Highlights and Analysis of the Governor's May Revision 2016

Thursday, May 19, 2016

Complete Analysis (PDF)

Executive Summary

Budget Overview. The May Revision reflects slower revenue growth and avoids major new General Fund spending proposals. The Governor has called again for fiscal restraint, and Senate Republicans hope it is more than a sound bite this time. The Governor already committed to massive future spending increases through the new minimum wage requirement, and legislative Democrats are seeking billions in spending on new or expanded programs. The May Revision also adopts the $2 billion homelessness bond for the mentally ill previously proposed by Senator De Leon.

Key changes in the May Revision compared to the January proposal include the following:

Revenues Grow More Slowly but Still Hit Record High. Revised General Fund revenues would reach $119 billion in 2015-16 and grow by 3.8 percent to over $123 billion in 2016-17. The 2016-17 revenue would be a record high and would exceed the original 2015 Budget Act by $6.5 billion. While revenues are still increasing from year to year, projected growth has slowed by $800 million compared to the January forecast, suggesting the economic tide may be shifting. This softening is largely due to weaker personal income tax revenues associated with lower capital gains. However, even with this revision, General Fund revenue would grow each year through 2019-20, despite the expiration of the temporary Proposition 30 taxes.

Record Spending and Future Deficits. Overall General Fund spending would reach $115.6 billion in 2015-16 and grow by 5.7 percent to a record $122.2 billion in 2016-17. Because of spending growth, including billions in annual costs resulting from the optional Medi-Cal expansion and the recent minimum wage mandate, the Administration now projects a General Fund deficit of $2.7 billion in 2019-20. This looming deficit underscores the need for spending restraint.

Minimum Wage Will Cost State Billions. The May Revision reflects the minimum wage ramp-up, which adds a 50-cent increase on January 1, 2017, with $39 million in General Fund costs for the 2016-17 fiscal year. These costs will increase rapidly, however. As shown in the chart below, the Administration projects annual General Fund costs will be $1.1 billion by 2019-20, when the minimum wage reaches $13 per hour, and $3.4 billion when the $15 wage is fully implemented. These costs would contribute substantially to the projected state deficits in future years.

Rainy Day Reserve Grows More Slowly. The state’s Rainy Day Fund (Proposition 2 of 2014) would grow to reach $6.7 billion by the end of 2016-17, or 5.4 percent of General Fund revenue. The weaker income tax revenue growth shrinks the mandatory deposits into the Rainy Day Fund by $1.3 billion overall ($1 billion in 2015-16 and $264 million in 2016-17) compared to the January forecast. Commendably, the Governor continues to propose an extra $2 billion deposit into the Rainy Day Fund. This additional deposit is an essential component in preparing for anticipated economic downturns given the low level of the reserve as a percent of revenue.

Homelessness Bond Added. The May Revision includes funding for the plan announced in January by Senator De Leon to use about 7 percent of existing Proposition 63 mental health revenue for a $2 billion revenue bond to help address the problem of the homeless mentally ill. This new program would spend about $267 million in bond proceeds in 2016-17. The Governor proposes to couple this bond with legislation seeking to restrain development costs by requiring “by right” land use entitlements for multifamily infill housing developments that include affordable housing. Overall programs for affordable housing would total $3.2 billion in state and federal funding. Senate Republicans support efforts to address homelessness and believe that a $2 billion bond could be a prudent use of existing funds, pending review of the proposal’s details.

Higher Education. The May Revision adds a proposal to provide $25 million in assistance for the California State University to increase four-year graduation rates, which may help get students out into the workforce faster. Other Higher Education proposals are largely unchanged since January.

K-12 Education. The Proposition 98 minimum funding guarantee would rise to $71.9 billion, an increase of $288 million in 2016-17 compared to the January estimate, including an additional $166 million for education mandates. The May Revision also adds $10 million for grants to universities to develop a four-year path for students to obtain a degree and teaching credential, compared to the typical five-year path typically available today. The Governor also maintains his January proposal to repackage existing preschool and other funds into an early education grant program, but would delay implementation until 2017-18 to allow for more planning.

Infrastructure: Sacramento Offices vs. Roads for Everyone. While California’s infrastructure needs are vast, the May Revision maintains the Governor’s January proposal to spend $1.5 billion one-time on pay-as-you-go renovations to office buildings in Sacramento. Senate Republicans believe there are greater infrastructure needs, such as roads, and have already called for a portion of these funds to be redirected to restore more than $750 million in expected reductions to transportation projects that have been announced.

Managed Care Organization (MCO) Revenue. The May Revision reflects net revenue increases of $1.1 billion resulting from the MCO package. These revenues free up General Fund from Medi-Cal to be used elsewhere in the budget. In addition to spending previously authorized as part of the MCO package of legislation, the Administration now proposes $266 million to pay for restoring a previous 7 percent reduction to the In-Home Supportive Services program.

Services for the Developmentally Disabled. The May Revision reflects additional General Fund spending of $297 million to improve care for the developmentally disabled. These funds were authorized as part of legislation enacted during the recent special session. However, the budget still does not address unfunded mandates such as costs for exempt employees whose pay must be adjusted under minimum wage mandates.

Cap and Trade Proceeds Despite Legal Questions. The May Revision continues the Governor’s January Cap and Trade proposal to spend $3.1 billion on current programs such as high-speed rail, housing, and transit as well as new programs meant to achieve post-2020 greenhouse gas reduction goals. Senate Republicans obtained a legal opinion from the nonpartisan Legislative Counsel in April indicating that the Governor lacks legal authority to use these funds for goals that are not established by law. It is disappointing that the Governor is pressing forward despite this dark legal cloud.

Transportation. The May Revision continues the Governor’s $3.6 billion transportation plan, including $3 billion in new taxes and fees, and adds a feature that may make the plan worse: another $193 million for a CalTrans program that the Legislative Analyst’s Office has already called overstaffed. In 2015 Senate Republicans proposed a plan which would provide $3.3 billion annually, plus $2.5 billion one-time, for California’s roads and highways without increasing taxes.

Complete Analysis (PDF)