Why California’s deficit remains a mystery ahead of Gavin Newsom’s latest budget

California Gov. Gavin Newsom is expected to unveil an updated state budget on Friday showing a huge budget deficit that’s likely to trigger painful spending cuts — a shortfall that appears to have grown during the past few months.

State lawmakers must produce a balanced budget by the time the new fiscal year begins on July 1. The governor in January estimated the state would face a $38 billion deficit.

Budget-watchers now anticipate that number has likely grown as revenue totals have been lower than Department of Finance projections.

Newsom could use several strategies to get the number down. He could include plans to tap the state’s reserve fund. He will likely factor in the $17 billion in savings he and legislative leaders agreed to last month. He could cut spending, or find ways to collect more revenue.

In April, the governor, Assembly Speaker Robert Rivas, D-Hollister, and Senate President Pro Tem Mike McGuire, D-Healdsburg, opened up budgets from 2022-2023 and 2023-2024 to find $1.6 billion in immediate spending “solutions,” or cuts, delays and other money-saving strategies.

The remainder of the $17 billion deal was related to a handful of other solutions leaders will implement in June, when they solidify their spending plan.

This much is certain: The governor faces a big challenge trying to balance the state budget. The state Department of Finance reported in its April finance bulletin that California’s fiscal year-to-date revenues were $5.8 billion or 4% below forecast as of March.

Adding to the sense of impending budget gloom: The nonpartisan Legislative Analyst’s Office last week updated its revenue forecast, with analysts saying their revenue projection is $19 billion below the Department of Finance estimate. That’s down from the $24 billion gap the LAO projected in February, but it’s still a sizable shortfall.

The LAO’s numbers are further evidence that the projected deficit announced Friday could be higher than the one Newsom estimated in in January. The deficit results from a combination of spending and revenue projections.

The Legislature must pass a budget by June 15 for lawmakers to continue receiving their paychecks and travel reimbursement.

How big is the deficit?

At the moment, leaders are having trouble even figuring out the size of the deficit they need to close. The governor and the LAO have been at odds over the state’s projected shortfall for months. The LAO in December said California could face an estimated $68 billion deficit.

Newsom in January expressed frustration that budget-watchers and journalists picked up this number “as gospel,” although the LAO and the Department of Finance frequently have different budget estimates.

So how will the governor calculate the state’s budget deficit? Scott Graves, budget director for the California Budget and Policy Center, suggested Newsom will likely shave the entire $17 billion from the shortfall.

The governor has also suggested withdrawing $13 billion in reserves — reflected in the legislative agreement — which Graves said he may further shrink the deficit number.

“So it could turn out that the the shortfall number that he presents in the May revision is going to seem maybe relatively low,” Graves said.

But nothing is certain until the revised budget comes out Friday. H.D. Palmer, a Department of Finance spokesman, also confirmed Newsom will subtract the $17 billion legislative agreement from the overall deficit.

However, the shortfall will also be subject to some numbers the Department of Finance has not yet made public, including April revenue receipts and further revisions to the revenue forecast, Palmer said.