A waiter walks past tables of people dining outdoors at Scoma's restaurant in Sausalito, Calif. | AP Photo/Eric Risberg
SACRAMENTO — California Gov. Gavin Newsom on Friday unveiled a record $227 billion January spending plan that marks a dramatic reversal from summer fears that the state would head off a financial cliff.
California's budget has benefited from massive stock market gains and income growth among its most affluent residents, particularly those in the high-flying Bay Area. The budget picture reveals a dramatic disconnect between upper class residents who have built wealth during the pandemic and those struggling to avoid eviction and put food on the table.
"This budget reflects this state is doing pretty damn well," Newsom said. "We've got a lot of work to do to help small and medium-sized businesses, but folks at the top are doing pretty damn well. But I don't begrudge that success, I admire and respect it."
Newsom proposed Friday using much of California's bounty from the rich to help those who have suffered disproportionately, as well as students who are failing in record numbers as they try to navigate a remote learning environment. The governor declared in his budget that he believes students belong in classrooms this spring despite resistance from teachers and some families who believe it is unsafe.
The state's coffers are so full that California will be constitutionally obligated to put billions of dollars into rainy-day reserve accounts, all while many other states are facing deficits. In New York, Gov. Andrew Cuomo says the state is $15 billion in the red.
Though California's pandemic fortune appears to be an outlier among states, Senate Majority Leader Mitch McConnell has already used those growing revenues to justify Republican opposition to federal stimulus aid for state and local governments. He said last month he didn't want to contribute to California's "slush fund," an argument that Republicans are likely to repeat when a Democratic-controlled Congress and President-elect Joe Biden pursue aid for states.
Newsom, a wine entrepreneur, on Friday praised companies like DoorDash and Airbnb that had initial public offerings last year, as well as Salesforce, saying he was "proud" of their success and that it reflected a unique environment California provides for tech entrepreneurs.
The state also did a better job over the past decade of squirreling away money, learning lessons from the Great Recession while liberal Democratic legislators were checked by a more austere Gov. Jerry Brown before Newsom took office.
Remarkably, the state has more money than it did a year ago, before the pandemic — the overall proposed spending total for 2021-22 is $5 billion higher than in last January's budget, while the general fund amount is a staggering $11.5 billion larger.
Standing at the precipice of the coronavirus unknown, Newsom and state lawmakers in June enacted a trimmer budget that delayed payments to schools and hoped for federal stimulus aid to spare courts and higher education from cuts. They braced for state revenues to go south at any minute, staring at a wave of business closures and unemployment claims that resulted from lockdown orders intended to slow the spread of the coronavirus.
It turned out that the state's wealthiest taxpayers, many in the Silicon Valley, had a banner year thanks to a soaring stock market and technology that meant the professional class could continue working remotely without skipping a beat. California's progressive income tax structure relies on the rich more than most other states and California did so well it actually saw more tax withholding during the last nine months of 2020 than in 2019.
But for all of California's wealth, the pandemic hammered the service sector and lower-income workers, forcing the unemployment rate to soaring to 16 percent last spring. The state has tried to protect California's struggling residents through eviction delays, mortgage deferments and jobless benefits, and Newsom's budget calls for more.
California has $34 billion beyond what it needs to balance its budget, and the governor said $22 billion will be put into various reserve funds. He emphasized that fiscal forecasters believe the surplus could be fleeting and that the state will face years of deficits in the future without putting aside money.
But Newsom also called "using resources from this surplus to help the most vulnerable Californians."
He is proposing $600 "rapid cash" grants for low-income workers this spring at a cost of $2.4 billion, matching what they are due to receive in stimulus payments from the federal government. He also wants to extend eviction protections for renters and channel federal aid toward ensuring those residents can stay in their homes.
Newsom last week announced a plan to give $2 billion to school districts that reopen their classrooms this spring. That money serves as an incentive to bring teachers and students back, as well as pay for staff and protections to help that process. But with most of the state still facing sky-high coronavirus rates, the proposal didn't get far out of the gate: Teachers unions immediately cast doubt on the idea while big-city districts said they needed the state to establish clearer thresholds that define what conditions are safe for schools to reopen.
If his budget is any guide, the governor intends to keep pushing districts and teachers to reopen sooner rather than later. "COVID-19 Pandemic-related disruptions to student learning and support services are best mitigated by providing students with access to in-person instruction," his budget declares.
Besides dangling money to reopen classrooms, Newsom is proposing $4.6 billion to overcome learning loss that has occurred ever since schools closed their doors in March. That money will be focused on lower-income students, English learners, foster children and those who are homeless, possibly through a longer school year or summer programs. The largest education expenses are for staff — so adding extra school hours will mean convincing teachers and other educators to return outside of the traditional school calendar.
Newsom is also proposing immediate action on business stimulus, including a new round of half a billion dollars in small business grants; $430 million in grants and tax credits for expanding businesses or those moving into California; and $71 million in fee waivers for restaurants and other firms forced to close during stay-at-home orders.
California's top business leaders called on state lawmakers to move quickly to approve relief.
"Any and all efforts to provide relief for small businesses, alleviate regulatory burdens and eliminate costs for them as they struggle through this pandemic should continue to be the priority of the Governor and policy makers," California Chamber of Commerce President and CEO Allan Zaremberg said in a statement. "The Legislature must act quickly on these proposals."
The governor is essentially calling for a rare mid-year budget addendum given that the existing spending plan is built on assumptions that turned out to be wrong — and without knowing how long or hard the coronavirus pandemic would hit the state. State leaders and families, for instance, presumed students would be back in classrooms by now, but absent dramatic action, the entire school year could remain remote for most California districts.
The Legislature has scheduled budget hearings upon its return next week, including an early adoption of rules to set the review process in motion. Assembly Speaker Anthony Rendon said it will be necessary to direct the state's surplus toward the least fortunate.
“Given the influx of tax revenue coming from high-income Californians who are doing well, we have a responsibility to use our resources to help those who have been struggling," he said in a statement. "These communities have been neglected many times in the past."
Keely Martin Bosler, Newsom's finance director, said the fiscal officials miscalculated the depth of the recession, as well as how unequally it would affect taxpayers. They also couldn't have predicted that the stock market would soar to new heights, with the Dow Jones Industrial Average clearing 30,000 despite high unemployment and widespread business closures.
Given the disparate impacts of the pandemic, look for liberal Democrats to call for more money for struggling residents, and possibly less held in reserves. Ahead of the governor's budget, Assemblymember Alex Lee (D-San Jose) led a call for $5 billion in direct aid to renters. He also said Friday that residents need more than another $600 in cash aid.
"The State Budget must provide relief to working families who are hurting," Lee said Thursday on Twitter. "It's intolerable for anyone to lose their home during the pandemic."
At the same time, labor unions and progressives could renew efforts for higher taxes on the rich. An effort last year to enact a wealth tax failed in the Legislature, while voters in November rejected a proposal to raise taxes on commercial property to benefit the state budget.
Businesses and moderates have raised concerns that any additional taxes would prompt tech firms and wealthy residents to flee to other states, especially after Oracle and Hewlett Packard Enterprise announced last month they would move their headquarters to Texas and some economists have suggested a remote work culture has untethered employees geographically.
Newsom dismissed those concerns Friday, putting faith in California's reputation as an incubator of innovative businesses thanks in part to its world-class universities. But he also said that he has no interest in another tax on the wealthy.
"Make no mistake, there are some that are talking about wealth taxes, some that are talking about big income taxes," he said. "They're not part of the conversation."
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