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Overview: A Dramatic Short-Term Tax Revenue Surge Leads to Unsustainable Spending.
Revenues spiked dramatically in the just-completed 2020-21 fiscal year, surpassing pre-pandemic levels, but will grow only slightly for several years going forward. Spending is also skyrocketing, but outside some investments in critical areas such as education, wildfire, disabled services, and broadband, many of the more than 400 spending initiatives in the budget raise concerns about need and effectiveness. The high spending puts California on track for annual deficits each year going forward, and even Jerry Brown described state spending as “not sustainable.” The budget fails to reverse billions in now-unnecessary deficit actions from last year, and it fails to take any steps to address the massive unemployment insurance debt that will soon drive employer costs higher. This budget seems to be as much about writing headlines as it is about righting problems for Californians.
Tax Revenues Reach Windfall Levels, Exceed Pre-Pandemic Forecasts. The revenues reflected in the budget are dramatically higher than recent expectations, surpassing even pre-pandemic forecasts. Compared to the budget signed in June 2020, General Fund tax revenues are estimated to spike by $54 billion (41 percent) in the just-completed 2020-21 fiscal year and then to slightly decline by $5 billion (2.7 percent) to $179 billion in 2021-22.
Expenditures Also Skyrocket. General Fund spending reaches nearly $184 billion in the just- completed 2020-2021 year, increasing $54 billion from the 2020 Budget Act, but declines slightly to $179 billion in 2021-22. Spending from all state funds would reach $263 billion in 2021-22, compared to $202 billion in the 2020 Budget Act. Federal funds approved through various pandemic response bills add an astonishing $277 billion to the state’s budget in 2020-21, raising the combined spending to over one-half trillion at $513 billion for the just-completed year.
Deficits Projected for Years Following Initial Surplus. Despite the recent revenue surge and short- term surplus, the operating deficit exceeds $21 billion in 2021-22, and additional deficits are projected for each year of the forecast, as shown in the chart below. While the state reserves could cover these deficits, the purpose of reserves should be to address unforeseen calamities, not foreseeable overspending.
Billions from Last Year’s Deficit Actions Remain in Place. Despite the surplus, the budget takes the ill-advised action to maintain a $7.8 billion withdrawal from reserves approved last year and to leave billions in tax increases and other borrowing in place. All told, failing to reverse all of last year’s deficit- driven actions allows the Governor and Democrats to spend an additional $15 billion in the short term.
One-Sided Changes to “Gann Limit” Make Room for Massive Spending. Several revisions to the calculations for the constitutional spending limit, or “Gann Limit,” make more room for the majority party’s spending spree. These changes create an additional $16.9 billion under the cap over the two- year period of 2020-21 and 2021-22. Several of the changes appear to stretch the limits of the constitutional rules.
Improved State COVID-19 Response Funding Approach. Much of the spending for the state’s response to the COVID-19 pandemic in 2020-21 was unilaterally authorized by the Governor through the Disaster Response Emergency Operations Account (DREOA). Rather than further extend the DREOA authority, the budget instead appropriates $1.7 billion General Fund to nine state agencies and grants authority for the Department of Finance to shift those dollars around after 10-day notification to the Legislature. This is an improved approach for transparency, but it still grants more authority to the Governor than a reasonable balance of powers would indicate.
Federal Funds Assist in Response and Recovery. Federal assistance will provide an astonishing $621 billion to the state overall in response to the pandemic. About $289 billion of this amount flows to or through the state budget, while the other $332 billion has been or will be distributed directly to California residents, local governments, nonprofits, or businesses. The most recent federal assistance bill, the American Rescue Plan Act of 2021, provides $27 billion to California for state fiscal relief, which can be spent through 2024.
Affordable Housing Production. The budget includes $1.75 billion in federal funds to help support affordable housing projects that qualified for, but did not receive, low-income housing tax credits or tax- exempt private activity bonds. The funding would serve shovel-ready projects, which have successfully acquired Department of Housing and Community Development (HCD) funding, and could help expedite more than 6,300 units of affordable housing.
Eviction Moratorium Extension and Rental Assistance. Though not technically part of the budget package, AB 832 (Chiu) extended the eviction moratorium until October 1, 2021, and expanded the assistance program to provide up to 100 percent for rental and utility financial obligations, including both overdue and prospective payments. AB 832 and other recent budget actions provide for an additional $2.6 billion in federal rental funds for the state and local governments, on top of an earlier allocation of $2.6 billion.
Local Planning Grants. The budget provides $600 million to help local jurisdictions meet required planning activities for housing and infrastructure needs, among other things. These grants would provide support for planning activities that give local governments necessary tools to support infill housing and infrastructure investments, improve overall housing compliance, and increase housing statewide.
Additional Funding to Local Governments to Combat Homelessness. The budget provides $1 billion General Fund to the Homeless Housing and Assistance Prevention program, including $240 million to Continuums of Care, $336 million to each city with a population of 300,000 or more, and $224 million to counties, and requires ten percent of the funds to be spent providing services to the state’s homeless youth. To be eligible for new funding, local governments will be required to develop and submit local homeless action plans.
Homekey Program. The budget provides $1.5 billion for the Homekey program, which could include the purchase, conversion, and/or rehabilitation of properties (such as hotels, motels, and office and commercial buildings) to provide shelter and services to the state’s homeless population, including an eight percent set-aside for homeless youth projects. The budget continues to restrict the funds for Homekey to only those projects that include prevailing wage contracts, thus increasing project costs and limiting the number of projects that can receive financial support. Additionally, the budget continues to provide an exemption from the California Environmental Quality Act (CEQA) for any Homekey project.
Homeless Encampment Resolution Grant Program. The budget provides $50 million to establish a grant program that would partner with local governments and assist them with resolving critical encampment concerns and transition individuals into safe and stable housing.
In-Person Learning. In the spring of this year, the Legislature provided $6 billion to schools as an incentive to reopen and deliver in-person learning as and begin addressing learning loss. The enacted budget continues to assume schools will offer in-person full-time instruction for the upcoming academic year while also requiring districts to offer a distance learning format for families that choose to have their children remain home. Additional funding of $753 million one-time Proposition 98 General Fund is provided in the budget for expanded learning opportunities, which works in tandem with prior learning loss programmatic efforts.
Universal Meals. In the budget year, $54 million Proposition 98 General Fund is provided for reimbursement of all meals served to students, including those who would not typically qualify. Commencing with the 2022-23 school year, the budget will require all schools to provide two free school meals each school day to any student regardless of need. The budget anticipates funding of $650 million ongoing to cover the cost.
Universal Transitional Kindergarten. The 2021-22 budget outlines a plan for full implementation of Universal Transitional Kindergarten by 2024. The budget provides $790 million one-time in a mix of funds for plan and implement of the program. However, not much beyond the funding provided in the budget is known about how the state plans to roll out the new program, how it will work with other preschool providers, or how the program will manage competition for teachers.
Golden State Stimulus Expansion. The budget provides $8.1 billion General Fund to build on previous efforts and expand the Golden State Stimulus program, providing payments to middle-income families with an adjusted gross income of $75,000 or less. Earlier this year, legislation established the Golden State Stimulus program, which provided $600 one-time payments to millions of low-income Californians, at a General Fund cost of $3.7 billion. The Golden State Stimulus II program is targeted at low- and moderate-income households.
Fails to Address Unemployment Insurance Debt. Despite tens of billions of dollars in surplus tax revenues, the budget fails to pay down the massive debt owed by the state’s Unemployment Insurance (UI) Fund to the federal government. The EDD estimates that the debt will reach $24.3 billion by the end of 2021. Paying down this debt will raise taxes on businesses by up to hundreds of millions of dollars per year beginning in 2023.
Belated Steps to Mitigate Employment Development Department Debacle. Governor Newsom failed to propose EDD fixes as part of his “early action” budget items that the Legislature addressed in January and February this year. The budget package belatedly includes more than $300 million and several policy changes to address backlogs and other ongoing EDD problems.
Some Support for Selected California Businesses. The budget includes a number of new programs that will provide more than $2 billion in additional financial support to California business owners and non-profits, including most notably $1.5 billion in federal funds to expand relief to small businesses through the California Small Business COVID-19 Relief Grant Program, bringing the total investment in that program to $4 billion over 2020-21 and 2021-22.
Elective “Pass-through” Tax Could Increase State Taxes but Reduce Federal Taxes. The budget enacts the Small Business Relief Act, which temporarily creates a new tax structure for selected pass- through entities, such as S Corporations. This would help offset federal tax changes from 2017 that reduced allowable State and Local Tax (SALT) deductions to no more than $10,000. For some individuals with pass-through income, electing to pay the new entity tax could increase state taxes but reduce the total federal tax liability of the individual, offsetting some of the SALT deduction losses.
Some State Recall Election Funds Raise Concerns. The budget provides $279 million General Fund for state and county election activities for the September 2021 recall election. The Secretary of State would receive $35 million, of which $17 million is for various media and “outreach” purposes that are at risk for partisan abuse, similar to funds that the previous Secretary of State directed through a backdoor process to a partisan public relations firm prior to the November 2020 election.
Federal Funds for Local Government. The budget provides $609 million from the federal Coronavirus Fiscal Recovery Fund for distribution to small cities and towns. A second allocation of $609 million will be distributed June 2022. Allocations are based on a local jurisdiction’s share of the state population.
Local Projects Receive More Than $1.3 billion in Special Allocations. The budget provides more than $1.3 billion across program areas for various legislative priorities and local projects throughout the state, including $389 million in program augmentations for a variety of uses, such as research and educational programs. A list of these projects and program allocations can be found in Control Sections 19.56 and 19.57 of SB 170 (Skinner).
Further Expansion of Medi-Cal to the Undocumented. This budget bill adds $48 million General Fund for 2021-22 to expand full-scope Medi-Cal to an estimated 250,000 undocumented individuals age 50 and above. These costs will increase to more than $1.3 billion General Fund annually. The addition of these individuals to Medi-Cal, which already serves more than a third of Californians, will continue to exacerbate access to care challenges due to the already-strained delivery system.
Addresses the Need for More Behavioral Health Treatment Beds. This budget creates a $756 million grant program in 2021-22 to provide county behavioral health departments and non-profit community partners with funding to construct, acquire, or rehabilitate properties to increase treatment bed capacity. Another $1.4 billion is scheduled for the 2022-23 fiscal year. The administration estimates that this funding will result in 15,000 new treatment beds statewide. These treatment beds are needed more than ever to meet our mental health needs, especially as the population of seriously mentally ill homeless has grown rapidly in California.
Children and Youth Mental Health Services. This budget includes $1 billion General Fund in 2021-22 and $1.4 billion General Fund planned for 2022-23 to implement a children and youth behavioral health initiative, which will increase preventive and early intervention behavioral health services, create a behavioral health virtual platform, develop a new school behavioral health counselor system and expand infrastructure for mental health facilities.
Phase-In of Overdue Payment Increases for Developmental Services. The budget includes $90 million to begin a five-year phase-in of the remaining community rate increases documented by the 2019 DDS rate study. Although immediate implementation of the rate increases documented by the study would be preferable, a phase-in of the study is a step in the right direction.
Provides More Child Care Services. The budget expands child care access by adding over 145,000 child care slots over the next two years, and this amount would grow further to 200,000 new slots by 2025-26 should the state's economic condition support it. The budget includes $292 million General Fund for Alternative Payment Programs, General Child Care, and Migrant Child Care slots to expand child care access. These funds prioritize General Child Care slots serving children who are 0 to 3 years of age. Additionally, the budget plan includes hundreds of millions of dollars more for future expansions, though these funds are not obligated.
Unnecessary Child Care Union Ascendency. The budget ratifies recent Child Care Providers United bargaining contracts, including funds for rate increases, provider licensing incentives, provider stipends, and $289 million in one-time funds for provider supplemental payments. This may increase costs by the hundreds of millions to billions of dollars annually, which helps newly unionized employees, but it provides no assurance of actual improvements for children.
Assists Low-Income Individuals with Overdue Utility Bills. Provides nearly $1 billion in federal American Rescue Plan Act Funds to cover low-income utility payment arrearages. The economic consequences of stay-at-home orders and precautionary quarantine measures not only increased home energy consumption for many California households but impacted many Californians' ability to pay their home energy bills. (The State Water Resources Control Board budget also includes nearly $1 billion to pay for overdue water bills.) Republican Senators Grove and Nielsen had submitted a budget letter requesting this type of assistance.
Additional Resources for the Elderly and Disabled. Provides $291 million General Fund in 2021-22 to increase grants for SSP, Cash Assistance Program for Immigrants, and California Veterans Cash Benefits. This action increases State Supplementary Program (SSP) grants to 2011 levels, which provides income support to eligible individuals who are aged 65 or older, blind, or disabled.
Addresses Complex Care Needs for Foster Youth. Provides $139 million General Fund to assist counties with serving foster youth with complex needs and behavioral health conditions, within California, as well as youth that return from an out-of-state congregate placement. This provides necessary treatment options to keep youth in families to the greatest possible degree and to eliminate the placement of foster youth with complex needs in out-of-state facilities whenever possible.
Guaranteed Basic Income Could Assist Foster Kids and Others. Includes $35 million in grants to local governments that would provide a guaranteed basic income for targeted individuals. These grants are supposed to prioritize individuals who age out of the extended foster care program at or after 21 years of age or who are pregnant, but the program would not be strictly limited to those populations— other unspecified groups could be targeted as well.
Coerces Counties to Sign In-Home Supportive Services Bargaining Agreements. The budget interferes in county operations by threatening to impose a seven percent penalty on counties that fail to reach an IHSS collective bargaining agreement. A seven percent penalty represents millions of dollars of realignment funds to large counties and up to hundreds of thousands of dollars in smaller counties. This fiscal penalty ignores the progress that has been made to date on IHSS collective bargaining and punishes counties that have properly balanced labor demands and fiscal stewardship of taxpayer dollars.
Relief for Overdue Water Bills. The budget appropriates $1 billion in federal funds for residential and commercial customer arrearages and revenue shortfalls due to the pandemic. This funding is desperately needed to help forgive unpaid water bills and provide relief to water and wastewater systems from the economic impacts of COVID-19.
Billions in Natural Resources Funding. Provides over $3 billion in programs and activities earmarked for climate, wildfire, and drought in the 2021-22 to support various natural resources packages, including for wildfire and forest resilience, water and drought, climate resilience, zero-emission vehicles, sustainable agriculture, and the circular economy.
Oil Fee Increase. Increases the oil spill prevention and administration fee on October 1, 2021, to $0.085 per barrel of crude oil or petroleum products and expands the fee to include renewable fuels. Authorizes the fee to be annually increased or decreased by a specific inflation measurement.
Forest Health and Wildfire Prevention Package. The budget provides nearly $1.5 billion across various departments in 2021-22. The funding supports plans to create resilient wildlands, support wildfire fuel breaks, advance science-based management and streamlined permitting, and support community hardening.
New Department of Cannabis Control. The budget includes $154 million and 622 positions for a new Department of Cannabis Control (DCC). This reflects the consolidation of the cannabis licensing and enforcement functions of the Bureau of Cannabis Control, the Department of Food and Agriculture, and the Department of Public Health into the DCC.
Local Jurisdiction Assistance Grant Program. The budget includes $100 million General Fund for the Local Jurisdiction Assistance Grant Program to assist local entities with costs associated with processing local cannabis permits. These grant funds can be used by the local jurisdictions or passed on to provisional licensees to assess and mitigate environmental impacts. Grant allocations are based on the number of provisional licensees, legacy licensees, and level of CEQA compliance required in jurisdictions across the state.
Broadband Investment Brings Promise as Well as Questions. The budget includes $4.4 billion to invest in broadband infrastructure. This includes $3.25 billion for the California Department of Technology to build a state-owned, open-access middle-mile broadband network, $1.1 billion for the California Public Utilities Commission to allocate for last mile broadband projects, and $50 million to fund a loan loss reserve account.
Clean Energy Investments. The budget includes $70 million General Fund for clean energy programs, but failed late-session negotiations result in deletion of $400 million previously included in the June budget. The $400 million was expected to be allocated among various energy priorities, including the Food Production Investment Program. Negotiations are expected to continue through the fall and the funding may be allocated in early 2022. Additionally, a $335 million investment is planned for 2022-23, however, there is no binding obligation for the additional $335 million.
Zero-Emission Vehicle (ZEV) Subsidies and Infrastructure Investments. Despite billions in subsidies and investments over the last decade, ZEVs have failed to gain an appreciable share of the vehicle market. At the end of 2020, only about 2 percent of registered light-duty (passenger) vehicles in California were ZEVs. This budget appropriates another $2.3 billion for ZEV vehicle and infrastructure subsidies, including $1.7 billion General Fund.
Funds Soft-on-Crime Policies Despite Recent Spike in Violent Crimes. The budget includes $76 million to implement and expand recent measures designed to further reduce the consequences for committing crimes. This funding will be used to help convicted felons seeking to be resentenced under recently modified (reduced) criminal penalties and to automatically expunge arrest records for misdemeanors and realigned felonies from arrestees’ criminal histories.
Transparent Use-of-Force Investigations Could Improve Trust in Police. The budget provides $15 million for the Attorney General to assemble four regional task forces to investigate all officer- involved shootings resulting in the death of an unarmed civilian. If these investigations are seen as transparent and the process is kept free from political influence, the distrust of the police that has taken root in many communities could begin to be addressed.
Efforts to Curb Organized Theft Continue. The budget includes $5.7 million to maintain the ongoing efforts of the joint CHP-DOJ regional property crime task force to crack down on organized retail theft.
Funding for Trial Courts Restored. The enacted budget restores a $177 million baseline General Fund budget reduction for the trial courts that was included in the 2020-21 pandemic budget solutions. The budget also provides $132 million in new trial court funding, including $72 million in discretionary funds for trial court operations and $60 million one-time to address case backlogs resulting from the pandemic.
Transportation Infrastructure. The budget includes $2 billion (special and federal funds) for streets, roads and highways. Failed late-session negotiations result in the deletion of $3.3 billion General Fund included in the June budget. While a substantial portion of the deleted funding supports Democrat priorities like active transportation and transit, absent this boost from the General Fund, transportation dollars will eventually fund these types of projects. The deleted funding included $500 million for high- priority grade separations and grade crossing improvements, which are projects typically supported by Republicans. Negotiations are expected to continue through the fall and the funding may be allocated in early 2022.
Clean California Initiative. The budget includes $329 million General Fund to clean up and beautify California highways, local streets, transit facilities, and other public spaces. It should be noted the budget indicates an additional $1.2 billion will be provided over the next two years, for a total of
$1.5 billion. However, there is no binding obligation for the remaining $1.2 billion.
High-Speed Rail Funds Noticeably Absent. This budget provides $624 million for the High-Speed Rail Authority, including $532 million from cap and trade revenues for infrastructure. Noticeably absent is the requested $4.2 billion in remaining bond funding requested by the Authority and the Governor, which was not allocated before the end of the 2021 session.
Three Waves of Budget-Related Bills. The state passed 34 budget and related bills in June or July, in addition to 17 bills passed from January through April as part of the “early action” steps to address various issues. The Democratic majority also delayed significant budget decisions until September, negotiated among themselves out of the public view, and then presented their decisions as a fait accompli in 16 more bills approved the final week of the legislative session with minimal public hearing. The three sets of bills are summarized in appendices at the end of this report.
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