Anticipating Newsom’s 2024-25 May Revision

As Governor Newsom prepares to unveil his updated 2024-25 California state budget proposal — commonly referred to as the May Revision or May Revise — we anticipate new insights into the state’s economic forecast and revenue projections. The revised proposal will delineate the governor’s strategy for navigating the substantial deficit while maintaining a balanced budget.

As we gear up to analyze the updated spending proposal, the Budget Center team is poised to evaluate how the governor plans to confront the challenging fiscal landscape. We are particularly interested in learning how the governor will address the shortfall while minimizing harm to critical safety net programs and continuing to make progress toward his policy agenda of a California for all.

When balancing the budget, we call on policymakers to prioritize the well-being of Californians. We know that cuts to any of these services would directly affect the lives of millions of Californians and disproportionately impact low-income communities and Californians of color.

What is the budget shortfall for California in 2024-25?

The current size of California’s budget shortfall remains uncertain, with estimates varying widely between $38 billion and $73 billion since January. These estimates hinge on assumptions about economic conditions, revenue collections, and the future needs of Californians. Of particular concern is that early information on tax collections points to a reality where state leaders cannot hope to cover the shortfall through higher-than-expected tax collections. 

Governor Newsom will present updated estimates in the May Revision, providing a more accurate assessment following the state’s recent tax collection deadline. The magnitude of the shortfall will significantly influence the forthcoming 2024-25 budget negotiations, serving as a deciding factor in shaping the state’s spending priorities for the coming fiscal year. 

How much will the governor tap into the state’s rainy day funds?

The “early action” deal agreed to by the governor and legislative leaders last month anticipates using — as the governor proposed in January — billions of dollars from two key state reserves to help close the budget shortfall. Leveraging the state’s ample reserve funds to offset some cuts, while preserving substantial savings to protect against potential future shortfalls should economic conditions worsen, is a prudent strategy

However, one aspect of the governor’s January plan has drawn significant scrutiny from policymakers and advocates alike: the proposal to completely deplete the Safety Net Reserve while simultaneously making cuts to CalWORKs, one of the programs the reserve was established to protect.

We will closely monitor the administration’s updated reserve strategy and its response to the widespread criticism surrounding the proposal to exhaust the Safety Net Reserve.

Who will be most affected by the budget cuts?

The forthcoming May Revision will undoubtedly reflect challenging decisions undertaken by the governor. Soon after, the Legislature will engage in negotiations with the administration to make the case for their respective priorities and desired trade-offs for the 2024-25 budget year.

Although California is considerably better prepared to confront this challenge than it was at the onset of the Great Recession, we urge policymakers to refrain from reducing support for programs and services that are critical for the well-being of California’s families, including food assistance, cash support, housing and homelessness supports, and other direct benefits. Cuts in these areas would disproportionately impact low-income communities and Californians of color.

Rather than targeting essential programs, policymakers should consider reductions to subsidies and tax breaks benefiting highly profitable corporations.

Will the governor consider revenue options to balance the budget and reduce harm?

Governor Newsom’s steadfast resistance to increasing revenue and reforming the state’s tax system further threatens cuts to essential programs and services, exacerbating the challenges faced by Californians already struggling to make ends meet. In January, the administration’s budget proposals allocated less than 1% towards raising additional revenue for the 2024-25 budget year. Given the expected persistence of the budget shortfall and widening inequality, policymakers must seriously consider revenue-raising measures to balance the budget, prevent detrimental cuts, and address the vital long-term needs of Californians.

One practical approach for bolstering state revenues is to eliminate or reduce costly tax breaks, ensuring that highly profitable corporations contribute equitably to California’s prosperity. Even temporary suspensions of select tax breaks could help mitigate the negative impacts of the shortfall in the near term. 

The Legislative Analyst’s Office has also proposed several worthwhile tax policy changes that would enhance California’s revenue picture, including eliminating the capital gains step-up basis on inherited assets, the mortgage interest deduction for second homes, and tax subsidies for oil and gas companies. 

Failure to implement meaningful revenue-raising measures leaves policymakers with increasingly difficult decisions and jeopardizes the progress in expanding vital support and investments throughout the state.

What other solutions do policymakers have to address the shortfall?

Beyond revenue solutions, state policymakers should target the bloated California Department of Corrections and Rehabilitation budget. Closing state prisons with roughly 15,000 empty beds would reduce unnecessary expenditures by as much as $1 billion per year. While prisons can’t be shut down overnight, planning for closures now will help ensure that multiple state prisons can be deactivated over the next few years, starting as early as 2025. 

As policymakers balance various priorities, it’s crucial to avoid reactionary overspending in response to exaggerated narratives surrounding issues like retail theft and crime. Both remain at rates well below pre-pandemic levels, and prudent resource allocation should reflect this reality.

This commentary was written by Mauricio Torres Jr. , communications director at the California Budget & Policy Center.