California’s Newsom Seeks 10,000 Fewer Jobs, Spending Cuts

(Bloomberg) -- California Governor Gavin Newsom’s latest budget proposal looks to slash 10,000 unfilled jobs from the state’s roster and cut tens-of-billions of dollars in spending to close a gaping deficit left by inflation and a plunge in tax revenue from wealthy earners.

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In total, the governor is offering to cut $32.8 billion, including a nearly 8% reduction to state operations through the next two fiscal years. A fact sheet provided by Newsom’s office said the proposal will make the state “more efficient, leaner, and modern.” The governor’s office touted the plan for not raising taxes and preserving spending for key social service programs.

The size of the deficit is largely due to swings in the stock market and faulty projections for the state’s three largest revenue sources: personal income taxes, corporate and sales taxes. Newsom’s office said budget officials have now lowered their estimate of how much the state is projected to take in from those three sources from 2022 through 2026 by $165 billion.

“This is just a reminder of the totality of the challenges on the basis of the volatility of our tax structure,” Newsom said during a press conference on Friday. “The benefits of a progressive tax system during good years, the challenges during years where things are contracting.”

The top 1% of California earners pay nearly half of personal income-tax collections.

Newsom, a second-term Democrat, in January had proposed a $208.7 billion plan that shrunk the state’s general-fund budget nearly 10% from the current fiscal year in order to fill what was estimated at the time as a $38 billion deficit. But his updated spending plan released Friday — based on the latest revenue figures in what is known as the May Revision — proposes even deeper cuts. The state’s general fund would plummet to $201 billion for the upcoming fiscal year that begins July 1, he said.

Through the end of March, the state collected 4% less in tax revenue for the current fiscal year — amounting to about $5.8 billion — than what Newsom had projected just four months ago, according to figures from the his finance department. Those bleak numbers prompted Newsom and the state’s Democrat-controlled Legislature last month to agree to $17.3 billion in actions to reduce the shortfall, including $3.6 billion in cuts, $5.2 billion in borrowing, and other accounting measures that delay spending to subsequent years or shift costs to other state funds.

On Friday, Newsom said the deficit had grown from $38 billion to $44.9 billion as revenue continued to come in lower than estimated. But early actions by the governor and lawmakers to slash spending leaves the state with a $27.6 billion shortfall.

“Unlike deficits of the past, the state’s underlying fundamentals are solid,” California Treasurer Fiona Ma said in an emailed statement. “The economy is strong, the agreed-upon early actions were real and significant, and the state has ample reserves and available cash to draw on if needed.”

Drawing on Reserves

Newsom’s plan calls for drawing down the state’s reserves by half — roughly $13.1 billion — to close the gap and cut $8.5 billion in spending from key priorities including climate change initiatives, housing and a scholarship program. His early proposal in January included a series of accounting maneuvers such as pushing $1.6 billion for the last payroll for state workers to be paid next year into the following fiscal year. In December he froze state spending.

The governor has also said he will seek to change recently passed legislation setting a $25 minimum wage for health care workers by 2026. Newsom wants to make the wage hikes contingent on funding, which could delay the increases and save the state money in the near term.

Read More: California Deficit Seen Rising by $15 Billion as Revenue Drops

In February, the state’s non-partisan Legislative Analysts Office said Newsom’s January calculations were overly optimistic as data showed that tax receipts fell short of estimates. With a progressive tax system that takes in less revenue when the income of the highest earners declines, California saw its outlook weaken after a 2022 slump in the stock and bond markets.

The deficit calculations were clouded by a rare delay in the tax filing deadline that concealed the size of the hole until late last year.

Lawmakers now have until the state constitutional deadline of June 15 to pass a budget and send it back to Newsom. If they don’t they forfeit their salaries and travel and living expense reimbursements until the day that the budget is signed into law.

--With assistance from Andrew Oxford.

(Updates with context through including details on cuts in second paragraph, quote in fourth and deficit calculations in seventh.)

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