Gov. Gavin Newsom unveiled his revised budget proposal for the coming fiscal year, detailing how the administration plans to address a deficit that has grown 50% since January. Agencies as well as lawmakers are examining several options for filling the spending gaps in priority programs—particularly on new climate policies.

The budget proposal for the 2023-24 year, known as the May Revise, maintains many of the cutbacks Newsom first pitched in January. Since then, however, state agencies have launched historic initiatives and approved sweeping regulatory mandates. The state is also beginning to fully implement existing regulations that are pulling more resources from agencies.

Among the portfolio of options on the table, the state could raise fees on regulated entities, bump up taxes on large companies or through voter-approved bonds, delay spending until the economy recovers, lean on existing federal investments or push Congress for more support. In delivering the May Revise during a press conference Friday, Newsom stressed the volatility of the state economy and the need for prudence in spending.

“We've talked a lot in the past about this notion of fiscal restraint and this notion of resilience,” said Newsom. “That's foundational to the May Revise.”

Despite some shortfalls, he added, the state is preserving and enhancing “programs that we all hold dear.” Environmental advocates applauded the administration for maintaining $48 billion in multiyear climate investments, after trimming $6 billion in January.

The administration did not deepen an 11% cut to the current spending on climate-smart agriculture programs. But Newsom does propose slashing LandFlex by 50%. The program, featuring a novel partnership with industry, would pay farmers not to pump in order to preserve vulnerable drinking wells nearby. The Department of Water Resources (DWR) in February awarded $25 million in grants to three groundwater sustainability agencies in the San Joaquin Valley through LandFlex. Reasoning that water conditions have significantly improved, the administration pulled back the remaining $25 million allocated last year.

After a four-month pause, the state decided in January to maintain $75 million in the 2022-23 budget for drought relief to small businesses that support agriculture. The May Revise would add another $25 million this year, following requests from Sacramento Valley farm groups for more emergency aid to support struggling rural economies.

The administration also moved $125 million in drought funding to flood control, doubling the amount of spending from last year. Following the January budget proposal, a parade of winter storms flipped the state’s hydrologic outlook. Assembly Republican Leader James Gallagher, who is proposing an additional $100 million to extend the relief program for agricultural businesses, called the cuts to other drought programs dangerous.

Yet the drought and flood dollars drew praise from farm groups.

“We are pleased by the state's important investments in flood protection measures and in agricultural business grants,” said California Farm Bureau President Jamie Johansson in a statement. “Farmers and ranchers appreciate efforts to safeguard California's agricultural sector, which feeds America.”

But Johansson pressed the administration to expand the state’s water storage through infrastructure investments. Last year Newsom set aside $500 million to further support water storage projects under consideration for Proposition 1 bond dollars at the California Water Commission. That funding, however, would not kick in until at least 2024.

According to Newsom, the state has identified $180 billion to spend on infrastructure over the next decade. He plans to leverage the money to acquire more federal discretionary dollars for shovel-ready projects.

“The only way to do that is to reform our permitting process and procurement process in the state of California,” he said.

The May Revise builds on funding from the federal Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA). In a call with reporters, Newsom’s climate advisor, Lauren Sanchez, said the governor is “laser focused” on tapping into federal funding opportunities. California stands to receive $48.6 billion from the IIJA and $645 million from the IRA.

Agriculture and business groups, however, have criticized the administration for setting ambitious carbon neutrality goals amid an economic downturn and while the state is already facing energy reliability issues. Just weeks before Newsom released the May Revise, the Air Resources Board banned the sale of diesel trucks starting in 2036 and approved a regulation for converting locomotives to zero emissions.

To accomplish these goals, Newsom reiterated a Republican talking point that the state has focused on streamlining environmental permits for major sports stadiums and must do more. The May Revise extends the effort to broadband, clean energy, housing and transportation as well as water storage and conveyance. Streamlining regulations would allow California to “build more, build faster, train more workers” and “build the projects we need to reach our ambitious climate goals.” Newsom called the idea “exciting, bold and meaningful” and pledged to unveil a legislative package this week offering more details.

Republican Senator Roger Niello of Fair Oaks said the state can be “smart about managing our budget” and still “address the things that matter,” such as building water storage.

Last month Newsom shot down a budget proposal by Senate Democratic leaders to raise corporate taxes, calling the idea irresponsible and arguing it would jeopardize progress. He reaffirmed that stance on Friday, saying that would be inappropriate after sending Californians $18 billion in tax rebates last year. He also wanted to avoid the dynamic of raising taxes to cover long-term expenses if the state budget falls short for a year or two, arguing this would hurt the business landscape.

“That creates a very challenging competitive frame for the state,” he said, while acknowledging that other states have been recruiting California companies. “I'm very mindful of our competitive nature vis-a-vis other states.”

That won him applause from California Chamber of Commerce President and CEO Jennifer Barrera, who said that tax increases “are not the right thing to do and this is not the right time to consider them.”

But the governor did accept the notion of raising taxes through a ballot measure to go before voters. The May Revise proposes shifting more than $1 billion in climate investments to a bond. It would cover $60 million for implementing the Sustainable Groundwater Management Act (SGMA) and $20 million for repurposing farmland fallowed under SGMA or due to drought. Several climate and flood bonds in the Legislature are already competing for ballot slots.

Roger NielloRoger Niello, R-Fair Oaks

California policymakers and industry groups are also hoping to tap into federal spending through the farm bill reauthorization to shore up climate programs and help farmers meet state-mandated air quality goals. 

The Newsom administration has submitted several requests related to conservation and climate investments. Topping the list is an increase in incentives for on-farm water use efficiency, particularly for the Colorado River Basin, and for more funding for the Environmental Quality Incentives Program (EQIP). Agricultural groups have been pressing the administration to restore funding for California’s version of EQIP, known as FARMER.

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While budget dollars have fallen short, CalEPA’s regulatory ambitions continue to rise, along with the costs for implementing the new initiatives. State agencies have submitted proposals for raising stakeholder fees to account for the added staff time. The State Water Resources Control Board is hoping to add 19 positions this year to address its new role as the regulatory backstop for SGMA. The board already has 21 positions dedicated to SGMA. In March DWR deemed six groundwater sustainability plans inadequate, sending them to the water board for further review. According to the proposal, the water board plans to recoup its costs through fees on the local groundwater agencies. It anticipates that tens of thousands of groundwater pumpers will be required to report their water use to the board starting in 2025.

The administration is also planning to raise the mill assessment on pesticide sales to pay for a suite of emerging environmental justice programs at the Department of Pesticide Regulation (DPR). In April the department released a set of potential concepts for overhauling the pesticide tax. While the mill assessment is not part of the current budget discussion, DPR is proposing to put $1.9 million in taxpayer dollars and $1.4 million in ongoing spending toward objectives outlined in its new Sustainable Pest Management Roadmap. The money would help to improve and streamline DPR’s registration and reevaluation process, identify alternatives to high-risk fumigants and lead strategic collaborations with stakeholders. The department plans to double the number of registration evaluations it performs annually, starting in 2024. The budget proposal suggests DPR plans to hire an outside consultant to initiate a study for fumigant alternatives by next summer. The added workload would require seven new positions.

CalEPA Secretary Yana Garcia told reporters that accelerating the state’s transition away from harmful pesticides is essential to protecting health and the environment.

Budget subcommittees in the Legislature have already begun diving into the many new proposals, as they race toward a June 15 deadline for passing a budget framework. With tax deadlines extended to October for most counties, revenues will remain uncertain throughout the legislative session, meaning budget negotiations over trailer bills will continue into September.

In the wake of the May Revise, Assembly and Senate Democratic leaders staked out their budget priorities and pushed for restoring public transit dollars and childcare funding. Senate President pro Tempore Toni Atkins did not respond to the governor shooting down her proposed corporate tax hike but did concede that “the budget this year will be challenging.”

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