Highlights and Analysis of the Governor's May Revision

Tuesday, May 16, 2017

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Executive Summary

Overview: Missed Opportunities.  It’s no secret that California is becoming increasingly unaffordable for many of its residents, as costs for housing, energy, and gasoline are at or near national highs.  Many Californians are not sharing in the current prosperity of those in a few coastal communities like Silicon Valley.  Senate Republicans believe that if the state is smart about managing its budget, we can keep moving forward by prioritizing the things that matter to Californians: good schools, safe communities, and a more affordable quality of life in California.

The May Revision misses opportunities through misplaced priorities and too few efforts to make California more affordable, such as by addressing the high cost of housing.  The revised budget is largely similar to the Governor’s January proposal but reflects somewhat higher tax revenues for 2017‑18. The state remains in the unfortunate position of receiving record-high tax revenues but still facing recurring deficits, a result of unrelenting spending growth.  The Governor continues to propose $3 billion in budget savings during the current year and budget year combined, including January’s “bait and switch” on California voters that redirects Proposition 56 tobacco taxes away from health care to help plug the budget hole. 

Spending Growth Creates Deficits.  Total General Fund spending would reach a record $124 billion in 2017-18, an increase of $1.7 billion compared to the updated current year amount, even after the Governor’s proposed savings items.  Although Senate Republicans cautioned against spending beyond our means, billions of dollars in long-term spending commitments made by Sacramento Democrats over the past several years have returned California to a deficit situation in 2016-17.  Additionally, annual operating deficits in excess of $1 billion would return by 2019-20 under the Governor’s forecast.

Revenues Reach New Record.   The May Revision estimates a $2.5 billion increase in General Fund revenue for 2017-18 when compared to the January budget (unrelated to the transportation tax increase).  Total General Fund revenue would reach $127.7 billion in 2017‑18, a record high that exceeds the revised 2016-17 amount by $6.1 billion and 5 percent.  Despite this upward revision, revenues over a three-year period remain lower than assumed when the 2016 Budget Act was signed.

Solutions Package Reduced.  The Governor lists $2 billion in spending revisions to address the deficit, compared to a solutions package of $3.2 billion in January.  However, the Governor’s official list of solutions excludes major savings actions such as the continued “bait and switch” on voters to redirect over $1 billion in Proposition 56 tobacco tax revenues to plug the budget hole, rather than increase access to care through Medi-Cal and Denti-Cal.  The May Revision does reverse the January proposal to freeze the child care expansion, but it maintains the reduction to middle-class scholarships, now estimated to be a cut of $32 million in 2017-18, growing to $115 million by 2020-21.

Rainy Day Reserve Likely Not Enough.  The Rainy Day Fund (Proposition 2 of 2014) would grow to reach $8.5 billion by the end of 2017-18, or 6.6 percent of General Fund revenue.  When combined with the discretionary reserve of $1.6 billion, the total reserve would reach $10.1 billion, or 7.9 percent of General Fund revenue. However, this is insufficient compared to the potential $20 billion shortfall a recession could bring. 

Higher Education: Tuition Hikes, Audits, and Budget Choices.  In response to recent State Auditor criticism, the May Revision holds $50 million in University of California (UC) funding back until UC acts on the audit recommendations and various other issues.  The May Revision also accepts UC and the California State University’s recent actions to raise tuition by 2.5 percent and 5 percent respectively.

At the same time, the May Revision creates a double hit to student costs by maintaining the reduction to middle-class scholarships proposed by the Governor in January.  The UC should certainly improve transparency and cut waste prior to raising tuition, but it is also the case that Sacramento Democrats have created substantial pressure on UC finances over the past decade by providing only $270 million more General Fund compared to 2007-08, a mere 8 percent increase, while dramatically raising spending by billions of dollars in other areas of the budget.

Proposition 98 Education Sets New Record.  Proposition 98 funding for K-14 education would grow by $5.9 billion over three years, up $1.5 billion from January.  Revised total Proposition 98 expenditures (including local funds) are $69.1 billion in 2015-16, $71.4 billion in 2016‑17, and $74.6 billion in 2017‑18.  Anticipated sales of K12 school facilities bonds are unchanged from January.  The Governor has withdrawn his proposals to “pause” last year’s child care expansion for one year and to defer payments worth $859 million from 2016-17 to 2017-18.  Unfortunately, the May Revision does nothing to change the previously planned reductions to Career Technical Education funding.

Revised Shift of In-Home Supportive Services (IHSS) Costs.  The May Revision reduces the shift of IHSS costs to counties substantially compared to the January proposal, and would leave counties with a net cost of $141 million in 2017-18. However, it remains a cynical strategy for the state to ramp up costs in the program following the beginning of the Coordinated Care Initiative in 2012, then seek to hand the higher cost program back to counties.   

Paying Down Pension Debt.  The May Revision proposes a loan of $6 billion as a supplemental payment to the California Public Employment Retirement System (CalPERS) to pay down unfunded liabilities.  By providing this additional payment now, the state will be able to lower the future estimated employer contributions and potentially save $11 billion over the next 20 years.  Repayment of the General Fund share would be credited toward Proposition 2’s debt repayment requirements.  Senate Republicans have long argued that the state needs to address its unfunded liabilities, but it would be preferable to avoid counting the repayment toward Proposition 2 requirements, which likely means that repayment of other debts could be delayed.

Missed Opportunities for Infrastructure and Environmental Projects.  The May Revision recognizes that California’s drought is over and removes funds that had been slated in January for drought response.  Unfortunately, the budget could have redirected these resources to major needs such as widespread tree mortality and critical flood infrastructure repair needs, but the May Revision largely overlooks these issues.

Significant Transportation Spending Skips Roads.  The May Revision includes increased spending of $2.8 billion generated from the new gas, diesel, and vehicle taxes.  Of this $2.8 billion, $873 million would be spent on programs that do not fix or maintain California’s roads and highways.  The extra tax dollars are being spent on other projects such as public transit, walking and biking paths, local planning, state and local park operations and maintenance, and university research programs.

Costs of “Resisting” the Trump Administration Grow.  The May Revision proposes $6.5 million General Fund and 19 positions for the Attorney General to continue his ongoing efforts to derail the federal government.  The proposed funding would primarily support legal staff who would contest the constitutionality of executive actions related to immigration, healthcare, and the environment.   While it is admirable that the Attorney General and the Governor have suddenly gained an appreciation for states’ rights, Senate Republicans believe that the state should work with the federal government to maximize value for Californians, rather than “poking the bear” for political points.

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