The 2021-22 Budget: Overview of the Spending Plan (Final Version)

The 2021-22 Budget: Overview of the Spending Plan GABRIEL PETEK LEGISLATIVE ANALYST AUGUST 2021 analysis full gutter 2021-22 BUDGET LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET Each year, our office publishes the California actions taken through July 15, 2021, but we have Spending Plan to summarize the annual state updated the narrative to reflect actions taken later in budget. This publication provides an overview of the the legislative session. In addition to this report, we 2021-22 Budget Act, then highlights major features have released a series of issue-specific, online posts of the budget approved by the Legislature and signed that give more detail on the major actions in the by the Governor. All figures in this publication reflect budget package. BUDGET OVERVIEW General Fund Condition the Proposition 98 Reserve (dedicated to school and community college spending) would reach Figure 1 summarizes the condition of the General $4.5 billion under the spending plan. (We do Fund under the revenue and spending assumptions not include this reserve in the total because in the July 2021 budget package, as estimated by withdrawals supplement the constitutional minimum the administration. spending level for K-14 education and therefore do Total General Fund Reserves Reach not help the state address future budget problems. $20.7 Billion Under Spending Plan. As shown However, this reserve does benefit schools because in Figure 1, the budget package assumes that it mitigates the funding reductions that occur when 2021-22 will end with nearly $21 billion in total the constitutional minimum drops.) reserves. This consists of: (1) $15.8 billion in the State Revenues Not Expected to Exceed Budget Stabilization Account (BSA), (2) $4 billion Appropriations Limit. The State Appropriations in Special Fund for Economic Uncertainties, Limit (SAL) limits how the state can use revenues and (3) $900 million in the Safety Net Reserve, that exceed a specific threshold. While the which is available for spending on the state’s Governor’s May Revision reflected revenue safety net programs, like Medi-Cal. In addition, estimates that exceeded the SAL by roughly $16 billion, the July budget package reflects Figure 1 different choices, which result in revenues remaining below the limit. The box on the next page General Fund Condition Summary describes budgetary actions related to the SAL. (In Millions) Budget Commits a $47 Billion General Revised Enacted Fund Surplus. A surplus occurs when, over the 2019-20 2020-21 2021-22 three-year budget window, the state collects Prior-year fund balance $11,442 $5,556 $28,248 more in General Fund revenues than it requires Revenues and transfers 140,400 188,775 175,345 to meet its existing obligations. We estimate the Expenditures 146,285 166,083 196,440 Legislature had a $47 billion surplus to allocate Ending fund balance $5,556 $28,248 $7,153 in the 2021-22 Budget Act. This surplus reflects Encumbrances $3,175 $3,175 $3,175 significantly higher revenues than were estimated at SFEU balance 2,381 25,073 3,978 the time of the 2020-21 Budget Act. It is also larger Reserves than the surplus included in the Governor’s May BSA $17,350 $12,339 $15,781 Revision. The key reason for this is that the budget SFEU 2,381 25,073 3,978 package uses $8.9 billion in American Rescue Safety net 900 450 900 Plan (ARP) fiscal relief funds to offset General Fund Total Reserves $20,631 $37,862 $20,659 revenue losses that have occurred, relative to the Note: Reflects administration estimates of budget actions taken through July 15, pre-pandemic trajectory, due to the coronavirus 2021. disease 2019 (COVID-19) public health emergency. SFEU = Special Fund for Economic Uncertainties and BSA = Budget Stabilization Account. (The initial estimate was $9.2 billion, but the figure was updated to reflect budgetary estimates made www.lao.ca.gov 1 analysis full gutter 2021-22 BUDGET by the Department of Finance [DOF].) This lowers $175 billion in 2021-22, which represents a decline General Fund costs by that amount. Figure 2 on of 7 percent over the historic 2020-21 level. This the next page describes the allocation of the decline is due to a variety of factors, including: the $47 billion General Fund surplus as of July 2021. nearly $8 billion withdrawal from the BSA in 2020-21 In particular, the spending plan dedicates the and the administration’s expectation that collections vast majority—nearly $39 billion—to one-time or from the personal income tax and corporation temporary program augmentations. The budget tax will decline somewhat. In addition, federal also uses $3.4 billion of the total for new, ongoing reimbursements for state disaster spending, including program spending. The full implementation cost on COVID-19, are scored as revenues (accounted for of these ongoing commitments is $12.4 billion by in “other revenues”). 2025-26. Revenue-Related Policy Changes. The revenue estimates in Figure 3 reflect some policy Revenues changes. Most notably, legislation included in the Figure 3 on the next page displays the budget package created a new option for owners administration’s revenue projections as incorporated of certain businesses to restructure their taxes in a into the July 2021 budget package. Revenues way that reduces their federal income taxes. While for 2020-21 reached historic highs. Between this change allows business owners to achieve a 2019-20 and 2020-21, revenues are estimated to net reduction in their combined federal and state have increased 25 percent, the largest single year income taxes, some owners would pay somewhat increase in over four decades. The budget package higher state taxes. As a result, the administration assumes General Fund revenues and transfers will be estimates this change will increase General Fund The State Appropriations Limit (SAL) Proposition 4 (1979) established an appropriations limit on the state and most types of local governments. Under these constitutional requirements, each year the state must compare the appropriations limit to appropriations subject to the limit. If appropriations subject to the limit are less than the limit, there is “room” under the limit. If appropriations subject to the limit exceed the limit (on net) over any two-year period, there are excess revenues. The Legislature can use excess revenues in three ways: (1) appropriate more money for purposes excluded from the SAL, (2) split the excess between additional school and community college district spending and taxpayer rebates, or (3) lower tax revenues. For more information on the SAL, please see our recent report: The State Appropriations Limit. Budget Allocates Significant Resources Toward Excludable Purposes. The state includes two major discretionary spending amounts that are excluded from the SAL. First, the July budget package includes $18 billion ($16.4 billion General Fund) in “qualified” capital outlay expenditures, which is spending that meets the statutory definition of capital outlay for exclusion under the SAL. Second, trailer bill language clarifies that the $8.1 billion in Golden State Stimulus payments are related to the state of emergency as a result of coronavirus disease 2019 and are therefore exempt from the SAL. Budget Includes Other Technical Adjustments to the SAL. In addition, the budget package reflects two other more significant adjustments to the SAL, which both increase room under the limit. First, trailer bill legislation reflects the intent of the Legislature to count realignment revenues to local governments as subventions in accordance with the changes in the state-local fiscal relationship that have occurred since 1980. This results in an additional $12.2 billion in room in 2021-22. Second, the budget includes trailer bill language that recognizes room under the limits of school and community colleges at the state level. This results in an additional $4.3 billion in room in 2021-22. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET revenues by $1.3 billion in 2021-22, with lower gains in the out years. These revenue increases Figure 2 were offset slightly by some smaller revenue How the Budget Allocates a reductions, such as the main street tax credit. $47 Billion General Fund Surplus Spending Debt and Figure 4 on the next page displays the Liabilities Reservesa administration’s July 2021 estimates of total state Ongoing Spending and federal spending in the 2021-22 budget package. As the figure shows, the spending plan assumes total state spending of $258 billion in 2021-22, an increase of nearly $30 billion from the revised 2020-21 level. This increase reflects the General Fund spending associated with the One-Time and Temporary Spending significant surplus in 2021-22. Federal funds are expected to decline substantially between 2020-21 and 2021-22, from $277 billion to $193 billion. This is due to the significant federal funds the state has received from federally enhanced unemployment insurance (UI) benefits, Note: Reflects LAO estimates of budget actions taken through which are accounted for in the state budget in the July 15, 2021. The final budget package, however, did not spend Employment Development Department (EDD). Under $3.3 billion of initially allocated spending on various transposition the administration’s assumptions, federal spending programs. These funds will revert to the General Fund. in EDD will reach $140 billion in 2020-21 and will a SFEU balance and Safety Net Reserve deposit. decline to $34 billion in 2021-22. SFEU = Special Fund for Economic Uncertainties. In addition to funds for UI, the state has received significant federal funds through several pieces of federal legislation, most notably the ARP. For example, in addition to programmatic and public health funding, the ARP included $27 billion in fiscal Figure 3 General Fund Revenue Estimates (Dollars in Millions) Revised Change From 2020-21 Enacted 2019-20 2020-21 2021-22 Amount Percent Personal income tax $99,599 $125,151 $123,298 -$1,853 -1% Sales and use tax 25,509 27,936 28,986 1,050 4 Corporation tax 13,954 20,720 18,106 -2,615 -13 Totals, Major Revenue Sources $139,061 $173,807 $170,390 -$3,417 -2% Insurance tax $3,135 $3,348 $3,428 $80 2% Other revenues 2,886 3,786 7,798 4,012 106 Transfer to/from BSA -3,345 5,011 -3,442 -8,453 -169 Other transfers and loans -1,337 2,822 -2,829 -5,651 -200 Totals, Revenues and Transfers $140,400 $188,775 $175,345 -$13,430 -7% Note: Reflects administration estimates of budget actions taken through July 15, 2021. BSA = Budget Stabilization Account. www.lao.ca.gov 3 analysis full gutter 2021-22 BUDGET relief funds for the state, which the state has mostly for schools and community colleges. Second, the budgeted in 2021-22. We describe the state’s July spending plan allocated $42 billion of the allocation of the ARP fiscal relief funds in more total General Fund surplus to a range of different detail below. program areas, as shown in Figure 5. We also Budget Package Includes $72 Billion provide more program-level information in the in Discretionary General Fund Spending Appendix. (The Appendix only is available for the Choices. The major spending choices in the online version of this report.) budget package fall across ten key programmatic Budget Commits $30 Billion in Discretionary areas. First, the spending plan allocates about Proposition 98 Funds. The State Constitution $30 billion in discretionary spending choices sets a minimum annual funding requirement for within the Proposition 98 minimum funding level schools and community colleges. Of the total Proposition 98 guarantee, the Figure 4 budget package includes about Total State and Federal Fund Expenditures $30 billion in spending proposals to provide the constitutionally (Dollars in Millions) required funding increases to Revised Change From 2020-21 Enacted schools and community colleges. 2019-20 2020-21 2021-22 Amount Percent Of this total, about $26 billion is General Fund $146,285 $166,083 $196,440 $30,358 18% one time, with the largest allocation Special funds 55,086 61,692 61,216 -476 -1 being $12.5 billion to pay down Budget Totals $201,372 $227,774 $257,657 $29,882 13% the deferrals the state adopted Bond funds $6,718 $7,855 $4,932 -$2,923 -37% as part of the June 2020 budget Federal funds 148,996 277,220 192,984 -84,236 -30 plan. The remaining $4 billion is Note: Reflects administration estimates of budget actions taken through July 15, 2021. ongoing, with almost two-thirds of Figure 5 Major General Fund Spending Choices in the 2021-22 Budget Act (In Billions) Schools and Community Collegesa Resources and Environment Golden State Stimulus Payments Other Transportation Ongoing One-Time or Temporary Higher Education Health Housing and Homelessness Human Services Criminal Justice 5 10 15 20 25 $30 a Proposition 98 spending includes General Fund and local property tax revenue. Note: Reflects LAO estimates of budget actions taken through July 15, 2021. The final budget package, however, did not spend $3.3 billion of initially allocated spending on various transposition programs. These funds will revert to the General Fund. 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET the funds allocated to provide academic support Stimulus); $1.5 billion for drinking water and and expanded learning time for disadvantaged drought-related activities; $1 billion for flexible aid students. to local governments for homelessness; and nearly Initial Budget Committed $42 Billion in Other $890 million for clean vehicle incentive programs. Discretionary General Fund Choices. The budget While the initial budget package allocated includes hundreds of spending choices across $3.3 billion for a variety of transportation programs, a range of policy areas, as shown in Figure 6. including for transit and active transportation, this Some of the major spending decisions include funding was contingent on subsequent legislation, $8.1 billion in stimulus payments to low-income which was not passed. As a result, these funds will Californians (the second round of Golden State revert to the General Fund. Figure 6 Discretionary Spending Choices in the 2021-22 Budget Act $42 Billion, One-Time, Temporary, and Ongoing Spending in the Budget Package Resources and Environment $1 Billion Human Services Criminal Justice Drinking water and drought- related activities Transportation Highways, roads, and transita Stimulus payments to low-income Californians Flexible local aid Other Housing and Homelessness CalAIM Health Higher Education a The final budget package, however, did not spend $3 billion of initially allocated spending on various transposition programs. These funds will revert to the General Fund. Note: Reflects LAO estimates of budget actions taken through July 15, 2021. CalAIM = California Advancing and Innovating Medi-Cal. www.lao.ca.gov 5 analysis full gutter 2021-22 BUDGET Figure 7 Budget Also Commits $27 Billion How the Budget Package Allocates $27 Billion in in ARP Fiscal Relief Funds. The ARP included $350 billion in flexible funding ARP Fiscal Relief Funds to state and local governments for (In Millions) fiscal recovery in the Coronavirus State Amount Fiscal Recovery Fund. Of this total, Replace Lost State Revenue $9,196 California’s state government received Address Increased Homelessness and Housing Shortages 4,876 about $27 billion. The state has until Broadband Infrastructure, Access, and Affordability 3,772 December 31, 2024 to use the funds Relief for Unpaid Energy Utility Bills and Arrearages 2,000 for any of the following purposes: (1) to Child Savings Accounts 1,778 respond to the public health emergency Small Business Grants 1,500 or negative economic impacts associated COVID-19 Response Costs 725 with the emergency; (2) to support Community Economic Resilience 600 Behavioral Health Continuum Infrastructure Program 530 essential work; (3) to backfill a reduction Training and Education Support for Displaced Workers 473 in total revenues that have occurred Community Care Expansion 450 relative to the pre-pandemic trajectory; Economic Support for Ports 250 or (4) for water, sewer, or broadband Emergency Financial Aid for Community College Students 250 infrastructure. Figure 7 shows how the Youth Workforce Development 185 budget package allocates these funds. CaliforniansForAll College Service Program 128 In addition to the $27 billion described in Mental Health Student Services Partnership Grant Program 100 Figure 7, California received $550 million Revitalization of California Tourism 95 Legal Aid for Renters 80 in Coronavirus Capital Projects Fund Reserve for Accountability and Oversight 19 from the ARP, which also is available to Federal Tracking, Accountability, and Cost Recoverya 11 the state on a more flexible basis. The Total $27,017 budget package allocated these funds to a Expenditures planned over four-year period. broadband infrastructure. ARP = American Rescue Plan and COVID-19 = coronavirus disease 2019. Additional Medicaid-Related Federal Funds. The ARP also included offset new General Fund costs. In addition, by a temporary enhanced federal match spending these funds, the state would draw down rate for home- and community-based services an additional $1.6 billion in federal Medicaid funds. (HCBS) funded through the Medicaid program. Figure 8 summarizes the budget’s approach for Specifically, the ARP allows the state to draw down these funds, which includes over 25 HCBS service an additional $3 billion in Medicaid HCBS funds, expansions and enhancements that must still be which the state must spend on new HCBS service approved by the federal government. expansions or enhancements, but ultimately will Figure 8 LAO Summary of HCBS Spending Plan Proposalsa (In Millions) HCBS ARP Federal Total Description Fundsb Medicaid Funds Funds New HCBS services $966.4 $974.0 $1,940.4 Existing HCBS service expansions and enhancements 850.9 484.8 1335.7 Workforce trainings and one-time provider payment increases 663.7 143.6 807.3 HCBS infrastructure improvements 448.3 1.5 449.8 HCBS assessment and navigation improvements 97.5 18.3 115.8 Totals $3,026.8 $1,622.2 $4,649.0 a Reflects different categorization of HCBS spending plan proposals relative to administration’s categorization. b Reflects costs that are expected to be covered by federal funding for home- and community-based service (HCBS) expansions and enhancements made available by the American Rescue Plan (ARP) Act of 2021. 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET EVOLUTION OF THE BUDGET Governor’s January Budget Proposal entirely the result of higher revenue collections and estimates relative to 2020 budget projections. On January 8, 2021, Governor Newsom Governor Allocated Half of the Surplus presented his state budget proposal to the Toward One-Time and Temporary Programmatic Legislature, marking the formal beginning of the Spending. In the January budget, Governor 2021-22 budget process (see Figure 9). proposed allocating about half of the surplus January Budget Proposal Reflected a $15.5 ($8.1 billion) to one-time or temporary Billion Surplus. At the time of the January programmatic spending, focused particularly Governor’s budget, and under the administration’s on housing and homelessness and resources revenue estimates, we estimated the Governor and the environment. The Governor’s budget had a $15.5 billion surplus to allocate in the also included about $2.5 billion on discretionary 2021-22 budget process. This surplus was nearly COVID-19-related spending, for example, for Figure 9 Time Line of Major Events in the 2021-22 Budget Process JANUARY 8. Governor Newsom presents proposed state budget to the Legislature, which allocates an JAN estimated $15.5 billion General Fund surplus. JANUARY. Revenue collections for 2020-21 are higher than expected by roughly $10.5 billion (relative to the Governor’s budget). FEBRUARY. Revenue collections for 2020-21 are FEB higher than expected by roughly $14.2 billion (relative to the Governor’s budget). MARCH 11. Congress passes and the President signs MAR the American Rescue Plan. MARCH. Revenue collections for 2020-21 are higher MARCH - MAY. The Legislature passes than expected by roughly $16.4 billion (relative to the legislation on nearly $7 billion in early Governor’s budget). actions, including for Golden State APR Stimulus payments, a second round of small business grants, and a wildfire and forest resilience package. MAY MAY 14. Governor Newsom presents a revised state budget proposal to the Legislature, which allocates an estimated $38 billion General Fund surplus. JUNE 14. The Legislature passes an initial budget package. JUN JUNE. Revenue collections for 2020-21 are higher than expected by roughly $4.8 billion (relative to the 2020-21 Budget Act). JUNE 28. The Legislature passes the final budget package, which allocates an estimated $47 billion General Fund surplus. www.lao.ca.gov 7 analysis full gutter 2021-22 BUDGET assistance for businesses. (At the time, the first round of grants was provided through federal government was considering, but had not executive action.) yet passed, the ARP.) In addition, the Governor • $536 million ($411 million General Fund) for a proposed the Legislature take immediate or early wildfire and forest resilience package. action on $12.8 billion in spending increases or revenue reductions. Governor’s May Revision Early Actions On May 14, 2021, Governor Newsom presented a revised state budget proposal to the Legislature. The Legislature took early action on nearly (This annual proposed revised budget is called the $6.8 billion in programmatic spending and revenue “May Revision.”) reductions during the 2021-22 budget process. Governor’s May Revision Reflected a $38 Figure 10 summarizes those actions. Most notably, Billion Surplus. At the time of the May Revision, they include: and under the administration’s revenue estimates, • $3.8 billion in Golden State Stimulus we estimated the Governor had a $38 billion payments, the first round of state direct surplus to allocate. This surplus figure was the payments to lower-income taxpayers. Of this result of three major factors. First, excluding policy total, $2.3 billion was directed to taxpayers choices and reflecting very strong cash collections with adjusted gross income (AGI) of less in the early months of 2021, revenues were higher than $30,000 and $500 million benefited by $51 billion. Second, constitutionally required undocumented taxpayers with AGIs less than spending, most notably for schools and community $75,000 and who file using an Individual colleges, was higher by $16 billion. Third, other Taxpayer Identification Number. The package major adjustments, such as lower safety net also included nearly $1 billion in additional spending and the costs of the early action package, one-time payments for California Work reduced costs by $3 billion. Opportunity and Responsibility to Kids May Revision Included Total of $85 Billion (CalWORKs) and Supplemental Security in Major Budgetary Choices. In addition to the Income/State Supplementary Payment (SSI/ surplus described above, the Governor had to SSP) recipients. make choices about how to allocate an additional • Just over $2 billion for a second round of $23 billion in spending on schools and community small business grants and $50 million in colleges and $27 billion in ARP fiscal relief funds, grants to nonprofit cultural institutions. (A which the ARP allocated to the state a couple of Figure 10 Early General Fund Actions in the 2021-22 Budget Process (In Millions) Income Assistance Golden State Stimulus paymentsa $3,786 Business Assistance Small business and cultural institution grants 2,075 Resources and Environment Wildfire and forest resilience package 411 Human Services Exempt pandemic UI from CalWORKs income eligibility 242 Other License renewal fee waivers (ABC and BBC) 119 Other Other, various 93 Human Services Child welfare, various 42 Total $6,767 a Includes direct payments to families, as well additional payments to CalWORKs and SSI/SSP recipients. UI = unemployment insurance; CalWORKs = California Work Opportunity and Responsibility to Kids; ABC = Alcoholic Beverage Control; and BBC = Board of Barbering and Cosmetology. 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET months before the May Revision was released. The spending; and (3) proposing changes to the how Governor proposed spending these funds across realignment revenues are treated under the SAL. a wide array of programmatic areas, including for Major Budget Choices in the Legislature’s program expansions and new programs. Package. With the additional resources described The SAL Became an Important Issue in the above, the legislative package made a number May Revision. Although the Governor’s budget of programmatic augmentations above those estimated the state would collect a small amount included in the May Revision. For example, ($529 million) of revenues in excess of the SAL, the package provided additional funding for: due to significantly higher revenue estimates, the (1) drought, wildfire, and other climate-related May Revision estimated the state would collect purposes; (2) homelessness services at the local $16.2 billion in excess of the SAL. For the tax level over multiple fiscal years; (3) phasing-in the rebate portion, the Governor proposed allocating implementation of the developmental services rate half of the total ($8.1 billion) to taxpayers in the study, (4) public health infrastructure, (5) lowering form of a second round of Golden State Stimulus the age eligibility for the Medi-Cal expansion; and payments. For the school payment portion, the (6) substantially larger augmentations for student Governor proposed allocating the payments in a financial aid programs. The Legislature’s budget future year, as allowed under the constitution. package also took some additional actions related to reserves and borrowing, including making Legislature’s Budget Package an additional deposit into the state’s Safety Net Initial Budget Package Passed on June 14, Reserve, paying off all the remaining outstanding 2021. The Legislature passed an initial budget school and community-college deferrals, and package on June 14, 2021. This package made setting aside funds to prepay bond debt service. two major modifications to the structure of the May Final Budget Package Revision, which gave the Legislature additional resources to allocate. First, it used LAO revenue Legislature Passed a Final Budget Package estimates from April 2021, modified for recent on June 28, 2021. The final budget package cash collections, rather than the administration’s largely reflected the Legislature’s approach on estimates. Second, it used some funding from the SAL-related choices (see box on page 2 for more ARP (both fiscal relief funds and funding for HCBS) information on the SAL in the final 2021-22 budget to offset General Fund costs. The Legislature’s package) and choices to use funding from the budget package also made different choices that ARP to offset General Fund costs. The subsequent meant that state revenues did not exceed the SAL. section describes the major features of the final These choices included: (1) scoring the Golden budget package and Figure 11 on the next page State Stimulus II payments as revenue reductions, lists the budget and budget-related legislation rather than spending; (2) reallocating some passed as of July 15, 2021 and Figure 12 on page capital outlay from federal funds to General Fund 11 includes budget-related legislation passed later in the legislative session. MAJOR FEATURES OF THE 2021-22 SPENDING PLAN The major General Fund and federal fund K-14 EDUCATION spending actions in the 2021-22 budget package are briefly described in this section, organized Significant Increase in School and around the issue areas shown in Figure 5 in the Community College Funding. Proposition 98 first section of this report. We plan to discuss (1988) established the minimum annual funding these and other actions in more detail in a series of level for schools and community colleges. This forthcoming publications this fall. funding requirement depends upon various www.lao.ca.gov 9 analysis full gutter 2021-22 BUDGET formulas that adjust for several factors, including the Constitution requires the state to deposit changes in state General Fund revenue. For some of the available funding into a statewide 2020-21, the minimum requirement is up reserve account for schools and community $22.5 billion (31.8 percent) compared with the colleges. Under the June 2021 budget plan, the estimates made in June 2020 (Figure 13 on total required deposit is $4.5 billion—$1.9 billion in the next page). This increase represents the 2020-21 and $2.6 billion in 2021-22. The largest largest upward revision since the passage of discretionary allocation of Proposition 98 funding Proposition 98 and is due to higher General Fund is $12.5 billion to pay down the deferrals the state revenue estimates. For 2021-22, the minimum adopted as part of the June 2020 budget plan. requirement increases by an additional $309 million Beginning in 2021-22, schools and community (0.3 percent) relative to the revised 2020-21 level. colleges will receive all of their funding according Makes Required Reserve Deposit, Pays Down to the regular monthly payment schedule. The Deferrals, and Funds New Programs. When the budget allocates the remaining funds for significant minimum funding requirement is growing quickly, one-time and ongoing program increases. For Figure 11 Budget-Related Legislation Passed on or Before July 15, 2021 Bill Bill Number Chapter Subject Number Chapter Subject Budget Bills and Amendments Trailer Bills Passed on or Before July 15, 2021 AB 128 21 2021-22 Budget Act AB 130 44 Education finance AB 85 4 Amendments to 2020-21 Budget Act AB 131 116 Child development SB 85 14 Amendments to 2020-21 Budget Act AB 132 144 Higher education SB 89 1 Amendments to 2020-21 Budget Act AB 133 143 Health SB 147 40 Amendments to 2020-21 Budget Act AB 134 75 Mental Health Services Act SB 129 69 Amendments to 2021-22 Budget Act AB 135 85 Human services AB 161 43 Amendments to 2021-22 Budget Act AB 136 76 Developmental services AB 164 84 Amendments to 2021-22 Budget Act AB 137 77 State government Early Action Bills AB 138 78 Unemployment insurance AB 81 5 Coronavirus disease 2019 (COVID-19) relief AB 140 111 Housing AB 82 6 COVID-19 pandemic childcare AB 141 70 Cannabis licensure AB 86 10 School reopening and reporting AB 143 79 Courts SB 86 15 Public social services AB 145 80 Public safety SB 92 18 Juvenile Justice Realignment AB 148 115 Public resources SB 93 16 Rehiring and retention in employment AB 149 81 Transportation AB 83 11 License renewal fees AB 150 82 Taxes AB 88 12 Golden State Stimulus AB 153 86 Social services SB 87 7 COVID-19 small business grants SB 139 71 Golden State Stimulus II SB 88 8 Golden State Stimulus SB 142 39 State employee bargaining agreements SB 91 2 Rental assistance SB 146 72 Correctional facilities SB 94 9 License renewal fees SB 151 74 Economic development SB 95 13 COVID-19 supplemental paid sick leave SB 152 34 Elections SB 156 112 Broadband SB 157 83 Crime enforcement and training programs SB 158 73 Hazardous waste SB 159 42 State employee compensation: Bargaining Unit 6 SB 160 87 Cannabis licensure Note: This figure includes budget bills and trailer bills identified in Section 39.00 of the 2020-21 Budget Act that were enacted into law. Ordered by bill number. 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET schools, these augmentations Figure 12 focus on providing academic Budget-Related Legislation Passed After July 15, 2021 support for disadvantaged students, reopening schools Bill Number Chapter Subject and addressing learning loss, Budget Bills and Amendments enhancing the education SB 170 240 Amendments to 2021-22 Budget Act workforce, and implementing Trailer Bills Passed After July 15, 2021 new curriculum or instructional AB 163 251 State government practices in certain subjects. The AB 167 252 Education finance community college augmentations AB 172 696 Human services focus on increasing the number AB 173 253 Public safety of full-time faculty, addressing AB 174 254 Vehicles deferred maintenance at campus AB 175 255 Housing AB 176 256 Small business grants facilities, and funding basic AB 177 257 Public safety student needs (including mental SB 155 258 Public resources health services). The budget SB 162 259 Community Economic Resilience Fund also provides a 5.07 percent Program baseline increase for the primary SB 165 279 State employee bargaining agreements school and community college SB 166 260 License fee waivers and deferrals funding formulas. SB 168 261 Childcare SB 169 262 Higher education Eliminates Supplemental SB 171 263 Health Payments but Establishes Note: This figure includes budget bills and trailer bills identified in Section 39.00 of the 2020-21 Multiyear Plan to Fund Universal Budget Act that were enacted into law. Transitional Kindergarten. Ordered by bill number. Trailer legislation adopted in June 2020 would have required recognition of the significant revenue increases the state to make payments to schools and (and ensuing increases in the guarantee) that have community colleges on top of the minimum occurred since that time, the June 2021 budget funding requirement beginning in 2021-22. plan repeals these payments. The budget, however, These supplemental payments were intended to makes another commitment that will increase accelerate the recovery of school funding from funding for schools—above the existing minimum the decline the state anticipated last June. In requirement—on an ongoing basis. Specifically, Figure 13 Comparing June 2020 and June 2021 Proposition 98 Estimates (In Millions) 2020-21 2021-22 June 2020 June 2021 June 2021 Change From Change From (Enacted) (Revised) Change (Enacted) 2020-21 Revised 2020-21 Enacted Minimum Guarantee General Fund $45,066 $67,685 $22,619 $66,374 -$1,310 $21,309 Local property tax 25,824 25,745 -79 27,365 1,620 1,540 Totals $70,890 $93,430 $22,539 $93,739 $309 $22,849 Funding by Segment K-12 schools $62,525 $80,918 $18,393 $80,523 -$395 $17,998 Community colleges 8,365 10,622 2,258 10,598 -24 2,234 Reserve deposit — 1,889 1,889 2,617 728 2,617 www.lao.ca.gov 11 analysis full gutter 2021-22 BUDGET it establishes a plan to make all four-year olds “zero-emission vehicle package.” Notably, the eligible for Transitional Kindergarten by 2025-26. budget act included an additional $3.3 billion from (Currently, only children born between September 2 the General Fund for the California Department and December 2 are eligible.) The Legislature and of Transportation and the California State the Governor have reached an agreement to cover Transportation Agency, which will revert to the the associated costs—approximately $2.7 billion at General Fund because subsequent legislation to full implementation—by adjusting the Proposition allocate funds was not enacted by October 10, as 98 formulas to increase the share of General Fund required in the budget act. revenue allocated to schools. Higher Education Resources and Environment The spending plan provides a total of $3.7 billion The spending plan provides a total of in new, discretionary General Fund monies in $8.4 billion in new, discretionary General Fund 2021-22, of which approximately $500 million is monies in 2021-22, of which nearly all is one ongoing, for higher education. Below, we highlight time or temporary, for a variety of resources and some of the major changes. environment programs. In particular, the budget Universities’ Core Operations. The spending package provides $6.9 billion General Fund (a plan includes a total augmentation of $1 billion total of $12.7 billion over four years) for seven ongoing General Fund for core operations at the major “packages” that each include funding for California State University (CSU) and the University multiple programs and projects. Specifically, the of California (UC). The augmentation brings the budget act includes (1) $3.1 billion to address the universities’ base funding back to pre-pandemic drought emergency and increase water resiliency, levels and then provides an additional 5 percent (2) $2 billion to incentivize increased adoption of base increase. (We do not include these zero-emission vehicles and installation of charging base funding increases in our discretionary infrastructure, (3) $758 million for wildfire prevention funding totals.) and mitigation activities, (4) $369 million for Targeted Augmentations for Universities. efforts to better adapt to the impacts of climate Beyond base funding, the budget includes change, (5) $253 million for a program to increase $2.6 billion General Fund in 2021-22 for targeted access to parks and outdoor recreation, (6) initiatives focused solely or primarily on the $170 million for incentives and planning efforts universities. The largest spending components to increase renewable energy, and (7) $65 million within this category are $650 million for deferred to incentivize improved waste management and maintenance and energy efficiency projects at CSU recycling activities. and UC, $500 million for student housing (with an additional $1.5 billion provided over the subsequent Transportation two fiscal years), and $458 million for CSU The spending plan provides a total of $1.2 billion Humboldt to transition to a polytechnic institution. in new, discretionary General Fund monies in By 2025-26, the one-time initiatives in this category 2021-22, which is entirely one time or temporary, will have expired, but approximately $400 million for transportation infrastructure. This includes in higher ongoing spending will remain. The largest $475 million in 2021-22 ($1.1 billion over three of these ongoing commitments involve supporting years) for litter abatement and beautification future resident enrollment growth. projects on state highways and local roads. Student Financial Aid Programs. The spending The budget also includes one-time funding of plan significantly expands the Cal Grant and Middle $280 million for improvements at the Port of Class Scholarship (MCS) programs. Specifically, Oakland, nearly $300 million for various California it provides $235 million ongoing General Fund to Highway Patrol and Department of Motor Vehicles expand eligibility for Cal Grant entitlement awards facility improvements, and $100 million for rail and to community college students regardless of their transit demonstration projects as part of the larger age and time out of high school. In addition, the 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET budget agreement includes $515 million ongoing behavioral health service delivery for children General Fund beginning in 2022-23 to revamp and youth under age 25. Second, the spending the MCS program. The revamped program results plan includes $445.7 million General Fund in a significant increase in the number of MCS ($755.7 million total funds) in 2021-22 to fund recipients and MCS award amounts. the Behavioral Health Continuum Infrastructure Program—which will provide grant funding to Health local entities for behavioral health facilities or The spending plan provides a total of $3.8 billion mobile crisis infrastructure. Funding for these two in new, discretionary General Fund monies in initiatives will be provided across five and three 2021-22, of which $1 billion is ongoing, for years, respectively. health-related programs. Below, we highlight some Public Health Infrastructure (Beginning in of the major changes. 2022-23). In negotiations on the 2021-22 budget, California Advancing and Innovating the Governor and Legislature agreed to provide Medi-Cal (CalAIM). CalAIM is a far-reaching on an ongoing basis, beginning in 2022-23, a set of reforms with a variety of goals. To support $300 million General Fund augmentation to the the first half-year of CalAIM implementation, the California Department of Public Health (CDPH) spending plan dedicates $664 million General Fund to improve state and local public health systems. ($1.1 billion total funds) in 2021-22. The bulk of (Prior to the pandemic, the average annual General CalAIM funding—ramping up and then settling in at Fund budget for CDPH has been about $175 million $500 million General Fund ($900 million total funds) since CDPH became a standalone department ongoing—supports an expanded array of services in 2007-08.) aimed at addressing the health and social needs of Human Services Medi-Cal’s high-cost, high-need populations. Medi-Cal Coverage Expansion. The The spending plan provides a total of $7.9 billion spending plan provides $94 million General Fund in new, discretionary General Fund monies in ($158 million total funds) for three major expansions 2021-22, of which $1.1 billion is ongoing, for a to Medi-Cal eligibility. First, the spending plan variety of new and existing initiatives throughout expands comprehensive Medi-Cal coverage to human services. (The full implementation income-eligible undocumented immigrants ages costs of these ongoing proposals grow to 50 and older. Second, the spending plan raises the $6.6 billion by 2025-26.) Additionally, the budget Medi-Cal “asset limit”—a cap on specified assets includes hundreds of millions of dollars for for eligible seniors and persons with disabilities. continued temporary assistance related to the (Once necessary federal approvals are obtained, COVID-19 pandemic response and support in the asset limit would be eliminated altogether.) child welfare, In-Home Supportive Services (IHSS), Third, the spending plan extends pregnancy and CalWORKs. Below, we highlight some of the and postpartum Medi-Cal coverage (available major changes. to higher-income individuals) from 2 months Developmental Services. The 2021-22 budget to 12 months post-childbirth. By 2024-25, the package lays out a five-year plan to reform the annual cost of these expansions is expected to service provider rate-setting process in the reach about $1.9 billion General Fund ($2.7 billion Department of Developmental Services system. total funds). The plan involves phasing in the full implementation Behavioral Health. The spending plan funds of the study’s recommended rate models over two major investments in behavioral health. First, a five-year period—with a General Fund funding the spending plan includes roughly $1 billion level of $89.9 million in 2021-22 that ramps up General Fund ($1.5 billion total funds) in 2021-22 to to $1.2 billion in 2025-26 and ongoing. The plan fund the Children and Youth Behavioral Health includes the implementation of a quality incentive Initiative—a package of augmentations through provider payment program, whereby a portion of multiple state departments intended to transform a service provider’s full payment ultimately will be www.lao.ca.gov 13 analysis full gutter 2021-22 BUDGET contingent on meeting certain performance and this effort, the budget includes $140 million to consumer outcomes benchmarks. support foster youth with complex or highly acute CalWORKs. The 2021-22 spending behavioral health needs who may have otherwise plan provides over $100 million (nearly been placed in congregate care out of state. $500 million ongoing) for a various policy The 2021-22 budget also includes $233 million changes in CalWORKs. These policy changes General Fund for pandemic assistance within child are primarily aimed at increasing eligibility and welfare, including continued support for non-minor participation in the CalWORKs programs. In terms dependents who would otherwise become ineligible of direct assistance to families, the budget uses for Extended Foster Care payments as well as new (1) realignment funding to provide a 5.3 percent funding for direct payments to foster caregivers, increase to the CalWORKs grant and (2) federal payments to short-term residential therapeutic COVID-19 relief funds to provide a one-time program providers impacted by the pandemic, and payment of about $640 to families. funds to increase emergency response child welfare social workers. Food Assistance. The 2021-22 budget provides $5 million (and $280 million ongoing) to expand Aging Programs. The 2021-22 budget provides the state’s California Food Assistance Program over $1 billion in funding for several program to individuals who were previously ineligible for expansions and enhancements that are in line assistance as a result of their immigration status. with the state’s Master Plan for Aging. Some Additionally, the budget provides $150 million examples of these include (1) expand full-scope in one-time funds for food bank infrastructure Medi-Cal, including IHSS, to undocumented assistance and increases ongoing funding levels older adults; (2) providing a grant increase for for senior nutrition programs to $35 million SSI/SSP recipients; (3) expanding eligibility and General Fund. services for the Adult Protective Services program; and (4) establishing a permanent IHSS back-up Child Care. The budget package includes provide system. $735 million in 2021-22 ($1.6 billion ongoing) across state and federal fund sources to provide Energy Utility Assistance. The 2021-22 budget additional slots for child care across several child includes significant new one-time funding under care programs. The Legislature and Governor the Department of Community Services and further agreed to add 80,000 child care slots Development to implement the California Arrearage through 2025-26, which is anticipated to cost an Payment Program, which will address energy additional $1 billion General Fund by 2026-27. In utility debts accrued throughout the pandemic. addition, the budget package provides $604 million The program is funded using $1 billion Advanced in 2021-22 ($1.1 billion ongoing) across several Research Projects Agency funds from the state’s fund sources to increase rates for child fiscal relief funds, and will provide direct payments care providers. to energy utility providers to offset customer arrearages. Child Welfare. The budget provides one-time and ongoing funding, along with significant Housing and Homelessness budget-related legislation, for the implementation of the federal Family First Prevention Act in The 2021-22 budget provides over $7.4 billion Child Welfare. Specifically, the budget includes (all funds) to about 30 housing and homelessness $32 million General Fund under the Department programs within the Business, Consumer Services, of Social Services to implement the federally and Housing Agency and departments under the required components of the act and an additional Agency’s purview. The vast majority of funding is $222 million General Fund in one-time funds to one time or temporary. Specifically, funding in the implement the optional prevention components budget declines to $2.5 billion (all funds) in 2022-23 of the law. Additionally, the budget includes for these housing and homelessness programs legislation aimed at reducing the number of and the budget only provides $24 million (General foster youth placed out of state. In support of Fund) in ongoing funding beginning in 2023-24. 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET The ongoing funding largely provides housing to implement, with the help of a third-party assistance for foster youth and former foster youth, administrator, a statewide open-access and resources to enhance local governments’ “middle-mile” broadband network for internet compliance with state housing laws. Most of the service providers to connect “last-mile” funding in 2021-22, $4.5 billion (all funds), is broadband infrastructure projects. (A primarily for homelessness-related proposals, while middle-mile network often consists of $2.9 billion (all funds) is allocated primarily towards high-capacity fiber-optic cables laid over housing-related programs in 2021-22. In addition, tens or hundreds of miles, for example, near 65 percent of funding in 2021-22 is federal, while the state’s highways. Last-mile projects, by 35 percent is state funding. contrast, connect middle-mile networks to Some of the major uses of housing and individual communities and their households.) homelessness funding in the budget would support • $1.05 billion in ARP fiscal relief funds to the Homekey Program’s acquisition of properties the California Public Utilities Commission for use as permanent housing, provide flexible aid (CPUC) to fund last-mile projects with grants to local governments to address homelessness in administered through its California Advanced their communities, provide funding to address the Services Fund program. (The multiyear backlog in affordable housing development, and spending agreement anticipates additional help local governments plan to meet their housing appropriations totaling $950 million General production goals. The budget also provides funding Fund over 2022-23 and 2023-24 for CPUC to that could be used to address homelessness and/ provide last-mile project grants.) or housing affordability in other program areas, • $50 million General Fund to CPUC to operate including the health, human services, veteran a “loan loss reserve fund” to help local entities services, courts, transportation, higher education, and nonprofit organizations obtain financing and labor programs. for their broadband internet service projects. (The multiyear spending agreement anticipates Other additional appropriations totaling $700 million Golden State Stimulus II. The budget General Fund over 2022-23 and 2023-24 for includes $8.1 billion General Fund in Golden State CPUC to operate the fund.) Stimulus II payments, the second round of state Legislature Ratified New Labor Agreements. direct payments to lower-income taxpayers. Under The Legislature ratified labor agreements with 20 of the second round, the state will send payments to the state’s 21 bargaining units. There are common an estimated 14.2 million taxpayers. Most of the provisions among all of the agreements that funding will go out as $600 one-time payments to include: taxpayers with incomes below $75,000 (taxpayers with dependents will receive an additional • Ending Personal Leave Program (PLP) $500 payment). The remainder will go out as 2020. The agreements ended PLP 2020. As $500 one-time payments to taxpayers with incomes such, employees no longer (1) have their pay less than $75,000 who file using an Individual reduced or (2) receive PLP 2020 leave each Taxpayer Identification Number. month. Broadband Infrastructure. As part of the • Restoring Employee Contributions to spending plan, the administration and Legislature Prefund Retiree Health Benefits. With agreed to spend $6 billion ($1.7 billion General PLP 2020 ending, state employees resumed Fund) over three fiscal years, starting in 2021-22, contributing a specified percentage of pay to on broadband infrastructure. Of the $6 billion, prefund their retiree health benefits. $4.35 billion is appropriated in 2021-22 as follows: • Restoring Suspended or Deferred Compensation Increases. During PLP 2020, • $3.25 billion in federal ARP fiscal relief funds many previously scheduled compensation to the California Department of Technology increases were suspended or deferred. www.lao.ca.gov 15 analysis full gutter 2021-22 BUDGET The ratified labor agreements restore these midyear notifications to the Legislature. compensation increases. Some of the HCBS ARP funds will be used to replace General Fund allocated through In addition to the above provisions, a number of the budget process to implement new HCBS agreements included compensation increases for activities. The remainder of the HCBS ARP specific bargaining units. In total, the agreements funds will be used to implement additional increased state costs by about $1.3 billion HCBS activities that currently are not ($717 million General Fund) in 2021-22. These budgeted in the 2021-22 Budget Act, but are increased costs are ongoing. Our report on labor proposed in the state’s HCBS Spending Plan agreements ending the personal leave program (pending federal approval). Due to delays in provides more detail on these agreements. the federal Medicaid claiming process, Control New Administrative Spending Authority. Section 11.95 also allows the administration The budget includes three new control sections to issue a General Fund loan of up to that grant flexible spending authority to the $750 million to the HCBS ARP Fund, which administration in the 2021-22 for a few different can be used to pay for the approved HCBS purposes. They are: activities prior to receipt of federal funds. • Control Section 11.91. This control section • Control Section 11.96. This control section provides the administration with flexibility provides the administration with some to expend the $1.7 billion from the General flexibility to fully expend the $27 billion Fund allocated in the 2021-22 Budget Act in ARP fiscal relief funds allocated in the to support the COVID-19-related activities 2021-22 budget package. For example, the of nine state departments. Specifically, the language allows DOF to transfer amounts language allows DOF to shift these funds within a program, project, or function, or to any other item in the budget to support between department’s state operations and COVID-19-related response and recovery local assistance items, in order to support costs. The language requires notification to the implementation of the appropriations of the Joint Legislative Budget Committee (JLBC) these funds. The language also allows DOF to ten days prior to any shift of funds. (The reallocate funding if they are not encumbered Governor initially proposed, but the budget by August 1, 2024 and use up to $10 million did not ultimately adopt, authority to extend in interest earnings on the funds to address Disaster Response and Emergency Operations unanticipated workload. Any changes DOF Account authorization for COVID-19.) makes pursuant to this section require a • Control Section 11.95. As previously 30-day notification to JLBC. mentioned, the state expects to receive Small Business Grants. The budget provides $3 billion in one-time additional federal the Governor’s Office of Business and Economic Medicaid funds authorized under ARP for Development (GO-Biz) $1.5 billion ARP fiscal relief existing HCBS activities. As a condition funds for around 130,000 additional grants to small of receiving these funds, the state will be businesses and nonprofits financially impacted by required to spend an equal amount of the COVID-19 pandemic. These funds increase funding on new HCBS enhancements and total state and federal funding for the California expansions. Control Section 11.95 creates a Relief Grant program to $4 billion. The program new fund—the HCBS ARP Fund—dedicated provides financial assistance grants in amounts to supporting the implementation of new between $5,000 and $25,000, depending on the HCBS enhancements and expansions. The applicant’s 2019 revenue. administration is allowed to oversee and expend the HCBS ARP funds through the Other Business Assistance Programs. The annual budget process or through written budget provides GO-Biz $600 million ($95 million 16 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2021-22 BUDGET ARP fiscal relief funds and $505 million General a variety of augmentations, across a number of Fund) for a variety of new and existing programs program areas, for various legislative priorities. that offer financial and technical assistance to Control Section 19.56 includes: $19 million businesses, including a new California Competes for workforce and economic development grant program, financial assistance to performance programs; $114 million for transportation and venues, tourism promotion, and support for small infrastructure; $32 million for health and human and underserved businesses. services programs; $260 million for parks, Community Economic Resilience Fund. recreation, and resources; $238 million for arts and The budget includes $600 million one-time ARP cultural programs; $110 million for housing and fiscal relief funds to start a new grant program homelessness; and $98 million for fire prevention for regions to develop and implement regional and public safety. Control Section 19.57 includes plans to create jobs in sustainable industries, $329 million in program augmentations for a including zero-emission vehicle infrastructure, variety of purposes, including research and climate resilience, transit systems, biomass educational programs. projects, offshore wind, and oil well capping and Agriculture Package. The budget includes remediation. $445 million from the General Fund on a one-time Eligibility Workload Backlog at EDD. The basis in 2021-22 (and an additional $425 million budget includes $276 million General Fund for EDD in 2022-23) for various activities related to the to hire an outside contractor to determine whether agricultural sector in California. The budget-year several million workers who received UI benefits amount includes $180 million for incentives to during the pandemic were eligible to receive farmers to find alternatives to the burning of those benefits. agricultural waste and $50 million for the Healthy Soils Program. School Facilities Grants. The budget allocates $740 million (non-Proposition 98 General Fund) Creation of the Department of Cannabis for school facility grants. Of this total, $490 million Control (DCC). The budget reflects the transfer is for schools to construct or renovate State of responsibility for most cannabis regulatory Preschool, transitional kindergarten, and functions from the Bureau of Cannabis Control full-day kindergarten classrooms. The remaining (BCC), CDPH, and the California Department of $250 million is to cover the state share for new Food and Agriculture to a new department within construction and modernization projects under the the Business, Consumer Services and Housing School Facilities Program. These funds supplement Agency—DCC. Because BCC’s only responsibilities existing funds from Proposition 51, the state school were related to cannabis licensing, the budget also bond approved by voters in 2016. reflects the dissolution of the bureau. The budget package includes $294 million in funding for the Control Sections 19.56 and 19.57. Two budget new department. control sections provide a total of $1.2 billion for www.lao.ca.gov 17 analysis full gutter 2021-22 BUDGET APPENDIX Note: In the online version of this report, we include a series of Appendix tables that have detailed information on the discretionary choices in the 2021-22 Budget Act. LAO PUBLICATIONS This report was prepared by Ann Hollingshead with contributions from analysts across the office, and reviewed by Carolyn Chu. 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. 18 LEGISLATIVE ANALYST’S OFFICE