RSG Solutions

May 16, 2023

By Jim Simon, Principal

Last Friday, Governor Newsom released his administration’s revised 2023-24 budget proposal, which encompasses total spending of $306.6 billion. As readers may recall, the January budget was the first in a few years that had to contend with a deficit, which at the time was approximately $22.5 billion. Since then, economic conditions including revenue delays, monetary policy and interest rates, and economic uncertainty have resulted in the deficit increasing to $31.5 billion. While the new budget is balanced, largely with proposed shifts of some General Fund sources to bonding while spreading some spending into future years, the Governor does acknowledge that future years’ budgets have more work to be done beyond this year.

For RSG’s clients, California’s investments in housing and homelessness as well as economic development programs remained relatively unchanged from the original January proposal. These policy areas, among others such as education and health care, were characterized as investments into what he hopes the Legislature will protect in their deliberations on the final budget.

The Governor emphasized that his $15.3 billion investment proposal in homeless programs remains at historically high levels, but coupled that investment with an emphasis on accountability for both homeless programs as well as housing element compliance. The Governor mentioned more than once the State’s lawsuits against Huntington Beach and Elk Grove, among unstated other local jurisdictions they are watching, for not doing enough to meet fair-share housing production goals.

For economic development, the May Revise does add $40 million in support from the State for apprentice programs geared towards women in the construction field, and rural areas were also highlighted as an area of emphasis. The Governor also championed his goal of spending $180 billion over the next 10 years to “rebuild” California infrastructure.

While expansion of programs, including an ongoing funding commitment to local communities for homeless programs and reparations now being discussed in Sacramento remained uncommitted at this time, the Governor did make clear that he not only expects the Legislature to bring back a balanced budget but also signaled he will likely veto additional appropriations outside the budget as he did last year when he vetoed over $20 billion in additional spending.

Relative to other states, California’s progressive tax structure wherein half of the income tax revenues come from 1 percent of taxpayers and relies on capital gain taxes will cause the State to have wider fluctuations from year to year when the economy changes according to the Governor, and this is why his budget continues to exercise restraint. The budget does not model a possible recession that could deepen the budget deficit by as much as $100 billion according to the Governor, nor does it signal that future years will be balanced.

Between now and the end of June, expect that the Assembly and Senate will have their work cut out for them to deliver a budget that meets the Governor’s expectations, not to mention how they contend with greater uncertainty that lies ahead. We are seeing similar restrained budget planning occurring at the local level among many of our city clients already. But local communities should also heed the Governor’s often stated determination on making cities and counties accountable to deliver results in housing and homelessness as the administration continues to work with the Legislature on bills to bolster enforcement activities.