California’s Newsom Sees Budget Deficit Deepening to $32 Billion

(Bloomberg) -- California is facing a deeper deficit than projected at the beginning of the year as the fortunes of its wealthiest residents wane, exacerbating the fiscal situation of a state already struggling with tech layoffs and banking upheaval.

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For the first time since California Governor Gavin Newsom took office in 2019, the state’s budget will swing into deficit, which he projected at $32 billion for the fiscal year starting July 1.

The hole is $9.3 billion bigger than Newsom forecast in January and reflects a sharp turnaround from the previous budget cycle’s almost $100 billion surplus when the state reaped the benefits of headier economic times.

The expected shortfall poses significant hurdles for the second-term Democrat, who’s been traveling to Republican-led states to extol his commitment to liberal priorities such as green energy, subsidized childcare, and social issues.

The sinking fortunes of California’s wealthiest residents, who shoulder a disproportionate share of the tax burden, has hammered revenues, with rising interest rates roiling stock markets and the tech sector and igniting a banking crisis that took down Silicon Valley Bank and First Republic Bank.

Roughly half of the state’s personal income taxes come from the top 1% of earners and there’s no sign of an immediate turnaround.

Thousands of workers have been laid off from California-based giants including Alphabet Inc., Meta Platforms Inc. and Twitter, while regional lenders, including PacWest Bancorp. continue to struggle.

Friday’s deficit forecast has an extra layer of uncertainty as tax payment and filing deadlines have been extended by six months until Oct. 16 in most California counties, due to severe winter storms earlier this year.

When Newsom presented his preliminary spending plan earlier this year, he said the emerging deficit would not hinder his plans for “transformative investments” in housing, education, childcare, health care and climate programs at the center of his second-term agenda.

On Friday, he sought to assure lawmakers and constituents that his priorities will continue to be funded, despite the worsening outlook, by citing a variety of options to help cover the shortfall.

Safety Net

Newsom, for instance, proposed pulling $450 million from the state’s safety net reserve, about half the money available, to reduce the need for cuts to spending on homeless programs, mental health and substance abuse treatment, health care, and other social programs that he said are critical for the state.

But the budget Newsom released Friday outlined billions of dollars in additional cuts to education programs, including arts education and vocation training, as well as public transit.

The governor and legislative leaders, all Democrats, face tough negotiations over potential cuts to many popular programs. Legislators are required by law to pass a budget by June 15 or forfeit their pay for each day they are late.

Some lawmakers are pushing Newsom to stave off cuts by tapping more of the state’s $37.2 billion state reserve fund, calls Newsom rejected on Friday.

“We are walking into a budget season where we need to maintain prudence,” he said, warning that a recession could worsen the fiscal situation in coming years.

The deficit is also setting up a showdown between Newsom and Democratic leaders in the legislature over increasing tax rates on corporations. Newsom says he doesn’t want to take any actions that would make California less competitive with other states trying to attract employers.

Senate President pro Tempore Toni Atkins said a corporate tax hike is a prudent option to protect funding for popular programs such as subsidized childcare.

“My colleagues don’t want to raise taxes. Who wants to raise taxes?” Atkins said in an interview with Bloomberg. “We’re trying to balance all of the needs without bending and preserving that reserve.”

--With assistance from Romy Varghese.

(Updates with additional comment in final paragraph. A previous version corrected the year t Newsom assumed office.)

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