California governor projects $22.5 billion budget deficit

California Gov. Gavin Newsom has projected a $22.5 billion budget deficit for the upcoming fiscal year.

That's a sharp turnaround from the $98 billion surplus Newsom had to work with last year.

Newsom announced the projected deficit Tuesday as he laid out his spending priorities for the fiscal year that begins in July. He's projecting a total state budget of $297 billion.

The state has about $35.6 billion in reserves.

THIS IS A BREAKING NEWS UPDATE. AP’s earlier story follows below.

SACRAMENTO, Calif. (AP) — Days after the start of his second term, California Gov. Gavin Newsom on Tuesday will announce his plan to cover a multi-billion dollar budget deficit in what could signal the end of a decade's worth of economic growth in the nation's most populous state.

Newsom, a Democrat, has been warning of a potential budget shortfall for more than a year, and the Legislative Analyst's Office said last in November the shortfall could be around $25 billion.

In September, Newsom publicly scolded lawmakers for sending him dozens of bills that, when added together, would have allowed billions in new spending. Newsom vetoed those bills, saying he has “made it crystal clear that we are seeing economic headwinds.”

But he's been unusually quiet in the days leading up to his budget announcement. In years’ past, Newsom would often have news conferences to roll out some of his big new spending programs. But this year, all he has said is he plans to ask lawmakers for an additional $202 million to strengthen levees that protect the state’s cities from flooding — an issue at the forefront this week after multiple powerful storms have caused flooding across the state.

Dealing with a deficit will be a change of pace for the state, where spending has more than doubled in the 10 years since the last recession. Officials have launched a dizzying amount of new programs and services — including committing to pay for all 4-year-olds to go to kindergarten and agreeing to cover the health expenses of all low-income immigrants who are living in the country without legal permission.

The money has come mostly from a soaring stock market that launched a parade of California-based tech companies. Those companies — including the likes of Uber, Airbnb, Lyft and Pinterest — made lots of people very rich, creating a new class of millionaires and billionaires in a state with a progressive tax code where nearly half of all income taxes come from the top 1% of earners.

Sine then, lots of economic factors — led by runaway inflation, supply chain disruptions and Russia's invasion of Ukraine — have had a chilling effect on the economy. The S&P 500, a key indicator of the health of U.S. stock markets, has fallen more than 18% since its peak at the end of 2021.

With rich people not making as much money, they are paying less in California state taxes. So far this year, California's tax revenues have been $4.6 billion below expectations — not including some one-time corporate tax payments that state officials say they can't count on.

Still, California appears to be well-positioned to weather an economic downturn. Of the $131 billion in general fund surpluses the state has had in the past four years, most of it — about $80 billion — has paid for things that do not require ongoing funding, like construction projects. Just $10 billion of surplus spending has paid for ongoing commitments, according to the Legislative Analyst’s Office.

Plus, the state has $37.2 billion stored across its various savings accounts, which by itself would be more than enough to cover a $25 billion deficit. Constitutional limits prevent lawmakers from emptying reserves to cover a deficit. And unlike the federal government, California's budget must be balanced. Newsom and lawmakers will have to tighten state spending to cover all of the shortfall — something that Senate Budget Committee chair Nancy Skinner said is doable.

“We funded things at such record levels, and a lot of the programs that we funded haven’t even gotten going yet, so we still have room to make some adjustments if needed,” she said, adding: “I’m very optimistic because we’re in good shape.”

Assemblymember Phil Ting, a Democrat from San Francisco and chair of the Assembly Budget Committee, said he thinks the deficit can be easily managed by state officials, saying he thinks the state is in for a “softer landing" than it had at the start of the last recession in the late 2000s.

“What we expect (on Tuesday) is a vision of how we protect all the amazing things we funded,” Ting said. “Things are definitely slowing down.”