Gov. Gavin Newsom on Wednesday called on California lawmakers to put money into the state's rainy day and raise the minimum wage for health care workers as part of a plan to close an expected $37.9 billion budget deficit. He signaled his intention to potentially delay the hike.

The budget shortfall was caused by a combination of lower-than-expected state revenues, missed tax deadlines, and overspending based on inaccurate budget projections. The state has experienced back-to-back deficits as uncertainty continues to hang over the U.S. economy, from a $100 billion budget surplus that peaked during the COVID-19 pandemic.

In a presentation Wednesday in Sacramento, Newsom outlined his proposed $291.5 billion budget for fiscal year 2024-25 and described the upcoming budget as an example of “revenue normalization after a period of enormous distortion.” did.

“All of this uncertainty comes because we experienced something we have never experienced in modern history, which is that the state did not collect taxes last April,” Newsom said. Told.

The deficit deepens the state's economic challenges and poses a political challenge this year for Mr. Newsom, who is working with lawmakers and interest groups to cut $8.5 billion in planned spending on things like housing and climate change. there is a possibility.

His budget proposal says he wants to work with lawmakers to put funding limits on the law he signed last year that raised the minimum wage for health care workers to $25 an hour, causing state revenue to fall below the minimum wage. In such cases, the effective date of the pay increase may be delayed. certain level.

The governor's plan seeks to preserve funding for many of his expensive policy promises, including expanding Medi-Cal eligibility to all immigrants regardless of legal status..

But his decision to drain $37.9 billion in budget reserves is another wake-up call for the Golden State. In the past, Mr. Newsom has called for tapping into the state's “rainy day fund” and other reserves, which serve as piggy banks pried open during financial crises, to avoid cuts to critical services and social safety net programs. He has rejected the demands of Democratic politicians.

The governor is proposing to declare an emergency budget this summer, with the drawdown of reserves required by law. His plan to spend $13.1 billion of reserves means there will be less money available to backfill spending if revenues continue to fall, making it even more painful and significant in coming years. This may necessitate significant reductions.

Newsom is proposing annual spending cuts while also drawing down reserves. The proposed 2024-25 budget would reduce spending by nearly $20 billion from lawmakers in the budget passed in June.

Last year, the state and federal government pushed back the filing deadline for 2022 income tax returns from April to November due to winter storms that hit the California coast and flooded parts of the state. State budget difficulties worsened. The extension affected more than 99% of taxpayers in 55 of California's 58 counties, according to the Treasury Department.

In a normal budget year, the state would have state tax receipts in hand before Mr. Newsom releases a revised budget in mid-May and before reaching a final spending agreement with lawmakers in June. are doing. The delay forced lawmakers and the governor to enact the current budget in July based on estimates of how much the state could expect to collect in tax revenue by the November deadline.

The Treasury Department last year projected a shortfall of nearly $32 billion for the current fiscal year, which ends June 30, forcing lawmakers and the governor to cut spending plans.

The state budget relies heavily on income taxes paid by California's highest earners. Earnings are volatile and depend on capital gains on investments, executive bonuses and tax windfalls from the issuance of new stock.

Mr. Newsom and lawmakers predicted further revenue losses due to the stock market decline, high interest rates and rising inflation.

Now, state leaders must cut spending next year to make up for last year's actual revenue shortfalls and projected deficits for next year.

“The timing challenges associated with this deficit estimate are certainly unique,” said Gabriel Petek of the Legislative Analyst's Office.

Despite budget challenges, California shows no signs of a larger economic crisis.

“California has historically grown faster than the United States on a per capita basis, making it one of the fastest growing states in the country,” said Jerry Nickell, UCLA Anderson Forecasting Director and professor of economics. Sberg says. . “And now it's growing at about the same rate as the U.S. because everyone is actually slowing down a little bit.”

He noted that geopolitical risks are increasing globally and that the presidential election could impact U.S. economic policy in the near future.

But Nickelsburg said he expected the slow growth to be short-lived and that economic growth would accelerate again from the second half of this year into 2025.

Newsom's January budget proposal begins a six-month process of hearings and negotiations with the California Assembly and Senate, both of which will have new leadership by the time budget talks intensify. become.

He promised to present a more complete fiscal plan in May, when the state has a more accurate picture of its 2023 income tax collections.