UPDATED: Highlights and Analysis of the 2019-20 Budget

Thursday, September 26, 2019

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Executive Summary

Overview: Positive Steps Along with Missed Opportunities.  The 2019-20 budget package reflects record highs for spending, revenues, and reserves.  Prior to lawmakers’ decisions on new spending commitments, the budget reflected nearly a $22 billion surplus.  The budget takes some significant steps to protect against wildfires, promote housing, improve schools and college opportunities, reduce debt, and build reserves.  However, despite the massive surplus, the budget also enacts more than $2 billion in unnecessary tax increases that will further raise the cost of living for Californians.  In addition, the budget could have done more to fix longstanding problems with existing programs, such as those that serve people with developmental disabilities. Instead, the majority party chose to approve new program expansions that will contribute to unsustainable “baseline” spending growth and raise the real prospect of deficits within a couple years, even without a recession.

Revenues Continue Rapid Rise.  General Fund tax revenues are budgeted for a new record high of nearly $146 billion in 2019-20, which is 6 percent above the enacted 2018‑19 budget.  Part of this sharp increase is attributable to the effects of federal tax reform.  The record revenues, which do not include the gas and car taxes approved in 2017, indicate that the state does not need to continue to raise taxes to take care of issues that are a priority for Californians. 

New Tax Increases Authorized Despite Record Surplus. The budget makes several tax changes that increase the tax burden on Californians by more than $2 billion, despite the state’s surplus, primarily through tax increases on small businesses that could be passed on to consumers. In a state where the high cost of living helps create the nation’s highest poverty rate, increasing taxes with an existing surplus adds insult to injury.

Dramatic Spending Increase Over Past Decade.  Spending in the new budget would reach $215 billion from all state funds in 2019-20.  This includes General Fund spending of nearly $148 billion, an increase of about $9 billion (6.6 percent) over the enacted 2018-19 budget.  Compared to the low point during the recession nearly a decade ago, General Fund spending shows an increase of $61 billion (71 percent).  Adding federal funds pushes the total budget to more than $321 billion. 

Longstanding Problems Still Not Fixed.  Despite new spending in this and recent budgets, the Governor and legislative Democrats have not fixed longstanding challenges with core programs like developmental services, access to justice through the courts, and Medi-Cal.   Instead of fully fixing these well-known problems, Democrats decided instead to spend more on new ideas like health care subsidies for families making up to $150,000 per year, and a Medi-Cal entitlement expansion for undocumented adults ages 19 through 25.

Questionable Suspension “Trigger” for Some Spending.  In order to reduce future spending to align with projected lower revenue growth, the budget package includes an ill-advised “trigger” to suspend $1.7 billion in spending on various programs, including payment rates for Medi-Cal and developmental services. There would likely be substantial pressure to continue much of this spending, but the trigger artificially makes long-term budget projections appear balanced.  

Surpluses Now, Deficits Likely to Follow.  Budget deliberations began in January with nearly a $22 billion point-in-time surplus before lawmakers considered additional spending decisions.  Despite this massive surplus, billions in new program spending in recent years, plus several billion more in expansions this year, mean that operating deficits could return by 2020-21.  Considering that state tax revenues are at record highs, this is cause for concern, particularly in light of a potential recession that could reduce revenues by $20 billion in a single year. 

Record Reserves Would Include School Funds.  The state’s Rainy Day Fund would grow to $16.5 billion by the end of 2019-20. An Education reserve fund authorized by Proposition 2 would be triggered for the first time by the constitutional formula and would reach a balance of $377 million.  Combined with a discretionary reserve of $1.4 billion and a Safety Net reserve of $900 million, total reserves would exceed $19 billion, or 13 percent of General Fund revenues.

Earned Income Tax Credit Expansion. The budget expands the state’s Earned Income Tax Credit, including a $1,000 supplement to families with a child under six years of age. 

Funds for Homelessness and Housing.  The budget adds $1.75 billion in one-time funds for various state programs that promote planning and infrastructure, as well as financing tools and tax credits intended to spur production across the state. Overall, the budget includes $8.3 billion across multiple departments and programs to help address housing and homelessness throughout the state.

Budget Short on Housing Policy Reforms. While the budget throws money at the housing crisis through tax credits and additional financing options, it does not include broader policy changes that deal with the underlying cause of expensive housing. These include restrictive environmental reviews, extensive and cost-prohibitive zoning restrictions, and a host of excessive fees, which have raised the costs of building and slowed down the production of housing units.

Expanded State Efforts for Emergency Response, Prevention, and Recovery.  The budget includes over $300 million in new General Fund resources for emergency response and recovery across various programs, including those operated by the Office of Emergency Services and the Department of Forestry and Fire Protection (CalFire).  The budget package also establishes a new government entity to oversee efforts by utilities to prevent wildfires.

Disaster Relief for Local Communities.  The budget includes $56 million General Fund to support recovery efforts across the state for areas devastated by the recent wildfires and mudslides.  Examples include $10.8 million to support the city of Paradise and $2 million to support the Butte County Fire Department.

Expanding Special Education. The budget provides $646 million in new, ongoing Proposition 98 funding for special education.  This includes grants to districts based on the number of children ages three to four years with exceptional needs, as well as funds to bring local educational agencies to the statewide base rate for special education funding.

Kindergarten Facilities Grants.  The budget includes $300 million one-time non-Proposition 98 General Fund for the Full-Day Kindergarten Facilities Grant program to construct new or retrofit existing facilities to support full-day kindergarten programs.

Early Education Expansion.  The budget package makes several augmentations and policy changes toward implementing Governor Newsom’s Universal Preschool plan, including removing a current requirement that parents must be working or in school to qualify for full-day preschool. The budget also spends taxpayer funds to benefit special interests’ efforts to organize child care providers. 

Eliminating Tuition for a Second Year of Community College.  The budget provides $43 million Proposition 98 General Fund to waive tuition for first-time, full-time community college students for a second academic year.  

Increasing University Enrollment Growth.  The budget includes $135 million for new undergraduate resident enrollment growth across the University of California and California State University systems, including $49 million for another 4,860 students at the University of California and $85 million to increase enrollment at the California State University by 10,000 students.

Expanding Financial Aid. The number of competitive Cal Grant awards would increase by more than 15,000, and students with dependent children would be eligible for larger awards.  The budget also opens eligibility for Cal Grants to undocumented students.  

No Reforms to Covered California, Just Subsidies. The 2019-20 budget appropriates $429 million General Fund to Covered California to provide premium assistance subsidies during the 2020 health coverage year. Of this amount, $345 million will be allocated for households with incomes between 400 percent and 600 percent of federal poverty level ($100,000 to $150,000 for a family of four). The administration expects to spend another $1 billion on subsidies in 2021 and 2022 before eliminating the subsidies in 2023.

Health Insurance Mandate Tax on Californians. The budget imposes an ongoing state individual mandate on all Californians to maintain “minimum essential health care coverage” or face a tax penalty of $695 per year for adults or 2.5 percent of income over the state’s tax filing threshold, whichever is greater. The administration projects more than $1 billion in tax penalty revenues over three years through 2022-23.  Data shows that lower-income families are most likely to end up paying the tax, which will subsidize higher-income families in Covered California, thus creating a “reverse Robin Hood” situation: the state will take money from the poor to help those who are better off.

State-Only Medi-Cal for Undocumented Adults under 26. The budget launches an expansion of full‑scope Medi-Cal coverage to an estimated 90,000 income-eligible young adults ages 19 through 25 who are residing in the state illegally. The initial cost of $74 million will grow to more than $220 million General Fund annually in future years.

Tax on Managed Care Organizations. The budget imposes a new three-and-a-half-year managed care organization (MCO) provider tax -- from July 1, 2019 until December 31, 2022 -- to be assessed on all commercial and Medi-Cal managed care health plans. If approved by the federal government, this tax will result in a General Fund benefit of up to $2 billion annually, which the majority party could spend anywhere in the budget, including potentially expanding Medi-Cal further to an estimated 1.1 million undocumented adults who are 26 years of age or older.

In-Home Supportive Services (IHSS) Increases.  The budget adds more than $650 million General Fund for IHSS, including restoration of a previous 7 percent reduction in hours and rebasing the county-state cost split to raise the state’s share. Unfortunately, the budget also includes a non-fiscal policy change that interferes in the local bargaining process.

Significant Increases to CalWORKs Grants and Eligibility. The budget raises CalWORKs grant levels significantly by $355 million for a partial year in 2019-20, which will rise to $455 million annually, and expands program eligibility by loosening asset test limits and other rules. 

More Needed for Developmental Services.  Following the release of a report showing a $1.2 billion General Fund shortfall in paying sufficient rates to providers of developmental services, the budget approves an increase of $125 million in 2019-20 and potentially $250 million thereafter.  Some providers would be left out entirely.  Senate Republicans and many community advocates have called for more funds for an across-the-board increase as a temporary measure.  The budget also fails to restore recessionary benefit cuts and misses an opportunity to use developmental center properties to benefit community services. 

Next Generation 9-1-1 Modernization Funded.  The 2019-20 budget includes $50 million General Fund (one time) to supplement existing revenues that support the state’s legacy 9-1-1 system and to allow the upgrade to Next Generation 9-1-1 to continue.  Starting January 1, 2020, the expanded 9-1-1 tax will generate about $110 million per year in additional revenue for these purposes.

Funding for New Judgeships.  Following nearly two decades of judicial officer shortages, increasing caseloads, and delayed civil proceedings, the budget includes $30 million General Fund to increase the number of judgeships in the state by 25, a positive step although much less than needed.

Continuation of Armed Prohibited Persons System (APPS).  The budget includes $17.5 million General Fund to permanently shift the Department of Justice’s APPS program away from the special funds that have been supporting it, but which have been significantly depleted, and to provide 26 new positions for APPS enforcement.  The budget also includes $3 million General Fund (one time) for a four-county pilot program to assist local sheriffs with their APPS enforcement efforts.

Curbing Offender Drug Use in Prisons and Communities.  The budget includes $71 million for a substance use disorder treatment program at all state prisons intended to address offender needs at all stages of their recovery.  The program will integrate cognitive behavioral therapy and medication assisted treatment before attempting to transition offenders to community-based aftercare in an attempt to help convicted felons break the cycle of addiction.

Reducing Pension Debts for the State and Schools. The budget provides $3 billion over four fiscal years to reduce the state’s unfunded pension liability. For local school districts, the budget includes more than $3 billion over two years to reduce districts’ unfunded pension liabilities and to reduce their employer pension contribution rates.

Paid Family Leave Expansion and Task Force. The budget includes an expansion of the state’s paid family leave program, which currently provides 6 weeks of paid leave to bond with a new child or care for a sick family member.  The budget extends paid family leave from 6 to 8 weeks.

More Money for the Troubled Department of Motor Vehicles (DMV).  The budget includes an additional $242 million to support more than 2,000 positions to continue DMV operations, including the issuance of Real IDs, at existing service levels and to fund various technology and operations improvements, including accepting credit cards as a form of payment at DMV offices.

Additional Voting Equipment Funds, Reduced Match for Counties.  The budget provides $87 million General Fund (with counties required to provide either no matching funds or 25 percent matching funds) for the continued replacement of voting equipment across the state.

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