Revenues Rise Significantly in 2021-22, Then Flatline. The enacted budget reflects another increase to forecasted revenues, compared to expectations just six months ago. General Fund revenues for 2021-22 are now budgeted at nearly $233 billion, which is higher than the original 2021-22 Budget Act level by $54 billion, or 30 percent. This is partly due to substantial capital gains from the pandemic stock market surge, which only appeared in the budget retroactively. However, state revenues are projected to drop by 4.3 percent to $223 billion for the 2022-23 budget year, and to show minimal average growth of 0.53 percent annually for the four years after the 2021-22 year, as illustrated in the chart below.
Expenditures Increase Rapidly, Double in Five Years. General Fund spending would reach nearly $243 billion for the revised 2021-22 year, an astounding increase of $47 billion, or 24 percent, from the level authorized by the 2021 Budget Act. This spending is twice the expenditures seen just five years prior, in 2016-17, as indicated by the arrow in the chart below.
Spending would then decline to $234 billion in 2022-23. Though lower than the revised 2021-22 level, the 2022-23 spending level would be 19 percent higher than the original 2021-22 Budget Act.
A Surplus for Now. Governor Newsom first declared in his May Revision press conference that the state has a surplus of $97.5 billion. However, that figure does not yet account for mandatory spending on education under Proposition 98 and reserve and debt requirements under Proposition 2. The Governor indicated the figure that reflects these obligations is $49 billion, while the nonpartisan Legislative Analyst’s Office (LAO) later estimated the surplus to be $52 billion. Even these lower estimates indicate a historically high surplus, at least for the moment.
Spending Leads to Operating Deficits. Despite the Governor’s claims that 93 percent of the surplus spending is “one-time,” the data show that more than two-thirds of the $32 billion “one-time” spending in the 2022-23 budget repeats or is replaced by other “one-time” spending the following year. The spending levels launched by this budget would outpace even the historically high revenues, leading to operating deficits in the years following 2022-23, including a deficit of $6.3 billion in 2023-24.
Reserves. The enacted budget provides an estimated $37 billion in total reserves, including the following categories:
- $23 billion in the Rainy Day Fund
- $9.5 billion in the Proposition 98 Rainy Day Fund
- $3.5 billion in the discretionary reserve (the Special Fund for Economic Uncertainty)
- $900 million in the Safety Net Reserve Fund
While these reserves are a record in dollar terms, they are lower than pre-pandemic levels in percentage terms. Additionally, the point of reserves is to prepare for unknown budget difficulties, not preplanned overspending.
State “Gann” Spending Limit. The budget estimates that state spending would be under the constitutional Gann limit for the combined 2020-21 and 2021-22 years by $11 billion, and would also be under the limit for 2022-23 by $12 billion. These calculations reflect budget adjustments to increase Gann-exempt spending and tax “refunds.” The budget package also redefined “state subventions” for local government spending as an accounting gimmick to create $21 billion in additional “room” under the limit over two years.
“Trigger” For Additional Spending Commitments. The budget includes a “trigger” that would authorize several spending increases prioritized by Democrats, contingent upon future legislation and subject to a determination in the spring of 2024 that sufficient revenue exists. The spending increases include a new tax credit to offset costs for union membership dues, CalWORKs benefit increases, and Medi-Cal expansions, among others.
Tax Refunds. The budget provides $9.5 billion General Fund for the Better for Families Tax Refund plan to provide one-time payments to Californians to help offset the impacts of high gas prices and other growing costs due to inflation. The “refunds” are not tied to what a taxpayer actually paid, but instead would be distributed based on a three-tier income structure and would include an additional payment for dependents. The payments would range from $200 for an individual making up to $250,000 per year up to $1,050 for a couple with dependents and a joint income below $150,000.
Legislative Democrats Reject Gas Tax Relief. The Governor proposed, but legislative Democrats rejected, suspending the July 1 inflationary increases on gas and diesel excise taxes. As a result, on July 1, 2022, gasoline and diesel taxes increased by 2.8 and 2.1 cents per gallon, respectively.
Partial Diesel Fuel Sales Tax Suspension. The sales tax rate on diesel is currently 13 percent. The budget suspends for one year, from October 1, 2022 until September 30, 2023, a portion of the sales and use tax assessed on the sale of diesel fuel, equivalent to 3.94 percent, providing an estimated $439 million in relief at the diesel pump over a one-year period.
Paycheck Protection Program (PPP) Conformity. The budget updates conformity of state tax law to the federal PPP grant period. Previous conformity actions excluded an extension of the federal PPP grant program by two months in spring of 2021. The budget allows all federal PPP grants to be excluded from the definition of income for the purposes of state taxation.
Earlier Restoration of Business Credits. The budget reflects reduced revenues of $5.5 billion as a result of February 2022 actions to reverse pandemic tax increases. Specifically, SB 113 (Committee on Budget) restored net operating losses and business tax credits that were cut in the 2020 budget when the state believed it faced a major deficit. Republicans called for these tax actions to be reversed in 2021, but the Governor and Democrats delayed fixing the unnecessary tax increases until earlier this year.
Young Child Tax Credit Expansion. The budget expands the Young Child Tax Credit (YCTC) to families that file returns without income, but otherwise quality for this credit, and would index the credit to inflation starting in the 2022 tax year. This expansion of the YCTC would cost more than $150 million General Fund by 2025-26, and grow each year thereafter.
Lithium Tax. The budget establishes a volume-based tax on lithium extracted from geothermal brine. Counties impacted by the lithium extraction will receive 80 percent of the tax revenue. The remaining 20 percent will be used for Salton Sea maintenance, operations, and restoration activities. While this seems attractive, there are concerns the tax rates will make California lithium uncompetitive in the marketplace. Additionally, the budget does not actually include any tax revenue, since the new revenues are not expected until at least 2023-24.
Cannabis Tax Reform. The budget eliminates the cannabis cultivation tax and sets the cannabis excise tax at 15 percent for three years. After that, the excise tax would adjust to compensate for the elimination of the cultivation tax, but is capped at 19 percent. The budget provides up to $150 million in General Fund to backfill lost tax revenues supporting various youth prevention and substance abuse treatment programs, environmental programs, and public safety-related activities.
Cannabis Equity Operator Subsidies Increased. This budget provides $10,000 tax credits to equity licensees and allows equity licensees who are also retailers to retain 20 percent of the cannabis excise tax they collect.
Skilled Nursing Facility Tax. The 2022-23 budget imposes a new version of a tax called the “Quality Assurance Fee” on skilled nursing facilities. While the industry has supported past versions of the Quality Assurance Fee, this version was strongly opposed by the nursing home industry. In addition, the trailer bill gave two health departments new fee authority, including one that strictly enforces union-dictated staffing ratio laws.
Housing and Homelessness
State to Become “Silent Partner” in Home Ownership. The budget includes $500 million General Fund for the new California Dream for All program, and provides authority to issue an additional $1 billion in bonds annually for the next 10 years. The program is a shared mortgage assistance program where the state will provide up to 20 percent in down payment or closing cost assistance for first-time homebuyers. Specific eligibility parameters are still unknown, but this program would put the state in the unusual and risky position of being a part owner of individual houses.
Sets Aside General Fund to Forgive Rental Assistance Loans. The budget provides nearly $2 billion General Fund to allow for the forgiveness of General Fund loans made to local governments for the Emergency Rental Assistance Program, which provided money to tenants with overdue rent payments.
CalHome-Homeownership Support Program. The budget includes $250 million in 2022-23 for the CalHome program, which enables low and very-low income households to become or remain homeowners. The program provides grants to local agencies and nonprofits for direct homeowner and housing rehabilitation assistance (including mobile homes).
New Program for Adaptive Reuse Developments. The budget includes $150 million General Fund in 2022-23 for a new program within the Department of Housing and Community Development (HCD) that would provide grants to local jurisdictions. Adaptive reuse is the process of changing the use of an existing building for any purpose other than its original design. This grant program could help remove cost impediments to adaptive reuse projects (e.g., structural improvements and plumbing/electrical design) and could accelerate conversions to residential use.
Homeless, Housing Assistance, and Prevention Program. The budget provides $1 billion in 2022-23 to the Homeless Housing and Assistance Prevention program. The program also requires ten percent of the funds to be spent on providing services to the state’s homeless youth.
Encampment Resolution Grant Program. The budget provides $300 million in 2022-23 for the Encampment Resolution Grant program within the California Interagency Council on Homelessness. The program, established with $50 million in the 2021 Budget Act, partners with local governments and provides grant funding to assist them with resolving critical encampment concerns and transitioning individuals into safe and stable housing.
Homekey Program. The budget includes $1.3 billion to continue the Homekey program in 2022-23. Homekey helps fund the purchase, conversion, and 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.
Pandemic Response Reduced but Still Significant. The budget provides $2.3 billion for various pandemic-related efforts, down from $3.7 billion last year. This includes a $250 million “contingency” fund within the Department of Public Health budget that is available for the Governor to direct, subject to a 10-day notice to the Legislature.
New Abortion Programs. The 2022-23 budget includes $207 million in new proposals that prop up the abortion industry, including an abortion expansion pilot program in LA County, an abortion travel support fund, security and IT upgrades at abortion clinics, and scholarships and loan repayments for abortion clinic workers.
All Low-Income Undocumented Immigrants in Medi-Cal. The 2022-23 budget includes another Medi-Cal eligibility expansion in 2024 for roughly 700,000 undocumented individuals ages 26 through 49, at an estimated cost of $2.1 billion General Fund annually. This expansion follows recent eligibility expansions of roughly 104,000 undocumented children (2016), 99,000 young adults age 19-25 (2020), and 235,000 undocumented older adults age 50 and above (started in spring 2022). Once fully implemented, the state will spend more than $5 billion annually on Medi-Cal for roughly 1.2 million undocumented enrollees.
No-Bid Contract for Insulin Factory. The 2022-23 budget includes $100 million for the state to enter into a no-bid contract with a current drug manufacturer to construct a California-based facility where insulin (and eventually other drugs) will be produced. The state will then contribute ongoing funds to finance the insulin production by the chosen manufacturer at the new facility and to sell that insulin on the global market. This venture is risky as the state could be on the hook for cost overruns, production setbacks, and even product liability.
New Bureaucracy to Impose Healthcare Price Controls. The enacted budget includes the creation of an Office of Health Care Affordability that would impose financial penalties on hospitals and other providers in the healthcare industry who fail to meet the state’s dictated healthcare “cost targets.” The new office will cost roughly $30 million annually and employ more than 100 enforcement staff, a third of which will be attorneys. Strictly enforced, these price controls could lead to rationing of health care services.
Hospital and Nursing Home Staff Bonuses. The 2022-23 budget adds $1.1 billion for up to $1,500 in bonus checks for hospital and skilled nursing facility workers. This would be provided to both licensed and non-licensed health care personnel. The state will provide $1,000 per employee automatically and an additional $500 of state funding could be available to the employee if it is optionally matched by an equivalent amount by the employer.
Inadequate Spending on Mental Health Beds. The enacted budget falls short of the legislative Republican proposal to use $10 billion of our surplus to permanently end the treatment bed deficit in this state. The 2022-23 budget includes just $1.7 billion for county behavioral health departments and non-profit community partners to construct, acquire, or rehabilitate properties in order to increase mental health treatment bed capacity, and another $1 billion for the counties to provide tiny homes and other short-term shelters for those individuals with serious mental illnesses.
Strategic Energy Reliability Reserve. The budget includes $2.25 billion General Fund for a Strategic Reliability Reserve. The program’s goal is to find more power for the grid because California’s reliance on intermittent power resources has made the grid unreliable and at risk of rolling blackouts. Experts predict California could face electricity shortages of 1,700 megawatts (MW) this summer. This program will only provide up to an additional 529 MW of power this summer, but will have greater benefits in future years.
Clean Energy Incentives. The budget includes $140 million to incentivize long-duration energy storage projects. Given the lack of diverse resources on California’s electricity grid, and the need for power generation when the sun stops shining and the wind stops blowing, these types of projects are needed to keep the lights on.
Unallocated Energy Funds. The budget package includes up to $10.4 billion still to be allocated for energy investments. Notably, there is no binding obligation to provide the remaining funding in the current year or future years. It is unknown when or for what specific purposes these funds will be allocated.
Transportation Infrastructure. The budget includes a General Fund investment of $5.4 billion General Fund in the transportation system. While a substantial portion of this funding is for non-road Democrat priorities, General Fund dollars for these projects means California’s transportation-specific dollars can remain focused on more conventional projects that may actually improve roads.
Port Infrastructure and Goods Movement. The budget includes $670 million General Fund for port‑related projects, workforce training, and process and operational improvements to increase goods movement.
Billions for High-Speed Rail Comes with Increased Oversight. After more than a year of negotiations between the Legislature and the Governor, this budget includes $4.2 billion in remaining bond funds for the high-speed rail project. The funds come with significant increased oversight of the project, including the creation of the High-Speed Rail Authority Office of the Inspector General.
Zero-Emission Vehicle Subsidies and Infrastructure Investments. The budget includes $2.6 billion to subsidize ZEVs and ZEV infrastructure, focused on low-income consumers and communities, heavy-duty trucks, transit buses, and school buses. The budget sets aside an additional $1.1 billion for ZEV investments, to be allocated in August after subsequent budget negotiations are complete, and promises another $2.4 billion in future years. However, there is no binding obligation to provide the promised funding in the current year or future years.
Resources and Environment
Water and Drought Resilience. The budget includes nearly $2.8 billion to provide immediate drought relief in some areas, but delays other important decisions.
Firefighting Investments, but Lack of Fire Prevention. The budget provides nearly $157 million in investments to better fight fire, while deferring other wildfire decisions and generally falling short on fire prevention efforts. Given that wildfire greenhouse gas emissions have overwhelmed other possible emission reductions in California, wildfire prevention deserves substantially more funding and a clear plan of action.
Delays for Other Climate Plans. Contains over $1.4 billion earmarked for other broad climate-related categories in 2022-23, such as $150 million for extreme heat, yet delays actual plans for these areas.
Local Government Sustainability Fund. The budget provides $100 million General Fund to provide short-term grants to local entities facing significant challenges to their local revenues and services, but who demonstrate a commitment to advancing a more climate-resilient local economy.
Business and Employment
Fails to Sufficiently Address the Unemployment Debt. The budget appropriates a measly $250 million for payments towards the Unemployment Insurance Fund Loan, which has an astonishing balance of roughly $18 billion. Further, the budget provides no unemployment insurance tax relief for businesses. Note that the Governor and Democrats claim the budget provides $1.5 billion for the unemployment debt and employers. However, except for the $250 million, none of the remaining funds are actually appropriated in the budget. This means the remaining amounts are not guaranteed, and can easily be changed or omitted from future budgets.
Supplemental Paid Sick Leave Grants. The budget includes $250 million for Supplemental Paid Sick Leave Relief Grants to offset costs incurred by the recently enacted Paid Sick Leave Program. Negotiations are still in progress on the statutory changes but information previously provided suggests the grants will be for small businesses and nonprofits with up to 150 employees.
Continues to Push “High Road” Standards. Launches a number of potentially beneficial apprenticeship and job training programs. However, these also incorporate “High Road” employment standards, which CalChamber has characterized as, “…simply a euphemism for the policy agenda of the labor movement.”
Plans to Modernize the Employment Development Department (EDD). The budget provides $136 million ($68 million General Fund) one-time for EDD Next, a five-year plan to modernize the EDD. Some immediate improvements include call center redesign, online portal enhancements to improve the online experience for claimants and employers, and expanded fraud data analytics.
Displaced Oil and Gas Worker Pilot Programs. The budget includes $40 million one-time General Fund to create a pilot program to provide assistance for displaced oil and gas workers as a result of the state’s attempts to dismantle the fossil fuel industry. It also provides $20 million one-time General Fund to support training displaced oil and gas workers in Kern and Los Angeles Counties to cap open and abandoned wells.
Paying Down Unfunded Pension Liabilities. The budget appropriates $2.9 billion in one-time Proposition 2 debt repayment from the General Fund to supplement the state’s appropriation to the Public Employees’ Retirement Fund to further reduce the unfunded liabilities of the CalPERS state plans.
Acceleration of Developmental Services Provider Rate Increases. The budget includes $264 million ($159 million General Fund) to accelerate the implementation of the service provider rate study by six months. Accelerating the implementation of the rate study will help providers increase compensation for frontline staff and potentially aid in closing the staffing gap.
Recognizes Growing Workforce Issues in Developmental Services. The budget provides $185 million General Fund one-time to establish several workforce stabilization programs to address challenges in recruiting and retaining professionals in the disabled services system.
Savings for Self-Determination Program Participants. The budget provides $7 million ongoing ($4 million General Fund) to remove the requirement that financial management services be paid out of the individual budgets of self-determination program (SDP) participants, and instead requires regional centers pay the full cost of the services.
Extends Assistance for Overdue Utility Bills. Provides $1.2 billion in one-time General Fund to continue the California Arrearage Payment Program (CAPP) to help pay down past due bills for residential customers as a result of the COVID-19 pandemic.
Major Increases to CalWORKs Grants. The budget includes $296 million for an 11 percent increase in CalWORKs maximum aid payment levels. It also includes $816 million one-time over the next three fiscal years to increase CalWORKs grants by an additional 10 percent for a total increase of 21 percent beginning October 1, 2022.
Continues the Low Income Household Water Assistance Program (LIHWAP). The budget continues the administration of LIHWAP through June 30, 2026 or until $200 million in one-time federal fund authority is expended, whichever occurs first.
Food Assistance for Undocumented Immigrants with No Accountability. The budget provides $35 million General Fund to expand the California Food Assistance Program (CFAP) program to Californians aged 55 and older regardless of immigration status. The budget also removes the requirement that undocumented applicants comply with federal CalFresh work requirements that citizens still must meet. This means that citizens receiving assistance will be held to a higher standard than undocumented immigrants.
Services for Undocumented Immigrants at the Border. The budget includes $175 million one-time General Fund for the Rapid Response Program, which was established in 2019. The program directs the Department of Social Services to award grants or contracts to entities providing assistance such as food, clothing, shelter, transportation, and medical aid mostly to undocumented immigrants.
All Time High for K-12 Education. The 2022 Budget Act supports another banner year for California’s estimated 5.9 million student body, with total funding for K-12 education at $128 billion. Of this amount, $78.6 billion is supported by the General Fund and the remaining $50 billion from other funds. Per pupil spending would reach $16,993 in Proposition 98 funds and $22,893 in all funds. This represents an increase of $8,276 per pupil (49 percent) compared to ten years ago.
Local Control Funding Formula (LCFF). The budget includes the largest LCFF cost-of-living adjustment in the history of the LCFF, a 6.56 percent adjustment. Additionally, the budget includes an ongoing Proposition 98 base funding adjustment of $4.32 billion (6.28 percent) to the LCFF. This additional infusion of funding toward the base is to help school districts and charter schools address ongoing fiscal pressures, staffing shortages, and other operational needs.
Learning Recovery Emergency Block Grant. This year’s budget established the Learning Recovery Emergency Fund with $8.6 billion in one-time Proposition 98 General Fund. This Fund will support the Learning Recovery Emergency Block Grant, which will help assist schools in establishing programs and initiatives related to learning recovery. Of this amount, $7.9 billion will go to K-12 schools through the 2027-28 fiscal year, and $650 million will support the California Community Colleges.
Higher Education. This year’s budget reflects multi-year compacts with the University of California, the California State University, and the California Community Colleges, with each segment receiving an ongoing base increase each year over five years. Total funding for all higher education entities is $42 billion ($29 billion General Fund/Local Property Tax and $13 billion other funds).
Cal Grant Reform, Maybe. The budget authorizes significant reforms to the Cal Grant program beginning 2024-25, provided a determination is made in the spring of 2024 that General Fund over the multiyear forecast is available to support the ongoing augmentation. If the multiyear forecast has sufficient funds, the Cal Grant Reform Act will replace the existing Cal Grant program with a new version that provides a Cal Grant 2 for eligible California Community College students with financial need, and provides a Cal Grant 4 for eligible four-year university students with financial need.
Crime Reduction. The budget provides approximately $140 million for crime reduction efforts, which include the following:
- $107 million to crack down on organized retail theft
- $23 million for fentanyl enforcement by the Department of Justice and the California Military Department
- $5.5 million for a sideshow task force and $4 million for a highway violence task force within the California Highway Patrol
Notably, the budget fails to include the $20 million the Governor proposed in January for grants to small businesses victimized by organized retail theft.
Clamping Down on Gun Ownership. The budget includes nearly $35 million to buy back guns, track guns and gun parts, enhance firearm data systems, and fund gun violence research that will lead to more gun control laws and make it more difficult to lawfully own a firearm. The bulk of this funding ($25 million) would support local gun buyback programs, despite research that shows buybacks to be ineffective. These funds would be better spent removing guns from dangerous felons who illegally possess them or attacking the growing catalytic converter theft problem.
New Judgeships. The budget includes $43 million to fund 23 new judgeships, which accounts for all of those that are established in law but to date have been unallocated due to a lack of funding. It also includes about $54 million for facilities modifications necessary to accommodate the new judgeships. This funding reduces the statewide need for new judgeships from 139 in 2020 to about 116 (as identified in the 2020 updated judicial needs assessment). This is a good start, but still leaves more than 80 percent of the need unmet.
Firearm Relinquishment Program. The enacted budget provides $40 million one-time General Fund to establish a court-based firearm relinquishment pilot program in six courts for the safe removal of firearms from individuals prohibited from possessing them. Considering that the courts have been required since 2016 (by Proposition 63) to follow up on mandatory firearm relinquishments to ensure they have taken place, this funding is long overdue.