A year after tackling what state finance officials projected would be a record budget shortfall, California’s government is rolling in so much money that it could be forced to give some cash back to taxpayers.
Bolstered by federal aid and an economy that has recovered faster than anticipated, particularly for the wealthiest Californians, Gov. Gavin Newsom will reveal his revised budget plan this week. The announcement kicks off a final negotiation with lawmakers over the multibillion-dollar surplus that’s expected to surpass rosy estimates from January. At stake is major spending on homelessness, health care for undocumented immigrants and the worsening drought.
Newsom has teased that people will see “historic investments” in his budget.
“We talk about California roaring back,” he said last week. “Our efforts across the spectrum will be without precedent in California history.”
It’s a sharp turnaround from 2020, when the coronavirus pandemic decimated the economy and California’s finances. Newsom and lawmakers crafted a budget deal to close what they expected would be a $54 billion deficit, relying on reserve accounts, internal borrowing and a temporary limit to corporate tax credits to avoid widespread cuts to many state programs.
Expectations of plunging tax revenue turned out to be overly pessimistic, however, especially after a soaring stock market benefited wealthy households that provide a large portion of state revenue through personal income taxes. The recovery has been so robust that a decades-old spending limit could even kick in and put a few dollars back in Californians’ pockets.
In January, Newsom said California would have a one-time discretionary surplus of more than $15 billion, even after replenishing reserve accounts. Since then, tax receipts for December through March have come in an additional $16.7 billion above estimates, though much of that money is obligated to K-12 schools and other programs.
State finance officials will provide a final projected surplus when Newsom rolls out his updated budget proposal, which must happen by Friday. California also received $26 billion from the latest federal coronavirus relief package in March, with broad authority on how to use it.
The overflowing coffers are likely to set off a scramble for new spending. Legislators have previewed their priorities in recent weeks, proposing everything from assistance for first-time home buyers to expanded college scholarships to more subsidized child care slots.
“We have a once-in-a-generation opportunity to make transformative changes for California,” state Senate President Pro Tem Toni Atkins, D-San Diego, said during a news conference last month.
But they may run into the Gann Limit, a law approved by voters in 1979 that requires the state government to keep per capita spending below the 1978-79 level, adjusted for growth in personal income and population. It hasn’t been triggered since 1987, when California refunded $1.1 billion to taxpayers.
The law now kicks in if the state exceeds the limit for two years in a row. Half of the money beyond the spending cap then goes to schools and half goes back to taxpayers.
Finance officials estimated excess revenue of $102 million in January, which would mean a tiny rebate of a few dollars per person. That could be revised up this week, though there are also options to work around it by spending on certain exempt purposes, such as construction.
Some of the operating surplus is already spoken for. Newsom and the Legislature took a series of early budget actions this spring, primarily to help Californians slammed by the pandemic: $6.5 billion for small business tax credits and grants, stimulus checks for low-income Californians and money for wildfire prevention, among other emergency aid.
That still leaves billions of dollars for Newsom, lawmakers and advocacy groups to wrangle over in the coming weeks. The Legislature must pass a balanced budget by June 15 or forgo its pay.
The most significant debate could center on homelessness. Advocates, including big-city mayors, are calling for sustained funding to address the problem. Democrats in the Senate and Assembly are pushing to spend $20 billion over five years to acquire new homeless housing, support transitional services provided by local governments and pay the deposit for homeless people who need help moving into apartments.
“It deserves to have the biggest response from the Legislature to really ensure that we are … using all the power that we have to house people in California,” Assembly Member Phil Ting, a San Francisco Democrat who chairs the budget committee, said during a briefing last month.
That housing proposal would use nearly half of the expected operating surplus and available federal aid. Newsom has been eyeing a narrower approach to extend his Homekey program, which successfully created almost 6,000 new homeless housing units last fall through hotel and motel conversions.
Lawmakers are also pushing to make all adults age 65 or older eligible for Medi-Cal, the state’s health insurance program for the poor, regardless of their immigration status. Newsom proposed the move last year but abandoned it once the recession hit.
The pandemic, however, has added new urgency to the proposal. It has exposed the “huge disparity in the haves and have-nots,” state Sen. Susan Eggman, D-Stockton, said last month.
The Legislature estimates the expansion would cost less than $100 million, though supporters see this as a starting point for phasing in Medi-Cal eligibility for all undocumented immigrants — beyond those already eligible until age 26. New ongoing spending could give Newsom pause, because state finance officials expect a growing multibillion-dollar budget deficit starting next year.
The Senate has advanced a $3.4 billion package to help prepare California for the oncoming drought, which would need to win approval from the Assembly and governor. It includes $500 million to help small communities access drinking water and water supplies, $500 million for water-efficiency projects such as drought-tolerant lawn replacements, $200 million for water recycling projects, and $1 billion from the federal pandemic aid to cover unpaid utility bills.