Los Angeles fires take center stage in California budget briefing

The devastating fires affecting Los Angeles took center stage Friday when California’s finance director presented Gov. Gavin Newsom’s proposed $322.2 billion budget.

Joe Stephenshaw reported the state will head into budget talks with a slight $363 million surplus after revenues for the first half of fiscal year 2024-25, which began July 1, came in $16.5 billion higher than expected.

Newsom, who usually announces the budget in person, has remained in the state to help local officials manage the impact of the devastating wildfires in and around Los Angeles. He didn’t participate in the budget presentation.

Stephenshaw started Friday’s press conference by saying: “The governor’s total focus now is on the communities and residents impacted by the devastating fires in Los Angeles.”

In previous years when local governments were hit by reduced taxes from the loss of homes and the resultant reduction in assessed property values when homes were lost, lawmakers have provided funding to cities to make up the difference.

Those kinds of decisions will be up to lawmakers as budget talks move forward, he said.

Newsom’s proposed a $322.2 billion budget includes a $228.9 billion general fund, $16.9 billion in reserves and no plans to raise taxes.

The proposed budget pencils out “thanks to a stronger economy, stock market, and cash receipts,” Newsom said at a press briefing Monday.

Last year, the state headed into budget talks with a $45 billion deficit.

Stephenshaw cited the two-year budget framework Newsom used in structuring last year’s budget, along with the revenue windfall, for the state’s improved fiscal condition.

The governor has proposed legislation as part of the budget that would reform Proposition 2, which created a situation where 10% of revenues go into the rainy day fund each year. The governor wants that increased to 20%.

Allocations to the rainy day fund are currently included as an expenditure and thus fall under the cap on how much money the state can “spend” before it has to return money to taxpayers.

Another difference between this year and last year’s budget is the governor proposed allocating $1 billion more for the special fund for economic uncertainties for a total of $4.5 billion. That is money designated to deal with situations like natural disasters, Stephenshaw said.

The budget is growing only slightly by $1.2 billion to account for the state’s revenue volatility, because a disproportionate amount of its income taxes comes from its wealthier residents, who receive income from capital gains, up when the stock market does well and down when it does not, Stephenshaw said.

“There are very limited new commitments in the budget,” he said.

The governor made the decision to eliminate plans to cut administrative positions from either the California Department of Forestry and Fire Protection or the California Highway Patrol, before the fires broke out.

A decision was made last year to cut 10,000 vacant positions to close the deficit, but instead the state only reduced positions by 6,500 to save $1.2 billion over the current year’s budget and the 2025-25 fiscal year, according to budget documents.

The budget allocates $2.7 billion for climate-related projects of the $10 billion statewide climate bond measure approved by voters in November. Of that $1.5 billion will be for forest resilience projects.

“This plan will accelerate projects and programs that build water and wildfire resilience, with up to two‑thirds of these investments delivering on California’s nature‑based solution climate targets, increasing the health of natural systems and their ability to absorb more carbon than they release,” according to the budget document.

The budget also includes a wildfire income exclusion to provide tax relief for wildfire victims from 2025 through 2029, Stephenshaw said.

From the $10 billion statewide bond measure voters in November approved for K-14 education construction projects, the governor has allocated $1.5 billion for modernization and new construction and $51.5 million for community colleges, he said.

The budget would double funding for CalFire to $1.3 billion and would add 2,400 new firefighters.

The budget also takes into account uncertainties around federal funding, Stephenshaw said.

“The risks to the budget we are facing include stock market volatility, uncertainty around federal policy and tariffs, which could have some impact on California,” he said. “We also recognize we could face additional tax delays due to disasters going forward.”

He noted part of the reason the state ended up with such a steep deficit last year, is because income tax deadlines for most of California had been delayed to match IRS deadlines extended after the state was hit by floods.

“There is a federal emergency declaration for the Los Angeles fires,” Stephenshaw said. “That is going to trigger some tax filing delay from the IRS. We aren’t anticipating any others at this point.”

Still, Los Angeles County, with 10 million residents, represents more than a quarter of California’s population.

“I look forward to the May Revise when we will have a fuller picture of the state’s finances and know the full extent of damage from the devastating fires in the Los Angeles area,” State Treasurer Fiona Ma said in a prepared statement. “I also remain hopeful that the final budget will continue to invest in our state’s housing, education, and environmental goals as we rebuild.”