California surplus expected to hit unprecedented $97 billion under Newsom’s budget plan

California’s government surplus is expected to balloon to $97.5-billion by next summer under the budget plan unveiled Friday by Gov. Gavin Newsom, an estimate that dwarfs previous projections and comes amid concerns that rising inflation and arcane spending rules could throw the state’s finances back into disarray in the near future.

“No other state in American history has ever experienced a surplus as large as this,” Newsom said at a press conference in Sacramento.

The new budget blueprint estimates $300.6-billion in total spending during the fiscal year that begins in July — a $14-billion increase from what Newsom proposed to lawmakers only four months ago. The governor’s plan asks lawmakers to devote billions of dollars to a raft of new items: an inflation relief package for Californians, more money to address dangerous drought and wildfire conditions, subsidies for low and middle-income healthcare plans and the highest per-pupil school funding levels in the state’s history.

Government spending of the magnitude envisioned by Newsom would be made possible, in large part, by the remarkable investment earnings of California’s wealthiest taxpayers.

The governor’s new budget, a revision to the plan he offered in January, points out the outsized role that taxes paid on capital gains have on the state’s finances. Those dollars make up a higher percentage of personal income taxes collected than at any point since 1999 — which Newsom’s budget points out occurred just before the collapse of the state’s dot-com industry, an implosion that helped trigger massive state budget deficits for much of the decade that followed.

“For those that are concerned about that, they are right to be concerned about that. We are deeply mindful of that,” Newsom said in offering what he insisted is a cautious plan focused on short-term spending proposals.

Compared to Newsom’s January plan, the most notable change reflects new worries about the effect of rising inflation. The governor’s budget earmarks $18.1 billion in short-term relief, with more than 60% of the money to be distributed through $400 cash payments to Californians who own a vehicle.

But that effort has found little support in the Legislature since it was first announced by Newsom in March. Democratic legislative leaders have instead urged the adoption of a plan to distribute relief funds based on adjusted gross income, not whether someone owns a car. Resolving the disagreement over who gets the money is likely to be a key part of private negotiations between Newsom and the Legislature in the coming weeks.

The governor’s inflation relief plan also includes money to provide help to struggling renters who applied for a state rental assistance program by March 31. Some low-income residents would also be eligible for help paying utility bills and for free public transit rides under Newsom’s budget plan.

Californians who work in hospitals and skilled nursing facilities could receive cash stipends of $1,500 per person under the budget’s inflation relief package — or, if the employer provides matching funds, up to $2,000 per worker.

Newsom’s budget overview did not explicitly lay out the chances of a sharp reversal of fortunes in the coming years — even though the financial warning signs have been visible for months. In the spring, the independent Legislative Analyst’s Office reported that a simulation of 10,000 possible state revenue scenarios resulted in shortfalls 95% of the time.

No problem looms larger, said the analysts, than the confusing outcome of how new tax revenues must be treated under a spending limit enshrined in the California Constitution — a 1979 voter-approved amendment that triggers mandatory education spending and tax rebates when cash receipts breach a predetermined cap. Newsom’s new budget projects no such problem in the near term, proposing spending in areas that aren’t counted toward the cap.

Legislators, who successfully defused the spending limit problem last year with a short-term solution, have pitched their own one-time workaround for this year. But there is growing agreement in the state Capitol that the 1979 law needs to be formally modified through a ballot measure sent to voters in 2024.

The government spending blueprint also reflects changes in the political climate. Newsom is asking lawmakers to set aside $125 million for expanded access to abortion services, an effort that kicked into high gear almost two weeks ago after the unauthorized leak of a draft U.S. Supreme Court opinion to overturn the ruling in Roe vs. Wade. The revised budget calls for spending $40 million in taxpayer funds to subsidize abortion-related resources for low-income women, including those who may travel to California from other states.

Not all spending decisions envisioned by Newsom’s budget are fully fleshed out.

The revised blueprint includes scant details on how much it will cost to fully implement the governor’s sweeping proposal to provide court-ordered treatment for homeless individuals with severe mental illness and behavioral health needs. The so-called Community Assistance, Recovery and Empowerment Court would create a new civil justice treatment program for some 7,000 to 12,000 Californians experiencing psychiatric conditions such as schizophrenia, and who need treatment and shelter to stabilize.

For up to two years, a CARE plan would help connect participants to medication and a variety of mental health services, along with a housing plan, a public defender and a personal advocate.

Newsom proposed new funding for the state Department of Aging and $39.5 million for the judicial branch to conduct CARE Court hearings and provide other related services. But there is no clear sense of what the state might need to pay for the services that would be provided by county governments.

Since January, legislators have held dozens of public hearings to examine the governor’s original budget plan and to consider modifications. Last month, state Senate Democrats used the debate over relief from rising inflation and gas prices to also propose broad funding increases for social services and record cash reserves for general government needs as well as schools and so-called safety net programs.

Although lawmakers have passed on-time budgets for the past decade, the process in recent years has dragged on far beyond the June 15 constitutional deadline. The governor and Democratic leaders in those instances have quickly settled on a broad framework — meeting the official finishing date and ensuring legislative salaries aren’t forfeited.

But officials have then spent days or even weeks haggling over the fine print, ultimately laying out the details in supplemental budget bills approved by the Legislature through votes taken into early summer.