Facing a $22.5 billion shortfall in fiscal 2024, California Gov. Gavin Newsom wants to reverse plans outlined in this year’s budget to cash-fund some capital projects.

Using debt financing would allow for more flexibility in the 2023-24 budget, according to the preliminary budget proposal Newsom introduced Tuesday.

“We had a $73 billion surplus in fiscal year 2020-21 and a $100 billion surplus in fiscal year 2021-22, so we did not need bonds, but we will be tapping bonds this year,” Newsom said. “We will be issuing $4.3 billion in bonds to preserve cash.”

Newsom’s initial budget proposal includes $297 billion in spending, an $11 billion decrease from the current year.

It represents a stark shift from the fiscal boom California experienced last year. Revenues are down $29.5 million this year over expectations forecast in the current budget that took effect July 1.

“We put in an inflation adjustment last year that totals $10 billion over a multi-year period,” Newsom said. “And 93% of the one-time surplus went to one-time spending.”

The result of what Newsom called fiscal discipline is that the state is in good shape, because it didn’t “engage in profligate spending.”

In addition to debt funding capital projects, Newsom also proposed deferring spending billions of dollars on public universities, transit, behavioral health, climate change efforts and water projects. The budget tentatively cuts $3.9 billion, but Newsom said those cuts included in his January proposed budget could be reversed in May, when he issues a revised budget proposal, if revenues improve.

Newsom highlighted the state’s well-known revenue volatility because of its dependence on personal income taxes and capital gains from wealthy residents in a chart at the start of his budget reveal.

“Nothing about this presentation should surprise anyone,” Newsom said, because both the Legislative Analyst’s Office and state Department of Finance had signaled the downward trend, as the Federal Reserve slows down the economy by pushing up interest rates.

“The state’s one consistency is the inconsistency in tax revenues, because of our progressive tax structure,” he said.

Roughly 49% of personal income tax collected by California in 2020 came from just 1% of tax filers, according to the Department of Finance. Newsom started the presentation with a chart showing that capital gains as a percentage of personal income in California was down to 5.52% from nearly 10% in the 2022-2023 budget year.

The LAO warned in its November report to the Legislature of the potential for a $25 billion deficit for fiscal year 2023-24.

Rating agency analysts have said that the state’s revenue volatility is already baked into its ratings.

Moody’s Investors Service rates California Aa2 and Fitch assigns its AA rating, both with stable outlooks. S&P Global Ratings assigns its AA-minus rating and a positive outlook.

The state has $35.6 billion available in various reserve funds, and $22.4 billion in its rainy day fund, the latter roughly equal to the current projected deficit.

Newsom said he made a conscious decision with the budget to not tap those reserves in order to leave flexibility.

The governor also said he wanted to sustain efforts to pay down the state’s unfunded pension liabilities that began during Jerry Brown’s 2011-2019 administration, when Newsom was lieutenant governor. The fiscal 2023-24 budget includes $1.9 billion toward unfunded pension liabilities, and roughly $5.3 billion to be paid over the next three years.

Newsom said his proposals guard against the potential for further revenue declines if the mild recession predicted by many economists is realized.

The governor’s plan now calls for issuance of $3 billion in bonds for projects across the 23-campus California State University system that the state had planned to pay for with cash from the general fund. CSU will issue debt for the projects, and then the debt service on the bonds will be covered by the general fund, according to the governor.

The budget would also revert other projects that the 2022-23 budget act anticipated shifting to cash back to bonds. That includes canceling the plan to redeem $2.1 billion in callable general obligation bonds, and $2.1 billion in other capital projects the Newsom administration had proposed to pay for with cash will instead be funded through lease revenue bonds.

The fiscal year 2023-24 budget also slows plans to fund Newsom’s climate change agenda. The last two budgets allocated $54 billion over five years to advance the state’s climate agenda. Newsom’s fiscal 2024 proposal would maintain 89% of those investments, or about $48 billion, and “continues to prioritize equity and investments in populations facing disproportionate harm from pollution and the climate crisis,” according to the budget document.

The state has shifted funding from some other programs to sustain the governor’s climate change programs, but will also double down on efforts to secure federal funding from the federal Infrastructure Investment and Jobs Act, Newsom said.

Most of the climate change budget reductions are included in what the budget describes as “trigger cuts,” and will be restored if revenues improve, according to the proposed budget.

“We have delayed $7.4 billion in investments, not made reductions,” Newsom said. He included $5.7 billion in trigger cuts, and $4.3 billion that would be shifted if the state can tap federal resources.

“There will be no new tax increases, nor direct service cuts,” Newsom said.

The budget also “sustains a multi-year commitment of $44 billion in state funds for statewide infrastructure investments,” according to the budget document. That includes funding to accelerate the transition to zero-emission vehicles, modernize the state’s transportation system, promote energy innovation and reliability, provide greater access to broadband connectivity, advance the state’s housing goals, reduce wildfire risk to communities and to support drought resiliency and response.

Even as Newsom introduced the budget on Tuesday, he was preparing to travel to the Central Valley to evaluate what the state could do to aid efforts to deal with the flooding and infrastructure destruction wrought by a series of storms that have pummeled the state since early December.

“We are working on a water bond, and trying to get those dollars out there including immediate drought support,” Newsom said. “Before drought was top of our minds, and now what is top of our minds is flooding.”

The governor added $202 million to the budget for urban development and flood strategies, he said.