by Dane Hutchings, RPPG Director, Government Affairs
On May 14, 2020, Governor Newsom presented his 2020-2021 Budget May Revision. The Governor opened by outlining the stark contrast between his optimistic January budget proposal which reflected record low unemployment, a thriving economy and projected surplus of 5.6 billion in revenue with the reality that we are faced with today. Now, California and the world at large are in the midst of a COVID-19 induced economic shutdown with deficits projected to surpass the days of the Great Recession—and rivaling the Great Depression of the 1930’s.
The Governor aims to balance a projected $54.3 billion deficit ($41 decline in revenues surplus plus projected increases in cost) while protecting the state’s core values: public education, public health, public safety, and providing aide to the people affected the most by COVID-19. However, what his budget proposal does not reflect is the billions of needed direct investment in local government services. While the Governor did make mention of releasing $450 million of CARES Act dollars for local governments for public health and safety related expenses due to COVID-19, his revised proposal provides little on how to access said dollars, nor does it reflect projected amounts per capita.
The May Revise proposes a combination of actions to address the projected state deficit, which broadly includes:
- Spend down $16.2 billion in the Budget Stabilization Account (Rainy Day Fund) over three fiscal years and allocate $450 million from the Safety Net Reserve to offset increased health care costs in 2020-21.
- Borrow from special funds, other reserves, and deferrals of payments ($4 billion).
- “New” revenue through the suspension of net operating losses and temporarily limit to $5 million the amount of credit a taxpayer can use in any given tax year, to generate new revenue of $4.4 billion in 2020-21 to support schools and maintain core state functions. The proposal could potentially generate $3.3 billion in 2021-22 and $1.5 billion in 2022-23.
- Utilize $8.3 billion in federal CARES Act.
- Cancel $6.1 billion in program expansions and spending increases, including redirecting $2.4 billion in extraordinary payments to California Public Employees’ Retirement System (CalPERS) to temporarily offset the state’s obligations to CalPERS in 2020-21 and 2021-22.
- Various budget cuts totaling $14 billion (26% of total solution) as highlighted below. Many cuts are “triggered” if sufficient funding is not provided by the federal government in the next round of federal stimulus support.
Newsom emphasized that California is in a better position today to confront the challenges ahead with the largest rainy-day fund in state history and prudent one-time investments with past surpluses. While California enters this downturn with a strong fiscal foundation and in a better place than in past recessions, his proposal calls for a 26 percent reduction in spending including major cuts in education spending, rollbacks on a series of proposed programs and a 10 percent salary decrease across the board for all State employees.
With looming cuts and major programs on the proverbial “chopping block,” the Governor took the opportunity to call upon Congress and the President to take immediate action on the Heroes Act—a 3 trillion-dollar spending package introduced by House Democrats this week.
“The President of the United States, with a stroke of the pen, could provide support for Nancy Pelosi’s new Heroes Act and these cuts could be eliminated.”
Earlier this week, California and the other members of the newly formed Western States Pact submitted a formal request for 1 trillion dollars in direct federal aid for state and local government. Senate Republicans have publicly rejected the Heroes Act stating that the Senate will not entertain a “Blue state bailout.”
Regardless of the outcome federally, the State Legislature and the Administration will continue to engage in ongoing negotiations as they work to finalize a budget by June 15 as required by the California Constitution.
Below is a more detailed assessment of the Governors proposed budget revise that highlights areas important to local government.
To access the Governor’s detailed May revise budget proposal, click HERE
HOUSING & HOMELESSNESS
- Proposes $750 million federal funds ($150 million already allocated) to Project RoomKey to use the funds to purchase hotels and motels, to be owned and operated by local governments and nonprofits.
- Provides $1.5 million to the Homeless Coordinating and Financing Council.
- The CARES Act to provide a direct allocation to local governments of $9.5 billion to California and $5.8 billion to cities and counties with populations over 500,000 (includes 15 counties, 5 cities, and the city and county of San Francisco):
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- $450 million to cities that did not receive a direct allocation.
- $1.3 billion to counties to address public health, behavior health and other needs as a result of COVID-19.
- Funding must be expended by December 31, 2020 and be consistent with federal guidelines.
- Proposes to expend $331 million in National Mortgage Settlement funds for housing counseling, mortgage assistance and renter legal aid services as follows: the California Housing Financing Agency will administer $300 million for housing counseling and mortgage assistance, and the remaining $31 million to the Judicial Council to provide grants to legal aid services organizations.
- Maintains $500 million in low-income housing state tax credits.
- Includes the following revisions:
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- $250 million in mixed-income development funds over the next three years
- $200 million in infill infrastructure grant funds
- $115 million in other housing program funds
WILDFIRE PREPAREDNESS AND NATURAL RESOURCES
- Reduces funding for the home hardening pilot grant program from $110.1 million ($26.8 million General Fund, $75 million Federal Trust Fund, and $8.3 million Greenhouse Gas Reduction Fund) to $8.3 million (Greenhouse Gas Reduction Fund).
- Maintains $85.6 million General Fund ($135.1 million ongoing) for permanent firefighting positions to provide operational flexibility throughout the peak fire season.
- Withdraws the $250 million General Fund proposal to establish a Climate Catalyst Fund.
- Maintain $2 million General Fund for the Wildfire Forecast and Threat Intelligence Integration Center to enhance the state’s emergency response capabilities. May Revision proposes to reduce this proposal by $6.8 million General Fund across various departments.
- Proposes to withdraw $101.8 million ($26.8 million General Fund) for Cal OES and Department of Forestry and Fire Protection (CAL FIRE) for implementation of the home hardening pilot grant program authorized by Chapter 391, Statutes of 2019 (AB 38). Maintain $8.3 million Greenhouse Gas Reduction Fund for CAL FIRE to meet defensible space-related and other requirements pursuant to AB 38.
- General Fund Solutions: Direct Mission Support—$34.3 million General Fund. Wildland Firefighting Research Grant Program—$5 million General Fund.
TRANSPORTATION
- Proposes a reduction in fuel tax revenues of $1.8 billion through 2024-25 yet maintains current planning and engineering staffing levels to continue developing and designing previously programmed transportation projects.
ENERGY
- Proposes $2.8 million and 3 positions in additional resources from the Public Utilities Commission Utilities Reimbursement Account to identify which areas of the state lack sufficient access to broadband.
- Includes an additional 11 positions for the Commission (in addition to the January proposal of 93 positions) to further improve its Wildfire Mitigation Plan guidelines and performance metrics.
PROPOSED ELECTRONIC CIGARETTE TAX
- In enacted by a two-thirds vote of the State Legislature, this new tax would be effective on January 1, 2021. The tax will include $2 for each 40 milligrams of nicotine in the product, similar to the tax on a pack of cigarettes.
- Revenues from the tax are expected to be $33 million in 2020-21, would be deposited into a new special fund, and will be used to increase enforcement and to offset Medi-Cal costs.
CANNABIS EXCISE TAX
- May Revision includes special fund proposals, $68.2 million for the Department of Consumer Affairs, Bureau of Cannabis, Control, $20.8 million for the Department of Public Health, and $54.8 million for the Department of Food and Agriculture.
- Updated Allocation of the Cannabis Tax Fund: Within the Proposition 64, specified allocation of resources in the Cannabis Tax Fund, the Budget estimates $296.9 million will be available for 2020-21.
- The structure of these allocations is unchanged from 2019-20 as follows:
- Youth education, prevention, and early intervention and treatment and school retention—60 percent ($178.1 million)
- Environmental protection—20 percent ($59.4 million)
- Public safety-related activities—20 percent ($59.4 million)
PUBLIC HEALTH
- Holds funding for Medi-Cal county administration at the 2019 Budget Act level, inclusive of $12.7 million General Fund approved in March 2020 through the Control Section 36.00 process, for a savings of $31.4 million ($11 million General Fund). This reduction is contingent on receipt of sufficient federal funding.
- Eliminates the January proposal to expand full-scope Medi-Cal to all income eligible persons 65 years and older, regardless of immigration status.
- Includes $5.9 million General Fund for 2020-21 and $4.8 million General Fund ongoing, to support laboratory staff to increase the laboratories’ testing capacity, and to purchase equipment and laboratory supplies that are specifically utilized for COVID-19 testing as well as other diseases. Maintains critical funding for infectious disease prevention and control, including $5 million General Fund each for STD, HIV, and hepatitis C virus prevention and control.
- Eliminates the Foster Family Agency social worker rate increases in 2020-21, resulting in a cut of $4.8 million General Fund.
- Using the CARES Act Funds, direct $3.8 billion to protect public health and public safety; $1.3 billion to counties for public health, behavioral health and other health and human services programs; and $450 million to cities for public safety and to support homeless individuals.
K-12 & HIGHER EDUCATION
- The May Revision includes total funding of $99.7 billion ($47.7 billion General Fund and $52 billion other funds) for all K-12 education programs.
- The COVID-19 Recession is having a massive impact on the state’s K-14 Proposition 98 Guarantee. This May Revise estimates that that the Guarantee will decline by $19 billion from the Governor’s budget. This decline in funding is approximately 23% of the 2019 Budget Act Proposition 98 funding level.
- Proposed temporary revenue increases: Temporary three-year suspension of net operating loss and limitation on business incentive tax credits to offset no more than $5 million of tax liability per year.
- Shortfall in revenues creates a decline of $19 billion to Proposition 98 Minimum Guarantee.
- Beginning in 2021-22, the Administration proposes to provide supplemental appropriations of 1.5% of General Fund revenues per year, in order to avoid a permanent drop in the Proposition 98 Minimum Guarantee and maintain the Guarantee at 40% of total state General Fund support.
- Proposes a reduction to the Local Control Funding Formula by $6.5 billion (10%), which includes the elimination of a 2.31 percent cost of living adjustment. Reductions could be backfilled if there are sufficient federal funds.
- Local property tax adjustments will take in place. An increase of $84.5 million Proposition 98 General Fund in 2019-20 and $727 million Proposition 98 General Fund in 2020-21 for school districts, special education local plan areas, and county offices of education as a result of lower offsetting property tax revenues in both years.
- The UC, CSU, and CCC’s are expected to receive at least $260 million, $525 million, and $579 million, respectively, from the Higher Education Emergency Relief Fund.
- Proposed 10% reduction to Cal Grant award for new students attending a private, nonprofit college or university in the fall.
- Proposed ongoing 10% reduction to UC and CSU’s operating budgets and decreases in general fund for summer financial aid (triggered if insufficient federal funds)
- Deferral of $330 million Prop 98 funds from current year to budget year and $660 million from budget year to 2021-22.
- Decreasing support for the CCC Strong Workforce Program by $135.6 million and for Calbright College by $3 million (Proposition 98).