Highlights and Analysis of the Governor's 2020-2021 May Revision

Wednesday, May 20, 2020

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Executive Summary

Overview.  The May Revision projects a deficit of $54 billion that the Governor proposes to close through a mix of actions, including reserves, federal funds, internal borrowing, tax increases, and program reductions.  The largest single category is a list of $14 billion “trigger cuts” that would be made to programs unless the federal government authorizes additional funds for states and local governments.  The May Revision maintains or revises several proposals for wildfire preparation and mitigation that were included in the Governor’s January proposal.  Overall concerns are that the budget gives little indication that Governor Newsom will roll back costs and mandates imposed on businesses, even as many of those businesses will struggle to reopen or stay open. In fact, the Governor proposes more than $4 billion in new taxes on businesses, and would still spend $22 million to enforce AB 5, continuing to hold out-of-work Californians back from income opportunities. Additionally, several major new expansions of state programs that were enacted in recent years would be maintained, even though those expansions are now shown to be unaffordable. Finally, the May Revision misses opportunities to redirect funds from low priorities like the unworkable High-Speed Rail project.

Deficit Would Reach Tens of Billions of Dollars.  The Governor’s May Revision estimates a General Fund deficit of $54 billion by the end of 2020-21.  This would be the combined result of a revenue decline of $41 billion, higher spending of $7 billion for health and human services programs, and $6 billion in spending to respond to COVID-19.  This deficit is based on tax revenue estimates that are between $2 billion and $13 billion lower than those estimated by the nonpartisan Legislative Analyst’s Office. 

Mix of Actions Proposed to Address Deficit.  The Governor proposes several major categories of actions to address the $54 billion deficit:

  • $14 billion in “trigger cuts” that would be made to existing programs if the federal government does not provide additional funds for states and local governments. These cuts would include a 10 percent reduction to schools’ Local Control Funding Formula and reductions to developmental service provider payment rates.

  • $8.8 billion by drawing down various state reserves, including $7.8 billion from the Rainy Day Fund, $524 million from the Public School Safety Account, and $450 million from the Safety Net Reserve Fund.

  • $8.4 billion by foregoing program expansions that were either proposed in the Governor’s January 2020 proposal, such as $250 million for a Climate Catalyst Fund, or that were authorized in the 2019-20 Budget Act but not yet implemented.

  • $4.4 billion from tax increases, including the suspension of net operating losses for businesses and limiting business tax credits. 

  • $10.4 billion in loans or transfers from state special fund accounts or deferrals.  

  • $8.3 billion in federal funds that have already been authorized, including $5.1 billion in higher federal payments for Medi-Cal and $3.8 billion from the Coronavirus Relief Fund.

Governor Seeks Broad Authority for More COVID-19 Expenditures. The May Revision anticipates spending $8.6 billion in response measures, including $2.4 billion that has already been authorized under emergency spending. However, as part of this amount, the Governor seeks additional broad authority to spend $2.9 billion in unclear ways with only 72 hours’ notice to the Legislature.

Extraordinary Federal Assistance, but Governor Seeks More.  Federal assistance will provide an astonishing $186 billion to the state or directly to individuals and local governments.  The state would direct part of its federal share to assist school districts and local health authorities. Despite this extraordinary level of federal assistance, the Governor is asking for still more bail-out money from Washington, DC, all the while continuing to fund an onslaught of lawsuits against federal authorities.

Two Million More Californians on Medi-Cal, with Provider and Program Cutbacks. The Administration projects that by July 2020 enrollment in Medi-Cal would increase to 14.5 million Californians, 2 million more than originally projected in January. This results in total program costs of $112.1 billion ($23.2 billion General Fund) in 2020-21, a 12.7% increase in costs from 2019-20. To help pay for this increase, the Governor scales back a number of Medi-Cal benefits and program expansions. While the Governor withdraws his proposal to expand Medi-Cal to undocumented seniors to save $87 million in General Fund, he continues the recent expansion to 105,000 undocumented young adults at a General Fund cost of $296 million in 2020-21. In addition, the Governor uses $1.2 billion in Proposition 56 tobacco tax funds for general Medi-Cal spending rather than for increased Medi-Cal provider payments.

Maintains CalWORKs Grant Levels But Cuts Childcare and Employment Services. The May Revision proposes to keep the approximately $800 million in recent CalWORKs grant increases, while at the same time cutting essential services such as child care and employment services that aid participants in becoming independent of state support. The May Revision estimates an increase of 102 percent in CalWORKs enrollment for an average monthly caseload of 724,000 families.

Estimates $43.8 billion in Unemployment Insurance Benefits, a 650% Increase. The May Revision reflexes $43.8 billion in UI benefits for the 2020-21 budget year. The Administration indicates these benefits will be paid through a combination of federal loans, federal grants, and the traditional employer contributions.

Despite Budget Deficit, Administration Maintains AB 5 Enforcement Funding. Despite AB 5 handicapping the flexibility of workers statewide, especially during the COVID-19 crisis, the May Revision proposes to keep the approximately $22 million for AB 5 enforcement as proposed in the January budget.

Closure of Barstow Veterans Home Equates to No New Admissions into All Veterans Homes. Even though this action removes 175 elderly and disabled veterans from their residence in the midst of a pandemic and results in a net General Fund increase of $2 million in 2020-21, Governor Newsom still wants to permanently close the California Veterans Home in the city of Barstow in hopes of savings in future budget years. But any future savings are only realized by halting admissions of new veterans to all veterans homes over the next three years as the transplanted Barstow residents would likely take priority over new applicants.

Proposes 10 Percent Trigger Cut to State Worker Wages. Beginning in July 2020, the May Revision proposes a 10 percent across the board pay cut for state workers, resulting in $2.8 billion in budget savings ($1.4 billion General Fund). While cutting some employees pay, the May Revision also proposes $604 million ongoing ($261 million General Fund) in salary increases for certain state employees.

Proposes $364 million in Trigger Cuts to Developmental Services. Despite a rate study released last year indicating the developmental services provider system was underfunded by $1 billion, the May Revision makes approximately $364 million in trigger cuts, largely related to provider rates and utilization, absent federal funding, and removes approximately $11 million in provider rate adjustments regardless of the receipt of federal funds.

Proposition 98 Education Spending.  The May Revision proposes to fund Proposition 98 at the constitutionally required minimum of $70.5 billion.  Changes in the minimum guarantee are driven largely by General Fund revenue, which declined significantly in 2019-20 and estimated into 2020-21.  The May Revision update reflects a decrease of $14 billion from the Governor’s Budget and a $4 billion or 5 percent decline in the current year. The May Revision also proposes to withdraw all of the funding in the Public School System Stabilization Account, which was projected to be $524 million in 2019-20.

Learning Loss Mitigation.  The May Revision proposes to use $4.4 billion in federal funding to address learning loss related to COVID-19 school closures.  This amount includes $4 billion of the state’s $9.5 billion allocation from the Coronavirus Relief Fund and the states entire allocation, $355 million, from the Governor’s Emergency Education Relief Fund.  Money could be used for a variety of activities including learning supports, extending the instructional school year, providing additional academic services for pupils and providing integrated student supports to address other barriers to learning.

Department of Early Childhood Development.  The May Revision adjusts the Governor’s proposal to establish the Department of Early Childhood Development under the Health and Human Services Agency.  Specifically, the Administration proposes to transfer existing early learning and child care programs to the Department of Social Services, which aligns all child care programs within one department in state government.  $2 million General Fund in 2020-21 is maintained to support this transition.

Additional Special Education Funding.  The May Revision maintains the Governor’s Budget proposed increase to special education base rates, updated to $645 per pupil at May Revision.  This figure reflects the suspension of the 2.31 percent cost-of-living adjustment proposed at the Governor’s Budget and will be apportioned on a three-year rolling average of local educational agency average daily attendance.

School Pension Relief by Repurposing Previous Payments.  The May Revision includes $2.3 billion to reduce school and community college employer pension contribution rates in 2020-21 and 2021-22.  Funding for this proposal would come from repurposing the $2.3 billion in supplemental payments provided in the 2019-20 budget to pay down school and community college unfunded pension liabilities.  The repurposed funds are expected to reduce the district contribution rates for CalSTRS and CalPERS by roughly 2.2 percentage points in each 2020-21 and 2021-22.

Eliminates $565 million in Funding for Housing. The May Revision would reduce funding for housing programs across the state, taking back $565 million from the 2019 Budget Act for various mixed-income and infill infrastructure projects critical to support the state’s long-term plan to increase the production of housing units.

New Taxes Could Hinder Employment and Extend Crisis. The Governor’s May Revision includes several proposals that increase state General Fund revenue by $4.4 billion in 2020-21. The proposals include temporarily suspending net operating losses for medium and large companies and temporarily limiting to $5 million the amount of tax credits that can be used.  The suspension and limitation would be in effect for the next three years, through 2023-24. The proposals would generate $3.3 billion in 2021-22, and $1.5 billion in 2022-23.

Continues to Expand Authority for Department of Business Oversight.  The May Revision continues to expand the Department of Business Oversight’s enforcement and licensing activities to financial service entities not currently regulated by the state (such as debt collectors), proposing to fund the expansion with new fees on businesses.

Modest Support for Businesses Ineligible for Federal Relief. The May Revision includes $50 million to support the Small Business Loan Guarantee Program operated by the Small Business Finance Center at the California Infrastructure and Economic Development Bank (I-Bank). This would expand on the Governor’s earlier emergency action to provide $50 million to the I-Bank.

Modest Small Business Tax Relief.  The May Revision continues to propose a first-year exemption from the $800 minimum tax paid by limited liability companies, limited partnerships, and limited liability partnerships, consistent with corporations in California. These changes would reduce state revenues by $100 million General Fund annually, and would be subject to annual authorization. 

Sales Tax Exemptions Extended.  The May Revision proposes to extend, for two additional years, the sales tax exemptions for diapers and menstrual products that were included in the 2019 Budget Act.  These exemptions are projected to reduce revenues by approximately $35 million annually.  Local sales taxes would also decrease, bringing total revenue losses to roughly $75 million annually. 

Emergency Preparedness and Response Funding.  The May Revision retains many of the emergency preparedness and response proposals included in the Governor’s January budget, including:

  • $50 million General Fund for community power resiliency. 

  • $17.3 million General Fund loan for the Earthquake Early Warning System.

  • $38 million General Fund (an increase of $21.5 million over the January budget) for ongoing disaster recovery efforts covered by the California Disaster Assistance Act.

  • $9.2 million General Fund and $200,000 federal funds to support increased disaster preparedness and response activities at the Office of Emergency Services (OES).

  • $503,000 General Fund to transfer the duties of the Seismic Safety Commission to OES.

  • $2 million to create the Wildfire Forecast and Threat Intelligence Integration Center.

  • $11 million General Fund for a multi-agency cybersecurity effort to harden the state’s critical networks.

Funding to Increase Surge Capacity During Wildfire Season. The May Revision includes $85.6 million in General Fund spending this year and $135.1 million ongoing to the Department of Forestry and Fire Protection (CalFire) for a staffing relief package. The proposal is a shift away from the previous spending plan presented in January to support a new training center, training equipment, and administrative costs. Instead, the May Revision proposes to use this funding for additional seasonal staff at the peak of the fire season, while also supporting a plan to phase in permanent, year-round positions. The modification is a welcome change from the January budget given the effects of COVID-19 on state revenues, and the fact that this fire season is forecasted to begin earlier than past years.

Mitigation of Utility-Caused Wildfires.  With the continuation of several Governor’s January proposals and a small increase proposed in the May Revision, the California Public Utilities Commission is slated to receive 106 new positions and $30 million to address issues related to utility-caused wildfires.

Scales Back Expansion of Wildfire Programs from Previous Proposals. The Revision includes $2 million in funding for a Wildfire Forecast and Threat Intelligence Integration Center under SB 209 (Dodd, 2019). The above financing is a reduction from $6.8 million General Fund across various departments. The May Revision also proposes to withdraw $101.8 million ($26.8 million General Fund) for Cal OES and CalFire to implement the home hardening pilot grant program authorized by AB 38 (Wood, 2019). While AB 38 received mixed support from Senate Republicans due to new disclosure requirements and how funding would be awarded, the Revision maintains $8.3 million from the Greenhouse Gas Reduction Fund (GGRF) for CalFire to meet defensible space-related and other requirements under AB 38.

Continues Wasteful Spending on Land Acquisitions. While the May Revision has scaled back the initial proposal to spend $20 million on a New State Park, it still includes $5 million from the General Fund to secure a new, undisclosed property. The Revision also includes $4.6 million from various bond funds to acquire inholding properties that expand existing state parks. Given the state’s deferred maintenance problems and the impacts of COVID-19 on all department budgets, the decision for the Administration to include these tone-deaf purchases is an example of wasteful spending. 

Judiciary Trigger Reduction.  The May Revision includes what likely amounts to a poorly thought out gamble on the state receiving federal coronavirus bailout funds.  It includes a reduction of more than $216 million in baseline reductions to the courts that triggers off only if the state receives its share of roughly $500 billion in federal bailout money.  The Judicial Council postponed or otherwise delayed tens of thousands of civil and criminal cases to curb the spread of COVID-19.  Although there is also a proposal for $50 million for the courts to work through the resulting backlog, the net of baseline reductions and the $50 million augmentation would likely still leave the courts lacking sufficient resources to provide the current level of service and work through the backlog.  Baseline reductions to court operations at this moment in time could be catastrophic to the state’s justice system.

Doubling Down on Prison Closure.  The May Revision maintains the Governor’s January concept of closing a state prison by proposing the closure of one facility in 2021-22.  In addition, the Governor proposes to close a second facility in 2022-23.  To accomplish this, he assumes the recent downward population trend continues, and he proposes to streamline the reception center process to get inmates into credit-earning programs earlier and to further expand sentence credits.  Instead of looking for more ways to let criminals out of prison, the Governor should look for ways to support victims of crime and prevent additional victimization.

Counties Take Remainder of Juvenile Justice Burden.  The May Revision scraps the Governor’s signature proposal to shift the Division of Juvenile Justice (DJJ) to a new department in the Health and Human Services Agency, and instead shifts responsibility for all remaining juvenile commitments to the counties.  DJJ houses the highest-risk juvenile offenders.  This policy would be an especially hard hit to small- and medium-sized counties who lack the capacity and programs to serve this offender population.

Read complete analysis (pdf)