The 2023-24 Budget: Overview of the Spending Plan (Final Version)

2023-24 BUDGET The 2023-24 Budget: Overview of the Spending Plan GABRIEL PETEK | LEGISLATIVE ANALYST OCTOBER 2023 www.lao.ca.gov 1 2023-24 BUDGET 2 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET INTRODUCTION Each year, our office publishes the California the Governor. All figures in this publication reflect Spending Plan to summarize the annual state actions taken through the end of June 2023, but we budget. This publication provides an overview of have updated the narrative to reflect actions taken the 2023-24 Budget Act, gives a brief description later in the legislative session. In addition to this of how the budget process unfolded, and report, we have released a series of issue-specific, then highlights major features of the budget online posts that give more detail on the major approved by the Legislature and signed by actions in the budget package. THE BUDGET PROBLEM In this section, we present our estimates of the in more detail in our report, The 2023-24 Budget: budget problem the Legislature addressed in the Overview of the Governor’s Budget.) 2023 budget package. After two years of significant Budget Problem Includes $4.5 Billion in New, surpluses, the state faced a budget problem, Discretionary Proposals. Most of the reason that or deficit, this year. In the context of budget the state faced a budget problem in 2023-24 was development, a budget problem occurs when that state revenues declined relative to expectations estimated resources are insufficient to cover the from June 2022. (We describe these dynamics in costs of currently authorized services. Under the more detail later in this report.) However, about State Constitution, a budget problem must be $4.5 billion of the budget problem is the result of solved, for example, by increasing revenues or new, discretionary spending in the budget package. reducing spending. (We define discretionary spending as new spending or revenue reductions that were not previously $27 BILLION BUDGET PROBLEM authorized under current law or legislative policy.) Budget Package Addressed a $27 Billion These discretionary spending amounts are listed Budget Problem. We estimate the Legislature in Appendix 3. solved a $26.5 billion budget problem in the 2023-24 budget package. This budget problem HOW THE SPENDING PLAN is nearly the same as the one addressed by the ADDRESSES THE BUDGET Governor in the May Revision. (Although we cited PROBLEM a slightly higher number in our Initial Comments on The state has several types of solutions—or the Governor’s May Revision report, after further options—for addressing a budget problem, but review, the budget problem we estimated at that the most important include: reserve withdrawals, time should have been slightly lower.) Our estimate spending reductions, revenue increases, and cost of the budget problem is also lower than the figure shifts (for example, between funds). Figure 1 on the cited by the administration. The reasons for this next page summarizes the budget solutions that difference are generally the same as those we budget package used to address the $27 billion cited at the Governor’s budget and May Revision. budget problem. They include: $13 billion in Namely, the administration’s calculation of the spending-related solutions, $10 billion in cost shifts, budget problem included the cost of some policies and nearly $4 billion in revenue-related solutions. that had not been adopted by the Legislature. (As we discuss in more detail later in this report, For example, the administration’s estimates the spending plan does not use any of the state’s included an assumption about the costs of inflation reserves to close the deficit.) The remainder of this in future years that was not current law. (We section describes each of these components in explained the differences between our estimates more detail. www.lao.ca.gov 3 2023-24 BUDGET year of the multiyear (2024-25 Figure 1 through 2026-27). That is, the spending would be moved to How the Budget Package a future year. About half of the Addresses a $27 Billion Budget Problem spending-related solutions in (In Billions) the budget package are delays. For example, in 2023-24, the $30 spending plan delays: $1 billion for 25 Revenue zero-emission school buses and Related infrastructure, $700 million for the 20 higher education housing revolving Cost Shift loan program, and $550 million for 15 Total broadband last-mile project grants. 10 $340 Million in Reductions Spending 5 Related Subject to Trigger Reduction. The Governor’s budget and May Revision proposed making a sizeable amount of spending-related solutions subject to trigger restoration language. $13 Billion in The final budget package, Spending-Related Solutions however, ultimately only included this trigger The budget package includes $13 billion in restoration language for $340 million in spending spending-related budget solutions. They can be reductions. This included a $235 million reduction categorized into three types: reductions, delays, for multifamily seismic retrofit matching funds and and reductions subject to trigger restoration. $50 million reduction to the CalHome program. Nearly all of these solutions would apply to one-time Under this language, these amounts will be and temporary spending enacted in recent budgets. reduced unless, in January 2024, the administration Appendix 1 provides a list of the spending solutions estimates there are sufficient resources available to in the 2023-24 budget package. The remainder fund these expenditures. In that case, the programs of this section describes the spending solutions would be restored halfway through the fiscal year. by type. Significant Recent One-Time and Temporary $5.6 Billion in Reductions. A spending Spending Remains After Spending-Related reduction occurs when the Legislature eliminates Solutions. In 2021-22 and 2022-23, in response an appropriation previously approved under to historically large surpluses, the Legislature current law or policy. The spending plan includes allocated tens of billions of dollars on a temporary $5.6 billion in reductions. The largest of these is the basis—that is, to purposes that would end after withdrawal of a discretionary $750 million principal a few years While the spending plan makes payment on state’s unemployment insurance loan reductions to some of these temporary allocations, (which otherwise is paid by employers’ payroll most notably in 2023-24, significant temporary taxes). The spending plan also makes a $549 million spending is still authorized under current law for reduction to the energy arrearage payment program 2023-24 and beyond. Under our estimates, these and withdraws nearly $280 million for water remaining amounts would total $12.5 billion in recycling projects. 2023-24, $9.4 billion in 2024-25, and $4.1 billion in 2025-26. To the extent budget problems persist—as $6.7 Billion in Delays. A spending delay is an we anticipate is likely—the Legislature would have to expenditure reduction proposed for the budget revisit these and other spending augmentations in window (2021-22 through 2023-24) with an the future. Appendix 4 provides a list of temporary, associated, offsetting cost increase in a future 4 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET discretionary spending (above $50 million) allocated for voter approval. The other bond shifts do not in recent years that is still in place after the require further legislative action or voter approval.) reductions in the 2023-24 budget package. Appendix 2 provides a list of the cost shifts included in the 2023-24 budget package. $10 Billion in Cost Shifts $3.6 Billion in Under LAO estimates, the budget package includes $10.3 billion in cost shifts. Cost shifts Revenue-Related Solutions occur when the state moves costs between entities, The spending plan includes $3.6 billion in fund sources, or across fiscal years. For example, revenue-related solutions, which are also listed shifting spending from the General Fund to special in Appendix 2. The main solution in this area is a funds or, as has been done in prior budgets, renewal and increase in a tax on health insurance shifting costs from the state to local governments. plans known as the managed care organization Major cost shift proposals in the spending plan (MCO) tax. Under the new policy, the tax would include: (1) $2.7 billion in loans from special funds last from April 2023 through December 2026 and (and other state funds) to the General Fund; (2) a primarily be used to maintain and augment support shift of $1.6 billion in costs for zero-emission for Medi-Cal, the state’s Medicaid program. The tax vehicles and other energy-related programs from also requires approval from the federal government the General Fund to the Greenhouse Gas Reduction to be used to draw down federal funding to Fund (GGRF); and (3) shifts in a variety of capital support Medi-Cal. (We describe the reauthorized outlay projects from General Fund cash to bonds, MCO tax in more detail in the “Major Features” for example, for climate projects, student housing, section of this report.) The budget package and clean energy projects. (Bonds associated with assumes that, in 2023-24 specifically, the renewed the climate projects and clean energy, however, are MCO tax provides $3.4 billion to address the not yet final. The Legislature currently is considering budget problem. bills that would put those bonds on the ballot BUDGET CONDITION In this section, we describe the overall condition of the General Fund Figure 2 budget under the spending plan. We also describe the condition of General Fund Condition Summary the school and community college (In Millions) budget. As is the case in the previous 2021-22 2022-23 2023-24 section, all of the figures here use the Revised Revised Enacted administration’s budget estimates as Prior-year fund balance $40,057 $55,810 $26,352 of June 2023. Revenues and transfers 232,537 205,134 208,688 Expenditures 216,785 234,592 225,928 General Fund Budget Ending fund balance $55,810 $26,352 $9,112 Figure 2 summarizes the condition Encumbrances $5,272 $5,272 $5,272 of the General Fund under the SFEU balance $50,538 $21,080 $3,840 revenue and spending assumptions Reserves in the June 2023 budget package, BSA $21,708 $22,252 $22,252 SFEU 50,538 21,080 3,840 as estimated by the administration. Safety net 900 900 900 The state would end 2023-24 with Total Reserves $73,146 $44,232 $26,992 $3.8 billion in the Special Fund for SFEU = Special Fund for Economic Uncertainties and BSA = Budget Stabilization Account. Economic Uncertainties (SFEU). www.lao.ca.gov 5 2023-24 BUDGET (The SFEU is the state’s operating reserve and California businesses, both of which drag down essentially functions like an end-of-year balance.) compensation to higher-income taxpayers. Total General Fund Reserves Reach Extends Film Tax Credit. The estimates in $27 Billion Under Spending Plan. As mentioned Figure 3 also include the impact of the state’s previously, the budget package does not use revenue-related policy changes. In particular, the any reserves to close the $27 billion deficit. As a budget package extends the state’s film tax credit result, under the administration’s estimates and program—which awards $330 million per year in assumptions, general purpose reserves would tax credits to motion picture productions to offset total $27 billion by the end of 2023-24, including a portion of their costs—for an additional five years. $22.3 billion in the Budget Stabilization Account The credit was set to expire in 2025, but now is (BSA), the state’s general-purpose constitutional in place through 2030. The budget package also reserve account. In addition, the state would have makes the film tax credit refundable, meaning $10.8 billion in the School Reserve, available only production companies can receive a refund for for school and community college programs. a portion of their tax credits that exceeds their In both cases, the state has reached the tax liability. constitutional maximum for the accounts, which Spending means deposits are no longer required (but optional deposits can be made). Figure 4 displays the administration’s June 2023 estimates of total state and federal spending in the Revenues 2023-24 budget package. As the figure shows, Figure 3 displays the administration’s revenue the spending plan assumes total state spending projections as incorporated into the June 2023 of $307.9 billion in 2023-24. This is essentially flat budget package. As the figure shows, revenues compared to the 2022-23 level, but includes an from the state’s three major sources are expected 11 percent increase in special fund spending and to decline over the three years of the budget a 4 percent decrease in General Fund spending. window, including by 8 percent between 2021-22 (The “Major Features” section of this report also and 2022-23 and 2 percent between 2022-23 and describes some of the major discretionary spending 2023-24. The bulk of this decline is attributable choices reflected in the spending plan.) In addition, to the personal income tax (PIT). Declines in the between 2022-23 and 2023-24, federal funds PIT are, in part, attributable to weakness in the are expected to decline 6 percent as significant technology sector and a decline in investment in pandemic-related federal assistance to the state continues to decline. Figure 3 General Fund Revenue Estimates (Dollars in Millions) Revised Change From 2022-23 Enacted 2021-22 2022-23 2023-24 Amount Percent Personal income tax $137,144 $122,769 $118,161 -$4,608 -4% Sales and use tax 33,026 33,072 33,366 293 1 Corporation tax 45,128 42,091 42,081 -11 — Total, Major Revenue Sources $215,299 $197,932 $193,607 -$4,325 -2% Insurance tax $3,495 $3,673 $3,881 $208 6% Other revenues 4,709 4,694 8,789 4,095 87 Transfer to/from BSA -7,065 -544 — 544 -100 Other transfers and loans 16,099 -621 2,411 3,032 -488 Totals, Revenues and Transfers $232,537 $205,134 $208,688 $3,554 2% Note: Reflects administration estimates of budget actions taken through July 1, 2023. BSA = Budget Stabilization Account. 6 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET Figure 4 Total State and General Fund Expenditures (Dollars in Millions) Revised Change From 2022-23 Enacted 2021-22 2022-23 2023-24 Amount Percent General Fund $216,785 $234,592 $225,928 -$8,664 -4% Special funds 45,257 73,700 81,960 8,261 11 Budget Totals $262,042 $308,292 $307,888 -$403 — Bond funds $8,653 $6,035 $2,916 -$3,119 -52% Federal funds 171,542 153,230 143,882 -9,348 -6 Note: Reflects administration estimates of budget actions taken through July 1, 2023. School and Community College Budget initiatives. To cover these increases and avoid spending more than the guarantee, the budget Proposition 98 Minimum Guarantee Down package includes $3 billion in reductions or delays Over Budget Window. The State Constitution to several previously approved one-time grants. sets a minimum annual funding requirement for schools and community colleges. The minimum The State Appropriations Limit (SAL) guarantee is met with a combination of General The SAL limits how the state can use revenues Fund and local property tax revenue. After two that exceed a certain limit. In recent years, the SAL years of extraordinary growth in the minimum has been an important constraint in the budget guarantee, Proposition 98 funding is somewhat process and has impacted the Legislature’s budget down from these peak levels. Compared with the decisions. This year, the SAL was not salient to the estimates included in the June 2022 budget plan, budget process because of declines in revenues, the administration revises its estimates of the which have meant the state has more room under minimum guarantee up $317 million in 2021-22 the limit. Figure 5 provides an overview of the SAL and down $3 billion in 2022-23. For 2023-24, the estimates in the budget. As the figure shows, the administration estimates the minimum guarantee is state is expected to have room across all years in $108.3 billion—$2 billion below the 2022-23 level the budget window, including $22 billion in 2021-22, enacted in June 2022. The net decrease over the $11 billion in 2022-23, and $15 billion in 2023-24. period is primarily attributable to lower General Fund revenue estimates, somewhat offset by higher local property tax revenue. Includes Additional Figure 5 Ongoing Spending, Reduces SAL Estimates in the 2023-24 Budget Act or Delays Previous One-Time (In Billions) Augmentations. Despite the drop in the guarantee, the 2021-22 2022-23 2023-24 budget package provides a SAL Revenues and Transfers $256 $240 $243 total of $4.8 billion to cover an Exclusions -152 -115 -117 8.22 percent statutory cost-of-living Appropriations Subject to the Limit $104 $124 $126 adjustment (COLA) for existing Limit $126 $136 $141 Room/Negative Room $22 $11 $15 programs. Compared with the June Excess Revenues? No 2022 budget plan, it also includes Note: Reflects administration estimates of budget actions taken through July 1, 2023 a net increase of $1.3 billion in SAL = state appropriations limit. constitutionally required deposits into the School Reserve, as well as a few new ongoing and one-time www.lao.ca.gov 7 2023-24 BUDGET EVOLUTION OF THE BUDGET This section provides an overview of the 2023-24 budget addressed an $18 billion budget problem budget process. Figure 6 contains a list of the in that proposal. (This is somewhat lower than the budget-related legislation passed on or before $22 billion budget problem the administration has July 1, 2023. referenced. As described earlier, the difference between our estimates are mainly attributable to Governor’s January Budget Proposal differences between what we consider baseline Governor’s Budget Addressed $18 Billion spending.) The Governor’s budget solutions Budget Problem. Governor Newsom presented focused mainly on spending, with $13.6 billion his proposed state budget to the Legislature on in spending reductions, spending delays, and January 10, 2023. We estimate the Governor’s spending reductions subject to trigger restoration. In addition, Figure 6 the Governor also proposed Budget-Related Legislation Passed on or Before $4.3 billion in cost shifts and July 1, 2023 $350 million in revenue-related solutions, which included, most Bill Number Chapter Subject notably, an initial proposal for the Budget Bills and Amendments state to reauthorize the MCO tax. SB 101 12 2023-24 Budget Act Governor Did Not Propose AB 100 3 Amendments to the 2021-22 Budget Act and 2022-23 Budget Act Using State’s Reserves. The AB 102 38 Amendments to the 2023-24 Budget Act Governor did not propose using AB 103 33 Amendments to the 2021-22 Budget Act and any reserves. The Legislature can 2022-23 Budget Act only access required deposits Early Action Trailer Bills (Passed Before June 1, 2023) in the BSA or the Proposition 98 AB 110 4 Early childcare and education AB 111 5 Student loan debt Reserve in response to a disaster AB 112 6 Distressed hospital loan program or if the Governor calls a fiscal AB 113 7 Agricultural labor relations emergency. Although a fiscal Other Trailer Bills Passed Before July 1, 2023 emergency was most likely AB 116 41 Early childcare and education available, we understand the AB 118 42 Health AB 119 13 MCO provider tax Governor did not call one in order AB 120 43 Human services to save the state’s reserves in AB 121 44 Developmental services response to continued economic AB 127 45 General government uncertainty and in case they are AB 128 46 Cannabis AB 129 40 Housing needed for future deficits. As our AB 130 39 Public employment office has noted, fiscal conditions AB 134 47 Public safety could worsen in the coming years. SB 114 48 Education In January, the administration SB 115 49 Arts and music education SB 117 50 Higher education similarly expressed that, if revenues SB 122 51 Public resources declined further, using reserves SB 123 52 Energy would be considered. SB 124 53 Energy SB 125 54 Transportation SB 131 55 Taxation SB 132 56 Film tax credit SB 133 34 Courts Note: This figure includes budget bills and trailer bills identified in Section 39.00 in the 2023-24 Budget Act that were passed by the Legislature on or before July 1, 2023. Ordered by bill number. MCO = managed care organization. 8 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET Governor’s Spending Reductions Focused on for future costs of two programs—California Areas With Large, Recent, Temporary Spending Work Opportunity and Responsibility to Kids and Augmentations. In recent years, the state has Medi-Cal—in the event of a recession.) However, focused spending on one-time and temporary the administration did not propose using any funds purposes mainly in some key areas, including: from the BSA or the School Reserve, nor did the natural resources, energy, and climate; housing Governor call a fiscal emergency. and homelessness; and transportation. Although Legislature’s Budget to a lesser extent, however, on an ongoing basis, recent surpluses have been dedicated to health, The Legislature passed an initial budget package human services, and higher education. In general, on June 15, 2023. The Legislature’s budget the Governor’s budget did not propose large package adopted LAO estimates of local property reductions to health and human services programs. tax revenues, which resulted in an increase to the Rather, the Governor’s proposed spending-related Proposition 98 guarantee by $2.1 billion across solutions were concentrated in areas that received 2022-23 and 2023-24. The legislative package used large one-time and temporary augmentations this additional funding primarily to help maintain (for example, natural resources, climate, energy, previously approved programs. Otherwise, the and transportation). Legislature adopted the administration’s revenue projections, which means it also addressed a Governor’s May Revision similarly sized budget problem as the May Revision Governor’s May Revision Addressed a Larger did. Relative to the May Revision, the Legislature’s Budget Problem. On May 12, 2023, Governor budget package also: (1) reallocated projected Newsom presented a revised state budget proposal unspent funds in child care and State Preschool to the Legislature, referred to as the May Revision. programs to increase provider rates and reduce Relative to the January projections in the family fees beginning October 1, 2023; (2) included Governor’s budget, we estimated at the time that a slightly different mix of reductions as the Governor the budget problem grew by about $10 billion to from climate change-related packages (although $28 billion, due largely to lower revenue estimates, a similar overall level); (3) restored $1 billion in which continued to decline relative to Governor’s 2023-24 in proposed General Fund reductions to budget expectations. (Upon further review, the transit capital funding and added flexibility to allow actual budget problem at the May Revision should local agencies to use this funding for operations; have been somewhat less than $28 billion.) The (4) rejected the Governor’s proposals to use Governor proposed addressing much of the General Fund cash to pay for certain capital outlay additional budget problem with more cost shifts project costs, instead using lease revenue bond and revenue increases. Major cost shift proposals financing to pay for these costs; and (5) accelerated in the May Revision included, for example, $2 billion the time line to spend funds for MCO tax-related in loans from special funds (and other state funds) augmentations to around four years from eight to to the General Fund, and shift of $1.1 billion in ten years. costs for zero-emission vehicles from the General Final Budget Package Fund to the GGRF. The increase in revenue-related proposals were the result of a revision to the The Legislature passed an amended budget act proposed MCO tax. and associated trailer bills on June 27, 2023 and June 29, 2023. Figure 7, on the next page, contains May Revision Proposed Using Safety Net a list of the budget-related legislation passed later Reserve, but Maintained State’s Constitutional in the legislative session. The next section of this Reserves. The Governor’s May Revision proposed report describes the major features of the final using $450 million from the $900 million balance budget package. of the Safety Net Reserve. (The 2018-19 budget created the Safety Net Reserve to set aside funds www.lao.ca.gov 9 2023-24 BUDGET Figure 7 Budget-Related Legislation Passed After July 1, 2023 Bill Number Chapter Subject Budget Bills and Amendments SB 104 189 Amendments to the 2022-23 and 2023-24 Budget Acts SB 105 862 Amendments to the 2022-23 and 2023-24 Budget Acts Trailer Bills Passed After July 1, 2023 SB 135 190 Public safety SB 137 191 Health SB 138 192 Human services SB 140 193 Early childcare and education SB 141 194 Education finance SB 142 195 Higher education SB 143 196 State government SB 148 197 State bargaining unit agreements SB 151 211 State Bargaining Unit 6 agreement SB 152 198 Background checks and fingerprinting Note: This figure includes budget bills and trailer bills identified in Section 39.00 in the 2023-24 Budget Act that were passed by the Legislature after July 1, 2023. Ordered by bill number. MAJOR FEATURES OF THE 2023-24 SPENDING PLAN The major General Fund and federal fund in state General Fund revenue. For 2022-23, spending actions in the 2023-24 budget package are the guarantee is down $3 billion (2.7 percent) briefly described in this section. We plan to discuss compared with the estimates made in June 2022 these and other actions in more detail in a series of (Figure 8). The decrease in the guarantee is forthcoming publications to be released this fall. primarily attributable to lower General Fund revenue estimates, somewhat offset by higher local property K-14 Education tax revenue. For 2023-24, the guarantee increases Funds Modest Increase in School and by $953 million (0.9 percent) relative to the revised Community College Funding. The Proposition 98 2022-23 level. For 2023-24, projected increases in minimum guarantee depends upon various formulas property tax revenue offset declines associated with that adjust for several factors, including changes lower General Fund revenue estimates. Figure 8 Comparing June 2022 and June 2023 Proposition 98 Estimates (In Millions) 2022-23 2023-24 June 2022 June 2023 June 2023 Change From Change From Enacted Revised Change Enacted 2022-23 Revised 2022-23 Enacted Minimum Guarantee General Fund $82,312 $78,117 -$4,195 $77,457 -$660 -$4,855 Local property tax 28,042 29,241 1,199 30,854 1,613 2,812 Totals $110,354 $107,359 -$2,995 $108,312 $953 -$2,042 Funding by Segment K-12 schools $95,524 $93,241 -$2,283 $94,953 $1,712 -$571 Community colleges 12,606 12,331 -275 12,456 125 -150 Reserve deposit 2,224 1,787 -437 903 -885 -1,322 10 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET Increase in Required Reserve Deposits. which is $100 million less than the previously In certain circumstances, the Constitution intended augmentation, and continues to assume an requires the state to deposit some of the available additional $875 million will be provided in 2024-25. Proposition 98 funding into a statewide reserve The budget also delays the intended $550 million account for schools and community colleges. Under non-Proposition 98 General Fund increase to the the adopted budget plan, the state deposits a total California Preschool, Transitional Kindergarten and of $7.5 billion into this account across the 2021-22 Full-Day Kindergarten Facilities Grant Program from through 2023-24 period—an increase of $1.3 billion 2023-24 to 2024-25. compared with the estimates made in June 2022. Resources and Environment The higher required deposits are primarily due to revenue estimates from the administration that have Reductions to Multiyear Climate Change capital gains accounting for a larger share of General Budget Packages. To help address the budget Fund revenue over the period. problem, the spending plan makes a number of changes to one-time and temporary funding that was Provides Large COLA to School and agreed to in previous budgets for climate, resources, Community College Districts. In addition to the and environmental programs. The administration required reserve deposits, the budget package has estimates that these multiyear funding reductions several ongoing and one-time increases. The largest and delays have the cumulative effect of lowering ongoing augmentation is $4.8 billion to provide an 8.22 percent COLA for K-12 and community General Fund spending by $8.7 billion across the budget window of 2021-22 through 2023-24. While it college programs. In K-12, the budget also includes includes less spending than previous budgets $300 million ongoing targeted to low-income initially agreed upon for certain activities—such as schools with relatively high rates of student mobility related to extreme heat, nature-based solutions, within the school year, as well as $250 million one coastal resilience, and energy—the budget maintains time for literacy coaches and reading specialists. the majority of overall intended funding for each For community colleges, the budget also includes of the original thematic climate-related packages $154 million ongoing for an apportionments funding protection known as “stability,” which cushions local (maintaining about $25 billion across the three-year budget window). Moreover, the spending plan college budgets from enrollment and other declines. backfills some of these General Fund reductions Budget Has Notable K-14 Structural Gap. using other sources—primarily the GGRF. For The 2023-24 Proposition 98 spending level is example, while the budget reduces General Fund not sufficient to fully fund all ongoing spending spending for energy-related activities by $2 billion, authorized in the budget package. To cover these it provides $1.1 billion in GGRF to partially offset costs, the budget package uses $1.9 billion in associated programmatic impacts. one-time, prior-year funding to fund the primary school and community college funding formulas Flood Management and Response. ($1.6 billion for schools and $290 million for California The spending plan includes $401 million in one-time Community Colleges). Using one-time funds to cover funding in 2023-24 ($374 million from the General ongoing costs creates a deficit in the Proposition 98 Fund and $27 million from bond funds) for flood management and response activities, along with budget the following year. intent to provide an additional $35 million General Funds School Facilities Grants. The 2022-23 Fund in 2024-25. This includes funding for (1) flood budget package provided $1.3 billion one-time management projects in the Central Valley that non-Proposition 98 General Fund to cover the state are part of the State Plan of Flood Control (SPFC); share for new construction and modernization (2) local flood management projects in areas outside projects under the School Facility Program (SFP). the SPFC, including for Delta levees; and (3) support The 2022-23 budget package also included intent of small agricultural businesses and underserved language to provide an additional $2.1 billion in and small farms affected by storms. The 2023-24 2023-24 and $875 million in 2024-25. The budget total also includes $135 million for contingencies provides about $2 billion to the SFP in 2023-24, www.lao.ca.gov 11 2023-24 BUDGET related to the 2023 storms—$40 million for the government. If approved by the federal government, communities of Planada in Merced County and the tax is expected to generate revenues of Pajaro in Monterey County, which experienced $8.2 billion in 2023-24 ($32.1 billion through severe damage and displacement from the 2026-27). After factoring in the portion of revenues storms, and $95 million for other response and used to help cover the cost of the tax on health recovery activities. Additionally, associated budget insurance plans, the tax is projected to yield a net legislation streamlines the process for diverting fiscal benefit to the state of $4.4 billion in 2023-24 flood flows to both reduce flood risk and recharge ($19.4 billion through 2026-27). Of this amount, groundwater basins. $3.4 billion in 2023-24 ($8.3 billion through 2026-27) will be used to offset General Fund spending in Transportation the Medi-Cal program. The remaining $1 billion Support for Local Transit Agencies. The budget in 2023-24 ($11.1 billion through 2026-27) will be package includes several measures to support deposited in a special fund and used for various transit and rail improvements and to provide relief health-related augmentations, most of which will be to transit agencies that are projecting operational decided as part of next year’s budget process. funding shortfalls. This includes $4 billion from the Higher Education General Fund over a two-year period (including $2 billion in 2023-24) for the Transit and Intercity State Increases Base Funding for Universities’ Rail Capital Program and $1.1 billion over a Core Operations. The 2023-24 budget includes four-year period (including $410 million in 2023-24) a total of $443 million to provide 5 percent from the GGRF and the Public Transportation unrestricted General Fund base augmentations to Account for the new Zero-Emission Transit Capital the University of California (UC) and the California Program. Both programs will allocate funding State University (CSU). The universities may use their to transit agencies on a formula basis to use for base augmentations to cover any operating cost capital improvements and/or operational support. increases, including increases in employee salary The budget package also includes budget trailer and benefit costs. Provisional language requires the legislation that (1) implements several accountability universities to report to the Legislature by December measures for the funding augmentations, such as 31, 2024 on how they specifically used these funds. requiring agencies to submit short- and long-term In addition to unrestricted base increases, both UC financial plans; (2) temporarily extends statutory and CSU receive augmentations for their student relief measures provided to transit agencies during basic needs, rapid rehousing, and student mental the pandemic; and (3) requires the California State health programs, as well as their support programs Transportation Agency to establish a task force to for students with disabilities. develop and submit policy recommendations to the State Sets Resident Undergraduate Legislature on how to grow ridership and improve Enrollment Targets for UC and CSU. The state overall transit services. expects both UC and CSU to enroll more resident undergraduate students in 2023-24. Specifically, UC Health is to increase resident undergraduate enrollment by Reauthorizes MCO Tax and Makes Related 7,800 full-time equivalent (FTE) students (4 percent) Program Augmentations. The budget package over its 2021-22 level. CSU is to increase resident includes trailer bill legislation (Chapter 13 of 2023 undergraduate enrollment by 4,057 (FTE) students [AB 119, Committee on Budget]) to renew a tax (1.2 percent) over its 2022-23 level. (With this on health insurance plans known as the MCO tax. budgeted growth, CSU would remain below its Chapter 13 authorizes the tax from April 2023 2020-21 peak resident undergraduate enrollment through December 2026. Like past versions of level.) Provisional budget language authorizes the the MCO tax, the tax is designed to draw down administration to reduce funding for UC or CSU if additional federal Medicaid funding while imposing a it enrolls fewer students than expected. Funding relatively small cost to the health insurance industry. would be reduced at the 2023-24 state marginal This arrangement requires approval from the federal 12 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET cost rates of $11,640 per UC student and $10,070 billion in one time funds from various state and per CSU student. Provisional language also sets federal fund sources to support the following: (1) enrollment expectations for the universities for each monthly rate supplement payments to providers of the next few years, with UC expected to grow based on region and number of enrolled children 1.4 percent annually and CSU expected to grow from January 1, 2024 through June 30, 2025; (2) a 3 percent annually. one-time provider lump-sum transitional payment; Budget Converts Many Higher Education (3) a narrower definition of part-time care; (4) Capital Projects From Cash to Debt Financing. extension of COVID-19 reimbursement flexibility The 2021-22 and 2022-23 budget agreements policies from September 30, 2023 to June 30, 2025; included significant upfront, non-Proposition 98 (5) maintaining minimum funding levels for health, General Fund cash for certain higher education retirement, and training funds; and (6) administrative capital projects. In response to the state’s projected funds for MOU-related activities, including dues budget deficit, the 2023-24 budget agreement collections and subsidized provider reporting rescinds the vast majority of the 2022-23 General compliance. These program changes generally were Fund cash, as well as some of the 2021-22 cash. collectively bargained between the state and Child The segments instead are to issue revenue bonds. Care Providers United (CCPU) for represented child The state provides each of the segments with care and State Preschool providers and, for parity ongoing General Fund augmentations intended to sake, extended to remaining child care and State cover the associated borrowing costs. The state Preschool providers (with the exception of the health, shifted all affordable student housing construction retirement, and training funds, which is limited to projects (35 projects across the three segments), as CCPU-represented providers). well as nine other university capital projects, to debt Modifies Family Fee Schedule. During the financing. In total, the state rescinded $3.2 billion COVID-19 pandemic, the federal government in one-time General Fund appropriations for these allowed states to temporarily waive family fees in projects, replacing it with $240 million in ongoing child care programs. The state waived family fees in General Fund augmentations for debt service. both the child care and State Preschool programs, with the fees scheduled to return July 1, 2023. Infrastructure Chapter 4 of 2023 (AB 110, Committee on Budget Legislation Intended to Expedite Infrastructure and Fiscal Review) provided $39 million across Projects. The overall budget agreement includes state and federal fund sources to waive family fees several policy and budget trailer bills aimed at until September 30, 2023. On October 1, 2023, the expediting the construction of various types of family fee schedule must be reinstated in child care infrastructure projects. This includes Chapter 60 programs. Prior to the COVID-19 pandemic, families of 2023 (SB 149, Caballero and Becker), which making at least 40 percent of the state median authorizes some types of infrastructure projects— income were required to pay a fee (varying from including certain energy, semiconductor and about 1 percent to 10 percent of family income) for microelectronic; transportation; and water-related child care and full-day State Preschool services. projects—to receive streamlined judicial review The budget includes $78 million ($66 million General under the California Environmental Quality Act. It also Fund and $12 million Proposition 98 funds) to includes Chapter 58 of 2023 (SB 146, Gonzalez), reduce family fees in child care and State Preschool which authorizes the use of two project delivery to 1 percent of family income for families making methods—progressive design-build and job order at least 75 percent of the state median income, contracting—under certain circumstances. beginning October 1, 2023 (with full-year costs increasing to $100 million annually). Families making Child Care and Preschool below 75 percent of the state median income would Sets Aside Funds to Support Collectively not pay a fee. Bargained Early Education Agreement and Parity Actions. The budget package includes $2.7 www.lao.ca.gov 13 2023-24 BUDGET Corrections Housing and Homelessness Reduced Spending Due to Deactivation of Significant, Prior-Year Funding Augmentations Several Correctional Facilities. The budget Generally Maintained. Previously enacted budgets reflects a reduction of $311 million primarily from authorized significant, albeit primarily one-time and the General Fund (growing to $433 million annually temporary, funding for housing and homelessness, beginning in 2027-28) resulting from the deactivation including authorizing some spending actions of two prisons and six individual yards at various for 2023-24. The 2023-24 Budget Act largely prisons due to the ongoing decline in the prison maintains those spending actions. During the population. (We note that these reductions are in 2023-24 budget process, the Governor proposed addition to savings resulting directly from having $367.5 million in spending reductions for various fewer people in prisons overall.) Despite this, prison primarily homeownership-related programs. The population projections indicate the state could Legislature largely rejected those spending cuts deactivate additional prisons in the future. To inform and instead adopted $67.6 million in General such potential future deactivation decisions, the Fund spending reductions for the Department of budget package includes budget trailer legislation Housing and Community Development’s (HCD’s) requiring the California Department of Corrections CalHome Program ($50 million) and the Downtown and Rehabilitation to report on various factors Rebound Program ($17.5 million). The budget also that impact its prison capacity needs, such as the achieves budget-year savings through the delay amount of space needed to operate rehabilitation of $345 million previously allocated to HCD’s programs. The budget also reflects a $92 million Foreclosure Intervention Housing Preservation reduction primarily from the General Fund in 2023-24 Program (this spending will instead be spent over (generally growing to $96 million annually beginning several years through 2026-27). Finally, the 2023-24 in 2025-26) to reflect the closure of the Division of budget authorizes an increase of $100 million Juvenile Justice (DJJ) and resulting deactivation in one-time General Fund spending for HCD’s of three of its facilities. This closure is the result of Multi-Family Housing Program and continues legislation included in the 2021-22 and 2022-23 the recent practice of providing an additional budget packages which realigned responsibility for $500 million for the state Low-Income Housing Tax DJJ youth from the state to the counties. Credit Program. (Because these credits would not San Quentin Capital Outlay Projects to be claimed until the housing units are complete, the Support Development of the California Model. General Fund impact of these tax credits will occur On May 5, 2023, Governor Newsom established in a few years.) As most of the recently authorized an advisory council to recommend changes to housing and homelessness budget actions have San Quentin State Prison in order to help develop been temporary or one time in nature, most of that the California Model, which is broadly focused on funding is set to expire soon. promoting a more rehabilitative and health-focused Budget-Related Legislation Increases environment in California prisons. To support this Oversight and Accountability. The 2023-24 budget effort, the budget includes $360.6 million in new included budget-related legislation aimed to increase lease revenue bond authority to demolish an existing oversight and accountability of the state’s housing building and construct a new educational and and homelessness programs. At a high level, this vocational center as well as $20 million one-time legislation makes the receipt of Homeless Housing, from the General Fund for various related capital Assistance and Prevention Program funding outlay projects at the prison. In addition, the contingent on the creation of, and adherence to, a budget package includes budget trailer legislation regionally coordinated homelessness action plan. to (1) facilitate completion of these projects by It requires each plan to coordinate homelessness 2025, such as by exempting them from historic funding and services across the region, assign building preservation requirements and (2) change specific roles and responsibilities to each party to the name of the prison to the San Quentin the plan, and set forth key actions that each party Rehabilitation Center. will take to reduce and prevent homelessness. 14 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET www.lao.ca.gov 15 2023-24 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 2023-24 Budget Act LAO PUBLICATIONS This report was prepared by Ann Hollingshead with contributions from analysts across the office, and reviewed by Carolyn Chu. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, California 95814. 16 LEGISLATIVE ANALYST’S OFFICE