The 2023-24 Budget: Broadband Infrastructure

2023-24 BUDGET The 2023-24 Budget: Broadband Infrastructure GABRIEL PETEK | LEGISLATIVE ANALYST | MARCH 2023 SUMMARY Significant Changes to Original 2021 Broadband Infrastructure Spending Plan. Since July 2021, the administration and the Legislature have made substantive changes in the amounts and sources of funding for the original broadband infrastructure spending plan—a $6 billion ($4.3 billion American Rescue Plan [ARP] fiscal relief funds, $1.7 billion General Fund) multiyear plan enacted in 2021. While the total amount of the spending plan has increased only by $550 million, the source of funding for the majority of the spending plan is now General Fund. Out of the revised total $6.55 billion, $3.64 billion is General Fund and $2.91 billion is federal ARP fiscal relief funds. Major Federal and State Broadband Programs and Projects Reaching Critical Milestones and Deadlines. The administration is making important decisions as it moves from planning into development and implementation across the state’s broadband programs and projects. Middle-mile network architecture decisions and final contract awards are expected within the calendar year. Last-mile project grant rounds are opening midyear, ending with awards early next year. Project financing through the Broadband Loan Loss Reserve Fund also is expected in 2023-24. Furthermore, key federal broadband infrastructure programs will announce more federal funding midyear, with the state’s initial allocation of funding expected by the end of 2023-24. The status of each of these programs and projects also highlights important upcoming deadlines, such as the federal ARP fiscal relief fund deadline to enter contracts by December 31, 2024 and spend funds by December 31, 2026. Governor’s Proposed Delays Help Address Budget Problem… The Governor’s 2023-24 budget proposes to delay $1.125 billion in General Fund appropriations—$575 million for the Broadband Loan Loss Reserve Fund and $550 million for last-mile projects—from 2022-23 and 2023-24 to 2024-25, 2025-26, and 2026-27 to address the projected budget problem in 2023-24. We find the proposed delays to be prudent and worthy of legislative consideration for three main reasons: (1) the delays (if approved) represent a relatively small portion of the funding in the original spending plan—$1.125 billion of the $6 billion—across two programs; (2) starting in 2023-24, a significant amount of additional federal funding for broadband infrastructure is expected; and (3) the administering programs remain in planning or early implementation, and the remaining appropriations from 2021-22 to 2023-24 will continue to fund program awards in the near term. …But Larger Budget Problem Likely at May Revision, With Proposed Future Spending Likely Unaffordable. We anticipate the budget problem to be about $7 billion larger at May Revision. Moreover, we find that the state likely will be unable to afford the overall spending levels in 2024-25, 2025-26, and 2026-27 proposed in the Governor’s 2023-24 budget, including the resumption of delayed one-time spending for broadband infrastructure. As a result, the delayed broadband infrastructure spending likely will not be affordable in future years without reductions in other areas. Recommend Spending Federal ARP Fiscal Relief Funds First, Evaluating Remaining General Fund in Spending. We recommend the Legislature direct the administration through trailer bill language to spend federal ARP fiscal relief funds first. We also recommend including increased encumbrance and expenditure reporting. We also recommend the Legislature evaluate the updated spending plan to consider (1) how anticipated additional federal funds could supplement existing and/or planned appropriations; (2) how General Fund spending might be prioritized among existing programs and projects to achieve statutory goals; and (3) how, based on this prioritization, spending delays and/or reductions (including delays in the Governor’s proposed budget) could be made with the least adverse impact on meeting these statutory goals. www.lao.ca.gov 1 2023-24 BUDGET BACKGROUND BROADBAND INFRASTRUCTURE Unserved Households Do Not Have Access to Broadband. Unserved households can be defined Various Components of Broadband as those without access to broadband (as defined Infrastructure. Broadband infrastructure allows by FCC). According to the California Public Utilities internet service providers (ISPs) and other Commission (CPUC), there are 353,494 unserved entities to provide high-speed internet access to households in California as of December 31, 2020. communities and households. This infrastructure (CPUC expects updated data to be published can be categorized into three groups based on the in April 2023.) distance covered, from longest to shortest distance: Underserved Households Do Not Have • Backbone or Long-Haul. Backbone Access to Faster Broadband. Underserved or long-haul infrastructure often uses households can be defined as those with access to high-capacity fiber-optic cables laid over broadband, but not at 100 Mbps download speed hundreds or thousands of miles to connect and 20 Mbps upload speed. Faster broadband different countries, states, and/or regions to gives consumers the ability to, for example, do the internet. various internet activities simultaneously across • Middle-Mile. Middle-mile infrastructure multiple devices. According to CPUC, there are also often consists of fiber-optic cables laid 743,387 underserved households in California as of over tens or hundreds of miles that, once December 31, 2020. connected to by an ISP, can deliver local internet access. STATE’S 2021 BROADBAND • Last-Mile. Last-mile infrastructure relies INFRASTRUCTURE SPENDING PLAN on antennae, cables, poles, wires, and Administration and Legislature Reached other components to connect middle-mile Three-Year, Multibillion Dollar Broadband infrastructure to individual communities Infrastructure Agreement in 2021. In July 2021, and households. the administration and the Legislature agreed to spend $6 billion over three fiscal years (starting UNSERVED AND in 2021-22) on broadband infrastructure. Out of UNDERSERVED HOUSEHOLDS the $6 billion in the 2021 agreement, $4.3 billion came from federal ARP fiscal relief funds and Federal Communications Commission (FCC) Provides Broadband Definition. The $1.7 billion came from the General Fund. (ARP FCC defines broadband as high-speed internet fiscal relief funds must be encumbered [that is, access that provides a minimum of 25 Megabits obligated or under contract] by December 31, 2024 per second (Mbps) download speed and 3 Mbps and expended [that is, spent on costs incurred] by upload speed. (Mbps measures how much data December 31, 2026.) can be downloaded or uploaded over a network Three Broadband Infrastructure Programs connection.) Internet access at these speeds and Projects Funded by Spending Plan. The 2021 allow consumers to use the internet for a variety of agreement, now spending plan, funds three related activities such as accessing information, studying broadband infrastructure programs and projects: online, and working remotely. (Other factors such • Statewide Open-Access Middle-Mile as latency—how long it takes data to travel—and Network. The state is building, leasing, and reliability—how long a connection is maintained— purchasing middle-mile infrastructure to also affect whether consumers can access internet create a network deployed primarily along service at these speeds.) the state’s highways and other rights of way. 2 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET The middle-mile network is expected to be Chapter 112 of 2021 (SB 156, Committee available to ISPs, public entities, and other on Budget and Fiscal Review) Implements the organizations that can deliver broadband, Broadband Infrastructure Agreement. The particularly to unserved and underserved Legislature also passed (and the Governor signed) communities and households. The 2021 SB 156 in July 2021 to implement the broadband spending plan appropriated $3.25 billion infrastructure agreement. Senate Bill 156 in ARP fiscal relief funds in 2021-22 for the establishes the roles and responsibilities of state middle-mile network. government entities involved in implementation, • Last-Mile Projects. The state is providing including the Department of Technology (CDT), the grants to ISPs, public entities, and other California Department of Transportation (Caltrans), organizations to fund last-mile infrastructure and CPUC; requires the $2 billion appropriation for projects that connect unserved and last-mile infrastructure projects to be evenly split underserved communities and households to between rural and urban counties; and provides middle-mile infrastructure. The 2021 spending some prioritization of program and project activities, plan appropriated $2 billion ($1.1 billion such as identification of priority middle-mile ARP fiscal relief funds and $900 million network locations that will enable last-mile projects General Fund) across three fiscal years for to connect unserved communities and households. last-mile project grants through CPUC’s (The rural-urban allocation split only is required until California Advanced Services Fund (CASF) June 30, 2023, but we understand from CPUC that program’s Federal Funding Account (FFA). this split will be maintained thereafter.) • Broadband Loan Loss Reserve Fund. Figure 1 The Broadband Loan Loss Original 2021 Broadband Infrastructure Spending Plan Reserve Fund will be a (In Millions) program within CPUC’s CASF program that will provide Funding Source local government entities Fiscal General Federal Total and nonprofit organizations Program or Project Year Fund Funds Funds with grants to help them, for Middle-Mile Network 2021-22 — $3,250a $3,250 example, pay the costs of 2022-23 — — — 2023-24 — — — debt issuance and establish Subtotals (—) ($3,250) ($3,250) and fund reserves for Last-Mile Projects 2021-22 — $1,072b $1,072 broadband infrastructure 2022-23 $125 — 125 projects. The 2021 spending 2023-24 803 — 803 plan appropriated $750 million Subtotals ($928) ($1,072) ($2,000) General Fund over three fiscal Broadband Loan Loss Reserve 2021-22 $50 — $50 years for the Broadband Loan Fund 2022-23 125 — 125 2023-24 575 — 575 Loss Reserve Fund. Subtotals ($750) (—) ($750) Figure 1 provides appropriations All Programs and Projects 2021-22 $50 $4,322 $4,372 by fiscal year and allocations by 2022-23 250 — 250 program or project as approved in 2023-24 1,378 — 1,378 Totals $1,678 $4,322 $6,000 the state’s original 2021 broadband a The $3.250 billion in federal funds for the middle-mile network in 2021-22 was appropriated to infrastructure spending plan. the California Department of Technology out of the state’s American Rescue Plan (ARP) fiscal relief allocation. b The $1.072 billion in federal funds for last-mile projects in 2021-22 was appropriated to the California Public Utilities Commission, of which $550 million was the state’s allocation from the ARP’s Coronavirus Capital Projects Fund and $522 million was out of the state’s ARP fiscal relief allocation. www.lao.ca.gov 3 2023-24 BUDGET CHANGES TO STATE’S 2021 Information Administration (NTIA) through four new and existing broadband programs described below. SPENDING PLAN Majority of Funding Allocated to Broadband Two Significant Changes to Spending Equity, Access, and Deployment (BEAD) Plan. Since July 2021, the administration and Program. The BEAD program received the Legislature have changed the state’s 2021 $42.45 billion of the $65 billion total, nearly all broadband infrastructure spending plan in two of which is to provide states, territories, and main ways: other jurisdictions with allocations for broadband • $1.4 Billion Shift From Federal ARP adoption and deployment projects (primarily Fiscal Relief Funds to General Fund in last-mile projects). State allocations from the 2021-22. Pursuant to Control Section 11.96 BEAD program are described below. (This brief of the 2022-23 Budget Act, the fund source focuses on the federal BEAD program and Digital for appropriations totaling $1.4 billion in Equity Act programs due to the significant amount 2021-22 shifted from ARP fiscal relief funds of additional federal funding available to the state to the General Fund—$887 million for the for broadband programs or projects.) middle-mile network and $522 million for • Initial Allocation of $100 Million to Each last-mile projects. (This shift was made State ($5.3 Billion of Total Program Funds). due to increased flexibility in the use of a Each state will receive an initial allocation portion of ARP fiscal relief funds.) After the of $100 million, of which $5 million will be shift, there is $2.9 billion in ARP fiscal relief provided at the program outset to support funds (as compared to $4.3 billion in the state planning efforts. 2021 spending plan) allocated in 2021-22 for • Additional Allocation to States Based on broadband infrastructure. Unserved Locations in High-Cost Areas • $550 Million General Fund Added Across ($4.245 Billion of Total Program Funds). 2023-24 and 2024-25 for Increased Each state will receive an allocation based on Middle-Mile Network Costs. In June 2022, the number of unserved locations in high-cost the Legislature passed (and the Governor areas of their state as a percentage of all such signed) Chapter 48 of 2022 (SB 189, locations nationwide. Committee on Budget and Fiscal Review). • Allocation of Remaining Funds to In SB 189, the Legislature stated a goal to States Based on Unserved Locations appropriate an additional $550 million General ($32.056 Billion of Total Program Funds). Fund ($300 million in 2023-24 and $250 million Each state will receive an allocation from in 2024-25) for increased costs to build, lease, remaining program funds based on the and purchase the state’s middle-mile network. number of unserved locations in their state as Figure 6 on page 11 reflects these significant a percentage of all such locations nationwide. changes (as well as the proposed delays in the Digital Equity Act Programs Funding. The 2023-24 Governor’s Budget). Digital Equity Act programs received $2.75 billion for three grant programs to improve digital equity RECENT MAJOR FUNDING across specific populations such as low-income INCREASE FOR FEDERAL households, racial and ethnic minorities, and BROADBAND PROGRAMS rural communities: Federal Infrastructure Investment and Jobs • State Digital Equity Planning Grant Act (IIJA) Included $65 Billion for Broadband Program ($60 Million of Total Program Programs Nationwide. In November 2021, the Funds). Each state will receive an allocation federal IIJA was signed into law providing $65 billion to support its development of a digital equity for broadband programs. A majority of the funding is plan, which will identify barriers to digital managed by the National Telecommunications and equity and plan how to address related 4 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET outcomes across program areas such as STATUS OF MAJOR FEDERAL AND education and health care. STATE BROADBAND PROGRAMS • State Digital Equity Capacity Grant AND PROJECTS Program ($1.44 Billion of Total Program In this section, we provide high-level updates Funds). Each state will receive annual on the status of each state broadband program allocations over five calendar years to support and project in the spending plan, as well as on implementation of their digital equity plans, the federal BEAD program and Digital Equity Act including related projects. programs. Figure 2 on the next page and Figure 3 • Digital Equity Competitive Grant Program on page 7 provide estimated time lines for each ($1.25 Billion of Total Program Funds). program and project, with specific dates and other Specific types of state entities could receive details provided under each program or project annual allocations over five calendar years to section. (The time lines below are subject to change implement digital equity projects. based on, for example, administrative delays and Enabling Middle Mile Broadband funding changes.) Infrastructure Program Funding. The Enabling Middle-Mile Network Middle Mile Broadband Infrastructure Program received $1 billion to build, improve, and/or Estimated Length of 10,000 Miles at Total purchase middle-mile infrastructure. (We do not Cost of More Than $4.5 Billion. In May 2022, have any information as to whether or not the state CDT presented a network map that spans an applied for and/or receive a notice of award from estimated 10,000 miles across the state. Caltrans this program.) uses the map to guide its pre-construction Tribal Broadband Connectivity Program work on individual network segment projects, Funding. The Tribal Broadband Connectivity which Caltrans expects to complete by the end Program received $2 billion, in addition to of 2024. CDT estimates that the total cost to the $980 million appropriated by the federal build the network (that is, the cost of standalone Consolidated Appropriations Act of 2021, to provide construction projects without, for example, any tribal governments with allocations for broadband leasing or purchasing of middle-mile infrastructure) adoption and deployment. is more than $4.5 billion. However, Caltrans’ pre-construction work could determine that at Remainder of Funding Overseen by FCC least some segments are not needed to complete Through Affordable Connectivity Program the network. (ACP). The remaining funding for broadband programs under IIJA is overseen by FCC Decisions to Finalize Network Architecture through the ACP, which provides low-income Expected in Next Few Months. CDT expects to households with monthly subsidies to pay for finish its review of network construction contract internet service and one-time subsidies to pay for bids and lease and purchase agreements in the internet-connected devices. According to data from next few months. Once its review is finished, the Universal Service Administrative Company, CDT will finalize the network architecture as a which administers the ACP as directed by FCC, combination of joint-build construction projects, 33 percent of eligible households in California are leases and purchases of existing middle-mile enrolled in the ACP as of March 6, 2023. (There are infrastructure, and standalone construction almost 6 million eligible households in California.) projects. This combination will allow CDT to reduce the total cost of the network from the more than $4.5 billion needed for a standalone network build to within the $3.8 billion appropriated by the Legislature. www.lao.ca.gov 5 2023-24 BUDGET Figure 2 Estimated Major State Broadband Program and Project Time Linesª 2023 2024 2025 2026 2027 2028 2029 Pre-Construction Work Continues Majority of Construction Starts Completed Federal Deadline Final Network Architecture Decisions Signed Contracts to Build and Lease Network Middle-Mile Network Pre-Construction Work Completed Federal ARP Fiscal Relief Funds Encumbrance Deadline Federal ARP Fiscal Relief Funds Federal Expenditure Deadline Construction Completed CASF FFA Grant Round #1 Applications CASF FFA Grant Round #1 Application Review CASF FFA Grant Round #1 Awards CASF FFA Grant Round #2 Applications CASF FFA Grant Round #1 Project Construction Starts Last-Mile CASF FFA Grant Round #2 Application Review Projects CASF FFA Grant Round #2 Awards Federal ARP Fiscal Relief Funds Encumbrance Deadline CASF FFA Grant Rounds #1 and #2 Project Construction CASF FFA Grant Rounds #1 and #2 Project Construction Completed Federal ARP Fiscal Relief Funds Expenditure Deadline Proposed Decision Broadband Loan Loss Broadband Loan Loss Reserve Fund Round #1 Reserve Fund a Approximate time lines based on information available as of March 20, 2023. ARP = American Rescue Plan and CASF FFA = California Advanced Services Fund Federal Funding Account. 6 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET Figure 3 Estimated Major Federal Broadband Program and Project Time Linesª 2023 2024b 2025 2026 2027 2028 2029 FCC Publishes Final Map NTIA Announces Program Allocations California's Five-Year Action Plan Due to NTIA Completed Initial Proposals Due to NTIA State Challenge Process BEAD Initial Proposal Approval and 20 Percent Funding Release Program Implementation Starts With 20 Percent Funding Final Proposals Due to NTIA Final Proposal Approval and Remaining Funding Release Implementation Starts With All Funding State Digital Equity Plan Due to NTIA State Capacity Program - Application and Awards Competitive Program - Application and Awards State Capacity Program - Implementation Starts Digital Equity Act Programs Both Programs - Implementation Starts Competitive Program - Implementation Completed State Capacity Program - Implementation Continues State Capacity Program - Implementation Completed a Approximate time lines based on information available as of March 20, 2023. b Full-year time lines in 2024 and future years do not indicate specific dates or time lines. Rather, they indicate time frames within which specific dates or time lines will be forthcoming. BEAD = Broadband Equity, Access, and Deployment; FCC = Federal Communications Commission; and NTIA = National Telecommunications and Information Administration. www.lao.ca.gov 7 2023-24 BUDGET Signed Contracts to Build, Lease, and Figure 4 Purchase Network Expected by End of 2023. CDT expects all contracts necessary to build, lease, CASF FFA Allocations for and purchase individual network segments will be Rural Counties signed by the end of 2023, which will encumber (In Millions) both the federal ARP fiscal relief funds and General Fund. However, of the $3.8 billion appropriated by County Allocation the Legislature, only $2.4 billion is federal ARP fiscal Alpine $7.0 relief funds that must be encumbered by December Amador 57.2 Calaveras 30.8 31, 2024 and expended by December 31, 2026. Colusa 29.0 (General Fund is not subject to the same Del Norte 10.3 encumbrance and expenditure deadlines.) El Dorado 111.9 Glenn 25.1 Estimated Network Maintenance and Humboldt 59.5 Operations Costs Not Yet Available. Once the Inyo 13.2 network is completed, it will need to be maintained Kings 37.7 and operated as ISPs and other entities connect to Lake 28.4 Lassen 24.9 the network and provide broadband to communities Madera 66.6 and households. While CDT, GoldenStateNet Mariposa 40.8 (the network’s third-party administrator), and Mendocino 57.4 other entities have outlined considerations for the Modoc 23.9 Mono 10.6 network’s business model once completed, no Nevada 74.9 estimate of the costs to maintain and operate the Plumas 42.3 network is available at this time. San Benito 10.4 Sierra 12.5 Last-Mile Projects Siskiyou 45.8 Sutter 20.4 CPUC CASF FFA Rulemaking Procedure Tehama 74.8 Complete. In April 2022, CPUC finished its Trinity 29.7 rulemaking procedure for the new FFA within Tuolumne 15.5 Yuba 39.4 the commission’s CASF program. The decision Total $1,000.0 adopted rules and guidelines for the new FFA, CASF FFA = California Advanced Services Fund Federal Funding including county designations as rural or urban Account and calculated allocations for each county in compliance with SB 156. Each county receives First CASF FFA Grant Application Round an initial allocation of $5 million. The remainder Expected to Open in June, Second Round in of the allocation is calculated based on the January. CPUC expects to open its first CASF FFA county’s share of California households, as a grant application round in June, receive all grant proportion of either all rural counties or all urban applications by August, review the applications counties, without access to broadband with at from August to December, and award grants in least 100 Mbps download speed. As previously January 2024. A second round also is expected to mentioned, while the rural and urban funding split is open in January 2024, receive all grant applications only maintained through June 30, 2023 by SB 156, by March, review the applications from March we understand from CPUC that they will maintain to November, and award grants in December this split thereafter. Figure 4 and Figure 5 provide 2024. In each round, construction is expected the allocations by county, divided by rural or urban to continue through the ARP fiscal relief funds county designations. expenditure deadline of December 31, 2026. Of the $2 billion in previous or planned last-mile project appropriations, only $550 million is ARP fiscal relief funds subject to the deadline. 8 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET Broadband Loan Loss Reserve Fund Figure 5 CPUC Broadband Loan Loss Reserve Fund CASF FFA Allocations for Rulemaking Procedure Remains Active. The Urban Counties CPUC rulemaking procedure for the Broadband (In Millions) Loan Loss Reserve Fund remains active, with a revised staff proposal and proposed decision to County Allocation implement the fund expected by July 1. Both CPUC Alameda $24.5 and the California Infrastructure and Economic Butte 19.2 Development Bank entered into an interagency Contra Costa 16.1 agreement on the Broadband Loan Loss Reserve Fresno 61.2 Imperial 14.0 Fund in November 2022, and plan to continue Kern 31.3 working together on its implementation. Los Angeles 104.7 First Broadband Loan Loss Reserve Fund Marin 11.5 Merced 27.3 Application Round in 2023-24. While the first Monterey 17.3 application round of the Broadband Loan Loss Napa 10.7 Reserve Fund is expected to open in 2023-24, the Orange 92.0 exact time line to receive and review applications Placer 30.3 Riverside 50.6 and award funds remains unknown. While the Sacramento 38.7 total amount of grants available in the first round San Bernardino 59.7 is also unknown, the Governor’s budget proposes San Diego 81.3 $175 million in 2023-24 with the remaining balance San Francisco 10.4 San Joaquin 29.4 of $575 million delayed to 2024-25 ($300 million) and San Luis Obispo 22.3 2025-26 ($275 million). San Mateo 10.4 Santa Barbara 15.9 Federal BEAD Program Santa Clara 36.0 Santa Cruz 10.3 Initial Planning Funds Awarded in November Shasta 32.4 2022. NTIA awarded the state $5 million in initial Solano 17.0 planning funds from the state’s initial allocation of Sonoma 19.2 $100 million in November 2022. These funds must Stanislaus 25.4 Tulare 45.1 be used to support state planning efforts, including Ventura 20.4 the preparation and submission of a five-year action Yolo 15.9 plan. The five-year action plan will, for example, Total $1,000.5a provide information about the state’s approach to and a Difference from $1 billion total allocation due to rounding. goals for broadband access, adoption, affordability, CASF FFA = California Advanced Services Fund Federal Funding Account and equity. NTIA expects the five-year action plan to inform the state’s initial proposal on how it will use the $1 Billion in Awards Available in First Round. first 20 percent of its BEAD program allocation. The CPUC also estimates the total amount of grants state must submit a five-year action plan to NTIA no available in the first CASF FFA grant application later than August 28. round will be $1 billion (including all $550 million in State’s Program Allocation Expected by End ARP fiscal relief funds). While CPUC has indicated of June. NTIA will announce each state’s program that the total amount of grants available in the allocation from the BEAD program by the end of second round will be $1 billion, we would note that June. Once NTIA announces program allocations, the Governor’s 2023-24 budget proposes to delay each state must submit an initial proposal that at least $350 million of the $1 billion that is available describes how the state plans to use program (after first round awards) from 2023-24 to 2025-26 funds for grants to ISPs, public entities, and other ($200 million) and 2026-27 ($150 million). (We provide organizations within 180 days. Based on NTIA’s time more detail on the proposed delays in the “2023-24 line, initial proposals will need to be submitted to NTIA Governor’s Budget” section later in this brief.) before the end of 2023. Once approved, the state will www.lao.ca.gov 9 2023-24 BUDGET receive no less than 20 percent of the state’s program Federal Digital Equity Act Programs allocation. All remaining funds will be available State Digital Equity Planning Grant Program once the state submits, and NTIA approves, a final Award Received in November 2022. NTIA awarded proposal (no later than one year after NTIA approves the state $4 million from the State Digital Equity the initial proposal). Planning Grant Program to support its development CPUC Federal BEAD Program Rulemaking of a digital equity plan. California’s State Digital Procedure Now Active. The CPUC rulemaking Equity Plan must be submitted to NTIA no later procedure for the state’s implementation of the than November 30. federal BEAD program is now active. An order More Information Forthcoming on Capacity instituting rulemaking provides initial issues to and Competitive Grant Programs. NTIA will provide address including specific program definitions, more information on the Capacity and Competitive prioritization of proposed broadband projects, and Grant Programs to states and other jurisdictions over the implementation of a challenge process. According the next several months. to the order instituting rulemaking, CPUC intends to complete its rulemaking procedure within 18 months. GOVERNOR’S 2023-24 BUDGET PROPOSAL ASSESSMENT Governor’s 2023-24 Budget Proposes Delay Governor’s Proposed Spending Delays Help of $1.125 Billion General Fund in Previous Address Current Budget Problem… In The and Planned Appropriations. To help address 2023-24 Budget: Overview of the Governor’s the projected budget problem in 2023-24, the Budget, our office evaluated the proposed budget Governor’s 2023-24 budget proposes to delay solutions in the Governor’s 2023-24 budget. $575 million General Fund for the Broadband Loan We found that the administration’s proposed Loss Reserve Fund and $550 million General Fund spending-related delays and reductions, including in last-mile project funding—otherwise scheduled broadband infrastructure spending delays, were for 2022-23 and 2023-24—to 2024-25, 2025-26, a prudent alternative to tapping into the state’s and 2026-27. If approved by the Legislature, the reserves. However, we also recommended the proposed delays would maintain $175 million Legislature use specific criteria to evaluate which General Fund for the Broadband Loan Loss Reserve recent augmentations to maintain versus which Fund and $253 million General Fund for last-mile ones to reduce or delay, potentially considering projects in 2023-24. different spending-related solutions than proposed Administration Maintains $300 Million in the Governor’s 2023-24 budget. Based on General Fund in 2023-24 for Increased these criteria, we consider the proposed delays Middle-Mile Network Costs. Consistent with the of broadband infrastructure spending worthy legislative goal in SB 189, the Governor’s 2023-24 of legislative consideration. First, the delays (if budget includes $300 million General Fund in approved) would maintain the planned schedule for 2023-24 and $250 million General Fund in 2024-25 spending the bulk of the federal and state funding for increased costs to build, lease, and purchase from the original spending plan—$4.875 billion the state’s middle-mile network. of the $6 billion—across the three programs and projects. Second, starting in 2023-24, a significant Figure 6 shows the updated spending plan, amount of additional federal funding from the BEAD incorporating the previously discussed changes program (which we discuss in more detail below) is already made as well as the Governor’s proposed expected. Third, CPUC’s CASF FFA grant program spending delays. and Broadband Loan Loss Reserve Fund program remain in planning or early implementation, and 10 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET the remaining appropriations from Figure 6 2021-22 to 2023-24 will continue Updated Broadband Infrastructure Spending Plan, to facilitate program funding and Incorporating Delays Proposed in Governor’s Budget grant awards. (In Millions) …But Larger Budget Problem Likely at May Revision, With Funding Source Proposed Future Spending Fiscal General Federal Total Likely Unaffordable. However, in Program or Project Year Fund Funds Funds The 2023-24 Budget: Multiyear Middle-Mile Network 2021-22 $887a $2,363b $3,250 Assessment, our office projects 2022-23 — — — the budget problem to increase at 2023-24c 300 — 300 May Revision by about $7 billion. 2024-25c 250 — 250 2025-26 — — — Moreover, we find that the state 2026-27 — — — likely will be unable to afford the Subtotals ($1,437) ($2,363) ($3,800) overall spending levels in 2024-25, Last-Mile Projectsd 2021-22 $522e $550f $1,072 2025-26, and 2026-27 proposed 2022-23 125 — 125 in the Governor’s 2023-24 budget, 2023-24 253 — 253 including the resumption of delayed 2024-25 200 — 200 2025-26 200 — 200 one-time spending for broadband 2026-27 150 — 150 infrastructure. Therefore, in order to Subtotals ($1,450) ($550) ($2,000) preserve the state’s reserves to pay Broadband Loan Loss Reserve 2021-22 — — — for core services if revenues decline Fundg 2022-23 — — — further or in the event of a recession, 2023-24 $175 — $175 2024-25 300 — 300 we recommend the Legislature 2025-26 275 — 275 consider additional spending-related 2026-27 — — — delays and reductions than currently Subtotals ($750) (—) ($750) proposed by the Governor. As All Programs and Projects 2021-22 $1,409 $2,913 $4,322 a result, the delayed broadband 2022-23 125 — 125 infrastructure spending likely will not 2023-24 728 — 728 2024-25 750 — 750 be affordable in future years without 2025-26 475 — 475 reductions in other areas. 2026-27 150 — 150 Additional Federal Funds Total $3,637 $2,913 $6,550 From BEAD Program Available a Pursuant to Control Section 11.96 of the 2022-23 Budget Act, the Department of Finance shifted $887 million for the middle-mile network from American Rescue Plan (ARP) fiscal relief funds to Starting in 2023-24. Though the General Fund in 2021-22. state’s BEAD program allocation b The remaining $2.363 billion in federal funds for the middle-mile network in 2021-22 is state ARP fiscal relief funds. will not be available until the end c The additional $550 million General Fund for the middle-mile network ($300 million in 2023-24 and of June, the state likely will receive $250 million in 2024-25) is consistent with the legislative goal to provide these amounts (subsequent to the submission of a statutory report) in Chapter 48 of 2022 (SB 189, Committee on Budget and up to 20 percent of its allocation by Fiscal Review). the end of 2023-24. We anticipate d All last-mile project amount and timing changes from the initial spending plan for 2023-24 through 2026-27 are proposed changes in the Governor’s 2023-24 budget. this allocation to be in the tens if e Pursuant to Control Section 11.96 of the 2022-23 Budget Act, the Department of Finance shifted not hundreds of millions of dollars. $522 million for last-mile projects from ARP fiscal relief funds to General Fund in 2021-22. f The remaining $550 million in federal funds for last-mile projects in 2021-22 is the state’s allocation A significant amount of additional from the ARP’s Coronavirus Capital Projects Fund. federal funds—at least in the g All Broadband Loan Loss Reserve Fund amount and timing changes from the initial spending plan for 2021-22 through 2025-26 are proposed changes in the Governor’s 2023-24 budget. hundreds of millions of dollars—is expected thereafter by the end of funds, the appropriations that remain for last-mile 2024-25, when the state will receive the remaining projects in 2023-24 and that are delayed to 2024-25, 80 percent of its program allocation. While the IIJA 2025-26, and 2026-27 could be supplemented with requires states use federal funds for broadband funds from the state’s BEAD program allocation. infrastructure to supplement and not supplant state www.lao.ca.gov 11 2023-24 BUDGET Delaying or Reducing General Fund for could be built with General Fund as they are Increased Middle-Mile Costs in 2023-24 and deemed necessary to sufficiently complete 2024-25 Another Potential Solution to Budget the network. This approach would maintain Problem. Consistent with the legislative goal in progress on the middle-mile network but, SB 189, the Governor’s 2023-24 budget maintains in the near term, make available additional $550 million General Fund across 2023-24 and General Fund in 2023-24 to solve the 2024-25 for the middle-mile network. However, budget problem. given the budget problem, the Legislature might • Federal BEAD Program Permits Use of consider whether this increased General Fund Allocations on Middle-Mile Infrastructure spending could be delayed or reduced. Costs. Federal BEAD program rules allow • Network Architecture Decisions and states to use some of their allocations for Ongoing Pre-Construction Work Likely Will middle-mile infrastructure costs, if additional Affect Total Network Cost. CDT maintains middle-mile infrastructure is required to that all 10,000 miles of the middle-mile connect last-mile projects. While most of network must be built, leased, and purchased the federal BEAD program allocation likely to be available for last-mile projects (at will be used for last-mile projects, at least least some of which will be funded by the some additional federal funds (though not CASF FFA and federal BEAD programs), to the entire $550 million) could be used for the increase competition among ISPs, and cover middle-mile network. maintenance and operations costs. Whether Budget Constraints Warrant Prioritizing or not all 10,000 network miles are needed will Among Goals and Projects. More than half not be known, however, until final decisions of the funding in the updated broadband are made about the network’s architecture, infrastructure spending plan—$3.637 billion out pre-construction work is completed, and of the $6.55 billion—is now General Fund. While its maintenance and operations costs are prioritizing the encumbrance and expenditure of estimated. The absence of this information ARP fiscal relief funds to meet federal deadlines is cautions against making assumptions about important, General Fund resources are more flexible the required length of the middle-mile network and can be reconsidered in order to address the and its associated cost. immediate budget problem. Moreover, considering • Pre-Construction Work Also Will Determine whether the current prioritization of available the Order and Sufficiency of Network General Fund will achieve the goals in SB 156 is Segments. CDT expects pre-construction important. For example, the expeditious connection work led by Caltrans to be completed by the of unserved and underserved communities (a end of 2024. This pre-construction work will goal stated for the CASF FFA) might warrant determine whether planned segments of the redirection of at least some available funding from middle-mile network will be sufficient for its one program or project to another. The Broadband completion, and in what order each of the Loan Loss Reserve Fund, for example, might help segments should be built, leased, and/or local governments and nonprofit organizations purchased. Without knowing which segments finance broadband infrastructure projects, but are sufficient and in what order they should be current economic conditions might favor direct completed, prioritizing the encumbrance and awards of last-mile project funding to some of those expenditure of the $2.363 billion in ARP fiscal same entities. relief funds by the federal deadlines to build, lease, and purchase initial network segments would be prudent. Subsequent segments 12 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET RECOMMENDATIONS Consider Delaying or Reducing General Fund Appropriation for Increased Middle-Mile Prioritize Use of ARP Fiscal Relief Funds to Network Costs as One Potential Budget Meet Federal Deadlines. We recommend the Solution. We recommend the Legislature consider, Legislature prioritize encumbrance and expenditure as part of its evaluation of the updated spending of the $2.363 billion in federal ARP fiscal relief plan and prioritization of available General Fund, funds appropriated for middle-mile network and delaying or reducing the $550 million General Fund $550 million for last-mile projects. The Legislature across 2023-24 and 2024-25 for increased costs to could consider whether to statutorily direct CDT build, lease, and purchase the state’s middle-mile and CPUC to use these funds before any General network. While this delay or reduction could affect Fund is encumbered and expended. We also the architecture and length of the network, our recommend the Legislature consider requiring more assessment supports consideration of this funding frequent updates on encumbrance and expenditure as one potential solution to the budget problem. information from DOF to ensure federal deadlines To help inform its consideration of this potential will be met. The United States Department of the funding delay or reduction, we also recommend Treasury currently requires the state to file quarterly the Legislature request additional information encumbrance and expenditure reports but, to avoid about factors that could affect the total cost of the the potential loss of federal funds, the Legislature network such as the status of pre-construction might consider requiring monthly reports until work on network segments and the estimated December 31, 2026. ongoing maintenance and operations costs for Evaluate Updated Spending Plan and the network. Prioritize Available General Fund to Achieve Statutory Goals. We recommend the Legislature evaluate the updated spending plan to consider (1) how anticipated additional federal funding from the IIJA could supplement existing and planned appropriations; (2) how General Fund spending might be prioritized among existing programs and projects to achieve the goals of SB 156; and (3) how, based on this prioritization, spending delays and/or reductions (including delays in the Governor’s proposed budget) could be made with the least adverse impact on meeting these statutory goals. www.lao.ca.gov 13 2023-24 BUDGET 14 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET www.lao.ca.gov 15 2023-24 BUDGET LAO PUBLICATIONS This report was prepared by Brian Metzker, and reviewed by Mark C. Newton and 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. 16 LEGISLATIVE ANALYST’S OFFICE