The 2021-22 Budget: Overview of the Governor's Budget

The 2021-22 Budget: Overview of the Governor’s Budget How the Governor Allocates $15.5 Billion Windfall Among His Spending Proposals Criminal Justice Human Services Higher Education Other Resources and Environment Housing and Homelessness Health and Behavioral Health Business Assistance GABRIEL PETEK LEGISLATIVE ANALYST JANUARY 2021 analysis full gutter 2021-22 BUDGET LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET Executive Summary State Fiscal Picture Has Improved Amidst Continued Crisis. The pandemic disrupted the livelihoods of millions of Californians and takes the lives of thousands of Californians each month. Last year, the Legislature faced an unprecedented challenge to adopt a budget facing extraordinary uncertainty. Today, however, the state’s fiscal picture is quite different. Under the Governor’s budget, revenues are nearly back to pre-pandemic levels and state costs have not risen as dramatically as anticipated. While the crisis is still ongoing, this budget offers the Legislature an opportunity to consider how the state can best use its resources to help California respond and recover. State Has Significant Windfall to Allocate in 2021-22, but Faces Multiyear Challenges. Under the Governor’s budget, the state would end 2021-22 with $18.9 billion in total reserves, an increase of $7.5 billion over the last year’s enacted level. This increase is the result of constitutionally required reserve deposits, which reflect much stronger than anticipated revenue growth. In addition, we estimate the Governor had a significant windfall—$15.5 billion—to allocate in developing his 2021-22 budget proposal. However, the state budget faces challenges over the longer term. In particular, the administration anticipates the state would have operating deficits if the Legislature adopted the Governor’s budget proposals, reaching $11.3 billion in 2024-25. Governor’s Budget Proposals Focus on One-Time Spending. The figure below shows how the Governor proposes the Legislature allocate the $15.5 billion windfall. In particular, the Governor proposes spending over half of the windfall on one-time or temporary purposes. This report describes the various major budget proposals in more detail, offers some initial assessments, and provides Appendix figures detailing the Governor’s proposals for the windfall. Overall LAO Comments Recent Federal Pandemic Relief How the Governor Should Inform State Actions. In late Allocates(cid:31)a $15.5 Billion Windfall December, the federal government passed a fifth round of pandemic relief, providing SFEU Balance additional funding to most taxpayers, people receiving unemployment insurance Debt and benefits, renters, businesses, and schools. Liabilities The Governor’s budget includes a number One-Time Spending of significant proposals that address similar Revenue pandemic-related needs. While this overlap Reductions is understandable given the timing, it would be prudent to examine the Governor’s proposal in light of the new federal relief. Ongoing Spending Specifically, we recommend the Legislature: (1) determine how to best target state funds SFEU = Special Fund for Economic Uncertainties. to those not benefiting from the federal assistance, and (2) strive to complement, rather than duplicate, the federal activities. www.lao.ca.gov 1 analysis full gutter 2021-22 BUDGET Assessment of Governor’s Immediate Action Proposals. The Governor’s budget includes $5 billion in actions he proposes the Legislature adopt within the next few weeks. First, the Governor proposes $2 billion for in-person instruction grants connected to a school reopening proposal. We are concerned this proposal sets unfeasible time lines. Second, the Governor proposes providing $2.4 billion in tax refunds to low-income taxpayers, which we think could be more targeted. Third, we agree the Governor’s proposal to provide $550 million in small business grants is worth considering. Fourth, the Governor’s proposal to waive fees for individuals and businesses directly affected by the state’s stay-at-home orders is reasonable. Framework for Considering Early Action Proposals. The Governor proposes over two dozen proposals costing $7.8 billion that he is asking the Legislature to pass in the early spring. We recommend the Legislature consider each proposal separately and ask a series of questions to determine if the proposals warrant early action. These questions are: (1) Does the administration provide sufficient evidence of a problem? (2) Is the proposal time sensitive? (3) Is the entire funding amount time sensitive? (4) Is there sufficient detail in the plan to assess its potential success? Restoring Budget Resilience. In June 2020, the state took a number of actions—including making withdrawals from reserves and shifting costs—that were larger than necessary. In light of this fact, as well as continued economic uncertainty and anticipated future deficits, we think it is important that the state restore most or all of that budget resilience. The Governor’s interpretation of the constitutional requirement results in a sizeable deposit to rebuild some budget resilience, but he uses very few discretionary proposals to restore these tools. We agree the state should remain focused on the crisis at hand, but taking some of these actions now is nonetheless important both to address the state’s multiyear budget problem and help California weather the next unexpected downturn. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET OVERVIEW OF THE GOVERNOR’S BUDGET The state’s fiscal situation has continued Legislature. In this report, we provide a brief to rapidly evolve since the beginning of the summary of the proposed budget based on coronavirus disease 2019 (COVID-19) pandemic our initial review. In the coming weeks, we will last year. Although the state economy abruptly analyze the plan in more detail and release several ground to a halt in the spring with the emergence additional budget analyses. of COVID-19, it has experienced a quicker The objective of this report is to summarize rebound than expected. While negative economic the Governor’s budget structure and major consequences of the pandemic have been severe, proposals for the Legislature, including any themes they do not appear to have been as catastrophic that emerged as we conducted our preliminary from a fiscal standpoint as the budget anticipated. review. We also provide our initial assessment But, the recovery has been uneven. Many of the structure of the budget and raise issues low-income Californians remain out of work, while for legislative consideration on the major budget most high-income workers have been spared. proposals. On January 8, 2021, Governor Newsom presented his proposed state budget to the GENERAL FUND WINDFALL UNDER THE GOVERNOR’S BUDGET Budget Condition reserve, the Budget Stabilization Account (BSA). Generally, these reserve deposits are Figure 1 shows the General Fund condition higher when the state collects more revenues. based on the Governor’s proposals and using the Under the administration’s revenue estimates, administration’s estimates and assumptions. Total Reserves Reach $18.9 Billion. The bottom of Figure 1 Figure 1 shows total reserves General Fund Condition Summary planned for the end of 2021-22 (In Millions) under the administration’s 2019-20 2020-21 2021-22 estimates and assumptions. Under Revised Revised Proposed the Governor’s proposed budget, Prior‑year fund balance $11,292 $5,359 $12,203 the state would end 2021-22 with Revenues and transfers 140,623 162,742 158,370 $18.9 billion in total reserves. Expenditures 146,556 155,898 164,516 This represents an increase of Ending fund balance $5,359 $12,203 $6,058 $7.5 billion over the enacted Encumbrances $3,175 $3,175 $3,175 reserve level of $11.4 billion in SFEU balance 2,184 9,028 2,883 2020-21. The increase is the result Reserves of three factors: BSA $17,120 $12,536 $15,574 SFEU 2,184 9,028 2,883 • Deposit of $3 Billion in BSA Safety net 900 450 450 for 2021-22. Proposition 2 Total Reserves $20,204 $22,014 $18,907 (2014) requires the Legislature SFEU = Special Fund for Economic Uncertainties and BSA = Budget Stabilization Account. to set aside monies each year in the state’s constitutional www.lao.ca.gov 3 analysis full gutter 2021-22 BUDGET the state is required to make a $3 billion Windfall deposit into the BSA in 2021-22. We Estimate Governor Allocated a Windfall • $4.2 Billion in Reserve Deposit of $15.5 Billion. We estimate the Governor Adjustments. Proposition 2 also requires the had a $15.5 billion windfall to allocate in the state to revise, or “true up,” BSA deposits 2021-22 budget process. This is slightly larger for the two preceding fiscal years based than the $15 billion surplus the Governor has on updated revenue estimates. Under the cited. Both our office and the administration administration’s assumptions, the state would estimate the budget “surplus” or “windfall” by need to make $4.2 billion in true-up deposits estimating the amount of discretionary spending to the BSA for 2019-20 and 2020-21 due to in the budget. We define discretionary spending notably improved revenue estimates since the as new spending not required under law or to 2020-21 Budget Act. Of this total, $3.2 billion maintain current service levels. In a number of is due to the administration’s interpretation of areas, our office and the administration differ on the constitutional rules (see the nearby box). whether a spending proposal is discretionary or • Increase in the Discretionary Reserve not. For example, recent budgets made a number Balance of $267 Million. The state’s main of programmatic spending amounts subject to discretionary reserve is called the Special suspension under certain conditions. Those Fund for Economic Uncertainties (SFEU). conditions are not met, so we do not count funding The 2020-21 budget package enacted a those program amounts as discretionary, although discretionary reserve balance of $2.6 billion the administration does. and the Governor proposes a year-end Comparison to LAO November Outlook. In balance of $2.9 billion in that reserve. our Fiscal Outlook released in November 2020, our Administration Estimates Large Multiyear office anticipated the state would have a windfall Operating Deficits. An operating deficit occurs of $26 billion, significantly higher than the windfall when baseline expenditure growth outpaces allocated in the Governor’s budget. There are a few anticipated revenue growth. Both our office and major sources of this difference. Specifically, the the administration anticipate this is the case. In our administration’s estimates include: November Fiscal Outlook, we found the state faces • Much Higher BSA Deposits and large and growing multiyear operating deficits over Constitutional Debt Requirements. Across the outlook period. Under its own revenue forecast, the budget window, the administration the administration also anticipates the state would anticipates the state will have $5.6 billion face operating deficits if the Legislature adopted in higher required reserve deposits and the Governor’s budget proposals. Specifically, these debt payments under the requirements deficits would grow from $7.6 billion in 2022-23 to of Proposition 2. This is due to the $11.3 billion in 2024-25. Governor’s Interpretation of Constitutional True-Up Rules The constitution requires the state to make annual deposits into the Budget Stabilization Account (BSA) unless the withdrawal is reduced or suspended under a budget emergency. The state also must revise, or “true up,” BSA deposits for the two preceding fiscal years as revenue estimates are updated. In 2020-21, the state suspended the required BSA deposit and withdrew $7.8 billion from the BSA. The administration’s interpretation of the constitutional rules is that the state still must make a true-up deposit for the year in which the deposit was suspended. This results in an increased reserve requirement of $3.2 billion. This interpretation is not unreasonable, but other interpretations are plausible. 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET administration’s interpretation of true up • Higher Spending on Caseload-Driven requirements and higher estimates of capital Programs. Across the state’s major gains revenues. health and human services programs, the • Higher Direct COVID-19-Related administration’s estimates of General Fund Costs. The administration estimates spending is higher by nearly $2 billion direct COVID-19 expenditures, which compared to our estimates. Most of these we do not consider discretionary, are differences are in Medi-Cal and California higher by $4.4 billion compared to the Work Opportunity and Responsibility to Kids. budget act assumption. (We define In these two programs, the differences in direct COVID-19 expenditures to include our estimates of “baseline” costs (that is, expenses for testing, contact tracing, and excluding discretionary spending) are roughly vaccine distribution.) In our Outlook, we $900 million and $800 million, respectively. assumed these costs would be higher than • Very Similar Revenue Estimates. After 2020-21 by only $2.8 billion. In addition, accounting for reserve deposits and the administration appears to assume a reimbursements from the federal government, much lower federal reimbursement rate our estimates of revenues over the budget on COVID-19 expenditures, resulting in window are only $1.7 billion lower than the an additional $1.2 billion in costs relative administration’s January estimates. Given that to our November estimates. On net, the both our office and the administration revised administration estimates COVID-19-related revenue estimates upward by tens of billions costs are $2.8 billion higher than we assumed. of dollars, these figures are very similar. GOVERNOR’S PROPOSAL FOR ALLOCATING THE GENERAL FUND WINDFALL How the Governor Allocates the Windfall. • $2.5 Billion to Revenue Reductions. The Figure 2 shows how the Governor proposes the Governor proposes using $2.5 billion, about Legislature allocate the $15.5 billion windfall. 15 percent of the windfall, to reduce revenues. Specifically, the Governor proposes allocating: Figure 2 • $8.1 Billion to One-Time or Temporary Spending. The Governor proposes spending How the Governor just over half of discretionary resources, or Allocates(cid:31)a $15.5 Billion Windfall $8.1 billion, on a one-time or temporary basis for a variety of programmatic expansions. SFEU Balance (We define temporary to mean three years or fewer.) Debt and • $2.9 Billion to the SFEU Balance. The Liabilities One-Time Governor proposes the Legislature enact a Spending year-end balance in the SFEU of $2.9 billion. Revenue While the Legislature could set this fund Reductions balance to any amount greater than zero, in recent years, the Legislature has enacted Ongoing Spending balances in the SFEU around $1.5 billion or more. SFEU = Special Fund for Economic Uncertainties. www.lao.ca.gov 5 analysis full gutter 2021-22 BUDGET Nearly all of this total would Figure 3 provide a $600 tax refund to How the Governor Allocates the low-income taxpayers. $15.5 Billion Windfall by Program Area • $1.3 Billion to Ongoing (In Billions) Spending Increases. The Governor’s spending proposals Housing and Homelessness include $1.3 billion in ongoing Resources and Environment spending, slightly less than 10 percent of the windfall. (We Health and Behavioral Health estimate the costs of these Higher Education proposals would grow slightly Business Assistance over time, totaling $1.4 billion by 2024-25.) Criminal Justice One Time Ongoing • $700 Million to Repay Debts Human Services and Liabilities. In addition to Other $3 billion in constitutionally required debt payments, 0.5 1.0 1.5 2.0 $2.5 the Governor proposes the Legislature use $700 million in discretionary resources to repay state debts and liabilities. Figure 4 This includes repaying some special fund loans made in How the Governor Proposes Allocating the 2020-21 and an additional Windfall Among Spending Proposals payment to the California $15.5 Billion General Fund teachers’ pension system. Criminal Justice Human Services How the Governor Allocates the Windfall by Program Higher Area. Figure 3 shows how Education Other the $15.5 billion in spending proposals are distributed across major program areas. (School and community college spending is excluded from this figure because it is constitutionally required and, therefore, not discretionary.) The largest one-time spending proposals are for housing and homelessness, as well as natural resources and Resources and Environment the environment. In these areas, Housing and the Governor proposes spending Homelessness $2.3 billion and $1.9 billion on one-time or temporary purposes, respectively. The Governor focuses Health and Behavioral Health Business ongoing amounts on health and Assistance behavioral health. As Figure 4 shows, the Governor distributes 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET the $15.5 billion windfall over Figure 5 150 proposals. (The Appendix itemizes these proposals by How the Governor Allocates COVID-19-Related Spending program area.) Governor Allocates $2.5 Billion of the Windfall to Discretionary COVID-19-Related Spending. Business In addition to the new $4.4 billion Assistance in direct COVID-19 expenditures included in the Governor’s Direct COVID-19 Discretionary budget, the administration Housing and Spending COVID-19 Spending Homelessness proposes an additional $2.5 billion in discretionary COVID-19 Human Services spending. (Discretionary Higher Eduation COVID-19 expenditures include Other funding allocated to respond to the secondary effects of the pandemic, for example, funding for business assistance.) Figure 5, shows how COVID-19 = coronavirus disease 2019. the Governor’s Budget distributes discretionary COVID-19 spending revenue reductions (see Figure 6 on page 8). among program areas. In addition to the amounts This includes $2.4 billion in spending using the shown in the figure, more than $7 billion of the windfall, $6.7 billion in school and community Governor’s Proposition 98 proposals are directly college spending, $2.4 billion in tax refunds, and related to COVID-19. $1.4 billion in spending from special funds. The Governor Proposes $12.8 Billion for largest of the early action proposals using the Immediate or Early Action. The Governor windfall are $550 million for small business grants proposes the Legislature take immediate or and $250 million for funding to continue the early action on $12.8 billion in spending or Homekey program. MAJOR BUDGET PROPOSALS This section describes the major budgetary Number (ITIN) who will receive the EITC for 2020. proposals included in the Governor’s budget. The refund payments would begin in February We include General Fund proposals (both within 2021. The Governor’s budget assumes a cost of Proposition 98 and non-Proposition 98), as well $2.4 billion in 2020-21 for these refunds. as large spending proposals for special funds and LAO Comment: Legislature Could Consider bond funds. Alternative Targeting of Refunds. Prior to the pandemic, many of California’s low-income workers Tax Reductions and Business struggled to cope with the state’s high cost of Assistance living. The pandemic has exacerbated this problem, as job losses have fallen disproportionately on Tax Refunds to Low-Income Californians. The low-wage workers. In light of this, the Governor’s Governor’s budget proposes a one-time $600 tax proposal to target relief to low-income Californians refund to taxpayers who received the California makes sense. The Legislature, however, could Earned Income Tax Credit (EITC) for 2019 and consider alternative ways to target this relief. Over taxpayers using an Individual Taxpayer Identification the last year, most low-income Californians received www.lao.ca.gov 7 analysis full gutter 2021-22 BUDGET Figure 6 Spending Increases and Revenue Reductions Proposed for Immediate and Early Action (In Millions) Program/Department Proposal 2020‑21 2021‑22 Total Immediate General Fund Windfall Spending GO-Biz Small business grants, second round $550 — $550 X GO-Biz New grant program 250 — 250 Housing and Community Development Funding to continue Homekey program 250 — 250 Housing and Community Development Funding for housing-related infrastructure 250 — 250 CalFire Wildfire and forest resilience package 61 $195 256 California Student Aid Commission Cal Grant A eligibility change 58 58 116 BSCC Enhanced probation services for adults and juveniles 50 — 50 GO-Biz Forest resilience funding 47 — 47 Alcoholic Beverage Commission License Renewal Fee Waiver 45 — 45 X GO-Biz Grants to entrepreneurs 35 — 35 Department of Water Resources Sustainable groundwater management grants 30 30 60 Board of Barbering and Cosmetology License Renewal Fee Waiver 26 — 26 X GO-Biz Cultural institutions grants 25 — 25 X California Workforce Development Board Expand existing apprenticeships 25 — 25 Department of Conservation Wildfire and forest resilience package 25 60 85 Office of Emergency Services Home Hardening and Community Protection 22 — 22 Department of Food and Agriculture State Water Efficiency and Enhancement Program grants 20 20 40 Sierra Nevada Conservancy Wildfire and forest resilience package 20 50 70 Department of Parks and Recreation Wildland firefighting research grant 10 75 85 Department of Fish and Wildlife Wildfire and forest resilience package 9 36 45 Arts Council California Creative Corps Pilot Program 5 10 15 Tahoe Conservancy Wildfire and forest resilience package 1 11 12 Aging and Disability Connections Increase funding to ADRC centers — 3 3 Totals, General Fund Windfall Spending $1,814 $548 $2,362 Schools and Community College Spending (General Fund) Department of Education Expanded learning and academic intervention $4,557 — $4,557 Department of Education In-person instruction grants 2,000 — 2,000 X California Community Colleges Emergency student financial aid 100 — 100 California Community Colleges Student retention and enrollment strategies 20 — 20 Totals, Schools and Community Colleges $6,677 — $6,677 Revenue Reductions (General Fund) Revenue-related proposal Low-income tax refunds $2,400 — $2,400 X Revenue-related proposal California Competes tax credits — $10 10 Totals, Revenue Reductions $2,400 $10 $2,410 Special Fund Spending Various Cap-and-trade expenditure plan $624 $745 $1,369 CalRecycle Beverage container recycling pilots 5 5 10 Totals, Special Fund Spending $629 $750 $1,379 Total Early and Immediate Action Proposals $11,520 $1,308 $12,823 Note: This table reflects our best understanding of the administration’s immediate and early action proposals as of January 10, 2021. However, we continue to receive information from the administration. GO-Biz = Governor’s Office of Business and Economic Development; CalFire = California Department of Forestry and Fire Protection; BSCC = Board of State and Community Corrections; ADRC = Aging and Disability Resource Connection; and CalRecycle = California Department of Resources Recycling and Recovery. 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET two federal stimulus checks totaling $1,800 per • Small Business Grants. $550 million adult and $1,100 per child. One exception is to double the size of a recently created Californians who use an ITIN to file their taxes, program that awards grants up to $25,000 to who were not eligible for the federal programs. businesses and nonprofits with revenues Given this, the Legislature could consider more under $2.5 million that were impacted by the narrowly targeting the Governor’s proposal to pandemic. focus assistance on ITIN taxpayers. For example, • Other Business Grants. $250 million for our preliminary estimates suggest providing a California Competes to provide grants to refund of $1,800 per adult to ITIN taxpayers with businesses in addition to its traditional tax incomes below $75,000 (a similar threshold to the credits. federal program) would have a similar cost to the • Fee Waivers. $71 million to waive some of Governor’s proposal. the fees paid by certain professionals and Expansion of Tax Incentives. The Governor’s businesses disproportionately affected by budget proposes one-time increases of several the pandemic, such as manicurists and small existing tax credits and exclusions: restaurant owners. • Other. $135 million for a variety of other • Affordable Housing. $500 million for tax grant and loan programs aimed at helping credits to builders of rental housing affordable small businesses, with a focus on those from to low-income households. (This is the third underserved communities. Also, the budget consecutive year in which the Governor has provides $25 million to the Governor’s Office proposed a one-time expansion of the state’s of Business and Economic Development for housing tax credit, for a total of $1.5 billion cultural institutions. in tax credits. As with the prior expansions, up to $200 million would be available for LAO Comment: Some Proposals Raise the development of mixed-income housing Concerns. The Governor’s proposals to expand projects.) California Competes (both tax incentives • California Competes. $180 million for and grants) and CAEATFA raise a number of California Competes to award tax credits concerns: (1) we previously noted issues with the aimed at attracting or retaining businesses in effectiveness of California Competes and CAEATFA California. exclusion, (2) these programs are not well targeted • Hiring Credit. $100 million for tax credits to to businesses impacted by the pandemic, and smaller businesses that increase their number (3) businesses would realize the financial benefits of employees. more slowly than alternatives such as cash grants. • Sales Tax Exemption. $100 million for (For our previous analysis of California Competes sales tax exclusions awarded by the see: Review of the California Competes Tax Credit. California Alternative Energy and Advanced For our previous analysis of the CAEATFA exclusion Transportation Financing Authority (CAEATFA) see: Evaluation of a Sales Tax Exemption for Certain on purchases of equipment for certain Manufacturers.) manufacturing activities. Schools and Community Colleges Taxpayers would claim these tax credits and More Than $19 Billion in New Spending exclusions over a number of years beginning in Proposals. Proposition 98 (1988) establishes a 2020-21. The Governor’s budget assumes these minimum annual funding level for schools and proposals would reduce General Fund revenues by community colleges commonly known as the $76 million in 2020-21 and $30 million in 2021-22. minimum guarantee. Due to increases in the Expands One-Time Grants to Various Entities. minimum guarantee over the 2019-20 through The Governor’s budget includes several one-time 2021-22 period (see the box on page 11), the state proposals to provide assistance to businesses: has $19.1 billion available for new spending on www.lao.ca.gov 9 analysis full gutter 2021-22 BUDGET K-14 programs. The Governor proposes to spend apportionments, the budget provides only the most of this amount on three main priorities: 1.5 percent COLA. • Paying Down Deferrals ($8.4 Billion One LAO Comment: Budget Reflects a Reasonable Time). The June 2020 budget plan deferred Mix of One-Time and Ongoing Spending. Of $12.5 billion in payments to schools and the new spending specifically attributable to community colleges. The Governor proposes 2021-22, the budget allocates $2.6 billion for to pay down $8.4 billion of this amount, with ongoing commitments and $2.9 billion for one-time districts receiving the associated cash in activities. This one-time spending, combined 2021-22. Slightly more than $4 billion would with a $2.4 billion one-time deposit into the remain deferred from 2021-22 to 2022-23. Proposition 98 Reserve (discussed in the nearby • Providing In-Person Instruction and box), creates a budget cushion of $5.3 billion. Expanding Academic Support ($6.6 Billion This cushion helps protect ongoing programs from One Time). The Governor proposes volatility in the minimum guarantee. Specifically, immediate action to provide $2 billion in to the extent the guarantee drops or grows more one-time grants to incentivize schools to offer slowly in the future, the expiration of these one-time in-person instruction for younger students allocations allows the state to accommodate the and students with high needs, potentially lower guarantee without relying on program cuts or as soon as February 16, 2021. To receive payment deferrals. Having a large one-time cushion this additional funding, school districts must seems especially important in 2021-22 given the (1) develop or update a school reopening continued and significant economic uncertainty plan consistent with updated guidance from due to the pandemic. Moreover, $2.3 billion of the the California Department of Public Health, total Proposition 98 funding allocated to schools in including a plan for asymptomatic testing 2021-22 is supported with a one-time supplemental of all students and staff potentially as often payment (the Governor’s budget assumes no such as every week, and (2) approve collective additional payments are provided after 2021-22). bargaining agreements to implement the new LAO Comment: Concerns With Feasibility of school reopening plan by February 1. (Districts In-Person Instruction Proposal. Given the short could receive somewhat lower grant amounts time frame and significant steps schools would be if they meet these requirements one month required to take, we are concerned the proposal for later.) The Governor also proposes early offering in-person instruction is likely unfeasible and action to provide schools with $4.6 billion in could discourage school district participation. To grants to offer additional academic support be open by February 16, schools would only have for disadvantaged students, which could a few weeks to complete their reopening plans, include summer school, longer school days, arrange routine testing, and develop collective community learning hubs, and other locally bargaining agreements with their labor unions. It developed interventions. is also unclear whether the state and local health • Funding Cost-of-Living Adjustments departments have the capacity to provide the (COLA) ($2.2 Billion Ongoing). Most of the support and technical assistance necessary to ongoing funding in the Governor’s budget is help schools implement their reopening plans allocated for covering a 3.84 percent COLA in such a short time frame. The Legislature will for the Local Control Funding Formula. This want to consider whether the proposal provides COLA rate reflects the estimated statutory sufficient time for planning and whether the schools COLA for 2021-22 (1.5 percent) plus the and public health agencies have the capacity to compounded value of the COLA the state did effectively implement the requirements under the not provide in 2020-21. For other education time lines specified. To address these concerns, programs, including community college the Legislature could, for example, modify the proposal to first offer in-person instruction to all high-needs students a month before bringing back 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET all younger students. This would allow time for connectivity for distance learning, cleaning and schools to ramp up testing capabilities and address reconfiguring facilities, training teachers, and other implementation issues with a smaller group testing for the virus. However, the 2020-21 budget of students and staff. Alternatively, the Legislature allocated more than $7 billion in state and federal could direct resources to expanding statewide funds to address COVID-19-related costs and testing capacity and infrastructure that would allow mitigate learning loss. Recent federal legislation— schools to more easily access routine testing as a approved shortly before the release of the way to support school reopening. However, doing Governor’s budget—is likely to provide a similar so by February 16 may be difficult. amount of one-time funding in 2021-22. Although LAO Recommendation: Allocate Greater some additional state funding directed toward Share of Funding to Paying Down Deferrals academic support and reopening schools might and Addressing Pension Cost Increases. School be warranted, we think the budget misses an districts report a number of costs associated opportunity to make more progress on two other with responding to the COVID-19 pandemic issues. Specifically, we recommend the Legislature and preparing to resume in-person instruction. allocate a larger share of the one-time funds for Examples include purchasing devices and internet (1) paying down deferrals or (2) mitigating future Changes in the Proposition 98 Guarantee Under the Governor’s Budget Substantial Upward Revisions to Estimates of the Minimum Guarantee. Each year, the state calculates the minimum guarantee using a set of formulas in the State Constitution. The guarantee encompasses state General Fund revenue as well as local property tax revenue. Compared with the estimates in the June 2020 budget plan, the administration revises its estimates of the guarantee up $1.9 billion (2.4 percent) in 2019-20 and $11.9 billion (16.8 percent) in 2020-21. For 2021-22, the guarantee is up an additional $3 billion (3.6 percent) relative to the revised 2020-21 level. In addition, a law enacted last June requires the state to make a $2.3 billion supplemental payment on top of the guarantee in 2021-22. Including this payment, total Proposition 98 funding for schools and community colleges in 2021-22 is $88.1 billion—$60.8 billion from state General Fund and $27.3 billion from local property tax revenue. Budget Proposes Eliminating Supplemental Payments After 2021-22. When the state created the requirement for supplemental payments, it had anticipated a steep drop in the minimum guarantee that would affect school and community college funding for several years. The supplemental payments were intended to accelerate the recovery from this drop, with payments growing from $2.3 billion in 2021-22 to more than $6 billion by 2024-25. Due to the strong rebound in the minimum guarantee, the Governor proposes to eliminate these payments after 2021-22—effectively making the $2.3 billion included in the 2021-22 budget a one-time payment. Proposition 98 Reserve Deposits Required in 2020-21 and 2021-22. Proposition 2 (2014) established the Proposition 98 Reserve and set forth rules requiring deposits and withdrawals under certain conditions. Generally, the state is required to deposit Proposition 98 funding in this account when revenue from capital gains is relatively strong and the minimum guarantee is growing faster than per capita personal income. The administration estimates the state is required to make a $747 million deposit in 2020-21 and a $2.4 billion deposit in 2021-22. The total balance of the reserve would be $3 billion, which equates to about 3.5 percent of all funding that would be allocated to schools and community colleges in 2021-22. www.lao.ca.gov 11 analysis full gutter 2021-22 BUDGET cost increases related to pensions. Paying down explicitly for energy efficiency projects. Other deferrals would better position districts and the notable one-time proposals focus on emergency state to weather economic volatility by reducing student financial aid and faculty professional pressure on future Proposition 98 budgets. Paying development, with the intent to help students and down future pension costs could help smooth out faculty navigate some of the challenges associated a notable increase in costs currently projected with the pandemic and remote instruction. Though for 2022-23. Although taking these actions might unknown at the time of the Governor’s budget mean somewhat less one-time funding is available development, the administration is estimating for new programs in 2021-22, we think they would that California will receive roughly $2.9 billion in increase the likelihood that the programs districts additional one-time higher education support from do develop in the coming year can be sustained the new round of federal relief funding. A portion over time. of the $2.9 billion would go to CSU and UC, which they could use for emergency student financial Universities aid as well as various institutional purposes (such Governor Proposes Ongoing Base Increases as addressing revenue losses in their housing Linked With Certain Expectations. The Governor programs and covering higher COVID-19-related proposes a total of $336 million in additional technology and professional development costs). ongoing funding for the California State University LAO Comment: Governor’s University (CSU) and the University of California (UC). The Package Is Reasonable Starting Point…We think largest ongoing proposals for the universities the outline of the Governor’s budget package for are 3 percent General Fund base increases the universities is reasonable. It provides additional ($112 million for CSU and $104 million for UC). The funding for base operations to partly address Governor links these base increases to CSU and the reductions the state enacted last year. The UC meeting three expectations: (1) developing a Governor’s expectations for additional base funding plan to eliminate their achievement gaps by 2025, also are generally in line with legislative priorities (2) permanently increasing the share of courses the past several years (though the Legislature they offer online by at least 10 percentage points could consider expressing other expectations, over their pre-pandemic levels, and (3) establishing for example, on enrollment growth). The budget “dual admissions” pathways designed to simplify package designates more new funding to one-time and expedite student transfer from community than ongoing purposes, not further exacerbating colleges to CSU and UC. The Governor also the state’s projected operating deficit over the next expects the universities to improve the alignment of few years. It also designates the bulk of one-time their courses and programs with workforce needs. spending for maintenance and energy efficiency Additionally, he expects the segments to keep their projects—helping address existing backlogs while tuition flat at 2020-21 levels. Consistent with his avoiding more costly future repairs and potentially budget approach the past few years, the Governor having some modest economic stimulus effect. sets no enrollment growth expectations for CSU …But Some Components Could Be or UC. Beyond the base increases, the Governor Reconsidered. The Legislature might want to proposes ongoing augmentations for several revisit some of the specific proposals in the student support programs, including student basic Governor’s higher education package. If it were needs and mental health. to decide to put additional ongoing funding One-Time Proposals Focus on Maintenance into student support programs, we recommend and COVID-19 Relief. The Governor proposes the Legislature consider several fundamental a total of $450 million in one-time funding for the policy issues, including crystallizing overarching universities. The largest one-time initiatives are objectives, measuring unmet need, linking funding $175 million each for CSU and UC, with both levels and allocations with unmet need, and segments able to use the funds for deferred tracking progress toward meeting objectives. The maintenance and UC also able to use the funds Legislature also could evaluate most, if not all, 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET of the Governor’s one-time proposals (beyond The administration estimates this proposal the facility proposals) in light of the new federal would produce at least 5,000 beds to treat relief package, which has funding for the same persons with behavioral health disorders. (This purposes. Lastly, as lower-income students proposal is also discussed in the health and (those most affected during these times) receive behavioral health section of this report.) full tuition coverage at the public universities • Expanded Facilities to Support Housing. and campuses generally are on track to resume The Governor proposes $250 million for in-person operations for the 2021-22 academic the acquisition and rehabilitation of Adult year, the Legislature could reconsider having the Residential Facilities and Residential Care universities keep tuition levels flat. Raising tuition Facilities for the Elderly with a focus on would increase overall budget capacity, allowing preserving and expanding housing for more state priorities to be addressed, including low-income seniors who are experiencing potentially supporting more or better university homelessness or are at risk of homelessness. services. The Department of Social Services (DSS) would administer the program and provide Housing and Homelessness grants to local governments. Key Homelessness Proposals. The Governor Funding for Housing-Related Infrastructure. proposes $1.75 billion one-time General Fund for The Governor proposes $500 million one-time various programs related to homelessness. General Fund to the Infill Infrastructure Grant (IIG) • Homekey Continuation. The Governor program administered by HCD. This program helps proposes $750 million to continue the to fund housing-related infrastructure such as Homekey Program administered through building site remediation, sewers, and roads. Of the the Department of Housing and Community $500 million, the Governor requests early action Development (HCD). Over $800 million in from the Legislature to authorize $250 million in one-time funding (all funds) was provided 2020-21. This proposal adds to the $300 million to the newly established Homekey Program General Fund recently provided for IIG. in 2020-21. The program allows for the Eviction Protections. The Governor proposes acquisition and rehabilitation of hotels, motels, $11.7 million one-time General Fund to trial courts vacant apartments, and other properties that for the implementation of the Tenant, Homeowner, could be used to provide permanent housing and Small Landlord Relief and Stabilization Act for persons experiencing homelessness or at of 2020 (Chapter 37 of 2020 [AB 3088, Chiu]). risk of homelessness, and who are impacted Under the legislation, no tenant can be evicted by COVID-19. HCD provides Homekey before February 1, 2021 because of rent owed grants to local governments to acquire these due to a COVID-19-related hardship experienced properties, which are owned and operated at between March 4 and August 31, 2020, if the the local level. The administration indicates tenant provides a declaration of hardship. The law that the existing Homekey funding will create also specifies that for a COVID-19-related hardship over 6,000 housing units for individuals and that occurs later—between September 1, 2020 families. Of the $750 million, the Governor and January 31, 2021—tenants must pay at least requests early action from the Legislature to 25 percent of their rent due to avoid eviction. authorize $250 million in 2020-21. Tenants are still responsible for paying unpaid • Behavioral Health Infrastructure. The rents to landlords, but those unpaid amounts Governor proposes $750 million for the cannot be the basis for an eviction. Under the Department of Health Care Services (DHCS) legislation, landlords may pursue such unpaid to provide grants to counties for the rent in small claims filings. The administration acquisition and rehabilitation of properties to anticipates an increase in eviction cases (known as expand behavioral health treatment resources. unlawful detainers) and small claims filings when www.lao.ca.gov 13 analysis full gutter 2021-22 BUDGET the statutory protections expire, resulting in new financed. Given the state’s fiscal situation, CalAIM workload for trial courts. The Governor requests was withdrawn at the 2020-21 May Revision. The early action from the Legislature to authorize the Governor’s 2021-22 budget reintroduces CalAIM entire $11.7 million in 2020-21 in anticipation of in a broadly similar, but more developed, form. the increased workload. Lastly, the budget also (Consultation with stakeholders took place after the identifies the Governor’s desire to extend the proposal’s initial introduction.) To implement key eviction protections in AB 3088 past January 31, components of the proposal beginning in January 2021. The budget proposal does not provide details 2022, the Governor proposes to spend $1.1 billion about an extension of the eviction moratorium. total funds ($531.9 million General Fund) in LAO Comments: Governor Continues 2021-22, and $864 million total funds ($423 million to Rely on One-Time Solutions. While the General Fund) on an ongoing annual basis. Governor’s budget reflects his commitment LAO Comment: Legislative Considerations to curbing homelessness and addressing Regarding the CalAIM Reforms. In concept, housing affordability by once again proposing CalAIM reflects a promising package of reforms to significant state resources toward these issues, bolster, streamline, and transform care delivery in the Governor’s response continues to focus on Medi-Cal. At the same time, the CalAIM proposal one-time solutions. As we have said previously, is complex and far-reaching. While the stakeholder a clear, long-term strategy would make it more process leading up to the proposal was robust, the likely that the state’s investments would have a onset of COVID-19 obstructed the Legislature’s meaningful ongoing impact on its housing and opportunity to ask questions about the proposal homelessness challenges. In addition, several of and provide input. Accordingly, we suggest the the Governor’s proposals focus on the acquisitions Legislature use the upcoming budget process to: and rehabilitation of properties using one-time • Learn More About How This Year’s CalAIM resources. Moreover, whether the Governor’s Proposal Differs From the Prior Year’s. This proposals provide funding for supportive services year’s CalAIM proposal differs from the prior and maintenance is unclear. Lastly, it is unclear year’s proposal in many ways. For example, how the administration would target the resources the implementation time line is revised. administered by DHCS and DSS to address Also, whereas last year the administration homelessness. It is possible that addressing announced it was exploring whether to homelessness will not be the principal benefit of pursue a new federal funding opportunity for these proposals. residential services for individuals with mental Health and Behavioral Health illness, the current proposal announces an intent to pursue this opportunity. Additionally, Budget Reintroduces the California the current proposal expands the list of Advancing and Innovating Medi-Cal nontraditional Medi-Cal benefits that may (CalAIM) Proposal. As a part of the January be offered to enrollees to include asthma 2020-21 budget, the Governor proposed a large remediation services. number of Medi-Cal reforms collectively known • Resolve Key Outstanding Questions About as CalAIM. With this proposal, the Governor the Proposal. While the Governor released aimed to: (1) provide a more comprehensive extensive documentation with the updated suite of services to high-risk, high-need Medi-Cal CalAIM proposal, whether this information beneficiaries (such as transitional housing services answers key outstanding questions is unclear. to protect against homelessness); (2) standardize For example, how would the administration and streamline Medi-Cal managed care; (3) extend implement and continue to refine CalAIM programs and the associated federal funding for in coordination with other major statewide Medi-Cal currently authorized under temporary planning initiatives, including the Master waiver authority; and (4) rethink how mental health Plan for Aging, the Behavioral Health Task and substance use services are delivered and 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET Force, and other state efforts related to Fund—of which $136 million is ongoing—for homelessness? a demonstration project in which counties • Weigh the Potential Benefits and Risks would treat felony IST patients instead of the Presented by This Complex Reform Department of State Hospitals. This proposal Package. CalAIM presents both benefits and is similar in purpose to a rescinded proposal risks for Medi-Cal beneficiaries, providers, from last year’s Governor’s budget, but and policymakers. For example, transitioning structured differently. Medi-Cal beneficiaries and benefits into and • Potential Redirection of Jail Bonds for out of managed care—there are CalAIM Community Mental Health Facilities. The proposals in each of these two directions— Governor has expressed interest in redirecting often brings short-term disruptions even unused jail bonds to purchase or renovate if long-term improvements are likely to community mental health facilities. According materialize. to the administration, about $202 million could • Identify Components That May be Missing be made available for this purpose. From the Governor’s Proposal. The CalAIM LAO Comments: Legislative Considerations proposal reflects the administration’s priorities for Behavioral Health Proposals. First, the for how to transform Medi-Cal. The Legislature Legislature may wish to consider whether counties could consider whether it has additional—or have the capacity to increase their funding for different—priorities for transforming Medi-Cal behavioral health to meet the Behavioral Health and whether any components may be Continuum grant proposal’s match requirement missing from the Governor’s proposal, such without reducing existing services. Second, in as requirements for robust evaluation and considering the student behavioral health proposal, oversight. the Legislature may wish to ask the administration Budget Includes Several Major Behavioral whether Medi-Cal managed care plans would Health Proposals. The Governor’s budget includes have the capacity to meet the requirements to several major proposals to address behavioral receive the incentive payments given the significant health needs statewide. These include: added responsibilities they may receive under the administration’s CalAIM proposal. Finally, the • $750 Million to Strengthen County Legislature also may wish to ask the administration “Behavioral Health Continuum.” As why it is proposing ongoing funding for the described earlier, the Governor proposes county felony IST demonstration project, rather $750 million General Fund—made available than waiting until the demonstration project’s over three years—for competitive grants to effectiveness can be evaluated to make this funding counties to purchase or renovate real estate decision. for behavioral health facilities. Counties would be required to provide matching funds to Environment, Natural Resources, and receive these grants. Disaster Preparedness • $400 Million to Provide Student Behavioral Zero-Emission Vehicles (ZEVs) and Health Services Through Medi-Cal. The Infrastructure. The Governor’s budget includes Governor proposes $400 million total funds three proposals that would provide a total increase ($200 million General Fund)—made available of up to $1.5 billion (various funds) to promote over three years—to incentivize Medi-Cal ZEVs. First, the budget includes up to $1 billion managed care plans to establish treatment (Alternative and Renewable Vehicle and Fuel partnerships with county behavioral health Technology Fund) to support new ZEV fueling departments and schools. infrastructure. The funding would come from • $233 Million for Counties to Treat Felony extending various vehicle-related charges (such as Incompetent-to-Stand-Trial (IST) Patients. a portion of vehicle registration fees) set to expire The Governor proposes $233 million General www.lao.ca.gov 15 analysis full gutter 2021-22 BUDGET in 2024 and using some of the future revenue to wildfires. The total includes $675 million issue revenue bonds. Second, the budget includes from the General Fund and $325 million $465 million from the Greenhouse Gas Reduction from GGRF. Given the severity of wildfires Fund (GGRF)—$239 million in the current year and in recent years, it is reasonable to consider $226 million in the budget year—for (1) heavy-duty additional spending on wildfire prevention ZEV incentives and (2) light-duty ZEV incentives and mitigation activities. In comparison, for low-income households in disadvantaged most budget augmentations in recent years communities. Third, the budget includes $50 million have focused on building the state’s wildfire one time from the General Fund to support ZEV response capacity. In reviewing the proposed charging stations at state-owned facilities. package, it will be important to evaluate the LAO Comments: Legislative Considerations relative effectiveness of each proposal at in Reviewing ZEV Package. These proposals improving wildfire safety and, in turn, whether would continue efforts to meet the Legislature’s funding the particular mix of programs would greenhouse gas reduction goals, as well as support be the most effective way to spend the total the Governor’s ZEV goals established in a recent funding ultimately provided. In addition, all of executive order. In reviewing the proposals, there the proposed General Fund augmentations are many different issues for the Legislature to are one time, but the Legislature might want consider, including (1) whether the proposals are to consider whether certain programs should likely to be the most effective set of policies and operate on an ongoing basis to address what programs to promote ZEVs and achieve the state’s is a long-standing wildfire risk in many areas climate change and air quality goals; (2) how these of the state. state programs will be integrated or coordinated • California Disaster Assistance Act (CDAA) with existing programs, such as ZEV programs Funds. The administration proposes administered by electric utilities; (3) how the $256 million one time from the General Fund administration intends to balance efficiency and to assist local governments with emergency equity considerations in the allocation of funding response and recovery through CDAA—a for ZEV infrastructure and vehicles; and (4) whether $155 million increase over the amount issuing bonds—rather than continuing a pay-as-you budgeted for 2020-21. CDAA funding is used go approach—is the most appropriate funding to (1) restore or replace public real property mechanism for the proposed activities. damaged during disasters or (2) reimburse Disaster Response and Preparedness. local governments for eligible emergency In addition to the COVID-19-related spending response costs. Local governments are proposals discussed earlier, the Governor’s budget typically responsible for 25 percent of the includes numerous proposals related to responding eligible costs under CDAA, with the state to and preparing for disasters. (The budget covering the remaining 75 percent. also assumes total additional state spending in • Flood Management. The proposed budget 2020-21 of over $3 billion—including a net General includes $67 million from the General Fund Fund increase of $1.3 billion after accounting for in 2021-22, plus an additional $158 million federal reimbursements—for response and recovery over the subsequent three years, to fund activities related to the 2020 wildfires.) Some of the the state’s share of a large federal flood risk major proposals include: reduction project along the American River. The Governor also proposes $75 million • Wildfire Resilience and Forest Health. one time from the General Fund for deferred The Governor’s budget proposes a total maintenance on levees in the Central Valley, as of $1 billion—$323 million in 2020-21 well as about $140 million from Propositions and $677 million in 2021-22—for 15 1 (2014) and 68 (2018) for various other departments to implement various efforts flood-related projects and initiatives. related to improving forest health and making communities more resilient to future 16 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET • Disaster Response Emergency Operations for DTSC, which includes creation of an oversight Account (DREOA) Authority Extension. The board and changes to the charges that support authority the administration uses to access DTSC’s two major special funds. funds in DREOA for pandemic-response LAO Comments: DTSC Proposal Has Merit, is set to expire at the end of 2020-21. but Lacks Important Details. We find that The administration proposes extending its the proposals have merit given a backlog of authority to access DREOA for pandemic contaminated sites, the potential for an oversight response through control section language board to increase transparency and accountability, (C.S. 11.92) in the 2021-22 budget. In and the structural deficits of the two affected funds. reviewing the language, the Legislature However, certain details will be important for the will want to consider whether it allows for Legislature to evaluate each proposal. For instance, sufficient legislative oversight of pandemic additional information is needed on the specific response expenditures given the critical nature criteria DTSC will use to prioritize the $300 million and magnitude of these expenditures. and the specific projects that will be selected. In addition, while the funding is proposed as one Clean Up of Contaminated Sites. The time, it is unclear if there will be ongoing costs to Governor’s budget includes $300 million one maintain and operate implemented projects. The time from the General Fund in 2021-22 for the specific statutory language to establish the board Department of Toxic Substances Control (DTSC) and change the structure of charges also will be to clean up contaminated properties. The amount important. For example, the Legislature will want to proposed would be allocated for cleanup and consider whether the proposal fairly assigns costs investigation activities at sites across the state to payers that should bear the fiscal burden, as well according to risk-based criteria. The administration as whether the charges can be adjusted in future states that the proposed funding would be years to address inflation or other cost increases in contingent upon the enactment of the Governor’s order to avoid future structural deficits. proposed governance and fiscal reform package OVERALL LAO COMMENTS Recent Federal Pandemic Relief ...Reducing the Urgency of Immediate State Action. Nonetheless, given what we know now, it Recent Federal Action Provides Substantial would be prudent to step back and examine the Pandemic Relief Through the Spring... In late Governor’s proposal in light of new federal relief. December, the federal government passed an The additional federal relief significantly reduces additional package of pandemic relief which the pressure on the state to act immediately to included lump-sum payments to most taxpayers; provide economic assistance to those affected expanded unemployment insurance benefits; by the pandemic. The scale of the federal actions and provided funding for rental assistance, far outstrips the state’s spending capacity. As an additional business loans and grants, and schools. example, the Governor’s tax refund for low-income The Governor’s budget includes a number of Californians costs $2.4 billion, whereas we significant proposals—many of them proposed estimate the recent federal unemployment benefits as immediate and early actions—that address expansion will provide another $20 billion to similar pandemic-related needs. This overlap $30 billion to Californians impacted by job losses. is understandable given that the final details of State Should Complement Federal Action the federal package were only known as the and Focus on Controlling the Spread of Virus. administration was cementing its budget proposal. In light of the recent federal action, we recommend the Legislature: (1) determine how to best target www.lao.ca.gov 17 analysis full gutter 2021-22 BUDGET state funds to those not benefiting from the federal • Small Business Assistance Worth assistance, and (2) strive to complement, rather Considering. Recent federal business than duplicate, the federal activities. While the assistance, while considerably larger than state’s capacity to provide economic assistance is proposed state assistance, is not well much more limited than the federal government, targeted to the most impacted businesses. state funding can make a significant difference for Because of this, immediate state action on public health measures and controlling the virus. the $550 million for small business grants, As a result, one of the state’s most important which are targeted at impacted businesses, roles in complementing federal efforts is to restore is worth considering. (Taking immediate state economic activity by controlling the spread of action on the $25 million in cultural institution the virus, for example, through rapid vaccine grants also is worth considering for similar distribution. reasons.) Doing so, however, would not give the Legislature a chance to determine how Immediate and Early Action much demand actually exists for this brand Immediate Action Proposals. The Governor’s new program. Should the grants be approved, budget includes $5 billion in actions he proposes the administration should report regularly on the Legislature adopt within the next few weeks. their distribution. If funds remain unspent by These actions are intended to address some May Revision, the Legislature should consider the most pressing issues of the pandemic. As reallocating them to more pressing needs. noted earlier, however, some of these issues have • Fee Waivers Reasonable. Waiving fees for been addressed in the near term by the federal individuals and businesses directly affected relief package passed in December. Below, we by the pandemic and stay-at-home orders is summarize our assessment of these proposals reasonable. Moreover, the Legislature may and whether immediate action—as proposed—is wish to ask the administration if individuals warranted. and business would be reimbursed for fees paid since March 2020. In reviewing the • School Reopening Time Lines Likely specific proposals, the Legislature will want to Unfeasible. Given the short time frame and consider whether a full General Fund backfill significant steps schools would be required is necessary given the condition of the special to take, we are concerned the proposal for funds affected. offering in-person instruction is unfeasible and likely would discourage school district In addition, the Governor has indicated participation. It also is unclear whether state interest in taking immediate action on the eviction and local public health agencies have the moratorium, which is set to expire at the end capacity to support schools on such a short of January. To date, the administration has not time line. The Legislature will want to consider provided us with the details of this proposal. whether the proposal provides sufficient time Early Action Proposals. The Governor proposes for planning and whether the schools and over a dozen proposals costing $7.8 billion that public health agencies have the capacity to he is asking the Legislature to pass in the early effectively implement the requirements under spring. A few of these proposals—like academic the time lines specified. support for K-12 students and emergency financial • Tax Refunds for Low-Income Californians aid for community college students—overlap with Could Be More Targeted. Some groups, in recent federal action. While a number of proposals particular taxpayers who use an ITIN, have increase funding to existing state programs, others not been included in recent federal cash are mostly new, like those related to promoting assistance programs. The case for immediate sustainable agriculture. We recommend the action is strongest with regard to providing Legislature consider each proposal separately income support to these taxpayers. and ask a series of consistent questions when 18 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET determining whether the proposals warrant early be approved in concept with the final funding action. Specifically, we recommend the Legislature amounts determined as part of the final ask: budget package. For example, some funding proposed for early action would not be spent • Does the Administration Provide Sufficient until 2021-22. Evidence of a Problem? To make this • Is There Sufficient Detail in the Plan to determination, we suggest the Legislature Assess Its Potential Success? By definition, consider whether the proposal aims to with early action items, the Legislature has address pressing pandemic-related issues less time to understand the proposals, in ways that go beyond federal actions. voice its concerns, and ensure necessary Moreover, we suggest the Legislature changes are incorporated. Consequently, consider whether, absent the pandemic, the when adopting an early action proposal, the proposal would be worth pursuing. If not, Legislature should have sufficient information we suggest taking more time to review the from the administration to be reasonably proposal and its policy goals. For instance, assured the proposal will achieve its stated we do not think early action is a warranted goals. We recommend weighing whether the on the expansion of California Competes, advantages of taking early action outweigh as this proposal is not well targeted to help any uncertainty as to the proposal’s likelihood the most impacted business and also raises of success. For instance the state currently many policy questions that deserve thorough does not have an emergency financial aid consideration. For example, is California program for community college students Competes’ model appropriate for awarding (although it does have traditional financial aid grants? How would the state recoup funding if programs for these students). Deciding how businesses don’t meet their milestones? to best allocate state emergency financial aid • Is the Proposal Time Sensitive? Specifically, funds could take extra time and deliberation, we suggest the Legislature consider whether especially as the Legislature would want to early action is advantageous. As noted consider how any potential state allocation earlier, the recent federal action has reduced methods could interact with federal allocation the need for urgent action in some areas. methods. What is the overlap of the early action proposals with federal action? Would early Ultimately, making decisions with the benefit of state action provide substantial additional knowing how vaccine distribution proceeds, how benefits? For example, the administration the economy responds, how revenues perform in proposes providing $250 million to expand the spring, and whether the federal government Project Homekey in early action. Does the distributes additional funds to states will be very administration have a list of properties valuable for determining how to allocate the state’s ready for purchase and renovation? Would limited resources. early action allow individuals experiencing Restoring Budget Resilience homelessness move in earlier than they otherwise would? Rebuilding Budget Resilience. The • Is the Entire Funding Amount Time 2020-21 budget addressed a $54 billion budget Sensitive? Sometimes the administration problem, which arose as a result of an estimated asks for most or all of the funding associated historic decline in revenues. While those estimates with a proposal in order to start planning were reasonable at the time, since then, we have and developing the program. The full cost learned that they were too pessimistic. This means of the proposal, however, often is incurred the state took a number of actions to balance later. The Legislature may want to consider the budget—including making withdrawals from whether some early action proposals could reserves and shifting costs—that were larger www.lao.ca.gov 19 analysis full gutter 2021-22 BUDGET than necessary. In light of that fact, as well as the windfall to restore budget resilience. continued economic uncertainty and anticipated Specifically, the Governor proposes using future deficits, we think it is important that the state $700 million to repay debts and liabilities and restore most or all of that resilience. The state has sets the balance of the state’s discretionary two avenues available to do so: reserve at a somewhat level higher than the one enacted in 2020-21. Otherwise, however, • Constitutional Requirements. The the Governor does not use the windfall to administration’s interpretation and restore the budget’s fiscal resilience, which assumptions result in large constitutionally will be important to help the state weather the required reserve deposits and debt next downturn. repayments. For example, the state would end 2021-22 with $18.9 billion in reserves, about Addressing the Structural Deficit. Like $1.6 billion less than the amount proposed our office, the administration anticipates the under the 2020-21 Governor’s Budget. In budget faces a multiyear structural deficit. The addition, the state would be required to administration’s proposal to eliminate the ongoing dedicate about $3 billion to debt payments, supplemental payment to schools and community and the administration proposes using a colleges shrinks the size of these deficits. However, significant share of this total to pay down the Governor does not lay out a plan to address unfunded liabilities. the remainder, which is significant and growing • Allocating the Windfall. While the over time. We recommend the Legislature begin to administration does reflect large constitutional consider how the state might address the budget’s reserve deposits and debt payments, the ongoing problem. For example, using some of the Governor proposes using very little of windfall to make supplemental pension payments would reduce the multiyear structural deficit. CONCLUSION The pandemic has disrupted the lives and pre-pandemic levels and state costs have not risen livelihoods of millions of Californians and continues as dramatically as anticipated. Moreover, effective to take the lives of thousands of Californians each vaccines are being administered. While the state month. In the spring of 2020, the Legislature still is very much in the midst of this crisis, there faced an unprecedented challenge to respond to is hope on the horizon. The budget process offers the pandemic and adopt a budget in the face of the Legislature an opportunity to consider how the unprecedented economic uncertainty. Almost ten state can best use its resources to help California months into this disaster, the state’s fiscal situation respond and recover. is quite different. Revenues are nearly back to 20 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET APPENDIX Appendix Figure 1 Business Assistance: Discretionary Spending Proposals in the 2021-22 Governor’s Budget (In Millions) 2021-22 One Time or Program or Department Proposal 2020-21 Temporary Ongoing GO‑Biz Small business grants, second round $550 — — GO‑Biz California Competes: new grant program 250 — — GO‑Biz Small business finance center — $50 — GO‑Biz Small business loan guarantee program — 50 — GO‑Biz Grants to entrepreneurs 35 — — Totals $835 $100 — GO‑Biz = Governor’s Office of Business and Economic Development. Appendix Figure 2 Criminal Justice: Discretionary Spending Proposals in the 2021-22 Governor’s Budget (In Millions) 2021‑22 Program or One Time or Department Proposal 2020‑21 Temporary Ongoing BSCC Support for county probation departments $50.0 — — BSCC Funding for post release community supervision population — $19.5 — BSCC COVID-19-related funding for post release community supervision population — 12.1 — CDCR One-time deferred maintenance allocation — 50.0 — CDCR Valley State Prison: Arsenic and Manganese Removal Water Treatment Plant — 20.3 — CDCR California Institution for Men: Air Cooling at Facility A — 13.9 — CDCR Various other proposals — 19.6 $45.7 DOJ Consolidated forensic science laboratory campus — 6.5 — DOJ DNA Identification Fund backfill — — 6.0 Judicial Branch Deferred maintenance — 30.0 — Judicial Branch Courthouse construction and planning studies — 8.3 — Judicial Branch Courthouse facility operations, maintenance, and leases — — 53.5 Judicial Branch Continuation of self-help services funding — — 19.1 Judicial Branch Online adjudication of infractions and ability-to-pay — — 12.3 CalVCB Restitution Fund backfill — — 33.0 Totals $50.0 $180.0 $170.0 BSCC = Board of State and Community Corrections; COVID-19 = coronavirus disease 2019; CDCR = California Department of Corrections and Rehabilitation; DOJ = Department of Justice; and CalVCB = California Victim Compensation Board. www.lao.ca.gov 21 analysis full gutter 2021-22 BUDGET Appendix Figure 3 Health and Behavioral Health: Discretionary Spending Proposals in the 2021-22 Governor’s Budget (In Millions) 2021‑22 Program or One Time or Department Proposal 2020‑21 Temporary Ongoing CDPH Alzheimer’s and dementia research, awareness, training — $17.0 — CDPH Books for low-income children — 5.0 — CDPH Infectious disease (COVID-19) modeling activities — 0.5 — CHHS, Secretary Various proposals — 7.6 — EMSA Various proposals — — $0.7 Medi-Cal Provide incentives for student behavioral health — 200.0 — Medi-Cal Reintroduce CalAIM reforms — 108.9 423.0 Medi-Cal Expand and make permanent certain telehealth flexibilities — 34.0 — Medi-Cal Add continuous glucose monitoring benefit — — 3.8 OSHPD Increase geriatric workforce — 3.0 — State Hospitals Establish county demonstration project for incompetent to stand trial patients — 96.8 136.4 State Hospitals Construction projects — 54.3 — State Hospitals Extend and expand incompetent-to-stand trial diversion pilot program — 46.4 — State Hospitals Deferred maintenance — 15.0 — State Hospitals Various other proposals $13.0 5.0 19.2 Totals $13.0 $593.4 $583.1 CDPH = California Department of Public Health; COVID‑19 = coronavirus disease 2019; CHHS = California Health and Human Services Agency; EMSA = Emergency Medical Services Authority; CalAIM = California Advancing and Innovating Medi‑Cal; and OSHPD = Office of Statewide Health Planning and Development. Appendix Figure 4 Higher Education: Discretionary Spending Proposals in the 2021-22 Governor’s Budget (In Millions) 2021‑22 One Time or Program or Department Proposal 2020‑21 Temporary Ongoing California State University Deferred maintenance — $175 — California State University Emergency student financial aid — 30 — California State University CSU Monterey Bay Computing Talent Initiative — 10 — California State University Faculty professional development — 10 — California State University Student basic needs (Graduation Initiative) — — $15 California State University Student basic needs (mental health and technology) — — 15 California State University Other proposals — — 3 California Student Aid Commission Cal Grant A eligibility restoration $58 — 58 California Student Aid Commission Golden State Teacher Grants — 100 — California Student Aid Commission Additional Cal Grant competitive awards — — 35 California Student Aid Commission Cal Grant supplemental awards for foster youth — — 20 University of California Deferred maintenance and energy efficiency projects — 175 — University of California California Institutes for Science and Innovation — 20 — University of California Emergency student financial aid — 15 — University of California Student basic needs (mental health and technology) — — 15 University of California Programs in Medical Education (PRIME) — — 13 University of California Other proposals — 15 1 Other Workforce development and higher education linkages — 250 — Totals $58 $800 $175 22 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET Appendix Figure 5 Housing and Homelessness: Discretionary Spending Proposals in the 2021-22 Governor’s Budget (In Millions) 2021‑22 Program or One Time or Department Proposal 2020‑21 Temporary Ongoing Medi-Cal Provide grants to counties for behavioral health infrastructure — $750 — HCD Funding to continue Homekey program $250 500 — HCD Funding for housing-related infrastructure 250 250 — HCD Assistance for housing law compliance — — $4 RCFE and ARF Expand RCFE and ARF housing for seniors at risk of homelessness — 250 — Totals $500 $1,750 $4 HCD = California Department of Housing and Community Development RCFE = Residential Care Facilities for the Elderly; and ARF = Adult Residential Facilities Appendix Figure 6 Human Services: Discretionary Spending Proposals in the 2021-22 Governor’s Budget (In Millions) 2021‑22 One Time or Program or Department Proposal 2020‑21 Temporary Ongoing Child Care COVID-19 related support to providers and families — $55.0 — Child Welfare Expansions and flexibilities for non-minor dependents and former — 49.5 — foster youth CalWORKs Prevent adults from timing out of cash aid during pandemic — 46.1 — Food banks Augment funding for food banks during pandemic — 30.0 — SNB and TNB Increase benefit amounts in SNB and TNB programs — — $23.1 CalWORKs Reinstate funding for Cal-OAR accountability project — — 19.6 IHSS Adjust IHSS county administration for caseload increases — — 17.8 CFAP Augment CFAP benefits consistent with federal CalFresh actions — 11.4 — DDS Various proposals — 3.4 7.8 Child Welfare Various proposals — 11.2 5.9 Child Support Various proposals — — 16.6 Other Various proposals — 17.8 — Totals — $224.4 $90.7 COVID-19 = coronavirus disease 2019; SNB = Supplemental Nutrition Benefit program; TNB = Transitional Nutrition Benefit program; Cal-OAR = CalWORKs Outcomes and Accountability Review; IHSS = In-Home Supportive Services; CFAP = California Food Access Program; and DDS = Department of Developmental Services. www.lao.ca.gov 23 analysis full gutter 2021-22 BUDGET Appendix Figure 7 Resources and Environmental: Discretionary Spending Proposals in the 2021-22 Governor’s Budget (In Millions) 2021‑22 One Time or Program or Department Proposal 2020‑21 Temporary Ongoing Climate Catalyst Fund Sustainable agriculture funding $50.0 — — Climate Catalyst Fund Forest resilience funding 47.0 — — Conservation Corps Wildfire and forest resilience package — $15.0 — Conservation Corps Additional fire crews — — $5.9 Department of Conservation Wildfire and forest resilience package 25.0 60.0 — Department of Fish and Wildlife Wildfire and forest resilience package 9.0 36.0 — Department of Fish and Wildlife Various one-time upgrades and equipment — 41.8 — CalFire Wildfire and forest resilience package 61.1 195.0 — CalFire Additional fire crews — — 137.3 CalFire Various capital outlay projects — 54.2 — CalFire Deferred maintenance — 10.0 — CalFire Other proposals — 5.0 8.3 Department of Parks and Recreation Wildland firefighting research grant 10.0 75.0 — Department of Parks and Recreation Deferred maintenance — 20.0 — Department of Parks and Recreation Backfill for Harbors and Watercraft Fund — 10.0 — Department of Parks and Recreation Woolsey wildfire repairs — 10.0 — Department of Parks and Recreation Other proposals — 15.2 — Department of Pesticide Regulation Integrated pest management programs — 8.3 — DTSC Exide facility closure 20.0 66.0 — DTSC Cleanup of contaminated properties in impacted — 300.0 — communities DTSC Backfill for Hazardous Waste Control Account — 22.5 — DTSC Legal cost recovery for Exide facility — 14.0 — DTSC Backfill for Toxic Substances Control Account — 13.0 — Department of Water Resources Sustainable groundwater management grants 30.0 30.0 — Department of Water Resources Deferred maintenance of levees — 75.0 — Department of Water Resources American River flood project — 67.0 — DGS Resources Building renovation — 452.1 — Natural Resources Agency Wildfire and forest resilience package — 15.0 — Sierra Nevada Conservancy Wildfire and forest resilience package 20.0 50.0 — State Lands Commission Wildfire and forest resilience package — 12.0 — Tahoe Conservancy Wildfire and forest resilience package 1.0 11.0 — Totals $273.0 $1,683 .0 $152.0 CalFire = California Department of Forestry and Fire Protection; DTSC = Department of Toxic Substances Control; and DGS = Department of General Services. 24 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET Appendix Figure 8 Other: Discretionary Spending Proposals in the 2021-22 Governor’s Budget (In Millions) 2021‑22 One Time or Program or Department Proposal 2020‑21 Temporary Ongoing ABC License Renewal Fee Waiver $45.0 — — Arts Council California Creative Corps Pilot Program 5.0 $10.0 — Board of Barbering and Cosmetology License Renewal Fee Waiver 25.6 — — California State Library Various proposals — 8.0 — CalSTRS External investment audit services — — $12.3 Department of Food and Agriculture State Water Efficiency and Enhancement Program 20.0 20.0 — grants Department of Food and Agriculture Support for state-affiliated fairgrounds — 50.0 — Department of Food and Agriculture Blythe and Needles Border Protection Stations — 14.4 — Department of Food and Agriculture Integrated pest management programs — 11.8 — Department of Food and Agriculture Deferred maintenance at fairgrounds — 10.0 — Department of Food and Agriculture Farm to School grant program — 10.0 — Department of Technology Fund information security audit program and Security — — 21.0 Operation Center with General Fund Department of Technology Stabilize IT systems and staff Broadband for All efforts — — 11.4 DGS Gregory Bateson Building Renovation — 191.6 — DGS Jesse Unruh Building Renovation — 122.4 — DGS OS EVSE Infrastructure Assessment and Facility — 50.0 — Development DGS One-time deferred maintenance allocation — 20.0 — Franchise Tax Board Second phase of Enterprise, Data, Revenue project — — 55.6 Department of Insurance Enhance insurance fraud investigation and prevention — — 6.1 GovOps, Secretary Develop and implement Cradle-to-Career Data System — 3.0 12.0 GovOps, Secretary Implement statewide data strategy — — 0.6 GO-Biz Cultural institutions grants 25.0 — — CWDB Expand existing apprenticeships 25.0 — — OES Home Hardening and Community Protection 21.9 — — OES California Disaster Assistance Act adjustment — 193.5 — OES California Earthquake Early Warning System — 17.3 — OES One-time deferred maintenance allocation — 5.0 — School Facilities Construction and renovation of TK and full-day — 200.0 — Kindergarten facilities Totals $167.5 $936.8 $120.8 ABC = Department of Alcoholic Beverage Control; IT = information technology; DGS = Department of General Services; OS = Office of Sustainability; EVSE = Electric Vehicle Supply Equipment; GovOps = California Government Operations Agency; GO‑Biz = Governor ’s Office of Business and Economic Development; CWDB = California Workforce Development Board; OES = Governor’s Office of Emergency Services; and TK = Transitional Kindergarten. www.lao.ca.gov 25 analysis full gutter 2021-22 BUDGET LAO PUBLICATIONS This report was prepared by Ann Hollingshead, with contributions from analysts 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. 26 LEGISLATIVE ANALYST’S OFFICE