Highlights and Analysis of the Governor's Budget

Monday, February 1, 2016

Read complete "Highlights and Analysis" (pdf)

Executive Summary

For some people in our state today, life is truly California golden. High-tech industries and places like Silicon Valley are booming. However, this success has not been realized in all communities. Senate Republicans have identified key fiscal priorities that are essential to creating opportunity beyond just high-performing coastal areas. These issues, as summarized here, span a range of challenges faced by everyday Californians. Senate Republicans will promote these priorities throughout the process of evaluating and voting on the state budget.

Budget Overview. The Governor’s budget plan includes some major features that Senate Republicans can applaud, such as building up the state’s Rainy Day Fund, bringing Proposition 98 education spending to an all-time high, and making some modest investments in career preparation and public safety. The Governor has also wisely cautioned against spending the short-term revenue surge on long-term commitments, and most of his new spending proposals are appropriately one-time in nature. However, the budget plan also falls short in some key priority areas, such as providing adequately for those with developmental disabilities and making needed investments in transportation infrastructure without raising taxes.

Key elements of the budget plan include the following:

Record Revenues. State tax revenues continue their strong recent growth and would reach $120.4 billion General Fund in 2015-16, growing to an all-time General Fund high of $124.4 billion in 2016-17. These amounts include $5.9 billion in unanticipated new General Fund revenue compared to expectations when the Budget Act passed last June. The budget also forecasts that revenues will grow every year through 2019-20, as shown in the chart below, demonstrating that the state does not need to extend or increase taxes to meet its priorities. Appropriately, the Governor’s budget does not propose an extension of Proposition 30 temporary taxes. Allowing these taxes to expire as promised is consistent with Republicans’ priority of Respecting the Voters Through Responsible Government.

Record Spending. General Fund spending increases to $116.1 billion in 2015-16 and grows further to a record $122.6 billion in 2016-17. About $4 billion of the proposed spending increase is for onetime expenses, including $500 million for deferred maintenance and $1.5 billion for pay-as-you-go infrastructure projects on state buildings in Sacramento.

Strong Rainy Day Reserve. The state’s Rainy Day Fund (Proposition 2 of 2014) would grow to reach $8 billion by the end of 2016-17, and would include an extra deposit of $2 billion that would boost the reserve to 6.5 percent of General Fund revenue. Without this extra deposit, the Rainy Day Fund balance would be only 4.8 percent of revenue. In addition, the budget would also increase the non-Proposition 2 reserve to $2.2 billion, creating an overall reserve of over $10 billion. Building the state’s savings account to a healthy level beyond just the minimum requirement is consistent with Senate Republicans’ priority of Respecting the Voters Through Responsible Government.

Debts and Liabilities. The budget pays down $5.4 billion on outstanding infrastructure bonds, $1.6 billion toward Proposition 2-eligible liabilities, and $1.4 billion for education mandates. The Governor’s approach would pay off only a small portion of state liabilities, which total more than $320 billion. While California’s credit rating has improved in the past year (according to Standard & Poor’s), 47 other states have higher credit ratings. Consistent with the Senate Republican priority to Respect the Voters Through Responsible Government, the state could pay down additional debts and avoid future costs to help improve the state’s credit rating.

Higher Education. New proposals for Community Colleges include $200 million for “Strong Workforce” instruction and $30 million for basic skills remediation. For the University of California and California State University, the budget continues the previous plan for specific budget increases by providing 4 percent General Fund augmentations of $125 million each and one-time deferred maintenance funding of $35 million each. Tuition for both systems would remain flat. These are consistent with Senate Republicans’ priority of Building New Career Paths for Today’s Economy.

K-12 Education. Proposition 98 funding for K-12 education would grow by $4.7 billion over three years, and K-12 per-pupil spending would reach $10,600, an increase of 51 percent over the recent low in 2011-12. The Governor also proposes to repackage existing preschool and other funds totaling $1.7 billion into an early education grant program that could improve local control over early education.

Services for the Disabled. The budget takes a small step toward improving care for people with developmental disabilities (such as cerebral palsy), but could go much further. The $50 million General Fund proposed for community rate increases falls short of the need created by years of rate freezes and reductions. The budget could do more to Keep Our Promise to Those with the Greatest Needs.

Medi-Cal. The Medi-Cal program would grow to reach $19.1 billion General Fund in 2016-17 with 13.5 million Californians enrolled. Costs of coverage expansions under federal health reform continue to rise rapidly and now include an initial state cost of $740 million General Fund for the previously enacted “optional expansion” of coverage to adults. Unfortunately, the budget does not propose to restore rate cuts to doctors and other fee-for-service care providers.

Managed Care Organization (MCO) Proposal. The budget assumes that a revised version of the MCO funding package will be enacted, but most of the MCO revenues and expenditures are not included in the General Fund budget. This demonstrates that the MCO proposal is not necessary to balance the budget. Only $236 million in MCO proceeds are used for General Fund savings, in order to continue funding a prior year restoration to the In-Home Supportive Services program.

Human Services. The budget includes nearly a 3 percent cost-of-living increase to SSI/SSP grants, which amounts to $17 more per month for individuals and $31 per month for couples, at an annual cost of $80 million General Fund. This increase would be consistent with Senate Republicans’ priority of Keeping Our Promises to Those with the Greatest Needs.

Public Safety. The budget proposes some modest investments in public safety such as $250 million General Fund for local jail construction, which would help mitigate overcrowding resulting from the 2011 Public Safety Realignment. The judiciary would also receive $30 million in grants to promote innovation and $60 million for deferred maintenance. While these promote the priority of Keeping Our Communities Safe, more could be done in this area.

State Infrastructure. While California’s infrastructure needs are vast, the budget proposes to spend $1.5 billion one-time on pay-as-you-go renovations at certain state office buildings in Sacramento. Senate Republicans believe there are greater infrastructure needs than projects that would benefit primarily one city, such as by making a down payment toward our priority of getting Back to Basics: Great Roads and Reliable Water. Deferred maintenance of $500 million in total is also proposed across various areas, including community colleges.

Transportation Taxes. Unfortunately, the budget re-introduces the Governor’s 2015 plan for tax increases on motorists to fund transportation infrastructure. The plan would include $3 billion generated by increased gas and diesel taxes and a road user fee, while continuing to redirect existing transportation revenues to fund the General Fund’s debt service obligation. A superior approach is the 2015 Senate Republican proposal, which would provide $2.9 billion annually, plus $2.4 billion one-time, for California’s roads and highways without increasing taxes.

Cap and Trade. The budget continues the Governor’s Cap and Trade program by proposing to spend $3.1 billion on current programs such as high-speed rail, housing, and transit as well as new programs meant to reduce petroleum use by 50 percent. Much of this plan is based on the Governor’s 2015 executive order that established new greenhouse gas emission goals for the state of 40 percent below 1990 levels by 2030.

Read complete "Highlights and Analysis" (pdf)