Highlights and Analysis of the 2018-19 Governor's Budget Proposal

Wednesday, January 17, 2018

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Executive Summary

Budget Overview.  The Governor’s budget projects that tax revenues will set another record high, pushing the General Fund budget into surplus, at least for now.  Overall, the Governor proposes an appropriately cautious approach by building budget reserves to a record-high level, including an extra $3.5 billion deposit into the state Rainy Day Fund.  Senate Republicans fought hard to enact the Rainy Day Fund and commend the Governor for making it a priority in his budget.  The Governor also proposes new spending initiatives in several areas, such as career technical education, an online community college, and court infrastructure.  Though these new budget proposals are mostly one-time in nature, the state’s fast-growing “baseline” spending is projected to outgrow revenues and create deficits again within a few years.

Revenues Hit Record Highs Again...  Compared to the budget signed in June 2017, General Fund tax revenues are higher by $1.1 billion in the current year and would rise by another $5.8 billion for 2018-19. This would set a new record high of $135 billion that is 5.4 percent above the 2017 Budget Act.  These revenue records (which do not include gas taxes) indicate that the state does not need to raise taxes further on Californians to take care of priorities.

... And So Do Expenditures.  General Fund spending would reach $126.5 billion in the current year, an increase of $1.4 billion from the enacted budget, and would rise again to $131.7 billion in 2018-19, which is 5.3 percent higher than the 2017 Budget Act.  This significant spending increase is largely the result of growth in previously authorized programs or “baseline” spending, such as Medi-Cal and state employee compensation, rather than new programs.

Surpluses Decline to Deficits

Surpluses Are Short-Lived.  The Governor’s budget reflects a discretionary surplus of roughly $7 billion for 2018-19, prior to accounting for new spending proposals and reserve deposits.  This compares to a $7.5 billion surplus projected in November 2017 by the nonpartisan Legislative Analyst’s Office (LAO).  However, despite the current surplus, the Governor already projects that expenditures are on pace to grow faster than even the state’s record revenues over the next few years, resulting in an operating deficit of more than $1 billion by 2021-22, as shown in the chart above.

Rainy Day Fund Would Reach Constitutional Goal and Record High.  The state’s Rainy Day Fund (Proposition 2 of 2014) would grow to $13.5 billion by the end of 2018-19, a balance that is 10 percent of General Fund revenues. This includes a $3.5 billion supplemental payment (in addition to the $1.5 billion required amount) that the Governor proposes to reach the constitutional goal of reserving 10 percent of tax revenues in the fund.

The Governor’s budget also includes a discretionary reserve of nearly $2.3 billion, which would bring total reserves to $15.8 billion when combined with the Rainy Day Fund.  At nearly 12 percent of tax revenues, this combined reserve would be a record high. This focus on building reserves is consistent with recent calls by Senate Republicans to use at least $2 billion of the current surplus to prepare for an economic downturn. 

Proposition 98 Education.  Proposition 98 funding for K-14 education would grow from $74.5 billion in the 2017 Budget Act to $78.3 billion in 2018-19.  Proposition 98 per-pupil spending would exceed $11,600, and per-pupil spending from all sources would exceed $16,000.  The K-12 local control funding formula launched in 2013-14 would grow by $2.9 billion, reaching its funding targets for the first time. 

Funding for K-12 career technical education, which was scheduled to fall to zero in 2018-19, would instead continue indefinitely at $200 million per year, as part of the state’s Strong Workforce effort.  The Governor’s proposal also includes about $1.8 billion in one-time locally-flexible K-12 funding, which would reduce outstanding education mandate claims for schools who have submitted such claims.  Senate Republicans have called for using the Education surplus to fund career technical education and pay off school debts, and commend the Governor for supporting these priorities. 

Higher Education.  The Governor’s proposal increases unrestricted base funding for the University of California and California State University by $92 million each (roughly 3 percent each), and fully funds expected demand for Cal Grants and middle class scholarships.  It assumes no tuition increase for either system.

In addition, the proposal includes $120 million to launch a new fully-online community college that would serve some of the many Californians who would otherwise enroll at private non-accredited institutions which typically charge more than community colleges and have worse student outcomes.

Trial Court Funding Improves.  The budget includes increased funding for trial court operations of $150 million, which will bring underfunded courts significantly closer to full funding according to well-documented caseload needs.  In addition, the budget includes a proposal to fund the next 10 courthouse construction projects over two years using General Fund-backed lease-revenue bonds (in the counties of Glenn, Imperial, Riverside, Shasta, Siskiyou, Sonoma, Stanislaus, Sacramento, and Tuolumne).  While the Governor’s proposal for trial courts is a marked improvement over recent years, more funding for both operations and infrastructure will still be needed to ensure uniform access to justice statewide.

Governor Extends California Competes and Adds New Tax Credit for Veterans, Parolees. The Governor’s budget would extend the California Competes tax credit program through 2022-23 and proposes to set aside $200 million each year for the program.  Of these funds, $20 million would be set aside to provide direct assistance to small businesses.  Additionally, the 2018-19 budget includes a $50 million per year tax credit to encourage businesses to hire individuals with employment barriers, such as veterans, parolees, or CalWORKs recipients

Significant Cost for State Employee Raises and Benefits.  The budget proposes $1.2 billion to fund state employee raises, higher health care costs for current employees, and prefunding of retiree healthcare for current employees. These raises come as working families in many parts of the state struggle to find good-paying jobs. 

Pension and Retiree Health Costs Continue to Climb.  State spending growth on retiree health and pension obligations continues to outpace almost any other area of the budget.  The Governor’s budget provides $11.8 billion for pension and retiree health, an increase of 8 percent over spending in last year’s budget.  Senate Republicans have called for using $2 billion of the current surplus to pay down the state’s massive pension liabilities, which still surpass $92 billion.

Affordable Housing.  The Governor’s January budget reflects potential spending of $277 million on housing if the SB 3 housing bond is approved by voters in November of this year.  However, the budget does not propose any housing reforms that could help mitigate the housing crisis facing the state.  More reform efforts are needed if the state is to build enough housing to meet the needs of Californians from all income levels.

Cap and Trade.  The Governor indicates he will unveil his 2018-19 Cap and Trade expenditure plan of $1.3 billion at the State of the State address; therefore, this funding is not specified in the 2018-19 budget released today.

Transportation.  The Governor’s Budget allocates $4.6 billion from SB 1 gas and car taxes.  About 78 percent of the funding is slated for roads and highways and 22 percent is planned for non-road purposes (largely transit).  The Governor’s Budget also allocates $1.1 billion to the High-Speed Rail Authority.  Of this amount, $897 million is for construction costs and is largely derived from Cap & Trade proceeds.

Tobacco Tax Bait-and-Switch Continues.  Although the Governor proposes to use $650 million in Proposition 56 tobacco taxes for supplemental payments to Medi-Cal and Denti-Cal providers, the budget continues to undermine voter intent by using $210 million of the revenue for other Medi-Cal expenditures ($170 million) and to replace spending at the University of California ($40 million).

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