Overview. The Governor’s May Revision maintains the January estimate that the state has a $21.5 billion General Fund surplus. Tax revenues continue to adjust upward for now and would set another record high at $146 billion, or $1.6 billion higher than expected just a few months ago. However, the May Revision now forecasts slowing revenue growth a couple years down the road, and proposes that $1.8 billion in spending would sunset at the end of 2021. Total General Fund spending would reach a record $147 billion in 2019-20, up by $2.8 billion from January, including nearly $1 billion in new spending proposals. Total state spending would reach nearly $214 billion, while adding federal funds would bring the grand total to nearly $320 billion. State reserves would exceed $19 billion and would include for the first time a rainy day fund specifically for public schools, which is required when the budget meets certain constitutional tests. Unfortunately, despite the record revenues, the May Revision does not reverse any of the Governor’s major tax proposals from January.
Revenues Surpass Expectations. Compared to the Governor’s January budget proposal, General Fund tax revenues are projected to be higher by $1.9 billion in the current year and $1.6 billion in 2019‑20. Following a monthly shortfall in January personal income taxes, April showed stronger-than-expected personal income returns as well as stronger corporate income taxes. The May Revision also assumes $500 million in one-time tax revenues resulting from high-profile initial stock offerings by California-based companies such as Lyft and Uber. In all, General Fund tax revenues would set a new record high of $146 billion, which is 6 percent above the 2018 Budget Act. These record revenues (which do not include gas taxes) indicate that the state does not need to raise taxes further on Californians to take care of issues that are a priority.
Higher Spending Now, But Some Proposals Allegedly Would Sunset. Total General Fund spending would reach a record $147 billion in 2019-20, up by $2.8 billion from January. In order to curtail future spending to align with lower revenue growth, the May Revision proposes a sunset date of December 31, 2021 for $1.8 billion in larger spending items. However, the proposals selected to sunset are ongoing in nature, and assuming they would actually end is likely unrealistic. If the sunsets are not built into the budget forecast, the state would return to operating deficits in 2021-22 and the following year, even under current revenue projections.
Combined Reserves Would Exceed $19 Billion. The state’s Rainy Day Fund (Proposition 2 of 2014) would grow to $16.5 billion by the end of 2019-20, reflecting an increase of $1.2 billion compared to January’s estimate due to higher revenues. The May Revision also projects that, for the first time, the public school rainy day fund authorized by Proposition 2 would take effect with a balance of $389 million. Combined with the state’s other reserve accounts, total General Fund budget reserves would exceed $19.4 billion.
Unnecessary New Taxes Maintained. Despite even higher tax revenues from existing sources, the May Revision does not unwind the Governor’s major proposed new taxes from January, including a water tax, various business taxes, a health insurance mandate tax, and a 9-1-1 tax. These proposals are now projected to reach $2.4 billion combined, primarily as a result of $1.7 billion from discretionary taxes on businesses associated with federal tax reform. Given the state’s massive surplus and that Californians already pay among the highest taxes in the country, there is no reason to raise taxes again. Priorities like clean drinking water and tax credits for working families should be funded through existing resources.
Temporary Rate Increases for Providers of Developmental Disability Services. The May Revision proposes $330 million ($200 million General Fund) to fund rate increases for specified service providers in the developmental disability system. Senate Republicans applaud these targeted rate increases but note that providers across the board are suffering from low rates. The total amount is also less than Senate Republicans requested, but is a significant step in the right direction. Unfortunately, this rate increase is one of the proposals the May Revision would sunset December 31, 2021, which would be a devastating and unworkable setback for community services, unless replaced with real rate reform and sufficient additional funds.
Early Childhood Care Proposals and Adjustments. The May Revision reflects new proposals for early childhood care and education but also adjusts January proposals downward to reflect potentially lower future revenues. These proposals and adjustments include:
- Cannabis-Funded Child Care. Nearly $80 million in cannabis revenues to subsidize child care for school-age children from income-eligible families.
- CalWORKs Child Care. Nearly $41 million in 2019-20 and $54 million annually to allow CalWORKs recipients to receive Stage 1 child care for up to 12 months.
- Reduced Preschool Slots. The May Revision postpones the release of 20,000 preschool slots, bringing January’s proposal down to 10,000 slots that would begin in April 2020.
- Lower Kindergarten Construction Proposal. The May Revision reduces the January proposal for $750 million in kindergarten construction funds by $150 million and seeks to target the program more closely at promoting full-day kindergarten.
Additional Special Education Funding. The May Revision adds $119 million to the Governor’s January proposal for special education, bringing the total to $696 million in ongoing Proposition 98 funds. The method to distribute funds among schools would remain the same as proposed in January, which included low-income pupils and English learners as well as students with disabilities. Senate Republicans agree special education is a critical need to address, but the specific distribution method is questionable.
Assistance for Teachers in Target Areas and Subjects. The May Revision proposes nearly $90 million in one-time non-Proposition 98 funds to provide school loan assistance of up to $20,000 in high‑need areas, with priority given to hard-to-hire subjects like special education and math and school sites with high rates of non-credentialed teachers. In addition, nearly $45 million would provide training and resources for classroom educators, including STEM subject matter competency, computer science, social emotional learning, and restorative practices.
Additional Funds for Relief of School Districts’ Pension Payments. The May Revision proposes an additional $150 million in one-time General Fund, bringing the total to $850 million to make teacher pension payments on behalf of school districts. This supplemental payment provides relief to school district budgets and lowers their expected pension contribution from the projected 17.1 percent in January to 16.7 percent.
Earned Income Tax Credit Expansion Funded With New Taxes. As the Governor announced two days prior to the May Revision release, the revised budget would go further than the January proposal to expand the Earned Income Tax Credit (EITC) program. The cost would now reach $1.2 billion (from $1 billion in January; the current program is $400 million) by increasing a special supplement for families with children under six years of age. The January budget proposed a $500 annual supplement, but the May Revision would increase the supplement to $1,000 per family and would provide the supplement on a monthly basis. The May Revision would still pay for the program with several tax increases. While providing relief to working California families has been a long-term goal of Senate Republicans, there is no reason why Californians and small businesses should pay more to support an expanded program while existing General Fund revenues continue to reach record highs.
Emergency Preparedness and Response Funding. The May Revision includes $115 million in new General Fund spending on emergency response and recovery for 2019-20. Of these funds, $75 million would be provided on a one-time basis to support vulnerable populations that may be affected by increased power interruptions implemented by utility companies to prevent wildfires. Of the remainder, $20 million would be set aside to provide immediate funding for state agencies that are deployed in response to emergencies. Given the size and costs of recent large-scale disasters, including unprecedented loss of life, this additional investment in critical response efforts is prudent.
Improving Access to the Justice System. The May Revision provides about $45 million in increased funding for the State Judiciary, including $30 million to fund 25 of the 50 judgeships established in 2007 by AB 159 (Jones). These resources are long overdue and will provide much needed relief to litigants and courts in extremely under-resourced counties like San Bernardino, Riverside, and Kern.
Curbing Drug Use in Prisons. The May Revision proposes $71 million General Fund, increasing to $162 million annually thereafter, to implement a substance use disorder treatment program at all state prisons. The proposal is intended to break the cycle of drug addiction before returning inmates to their communities, while giving them resources to help them stay clean after release. While the proposal sounds promising, the Department of Corrections and Rehabilitation has a horrible track record implementing these kinds of programs. Oversight and accountability measures will be essential if this proposal is to achieve the intended results.
Housing and Homelessness. The May Revision would still provide 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 Governor’s housing plan is amended in the May Revision, however, with local governments no longer eligible to receive general purpose funds as a reward for meeting housing milestones. Instead, the May Revision provides $500 million for the Infill Infrastructure Grant program, allowing local governments to use funding for housing-related infrastructure such as water, sewers, roads, and public parks.
The May Revision continues to propose withholding 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.
The May Revision proposes $650 million to address homelessness across the state, a $150 million General Fund increase from the January budget. Big cities would be eligible for $275 million, counties would receive $275 million, and $100 million would be distributed to the state’s Continuums of Care.
Sales Tax Exemptions. The May Revision reflects the sales tax exemptions for diapers and menstrual products that the Governor announced a couple days prior to the May Revision release. These exemptions are projected to reduce revenues by $17.5 million in 2019-20 and $35 million annually. Local sales taxes would also decrease, bringing total revenue losses to $38 million initially and $76 million annually. These exemptions would be effective for two years only, expiring December 31, 2021.
Delay in Medi-Cal Expansion to Undocumented Young Adults. The May Revision delays the start date by six months for undocumented adults ages 19 to 25 to be eligible for full-scope Medi-Cal benefits. The Governor’s January budget proposed a July 1, 2019 start date, while the May Revision moves it to January 1, 2020.
Governor Yields on Taking County Public Health Funds but Still Threatens Rural Health Programs for the Uninsured. Recognizing the potential negative impact to local public health programs, Governor Newsom has agreed not to redirect realignment funds allocated to the counties back to the state, but his May Revision does propose to withhold realignment funds allocated to the County Medical Services Program Board that administers indigent health care programs on behalf of 35 rural counties.
Bigger Individual Healthcare Mandate Tax Penalty Needed to Repay General Fund for Upfront Covered California Subsidies. The May Revision proposes $295 million in General Fund to begin state subsidies on insurance purchases at Covered California for incomes between $50,200 and $150,600 for a family of four. The Administration states that the revenues from the individual mandate tax penalty will eventually cover both the subsidies and repay the General Fund. The Governor estimates penalty tax revenues of $317 million in 2020-21.
In-Home Supportive Services (IHSS) Restoration to Sunset in 2020-21. The Administration, as part of an effort to check ongoing spending in future budget years, proposes sunsetting the 7 percent restoration of authorized hours for IHSS providers. The program took a 7 percent cut in authorized hours during the recession, which was restored as part of the Managed Care Organization tax agreement in 2016.
Proposition 98 Education Spending Increases. Compared to January, higher tax revenue estimates mean that Proposition 98 funding for K-14 education would be higher by $389 million in 2019-20, reaching a total record of $81.1 billion.
Higher Education Proposals. The May Revision makes relatively small adjustments to proposed funding for the University of California and the California State University systems. These include a combined $10 million for the two systems to support “rapid rehousing” for homeless or housing insecure students. In addition, the May Revision proposes a one-time payment of $25 million to support the UC Retirement Program.