The 2020-21 Budget: Overview of the California Spending Plan (Final Version)

The 2020-21 Budget: Overview of the California Spending Plan Total Budget Problem - $54.3 Billion Federal $0 Funding Shift Costs -10 Reduce Spending -20 Adjust K-14 Education Spending -30 Increase Revenues -40 Use Reserves Baseline Adjustments -50 $-54 -60 GABRIEL PETEK LEGISLATIVE ANALYST October 7, 2020 analysis full gutter 2020-21 BUDGET LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Each year, our office publishes the California figures in this publication reflect the administration’s Spending Plan to summarize the annual state estimates of actions taken through June 30, 2020, budget. This publication provides an overview of but we have updated the narrative to reflect actions the 2020-21 Budget Act, provides a short history of taken later in the legislative session. In addition the notable events in the budget process, and then to this publication, we have released a series of highlights major features of the budget approved issue-specific posts providing more detail on various by the Legislature and signed by the Governor. All programmatic aspects of the budget. BUDGET OVERVIEW The $54.3 Billion Budget Problem Revenues The coronavirus disease 2019 (COVID-19) Figure 1 (see next page) displays the pandemic has had far-reaching negative impacts on administration’s revenue projections as incorporated the state economy, which have direct and indirect into the June 2020 budget package. The budget implications for the state budget. The final spending package assumes General Fund revenues and plan reflects an estimated $54.3 billion General transfers will be $137.7 billion in 2020-21, which is Fund budget problem for the 2020-21 budget. essentially flat over the revised 2019-20 estimates. This budget problem was estimated by the This is the result of two significant and offsetting administration at the time of May Revision (as we factors. First, tax revenue from the state’s three discuss further in the “Evolution of the Budget” largest sources is projected to decline by 15 percent section of this report) and is the net result of a relative to 2019-20. These revenue declines would number of factors, including (most notably): have been even larger absent two conditions. One, tax credit and deduction policy changes • Lower Revenues. The most significant cause are expected to result in additional revenues of of the state’s budget problem is a substantial $4.4 billion, which we discuss later in this report. decline in revenues. Largely as a result of Two, other revenues are significantly larger because a severe decline in economic activity, the the budget scores federal funding received for administration’s estimates for revenues in disaster assistance (in particular related to direct both 2019-20 and, most notably, 2020-21, COVID-19 spending) as other revenues. declined substantially between January and Second, offsetting the decline in tax revenue, May. Overall, the spending plan anticipates transfers and other revenues will increase revenues will be lower across the budget substantially between 2019-20 and 2020-21. This window by $42 billion. occurs as the spending plan uses reserve transfers • Higher Caseload-Related Spending. Another and loans from special funds to address the budget major driver of the state’s budget problem problem. is higher caseload-related costs across the state’s safety net programs, including: Total State and Federal Spending Medi-Cal, California Work Opportunity and Figure 2 (see next page) displays the Responsibility to Kids (CalWORKs), and administration’s June 2020 estimates of total CalFresh. In particular, the budget assumes state and federal spending in the 2020-21 budget a 9.2 percent year-over-year increase in package. As the figure shows, the spending Medi-Cal enrollees, a 51.1 percent increase plan assumes total state spending of $196 billion in CalFresh participation, and a 42.4 percent (excluding federal and bond funds), a decrease of increase in CalWORKs participating families. 4 percent over revised totals for 2019-20. General Fund spending in 2020-21 is $133.9 billion—a www.lao.ca.gov 1 analysis full gutter 2020-21 BUDGET Figure 1 General Fund Revenue Estimates (Dollars in Millions) Revised Change From 2019‑20 Enacted 2018‑19 2019‑20 2020‑21 Amount Percent Personal income tax $99,189 $95,566 $77,567 -$17,999 -19% Sales and use tax 26,150 24,941 20,583 -4,358 -17 Corporation tax 14,075 13,870 16,534 2,665 19 Subtotals ($139,414) ($134,377) ($114,684) (-$19,693) (-15%) Insurance tax $2,727 $3,052 $2,986 -$66 -2% Other revenues 2,344 4,199 7,704 3,505 83 Transfer to BSA -3,189 -2,120 — — — Transfer from BSA — — 7,806 — — Other transfers and loans -1,237 -1,883 4,539 6,422 -341 Totals, Revenues, and Transfers $140,060 $137,625 $137,719 $94 — Note: Reflects administration estimates of budgetary actions taken through July 1, 2020. BSA = Budget Stabilization Account. decrease of $13 billion, or Figure 2 9 percent, over the revised Total State and Federal Expenditures 2019-20 level. (Dollars in Millions) Federal funding in 2020-21 is expected to be $159.9 billion—an Revised Change From 2019‑20 Enacted increase of $34.2 billion over the 2018‑19 2019‑20 2020‑21 Amount Percent revised 2019-20 level. Increased General Fund $140,387 $146,933 $133,900 -$13,033 -9% federal funding is the result of two Special funds 57,152 57,874 62,115 4,241 7 main factors: (1) enhanced federal Budget Totals $197,539 $204,807 $196,015 ‑$8,792 ‑4% reimbursements for the state’s Bond funds $5,704 $7,187 $6,059 -$1,129 -16% Medicaid programs and (2) the Federal funds 97,202 125,714 159,878 34,164 27 state’s receipt of $9.5 billion in Note: Reflects administration estimates of budgetary actions taken through July 1, 2020. Coronavirus Relief Funds (CRF) to respond to the costs of the public pages 3 and 4) summarize the budget solutions health emergency. (The state also is anticipated to adopted in the 2020-21 Budget Act. They are: receive billions of dollars in reimbursements from the Federal Emergency Management Agency [FEMA], • Make Baseline Adjustments and but these are scored as revenues rather than federal Assumptions (19 percent). First, the expenditures.) spending plan uses $10.3 billion in adjustments and assumptions that do not Solutions Adopted involve choices about changes to current law. During the Budget Process For example, compared to the May Revision, the spending plan assumes revenues will This section describes the solutions adopted in be higher and CalWORKS caseload will be the 2020-21 Budget Act to address the estimated lower, resulting in improvements to the budget $54.3 billion budget problem identified by the bottom line. administration during the May Revision. • Use Reserves (15 percent). The budget Budget Solutions Adopted to Address a package authorizes $8.3 billion in reserve $54.3 Billion Budget Deficit. Figures 3 and 4 (see withdrawals to cover the state’s General Fund 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Figure 3 Actions Taken to Address a $54.3 Billion Budget Problem in the 2020‑21 Budget Package (In Billions) Subject to Trigger Not Subject to Trigger Total Make Baseline Adjustmentsa Account for higher federal Medicaid funding — $5.3 $5.3 Assume lower CalWORKs caseload — 2.0 2.0 Assume higher revenues — 1.0 1.0 Assume receipt of additional federal funds — 2.0 2.0 Use Reserves Make BSA withdrawal — 7.8 7.8 Make Safety Net Reserve withdrawal — 0.5 0.5 Increase Revenues Suspend net operating losses — 1.8 1.8 Limit business incentive tax credits — 2.0 2.0 Interaction between the two above items — 0.6 0.6 Make Deferrals and Adjustments to K‑14 Education Spending Defer education-related spending $6.6 5.9 12.5 Other adjustments 2.2 2.2 Reduce Spending Reduce spendinga 3.6 4.7 8.3 Shift Costs Make special fund loans 0.9 2.1 3.0 Shift pension costs — 1.7 1.7 Convert capital financing to LRBs — 0.7 0.7 Make special fund transfers — 0.1 0.1 Use Federal Funding Allocate Coronavirus Relief Fund to state — 2.7 2.7 Use CCDBG funds — 0.1 0.1 Total $11.1 $43.2 $54.3 a Some solutions displayed in the “Reduce Spending” section of this table should be included as baseline adjustments because they are withdrawals of January proposals. We did not have sufficient information from the administration to display these items separately in this table. BSA = Budget Stabilization Account; LRBs = lease revenue bonds; and CCDBG = Child Care and Development Block Grant. budget problem. We describe the state’s credits (excluding the low-income housing tax reserve situation in more detail in the next credit) in 2020, 2021, and 2022. section on the condition of the General Fund. • Adjust K-14 Education Spending • Increase Revenues (8 percent). The (27 percent). The budget package provides budget package includes two actions that state spending at the constitutional minimum the administration estimates will increase level for schools, largely achieved by providing tax revenues by an estimated $4.4 billion $12.5 billion in payment deferrals and in 2020-21. First, the budget temporarily $2.2 billion in other adjustments. (Deferrals suspends net operating loss (NOL) deductions, allow the state to reduce the budgeted preventing corporations with net income over spending level on schools while allowing $1 million from using NOLs in 2020, 2021, and schools to continue to operate a larger 2022. Second, the budget limits businesses program by borrowing or using cash reserves.) from claiming more than $5 million in tax We describe the state’s overall spending on www.lao.ca.gov 3 analysis full gutter 2020-21 BUDGET Figure 4 How the Budget Addresses a $54.3 Billion Budget Problem (In Billions) Total Budget Problem - $54.3 Billion $0 Use Federal Funding -10 Shift Costs -20 Reduce Spending -30 Adjust K-14 Education Spending Increase Revenues -40 Use Reserves -50 Baseline Adjustments -60 K-14 education in the “Major Features” section further in the “Major Features” section of this of this report. report. • Reduce Spending (15 percent). There are • Use Federal Funds (5 percent). In a number $8.3 billion in spending reductions across the of places the spending plan uses federal budget. Many of these spending reductions— funds to offset state spending, which partially such as reductions to state employee pay addresses the budget problem. For example, and lower spending on higher education and the spending plan allocates $2.7 billion to the judicial branch—are subject to the federal state programs, such as public safety and trigger legislation. This means the reductions public health, from the federal CRF. We will be cancelled on October 15, 2020 if more discuss how the spending plan allocates the federal aid is forthcoming to the state. (We entire $9.5 billion in CRF monies in the “Major discuss the federal trigger legislation in more Features” section of this report. detail below.) This section also includes the $11 Billion in Spending Reductions and withdrawal of some of the Governor’s January Other Changes Restored if Federal Funds proposals. Although we would typically Are Forthcoming. The budget makes about display these types of changes as “baseline $11 billion in spending reductions, K-14 deferrals, adjustments,” we did not have sufficient and special fund loans subject to federal “trigger” information to do so. language in Control Section 8.28 (see Figure 5 on • Shift Costs and Borrowing (10 Percent). The the next page). Under this language, if the federal budget takes a number of actions that shift government passes legislation by October 15, costs, either from the General Fund to other 2020 providing at least $14 billion in funding to the funds or from the current year to future years. state, all of the amounts subject to the trigger would Together, these actions address $5.5 billion of be restored. If the federal government provides less the budget problem. We discuss these actions than $14 billion, the restorations would be made 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET proportional to their share of the total. (The budget suspension would take effect at the beginning of also assumes the state will receive $2 billion in new the fiscal year (on July 1, 2021). Figure 6 shows the federal funding that could be used flexibly, which is displayed as baseline adjustment above.) As Figure 5 of this writing (September 30, 2020), the federal Spending Reductions and Deferrals “Triggered government had not passed such legislation. Off” if Federal Funds Are Forthcoming Some Spending Is Subject to Potential (In Billions) Suspension in 2021-22. Similar to action taken in 2019-20, the spending plan makes some spending subject to suspension in 2021-22. In these cases, Education‑Related Deferrals $6.55 Spending Reductions statute directs the Department of Finance (DOF) Employee compensation reduction 1.89 to calculate whether General Fund revenues will Higher education reductions 0.97 exceed General Fund expenditures—without Special fund loansa 0.94 suspensions—in 2021-22 and 2022-23. If DOF Realignment backfill 0.25 determines revenues will exceed expenditures, Infill infrastructure grant program reversion 0.20 then the programs’ ongoing spending amounts Judicial branch reduction 0.15 will continue and not be suspended. Otherwise, Golden State Teacher Grant Program reduction 0.09 the expenditures are automatically suspended. Child support agency funding reversion 0.05 Moderate-income housing reversion 0.05 In most cases, suspensions would occur halfway Total, Spending Reductions $4.58 through the fiscal year (on December 31, 2021). Total $11.14 One exception is the suspension of the use of a Borrowing from special fund loans related to employee compensation savings. Proposition 56 revenues for Medi-Cal provider Note: Numbers may not total due to rounding. payment increases. Under the spending plan, this Figure 6 Programmatic Funding Subject to Potential Suspension (In Millions) Program Funding Suspension 2021‑22 2022‑23 Medi-Cal Use of Proposition 56 revenues for provider payment increases $768.9 $799.5 IHSS Continued restoration of 7 percent service hour reduction 229.3 500.7 DDS/DOR Supplemental provider payment increases 139.1 299.1 Medi-Cal Extension of Medi-Cal coverage for postpartum mental health 17.8 35.6 Medi-Cal Restoration of optional benefits 17.6 35.2 DDS Nonenforcement of uniform holiday schedule policy 17.5 35.0 Child welfare Funding for Family Urgent Response System 15.0 30.0 DDS Additional supplemental provider payment increases 10.8 23.6 Senior nutrition Augmentation for Senior Nutrition Program 8.8 17.5 Child welfare Emergency Child Care Bridge Program supplement 5.0 10.0 UC and CSU Student financial aid during the summer 5.0 10.0 Child welfare Public health nursing early intervention pilot program in Los Angeles County 4.1 8.3 Senior nutrition State funding for Aging and Disability Connection program 2.5 5.0 Child welfare Foster Family Agency social worker rate increase 3.2 6.5 HCD All Transitional Housing Program grants to counties for former foster youth 4.0 8.0 Medi-Cal Expansion of screening and intervention to drugs other than alcohol 0.2 0.4 Total General Fund Savings $1,248.8 $1,824.4 IHSS = In-Home Supportive Services; DDS = Department of Developmental Services; DOR = Department of Rehabilitation; and HCD = Housing and Community Development. www.lao.ca.gov 5 analysis full gutter 2020-21 BUDGET estimated General Fund savings in 2021-22 and Figure 7 2022-23 if the suspensions are operative. General Fund Condition Summary The Condition of the General Fund (In Millions) Figure 7 summarizes the condition of the General 2019‑20 2020‑21 Fund under the revenue and spending assumptions Prior-year fund balance $11,280 $1,972 in the June 2020 budget package, as estimated by Revenues and transfers 137,625 137,719 DOF. Expenditures 146,933 133,900 State Makes First-Ever Withdrawal From Ending fund balance $1,972 $5,791 Encumbrances $3,175 $3,175 BSA Under Rules of Proposition 2. The Budget SFEU balance ‑1,203 2,616 Stabilization Account (BSA) is governed by Reserves constitutional rules under Proposition 2, which was BSA balance $16,116 $8,310 enacted by voters in 2014. Proposition 2 limits SFEU balancea -1,203 2,616 when—and how much—the state can withdraw Safety net reserve 900 450 from the BSA in any given year. The 2020-21 budget Totals — $11,376 makes a withdrawal of $7.8 billion from the a Includes $716 million in COVID-19 reserve. BSA, the first-ever withdrawal under the rules of Note: Reflects administration estimates of budgetary actions taken through Proposition 2. The withdrawal is made pursuant July 1, 2020. SFEU = Special Fund for Economic Uncertainties ; BSA = Budget Stabilization to the Governor’s disaster declaration in response Account ; and COVID-19 = coronavirus disease 2019. to the COVID-19 public health emergency and proclamation of a budget emergency on June 25, $716 million designated for COVID-19 contingency. 2020. In addition, the spending plan transfers Under existing law, the Governor can transfer funds $450 million from the Safety Net Reserve. from the SFEU to the Disaster Response Emergency 2020-21 Would End With $11.4 Billion in Operations Account (DREOA, a subaccount within Reserves. Under the spending plan assumptions the SFEU) with notification to the Legislature. and estimates, 2020-21 would end with $11.4 billion Monies transferred into DREOA are continuously in reserves. This includes $8.3 billion in the BSA, appropriated for disaster response and recovery $2.6 billion in the Special Fund for Economic operation costs incurred by state agencies during a Uncertainties (SFEU), and $450 million in the Safety state of emergency. Net Reserve. The balance of the SFEU includes 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET EVOLUTION OF THE BUDGET Governor’s January Budget Anticipated Congress Passed Legislation to Address the State Would Have a Surplus of $6 Billion. COVID-19. In March and April, the federal Governor Newsom presented his proposed state government passed legislation directing funding budget to the Legislature on January 10, 2020, as to states, local governments, and private entities Figure 8 (see next page) shows. At the time, the in response to the COVID-19 emergency. This administration expected revenues for 2019-20 to legislation included: the Coronavirus Preparedness continue to exceed expectations from the 2019-20 and Response Act; the Families First Coronavirus Budget Act. With continued expected revenue Response Act; the Coronavirus Aid, Relief, and growth, the administration anticipated a surplus Economic Security (CARES) Act; and the Paycheck of about $6 billion for 2020-21. The Governor Protection Program and Health Care Enhancement proposed allocating that surplus to a variety Act. Among many other changes, these pieces of purposes, two of the largest of which were of legislation provided additional funding for state homelessness and re-envisioning Medi-Cal. and local governments to respond to COVID-19; COVID-19 Emergency Resulted in Rapidly increased the federal share of costs for state Evolving Public Health and Economic Situation. Medicaid programs; provided financial assistance In March, the state’s public health and economic to small businesses; increased unemployment situations began to change dramatically. On insurance benefits; and provided direct, March 4, 2020, the Governor declared a state broad-based cash assistance to most individuals. In of emergency in response to the first confirmed addition, federal emergency declarations authorized death of a coronavirus patient in California. On FEMA to provide additional funding to states and March 19, the Governor issued an executive order local governments to reimburse them for certain requiring Californians to shelter in place statewide. COVID-19-related costs. A few days later, the Governor requested and the In the May Revision, Administration President approved a major disaster declaration Estimated State Faced $54.3 Billion Budget for the state of California in response to the Problem. Shortly before the May Revision was COVID-19 public health emergency. Meanwhile, in released, our office published a Spring Fiscal March, California experienced an unprecedented Outlook estimating the state faced a budget rise in unemployment. For example, between problem likely ranging between $18 billion and March 22 and 28, California processed more than $31 billion depending on the economic trajectory of 1 million initial claims for regular unemployment the next year. On May 14, 2020, Governor Newsom insurance, surpassing the record high prior to presented a revised state budget proposal to COVID-19 by nearly ten times. the Legislature, which estimated the state faced State Began Incurring Significant Direct a $54.3 billion budget problem. Although the Costs to Respond to COVID-19. Before beginning administration’s revenue estimates were similar a recess in mid-March, the Legislature passed to those at the higher end of our predicted range Chapter 2 of 2020 (SB 89, Committee on Budget of budget problems, the administration made and Fiscal Review) and Chapter 3 of 2020 (SB 117, other assumptions that resulted in a larger budget Committee on Budget and Fiscal Review), which problem. (We explained the difference between our authorized the administration to spend up to estimates in The 2020-21 Budget: Initial Comments $1 billion for COVID-19 response and provided on the May Revision.) The Governor’s May Revision funding for schools to purchase equipment and included a number of proposed solutions across a clean facilities. In addition, the administration wide range of areas to solve the budget problem. used its authority under DREOA in March to make Initial Budget Package Passed on additional COVID-19-related expenditures. June 15, 2020. The Legislature passed an initial budget on June 15, 2020. A key feature of the initial www.lao.ca.gov 7 analysis full gutter 2020-21 BUDGET Figure 8 Time Line of Major Events in the 2020‑21 Budget Process JANUARY 10. Governor Newsom presents a proposed state budget to the Legislature, which estimates the state has a $6 billion surplus. JANUARY. Tax collections are ahead of projections by $1 billion. JAN FEBRUARY. Tax collections are ahead of projections by $1.3 billion. MARCH 4. The Governor declares a state of emergency in response to the first confirmed death of a coronavirus patient in California. MARCH 13. The President declares COVID-19 a national emergency. MARCH 16. The Legislature allocates up to $1 billion in General Fund FEB and $100 million in Proposition 98 funding for COVID-19 response, including purchasing personal protective equipment and sanitizing and cleaning school facilities. MARCH 14-18. Congress passes and the President signs the Families First Coronavirus Response Act. MARCH 19. The Governor issues a statewide stay-at-home order. MARCH 22. The Governor requests and the President approves, a MAR major disaster declaration for the state of California in response to the COVID-19 public health emergency. MARCH 25. The administration notifies the Legislature of its intent to immediately transfer $1.3 billion from the Special Fund for Economic Uncertainties to a subaccount within the fund: the Disaster Response Emergency Operations Account. MARCH 25-27. Congress passes and the President signs the APR Coronavirus Aid, Relief, and Economic Security Act. MARCH 28. Initial jobless claims reach 1.7 million in California (11.7 million nationally). APRIL 21-24. Congress passes and the President signs the Paycheck Protection Program and Health Care Enhancement Act. MAY 8. Our office releases a spring Fiscal Outlook estimating the state MAY will have to address a budget problem between $18 billion and $31 billion. MAY 14. The Governor presents a revised state budget proposal to the Legislature, which estimates the state faces a $54.3 billion budget problem, largely the result of significant declines in revenue projections. JUNE 15. The Legislature passes an initial budget package, addressing a $54.3 billion budget problem. JUN JUNE 25. The Governor issues a proclamation of a budget emergency to allow the state to access funds in the Budget Stabilization Account. JUNE 26. The Legislature passes the final budget package. JUNE 29. The Governor signs the final budget package. COVID-19 = coronavirus disease 2019. 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET budget package is that it assumed $14 billion in would be forthcoming and took the Governor’s federal funding would be forthcoming, reducing the approach in the May Revision to make other need for spending reductions and other actions to spending reductions contingent on other federal balance the budget. The initial budget package also money. In addition, relative to the June 15 initial would have reinstated two General Fund payment package, the final package made several changes, deferrals, including a fourth quarter payment including increasing school deferrals by $3.5 billion deferral to California Public Employees’ Retirement (assuming no federal money is forthcoming), System (CalPERS) and the state employee payroll increasing revenue assumptions by more than deferral. $1 billion, and eliminating the plan to reinstate Final Budget Package Signed on June 29, General Fund payment deferrals. The Governor 2020. The Legislature passed a final budget signed the 2020-21 Budget Act and related budget package on June 26, 2020. The final budget legislation on June 29, 2020. The Governor made package assumed that $2 billion in federal funds one line item veto. Figure 9 lists the budget and budget-related legislation passed as of July 1, 2020. Figure 9 Budget‑Related Legislation Bill Number Chapter Subject Legislation Signed Before July 1, 2020 SB 74 6 2020-21 Budget Act AB 89 7 Amendments to the 2020-21 Budget Act AB 75 9 Amendments to the 2019-20 Budget Act AB 76 5 Proposition 98 2019-20 deferrals and settle-up payments AB 78 10 Infrastructure and economic development bank AB 79 11 Human services AB 80 12 Health omnibus AB 81 13 Health funding AB 82 14 State government AB 83 15 Housing AB 84 16 Public employment and retirement AB 85 8 State taxes and charges AB 90 17 Transportation AB 92 18 Public resources AB 93 19 Earned income tax credit AB 100 20 State government AB 102 21 Retirement savings AB 103 22 Unemployment compensation benefits SB 98 24 Schools and child care SB 116 25 Higher education Legislation Signed After July 1, 2020 SB 115 40 Amendments to the 2019-20 and 2020-21 Budget Acts AB 107 264 General government AB 1867 45 Small employer family leave mediation AB 1869 92 Criminal fees AB 1872 93 Cannabis AB 1876 87 Earned Income Tax Credit AB 1885 94 Debtor exemptions: homestead exemption SB 118 29 Public safety SB 119 30 State employment: state bargaining units SB 820 110 Education finance SB 823 337 Juvenile justice realignment Note: This figure includes budget bill and trailer bills identified in Section 39.00 of the 2020-21 Budget Act that were enacted into law. www.lao.ca.gov 9 analysis full gutter 2020-21 BUDGET MAJOR FEATURES OF THE 2020-21 SPENDING PLAN EDUCATION used, (3) provide stipends for voucher providers, (4) provide an additional 14 paid non-operation days for voucher providers, and (5) extend temporary Early Education voucher child care for an additional 90 days. The Removes Unused Early Education Funds. budget also provides a $47 million ongoing federal The budget plan makes $161 million in ongoing fund increase for alternative payment slots. The reductions to State Preschool ($130 million additional slots are to be prioritized to provide Proposition 98 General Fund and $31 million care for children previously served with temporary non-Proposition 98 General Fund). Most of these voucher slots. funds are prior-year augmentations that were K-14 Education never awarded to State Preschool providers. To achieve additional savings, the budget plan also Reduces School and Community College rescinds unspent funds from initiatives included Funding to Reflect Lower Minimum in the 2019-20 budget. This includes $263 million Requirement. Proposition 98 (1988) established non-Proposition 98 General Fund intended to help a minimum annual funding requirement for child care providers construct or renovate facilities schools and community colleges. This minimum and $195 million ($150 million non-Proposition 98 requirement depends upon various formulas General Fund and $45 million federal funds) to that adjust for changes in state General Fund improve and expand child care and preschool revenue and other factors. Due to the significant workforce training. (The budget redirects the bulk of drop in state revenues, the minimum requirement the federal funds to partially backfill General Fund is down $3.4 billion in 2019-20 from the June costs for Stage 3 child care in 2020-21.) 2019 estimates. In 2020-21, the minimum Allocates Additional Federal Funds. Chapter requirement drops by an additional $6.8 billion 24 of 2020 (SB 98, Committee on Budget and (8.7 percent) from the revised 2019-20 level Fiscal Review) allocated $350 million one time (Figure 10). The budget plan funds schools and federal funds provided in the CARES Act. Funds community colleges at the lower required levels. will be used to (1) cover 2019 20 expenses related It implements the reductions, as well as various to COVID 19, (2) reimburse child care providers for other changes, primarily by deferring $12.5 billion authorized hours of care instead of child care hours in payments to districts. (When the state defers Figure 10 Proposition 98 Funding by Segment and Source (Dollars in Millions) Change From 2019‑20 2018‑19 2019‑20 2020‑21 Final Revised Enacted Amount Percent Funding by Segment K-12 Education $69,311 $68,568 $62,525 -$6,043 -8.8% California Community Colleges 9,211 9,109 8,365 -745 -8.2 Totals $78,522 $77,678 $70,890 ‑$6,788 ‑8.7% Funding by Source General Fund $54,746 $52,656 $45,066 -$7,590 -14.4% Local property tax 23,776 25,022 25,824 802 3.2 Note: Amounts reflect June 2020 enacted budget levels, assuming the state does not receive additional federal funding. 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET payments from one fiscal year to the next, the state 2020-21. General Fund reductions to the UC’s can reduce spending while allowing school districts and CSU’s base operations are partially offset to maintain programs by borrowing or using cash by targeted ongoing augmentations. Targeted reserves.) If the state receives additional federal augmentations include covering higher pension funding, up to $6.6 billion would instead be paid on costs at CSU and expanding certain medical the regular schedule. education programs at UC. The budget does not Creates Supplemental Obligation to Increase set enrollment targets for either CSU or UC, and it Funding in Future Years. This obligation has two assumes both segments hold resident tuition flat parts. First, it requires the state to make temporary in 2020-21. After accounting for tuition and other payments on top of the Proposition 98 requirement core revenue, total ongoing core support decreases beginning in 2021-22. Each payment will equal 3.3 percent at CSU and 2.1 percent at UC. 1.5 percent of annual General Fund revenue and If State Receives Additional Federal Relief can be allocated for any school or community Funding, Support for CSU and UC Would college purpose. These payments will continue until Notably Increase. The universities are included the state has paid $12.4 billion—the amount of in the state’s contingency plan as set forth in funding schools and community colleges could have Section 8.28 of the 2020-21 Budget Act. If the state received under Proposition 98 if state revenues had receives at least $14 billion in additional federal relief continued to grow. Second, the obligation requires funding by October 15, 2020, the budget allocates the state to increase the minimum share of General $498 million of this funding to CSU and $472 million Fund revenue allocated to schools and community to UC. These amounts would not only eliminate colleges from 38 percent to 40 percent on an base reductions for the universities but provide each ongoing basis. This increase is set to phase in over segment with the equivalent of a 5 percent General the 2022-23 and 2023-24 fiscal years. Fund base increase. (At UC, this base increase Repurposes Prior Pension Payment to applies only to its core campus operations, not its Reduce District Costs Over the Next Two Years. centralized systemwide operations.) Total ongoing The 2019-20 budget plan included a $2.3 billion core support would increase 2.6 percent at CSU supplemental pension payment on behalf of schools and 3 percent at UC. (If the state receives more and community colleges. Of this $2.3 billion, than $2 billion but less than $14 billion in additional $1.6 billion was for the California State Teachers’ federal relief funding, the specified amounts Retirement System (CalSTRS) and $660 million was provided to the universities are proportionally for CalPERS. At the time, the state estimated that reduced.) the supplemental payment could reduce district pension costs by roughly 0.3 percent of annual pay COST SHIFTS AND BORROWING over the next few decades. The 2020-21 budget Special Fund Loans and Transfers. In past plan repurposes this payment to reduce pension recessions, the state made loans from other costs by a larger amount over the next two years. state accounts, known as special funds, to the Specifically, districts will receive cost savings of General Fund to address budget problems. The approximately 2 percent of pay in 2020-21 and General Fund must eventually repay these loans 2021-22 (about $1.15 billion per year), but will not with interest. The spending plan again makes use experience savings over the following decades. of this tool, making $3 billion in loans from a wide Universities range of special funds. Included with these loans is control section language that lends special fund Enacted Budget Notably Reduces General savings from lower employee compensation costs Fund Support for the Universities. Ongoing in 2020-21 to the General Fund. The administration General Fund spending decreases by a net of estimates this would yield nearly $1 billion in loans. $251 million (5.8 percent) for the California State (These loans would be undone if more federal University (CSU) and $259 million (7 percent) for funding is forthcoming, per the trigger language the University of California (UC) from 2019-20 to www.lao.ca.gov 11 analysis full gutter 2020-21 BUDGET discussed earlier.) Finally, the budget transfers COVID-19 SPENDING about $100 million in special fund balances to the General Fund—amounts that would not be repaid. State Spending on COVID-19 Shift Pension Costs. The budget takes actions $2.2 Billion Allocated Under DREOA, SB 89, in a few pension-related areas that result in cost and SB 117. Before the final budget process shifts from the present to the future. First, the began in May, the state incurred about $2.2 billion 2019-20 budget made a supplemental pension in COVID-19 expenditures under the authority payment of $2.5 billion to CalPERS. The state would provided by SB 89, SB 117, and DREOA (as have realized savings over the next few decades described earlier). These funds were allocated from this payment, eventually resulting in an to fulfill a wide variety of state needs, including estimated gross savings of $5.9 billion. The budget procuring medical supplies and personal protective repurposes this supplemental payment to supplant equipment, preventing and containing COVID-19 state General Fund contributions to CalPERS this among homeless individuals, and providing services year. This results in savings of $2.4 billion, which to at-risk individuals. The spending plan anticipates the budget scores over multiple years including the federal government eventually will reimburse the 2021-22, but foregoes the future savings, thus state for an estimated 75 percent of most of these resulting in higher ongoing costs. Second, the costs under the federal disaster declarations. budget suspends CalSTRS’ ability to increase the state’s contribution rate in 2020-21. (Currently, $3.5 Billion in Direct COVID-19-Related CalSTRS can only increase the state’s rate by Expenditures Allocated in the Budget. The 0.5 percent per year—equivalent to $169 million in budget package also allocates an additional 2020-21.) Instead, the budget provides offsetting $3.5 billion in direct COVID-19-related expenditures. payments to CalSTRS using other required These funds are allocated for similar purposes as debt payments. Finally, the budget eliminates a the prior amounts, including procuring personal $265 million supplemental payment to CalPERS protective equipment, expanding hospital and planned for 2020-21 under current law. The medical surge capacity, providing hotels for spending plan also uses Proposition 2 required debt healthcare workers who come into contact with payments to pay for a $243 million unfunded liability COVID-19 patients, and statewide testing and pension payment for California Highway Patrol, contact tracing. The budget package assumes thereby reducing General Fund costs. the federal government will reimburse the state for 75 percent for most of these costs. Shifts Roughly $700 million in Costs to Lease Revenue Bonds (LRBs). Recent budgets have set $716 Million for COVID-19 Contingencies aside General Fund monies to pay for some capital in the SFEU. In the May Revision, the Governor outlay projects. For example, the state has set aside proposed that the Legislature set aside $2.9 billion nearly $1 billion in the State Project Infrastructure in a fund that the Governor could access for future Fund (SPIF) for the renovation of the State Capitol COVID-19-related expenses. The final spending Annex and the construction of a new office building plan does not include the contingency fund, but near the State Capitol. The spending plan converts does designate $716 million in the SFEU for this $694 million from the SPIF and some other smaller purpose. (There is no formal subaccount or budget projects to LRB financing. As a result, the state will language providing appropriation authority for this borrow from the bond market to pay the upfront funding.) Because these funds are not appropriated, costs of these projects and then repay those bonds the budget plan does not assume there are any with interest over time. This results in savings of associated federal reimbursements. roughly $700 million in 2020-21, but higher debt Federal Coronavirus Relief Fund service costs over time. Budget Allocates $9.5 Billion in CRF. Congress established the CRF to provide money to state, local, tribal, and territorial governments for 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET “necessary expenditures incurred due to the public COVID-19 pandemic. Of this total, $225 million health emergency with respect to the Coronavirus is provided to cities with populations greater Disease 2019” that are incurred between March 1 than 300,000 that did not receive a direct and December 30, 2020. California’s state federal allocation and $275 million is provided government received $9.5 billion from the CRF. to cities with a population of less than (Cities and counties in California with populations 300,000. greater than 500,000 also received $5.8 billion Control Section Language Gives in CRF directly from the federal government.) Administration Discretion to Reallocate CRF Guidance from the U.S. Department of the Treasury Monies. Under federal law and U.S. Treasury policy, (U.S. Treasury) outlines the eligible uses of these if any states’ CRF funds are unspent at the end of funds. The spending plan allocates the state’s CRF 2020, they must revert back to the U.S. Treasury. As funds to the following purposes: such, the budget authorizes the Director of Finance • Schools and Community Colleges. The to reallocate the funding to other allowable activities budget allocates $4.5 billion to K-14 entities if CRF funds are not spent before September 1, to mitigate the effects of school closures 2020. The language requires a ten-day notification related to COVID-19. For example, schools to the Joint Legislative Budget Committee. and community colleges will be able to use this funding to pay for increased costs related to: OTHER MAJOR FEATURES summer school, additional instructional time, and other services and supports for students. Safety Net Programs • State Programs. The budget allocates $2.7 billion in CRF funds to offset state costs Medi-Cal. The spending plan allocates in a variety of programs, for example in public $115.4 billion total funds ($23.6 billion General safety, public health, and for increased costs of Fund) in 2020-21 to Medi-Cal local assistance certain caseload-driven programs (in particular, in the Department of Health Care Services. This CalWORKs). reflects an increase of $15.9 billion total funds—or 16 percent—over 2019-20 estimated spending. • Counties. The budget provides $1.3 billion to (General Fund spending increases by a much more counties to be used toward homelessness, modest 4 percent.) Caseload in the program is public health, public safety, and other services projected to grow by 9 percent between 2019-20 to combat the COVID-19 pandemic. These and 2020-21—from 13 million to 14.2 million— funds are allocated according to each county’s largely due to the projected impact of COVID-19. share of the state’s population, but require This COVID-19-related projected caseload growth counties to comply with the state’s public results in a $6.1 billion ($2.1 billion General Fund) health orders to receive them. year-over-year increase in projected program • Homelessness Programs. The budget expenditures. However, two major adjustments allocates $550 million to the Department significantly offset this and other cost-related of Housing and Community Development changes in Medi-Cal. First, the federal government (HCD) for Project Homekey, intended to approved the state’s recently reauthorized managed provide housing for individuals and families care organization (MCO) tax for the period of who are experiencing homelessness or January 1, 2020 through June 30, 2023. Revenues who are at risk of homelessness due to the from the new MCO tax offset about $1.7 billion in COVID-19 pandemic. We discuss this funding General Fund spending in Medi-Cal in 2020-21. in more detail in the section below on local Second, Congress approved a 6.2 percentage-point government funding. increase in the federal government’s share of cost • Cities. The budget provides $500 million to for Medicaid (Medi-Cal is the state’s Medicaid cities for homelessness, public health, public program) for the duration of the national public safety, and other services to combat the health emergency caused by COVID-19. The www.lao.ca.gov 13 analysis full gutter 2020-21 BUDGET spending plan assumes this enhanced federal projected to reach $7.8 billion (as compared to funding is in place through the end of 2020-21 about $6.3 billion in 2010-11). and will offset around $2.8 billion in General Fund Funding for Local Governments spending in Medi-Cal in 2020-21. In-Home Supportive Services (IHSS). The In addition to the CRF funding provided to local budget projects IHSS total costs to increase governments, which is described in the previous from $13.6 billion in 2019-20 to $15.2 billion in section, the spending plan allocates General 2020-21 (11.7 percent). General Fund costs are Fund monies to local governments for a variety of estimated to slightly increase between 2019-20 purposes, in particular realignment and housing. ($4.3 billion) and 2020-21 ($4.5 billion). This slight This section describes these programs in more year-to-year increase in General Fund expenditures detail. masks a number of cost increases and costs Budget Partially Backfills Projected shifts. Specifically, the budget assumes continued Realignment Revenue Declines. The 1991 year-to-year growth to the three primary IHSS cost and 2011 realignments dedicated state sales tax drivers: caseload (4.1 percent), hours per case and vehicle license fee revenue to counties for (1.5 percent), and IHSS provider hourly wages and the administration of various programs on behalf benefits (6.5 percent). Additionally, the budget of the state. The budget provides $750 million to rejects the administration’s May Revision proposal backfill anticipated declines in realignment revenue to reduce IHSS service hours by 7 percent effective in 2020-21. An additional $250 million would be January 1, 2021, resulting in a cost of $205 million available through a trigger mechanism if the state General Fund in 2020-21. Similar to Medi-Cal, total receives additional federal funding by October 15, IHSS General Fund costs are partially offset by a 2020. Associated budget bill language directed temporary increase in the federal government’s the California State Association of Counties to share of IHSS costs for the duration of the national work with DOF to determine the funding allocation. public health emergency—an estimated total of Additionally, the language allowed the funding to $1.2 billion of IHSS General Fund savings across be used to prioritize support for health, human 2019-20 and 2020-21. services, entitlement programs, and programs CalWORKs. CalWORKs provides cash that serve vulnerable populations. The selected assistance, child care, and employment services methodology, allocates funding to each county in to low-income families with children. Generally proportion to the amount of realignment funding speaking, CalWORKs caseload and costs increase shortfall each county is facing, which is consistent during and following economic recessions and with how funding would have been allocated if it decrease during economic expansions. The all-time flowed through existing realignment formulas. As high for CalWORKs caseload (587,000 cases per a condition of receiving the funding, counties must month) was reached in 2010-11 in the immediate show that they are in compliance with state and wake of the Great Recession. In response to federal public health requirements. the COVID-19 public health emergency and Budget Provides $600 Million for Project recession, as part of the May Revision proposal, the Homekey and Related Services. At the outset administration projected the CalWORKs caseload of the COVID-19 pandemic, the state provided would increase well above this previous high, $50 million for the newly established Project averaging about 725,000 cases in 2020-21 (about Roomkey. The program helped local governments twice the caseload projected in the Governor’s acquire hotels and motels to provide for the January budget proposal). The final budget projects immediate housing needs of vulnerable individuals a lower CalWORKs caseload—instead equaling experiencing homelessness that were at risk the previous all-time high of 587,000 in 2020-21. of contracting COVID-19. Building off Project Because grant levels are higher now than during Roomkey, the 2020-21 spending plan provides the previous recession, total CalWORKs costs are $550 million of the state’s direct allocation of 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET federal CRF for Project Homekey. Project Homekey under Control Section 3.90, the 2020-21 budget provides for the acquisition of hotels, motels, assumes savings of $2.8 billion ($1.5 billion for the residential care facilities, and other housing that General Fund) resulting from reductions in employee can be converted and rehabilitated to provide compensation. The Legislature (1) directed the permanent housing for persons experiencing administration to seek to achieve these savings homelessness or at risk of homelessness, and who through the collective bargaining process and (2) also are impacted by COVID-19. Through HCD, authorized the administration to impose furloughs the state will provide grants to local governments if the administration and unions could not reach to acquire these facilities, which will be owned and agreement. The administration reached agreement operated at the local level. The 2020-21 budget with all 21 of the state’s bargaining units in June and also provides an additional $50 million General Fund July 2020 to reduce state employee compensation for the acquisition, conversion, rehabilitation, and costs in 2020-21. As part of the budget package, operation of Project Homekey sites. Associated the Legislature ratified the agreements with all trailer bill language provides exemptions to the 21 bargaining units. We released an analysis on California Environmental Quality Act and local September 9, 2020 that (1) provides a historical zoning restrictions to expedite the acquisition of record of all the labor agreements between the state Project Homekey sites prior to the December 30, and its employees to reduce state costs in 2020-21 2020 deadline to expend CRF funds. and (2) looks forward and provides comments Budget Provides $300 million to Continue the and recommendations to help the Legislature Homeless Housing, Assistance, and Prevention think through future decisions to reduce employee (HHAP) Program. The 2019-20 budget provided compensation should the budget problem persist $650 million for one-time grants to cities, counties, beyond 2021-22. and Continuums of Care (CoCs) to fund a variety of Includes Major Prison and Parole Changes programs and services that address homelessness Leading to Savings in Future Years. The budget through the HHAP program. The 2020-21 budget includes the following major changes to the prison provides an additional $300 million General Fund and parole systems that will result in significant for a one-time continuation of HHAP. Specifically, savings in future years. the budget makes $130 million available for cities • Makes Changes to Reduce the Prison with populations of 300,000 or more, $90 million Population. The budget reflects various available for CoCs, and $80 million available for changes intended to further reduce the counties. To receive funds, the eligible entities prison population. For example, the California must provide a plan to the Homeless Coordinating Department of Corrections and Rehabilitation and Financing Council describing how they have (CDCR) plans to (1) reduce the time it takes to coordinated, and will continue to coordinate, with identify housing for newly received inmates— other local agencies to address homelessness in allowing them to access rehabilitation their region. The funding may be used to operate programs earlier and earn more time off their Project Homekey sites and for evidence-based prison terms—and (2) increase the amount of solutions, including rapid rehousing, rental time certain inmates earn off their prison terms subsidies, and subsidies for new and existing through good behavior. These two changes housing and emergency shelters. are estimated to reduce the inmate population Other by nearly 11,000 inmates by 2023-24. The budget assumes that these changes will create Reductions in Employee Compensation. $6.4 million in savings in 2020-21. Savings will As part of the 2020-21 spending plan, the likely increase to hundreds of millions of dollars Legislature directed the administration to, through within a few years. budget related legislation, reduce state employee • Includes Plan to Close Two Prisons by compensation costs by up to 10 percent to achieve 2022-23. The administration has indicated the savings assumed in the budget. Specifically, www.lao.ca.gov 15 analysis full gutter 2020-21 BUDGET it plans to close one prison in 2021-22 and Plan to Realign Division of Juvenile Justice. another in 2022-23 in order to accommodate The budget reflects the approval of a May the ongoing decline in the inmate population, Revision proposal to gradually “realign” or shift the primarily resulting from Proposition 57 (2016). responsibility of the Division of Juvenile Justice (DJJ) The budget package includes legislation for housing certain juvenile offenders from the state requiring CDCR to inform the Legislature to the counties. Beginning July 1, 2021, youth who of the specific prisons to be closed by would otherwise be sent to DJJ would generally January 10, 2021 and January 10, 2022. The be placed under county supervision. Accordingly, administration estimates the closures will result the budget package provides $9.6 million General in $400 million in ongoing savings annually Fund—increasing to $209 million annually by within a few years. (Proposition 57 reduced 2024-25—to assist counties with their increased the amount of time inmates serve in prison responsibilities. These costs would be at least primarily by increasing CDCR’s authority partially offset in future years from state savings to reduce inmates’ sentences, such as for related to reductions in the DJJ population. completion of rehabilitation programs.) Supports Community Resilience During • Makes Changes to Reduce the Parole Power Shutdowns. The budget provides Population. The budget package includes $50 million General Fund on a one-time basis legislation capping parole terms for many to mitigate the effects of power shutdowns parolees at two to three years and establishing implemented to reduce the risk of wildfires sparked an early discharge process. Due to these by utility-owned equipment. changes, the budget assumes $23.2 million Local Air District AB 617 Implementation. in reduced parole expenditures in 2020-21, The spending plan includes $50 million one-time (Air increasing to roughly $76 million in ongoing Pollution Control Fund) to continue support for local savings within a few years. air district costs of implementing Chapter 136 of 2017 (AB 617, C. Garcia). Local air district costs include maintaining air monitoring equipment and developing and implementing community air protection plans. LAO PUBLICATIONS This report was prepared by Ann Hollingshead, with contributions from others across the office, and reviewed by Carolyn Chu and Anthony Simbol. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 16 LEGISLATIVE ANALYST’S OFFICE