Highlights and Analysis of the Governor's May Revision

Wednesday, May 16, 2018

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Executive Summary

Overview: Budget Reserves and Infrastructure Are High Priorities for Surplus.  The May Revision projects that tax revenues will rise significantly, increasing the General Fund surplus to over $10 billion.  Overall, the Governor continues to propose a cautious approach by building budget reserves to a record-high level and focusing most new spending on one-time proposals.  These spending items include $1.9 billion for various infrastructure projects as well as $359 million to help address homelessness and $312 million for mental health.  Senate Republicans applaud the Governor’s focus on building reserves and addressing legitimate one-time needs such as infrastructure. These are priorities that Senate Republicans have long supported, although some of the infrastructure proposals could be better prioritized.  Despite the current surplus, though, continued “baseline” spending growth is projected to outpace revenues over the next several years, giving credence to the Governor’s warning that the state is already “overextended” even before considering a possible recession.   

Revenues Continue Rapid Rise.  General Fund tax revenues would set a new record high of $137.9 billion in 2018-19, which is $10.2 billion (8 percent) above the enacted 2017-18 budget.  Compared to the Governor’s January budget estimates, tax revenues are projected to be higher by $3.5 billion in the current year and by $3.2 billion in 2018‑19.  Part of this sharp increase is attributable to the effects of federal tax reform. The record revenues, which exclude gas taxes, indicate that the state did not need to raise taxes further to take care of issues that are a priority for Californians. 

Budget Spending Tops $300 Billion.  State spending would reach $199 billion from the General Fund and other state funds in 2018-19.  Federal funds would add another $107 billion in spending, which would bring the combined total to roughly $306 billion, the first time the budget would exceed $300 billion.  Spending is expected to grow by 20 percent through 2020-21, faster than revenues, due to continued increases in baseline spending. 

Surpluses Now, Deficits to Follow.  The nonpartisan Legislative Analyst’s Office estimates the surplus to be more than $10 billion, compared with the Governor’s estimates of nearly $9 billion. (Note that the previous indication of a $13 billion surplus may have referred to revenue growth prior to removing mandatory spending adjustments.)  However, despite the current surplus, the rapid growth in expenditures would lead to a projected operating deficit of more than $1 billion by 2021-22.  Thus, the Governor was prudent to note in his press conference that the state is already “overextended,” considering the potential for recession and the state’s existing spending path.

Rainy Day Fund Would Reach Constitutional Goal and Record High.  The state’s Rainy Day Fund (Proposition 2 of 2014) would grow to $13.8 billion by the end of 2018-19, a balance that is 10 percent of General Fund revenues. This includes a $2.6 billion supplemental payment (in addition to the $1.7 billion required amount) that the Governor proposes to reach the constitutional maximum.  Senate Republicans fought to create the Rainy Day Fund for years and applaud the Governor’s proposal to fully fund it.

The Governor’s budget also includes a discretionary reserve of $3.2 billion, which would bring total reserves to $17.0 billion when combined with the Rainy Day Fund.  At 12.3 percent of tax revenues, this combined reserve would be a record high.

Concerns Over Governor’s Spending Limit Estimate.  The LAO recently raised new concerns in a report that the Department of Finance’s January 2018 calculation of the so-called Gann spending limit used improper methods.  Finance estimates that the state has roughly $12 billion in “spending room,” but the LAO believes that the spending room should be only about $5.6 billion. With stronger revenue reflected in the May Revision, the room under the cap actually could be smaller than this LAO estimate. Senate Republicans will continue to review this critical issue as budget deliberations continue.

Addressing Infrastructure Needs.  Pointing out that the state has a $20 billion backlog in “deferred maintenance” projects, the Governor proposes $1.9 billion in one-time expenditures across various program areas.  In addition to items described elsewhere in this summary, these proposals include:

  • $100 million each for the University of California and the California State University
  • $174 million for state prisons
  • $100 million for courts

Flood Control Infrastructure Investments.  The May Revision includes $295 million General Fund for urban flood control projects, levees, and operations and maintenance.  These proposals appear to include much-needed projects that Senate Republicans have advocated repeatedly in recent years, such as $100 million for levee improvements.

Voters Asked to Approve the No Place Like Home Program.  The May Revision proposes to place the “No Place Like Home” program before the voters in the November 2018 general election. Legislation enacted in 2016 authorized this program, a $2 billion bond for mentally ill housing to be funded with existing mental health dollars. However, the program is currently blocked due to ongoing litigation.  The Governor’s proposal would give the voters of California the opportunity to approve No Place Like Home directly and avoid further court delays.

Combatting Homelessness.  With many communities facing a homelessness crisis, the May Revision proposes $359 million for a number of actions to help local governments combat homelessness. The funding is intended to provide short-term assistance until a November 2018 housing bond measure may be approved, and revenues from the recently enacted real estate transaction taxes are distributed statewide.

Investment in Mental Health.  The May Revision provides $312 million in one-time General Fund spending on reimbursements to the counties for early interventions for emotionally disturbed teens, psychiatric medical education programs in underserved and rural areas, and county mental health program oversight. 

State Offices Given Questionable Priority.  The May Revision proposes to use $630 million in one‑time General Fund rather than borrowing to replace or rehabilitate state facilities. The funding will provide for the completion of several office building projects in the Sacramento area over the next few years.  While using one-time General Fund resources for infrastructure needs is a responsible approach, Sacramento office buildings may not be the highest priority given the state’s overall challenges, including needs to address water storage and the lack of affordable housing.

Forest Health Funding.  The May Revision adds $96 million from non-General Fund sources to support recommendations of the Forest Carbon Plan, including prescribed fire and fuel reduction, forest health projects, watershed grants, and programs to encourage new markets for wood products. While this is a good first step, considering the threat of additional catastrophic wildfires and the current General Fund surplus, Senate Republicans believe a much larger investment in forest health is needed.

Expansion for State Earned Income Tax Credit Program.  The May Revision proposes to expand the Earned Income Tax Credit to workers between the ages of 18 and 25 and those above 64. In addition, the credit’s income limits are adjusted to reflect the minimum wage increase to $12 per hour in 2019.  With the proposed expansion, the amount of tax credits provided to low-income working families is expected to grow from $200 million in 2016 to $400 million in 2018.

Disaster-Related Property Tax Funds for Local Governments.  Following multiple recent natural disasters, the May Revision includes $33 million General Fund to backfill the property tax losses that cities, counties, and special districts will incur due to the recent wildfires and mudslides.  Of this amount, $21.8 million is for Northern California jurisdictions and $11 million is for Southern California jurisdictions.

Proposition 98 Education.  Proposition 98 funding for K-14 education would grow to $78.4 billion in 2018-19, up from $74.5 billion in the 2017 Budget Act and by roughly $100 million from January.  The K-12 local control funding formula launched in 2013-14 would reach its targets for the first time, growing by almost $3.2 billion, up from $2.9 billion in January. 

The Governor’s January proposal to provide one-time locally-flexible K-12 funding, which would reduce outstanding education mandate claims for schools, would grow from about $1.8 billion in January to over $2 billion.  The January proposal to support ongoing K-12 career technical education as part of the state’s Strong Workforce effort continues at $200 million.

Higher Education.  The May Revision maintains the Governor’s January proposals to increase ongoing General Fund support for the University of California and California State University by $92 million each (roughly 3 percent each).  The systems would now also receive an additional $100 million each in one-time funding for deferred maintenance.  Tuition for both is expected to remain flat, but if either were to increase tuition, its General fund support would be reduced by an amount sufficient to offset any resulting growth in state financial aid costs.  Funding for Cal Grants would rise by $58 million to cover expected growth in demand.  Middle-class scholarships would continue to be fully funded.

Transportation Dollars for Bureaucracy.   The May Revision includes an increase of $206 million for architectural and engineering workload associated with new transportation projects funded by SB 1 gas and car taxes.  This will significantly increase a program the LAO previously determined is significantly overstaffed, and likely remains overstaffed today, rendering some or all of this increase unnecessary.  The May Revision increase equates to nearly 900 state and contractor positions.

Public Safety Improvements.  The May Revision dedicates significant resources to improving the state’s prison system, including $153 million one-time General Fund for roof repairs and mold remediation at prisons that sustained damage during the wet winter of 2017 (up from $139 million in January) and $106 million General Fund annually for three years to treat all inmates with Hepatitis C.  The Governor’s updated budget proposal also includes just over $23 million General Fund to backfill decreasing revenues from fines and fees on criminal convictions that fund the state’s forensic laboratories and peace officer training programs.

No Change to Cannabis Revenues.  The May Revision includes an increase of $133 million for cannabis-related activities.  The largest increases are for licensing and enforcement of the industry, but notably the California Department of Justice is slated to receive $14 million to combat illegal cannabis activity.  Despite a lower number of businesses seeking licensure than expected, the tax revenue estimate is unchanged from January at $815 million through the end of 2018-19.

Cap and Trade Increases.   The May Revision adds $50 million in additional auction proceeds to implement the recently released Forest Carbon Plan, which would bring 2018-19 expenditures to $1.3 billion for mostly ongoing programs and projects. 

No Additional Funding for Medi-Cal Provider Rates.  Despite $32 million in additional Proposition 56 tobacco tax revenue and $52 million in new program savings, the Governor proposes no additional Medi-Cal provider rate or supplemental payments beyond those proposed in the January budget. Instead, the Governor continues to reject the will of the voters by taking another $55 million—on top of the $169 million in the January budget—for other budget needs rather than to expand access to care. The Governor plans on negotiating with providers on the allocation of the supplemental payments included in the January budget.

In-Home Supportive Services (IHSS) Growth Continues.  The May Revision proposes an overall increase to IHSS of $280 million General Fund as a result of increased overtime, average hours per case, and the cost per case.  Within the new cost-sharing agreement, the May Revision estimates no new county costs. 

Continuum of Care Reform.  The May Revision proposes an additional $105 million in the current year and budget year as a result of slower-than-anticipated caseload movements from group homes to foster family homes.  Additionally, the May Revision proposes various one-time increases for counties to implement the new foster youth assessment tool, clear the backlog of foster families waiting to be approved, and to provide funding at the time of foster youth placement.

Read Complete Report (pdf)