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Deficit Proposals Emphasize Delays and Fund Shifts. California’s recent string of increasing surpluses has come to an end. The Governor’s January budget now projects a deficit of $22.5 billion by the end of 2023-24. This is 10 percent lower than the $25 billion deficit projected by the nonpartisan Legislative Analyst’s Office (LAO) in November, though the difference is largely due to technical assumptions.
In order to address the deficit, the Governor proposes a mix of solutions that emphasize short-term delays and fund shifts rather than reducing the significant ongoing program expansions made in recent years. This approach largely kicks the can down the road, rather than get spending truly under control. The solution categories are summarized in the chart and descriptions below.
- Funding delays of $7.4 billion spread across multiple programs, the largest of which is $900 million for higher education student housing.
- Reductions and pullbacks totaling $5.7 billion, most notably including $3 billion for inflationary adjustments and eliminating $750 million that had been budgeted to reduce California’s Unemployment Insurance debt to the federal government.
- “Trigger” reductions of $3.9 billion that include $3.1 billion for climate and transportation projects. The Governor proposes an automatic trigger to restore these items midway through the year if, based on his determination in January 2024, revenues appear sufficient to cover the costs.
- Borrowing of $2.7 billion, which includes $1.8 billion in shifts from General Fund cash to bond financing, as well as $850 million in loans from various state special funds.
- Fund shifts of $2.5 billion, which mostly consists of $1.5 billion for zero-emission vehicles.
- Tax revenues of $317 million in 2022-23 for a renewal of the state’s Managed Care Organization (MCO) tax, though this reflects only a partial year effect. The tax increase would grow to $2 billion annually once fully phased in. Though directed at one industry, this tax would free up General Fund for any Democratic spending goal.
No Surprise: Revenues Fall by Tens of Billions. California’s tax revenue surge has unsurprisingly abated. The Governor’s budget estimates that revenues will be lower by nearly $35 billion over 2022-23 and 2023-24 combined. Capital gains play a significant role in this change. In 2021-22, those gains reached a record $27 billion, but now are projected to drop to $17 billion by 2023-34. This $10 billion decline in capital gains over two years would account for most of the projected $13 billion decline in comparable General Fund revenues.
Expenditures Shift Between Years and Drop Modestly. General Fund expenditures under the Governor’s proposal would total $240 billion in 2022-23, which represents an increase of $5.7 billion compared to the level enacted in June 2022. This is due to a shift of $20 billion from 2021-22 to the current year as well as to following years. For the proposed 2023-24 budget year, expenditures would decline to $224 billion, a drop of $11 billion (4.6 percent) compared to the enacted 2022-23 budget. Some policy areas would see an increase in spending, such as Health and Human Services, while other would see a decrease. Despite the deficit, the budget includes discretionary increases totaling about $2 billion in 2023-24, spread across a variety of policy areas.
Long-Term Deficits with Short-Term Solutions. The Governor’s proposals would have the state continue to live off the recent short-term revenue surge while planning for ongoing spending increases. Thus, the Governor’s multiyear forecast indicates the state will have operating deficits each year through 2026-27, but his solutions only address the deficits through 2024-25, as illustrated in this chart.
Reserves Left Intact for Now. The proposed budget maintains an estimated $36 billion in total reserves, which the Governor proposes to maintain without tapping to address the deficit. The Department of Finance and LAO both note that, should even a mild recession materialize, state revenues could decline by an additional $20 billion to $40 billion. The reserve balances include the following categories:
- $22.4 billion in the Rainy Day Fund.
- $8.5 billion in the Proposition 98 Rainy Day Fund
- $3.8 billion in the discretionary reserve (the Special Fund for Economic Uncertainty)
- $900 million in the Safety Net Reserve Fund
Includes $1.6 billion for Housing Programs. Although the Governor proposes $1.6 billion for various housing programs, the budget would reduce or revert $350 million General Fund in 2023-24 (some of which was authorized as part of the 2022 Budget Act but not appropriated). This would include reverting $200 million of the $500 million for the California Dream for All Program, reverting $50 million from the Accessory Dwelling Unit program provided in 2022-23, and not providing $100 million in funding for the CalHome Program.
No Significant Housing Reforms Included. The Governor states his intent to work with the Legislature on identifying and eliminating barriers that delay housing production or increase the cost to build housing. Unfortunately, the budget does not include a proposal to achieve these goals, and ironically remains silent on the fact that, according to the California Building Industry Association, recent rules and regulations, especially those imposed as part of his climate change package, will add a minimum of $50,000 per housing unit. In addition to the $50,000 increase in cost, the changes also add complexity, confusion, and an opportunity for housing opponents to force delays of needed home construction.
Democrats’ Homelessness Strategy Failing So Far. Democrats’ massive recent spending increases to combat homelessness are failing. The state has committed more than $20 billion to address homelessness since 2018-19, yet new federal data show that California saw the largest increase in homelessness of any state from 2020 to 2022 (6.2 percent) and from 2007 to 2022 (23 percent). Democrats’ insistence on only using the “Housing First” approach, combined with a lack of accountability for homeless individuals engaged in substance abuse, are likely key factors in this failure. Rather than continue to throw good money after bad, the state should halt ineffective programs and re-evaluate its approach to addressing homelessness. Otherwise, no amount of budget increase will have any significant lasting effect.
Funding for Local Governments’ Homeless Services Tied to State Housing Law. The Governor’s budget includes $1 billion for the Homeless Housing, Assistance, and Prevention (HHAP) program, but proposes to tie the funding (and future funding) to local compliance with state housing law. The Governor, however, fails to include statutory language that identifies the program criteria and legal restrictions necessary to achieve this goal. Additionally, the budget states the Governor’s intent to work with the Legislature to advance homeless accountability legislation, but fails to include details on the accountability measures or how those measures would be evaluated.
Encampment Resolution Grant Program. The proposed budget includes $400 million for the Encampment Resolution Grant program, which partners with local governments and provides grant funding to assist them with resolving critical encampment concerns and transition individuals into housing. The previous two budget acts included $350 million for the recently established program.
Medi-Cal Managed Care Plans to Cover Rent. The administration seeks federal approval to allow Medi-Cal managed care plans to pay for up to six months of rent for the homeless or those at risk of homelessness. While this may get some off the streets temporarily, without accountability for behavioral health and substance use treatment, this benefit may just be a costly endeavor without permanent results.
Inadequate Funding for County Mental Health Bed Expansion and CARE Court Implementation. Showcasing the Governor’s misplaced priorities, the Governor’s budget proposes just $17 million General Fund in 2023-24 for county behavioral health departments to implement CARE Court, with annual funding in future fiscal years limited to only $109 million. Further, the Governor delays roughly $730 million General Fund scheduled in the 2022 Budget Act for mental health facility construction and expansion and short-term housing for the seriously mentally ill homeless population. Given the recent federal data showing an increase in California’s homelessness population, this funding should have been a priority for protection.
Another Managed Care Tax to Sustain Democrat Overspending. The Governor proposes another three-year managed care organization provider tax (MCO tax) -- from January 1, 2024 until December 31, 2026 -- on all commercial full-service health plans and on all Medi-Cal managed care plans. Although this mechanism’s purpose is to provide a source of revenue to “draw down” matching federal funding, the end result is to free up $317 million General Fund in 2023-24 (and $6.2 billion General Fund through 2026-27) to “protect” other Democrat priorities such as abortion subsidies and Medi-Cal expansions to undocumented populations.
More Abortion Industry Support Using Federal Funds. The Governor proposes to create another subsidy program for the abortion industry, but plans on securing federal funding to pay for it. The new program would provide $200 million in grants (starting in 2024-25) to abortion providers in order to offset service costs for the uninsured, update infrastructure, and provide the abortion workforce with scholarships and loan repayments.
Prison Closures. Consistent with the Department of Corrections and Rehabilitation’s (CDCR) announcement in December, the Governor’s budget reflects the administration’s intent to close two more prisons (in addition to the one already closed and the one underway) and deactivate six individual yards at facilities throughout the state in the near term. The budget assumes annual savings of $150 million per year associated with the deactivations. In light of recent increases in crime, especially violent crime, the state should proceed with caution when considering whether to close prison facilities.
In-Prison Drug Treatment Program May be Faltering. Rumors are percolating about potential mismanagement of the Medication Assisted Treatment component of CDCR’s Integrated Substance Use Disorder Treatment Program. Inmates may be abusing the primary treatment drug, Suboxone, and it appears that illicit trafficking of Suboxone may be occurring within the prison system, yet the Governor’s budget continues the program at all-time high funding levels.
Maintaining Court Operations. The Governor’s budget includes a $94 million General Fund augmentation to cover trial court cost increases, including inflationary and employee health and retirement benefit costs. It also provides $200 million to backfill declining revenues to the Trial Court Trust Fund and the State Court Facilities Trust Fund. Overall, it appears the intent is to maintain existing levels of service in the courts.
Proposition 98 Education. The 2023-24 Proposition 98 funding for K-12 schools and community colleges is $109 billion, an increase of about $1.8 billion or 1.7 percent relative to the 2022-23 revised budget.
Proposition 98 General Fund spending per pupil would increase to $17,519 in 2023-24, an estimated 3.3 percent increase from 2022-23, and $23,723 per pupil from all funding sources. This includes:
- $4.2 billion increase in the Local Control Funding Formula (LCFF), reflecting an 8.13 percent cost of living adjustment (COLA) and growth adjustments. This is an increase of almost 1.6 percent from the COLA adjustment in the 2022-23 budget, which was already the largest COLA adjustment in the history of LCFF. This brings the total LCFF funding to $80 billion.
- $8.5 billion balance in the Public School System Stabilization Account. This reflects deposits of $3.7 billion, $1.1 billion, and $365 million in 2021-22, 2022-23, and 2023-24 respectively. As in the prior budget year, this balance triggers previously authorized (but ill-advised) local school district reserve caps in 2023-24.
Proposition 28 Implementation. The budget includes $941 million to implement the newly approved Proposition 28, which creates an ongoing program to fund arts and music education beginning in 2023‑24. The proposition requires one percent of the Proposition 98 Guarantee be allocated to schools for these education programs. It should be noted that the Governor’s budget simultaneously cuts $1.2 billion in Proposition 98 General Fund spending from the Arts, Music, and Instructional Materials Discretionary Block Grant included in the 2022 Budget Act. This decreases the one-time allocation from $3.5 billion to $2.3 billion Proposition 98 General Fund.
Opioid Overdose Drugs in the Classroom. The budget proposes $3.5 million ongoing Proposition 98 General Fund for all middle and high schools to have at least two doses of naloxone hydrochloride or other opioid overdose medication for emergency aid on campus. While potentially lifesaving, this proposal illustrates the state’s failure to properly get ahead of an alarming epidemic that is now impacting our students.
Transitional Kindergarten. The budget provides $690 million to support the second year of the Universal Transitional Kindergarten (TK) expansion. This figure provides funding for an additional 46,000 TK students in the budget year. The budget also proposes $165 million General Fund to support an additional certificated or classified staff person in each TK classroom. Full implementation of universal TK is anticipated in 2025-26.
Full-Day Kindergarten Program Delay. The 2022-23 budget included $100 million one-time General Fund and proposed an additional $550 million in 2023-24 to support the California Preschool, Transitional Kindergarten and Full-Day Kindergarten Facilities Grant Program (FDK Program). The Governor’s budget would delay the 2023-24 investment to 2024-25.
California State University. Ongoing General Fund investments for the California State University (CSU) include $254 million General Fund for CSU operations, and $227 million General Fund to support a five percent base increase.
University of California. Ongoing General Fund investments for the University of California (UC) include $253 million for UC operations, and $216 million for a five-percent base increase, and ongoing General Fund resources of $30 million for California resident undergraduate enrollment growth.
Shifts and Delays in Capital Outlay Projects. As part of the Governor’s deficit solution package, the budget would shift $405 million in CSU projects from General Fund to CSU bonds, and would delay $366 million in UC projects across several campuses.
California Community Colleges. The Governor’s budget proposes an increase of $93 million ongoing Proposition 98 General Fund to provide an 8 percent COLA for select categorical programs and the Adult Education Program. This is approximately a $40 million increase compared the investment in last year’s budget. Other notable proposals include an increase of $14 million one-time Proposition 98 General Fund to support the administration of workforce training grants in collaboration with the California Department of Forestry and Fire Protection. The budget would also provide an increase of $200 million one-time Proposition 98 General Fund to continue community college efforts to increase student retention rates and enrollment.
Energy and Utilities
Strategic Energy Reliability Reserve. Retains $1 billion of future year funding promised last year, including $845 million for 2023-24. The Solar + Storage program has a proposed reduction of $270 million.
California Arrearage Payment Program. Reflects savings of $400 million based on approved applications for assistance with utility debt.
Clean Energy Incentive Programs Modestly Reduced. Maintains most of the previously promised $1.4 billion for clean energy programs, with reductions of about $200 million across various programs.
Defers Some Broadband Investments. Proposes to defer $550 million for last‑mile broadband infrastructure and $575 million for the Loan Loss Reserve Fund, used to finance local broadband infrastructure development, to future years. While these deferrals do not reduce funding now, they may slow the progress of closing the digital divide.
Continues to Propose Gas Price Gouging “Penalty.” Fails to propose any tax or regulatory reforms to reduce the price of gasoline, instead relying on previous blame-shifting “penalty” proposal.
Gasoline and Diesel Taxes to Increase Again. Annual gas and diesel tax adjustments would increase the price of gas by 4.3 cents per gallon and the price of diesel by 3.3 cents per gallon.
Transportation Infrastructure. Proposes decreasing last year’s $9.5 billion General Fund investment in transportation by $2.2 billion.
Zero-Emission Vehicle Subsidies and Infrastructure Investments Decreased. Proposes reducing zero‑emission vehicle subsidy, infrastructure, and equity projects by $1.1 billion.
High-Speed Rail Office of the Inspector General. Includes $1 million for the implementation of the High-Speed Rail Office of the Inspector General.
High-Speed Rail. In addition to spending previously appropriated bond funds, proposes expenditures of $526 million in 2023-24 from Cap and Trade funds.
Resources and Environment
Maintains Most Multiyear Wildfire Funding Commitments. Since 2021, the budget has committed $2.8 billion to accelerate forest health and fire prevention activities through multiyear budgeting. The 2023-24 budget maintains $2.7 billion of those commitments to advance fire prevention, reduce the risk of catastrophic wildfires, and provide fire protection and response resources.
Investments in wildfire prevention are a welcome change from budget years past, and are a high priority for Senate Republicans. However, it is still not enough to eliminate the devastation Californians face each wildfire season or make up for the years of neglect and mismanagement of our forests by the Democrats. Adequately funding this effort will take billions of dollars annually over the next decade to get California’s forests cleaned up enough to manage the risk of catastrophic wildfires.
Maintains Drinking Water and Drought Commitments from Past Budget Cycles. Like Wildfire funding, the budget maintains $8.6 billion committed in the 2021 and 2022 Budget Acts for immediate drought response activities to help communities in the near term. However, the proposal falls short on long-term planning and represents yet another missed opportunity by Democrats to fund critical water infrastructure projects, such as Sites Reservoir, protect farmers’ and farmworkers’ livelihoods, and provide Californians safe and affordable drinking water.
Infrastructure Investments Needed for Flood Preparedness and Response. The budget proposes $202 million in much-needed investments in statewide flood control and reduction activities to reduce urban flood risk, reinforce our levees, and protect the Central Valley from devastation. However, the budget completely omits critical maintenance upgrades or enhancements to the state’s aging dam infrastructure. Investing in the state’s network of dams is a matter of public safety. They control 70% of the state’s water supply, supply 15% of the power, and provide flood control. Yet, the state has neglected to finance and perform regular maintenance on over half of California’s dams, which are now categorized as high-hazard dams. Their failure would result in loss of life, loss of human life, and economic damage.
Reduces Climate Budget. The proposed budget would reduce multiyear climate spending by $6 billion through deferrals, reductions, and trigger cuts. While reducing spending in this area is prudent given the multibillion-dollar deficit, it would be more beneficial to eliminate program funding for projects that do not generate immediate benefits. Funding for programs like urban greening and zero-emission vehicles could instead finance water infrastructure projects or forest management activities. The budget should prioritize funding to put a dent in areas where state investments are deficient and pose threats to human life and property.
Business Support, Workforce Development and Employment
Pulls Back Promised Relief for Job Creators and Small Businesses. Proposes deletion of $750 million, promised in last year’s budget, to help pay down the Unemployment Insurance (UI) debt, and withdraws the commitment of $500 million in 2024-25 for small businesses to offset rising federal UI tax rates.
California Small Business COVID-19 Relief Grant Program. The budget proposes a reversion of $92 million from the California Small Business COVID-19 Relief Grant Program. According to the Governor, of the $150 million included in 2022-23 for the remaining eligible businesses, only $58 million is needed to fully fund all eligible businesses. Given this administration’s poor treatment of businesses generally, that $92 million could at least be redirected toward helping businesses pay the costs of the Unemployment Insurance tax increase, if there is truly no more demand for the grants.
IBank’s Small Business Finance Center and the California Rebuilding Fund. The 2023-24 budget includes a $50 million reduction in funding for the IBank’s Small Business Finance Center and the California Rebuilding Fund. This would leave approximately $38 million available for financial assistance to small businesses.
CalCompetes Grant Program Continues Without Performance Review. The January budget includes $120 million General Fund for the California Competes grant program. The program is in the early stages of implementation and outcome data is not available yet, leaving the Legislature unable to determine whether the program is actually achieving results. The Legislature would be prudent to require a performance review before the state continues to provide scarce General Fund resources to a program that could be wholly ineffective and a waste of resources.
Employment Development Department (EDD) Modernization. Includes $198 million in funding for EDD IT systems, improved service for claimants, and fraud prevention. This funding continues a five-year modernization plan initially funded in 2022-23.
Film and Television Tax Credit. The January budget proposes $330 million per year beginning in 2025-26 to extend the existing program through 2029-30 and make the tax credit refundable.
Reductions to Apprenticeship, Workforce Development, and Training Program. Proposes decreases to various programs totaling $130 million. Also delays $397 million for various healthcare and workforce development initiatives within Department of Health Care Access and Information.
CalWORKs Grant Increase. The 2023-24 budget includes a 2.9 percent increase to CalWORKs Maximum Aid Payment levels, estimated to cost $87 million in 2023-24. This increase is in addition to $296 million included in the 2022-23 budget, an 11 percent increase in CalWORKs maximum aid payment levels, and $816 million in one-time spending provided over the next three fiscal years, temporarily increasing CalWORKs grants by an additional 10 percent through September 2024. This combined funding in the 2022-23 budget provided a total increase of 21 percent in CalWORKs grants that began in October 2022.
Electronic Benefit Fraud Mitigation. The budget includes $50 million ($17 million General Fund) in 2023-24, $23 million ($7.9 million General Fund) in 2024-25, and $3.5 million ($1.2 million General Fund) in 2025-26 to address the increasing Electronic Benefit Transfer (EBT) theft of CalWORKs and CalFresh benefits. Electronic benefit theft has increased at an alarming rate over the past few years, and the outdated EBT technology and security have left these benefits especially vulnerable.
Child Care Programs
Child Care Slot Expansion Timing Delay. The 2021 Budget Act initiated the addition of 200,000 child care slots by 2025-26, which was continued in the 2022 budget act. While the 2023-24 budget continues to support this goal, thousands of the newly available slots have yet to be filled. To allow more time to fully utilize the slot expansions already authorized, 20,000 new slots will be funded in 2024-25 instead of 2023-24.
Child Care COLA. The 2023-24 budget includes $302 million General Fund for Child Care and Development programs and $1.5 million for the Child and Adult Care Food Program. This increase is reflective of an estimated 8.13 percent statutory COLA.
Protects the Developmentally Disabled Rate Reform Plan from Cuts. The Governor’s budget sustains the plan to fully implement the developmentally disabled service provider rate reforms at a cost of $1.2 billion annually through 2024-25. The budget also increases a variety of safety net services to high-intensity individuals, individuals with autism spectrum disorders, and supports to foster youth that are eligible for regional center services. Senate Republicans have long fought to protect and adequately fund these programs.
Capital Outlay Fund Shifts and Deferrals. The budget would shift approximately $1.4 billion of capital projects to lease-revenue bonds, partially reversing a 2022 action to shift $3.2 billion from bonds to General Fund cash. The budget also proposes to shift capital projects totaling $680 million from cash to bonds in future years. An additional $850 million of new capital projects would be deferred to future years. These actions would result in significant new borrowing for the state, at a time of fiscal uncertainty, and should be considered through a long-term lens of budgetary responsibility.
Budget Increases State Debt with Elimination of Bond Redemption. The 2022 Budget Act included a scheduled redemption of callable general obligation bonds totaling $1.7 billion in 2024-25. The Governor’s budget now proposes to reverse that action, worsening the state’s financial situation, increasing annual debt service costs, and negatively impacting the state’s borrowing position.