Highlights and Analysis of the Governor's 2020-21 Budget Proposal

Senate Republican Fiscal Office
Wednesday, January 15, 2020

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Executive Summary

Overview.  The Governor’s second budget begins with a one-time surplus of $5.6 billion for 2020-21, largely as the result of continued revenue growth, but the following budget years are projected to barely break even.  The Governor’s budget would spend roughly $4 billion of the surplus on a long list of one‑time or ongoing proposals—the Legislative Analyst’s Office (LAO) counted 140 distinct new proposals.  Larger proposals include a new $750 million homelessness program and a Medi-Cal eligibility expansion that would grow over time to cost $320 million annually.  Special education and other K-12 programs would see significant increases as well, largely within the Proposition 98 spending guarantee. Some vague proposals, such as a state generic drug label and a health care price-setting program, likely would have major fiscal implications, but the Administration has provided few details and no budget estimates. Despite its long list of new spending ideas, the Governor’s budget misses opportunities to address longstanding program challenges, such as poor access to services for the developmentally disabled, and to make further reductions in the state’s major pension and retiree liabilities.  With both the Governor and the nonpartisan LAO cautioning about a possible recession, the time to move ahead in these areas may be drawing short.

Revenues Continue to Rise.  Compared to the budget signed in June 2019, General Fund tax revenues are higher by $2.6 billion in the current year and would rise by another $5.1 billion to reach nearly $154 billion in 2020-21. This would set a new record high that is 5.2 percent above the 2019 Budget Act.  These revenue increases (which do not include the gas taxes authorized in 2017) indicate that the state did not need to raise taxes further on Californians to take care of our priorities. 

Expenditures Also Increase.  General Fund spending would reach nearly $150 billion in the current year, an increase of $2.0 billion from the 2019 Budget Act, and would rise again to reach $153 billion in 2020-21.  Spending from all state funds would reach $222 billion in 2020-21, compared to $215 billion in the 2019 Budget Act.  The Governor asserts that 79 percent of the new spending is for one-time purposes, though that claim has not yet been evaluated. Major new expenditure proposals include homelessness efforts ($750 million), housing tax credits ($500 million), special education ($250 million), and emergency response ($120 million).

Combined Reserves Would Reach $21 Billion.  The state’s Rainy Day Fund (Proposition 2 of 2014) would grow to $18 billion by the end of 2020-21.  Three other reserve accounts would combine to create overall reserves of $21 billion, or 13.7 percent of revenues.

Longstanding Problems Still Not Fixed.  Despite starting another year with a significant surplus, the Governor’s budget fails to propose meaningful solutions to longstanding challenges such as poor access to services for the developmentally disabled and for people already enrolled in Medi-Cal. 

Homelessness. The Governor’s budget includes over $1 billion in funding and new policy changes directed at the state’s homelessness crisis. The largest proposal would spend $750 million to create a new homelessness fund within the Department of Social Services, intended to be distributed to non-profits for a variety of possible uses. 

Housing. The Governor’s budget proposes $500 million General Fund within the Tax Credit Allocation Committee for the state housing tax credit program, which works in conjunction with two federal tax credit programs to reduce a project’s funding gap. The budget also provides more than $1.3 billion from previously authorized bond programs for various housing programs, including infill infrastructure grants, the Multifamily Housing program, and housing purchase assistance for veterans. The budget misses an opportunity, however, to seek broader reforms.

Independent Contractor Restriction (AB 5) Enforcement. The budget proposes a total of $21.7 million to implement and enforce last year’s Assembly Bill 5 (Gonzalez), which imposes a three‑prong test on employers when determining whether an employee can be classified as an independent contractor. The funds would be spent investigating claims, training employers and state staff, and prosecuting cases. It is unfortunate that the Governor proposes funds to enforce this ill-advised law rather than seeking much-needed reforms.

Emergency Preparedness and Response Funding.  The budget proposes to provide CalFire $120 million General Fund in 2020-21 ($150 million ongoing) for additional resources during peak fire season. The budget would also allocate $9 million ($8.8 million General Fund) and 22 positions across multiple departments to begin implementation of the Wildfire Forecast Center to enhance the state’s emergency response and recovery capabilities.

The proposed budget also includes $110 million (General Fund, Greenhouse Gas Reduction Fund, and federal funds) to implement the Wildfire Mitigation Financial Assistance Program, which would encourage hardening of homes, businesses, and public buildings and also facilitate vegetation management and defensible space activities.

Community Resilience and Public Safety Power Shutoffs (PSPSs).  The Governor’s budget proposes $50 million in new one-time spending to expand on last year’s investment in communities that are vulnerable to wildfires and thus may be subject to PSPSs.  The funds would support a matching grant program to harden vulnerable local resources, including schools, county election offices, and food storage reserves.  This funding would provide an important stopgap, but the long-term solution must improve forest management practices and ensure the utility companies maintain their infrastructure responsibly.

Medi-Cal Coverage for Undocumented Seniors. The Governor’s 2020-21 budget includes $64 million General Fund to expand full-scope Medi-Cal coverage to an estimated 27,000 income-eligible seniors (age 65 and up) who are living in the state illegally. Full implementation costs are expected to grow to $320 million General Fund by 2022-23. Medi-Cal currently covers about 250,000 low-income undocumented children under age 18 (at a cost of roughly $300 million annually) and is in the process of covering an estimated 105,000 undocumented young adults ages 19-25 (at an estimated cost of $232 million annually).

Price Controls and State-Financed Manufacturing of Prescription Drugs. The Governor’s budget includes two financially and constitutionally questionable proposals that attempt to lower prescription drug prices. First, the Governor proposes to contract and finance the manufacturing of certain generic drugs for use by the state and other participants. Second, the administration proposes to set the market price for the drugs purchased by Medi-Cal, CalPERS, Covered California, and potentially other purchasers. The Governor’s budget provides no further details on these proposals and does not score any costs or savings at this time.

New Tax on Vaping, and a Ban on Flavored Nicotine. The Governor proposes a tax of $2 per 40 milligrams of nicotine on vaping products beginning January 1, 2021. This tax will be on top of all existing sales and excise taxes on E-cigarettes and is estimated to raise $32 million in 2020-21. It would be used for youth usage prevention, enforcement, and health care workforce programs. In addition, the Governor wants to ban sales of all flavored nicotine products by January 1, 2021, which would decrease sales and excise tax revenue by an unknown amount.

Rates for Developmental Services. Despite a study released last year indicating that the developmental services system was underfunded by approximately $1.8 billion, the Governor’s Budget does not significantly address rate reform and only increases rates for Early Start services for children aged 0-3. The system suffers from grossly inadequate rates for providers and a confusing and often inequitable method of determining rates. The budget largely ignores these rate issues. The budget does include $78 million to create a Performance Incentive Program, intended to encourage quality, reduce disparities, and improve data collection.  

Proposition 98 Education.  Proposition 98 funding for K-14 education would grow from $81 billion in 2019-20 to $84 billion in 2020-21.  Proposition 98 spending per pupil would increase by 5 percent to approximately $12,600, and per-pupil spending from all sources increases by 3 percent to $18,000.  Additional Proposition 98 augmentations include a $1.2 billion base increase for the Local Control Funding Formula (LCFF) and a $110 million net deposit into the public school reserve account.

Revision to Special Education.  The Governor’s budget proposes a three-phase, multi-year effort to improve special education finance, services, and student outcomes.  For the 2020-21 fiscal year, the budget proposes a new base formula funded with the initial $645 million provided in the 2019 Budget Act.  In addition to the proposed base rate formula change, the Budget proposes and additional $250 million ongoing Proposition 98 General Fund based on the number of children ages 3 to 5 with exceptional needs served.

Educator Recruitment and Professional Development.  The Governor proposes $900 million in Proposition 98 General Fund to expand and increase K-12 teacher and administrator preparedness through workforce development, residency, and credentialing programs.

Community Schools.  The Governor proposes $300 million in one-time Proposition 98 General Fund to establish Community School grants.  These grants will allow local education agencies to develop partnerships with their local community providers and implement programs that are aligned with the community school model.  These programs include wrap-around services, intensive health, mental health, and social services as well as early screening and intervention.

Opportunity Grants.  The Governor proposes $300 million one-time Proposition 98 General Fund for Opportunity Grants.  These grants are intended to assist the state’s lowest-performing schools and districts in addressing root causes for persistent low performance.

School Nutrition.  The Governor proposes $60 million Proposition 98 General Fund to increase state funding for school nutrition.  Additionally, the Budget proposes $10 million Proposition 98 General Fund to provide training for school food service workers, and another $10 million in non-Proposition 98 General Fund for the California Department of Food and Agriculture to establish a Farm to School Grant Program.

Full-Day Preschool Slots. The Governor’s budget includes $32 million non-Proposition 98 General Fund to provide an increase of 10,000 full-day preschool slots for non-local educational agencies starting April 1, 2021. The budget also includes $96 million non-Proposition 98 General Fund to annualize the 10,000 full-day State Preschool slots for non-local educational agencies beginning April 1, 2020.

Taxpayer Funds for Union Organizing.  The budget also includes $8.5 million General Fund for costs to implement child care organizing through new staff efforts at several state departments.   

University Funding Increases.  The California State University (CSU) would see an increase of approximately $247 million in ongoing General Fund, and $6 million in one-time funding.  Ongoing funding includes $199 million (5 percent) increase in base resources.  The CSU would have some flexibility to make spending decisions but would be expected to pay operations costs, expand student access, and continue support for the Graduation Initiative of 2025.

The Governor’s budget increases ongoing General Fund for the University of California (UC) by $219 million and provides a total of $56 million for one-time UC initiatives. Ongoing funding includes $169 million (5 percent) increase in base resources, and similar to the CSU, the Governor does not tie this increase to a specific purpose.  However, the Administration expects the UC to continue focusing on college affordability, improving degree completion, and narrowing achievement gaps. Additionally, though it sets no specific UC enrollment target, the Administration expects UC to further increase resident undergraduate enrollment in 2020-21 and 2021-22.

The remaining ongoing UC increases are for various programs, including UC Riverside’s School of Medicine and UC San Francisco’s Fresno branch campus. The largest one-time proposal would develop a UC Davis-administered grant program for animal shelters at a cost of $50 million.

Community College Increases.  The Governor proposes an increase of $296 million Proposition 98 General Fund for ongoing spending for the California Community Colleges, including funds for enrollment growth, cost of living, and apprenticeship programs, among other programs.

Climate-Related Bond Proposed.  The Administration is proposing a $4.75 billion Climate Resilience Bond, which, if approved by voters, would designate 80 percent of the funds to address near-term risks (floods, drought, and wildfires), while the remaining funds would be used to address long-term climate risks (sea level rise and extreme heat). 

Small Business Tax Relief.  The budget proposes 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.  Small businesses are struggling in the state’s high cost and over-regulated environment, and this proposal is a step in the right direction in mitigating the high tax bill some small businesses face.

Fine and Fee Revenue Shortfalls Jeopardize Core Public Safety Programs.  The Governor’s budget would allocate $145 million across several departments to backfill decreasing revenues from fines and fees imposed through the criminal justice system.  Fines were originally intended to deter bad behavior, but the system ultimately evolved into a cash cow for state and local governments.  The time has come to update the system and secure the fiscal stability of the core public safety programs it funds.

Trial Court Funding Increase.  The budget includes $178 million in new funding for the trial courts, including $97 million to offset inflationary cost increases, $35 million to backfill declining fine and fee revenues received by the courts (see preceding paragraph), and $46 million to bring underfunded courts closer to parity with fiscally healthier courts.  These augmentations build on recent efforts to fully fund the courts and improve access to justice.  Notably, however, the Governor’s budget fails to include funding for new judgeships.  According to a November 2019 Needs Assessment, another 173 trial court judgeships are needed in 19 courts throughout the state to address existing caseloads.

Probation Reform Proposal Could Curb Recidivism, but Includes Risky Provisions.  The Governor’s budget proposes $210 million over the next four years to help local probation departments reduce their banked caseloads and provide programs and services to more misdemeanants.  This approach could interrupt the cycle of crime for some low-level offenders before their criminal behavior escalates, thus reducing recidivism.  However, the proposal would also decrease the maximum length of a probation term and includes a vague provision to establish “earned discharge” for probationers.  Although few details have been provided to date, this sounds very similar to the “good-time credit” provisions included in the 2011 Public Safety Realignment.  If this is indeed the model for earned discharge, then it would undermine judicial discretion and the collaborative process upon which probation depends.

Cannabis Regulatory and Tax Reform.  The Governor proposes to create a single Department of Cannabis Control to perform licensing and enforcement over the cannabis industry.  This will remove these functions from the Department of Food and Agriculture, Department of Public Health, and the Department of Consumer Affairs. The Governor also proposes to shift the collection of the cannabis excise tax from distributors to retailers, resulting in a revenue loss of between $30 million to $70 million in 2020-21, but increasing revenues in subsequent years by approximately $25 million. While the proposed shift would lead to a loss of revenue initially, it would streamline the methodology and tax collection process, improving administrative oversight by the California Department of Tax And Fee Administration and simply the process for the cannabis industry.

Expands Authority for Department of Business Oversight.  The budget proposes to change the Department of Business Oversight’s name to the Department of Financial Protection and Innovation, and would expand its regulatory authority to include, among other activities, licensing and examining new industries that may not be regulated and imposing additional fees.

Cap and Trade Expenditure Plan.  The Governor’s budget proposes a $965 million Cap and Trade Expenditure Plan. The plan includes $208 million for CalFire to implement forest health projects, fire protection enhancements, and 2019 fire safety legislation. Additional spending includes continued support to several existing ongoing programs such as Healthy Soils and Methane Reduction.

Transportation Infrastructure and Automatic Gas Tax Increases.  Although transit ridership continues to decrease, the Governor proposes spending $5 billion on public transit and rail infrastructure and $1.1 billion on active transportation projects over the next five years.  Gas taxes and vehicle fees, which begin automatically adjusting for inflation on July 1, 2020, would fund these projects.  These annual automatic tax and fee increases are estimated to add $589 million in costs to motorists in 2020‑21, raising Californians’ already-high cost of living even further.

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