The 2022-23 Budget: Overview of the Spending Plan

2022-23 BUDGET The 2022-23 Budget: Overview of the Spending Plan GABRIEL PETEK | LEGISLATIVE ANALYST OCTOBER 2022 www.lao.ca.gov i 2022-23 BUDGET ii LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET INTRODUCTION Each year, our office publishes the California All figures in this publication reflect actions taken Spending Plan to summarize the annual state through July 1, 2022, but we have updated the budget. This publication provides an overview of narrative to reflect actions taken later in the the 2022-23 Budget Act, gives a brief description legislative session. In addition to this report, we have of how the budget process unfolded, and then released a series of issue-specific, online posts highlights major features of the budget approved that give more detail on the major actions in the by the Legislature and signed by the Governor. budget package. BUDGET OVERVIEW BUDGET CONDITION Proposition 98 Reserve Also Reaches $9.5 Billion. In addition to the general-purpose Figure 1 summarizes the condition of the General reserves described above, the Proposition 98 Fund under the revenue and spending assumptions Reserve (dedicated to school and community in the July 2022 budget package, as estimated by college spending) would reach $9.5 billion under the administration. the spending plan. We do not include this reserve Total General Fund Reserves Reach Nearly in the total because withdrawals supplement the $28 Billion Under Spending Plan. As shown at the constitutional minimum spending level for K-14 bottom of Figure 1, the budget package assumes education and therefore do not help the state that 2022-23 will end with nearly $28 billion in total address future budget problems. However, this reserves. This consists of: (1) $23.3 billion in the reserve does benefit schools and community Budget Stabilization Account; (2) $3.5 billion in the colleges because it mitigates the funding Special Fund for Economic Uncertainties (SFEU); reductions that occur when the constitutional and (3) $900 million in the Safety Net Reserve, minimum drops. which is available for spending on the state’s safety net programs, like Medi-Cal. Revenues Figure 2 on the next page Figure 1 displays the administration’s General Fund Condition Summary revenue projections as incorporated (In Millions) into the July 2022 budget package. The most notable change between 2020-21 2021-22 2022-23 2021-22 and 2022-23 is the drop Revised Revised Enacted in corporation tax revenues. Most Prior-year fund balance $5,889 $38,335 $22,451 of this drop is due to timing issues Revenues and transfers 194,575 227,061 219,707 related to a recent change in how Expenditures 162,129 242,944 234,366 the state taxes pass-through Ending fund balance $38,335 $22,451 $7,791 Encumbrances $4,276 $4,276 $4,276 businesses. These changes SFEU balance $34,058 $18,174 $3,515 resulted in a one-time revenue boost in 2021-22, which tapered off Reserves BSA $14,643 $20,320 $23,288 beginning in 2022-23. SFEU 34,059 18,175 3,515 Policy Changes Reduce Tax Safety net 900 900 900 Revenues. The budget package Total Reserves $49,602 $39,395 $27,703 includes several policy changes Note: Reflects administration estimates of budget actions taken through July 1, 2022. which reduce tax revenues. SFEU = Special Fund for Economic Uncertainties and BSA = Budget Stabilization Account. wwwwww..llaaoo..ccaa..ggoovv 11 2022-23 BUDGET Figure 2 General Fund Revenue Estimates (Dollars in Millions) Revised Change From 2021-22 Enacted 2020-21 2021-22 2022-23 Amount Percent Personal income tax $128,856 $136,497 $137,506 $1,008 1% Sales and use tax 29,073 32,750 33,992 1,242 4 Corporation tax 22,591 46,395 38,464 -7,932 -17 Totals, Major Revenue Sources $180,519 $215,642 $209,961 -$5,681 -3% Insurance tax $3,139 $3,468 $3,667 $199 6% Other revenues 3,152 3,771 9,421 5,650 150 Transfer to/from Budget Stabilization Account 2,707 -5,677 -2,968 2,709 -48 Other transfers and loans 5,057 9,856 -375 -10,231 -104 Totals, Revenues and Transfers $194,575 $227,061 $219,707 -$7,354 -3% Note: Reflects administration estimates of budget actions taken through July 1, 2022. These changes are expected to reduce revenues in the Middle Class Tax Refund. Payments will be 2021-22 and 2022-23 by $2.2 billion and $4.2 billion, made to taxpayers with adjusted gross income respectively. The most significant policy change (AGI) below $500,000 (for joint filers) and $250,000 is the early elimination of limits on business’ use (for single filers). The payment amount is based of certain tax credits and deductions to reduce on AGI, with larger payments going to taxpayers their tax payments. These limits originally were with lower income levels. For example, a married put in place for tax years 2020 through 2022, but couple with two children whose AGI was $100,000 the budget package ended the limits for 2022. will receive $1,050. A similar family with AGI of The budget package also includes tax relief for $300,000 will receive $600. The stated intent of businesses receiving pandemic assistance from the refund is to help offset higher costs resulting various federal programs. Finally, the budget from recent inflation. (In the budget accounting, a package makes some changes related to the refund is scored as spending, rather than a revenue state’s cannabis taxes (which are special fund reduction, however.) revenues and not included in Figure 2). The plan Spending moves the point of collection for the retail excise tax from distributors to retailers, and it also eliminates Figure 3 displays the administration’s July 2022 the cultivation tax. To address the resulting loss estimates of total state and federal spending in the of cultivation tax revenue, the plan appropriates 2022-23 budget package. As the figure shows, $150 million General Fund in the spending plan assumes total state spending of 2023-24 and authorizes periodic administrative adjustments to the Figure 3 retail excise tax rate. Total State and Federal Fund Expenditures Spending Plan Provides (Dollars in Millions) One-Time Refund Payments to Most California Taxpayers. Revised Change From 2021-22 Enacted In addition to the revenue policy 2020-21 2021-22 2022-23 Amount Percent changes described above, the General Fund $164,129 $242,944 $234,366 -$8,578 -4% spending plan includes $9.5 billion Special funds 58,170 66,098 69,119 3,021 5 General Fund for a one-time tax Budget Totals $222,299 $309,042 $303,485 -$5,557 -2% refund payment, the Better for Bond funds $6,291 $9,907 $4,431 -$5,476 -55% Families Refund, also known as Federal funds 272,294 318,949 143,614 -175,335 -55 Note: Reflects administration estimates of budget actions taken through July 1, 2022. 22 LLEEGGIISSLLAATTIIVVEE AANNAALLYYSSTT’’SS OOFFFFIICCEE 2022-23 BUDGET $303 billion in 2022-23. This represents Figure 4 a slight decrease (2 percent) over the 2021-22 level. However, that decrease Augmentations for 2024-25 is attributable to the spending plan Prioritized by Trigger-On Language scoring new discretionary spending, (In Millions) particularly for spending that meets the definition of capital outlay under the state Augmentation Amounta appropriations limit (SAL), to 2021-22. CalWORKs maximum aid payment increase TBDb The next section describes some of the Tax credit to offset costs of union membership $400 major discretionary spending choices Cal Grant reform 365 Full pass-through of child support payments to CalWORKs families TBDc reflected in the spending plan. Victim compensation eligibility, benefits, and administration 50 Federal Funds Expected to Decline Align income levels for maintenance with income limits in Medi-Cal 33d Significantly Between 2021-22 Eliminate restitution fines 25 and 2022-23. The figure also shows Continuous Medi-Cal eligibility for children ages 0 to 4 20 Cal Grant CCC Expanded Entitlement award portability to nonprofit schools 10 federal funds decline $175 billion, or a Estimated cost in 2024-25. For some items, reflects a partial-year cost. 55 percent, between 2021-22 and b Trigger language does not specify an amount for the increase, could range from low hundreds of 2022-23. This decline is the result of millions of dollars to more than $1 billion. several significant federal programs c Trigger language does not specify an amount for the full pass-through. The administration has estimated costs of roughly $150 million, but actual costs will depend on collections and caseload at enacted in response to COVID-19 expiring the time of implementation. in 2022-23. For example, funding the d Increases to $80.2 million in 2025-26 and ongoing. state receives for federally enhanced TBD = to be determined. unemployment insurance benefits are accounted for in the Employment The Surplus Development Department (EDD) budget. Under Budget Package Includes $72.4 Billion in the administration’s assumptions, federal spending Discretionary General Fund Spending Choices. in EDD would decline from $34 billion in 2021-22 Figure 5 on the next page displays the major to $7 billion in 2022-23. Other federal programs discretionary spending decisions in the 2022-23 also are expected to expire in 2022-23, including Budget Act. It includes: (1) the $38.6 billion in the enhanced Federal Medical Assistance spending choices using the overall General Fund Percentage for the state’s Medicaid program surplus (this figure only includes the amount spent (which the administration assumes will expire in from the surplus and excludes reserve deposits, December 2022) and $27 billion in fiscal relief tax refunds, and debt payments, which are shown funding from the American Rescue Plan. However, instead in Figure 6) and (2) the $33.8 billion surplus there are also some increases in federal funds in within the school and community college budget. 2022-23 related to the Infrastructure Investment As the figure shows, schools and community and Jobs Act. colleges would receive the largest spending Hundreds of Millions of Dollars in Additional allocations reflecting the significant growth in Augmentations Linked to “Trigger” Language in Proposition 98. Within the overall General Fund 2024-25. Chapter 48 of 2022 (SB 189, Committee surplus, most spending amounts were dedicated on Budget and Fiscal Review) contains trigger to resources and the environment, transportation, language that prioritizes specified future program health, and housing and homelessness. The augmentations if certain conditions are met. remainder of this section discusses the major Figure 4 lists these program augmentations. In the components of each of these funding amounts. spring of 2024, the state will assess whether the General Fund can support these augmentations over the multiyear forecast. Though prioritized for funding in 2024-25, these program augmentations are not automatic. If the General Fund is determined to be able to support the augmentations, subsequent legislation still would be needed to enact them. www.lao.ca.gov 3 2022-23 BUDGET Figure 5 Major Discretionary Spending Choices in 2022-23 Budget Act (In Billions) $38.6 Billion Spending From Overall General Fund Surplus $33.8 Billion Surplus Within the School and Community College Budget Schools and Community Collegesa Resources and Environment Transportation Other Housing and Homelessness Health Human Services Higher Education School Facilities One Time or Temporary Public Safety Ongoing Workforce Development 5 10 15 20 25 30 35 $40 a Includes General Fund and local property tax revenue. Note: Reflects budget actions taken through July 1, 2022. Overall General Fund Surplus A surplus occurs when, over the three-year Figure 6 budget window, the state anticipates collecting more in General Fund revenues than it requires How the Budget Allocates a to meet its existing obligations. Put another way, $55 Billion Overall General Fund Surplus the overall General Fund surplus is the amount of revenue available for new spending commitments after paying for the costs of programs under current law. (If, instead, we found spending under current law was higher than projected revenues, we would Revenue Reductions and Tax Refunds use the phrase “deficit” or “budget problem” to describe the difference.) Spending Plan Allocated a $55 Billion SFEU Balance Overall General Fund Surplus. We estimate the Debt and Legislature had a $55 billion overall General Fund Loan Payments surplus to allocate in the 2022-23 Budget Act. Ongoing The surplus is about $3 billion larger than our Spending One-Time or Temporary estimate at the time of the May Revision due to Spending changes in federal funds assumptions and some workload budget adjustments. Figure 6 shows how the 2022-23 Budget Act allocated that surplus. Overall, we estimate 96 percent of the Note: Reflects budget actions taken through July 1, 2022. SFEU = Special Fund for Economic Uncertainties. surplus was devoted to one-time or temporary purposes and 4 percent is ongoing. Specifically, the budget allocated: 4 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET • $36.3 Billion to One-Time or Temporary Surplus Within the School and Spending. The spending plan used 64 percent Community College Budget of the overall General Fund surplus, or Total state spending on schools and community $36.3 billion, for one-time or temporary colleges is determined mainly by a set of programmatic expansions. (We define constitutional formulas set forth in Proposition 98 temporary to mean three years or fewer.) (1988). These formulas establish a minimum funding • $10.5 Billion to Revenue Reductions and Tax requirement for K-14 education, commonly known Refunds. The spending plan used $10.5 billion, as the minimum guarantee. The state meets the about 20 percent of the overall General Fund guarantee through a combination of General Fund surplus, to reduce revenues. (Nearly all of and local property tax revenue. The Legislature, these revenue-related amounts are one time or in turn, decides how to allocate this funding temporary.) In particular, this category includes among specific school and community college the $9.5 billion Better for Families Tax Refund, programs. When the guarantee exceeds the cost one-time payments to households with incomes of existing programs, the state has a “surplus” up to $500,000. within the school and community college budget. • $3.5 Billion to Maintaining Reserves. This amount is separate from the overall General The spending plan enacts a year-end balance Fund surplus and must be allocated for school and in the SFEU of $3.5 billion. (This amount is community college programs (or deposited into the technically discretionary because the Legislature Proposition 98 Reserve). can choose to set the balance of the SFEU How the Budget Allocates the Surplus to any amount above zero. However, recent Within the K-14 Education Budget. After budgets have enacted SFEU balances around setting aside funding for statutory cost-of-living $2 billion to $4 billion, which the state uses to adjustments (COLAs) and other planned program cover costs for unanticipated expenditures.) expansions, the budget plan includes $33.8 billion • $2.3 Billion to Ongoing Spending in discretionary spending proposals to meet the Increases. The spending plan includes minimum required funding level for schools and $2.3 billion in ongoing spending increases, using community colleges. As Figure 7 shows, the about 4 percent of the surplus. The ongoing spending plan includes $7.9 billion for ongoing costs of these augmentations would grow over time, reaching $4.9 billion by 2025-26. Figure 7 • $2.5 Billion to Pay Off Debts and How the Budget Allocates a Liabilities. Each year, the state pays many billions of dollars towards debts and liabilities. $34 Billion Surplus Within the School and (Under the spending plan, for example, the Community College Budget state would make $3.4 billion in constitutionally required debt payments under Proposition 2, as well as other routine debt payments made by the state, such as annual actuarially required Ongoing (Categorical) contributions to the state’s pension systems, debt service on state bonds, and the state’s plan to prefund retiree health.) In addition to One-Time Discretionary these routine payments, the spending plan Grants Ongoing uses $2.5 billion from the overall General Fund (General surplus funds to repay state debts and liabilities. Purpose) This includes $1.9 billion for converting some projects currently funded by lease revenue Other One Time bonds to cash and repaying around $600 million in special fund loans to the General Fund. www.lao.ca.gov 5 2022-23 BUDGET increases to the main school and community would have positive room of $29 billion. Because college funding formulas and $6.2 billion for ongoing the state’s SAL position is considered on net over increases to restricted categorical programs. two fiscal years, these two years have roughly The budget plan also includes $19.7 billion $13 billion in room remaining, meaning there are no in one-time funding, of which $12.1 billion is excess revenues in 2020-21 and 2021-22. Further, for discretionary block grants to schools and while the Governor’s May Revision left $3.4 billion community colleges. in unaddressed SAL requirements for 2022-23, the July budget package reflects different choices. As a STATE APPROPRIATIONS LIMIT result, under the spending plan, the administration estimates the state would have $12 billion in room in The SAL limits how the state can use revenues that year. that exceed a certain limit. When revenues are expected to exceed the limit before the state makes Budget Allocates $48 Billion of Surplus its discretionary budget choices, it has a SAL to Discretionary Choices That Address SAL requirement. (In other words, a SAL requirement Requirements. A key reason that the state does is the amount of revenue the state is required not have excess revenues across 2020-21 and to allocate in ways that meet its constitutional 2021-22 (as well as room under the limit in 2022-23) requirements under Proposition 4.) The Legislature is that the spending plan includes $48 billion in can meet SAL requirements by: (1) reducing discretionary choices that meet SAL requirements taxes or issuing tax refunds, (2) spending across the budget window. This includes: more on excluded purposes (categories of • $36.2 Billion From the Overall General excluded spending include: subventions to Fund Surplus. The spending plan dedicates local governments, debt service, federal and about 66 percent of the overall General court mandates, capital outlay, and emergency Fund surplus to meeting SAL requirements, spending), or (3) splitting excess revenues between including $24 billion in spending proposals, tax refunds and additional school spending. For $10.5 billion in tax refunds and other revenue more information on how the SAL works, see our reductions, and nearly $2 billion in debt report: The State Appropriations Limit. payments—specifically, the state’s conversion State Revenues Not Expected to Exceed of some lease revenue bonds to cash. Appropriations Limit. Figure 8 shows the • $11.5 Billion From the Surplus Within the administration’s July 2022 SAL estimates after Schools and Community Colleges Budget. accounting for all of the spending plan decisions. In addition, the spending plan dedicates As the figure shows, 2020-21 would end with one-third of the surplus within the schools and “negative room” (appropriations subject to the limit community colleges budget, or $11.5 billion, above the limit) of $16 billion. However, 2021-22 for SAL-excluded purposes. The largest components Figure 8 of these exclusions are SAL Estimates in the 2022-23 Budget Act $8.6 billion in emergency spending for discretionary (In Billions) block grants to assist schools 2020-21 2021-22 2022-23 and community colleges in the long-term recovery from SAL revenues and transfers $216 $256 $252 the COVID-19 pandemic, Exclusions -84 -160 -129 Appropriations Subject to the Limit $132 $97 $123 $1.4 billion to purchase Limit $116 $126 $136 electric school buses, and Room/Negative Room -$16 $29 $12 $630 million for community Excess Revenues? No college facilities maintenance Note: Reflects administration estimates of budget actions taken through July 1, 2022. and instructional equipment. SAL = state appropriations limit. 6 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET Figure 9 shows the distribution of the $48 billion in discretionary resources that Figure 9 meet SAL requirements by type. As the figure shows, more than three-quarters How the Budget Allocates $48 Billion in Discretionary of the total is dedicated to excluded Spending Choices to Meet SAL Requirements spending, including about half going to capital outlay projects. (Importantly, $36.2 Billion Using Overall General Fund Surplus the definition of capital outlay under the $11.5 Billion Using Surplus Within School and Community College Budget SAL is more expansive than the typical definition in the budget.) Some of the Tax Refunds and largest augmentations that meet this Revenue definition include: over $5 billion for Reductions various components of the transportation infrastructure package, nearly $2 billion Tax Refund (across the budget window) for the strategic reliability reserve (part of the Energy Package), $1.6 billion for the Behavioral Health Continuum Revenue Reduction Infrastructure Program (part of the Federal or Court Mandate Housing Bridge program), and $1.3 billion Capital Outlay for the school facilities aid program. Just less than one-quarter of the SAL-related budget choices are for revenue reductions and tax refunds, including Subvention Emergency the $9.5 billion Better for Families tax refund. (The box on the next page also describes some administrative and Excluded statutory changes to the SAL calculation Spending reflected in the spending plan, which result in lower SAL requirements across the budget window.) We plan to discuss Note: Reflects budget actions taken through July 1, 2022. the SAL estimates and major SAL-related decisions in the 2022-23 budget package SAL = state appropriations limit. in more detail in a forthcoming post. www.lao.ca.gov 7 2022-23 BUDGET Administrative and Statutory Changes to the State Appropriations Limit (SAL) Calculation Modifies the Definition of Subvention. The State Constitution allows subventions to local governments to be counted against that local government’s limit (instead of the state’s limit). Previously, the definition of subvention included only state funding to local government that was unrestricted. (This change built on actions taken last year, which we described here). Chapter 48 of 2022 (SB 189, Committee on Budget and Fiscal Review) expanded the definition of subvention to also include a variety of other specific streams of funds, as listed in Government Code 7903. For example, subventions will now include funds to counties for the administration of health and human services programs like Medi-Cal. In addition, the new law requires local agencies to identify and report any new state subventions that would cause that entity to exceed its own appropriations limit so that the state can continue to count those amounts at the state level instead. Counts More School District Capital Outlay Expenditures. School districts, like local governments and the state, have their own appropriations limits. State law requires most school districts to set aside a portion of their general-purpose funding for the ongoing and major maintenance of their facilities. Districts currently set aside approximately $2.2 billion per year related to this requirement. These funds meet the definition of capital outlay for SAL purposes, and so the spending plan adopts a plan to require school districts to exclude this spending from their limits. Because of the way school district limits interact with the state’s limit, excluding this change results in dollar-for-dollar reductions in appropriations subject to the limit at the state level. Counts Certain Information Technology (IT) Expenditures as Excluded. Previous spending plans did not categorize IT expenditures as SAL excludable, but this year’s spending plan identifies IT expenditures totaling $226.5 million General Fund in 2021-22 and $478.8 million General Fund in 2022-23 as expenditures on qualified capital outlay excluded from the SAL calculation. These expenditures include most IT project development and implementation costs and software licensing costs. Expenditures not currently identified as SAL excludable include hardware costs, IT project planning costs, and most IT system maintenance and operations costs. 8 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET EVOLUTION OF THE BUDGET This section provides an overview Figure 10 of the 2022-23 budget process. Figure 10 lists the budget and Budget-Related Legislation budget-related legislation passed as Passed on or Before July 1, 2022 of July 1, 2022. Bill Number Chapter Subject Governor’s January Budget Bills and Amendments Budget Proposal SB 154 43 2022-23 Budget Act AB 180 44 Amendments to the 2021-22 Budget Act On January 10, 2022, Governor AB 178 45 Amendments to the 2022-23 Budget Act Newsom presented his proposed Trailer Bills Passed on or Before July 1, 2022 state budget to the Legislature, AB 181 52 Education marking the formal beginning of the AB 182 53 Education: Learning Loss Recovery Fund AB 183 54 Higher education 2022-23 budget process. At the AB 186 46 Skilled nursing facilities financing time of the Governor’s budget, AB 192 51 Better for Families Tax Refund and under the administration’s AB 194 55 Revenue and taxes revenue estimates, we estimated the AB 195 56 Cannabis Governor had a $29 billion surplus AB 199 57 Courts to allocate in the 2022-23 budget AB 200 58 Public safety AB 202 59 Public safety infrastructure process. This surplus was nearly AB 203 60 Resources entirely the result of higher revenue AB 205 61 Energy collections and estimates compared AB 210 62 Early childhood education to 2021 budget projections. SB 125 63 Resources: Lithium Valley The Governor proposed spending SB 130 64 State employee compensation SB 131 65 Elections about 60 percent of discretionary SB 132 66 State employee compensation resources, or $17.3 billion, on a SB 184 47 Health one-time or temporary basis for a SB 187 50 Human services variety of programmatic expansions. SB 188 49 Developmental services The Governor also proposed using SB 189 48 State government, 2024-25 budget trigger SB 191 67 Employment/labor $6.2 billion to reduce revenues and SB 193 68 Economic development $2 billion for ongoing spending SB 196 69 State employee compensation increases. In addition, the Governor’s SB 197 70 Housing budget allocated a nearly $13 billion SB 198 71 Transportation surplus within the schools and SB 201 72 Tax credits community colleges budget. Note: This figure includes budget bills and trailer bills identified in Section 39.00 in the 2022-23 Budget Act that were enacted into law on or before July 1, 2022. Ordered by bill number. Governor’s May Revision On May 13, 2022, Governor Newsom presented a revised state budget proposal to the Legislature (called the nearly $57 billion compared to the Governor’s “May Revision”). At the time of the May Revision, budget, reflecting continued, unprecedented and under the administration’s revenue estimates, growth in revenue collections. Second, offsetting we estimated the Governor had a $52 billion this increase in revenues, constitutional spending surplus to allocate in the 2022-23 budget process. requirements were higher by $23 billion. This surplus was higher than the January estimate Third, also offsetting the increase in revenues, for three reasons. First, revenues were higher by baseline spending was also higher by $11 billion. www.lao.ca.gov 9 2022-23 BUDGET This was primarily the result of early legislative for affordable housing development, established action, including adopting $5.7 billion in a variety a new homeownership program, and provided of revenue reductions—such as the restoration of additional discretionary funding for homelessness net operating loss deductions—and $2.7 billion services at the local level over multiple fiscal for rental assistance. (The final budget package years; (3) provided larger ongoing base increases reflected a slightly lower appropriation amount, and funded higher enrollment growth at the $2 billion, for rental assistance.) universities; (4) provided larger augmentations for student financial aid grants; (5) accelerated the Legislature’s Budget Package implementation of a developmental services rate The Legislature passed an initial budget study; (6) provided additional funding for health package on June 13, 2022. The Legislature’s workforce development; and (7) deferred action budget package provided the same level of overall on, but set aside funding for, a number of the spending for schools and community colleges as Governor’s major health-related budget proposals, the May Revision, but designated more ongoing most notably the hospital and nursing facility and one-time funding for discretionary purposes. retention payments proposal. Relative to the May Revision, the Legislature’s Final Budget Package budget also: (1) rejected the Governor’s transportation-related relief proposals and instead The Legislature passed a final budget package provided tax rebates of $200 per taxpayer and on June 29, 2022 and a series of additional dependent for those with incomes below $125,000 budget-related bills in late August 2022. Figure 11 ($250,000 for joint filers) and one-time cash contains a list of the budget-related legislation assistance to Supplemental Security Income/State passed later in the legislative session. The next Supplementary Payment recipients and California section of this report describes the major features Work Opportunity and Responsibility to Kids of the final budget package. families; (2) provided significant additional funding Figure 11 Budget-Related Legislation Passed After July 1, 2022 Bill Number Chapter Subject Budget Bills and Amendments AB 179 249 Amendments to the 2022-23 Budget Act Trailer Bills Passed After July 1, 2022 AB 151 250 State employee compensation AB 152 736 COVID-19 relief: supplemental sick leave AB 156 569 State government AB 157 570 State government AB 158 737 Paycheck Protection Program AB 160 771 Public safety AB 185 571 Education AB 190 572 Higher education AB 204 738 Health AB 207 573 Human services AB 209 251 Energy and climate change AB 211 574 Public resources Note: This figure includes budget bills and trailer bills identified in Section 39.00 in the 2022-23 Budget Act that were enacted into law after July 1, 2022. Ordered by bill number. 10 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET MAJOR FEATURES OF THE 2022-23 SPENDING PLAN The major General Fund and federal fund Under the adopted budget plan, the state deposits spending actions in the 2022-23 budget package a total of $9.5 billion into this account across the are briefly described in this section, mostly 2020-21 through 2022-23 period—an increase of organized around the issue areas shown in Figure 5 $4.5 billion compared with the estimates made in in the first section of this report. We plan to discuss June 2021. The budget allocates the remaining these and other actions in more detail in a series of funds for significant one-time and ongoing program forthcoming publications this fall. increases. For schools, the largest ongoing augmentation is $7.9 billion to provide a 13 percent K-14 Education increase to the Local Control Funding Formula and Significant Increase in School and provide greater fiscal stability to school districts Community College Funding. The experiencing declining attendance. The budget Proposition 98 minimum guarantee depends plan also includes $12.1 billion in one-time funding upon various formulas that adjust for several for two K-12 block grants—$7.9 billion focused on factors, including changes in state General learning recovery and $3.6 billion intended for arts, Fund revenue. For 2021-22, the guarantee is music, and instructional materials. For community up $16.5 billion (17.6 percent) compared with colleges, the largest augmentation is $1.1 billion the estimates made in June 2021 (Figure 12). ongoing for apportionment increases, consisting This increase represents one of the largest upward of a COLA as well as a base increase above the revisions since the adoption of Proposition 98 and COLA. In addition, the budget plan includes is due to higher General Fund revenue estimates. $841 million one time for facilities maintenance and For 2022-23, the guarantee increases by an instructional equipment and $650 million one time additional $117 million (0.1 percent) relative to the for a COVID-19 block grant. revised 2021-22 level. Adjusts Guarantee Upwards for Expansion Makes Required Reserve Deposit and of Transitional Kindergarten. The June 2021 Funds New Programs. When the minimum budget plan established a plan to expand eligibility funding requirement is growing quickly, the for transitional kindergarten beginning in 2022-23. Constitution requires the state to deposit some Under the plan, all four-year old children will be of the available funding into a statewide reserve eligible by 2025-26. (Previously, only children born account for schools and community colleges. between September 2 and December 2 were Figure 12 Comparing June 2021 and June 2022 Proposition 98 Estimates (In Millions) 2021-22 2022-23 June 2021 June 2022 June 2022 Change From Change From Enacted Revised Change Enacted 2021-22 Revised 2021-22 Enacted Minimum Guarantee General Fund $66,374 $83,677 $17,302 $82,312 -$1,364 $15,938 Local property tax 27,365 26,560 -805 28,042 1,482 677 Totals $93,739 $110,237 $16,498 $110,354 $117 $16,615 Funding by Segment K-12 schools $80,523 $93,997 $13,474 $95,524 $1,527 $15,001 Community colleges 10,598 12,251 1,653 12,606 354 2,007 Reserve deposit 2,617 3,988 1,371 2,224 -1,764 -393 www.lao.ca.gov 11 2022-23 BUDGET eligible.) The Legislature and Governor also agreed to $880 million provided for water-related activities the state would cover the associated costs by in 2022-23, consistent with a multiyear agreement adjusting the Proposition 98 formulas to increase that was part of the 2021-22 budget package. the share of General Fund revenue allocated to Wildfire Resilience and Response. schools. Consistent with this agreement, the The spending plan provides resources to improve budget plan includes an increase in the 2022-23 the state’s resilience to wildfires, as well as to guarantee of $614 million related to the first-year augment the state’s capacity to respond when fires costs of the expansion. do occur. First, it includes a total of $900 million School Facilities Grants. The budget allocates from the General Fund on a one-time basis over $1.4 billion (non-Proposition 98 General Fund) three years—$80 million in 2021-22, $320 million in attributable to 2021-22 for school facilities grants. 2022-23, and $500 million in 2023-24—for various Of this total, $1.3 billion is to cover the state share departments to implement a package of proposals for new construction and modernization projects focused on wildfire prevention and improving under the School Facilities Program. These funds landscape health. This funding is in addition to supplement existing funds from Proposition 51, $200 million annually in continuously-appropriated the state school bond approved by voters funding from the Greenhouse Gas Reduction in 2016. (Funding from Proposition 51 will likely be Fund (GGRF) for similar purposes. Second, the exhausted in 2022-23.) The remaining $100 million spending plan provides roughly $850 million in is for schools to construct or renovate State 2022-23, of which about $500 million is ongoing— Preschool, transitional kindergarten, and full-day almost entirely from the General Fund—for various kindergarten classrooms. augmentations aimed at enhancing the state’s wildfire response. These augmentations mainly Resources and Environment support additional personnel and equipment at Energy Package. The spending plan the California Department of Forestry and Fire includes a total of $7.9 billion across five years Protection, but also provide wildfire response from the General Fund—including $1.2 billion resources for the Governor’s Office of Emergency through the California Emergency Relief Fund— Services, California Military Department, and for energy-related activities. This includes California Conservation Corps. Notably, the budget $5.2 billion—$2.3 billion in 2021-22 and $2.9 billion package also includes approval of a Memorandum in 2022-23—for activities such as actions to ensure of Understanding (MOU) with Unit 8, which there is adequate statewide electricity supply represents CalFire firefighters. As we discuss in our over the next few years, financial support to cover August analysis, this MOU could increase out-year unpaid household energy bills that accrued during wildfire response costs significantly. the pandemic, and incentives for long-duration Zero-Emissions Vehicles (ZEV) storage projects. Package. The budget package provides a total Drought Response and Resilience of $6.1 billion over five years for ZEV programs. Package. The budget package includes (This amount is in addition to $3.9 billion included $2.9 billion across three years from the General in last year’s budget.) This includes $3.1 billion Fund—including roughly $1 billion through the from various funds across 2021-22 and 2022-23, California Emergency Relief Fund—to respond to such as $1.5 billion from Proposition 98 General current drought conditions, as well as for activities Fund for zero-emission school buses, $804 million to prepare for future droughts. This includes from the General Fund for various activities $2.3 billion—$1.9 billion in 2021-22 and about including ZEV fueling infrastructure grants, $400 million in 2022-23—for activities such as $600 million from GGRF for heavy-duty vehicle actions to improve water conservation, drinking incentives, and $77 million in federal funds for water supplies and projects, grants for repairs to ZEV fueling infrastructure. community water systems, and steps to protect fish and wildlife from drought impacts. These funds add 12 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET Climate Change Response. In addition to the High-Speed Rail Project. The budget package aforementioned drought and wildfire packages, the appropriates essentially all of the remaining spending plan contains funding targeted to address unappropriated Proposition 1A bond (2008) other climate change impacts. This includes funds—$4.2 billion—for the high-speed rail project additional General Fund generally consistent in 2021-22. The budget package also includes with the 2021-22 agreement to address extreme associated budget trailer legislation that establishes heat ($150 million in both 2022-23 and 2023-24) a new independent Office of the Inspector General and nature-based climate solutions ($594 million for the High-Speed Rail Authority and prioritizes in 2022-23 and $428 million in 2023-24). funding the Merced-to-Bakersfield segment of the The budget package also provides significant project, among other provisions. augmentations to address sea-level rise, including Health and Developmental Services roughly $600 million in 2022-23 and $650 million committed for 2023-24. (These totals include some Retention Payments for Workers in Certain funding incorporated within the nature-based Health Care Facilities. The budget package solutions package.) includes roughly $1.1 billion General Fund (transferred into the California Emergency Relief Transportation Fund) in 2021-22 to provide one-time retention Transportation Infrastructure Package. payments to eligible workers in certain health care The budget package includes $9.5 billion across facilities, including hospitals and skilled nursing four years from the General Fund to support facilities. Eligible workers could receive up to transportation infrastructure. This includes $1,500 from the state. A similar payment is being $7.7 billion—$3.7 billion in 2021-22 and $2 billion included in labor bargaining agreements for state in both 2023-24 and 2024-25—to fund transit and employees, paid using a mix of General Fund and rail projects throughout the state. The package other funds. In addition to the $1.1 billion amount, also includes (1) $1.8 billion in 2021-22 to support the spending plan includes $70 million General active transportation, climate adaptation, and Fund for a separate program to provide retention grade separation projects, and (2) $100 million in payments to eligible workers in health care clinics. 2023-24 to augment a local litter abatement and Behavioral Health. The spending plan reflects a beautification grant program initiated in 2021-22. number of major investments in behavioral health. These investments include roughly $2 billion in Supply Chain Resilience Package. The budget General Fund expenditures in 2022-23 approved includes $1.4 billion from the General Fund over last year as part of the multiyear Children and four years for a package of initiatives intended to Youth Behavioral Health Initiative. This initiative support ports and goods movement infrastructure, funds a variety of programs administered by workforce development, and operational efficiency multiple state departments intended to transform at the state’s ports Specifically, the package behavioral health service delivery for children and consists of (1) $1.2 billion for the California State youth under age 25. In addition, the spending Transportation Agency to fund port, freight, and plan includes $1 billion General Fund in 2022-23 goods movement infrastructure; (2) $110 million ($1.5 billion General Fund over two years) to for the California Workforce Development Board establish a state-level Behavioral Health Bridge to establish a goods movement workforce training Housing program, which will support the creation campus; (3) $40 million for the Department of of immediate, clinically enhanced housing settings Motor Vehicles to increase capacity to issue for people experiencing homelessness with serious commercial driver’s licenses; and (4) $30 million for behavioral health conditions. the Governor’s Office of Business and Economic Development to fund operational and process Late in session, the Legislature passed improvements at ports. the Community Assistance, Recovery and Empowerment (CARE) Act. The CARE Act creates an alternative judicial process to connect those www.lao.ca.gov 13 2022-23 BUDGET with severe mental illness to behavioral health majority of funding is one time or temporary. services and supports. The spending plan provides However, the budget does provide $34 million in $88.3 million General Fund (of which $57 million is ongoing funding beginning in 2023-24 for housing for direct assistance to counties) to the Department assistance for foster youth and former foster youth. of Health Care Services, the California Health and Most of the funding—$2.9 billion General Fund— Human Services Agency, and the Judicial Branch is primarily for housing-related proposals, while for the implementation of the CARE Act in 2022-23. $1.9 billion General Fund is allocated primarily CARE Act implementation will begin in seven towards homelessness-related programs. “Cohort I” counties by October 1, 2023, with the Some of the major uses of housing and remaining counties to begin implementation no later homelessness funding in the budget would support than December 1, 2024. encampment resolutions; provide flexible aid to Medi-Cal Coverage Expansion to Remaining local governments to help address homelessness Undocumented Populations. Historically, in their communities; fund affordable housing undocumented residents were only eligible for development; and establish a new homeownership limited Medi-Cal coverage. In recent years, program. The budget also provides funding that the state has taken steps to expand eligibility could be used to help address homelessness for comprehensive Medi-Cal coverage to and/or housing affordability in other program undocumented residents under the age of 26 as areas, including the health, courts, and higher well as those over the age of 49. The budget education areas. package expands eligibility for comprehensive Higher Education Medi-Cal coverage to otherwise-eligible undocumented residents between the ages of Base Funding Increases for Universities’ 26 and 49 beginning no later than January 1, 2024. Core Operations. The spending plan provides the While there are no costs in 2022-23, the expansion California State University (CSU) and the University is expected to result in increased spending of of California (UC) with 5 percent increases to $2.1 billion General Fund at full implementation. their base General Fund support. These base increases equate to a $211 million augmentation Developmental Services Rate Reform for CSU and a $201 million augmentation for UC. Acceleration. The 2021-22 budget included The universities have discretion over how to spend funding to begin implementation of service provider their base augmentations. They likely will use the rate reform, with funding for rate increases and funds primarily to cover salary and benefit cost quality incentives ramping up to $1.2 billion General increases. (In addition to CSU’s unrestricted base Fund in 2025-26 and ongoing. The 2022-23 budget increase, the budget provides CSU with $103 million spending plan includes one-time General Fund in General Fund to cover certain pension and retiree 2022-23 ($159.1 million), 2023-24 ($34.1 million), health benefit cost increases.) The 5 percent base and 2024-25 ($534.1 million) to accelerate the time increases are consistent with the Governor’s line, reaching full implementation by 2024-25, one January proposal for the universities (also reflected year ahead of the original schedule. in the Governor’s university “compacts”). The June Housing and Homelessness legislative package had contained higher base Significant Funding Largely Continues increases for the universities. (We treat funding Existing Efforts. In addition to the $9 billion for increases for core operations, including pensions housing and homelessness programs provided in and other employee benefits, as maintaining current the budget last year, the 2022-23 budget authorizes service levels rather than discretionary spending.) an additional $4.8 billion General Fund over three Additional Funding Increases for years to nearly 20 major housing and homelessness Undergraduate Enrollment Growth. Largely programs within the Business, Consumer Services, consistent with 2021-22 Budget Act provisions, the and Housing Agency and the Housing and 2022-23 spending plan provides $81 million to CSU Community Development Department. The vast and $99 million to UC for resident undergraduate 14 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET enrollment growth. At CSU, enrollment is expected to enroll these additional 4,730 FTE students. The to grow by 9,434 full-time equivalent (FTE) students budget also indicates that UC is to grow by a further from 2021-21 to 2022-23 (leaving CSU still 1 percent in 2023-24, with this additional growth approximately 3,000 FTE students below its peak funded from an unrestricted General Fund base enrollment level in 2020-21). At UC, the budget augmentation to be provided that year. The budget funds growth of 7,132 FTE students—consisting of package also reflects UC’s continued implementation 1,500 FTE students that were not funded in previous of its statutory nonresident replacement plan, with budgets, 902 FTE students resulting from replacing an additional 902 nonresident slots replaced with nonresident with resident slots, and an additional resident slots in 2023-24. The budget package sets 4,730 FTE new students. UC has through 2023-24 no 2023-24 enrollment expectation for CSU. www.lao.ca.gov 15 2022-23 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 2022-23 Budget Act. 16 LEGISLATIVE ANALYST’S OFFICE 2022-23 BUDGET www.lao.ca.gov 17 2022-23 BUDGET 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, California 95814. 18 LEGISLATIVE ANALYST’S OFFICE