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A Surplus for Me, but No Job for Thee. The tale of “Two Californias” continues. The Governor’s budget raises tax revenue estimates yet again, while the state unemployment rate of 6.9 percent is the highest in the nation. Some sectors of the economy are booming, which creates the record tax haul, but many Californians continue struggling with inflation and the state’s worsening cost-of-living crisis. The budget once again appears to be ramping up spending in order to paper over more fundamental problems with the state’s housing and labor markets, which require reforms outside the budget. Though some of the Governor’s investments would be prudent, the budget also proposes a laundry list of spending on a wide range of issues for the second straight year, before the dust has settled on the 2021 budget’s effects. The Legislature should review current spending carefully before approving more nice-sounding programs that may actually do little to help Californians.
Revenues Rise Significantly in Current Year. The Governor’s budget projects another increase to forecasted revenues. General Fund revenues for 2021-22 are now estimated to be $202 billion, which is nearly 13 percent higher than the 2021 Budget Act level. However, these revenues are projected to drop slightly to $197 billion for the 2022-23 budget year before growing each year thereafter in the range of 1.8 percent to 5.0 percent annually.
Expenditures Increase Rapidly, Leading to Operating Deficits. General Fund spending would reach nearly $210 billion in the current year, an increase of $14 billion (6.9 percent) from the level authorized by the 2021 Budget Act, and would rise again to more than $213 billion in 2022-23. This new spending level for 2022-23 would be 8.5 percent higher than the 2021 Budget Act. The proposed spending increases would outpace revenues, leading to operating deficits for three years, as shown in the table below.
California Lags Nation in Jobs Recovery. Despite Governor Newsom’s claims, this state is behind the nation in recovering jobs. California has recovered only 69.6 percent of jobs lost to the pandemic, compared to 82.5 percent for the nation as a whole, according to the latest available data. Our unemployment rate of 6.9 percent remains significantly higher than the nation’s 4.2 percent. This means that another 520,000 Californians would be employed if we met the national average. There are fundamental problems in the state’s labor market that the budget is unlikely to resolve; broader reforms outside the budget are needed.
State “Gann” Spending Limit. The budget estimates that state spending would exceed the constitutional Gann limit by $2.6 billion in 2021-22, but would be under the limit for 2022-23. The LAO estimated in November 2021 that the state would need to address $26 billion in Gann-related spending or tax reductions by the end of 2022-23. It is not yet possible to reconcile these estimates, though the Governor has proposed $20 billion in infrastructure spending that is exempt from Gann restrictions. The Governor plans to wait until the May Revision revenue update to review and possibly address the $2.6 billion Gann issue for the current fiscal year.
Comparing the Governor’s Proposals to Senate Republican Priorities. On January 5, 2022, Senate Republicans sent a letter to the Governor and legislative Democrat leaders outlining high-level budget priorities. The following points compare these priorities to the Governor’s proposals:
Preparing for Long-Term Drought. The budget includes $750 million for immediate drought response activities to help communities in the near-term, but fails to adequately invest in the future. The proposal represents yet another missed opportunity by Democrats to fund critical water infrastructure projects to enhance water supply (such as Sites Reservoir), protect farmers’ and farmworkers’ livelihoods, and provide safe and affordable drinking water to Californians.
Better Ways to Address Homelessness. The Governor’s budget adds $2 billion for short- term housing for the mentally ill homeless living on our streets. The Governor is following Senate Republicans’ call for ending homeless encampments and focusing on building short- term shelter and treatment beds rather than just expensive permanent housing units. In addition, the Governor is supportive of a Senate Republican priority to reform conservatorship laws to get the seriously mentally ill into the treatment they need.
Helping People through Local Government. Senate Republicans proposed granting funds to local governments without restrictions, in order to better enable local priorities. Such grants are permissible and excluded under the Gann limit. Our initial review indicates the Governor has not proposed such unconditional grants, though some targeted grants are included, such as for retail theft prosecution.
Lowering the Cost of Living in California:
Expanding the Renter’s Tax Credit. While the Governor does not propose to expand the state’s renter’s credit, a missed opportunity that fails to acknowledge the struggles endured by renters in this high cost state, the budget does propose to expand the Young Child Tax Credit, part of the state’s Earned Income Tax Credit program, to families without income. The budget also includes two new tax credits, however these credits are targeted to green energy and climate mitigation, missing an opportunity to provide relief for thousands of other businesses.
Lowering Gas Prices Through a Gas Tax Holiday. While Senate Republicans called for a full gas tax holiday, reducing the price of gas by 54.1 cents per gallon, the budget instead includes a one-year suspension of the annual inflationary adjustment of only 3 cents per gallon.
Promoting Access to Jobs by Reversing Business Tax Increases. The January budget proposes to reverse the third year (2022- 2023) limit on business credits and net operating losses, providing $5.5 billion in relief to businesses. It is encouraging to see the Governor include one of the Senate Republicans’ priorities to provide relief to struggling California businesses.
Better Wildfire Preparation. The budget proposes $1.2 billion in one-time funding over the next two years to build upon the $1.5 billion Early Action Package passed last year to accelerate forest health and fire prevention activities. Funding for wildfire prevention is a welcome change from budget years past. However, it is still not enough to eliminate the devastation that Californians continue to face each wildfire season or make up for the years of neglect and mismanagement of our forests by the Democrats.
Reducing Government-Imposed Debt for Job Creators. The budget proposes to pay down the Unemployment Insurance (UI) debt to the federal government by $1 billion in 2022-23 and $2 billion in 2023-24. This proposal is in line with Senate Republican priorities, but since the debt amounts to $19.4 billion, more funds should be directed to reduce this massive debt that will burden job providers for years to come.
Non-Education Reserves Short of Previous Highs as Share of Budget. The state’s Rainy Day Fund (Proposition 2 of 2014) is projected to be $20.9 billion by the end of 2022-23. The budget also includes a discretionary reserve of nearly $3.1 billion and a Safety Net Reserve of $900 million, creating combined non-education reserves of nearly $25 billion. However, this is less than pre-pandemic highs as a percent of the budget, and the Legislature should add to it. The public school reserve would reach $9.7 billion, as required by Proposition 2, a record high for this Proposition 98 reserve.
Early Budget Approvals Sought. The Governor is asking the Legislature to take action in January on several spending proposals, including $1.4 billion to continue responding to the pandemic, $4.2 billion for the high-speed rail system, and $4.3 billion for other transportation investments. Other potential early action items include certain tax changes to conform to federal actions. The emergency spending authority employed by the Governor previously has not been renewed, so legislative action is required for these early spending actions.
COVID-19 Response. The Governor proposes $2.7 billion in new spending on vaccine distribution, testing, hospital surge staffing, contact tracing, and community outreach. Of this total amount, the Governor requests an immediate legislative appropriation of $1.4 billion in the current budget year. This creates an opportunity to hold the administration accountable for questionable state contracts and to properly assess if current pandemic response efforts are actually working.
Medi-Cal for all Undocumented Individuals. The Governor proposes to spend an additional $2.2 billion General Fund annually to expand Medi-Cal eligibility to roughly 764,000 undocumented individuals ages 26 through 49, starting in 2024. This would be the final expansion of Medi-Cal to the undocumented population after recent expansions to roughly 203,000 undocumented children and young adults (age 25 and under) and 235,000 undocumented older adults (age 50 and above). Medi- Cal is already strained by serving 14.6 million Californians—more than a third of the state’s population. Adding 764,000 more individuals to the system will certainly exacerbate current provider access problems.
Health Care Workforce Funding. The Governor proposes $1.7 billion over three fiscal years to fund incentives for increasing the state’s workforce of nurses, social workers, EMTs, behavioral health workers and community health workers. California’s health care workforce shortage is real, and, unlike the dangerous single-payer health plan offered up by some Democrats that will ration access to providers, serious efforts like this funding proposal will focus on adding more health care supply to meet ever-rising demand.
Expansion of Child Care. The Governor proposes $824 million for 36,000 additional subsidized slots, which, when combined with the slots funded in the 2021 Budget Act, would bring the total to over 145,000 with the goal of eventually reaching 200,000 slots. The budget also includes $373 million to support a full year of rate increases.
Extreme Heat. The Budget includes $2.1 billion General Fund in 2022-23 to combat extreme heat. The funds would support various activities that range from urban forestry projects to funding new programs that protect fish and wildlife, and provide for outdoor experiences. The budget prioritizes billions for climate initiatives that won’t have a meaningful impact for decades while critical issues like water supply and reliability remain unaddressed.
Zero-Emission Vehicles. The Governor proposes to spend $6.1 billion over the next five years to subsidize zero-emission vehicles (ZEVs) and ZEV infrastructure, focusing on low-income consumers and communities, heavy-duty trucks, transit buses, and school buses. Coupled with last year’s investment, California would spend $10 billion over six years to help transition Californians to ZEVs, aligning with the Governor’s call to ban the sale of gasoline cars by 2035.
Housing Development for Urban, Mixed Income and State Excess Sites. The budget would provide nearly $1 billion in 2022-23 for the following housing programs:
$375 million in 2022-23 ($625 million for 2023-24) for housing programs focused on infill development within the state’s urban core, as well as infrastructure improvements, and expedited development on state excess sites. $500 million for the Low-Income Housing Tax Credit program, consistent with annual funding provided over the last four years.
$50 million General Fund in 2022-23 ($150 million General Fund in 2023-24) for the California Housing Finance Agency’s Mixed-Income Housing program, which provides support for middle- income families to purchase a home.
$50 million General Fund in 2022-23 ($150 million in 2023-24) to further preserve targeted housing units in urban areas through the Portfolio Reinvestment program.
Homekey Housing and Local Government Support for Homelessness Included in 2021 Budget Act. The budget includes funding for homelessness programs that was previously included as part of the 2021 Budget Act. These include $1.5 billion for the Homekey program and $1 billion in flexible aid to local governments to continue to provide services and shelter to the homeless population.
Supply Chain Investments. The Governor proposes $2.3 billion for supply chain investments, including $1.2 billion for port, freight, and goods movement infrastructure and $1.1 billion for other related areas such as workforce training and ZEV equipment and infrastructure related to the supply chain.
Clean Energy Investments. The Governor proposes $2 billion General Fund over two years for clean energy investments, focusing on decarbonizing existing buildings, long duration storage, improvements to the Oroville Dam generation facility, industrial sector decarbonization, green hydrogen production and use, energy projects for food production facilities, and off-shore wind projects.
Proposition 98 Education. Proposition 98 funding from all sources for K-14 education reaches a new high at $102 billion in 2022-23. This is an $8.2 billion increase over revised budget act figures. Proposition 98 General Fund spending per pupil grows to $15,278 in 2022-23, a 3.3 percent ($500) increase over revised 2021-22 levels. Per-pupil spending from all sources is $20,855. Additional Proposition 98 augmentations include:
$3.3 billion base increase for the Local Control Funding Formula (LCFF), reflecting a 5.33 percent cost of living adjustment (COLA), bringing total LCFF funding to $70.5 billion.
$9.7 billion balance in the Public School System Stabilization Account. This reflects deposits of $3.6 billion and $3.1 billion for 2021-22 and 2022-23, respectively. The balance triggers local school district reserve caps beginning in 2022-23.
Universal Meals. Continuing the prior year investment into universal school nutrition, the budget provides $54 million in Proposition 98 General Fund to reimburse all meals served to students, including those that would not normally qualify for reimbursement under the state meal program. The budget requires all schools eligible for the federal universal meals provision waiver to apply for the program by June 30, 2022, as this will reduce the volatility in costs to the state and ensure the state is not paying for costs that would be reimbursed at the federal level. The state will continue to cover any remaining unreimbursed costs up to the federal free per-meal rate, at an estimated cost of $650 million Proposition 98 General Fund annually.
An additional $450 million in one-time General Fund is provided to school districts to support upgrades to kitchen infrastructure and equipment as well as provide training to food service employees.
Universal Transitional Kindergarten. The budget provides $639 million General Fund to support the second year phase in of Universal Transitional Kindergarten (TK). The budget also proposes $383 million General Fund to support an additional certificated or classified staff person in each TK classroom.
Special Education. $500 million on-going General Fund is proposed in the budget to support a special education programs related to learning recovery for students with disabilities and an increase to the statewide base rate for education funding.
Educator Professional Development. The Governor’s Budget proposal continues to make severalinvestments in preparing, training, and recruiting the K-12 workforce. Specifically, the budget provides $54.4 million in a mix of Proposition 98 and non-Proposition 98 General Fund to hire qualified teachers and substitutes.
Community College. The Governor’s budget proposes $1.8 billion in Proposition 98 General Fund items. The largest ongoing proposal is to provide $409.4 million for a 5.33 percent cost-of-living adjustment (COLA). Other notable ongoing investments include $53 million for a 5.33 percent COLA for select categorical programs, and $25 million to support 0.5 percent enrollment growth. These investments reflect a collaborative multi-year roadmap that focuses on equity and student success and builds on the Community College Systems Vision for Success.
California State University. Ongoing General Fund investments for the California State University (CSU) include $304.1 million General Fund for CSU operations, and $211.1 million General Fund to support a five percent base increase and ongoing General Fund resources of $81 million ongoing for California resident undergraduate enrollment growth of 9,434 full-time equivalent students in the 2022- 23 academic year. These investments reflect a multi-year compact between the CSU and the Governor’s Office that provides substantial and sustained funding increases to CSU in exchange for commitments to expand student access, equity, and affordability, and to create pathways to high- demand career opportunities.
University of California. Ongoing General Fund investments for the University of California (UC) include $307.3 million for UC operations, and $200.5 million for a five-percent base increase operations, and ongoing General Fund resources of $68.7 million for California resident undergraduate enrollment growth of 7,132 full-time equivalent students. These investments reflect a multi-year compact between the UC and the Governor’s Office that provides substantial and sustained funding increases to UC in exchange for commitments to expand student access, equity, and affordability, and to create pathways to high-demand career opportunities.
Combatting Organized Retail Theft. The Governor’s budget proposes $112 million General Fund each year for the next three years for local law enforcement, district attorneys, the Department of Justice, and the California Highway Patrol to crack down on organized retail theft. The budget also includes $20 million one time in 2022-23 for grants to small businesses that have been the victims of organized retail theft. This funding is a necessary response to the recent spike in retail theft; however, it does nothing to address other categories of theft, like catalytic converter theft, nor does it address the root cause of recent increases in crime – namely the soft-on-crime policies that have been enacted in California over the past decade.
Tightening the Noose on Firearm Ownership. The Governor proposes more than $35 million to buy back guns, track firearms and gun parts, enhance the state’s firearms-related information technology systems, and produce research on gun violence that will undoubtedly lead to more gun control laws and generally make it more difficult to own a firearm in California. The bulk of this funding ($25 million) is for a competitive grant to support local gun buyback programs, despite a significant body of research showing buybacks to be ineffective. These dollars would be better spent elsewhere, like funding solutions to the growing catalytic converter theft problem that can be especially devastating to low- income Californians.
New Judgeships. The budget proposes $43 million to fund 23 new judgeships, which accounts for all of those that are established in law but to date unallocated due to a lack of funding. Including the 25 judgeships that were funded in the Budget Act of 2019, implementation of this proposal would reduce the statewide need for new judgeships from 173 in 2019 to about 125 (as identified in the 2019 updated judicial needs assessment). This is a good start, but still leaves more than 70 percent of the need unmet.
Young Child Tax Credit. The budget expands the $1,000 Young Child Tax Credit to filers without income, and proposes to index the tax credit to inflation, benefitting 55,000 families.
State Supplementary Payment (SSP) Increase. The budget proposes an additional SSP increase of 24 percent, effective January 1, 2024, resulting in costs of $296 million General Fund in 2023-24 and $593 million ongoing, which would fully restore SSP monthly payments to pre-Great Recession levels. The increase is projected to bring maximum SSI/SSP grant levels to $1,123 per month for individuals and $1,940 per month for couples in 2024.
Former Foster Youth Tax Credit. The Budget proposes a refundable $1,000 tax credit for young adults aged 18 through 25 who were former foster youth at age 13 or older. This would cost $19 million and would assist former foster youth as they move from government dependence to a path of self- sufficiency.
Tax Credits for Green Energy. The budget includes $350 million for two new tax credits focused on green energy and mitigating climate change. It is disappointing to see the Governor prioritize a small section of businesses while thousands more continue to endure financial hardships as a result of the state’s tax and regulatory structure, as well as recent actions by the Governor intended to mitigate the COVID-19 pandemic.
Minimal Support for Small Business Relief. The budget would provide $150 million General Fund to businesses still waiting for relief from the state’s Small Business Relief Grant program. With the state’s record level of revenue, Senate Republicans are disappointed the Governor did not prioritize more support for the state’s struggling small businesses.
Tax Help for Businesses Left Out of Earlier Relief Efforts. The budget would provide relief to recipients of two additional federal grant programs, consistent with previous state actions for other federal COVID-19 relief programs exempting forgiven loans from taxable income and allowing for qualified expense deductions.
Various Business and Immigrant Assistance Programs. The budget provides more than $125 million within the Governor’s Office of Business and Economic Development for grants to businesses impacted by retail theft incidents, education and technical assistance to start-ups, tourism media campaigns, and a new unit within GO-Biz that would coordinate immigrant integration activities through enhanced services and support for economic development.
Employment Development Department (EDD) Problems. The proposed budget includes $134 million in short-term spending to continue developing IT systems, improving service for claimants, and protecting the state from fraud. While this may have potential, too many Californians are still waiting months for interviews needed to address their claims, and it is not yet clear what the timeline is for fixing the continuing EDD mess.
Transportation Infrastructure. The Governor proposes $4.9 billion General Fund for transportation infrastructure projects that would primarily support non-road projects, including rail and transit, walking and biking, grade separations, and climate adaptation projects. Of this amount, the Governor requests an immediate legislative appropriation of $4.3 billion in the current budget year. Notably, these projects will do little to improve roads, but perhaps a supplement of General Fund for non-road projects will leave more transportation dollars for fixing the roads.
High-Speed Rail. The Governor requests an immediate legislative appropriation of $4.2 billion in the current budget year to allocate the remaining bond funds for the high-speed rail project. The Legislature should deny this funding and end the rail fail.