert Rivas said his caucus “is committed to fiscal restraint and spending oversight while delivering solutions to improve the quality of life for all Californians and protect the most vulnerable.”

But Republican leaders criticized Newsom and Democrats for not acting earlier to reduce spending.

“As the governor pulls revenue gimmicks and accounting tricks, it’s impossible to bury the truth: California is bleeding because of a decade of Democrats’ one-party rule and reckless spending,” Senate GOP leader Brian Jones said in a statement.

Vince Fong, the top Republican on the Assembly budget committee, said it’s premature to dip into the state’s “rainy day” fund and repeated the call for a special session on the budget. “Waiting will not absolve him of his lack of preparation, and will only cause more harm to the most vulnerable Californians,” Fong said in a statement.

His office shared an analysis showing that in the past three years, the Legislature and Newsom added more than $17 billion in ongoing spending. But that represents a small portion of the huge surpluses the state enjoyed in 2021 and 2022. Newsom said that 93% of the roughly $100 billion surplus in 2022 went toward one-time projects, such as short-term social programs, tax rebates and construction.

Meanwhile, the nonprofit California Budget & Policy Center took Newsom to task for not proposing new tax revenues, such as removing tax breaks for corporations and increasing taxes on wealthy residents. Newsom has already declared a wealth tax bill dead on arrival.

Newsom’s plan does call for some reductions, including a combined $4 billion in cuts to climate change and housing programs (more on that below).

Elsewhere, Newsom is proposing lowering by $500 million the amount of money public schools will have for constructing new buildings or maintaining existing ones — from $875 million to $375 million. He signaled, however, he’d support a bond measure on the November ballot that would potentially bring in billions for school districts to repair and upgrade aging buildings. The current school facilities fund is nearly empty, and the Legislature has been working for months to craft a borrowing plan that could win backing from the governor as well as voters.

Otherwise, TK-12 education funding remained mostly intact, with few changes to transitional kindergarten, community schools, special education, universal school meals and other programs the governor has championed. To support those programs, Newsom proposed dipping into reserves and cutting cost-of-living adjustments to the Local Control Funding Formula — from a record-high of 8.2% last year to less than 1% in 2024 — which may present challenges to districts also facing the loss of COVID relief funds and declining enrollment.

Newsom is also proposing to phase out nearly $500 million in no-interest loans to public colleges and universities for building additional student housing. That sum would affect 2024-25, but Newsom wants to totally do away with $1.8 billion for the loan program through 2028-29. Doing so would put a large dent in the state’s aspirations to lower the cost of student housing. Still, Newsom and lawmakers have approved $2.2 billion in the past few years to support the construction of subsidized residence halls for low-income students.

Also in higher education, Newsom seeks to cut a planned $289 million expansion of the newly revised Middle Class Scholarship, choosing instead to maintain it at its base level of more than $600 million annually. The scholarship has given an average of nearly $2,000 to more than 300,000 students when it debuted in the 2022-23 academic year.

Another large cut is pulling $300 million in promised funds to develop a new research center studying the human body’s immune system. The money was meant for UCLA, part of an overall $500 million package. But wealthy philanthropists have pledged more than $200 million to UCLA, and the school purchased a shuttered shopping mall rather than building a new site.

While some higher ed programs would take a cut, Newsom’s budget proposal avoids significant reductions to public safety programs and projects flat spending of about $18 billion at the California Department of Corrections and Rehabilitation. His administration has moved to close four prisons since he took office, a trend facilitated by the state’s declining prison population. He did not call for any additional prison closures in the new proposal, and his budget showed a 1.4% projected increase in the number of state prison inmates.

From 123,977 inmates on Jan. 1, 2020, the California Department of Corrections and Rehabilitation now houses 94,222 people. The administration anticipates the number will fall below 90,000 inmates by 2026-27.

In his press conference, Newsom emphasized that his planned overhaul of San Quentin State Prison into a rehabilitation center is the future he envisions for the state’s prisons.

“I see San Quentin as a catalyst for reform within the system,” Newsom said.

But a group representing domestic violence shelters, rape crisis centers and other crime victims’ advocates pointed out that Newsom’s proposal didn’t include their requests for the state to commit $200 million to backfill what they expect to be steep federal funding cuts. Those reductions, the group said in a statement, would result in “catastrophic” service cuts across California.

CalMatters reporters Nigel Duara, Carolyn Jones, Marisa Kendall and Jeanne Kuang contributed to this story.

In September, Gov. Gavin Newsom unveiled what is likely one of the last large climate announcements of his tenure: California will move forward with linking its decade-old carbon market with a newly formed market in Washington state, aiming to merge it with the market California already shares with Quebec.

Newsom said California was “choosing certainty, partnership, and clean energy” amid a stream of federal climate policy rollbacks.

But the announcement didn’t distract environmental advocates from the sting of a challenging year back home for the so-called “cap-and-invest” program. As Newsom leaves his post, many policy and climate experts say the adjustments to the program put California’s climate goals further out of reach. The program provides billions of dollars in funding for climate and other programs.

Yet with little talk of climate policy in the governor's race, Californians are largely left guessing about how Steve Hilton or Xavier Becerra would handle the program or California’s broader climate ambitions. The Becerra campaign did not respond to multiple emailed requests for comment. Hilton told CalMatters he would move to suspend the carbon market — which he called “a disaster of a program” — entirely.

Twenty years ago, lawmakers made California the first state to mandate broad cuts in greenhouse gas emissions with AB 32, the landmark carbon emissions reduction law, which authorized the subsequent creation of a market. The law requires the program to be as cost-effective as possible while maximizing benefits to the state’s economy.

Whoever wins in November can appoint a handful of new members to the California Air Resources Board, which has to finish writing the linkage rules and will propose the budget that leans on carbon market revenue. The next governor will also help decide how aggressively California leads on climate, after a year of mixed signals about where the program is headed.

“It's really set up the politics of these issues to get worse and not better over time, and that is the problem that is being tossed like a live grenade into the lap of the next governor,” said Danny Cullenward, an economist who sits on an advisory committee focused on the carbon market.

A question of climate leadership

In May, a process to reauthorize the keystone climate program ended with a controversial agreement that the Legislative Analyst’s Office projects will roughly halve annual auction revenue, offering about $2 billion less in funding for priority environmental programs while opening a separate pool of free permits for polluters that pledge to invest in decarbonization, valued at as much as $4 billion.

Oil companies fought the initial cap-and-invest reauthorization proposal, arguing it would encourage companies to leave the state or further increase fuel prices. The California Air Resources Board, which manages the program, said the increased allowances it eventually approved were meant to balance affordability and economic uncertainty alongside emissions targets. In an email, a board spokesperson said the new incentives would not have any impact on the market’s auction revenue. (The Western States Petroleum Association, which represents refiners in the state, declined an interview for this story.)

The concern comes as California prepares to elect its next governor and nears its own 2030 target to reduce greenhouse gas emissions 40% below 1990 levels, on its way to zeroing out emissions by 2045.

“This is not a question anymore of whether or not we'll reach the target. This is a guarantee that we won't,” said Katie Valenzuela, a consultant for Communities for a Better Environment who previously co-chaired an environmental justice committee that advised regulators on the state’s program.

State officials have long framed cap-and-invest as a backstop, keeping the state on track for its climate targets by ratcheting down the emissions limit even if other programs fall short. Advocates worry the changes will have a chilling effect rather than signal the market’s long-term strength, just as California loses ground to federal rollbacks.

“It is going to become very difficult for us to say we are a climate leader when we are visibly missing our targets,” Cullenward said.

Others remain more optimistic. Cap-and-invest is one tool in California’s toolbox, even if this year dulled it. Meredith Fowlie, an economist at the University of California, Berkeley, said the program is not optimal but has done the basics of its job: sending a price signal to drive down emissions while raising revenues for important programs.

Linking with Washington’s market will strengthen California’s program overall, air board Chair Lauren Sanchez wrote to Newsom in September. In addition to creating a larger market with more credits available to industries in both states, the link is expected to raise carbon credit prices in California, where recent auctions have yielded prices at state minimums. A connected market could also lower prices in Washington, making the state’s more stringent program less lucrative. Low prices reduce the program’s revenues and starve polluting industries’ incentive to invest in lowering emissions.

Regulators have not yet established a rulemaking timeline for the linkage process, a spokesperson for the board told CalMatters, but the board expects the joint market to begin operating next year.

Chloe Ames, policy adviser at NextGen Policy, an organization founded by former gubernatorial candidate Tom Steyer, called linkage a strong step forward. The group is disappointed by the other changes made to cap-and-invest this year, she said, and will keep urging the legislature to adjust the industry incentives and California’s next governor to take climate seriously.

“It's been more challenging for us to say that we're a climate leader, and that's why we need to step up,” Ames said. “In this work, what are you going to do other than to be hopeful?”

Kicking the can

Since the market began, revenue has funded a wide range of priorities, including job training, clean energy and affordable housing. Managing those investments, alongside costs to Californians and emissions cuts, has been a balancing act — one the next governor will inherit, Fowlie said. “Some of those objectives are potentially in tension,” she said. “A sole focus on designing the program to meet our greenhouse gas reductions misses this really important larger picture that this program is about more than that.”

The legislature approved the program’s reauthorization and the state’s air regulators lay out its rules, but a governor has influence over how that process plays out and can exert his own priorities, Cullenward said.

Beyond the carbon market, governors have wider latitude: Newsom has used his executive authority on wildfires, water shortages and clean energy.

In the governor’s race, neither candidate has centered climate in his campaign. In their one debate, both candidates steered a question about climate change’s impacts toward affordability concerns, offering little detail on the actual climate policies they favor.

“I think it's fair to say that climate probably isn't the top priority of either one,” said Barry Vesser, the chief operating officer at the Climate Center, a California environmental group that opposed this year’s changes to the carbon market.

Becerra’s campaign website emphasizes affordability in climate policy. He has faced criticism for defending Chevron and for accepting large oil and gas donations. As attorney general, though, he defended the state’s carbon program in court, arguing that “carbon pollution knows no borders” and promising that California would fight the first Trump administration’s rollbacks.

Hilton has rallied against California’s Democratic establishment, and he told CalMatters he would aim to de-bloat the bureaucracy guiding the state’s climate policies. He likened the market’s recent programmatic changes to “rearranging deck chairs on the Titanic.” Hilton, who considers himself an environmentalist, has argued for redirecting resources from current climate programs and wildfire mitigation toward management of the state’s natural lands. He also wants to rework renewable incentives to create “a level playing field” for technologies like rooftop solar, hydropower and geothermal energy. His strategy, he claims, will reduce economic burdens for Californians while exceeding the state’s climate targets.

The relative lack of attention to climate policy is a missed opportunity, according to Valenzuela and Vesser. They see a chance for the next governor to more directly and publicly connect climate programs to affordability, a key concern for likely voters and an issue on which Becerra and Hilton agree.

Ultimately, the race’s rhetoric has advocates like Valenzuela “freaked out.” She points to a “huge chasm” between present reality and the policies that would put California on the right track. The state has little time left for the aggressive action its climate ambitions require, she and other advocates say, and it’s time to start dealing in reality.

“There's not many more governors left we can kick the can to before that bill comes due,” Cullenward said.

This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.