SACRAMENTO\u00a0\u2014\u00a0Gov. Gavin Newsom reached an agreement Friday with legislative leaders on a $351.7-billion state budget in his final year as governor, a spending plan that uses a tax windfall to avoid major cuts and lessen California\u2019s chronic deficit in the years ahead.<\/p>\n
The deal provides nearly $2 billion in state revenue next year through tax hikes on corporations, new levies on software sales and a revamped tax on managed healthcare organizations. Lawmakers and the governor continue major investments in education, healthcare and agreed to increase spending on subsidized childcare and affordable housing. <\/p>\n
\u201cWe want to leave the next governor not only a balanced budget, but a budget that is substantially structurally sound, and we\u2019re going to accomplish that,\u201d Newsom said in an interview Friday. \u201cWe were very cautious in terms of new spending,\u201d <\/p>\n
The agreement ends weeks of lobbying by outside interests and negotiations among lawmakers and the governor at the state Capitol about how to handle a surge of income tax collected on stock market gains related to artificial intelligence.<\/p>\n
Early forecasts last June projected a $12.6-billion deficit in 2026-27, according to the California Department of Finance. Updated predictions now suggest the state will end the year with a surplus of $4.5 billion. <\/p>\n
Democrats, following Newsom\u2019s lead, are tucking away $6.4 billion for future years, which allows the governor to knock down a deficit previously projected through 2027-28 and assuage criticism about his spending habits. <\/p>\n
But economists say the fix and revenue increase is likely only temporary. <\/p>\n
Spending in California has generally exceeded revenue growth during Newsom\u2019s tenure in the governor\u2019s office, creating a chronic shortfall. Despite the extra funding, the budget continues a trend of relying on reserves, shifting funds, borrowing and suspending debt payments to balance state spending. <\/p>\n
The Legislative Analyst\u2019s Office, the nonpartisan fiscal advisor for lawmakers, has warned of a roughly $10-billion gap between the amount of money the state brings in and spends, which could grow dramatically worse if the stock market turns downward. The LAO has said the existence of any operating deficit during a revenue boom is a red flag and that the state is \u201cill-prepared\u201d for even a modest decline.<\/p>\n
Christopher Thornberg, an economist and founder of the consulting firm Beacon Economics, said it\u2019s business as usual in Sacramento.<\/p>\n
\u201cThey love increasing spending. But it seems politically impossible to go the other way,\u201d Thornberg said. \u201cWe\u2019ve seen this play out over and over again.\u201d<\/p>\n
Lawmakers and the governor offered a different take and asserted that their decision to put the $6.4 billion into a short-term reserve, called the Projected Surplus Temporary Holding Account, and ask voters to allow them to store more money in the rainy day fund are examples of prudent budgeting. <\/p>\n
\u201cYou see us save more and you see try to address the immediate needs of our community, but also the structural budget that potentially awaits us,\u201d said Senate President Pro Tem Monique Lim\u00f3n (D-Goleta) in an interview. \u201cWe are forecasting a moment where we will need to address these issues and we want to start now to think about the future as well.\u201d<\/p>\n
Under a progressive tax structure, the state budget is dependent on income taxes paid by the ultra-rich on earnings largely from capital gains. The set up leaves California vulnerable to the unpredictable nature of the stock market, dramatic swings in revenue and, in recent years, reliant on poor projections. <\/p>\n
Negotiations at the state Capitol included an agreement on a constitutional amendment that seeks to offset the revenue highs and lows. <\/p>\n
If approved by voters on the statewide ballot in November, the amendment would raise a cap on mandatory deposits into the rainy day fund from 10% to 20% of general fund revenue. The measure would also allow lawmakers to exempt money they put into the rainy day fund and the temporary holding account from state spending limits. <\/p>\n
Under an existing state appropriations restraint, also known as the Gann Limit, lawmakers cannot spend more than an amount determined by a formula that takes annual tax proceeds, changes to the population and cost of living into consideration. Tax revenue above the limit must be divided between schools and refunds to taxpayers. <\/p>\n
With few exceptions, the limit applies to most appropriations of tax revenue, including when lawmakers put money away in the rainy day fund and other reserves. <\/p>\n
Newsom said the change will leave the state in a much better position to weather the volatility. Though calls for tax reform remain in California, the governor said being able to place more money into the reserves could ultimately solve the state\u2019s budget challenges. <\/p>\n
\u201cThe one thing missing is the one thing that I think we finally landed, which is the change in the reserves,\u201d Newsom said. \u201cIt changes the political dynamic, where now you\u2019re not exchanging general fund priorities.\u201d <\/p>\n
Republicans criticized the proposed constitutional amendment, which passed in a budget trailer bill this week, for failing to require that excess revenue pays down the state\u2019s $22 billion in unemployment insurance debt. <\/p>\n
State Sen. Tony Strickland (R-Huntington Beach) called it a missed opportunity.<\/p>\n
\u201cIt does not require debt payment to go to the UI debt,\u201d Strickland said. \u201cIt facilitates more spending, exempting reserve deposits from the state spending limit.\u201d <\/p>\n
As part of the negotiations, lawmakers agreed to delay some healthcare cuts that would have required monthly premiums for immigrants and eliminated dental care. The deal adopts a Medi-Cal asset test of $21,000 on July 1, 2027, instead of a $2,000.<\/p>\n
The budget agreement includes a provision requiring California\u2019s next governor to develop options to reduce taxpayer subsidies for corporations whose employees receive state-sponsored healthcare through Medi-Cal instead of the company\u2019s health plan. The plan is aimed at raising revenue to offset federal cuts that are expected to leave millions of Californians without access to healthcare. <\/p>\n
The California Department of Finance said state reserves are expected to total $28.8 billion under the 2026-27 budget.<\/p>\n","protected":false},"excerpt":{"rendered":"SACRAMENTO\u00a0\u2014\u00a0Gov. Gavin Newsom reached an agreement Friday with legislative leaders on a $351.7-billion state budget in his final…\n","protected":false},"author":2,"featured_media":376740,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6],"tags":[152515,7,9,8,152514,150730,943,7834,4263,9726,3290,150729,37499,20390,13438,61186,152516],"class_list":["post-376739","post","type-post","status-publish","format-standard","has-post-thumbnail","category-california","tag-budget-deal","tag-california","tag-california-headlines","tag-california-news","tag-chronic-deficit","tag-gann-limit","tag-governor","tag-lawmaker","tag-money","tag-negotiation","tag-newsom","tag-rainy-day-fund","tag-reserve","tag-revenue","tag-state-budget","tag-state-spending","tag-stock-market-gain"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/posts\/376739","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/comments?post=376739"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/posts\/376739\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/media\/376740"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/media?parent=376739"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/categories?post=376739"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us-ca\/wp-json\/wp\/v2\/tags?post=376739"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}