Highlights and Analysis of the Governor's 2019-20 Budget Proposal

Tuesday, January 15, 2019

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Executive Summary

Overview.  Governor Newsom starts his tenure with a one-time General Fund budget surplus of roughly $21 billion.  Fueled by the additional resources, the Governor proposes higher reserves and a wide variety of new expenditures, though most of the spending would be one-time, including significant reductions to debts.  The budget also proposes some ongoing spending increases, primarily in Education and Health and Human Services.  However, the budget does not do enough to protect against catastrophic wildfires and to fix challenges with programs such as services for the developmentally disabled.  Astonishingly, the budget also needlessly proposes tax increases totaling over $1 billion, including changes intended to pay for an expanded Earned Income Tax Credit, clean water, and expanded health insurance subsidies.  Taxpayers in high-cost California would be right to wonder when they might expect relief from the state’s poverty-inducing cost of living.  Though the Governor’s initial budget proposal shows structural balance for now, major concerns remain that the Governor will have difficulty resisting calls for higher spending from legislative Democrats and other advocates.

Governor’s Budget Is Just the Beginning.  The Governor’s budget is just the starting point for state spending each year.  Legislative Democrats will begin to negotiate for more spending from this point forward, meaning that the final budget will probably spend more and save less.  In addition, legislative Democrats have already announced plans for various bills of their own that would spend in excess of $40 billion General Fund annually. It remains to be seen whether Governor Newsom is willing or able to withstand pressure from his colleagues and other advocates to spend more.

Record Revenues, but Some Doubts.  Compared to the budget signed in June 2018, General Fund tax revenues are higher by $1.9 billion in the current year and would rise by another $4.7 billion to reach $144 billion in 2019-20. This would set a new record high that is 4.8 percent above the 2018 Budget Act.  However, tax data from December 2018 raise some questions about whether these projections will materialize.  Even so, these revenue increases (which do not include the gas taxes) indicate that the state did not need to raise taxes further on Californians to take care of our priorities. 

Expenditures Include One-Time and On-Going Proposals.  General Fund spending would reach $144 billion in the current year, an increase of $5.3 billion from the enacted budget, and would continue at roughly the same level in 2019-20.  Spending from all state funds would reach $209 billion in 2019‑20, compared to $201 billion in the enacted 2018-19 budget, a 4 percent increase.  The significant current year increase is driven mostly by one-time payments the Governor proposes to reduce debt.  The Governor claims that 86 percent of new spending is for one-time purposes, which may be overstated, but it is likely that over three-quarters of the spending is one-time in nature.  

Reducing State Debts.  The Governor’s budget proposes significant reductions to debts and unfunded retiree liabilities:

  • $4.1 billion to eliminate the remaining budgetary borrowing from special funds and “deferral” gimmicks previously used to address budget shortfalls. 
  • $3.0 billion to the unfunded liability for the Public Employees’ Retirement System (PERS).
  • $1.1 billion to the State Teachers’ Retirement System (STRS) unfunded liability as part of the required Proposition 2 debt payments.

Paying off budgetary borrowing is a welcome proposal for the current revenue surge, though the retiree debt payments are small in relation to the overwhelming liabilities for pensions and retiree health, which total $188 billion.

Combined Reserves Would Exceed $18 Billion.  The state’s Rainy Day Fund (Proposition 2 of 2014) would grow to $15.3 billion by the end of 2019-20, a balance that is greater than the 10 percent of General Fund revenue set out in the Constitution. This is because the Governor views the past discretionary additional deposits as not counting toward the 10 percent limit, consistent with a Legislative Counsel opinion, which allows a higher balance to remain in the fund (those extra deposits would also not be limited by Proposition 2’s restrictions on taking funds out).

The Governor’s budget also includes a discretionary reserve of nearly $2.3 billion and a Safety Net Reserve of $900 million, which would bring total reserves to $18.5 billion when combined with the Rainy Day Fund.  At nearly 13 percent of tax revenues, this combined reserve would be a record high.

Welcome Funds for Next Generation 9-1-1.  The Governor appears to have heard Senate Republicans’ concern that last year’s proposed 9-1-1 tax increase was unnecessary given the large budget surplus. As such, his proposed budget would provide $10 million General Fund in 2018-19 and $50 million in 2019-20 to continue upgrading the state’s 9-1-1 system.  However, the budget assumes that legislation restructuring the existing tax will be in effect on January 1, 2020.  Ensuring that appropriate limits, checks, and accountability measures are in place to govern the restructured tax will be an important part of the conversation moving forward. 

Earned Income Tax Credit Expansion Funded With New Taxes.  The budget proposes to expand the Earned Income Tax Credit (EITC) program to $1 billion (from $400 million) by increasing eligibility and benefits, and would pay for the program with several tax increases. The budget would also rename EITC the “Working Families Tax Credit.”  While providing relief to working California families has been a long-term goal by Senate Republicans, it is difficult to understand why Californians and small businesses should pay more to support an expanded program while existing General Fund revenues continue to reach record highs.

Housing and Homelessness.  The budget includes more than $2.2 billion in one-time General Fund to increase the level of housing construction for all income levels and reduce homelessness across the state.  The funding is intended to incentivize local governments to increase housing production, rewarding cities and counties that develop plans and achieve progress on short-term, higher statewide housing goals developed by the Department of Housing and Community Development.  A welcome element of this proposal would streamline environmental regulations for some housing developments.

The budget also proposes to withhold transportation funds in an attempt to motivate local governments to work with developers to increase housing through various reforms such as rezoning for density and revamping local processes to speed up production.  Such a punitive measure would be a bait-and-switch with respect to recently hiked transportation taxes.

Missed Opportunity for Developmental Services.  The budget does not propose any additional funds to fix the state’s widely recognized problems in delivering adequate community-based services to developmentally disabled individuals.  A provider payment survey due this March is widely expected to demonstrate significant payment shortfalls, and higher payment rates are likely needed.

New Income Redistribution in Attempt to Save the Affordable Care Act. Rather than increasing the number of affordable healthcare options for Californians, the Governor’s budget plans on increasing Covered California subsidies to households with incomes between $62,750 and $100,400 (for a family of four) and expands the subsidies to households with incomes between $100,400 and $150,600 (for a family of four). To pay for these subsidies, the Governor wants to impose a new tax “penalty” on Californians that choose not to carry health insurance. The Governor’s budget assumes $500 million in new penalty revenues for 2019-20.

Medi-Cal Coverage to All Undocumented Individuals Under Age 26. The Governor’s 2019-20 budget includes $197 million General Fund to expand full-scope Medi-Cal coverage to an estimated 138,000 income-eligible young adults ages 19-25 who are living in the state illegally. California currently covers 250,000 low-income undocumented children 18 and under in the Medi-Cal program.  Funding for the expansion would count in part on redirecting $63 million in local government money that counties now use for health programs.

Emergency Preparedness and Response Funding.  The budget proposes to provide CalFire $415 million (Cap and Trade revenues, General Fund, and other special funds) for forest health projects and fire protection enhancements, although most of this amount, including $200 million per year for forest health, was proposed last year.  The total proposal includes fuel reduction projects pursuant to SB 901 (2018), continuation of helicopter replacements, additional aircraft for CalFire, expanded firefighting surge capabilities, improved technology, and disposal of illegal fireworks. 

Property Tax Relief for Fire-Stricken Counties.  To help address communities affected by recent fires, the budget would also provide $31 million to backfill local property taxes, including three years of funds for Butte and Lake counties.

Early Childhood Education and Wellness Proposals.  The Governor proposes several augmentations for early childhood education and wellness:

  • $750 million in one-time General Fund for school districts to provide facilities for full-day kindergarten.
  • $125 million for first-year funding of a three-year plan to increase full-day, full-year access to state preschool in not-for profit programs to ensure a slot for all eligible low-income four-year-olds.
  • $500 million to expand subsidized child care facilities and to fund child care workforce training. 
  • $105 million (federal and Proposition 56 funds) to provide screenings for adverse experiences and other developmental goals to children.
  • $109 million (General Fund and federal funds) to expand home visitation programs through CalWORKs and the Black Infant Health program.
  • $50 million in one-time General Fund to help launch child savings accounts for post-secondary education, in partnership with local governments and First 5.

Special Education Funding Increase.  The Governor proposes $576 million for school districts serving high percentages of low-income pupils, English learners, and students with disabilities to supplement services for special education students. 

Paying Down School Pensions.  Another proposal would make a one-time $3 billion non-Proposition 98 payment to STRS to help reduce schools’ liabilities and mitigate the costs of statutory rate increases for teacher pensions.  There is no doubt that school districts face a significant challenge regarding pensions, though this proposal would seem to make no distinction between districts that have been more or less responsible in their budget decisions.

Higher Education Increases.  The Governor proposes a $402 million increase for California Community Colleges, including funds for a one-half percent enrollment increase (about 6,000 students) and an additional $40 million to fully subsidize fees for full-time students’ second year of study. 

The California State University would see an 8 percent funding increase, including $300 million in ongoing funding and $247 million in one-time funding for deferred maintenance and new on-campus child care facilities.  The Governor would increase University of California funding by 6.9 percent, including $240 million in ongoing funding and $153 million one-time for deferred maintenance and UC extension degree-completion programs.  These levels would fund enrollment growth of 2 percent (more than 7,000 students) at CSU, make funding ongoing for an additional 1,000 students funded last year at UC, and assume no fee increases for either system.

Student Aid Increases.  In addition to fully funding expected Cal Grant demand, the Governor proposes to supplement Cal Grant awards for students with children.  Cal Grant A awardees (for baccalaureate degrees) would receive an additional award amount of up to $6,000 per year.  Cal Grant B awardees (lower income students for baccalaureate degrees) would see their award increase by over $4,300 more per year, for a total of $6,000 annually.  Cal Grant C awardees (career or technical programs) would receive an additional $2,906, for a total of $4,000 per year. 

Proposition 98 Education.  Proposition 98 funding for K-14 education would grow from $77.9 billion in 2018-19 to $80.7 billion in 2019-20.  Proposition 98 spending per pupil would increase by $435 to exceed $12,000, and per-pupil spending from all sources would exceed $17,000.  The K-12 local control funding formula would grow by $2 billion, reflecting a 3.46 percent cost of living adjustment. 

Immigration Issues.  The Governor’s budget includes several components related to immigration issues:

  • $25 million General Fund for an “immigration rapid response team” to provide services at the border.
  • $75 million General Fund for immigration services such as assisting applicants for naturalization or Deferred Action for Childhood Arrivals.
  • $17 million to fund legal services for “undocumented and immigrant” students, faculty, and staff at California’s public colleges and universities.

Paid Family Leave.  The 2019-20 budget proposes extending the Paid Family Leave program from six weeks to six months, but does not identify a way to pay for it.  The uncertainty of the funding source is concerning, particularly if the Governor eventually proposes an increase in employee contribution rates, which would decrease take-home pay for most Californians.

CalWORKs Grant Increases.  Building off the 2018-19 budget, which increased CalWORKs grants by ten percent, the Governor’s proposal raises grant levels to 50 percent of the federal poverty line—a total grant increase of 25 percent when combined with the 2019-19 budget increases.

Budget May Encourage Local Government Debt.  The budget proposes to eliminate the current 55 percent voter approval requirement for debt issuance by Enhanced Infrastructure Financing Districts, resulting in no voter approval required. The districts facilitate tax increment funds for infrastructure development within their boundaries. These can be important tools for economic development after the dissolution of redevelopment agencies, but eliminating the voter threshold altogether removes a vital “check” on the use of public funds. 

Another Attempt at a New Drinking Water Tax.  The Governor is using a budget proposal from the past Administration to establish new taxes to support a safe drinking water program.  Unfortunately, this program is based upon the framework of SB 623 (Monning) of 2017, which mandates a new water connection tax, fertilizer tax, and milk tax to raise $140 million to $220 million annually.  At this time, the total number of unsafe drinking water systems statewide is unknown, and a tax increase amid the current surplus is unnecessary.

Funding Proposed to Disarm Prohibited Felons.  Since March 2015, Senate Republicans have been calling for the Department of Justice to explain its lack of progress toward eliminating the backlog of felons and other dangerous individuals identified by the Armed Prohibited Persons System (APPS) as illegally possessing firearms.  The budget includes a request for $5.6 million General Fund for APPS workload, though no details have been provided on how the funding would be used.

Bail Reform Law in Holding Pattern.  The budget includes $75 million for pilot projects in several trial courts aimed at building on previous efforts to improve pretrial risk assessment and developing best practices.  SB 10 (Hertzberg, 2018), which ends the state’s money bail system and replaces it with a system of pretrial risk assessment, is on hold, having been referred to the November 3, 2020 ballot for approval by the voters.  The proposed funding would help the courts prepare for implementation of SB 10 should the voters approve it.

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