Overview: Budget Reserves and Infrastructure Are High Priorities for Surplus. The 2018 Budget Act reflects record highs for spending, revenues, and reserves. Prior to lawmakers’ decisions on new spending commitments, the budget reflected a $10 billion surplus. The budget fills the state’s Rainy Day Fund to its limit with an extra deposit of $2.6 billion and makes a number of other large one-time expenditures in areas such as homelessness programs and infrastructure. Senate Republicans applaud the Governor’s focus on addressing these legitimate needs and on filling the Rainy Day Fund, although the infrastructure spending could be better prioritized. Despite the current surplus, though, continued “baseline” spending growth is projected to outpace revenues over the next several years, giving credence to the Governor’s warning that the state is already “overextended” even before considering a possible recession.
Revenues Continue Rapid Rise. General Fund tax revenues are budgeted for a new record high of nearly $138 billion in 2018-19, which is $10 billion (8 percent) above the enacted 2017‑18 budget. Compared to the Governor’s January budget estimates, tax revenues are projected to be higher by $3.5 billion in 2017-18 and by $2.8 billion in 2018‑19. Part of this sharp increase is attributable to the effects of federal tax reform. The record revenues, which do not include the gas and car taxes approved in 2017, indicate that the state did not need to raise taxes further to take care of issues that are a priority for Californians.
State Spending Tops $200 Billion. State spending in the new budget would reach $201 billion from all state funds in 2018-19, the first time state spending would exceed the $200 billion threshold. This includes General Fund spending of nearly $139 billion, an increase of about $13.6 billion (11 percent) over the enacted 2017-18 budget. Compared to Governor Brown’s first budget, in 2011-12, state General Fund spending will increase by more than $52 billion (nearly 61 percent). Furthermore, General Fund spending is projected to grow by another $14.3 billion through 2021-22 ($1 billion more than revenue growth) due to continued increases in baseline spending and major new spending commitments made by Sacramento Democrats in recent years.
Surpluses Now, Deficits to Follow. The nonpartisan Legislative Analyst’s Office estimated the budget surplus to be more than $10 billion before lawmakers considered additional spending decisions (compared with the Governor’s estimates of nearly $9 billion). However, despite the current surplus, the rapid growth in spending is projected to return the state budget to an operating deficit of $2.3 billion in 2021-22. Considering that state tax revenues are at record highs, the fact that deficits are projected to return so soon is cause for concern, particularly in light of a potential recession that could reduce revenues by $20 billion in a single year.
Rainy Day Fund Would Reach Constitutional Goal and Record High. The state’s Rainy Day Fund would grow to $13.8 billion by the end of 2018-19, a balance that reaches 10 percent of General Fund revenues, the maximum level allowed. This includes a $2.6 billion supplemental payment (in addition to the $1.7 billion required amount) that the budget authorizes in order to reach the constitutional maximum. Senate Republicans fought for years to create the Rainy Day Fund and applaud the Governor’s proposal to fully fund it.
The Governor’s budget also includes a discretionary reserve of $2.4 billion, which would bring total reserves to over $16 billion when combined with the Rainy Day Fund. At nearly 12 percent of tax revenues, this combined reserve would be a record high.
Homelessness Efforts. The 2018-19 budget provides $830 million to help local agencies combat homelessness across the state, including $500 million in one-time General Fund for a grant program that provides funds to cities and counties that declare a local shelter crisis and identify city‑county coordination efforts. The funds are available for a variety of purposes such as emergency housing vouchers, rapid rehousing, emergency shelter construction, and use of armories to provide temporary shelters.
No Place Like Home Bond. The budget package includes a bill (Assembly Bill 1827) to place the $2 billion “No Place Like Home” bond before the voters at the November 2018 general election. This program seeks to assist the mentally ill homeless population.
Questionable Priorities for Significant Infrastructure Funding. The budget provides $630 million for Sacramento office buildings, prioritizing these regional projects over statewide challenges for water storage, high housing costs, forest health and other needs.
Education Spending Reaches Yet Another New High. The Proposition 98 guarantee of funding for K-14 education grows in 2018-19 to an all-time high of $78.4 billion, up from $74.5 billion at the 2017‑18 Budget Act. Unfortunately, K-12 school facilities bonds (which are off-budget) remain insufficient to meet facility needs.
Career Technical Education Finally Stabilizes. K-12 career technical education funding that was set to fall to zero after 2017-18 continues permanently at $150 million per year, and another $150 million expands the regional Strong Workforce program to include K-12 schools.
New Online Community College Launches. The 2018-19 budget provides $120 million to launch a new fully-online community college intended to expand educational options for working learners.
Community College Funding Formula Broadens. The budget changes the formula for community college funding to include not only enrollment, but also service to needy students and positive student outcomes. One-time funding is provided to extend protection for colleges that would otherwise lose funding under the new formula.
UC and CSU Support Rises; Tuition Remains Flat. Tuition at the University of California and California State University will remain flat, while the state budget provides additional funding of $347 million to UC and $359 million to CSU.
Missed Opportunity to Prevent Gun Violence by Felons and the Mentally Ill. Despite Senate Republican calls for oversight of the Attorney General’s Armed Prohibited Persons System and a persistent backlog of more than 10,000 felons and mentally ill individuals who continue to own firearms in defiance of the law, the budget fails to provide additional funding for the Attorney General to disarm these potentially dangerous individuals.
Trial Court Funding Improves, but Need for Judges Continues. The budget provides funding for the trial courts that exceeds 90 percent of the workload need for the first time in a decade, but more than 180 new judgeships are still needed to fully meet annual demand and provide people with better access to the justice system.
Some Funding for Forest Health and Water Infrastructure, but More Needed. The budget contains $1.4 billion of funding from Cap and Trade revenues for various greenhouse gas reduction programs and projects, which includes $235 million to support Healthy Forest programs and projects. The budget also includes $295 million General Fund for urban flood control projects and levees. These are important steps, but more is needed to deal with the flood infrastructure requirements and the threat of wildfires.
Gas and Car Taxes Spent, but One-Fourth Not for Roads. The budget allocates $4.6 billion from the SB 1 gas and car taxes. Of this amount, about 61 percent is allocated to programs directly fixing streets, roads, highways, bridges, and culverts. About 16 percent is slated for programs that have a mixture of road and non-road projects. The remaining 23 percent is planned to be spent on projects unrelated to fixing roads, like transit and commuter rail improvements and operations.
$1 Billion in Proposition 56 Tobacco Tax Funds Allocated to Medi-Cal Providers. The 2018-19 budget allocates more than $1 billion in Proposition 56 tobacco tax funds for supplemental payments for physician and dental services and a new Medi-Cal provider loan repayment program as well as for rate increases for home health providers and pediatric day health care facilities. Despite these positive allocations, the budget still diverts $225 million of Proposition 56 funds to replace General Fund spending elsewhere, violating voters’ intentions.
Tax Credits Increased and Extended. The budget expands the state’s Earned Income Tax Credit program to include younger workers, and also continues the Cal Competes Tax Credit program, providing $180 million in tax credit benefits to California businesses through 2022-23.
Local Governments Get Relief for Mandates. The budget includes a one-time General Fund payment of $254 million to repay local agencies for costs owed for three repealed mandates associated with mental health services for severely emotionally disturbed children.
Missed Opportunity to Pay Down More Debt. Though this budget does meet constitutional requirements for debt payments, it only pays off a small portion of the state’s debts and liabilities. The 2018 Budget Act includes nearly $2.2 billion for retiree health care benefits, an amount that is five times what the state paid in 2001, but the state’s unfunded retiree health care liability continues to grow, reaching $91 billion in 2018-19. Overall state debts and obligations now surpass $300 billion.