The 2024-25 Budget: Broadband Infrastructure

2024-25 BUDGET The 2024-25 Budget: Broadband Infrastructure GABRIEL PETEK | LEGISLATIVE ANALYST | FEBRUARY 2024 SUMMARY Legislative Oversight Crucial as Broadband Infrastructure Programs and Projects Move to Implementation. Many of the federal and state broadband infrastructure programs and projects—especially the state’s middle-mile network and Federal Funding Account (FFA) grant program, as well as the federal Broadband Equity, Access, and Deployment (BEAD) program—are finishing their planning activities and moving into implementation. Billions of dollars will be encumbered and expended over the next few fiscal years. To achieve the Legislature’s goals in Chapter 112 of 2021 (SB 156, Committee on Budget and Fiscal Review) and other broadband infrastructure legislation, legislative oversight of the administration’s implementation of these programs and projects will be critical to their success. Recommend Approving Anticipated $250 Million Appropriation in 2024-25 for Middle-Mile Network. We recommend the Legislature approve the $250 million General Fund included in the California Department of Technology’s (CDT’s) operating budget in 2024-25 for the middle-mile network, which is consistent with the Legislature’s uncodified but stated goal in Chapter 48 of 2022 (SB 189, Committee on Budget and Fiscal Review). However, given the lack of critical information about middle-mile network construction, we recommend the Legislature adopt budget bill language that conditions this funding on more information about standalone California Department of Transportation (Caltrans) construction projects as well as other information necessary for legislative oversight of middle-mile network implementation. Recommend Rejecting Additional $1.5 Billion—$250 Million in 2024-25, $1.25 Billion in 2025-26— for Middle-Mile Network. We also recommend the Legislature reject the additional $1.5 billion General Fund proposed in the Governor’s budget, as well as the proposed budget bill language. The fiscal pressure facing the state does not support the General Fund investment in this proposal, particularly when more detailed information needed for legislative oversight is unavailable and some alternative funding sources may be explored. We raise no concerns with the positions requested by CDT, however, to support its middle-mile network implementation. Recommend Consideration of Additional Budget Solutions. While we recommend approval of the proposed delay of $100 million General Fund of FFA grant program funding for last-mile project grants (more reasonably considered as a reduction) and proposed reductions to the Loan Loss Reserve Fund (LLRF), the Legislature could consider additional budget solutions. Given the deterioration in the state’s budget, additional solutions would help the Legislature close the deficit. Specifically, up to $550 million General Fund could be reduced from proposed or scheduled appropriations for last-mile project grants given the availability in 2024-25 of $1.86 billion in federal BEAD program funding. The Legislature could also consider additional reductions of up to $500 million General Fund in LLRF support. www.lao.ca.gov 1 2024-25 BUDGET BACKGROUND BROADBAND can be categorized into three main groups based on distance covered, from longest to Federal Communications Commission shortest distance: (FCC) Provides Broadband Definition. The FCC defines broadband as high-speed Internet • Backbone or Long-Haul. Backbone or access that provides a minimum of 25 Megabits long-haul broadband infrastructure often uses per second (Mbps) download speed and 3 Mbps high-capacity fiber-optic cables laid over upload speed. (Mbps measures how much data hundreds or thousands of miles to connect can be downloaded or uploaded over a network different countries, states, and/or regions to connection.) Internet access at these speeds the Internet. allows consumers to use the Internet for a variety of • Middle-Mile. Middle-mile broadband activities such as accessing information, studying infrastructure also often consists of fiber-optic online, and working remotely. (Other factors such cables laid over tens or hundreds of miles that, as latency—how long it takes data to travel—and once connected to by an ISP or other entity, reliability—how long a connection is maintained— can deliver Internet access. also affect whether consumers can access Internet • Last-Mile. Last-mile broadband infrastructure service at these speeds.) relies on antennae, cables, poles, wires, and Many Areas and Households Lack Broadband other components to connect middle-mile Access. Unserved areas and households are broadband infrastructure to individual generally defined as those without access to households or institutions in a community. broadband (as defined by the FCC). (In this brief, we use the terms households and locations MAJOR FEDERAL AND STATE interchangeably.) Underserved areas and BROADBAND PROGRAMS AND households can be defined as those with access to broadband but without access to broadband PROJECTS at faster Mbps download and upload speeds with Three Major State Broadband Infrastructure higher reliability and/or lower latency. Federal Programs and Projects. In recent years, the state and state broadband programs define unserved has initiated a few significant programs related and underserved in different ways using various to broadband, in part due to funding provided by criteria. All of the major federal and state programs, the federal government. There are currently three however, estimate that there are hundreds of major state broadband infrastructure programs thousands of households in areas of the state and projects underway pursuant to Chapter 112 without broadband access. For major federal and of 2021 (SB 156, Committee on Budget and state programs discussed later in the brief, we Fiscal Review): describe relevant differences in the criteria and • Statewide Open-Access Middle-Mile definitions used and provide the estimated number Network. The state is building, leasing, of unserved and/or underserved calculated for and purchasing middle-mile broadband each program. infrastructure to create a statewide, open-access middle-mile network deployed BROADBAND INFRASTRUCTURE primarily along the state’s highways and other Components of Broadband Infrastructure. rights of way. (This project is also referred Broadband infrastructure allows Internet to as the Middle-Mile Broadband Initiative service providers (ISPs) and other entities to or MMBI.) This network is expected to be offer high-speed Internet access to areas, available to all public entities, ISPs, nonprofit households, and institutions. This infrastructure organizations, and other entities to connect 2 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET to and deliver high-speed Internet access. companies from end-users of intrastate Connecting entities will likely pay fees to the telecommunications services. State law state to maintain, operate, and repair the allows CPUC to collect up to $150 million network. These fees will then be deposited in surcharge revenues each year until into the State Middle-Mile Broadband December 31, 2032. Projects that intend to Enterprise Fund. This project is led by serve unserved households (that is, those the California Department of Technology without access to broadband as defined (CDT) and its third-party administrator, by the FCC) are eligible for CASF program GoldenStateNet (GSN), in consultation with account grants. Projects that intend to the California Public Utilities Commission serve priority unserved households—that (CPUC) and the California Department of is, unserved households with no Internet Transportation (Caltrans). access or with Internet access at or below • Last-Mile Project Grants. The state is a 10 Mbps download speed and 1 Mbps providing grants to ISPs, public entities, upload speed—often receive grant awards nonprofit organizations, and others before projects serving other unserved for last-mile broadband infrastructure households. Based on CASF program projects. These grants are awarded by account definitions and eligibility criteria, CPUC through several California Advanced the number of eligible priority unserved Services Fund (CASF) program accounts households in California is about 545,000 (described in a nearby box) as well as the and the number of remaining eligible Federal Funding Account (FFA). unserved households is about 360,000. » FFA. Senate Bill 156 originally created the » CASF Program Accounts. CASF program FFA to receive federal American Rescue accounts are funded by a surcharge rate on Plan (ARP) fiscal relief funds allocated for revenues collected by telecommunications last-mile broadband infrastructure projects. California Advanced Services Fund (CASF) Program Accounts The CASF program accounts administered by the California Public Utilities Commission support various broadband infrastructure-related activities, focusing on last-mile project grants. These accounts include: Broadband Adoption Account. This account provides grants to public entities, nonprofit organizations, and others to increase access to digital literacy programs and publicly available broadband. Broadband Infrastructure Account. This account provides middle- and last-mile broadband infrastructure project grants and loans. This account includes a line-extension program to offset the costs of connecting individual households or properties to certain broadband providers. Broadband Public Housing Account. This account provides grants and loans to publicly subsidized multifamily housing developments to finance broadband adoption and infrastructure projects. Rural and Urban Regional Broadband Consortia Grant Account. This account funds grants that assist eligible consortium grant applicants (that is, representatives from organizations that are organized by geography and/or region) with planning broadband infrastructure projects and completing associated grant application processes. Tribal Technical Assistance Account. This account provides tribes with technical assistance in the development of business plans, feasibility studies, and market studies in support of their broadband efforts. www.lao.ca.gov 3 2024-25 BUDGET However, as we describe in more detail later respective speeds if they do not meet certain in the brief, the FFA is now mostly supported latency requirements. Based on federal BEAD by the General Fund. Unserved households program definitions and eligibility criteria, are eligible for FFA program grants, with the the current number of eligible unserved FFA program rules further defining unserved households in the state is about 305,000 and households as those in areas without the current number of eligible underserved a reliable cable or fiber connection to a households in the state is about 155,000. broadband provider. (Technologies such as • Digital Equity Act Programs. The Digital fixed wireless and satellite internet services Equity Act programs received $2.75 billion are examples of broadband offerings nationwide for three grant programs to improve that do not require a direct cable or fiber digital equity across specific populations such connection.) Based on FFA definitions and as low-income households, racial and ethnic eligibility criteria, the number of eligible minorities, and rural areas. Below are the unserved households in California is three programs: around 1 million. » State Digital Equity Planning Grant • Loan Loss Reserve Fund (LLRF). The LLRF Program. This grant program received will provide local government entities, nonprofit $60 million to provide states with organizations, and tribes with grants to help allocations to support their development them obtain financing for last-mile projects of a digital equity plan, which will identify through, for example, establishing and funding barriers to digital equity and plan how to reserves and paying the costs of debt issuance address related outcomes across program for broadband infrastructure projects. areas such as education and health care. » State Digital Equity Capacity Grant Three Federal Infrastructure Investment Program. This grant program received and Jobs Act (IIJA) Broadband Infrastructure $1.44 billion to provide states with annual Programs Key to Major State Programs and allocations for five calendar years to Projects. The IIJA provides $65 billion in federal support the implementation of their digital funding for broadband infrastructure projects equity plans. nationwide. Three of the programs created with this funding by the National Telecommunications » Digital Equity Competitive Grant and Information Administration (NTIA) directly relate Program. This grant program received to the three major state broadband infrastructure $1.25 billion to provide applicants, including programs and projects: some state entities, with annual allocations for five calendar years to implement digital • Broadband Equity, Access, and equity projects. Deployment (BEAD) Program. The BEAD program received $42.45 billion of the • Enabling Middle-Mile Broadband $65 billion total, most of which is to provide Infrastructure Program. This grant states and other jurisdictions with funding for program received $1 billion nationwide last-mile broadband infrastructure projects. to provide funding for the acquisition, (Some funding can be used for middle-mile construction, or improvement of middle-mile broadband infrastructure if required to broadband infrastructure. connect a last-mile project.) Both unserved and underserved households are eligible for CURRENT STATE grants made with BEAD program funding. BROADBAND SPENDING PLAN Underserved households are defined as Significant Spending Plan Changes From Original those without broadband service that offers 2021 Agreement to 2023-24 Budget Act. Since the a 100 Mbps download speed and 20 Mbps initial broadband infrastructure agreement between upload speed. Also, households are defined the administration and Legislature in July 2021, as unserved and/or underserved at their 4 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET there have been significant changes Figure 1 in the funding amounts, sources, Broadband Infrastructure Spending Plan as of the and timing of the three major state 2023-24 Budget Act programs and projects. For more (In Millions) information about these changes, see our March 20, 2023 brief— Funding Source The 2023-24 Budget: Broadband Program or Project Fiscal Year GF FF TF Infrastructure—and the Middle-Mile Network Prior Years $887a $2,363b $3,250 “Broadband Infrastructure” section 2023-24 300 73c 373 of our November 8, 2023 post— 2024-25 250 — 250 The 2023-24 California Spending 2025-26 — — — Plan: Other Provisions. Figure 1 2026-27 — — — Subtotals ($1,437) ($2,436) ($3,873) provides the current spending plan for state broadband infrastructure Last-Mile Projects Grants Prior Years $647d $550e $1,197 2023-24 253 — 253 programs and projects as of the 2024-25 200 — 200 2023-24 Budget Act. 2025-26 200 — 200 2026-27 150 — 150 STATUS OF STATE Subtotals ($1,450) ($550) ($2,000) LLRF Prior Years — — — BROADBAND 2023-24 $175 — $175 PROGRAMS AND 2024-25 300 — 300 2025-26 275 — 275 PROJECTS 2026-27 — — — Subtotals ($750) (—) ($750) Statewide Open-Access All Programs and Projects Prior Years $1,534 $2,913 $4,447 Middle-Mile Network 2023-24 728 73 801 2024-25 750 — 750 Total Estimated Length of 2025-26 475 — 475 Middle-Mile Network When 2026-27 150 — 150 Complete Now 10,513 Miles. Totals $3,637 $2,986 $6,623 As of January 29, 2024, the total 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 ARP fiscal relief funds to GF in 2021-22. estimated length of the statewide b The remaining $2.363 billion in FF for the middle-mile network in 2021-22 is state ARP fiscal relief open-access middle-mile network funds. is 10,513 miles. Figure 2 provides c Chapter 189 of 2023 (SB 104, Skinner) appropriated a $73 million award of federal funds in 2023-24 from the IIJA’s Enabling Middle Mile Broadband Infrastructure Program. a summary of the middle-mile d Pursuant to Control Section 11.96 of the 2022-23 Budget Act, the Department of Finance shifted $522 million for last-mile projects from ARP fiscal relief funds to GF in 2021-22. network miles by delivery e The remaining $550 million in FF for last-mile project grants in 2021-22 is the state’s allocation from method. Leases and standalone the ARP’s Coronavirus Capital Projects Fund. Caltrans construction projects GF = General Fund; FF = federal funds; TF = total funds; LLRF = Loan Loss Reserve Fund; ARP = American Rescue Plan; SB = Senate Bill; and IIJA = Infrastructure Investment and Jobs Act. account for most of the network miles—8,616 miles or 82 percent of the total network. The remainder Figure 2 of the network miles are joint-build Middle-Mile Network Miles by Delivery Methoda construction projects (that is, Percent of Total construction projects where the Delivery Method Number of Miles Network Miles state is working with another party Leases 4,584 44% to build the network) and purchases. Caltrans Construction Projects 4,032 38 For more information about the Joint-Build Construction Projects 1,420 14 number of miles in each county or Purchases 477 5 legislative district and their delivery Total 10,513 method, see CDT’s Statewide a Data as of January 29, 2024. Middle-Mile Network Map. Caltrans = California Department of Transportation. www.lao.ca.gov 5 2024-25 BUDGET Funding Encumbered for at Least 6,500 finish the pre-construction work (that is, design, Miles. As of February 6, 2024, the total estimated environmental, and permitting work) on many of number of middle-mile network miles with its projects. Caltrans expects to complete this encumbered funding (that is, appropriated funds work by the end of 2024, after which contracts and that are committed to an unfilled purchase order purchase orders will be finalized and more specific or unfulfilled contract) is at least 6,500 miles. It is amounts of funding will be encumbered. Therefore, our understanding from the administration that while some number of miles for the standalone the amount of encumbered funding for joint-build Caltrans construction projects have encumbered construction projects, leases, and purchases funding, the exact number of miles is uncertain. (about 6,500 miles) is, in general, more precise than Figure 3 provides a summary of the middle-mile for the standalone Caltrans construction projects network projects and related costs with at least (about 1,800 miles). Caltrans is continuing to some funding encumbered. The figure does not Figure 3 Middle-Mile Network Projects With Encumbered Funding Encumbered Funding (In Millions) Estimated Cost Project Name Delivery Method Miles (In Millions) TF GF FF CVIN Lease 2,522 $715 $715 $427 $288 Various Standalone Caltrans Construction 1,800a 950 500b — 500 Lumen Joint-Build 1,186 257 257 — 257 Lumen Lease 710 141 141 — 141 Digital 395 Purchase 435 31 31 31 — Arcadian #1 Joint-Build 310 134 134 — 134 Arcadian #2 Joint-Build 280 171 171 — 171 Arcadian #3 Joint-Build 255 127 127 — 127 Zayo Joint-Build 193 13 13 — 13 TPN Lease 172 40 40 40 — Siskiyou Telephone Company Joint-Build 165 52 52 — 52 Arcadian #5 Joint-Build 117 38 38 — 38 Boldyn Lease 81 79 79 — 79 Arcadian #4 Joint-Build 44 17 17 — 17 Vero Joint-Build 24 7 7 — 7 Hoopa Joint-Build 23 10 10 — 10 Subtotals 8,317 ($2,782) ($2,332) ($498) ($1,834)c Encumbered Funding (In Millions) Estimated Cost Additional Costs (In Millions) TF GF FF Administration $250 $250 $8 $242 Conduit, Fiber and Vaultsd 234 234 172 62 Electronics 215 —e — — Hutsf 69 69 61 8 Subtotals ($768) ($553) ($241) ($312) Totals $3,550 $2,885 $739 $2,146 a The exact number of miles of standalone Caltrans construction projects that can be funded with the $500 million in encumbered federal ARP fiscal relief funds is unknown. The 1,800-mile estimate also assumes at least $450 million GF, all of which is appropriated yet unencumbered, as well as an anticipated appropriation of $250 million GF in 2024-25. b The $450 million difference between encumbered funding and the estimated cost of the standalone Caltrans construction projects is expected to be covered by appropriated yet unencumbered GF. c This FF subtotal does not include the $73 million award of FF in 2023-24 from the IIJA’s Enabling Middle-Mile Broadband Infrastructure Program. d Conduit are physical tubes that encase fiber-optic cables. Vaults are protective shelters for network equipment that are close to the served area or household. e Bids for network electronics remain under review, so no funding is encumbered yet for these purchase orders. CDT expects to encumber appropriated ARP fiscal relief funds for these costs once bids are reviewed. f Huts are protective shelters for network equipment used for middle-mile broadband infrastructure. TF = total funds; GF = General Fund; FF = federal funds; CVIN = Central Valley Independent Network; Caltrans = California Department of Transportation; IIJA = Infrastructure Investment and Jobs Act; ARP = American Rescue Plan; and CDT = California Department of Technology. 6 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET include about $665 million ($450 million General federal ARP fiscal relief funds or General Fund.) Fund and $215 million federal ARP fiscal relief Similar coordination between CDT and CPUC is funds) in appropriated, yet unencumbered, funding. expected for the federal BEAD program. Second Request for Innovative Ideas (RFI2) Market Research for Network Business Process Underway. For the remaining 2,200 Plan Underway. CDT is also starting to conduct or so miles of standalone Caltrans construction market research to develop a business plan for projects, CDT issued a second RFI2 solicitation— the maintenance, management, and operation of that is, a procurement method that defines a the middle-mile network as different segments are department’s business need or problem to solve completed and activated. On February 12, 2024, and allows vendors to design their own solutions— CDT announced its market research will involve on November 9, 2023. The main purpose of this interviews with existing public middle-mile network RFI2 solicitation is to identify opportunities for administrators, large private middle-mile network joint-build construction projects, leases, and/or operators, and potential state middle-mile network purchases in place of the remaining standalone customers. According to CDT, their intent is to Caltrans construction projects. This is because, in identify best practices to maintain and operate general, joint-build construction projects, leases, the network while minimizing the fiscal burden on and/or purchases are less costly than standalone the state. However, the third-party administrator Caltrans construction projects. CDT also asked for GSN expects forecasting revenues to be extremely ideas from vendors on the ongoing maintenance, challenging due to the scale and size of the network management, and operation of the network. and the unknown number of customers in both As of February 16, 2024, CDT received over unserved and underserved areas of the state. 50 proposals from vendors. CDT expects to review Last-Mile Project Grants these proposals over the next several months and incorporate any network changes (including CPUC Continues to Award Grants Through in the length and number of standalone Caltrans CASF Grant Programs. In 2023, CPUC CASF construction projects) by mid-2024. grant programs received 74 applications requesting $527 million. However, CPUC’s expenditure Additional Network Changes Based on authority for CASF grant programs in 2023 Last-Mile Project Grant Application Reviews. In addition to any changes from the RFI2 process, (net of state operations costs) was $72.6 million, CDT and CPUC’s review of last-mile project grant so only some grant applications could be funded. applications from the federal BEAD program and Other factors, such as application deadlines and state FFA also may change the length and number review time, also may have limited the number of standalone Caltrans construction projects (and of grants awarded. As a result, in 2023, CPUC possibly others). While federal BEAD program and awarded $39.1 million from its five CASF grant state FFA funding will be used primarily for last-mile programs: $23.3 million from the Broadband project grants, some of this funding can be used Adoption Account, $2.5 million from the Broadband for middle-mile infrastructure for connection to Infrastructure Account (including its Line Extension a last-mile project. As we discuss in more detail Program), $2 million from the Broadband Public later in the brief, CPUC is currently in the process Housing Account, $10.3 million from the Rural of reviewing FFA grant applications. CDT, in and Urban Regional Broadband Consortia Grant coordination with CPUC, also reviews applications Account, and $1 million from the Tribal Technical that expect to connect to the state’s middle-mile Assistance Account. network to determine whether current middle-mile CPUC Received Nearly 500 FFA Applications network projects can connect to the proposed Requesting About $4.5 Billion in Funding. last-mile project. If not, for last-mile projects CPUC closed the first FFA grant application awarded FFA grant funding, adjustments to the round on September 29, 2023 after receiving middle-mile network may be made and funding 484 applications requesting a total of $4.55 billion. requested. (Funds could be requested either from www.lao.ca.gov 7 2024-25 BUDGET CPUC also received 896 objections against these LLRF grant applications, as well as applicants’ responses to First LLRF Application Round Expected to those objections, by December 20, 2023. (Objections Open in March. CPUC expects to open the first against FFA grant applications are written comments application round of the LLRF in March, followed submitted by other parties that identify, for example, by funding cycles of equal amounts opening every factual errors in an application or requirements in three months thereafter, and make its first awards policy and/or statute for consideration alongside the sometime in the first half of 2024-25. Awards will be application.) CPUC, in coordination with CDT, will in the form of a debt service reserve—that is, a cash review these applications and objections over the reserve of funds to make debt service payments next six months and expect to make grant awards by if a project’s cash flow is delayed or disrupted— the end of June 2024. Figure 4 provides a summary guaranteed by a CPUC reserve fund. This debt of the FFA grant applications by applicant including service reserve guarantee is intended to function the number of applications submitted, the estimated as a form of credit enhancement for the eligible total cost of all projects for which grant funds were debts associated with a financed broadband requested, and the total amount of grant funding infrastructure project. requested (including as a percentage of the total amount requested by all applicants). Figure 4 Nearly 500 FFA Grant Applications Totaling More Than $4.5 Billion Percent of Total Number of Estimated Total Total Funding Funding Applications Project Costs Amount Requested Amount Applicants Submitted (In Millions) (In Millions) Requesteda AT&T 250 $2,614 $1,437 32% Golden State Connect Authority 37 1,251 818 18 Comcast 36 633 559 12 Cox 20 397 391 9 Frontier 23 226 170 4 Fort Bidwell Indian Community 1 87 86 2 Gateway Cities Council of Governments 1 79 78 2 Plumas-Sierra Telecommunications 11 75 75 2 Round Valley Indian Tribes 1 90 75 2 El Dorado County 4 66 66 1 Spectrum 22 85 64 1 AV Broadband Cooperative 1 155 45 1 City of Sacramento 1 41 39 1 AVX Networks 1 36 36 1 County of Los Angeles 1 85 35 1 Ranch WIFI 2 30 30 1 County of Placer 2 33 30 1 Karuk Tribe 1 454 29 1 The City of Huntington Park 1 25 25 1 Plenary Broadband Infrastructure Crenshaw 1 71 25 1 Hankins Information Technology 2 25 25 1 All Other Applicantsb 64 483 412 9 Totals 483 $7,041 $4,550 a The percentages of total funding amount requested may not add up to 100 percent due to rounding. b Includes all other applicants with requested amounts representing less than one percent of the total amount requested. 8 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET STATUS OF FEDERAL …But Some of State’s Remaining Allocation Also Could Be Made Available. However, CPUC BROADBAND PROGRAMS also requested (based on federal guidance) that BEAD Program NTIA make available to the state its entire program allocation, but condition some amount of funding on NTIA Notified California of $1.86 Billion NTIA’s approval of the state’s final proposal. BEAD Program Allocation in June 2023. On program rules require CPUC to submit the state’s June 26, 2023, NTIA announced that California will final proposal one year after the state’s second receive $1.86 billion in federal funds from the BEAD initial proposal volume is approved, so any remaining program. To receive this additional federal funding, funding conditions could be removed as early CPUC was required to submit to NTIA both the state’s as May 2025. Five-Year Action Plan—that is, a plan establishing the state’s broadband goals and priorities over the next CPUC Anticipates Use of Budget Control five years with a comprehensive needs assessment— Section for BEAD Program Funding. It is our and initial proposal describing the competitive process understanding from CPUC that any funding from the for last-mile broadband infrastructure project grants. state’s BEAD program allocation will be received and made available for expenditure using a control CPUC Submitted Five-Year Action Plan to section instead of a budget proposal. Specifically, NTIA in August 2023. Using the $5 million award Control Section 28.00 gives the administration received in November 2022 from the state’s initial flexibility to expend unanticipated federal funds BEAD program allocation of $100 million, CPUC or other nonstate funds during the current year. completed its draft of the state’s Five-Year Action Plan The Department of Finance could approve a Control on July 17, 2023. CPUC received over 500 pages Section 28.00 application from CPUC to receive and of comments during the public comment period expend the state’s BEAD program allocation, pending that ended August 11, 2023. CPUC then submitted notification of the Legislature. the state’s final Five-Year Action Plan to NTIA on August 28, 2023. Digital Equity Act Programs CPUC Submitted Initial Proposal to NTIA in CDT Completed Draft Digital Equity Plan in December 2023. CPUC completed its draft of the December 2023. Using the $4 million award received state’s initial proposal for the BEAD program on in November 2022 from the IIJA’s State Digital Equity November 7, 2023. CPUC received several dozen Planning Grant Program, CDT completed its draft of comments during the public comment period that the state’s digital equity plan on December 12, 2023. ended December 7, 2023. CPUC then submitted CDT received over 400 comments on the draft the state’s initial proposal as two volumes (based on plan during the public comment period that ended federal guidance) on December 27, 2023. January 25, 2024. The final digital equity plan is NTIA Approval of State’s Second Initial expected to be released before the end of 2023-24. Proposal Volume Will Make Available at Least Federal Funding to Implement State’s Digital 20 Percent of State’s Allocation… CPUC expects Equity Plan Forthcoming. Funding from the IIJA’s NTIA to approve the first volume of the state’s initial State Digital Equity Capacity Grant Program, as well proposal by the end of February 2024 and the second as other sources of funding such as the IIJA’s Digital volume in May 2024. Approval of the first volume will Equity Competitive Grant Program, will be used by allow CPUC to conduct the challenge process that is CDT (in coordination with other government entities) required by the BEAD program. This process allows to implement the digital equity plan. However, the ISPs, local governments, or nonprofit organizations program rules and time line for these programs to challenge a determination made by CPUC that remain under development by NTIA. Therefore, households or other locations are unserved or the amount of additional federal funding the state underserved. Successful challenges are submitted could receive to implement its digital equity plan is to NTIA for its review and approval. Approval not available. of the second initial proposal volume will make available at least the first 20 percent of the state’s BEAD program allocation. www.lao.ca.gov 9 2024-25 BUDGET Enabling Middle-Mile Broadband middle-mile network from the Enabling Middle-Mile Infrastructure Program Broadband Infrastructure Program. Chapter 189 of 2023 (SB 104, Skinner) appropriated this additional NTIA Notified California of $73 Million federal funding in 2023-24. However, it is our Program Award in June 2023. On June 16, 2023, understanding from the administration that the state NTIA announced that California will receive has not yet received this funding. $73 million in federal funds for the state’s GOVERNOR’S 2024-25 BUDGET FUNDING CHANGES • $100 Million for Last-Mile Project Grants. As a General Fund budget solution, the Requested 2024-25 Appropriations Reflect Governor’s budget proposes to delay Funding Delays and Reductions as Well as New $100 million in planned last-mile project grant Augmentations. The Governor’s budget requests funding available through the CASF FFA from a net total of $750 million General Fund in 2024-25 2024-25 to 2026-27. This delay would leave for state broadband infrastructure programs and $100 million General Fund appropriated in projects—$500 million in planned appropriations 2024-25 for last-mile project grants. and $250 million in new appropriations. • $150 Million for LLRF Awards. As a General The $500 million in planned appropriations is net Fund budget solution, the Governor’s of a proposed $100 million delay and $150 million budget also proposes to reduce $150 million reduction in otherwise planned appropriations in planned LLRF awards in 2024-25. for 2024-25. This reduction would leave $150 million • $500 Million for Statewide Open-Access General Fund appropriated in 2024-25 for Middle-Mile Network Costs. Of the LLRF awards. $500 million General Fund requested in 2024-25, $250 million is included in CDT’s Proposed 2025-26 Allocations Reflect state operations budget as an anticipated Both Reductions and New Augmentations. appropriation based on uncodified statutory The Governor’s budget also proposes a net language adopted in Chapter 48 of 2022 total of $1.625 billion General Fund in 2025-26 (SB 189, Committee on Budget Fiscal for state broadband infrastructure programs Review). The Governor’s budget requests a and projects—$1.25 billion in new allocations new, additional appropriation of $250 million and $375 million in planned allocations (net of in 2024-25 as part of CDT’s MMBI proposal proposed reductions). (described below). CDT plans to use all • $1.25 Billion for Statewide Open-Access $500 million requested on standalone Caltrans Middle-Mile Network Costs. The Governor’s construction projects. budget proposes a new, additional allocation of $1.25 billion General Fund in 2025-26 as » Proposed Budget Bill Language Would part of CDT’s MMBI proposal. CDT plans to Allow Administration to Increase use all $1.25 billion requested on standalone 2024-25 Amount. The Governor’s budget Caltrans construction projects. also proposes budget bill language that would allow the Department of Finance to • $200 Million for Last-Mile Project Grants. increase CDT’s $500 million appropriation There are no proposed changes in the in 2024-25 by up to an additional Governor’s budget to the $200 million in $500 million General Fund. planned last-mile grant funding available through the CASF FFA in 2025-26. 10 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET • $175 Million for LLRF Awards. As a General OTHER BUDGET PROPOSALS Fund budget solution, the Governor’s budget In the next section, we assess three other proposes to reduce $100 million in planned broadband-related proposals in the Governor’s LLRF awards in 2025-26. This reduction would budget that we briefly describe below—(1) CDT’s leave $175 million General Fund allocated in MMBI proposal, (2) CPUC’s CASF Local Assistance 2025-26 for LLRF awards. Budget Authority Augmentation proposal, and Proposed 2026-27 Allocation. The Governor’s (3) CPUC’s Ongoing Implementation of Broadband budget reflects the proposed delay of $100 million for All proposal. General Fund in last-mile project grant funding • CDT’s MMBI Proposal. This proposal available through the CASF FFA in 2024-25 by contains the new, additional appropriation increasing the total planned allocation in 2026-27 of $250 million General Fund in 2024-25 by $100 million—from $150 million to $250 million. and allocation of $1.25 billion General Fund Figure 5 provides the broadband infrastructure in 2025-26 discussed in the prior section. spending plan as of the Governor’s 2024-25 budget. Figure 5 Broadband Infrastructure Spending Plan as of the Governor’s 2024-25 Budget (In Millions) Funding Source Program or Project Fiscal Year GF FF TF Middle-Mile Network Prior Years $887 $2,363 $3,250 2023-24 300 73 373 2024-25 500a — 500 Augmentation 2025-26 1,250 — 1,250 Augmentation 2026-27 — — — Subtotals ($2,937) ($2,436) ($5,373) Augmentation Last-Mile Project Grantsb Prior Years $647 $550c $1,197 2023-24 253 — $253 2024-25 100d — $100 Delay 2025-26 200 — $200 2026-27 250d — 250 Delay Subtotals ($1,450) ($550) ($2,000) LLRF Prior Years — — — 2023-24 $175 — $175 2024-25 150 — 150 Reduction 2025-26 175 — 175 Reduction 2026-27 — — — Subtotals ($500) (—) ($500) Reduction All Programs and Projects Prior Years $1,534 $2,913 $4,447 2023-24 728 73 801 2024-25 750 — 750 2025-26 1,625 — 1,625 2026-27 250 — 250 Totals $4,887 $2,986e $7,873 a Chapter 48 of 2022 (SB 189, Committee on Budget and Fiscal Review) included a legislative goal to appropriate $250 million in 2024-25 for the middle-mile network. b Last-mile project funding amounts do not include $50 million GF in Local Agency Technical Assistance funding. c Last-mile project FF amounts do not include $1.86 billion in additional last-mile project funding from the IIJA, some of which could be allocated to the state starting in 2023-24. d The Governor’s 2024-25 budget proposes to delay $100 million in last-mile project funding from 2024-25 to 2026-27. e FF amounts do not include additional IIJA funding from Digital Equity Act programs, specifically the state planning and state capacity programs. GF = General Fund; FF = federal funds; TF = total funds; LLRF = Loan Loss Reserve Fund; SB = Senate Bill; and IIJA = Infrastructure Investment and Jobs Act. www.lao.ca.gov 11 2024-25 BUDGET Figure 6 CDT also proposes to make permanent 36 positions Proposed Permanent Positions in CDT’s MMBI that were established Proposal on a temporary basis in Title Classification 2022 to support middle-mile Deputy Director CEA network efforts using Program Manager IT Manager II existing funding. Figure 6 Assistant Program Manager IT Manager I provides a list of these IT Manager I - GIS IT Manager I positions by classification Procurement Manager IT Manager I Senior Business Manager IT Manager I and working title. Assistant Business Technology Manager IT Supervisor II » Proposed Budget Business Manager IT Supervisor II Business Manager IT Supervisor II Bill Language Would Senior Agreements Officer IT Supervisor II Allow Administration Senior Procurement Officer IT Supervisor II to Authorize Up to Senior Procurement Officer IT Supervisor II Three Additional Senior Procurement Officer IT Supervisor II Senior Procurement Officer IT Supervisor II Permanent Positions. IT Specialist II - GIS IT Specialist II The Governor’s budget IT Specialist II - GIS IT Specialist II also proposes budget bill IT Specialist II - GIS IT Specialist II language that would allow IT Specialist II - GIS IT Specialist II Financial Officer IT Specialist I CDT to request authority Region 1 Business Manager IT Specialist I from the Department Region 2 Business Manager IT Specialist I of Finance to establish Region 3 Business Manager IT Specialist I up to three additional Region 4 Business Manager IT Specialist I Region 5 Business Manager IT Specialist I permanent positions to Staff Services Manager III Staff Services Manager III support state middle-mile MMBI Legislative Manager Staff Services Manager II network efforts. Assistant Delivery Manager Staff Services Manager I Stakeholder Engagement Staff Services Manager I • CPUC’s CASF Local Attorney III Attorney III MMBI Information Officer I Information Officer I Assistance Budget Authority Senior Accounting Officer - AP Senior Accounting Officer Augmentation Proposal. Senior Accounting Officer - AR Senior Accounting Officer CPUC proposes to increase Senior Management Auditor Senior Management Auditor its CASF local assistance Senior Telecommunications Engineer Senior Telecommunications Engineer AGPA - Administration AGPA expenditure authority from AGPA - Financials AGPA the current $72.6 million to CDT = California Department of Technology; MMBI = Middle-Mile Broadband Initiative; $136.2 million in 2024-25 CEA = Career Executive Assignment; IT = information technology; GIS = Geographic Information Systems; AR = Accounts Receivable; AP = Accounts Payable; and AGPA = Associate and ongoing. An additional Governmental Program Analyst. $13.8 million in CASF expenditure authority is • CPUC’s Ongoing Implementation of requested primarily to cover state operations Broadband for All Proposal. CPUC proposes costs, for a total expenditure authority request to use $9.9 million in budget authority from its of $150 million. CPUC would use increased Utilities Reimbursement Account in 2024-25 local assistance expenditure authority to and ongoing to make permanent limited-term provide additional CASF program grants. funding approved in 2021-22 for CPUC’s broadband-related efforts. CPUC would use the budget authority to fund 46 permanent positions and convert 4 limited-term positions into permanent ones, for a total of 50 permanent positions. 12 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET ASSESSMENT OVERALL CONSIDERATIONS Legislative Oversight Crucial as Broadband Infrastructure Programs and Projects Move to California Faces Serious Budget Problem in Implementation. Many of the federal and state 2024-25, Significant Future Budget Deficits in broadband infrastructure programs and projects— 2025-26 and 2026-27. In our overview publication, especially the state’s middle-mile network and we describe the serious budget problem facing the FFA grant program along with the federal BEAD state in 2024-25 as well as the significant future program—are finishing planning activities and budget deficits that are projected over 2025-26 moving into implementation. Billions of dollars, and 2026-27. Our most recent deficit update some of which are federal funds subject to specific suggests even further downside risk in 2024-25. encumbrance and expenditure deadlines, will be Therefore, our assessment of the broadband encumbered and expended over the next few fiscal infrastructure proposals in the Governor’s budget years. (All federal ARP fiscal relief funds must be considers not only the merit of the proposals, but encumbered by the end of 2024 and expended also the fiscal pressure facing the state. Moreover, by the end of 2026.) To achieve the goals of our assessment applies the recommendations SB 156 and subsequent broadband infrastructure from our overview publication to these proposals— namely, applying a very high bar for all discretionary spending Figure 7 proposals and maximizing one-time Broadband Infrastructure Appropriations, spending reductions. Encumbrances, and Expenditures To Date Substantial Amount of (In Millions) General Fund Appropriated for Broadband Infrastructure Funding Source Remains Unencumbered Program or Project Funding Status GF FF TF and Unexpended. Out of Middle-Mile Appropriated $1,187 $2,436 $3,623 the $2.3 billion General Fund Network Encumbered 737a 2,354b 3,091 appropriated through 2023-24 Expended 30 932 962 across the middle-mile network Last-Mile Project Appropriated $900 $550 $1,450 ($1.2 billion), last-mile project Grantsc Encumbered — — — grants ($900 million), and LLRF Expended — — — ($175 million), approximately $740 million is encumbered LLRF Appropriated $175 — $175 Encumbered — — — and only $30 million has Expended — — — been expended. Therefore, Funding Source nearly $1.5 billion in General Program or Project Funding Status GF FF TF Fund appropriated for state All Programs and Appropriated $2,262 $2,986c $5,248 broadband infrastructure remains Projects Encumbered 737 2,354 3,091 unencumbered and unexpended. Expended 30 932 962 Figure 7 provides a summary of a Difference of $2 million between GF encumbrance amount in Figure 3—Middle-Mile Network Projects With Encumbered Funding—and amount in this figure likely due to rounding. all the broadband infrastructure b Difference of $208 million between FF encumbrance amount in Figure 3—Middle-Mile Network appropriations with encumbrance Projects With Encumbered Funding—and amount in this figure likely due to reporting funding for network electronics as encumbered in most recent quarterly ARP state fiscal recovery fund report. and expenditure estimates as of c Last-mile project appropriation, encumbrance, and expenditure amounts do not include $50 million late 2023/early 2024. GF in Local Agency Technical Assistance funding. Most of this funding is encumbered and in the process of being expended. GF = General Fund; FF = federal funds; TF = total funds; LLRF = Loan Loss Reserve Fund; and ARP = American Rescue Plan. www.lao.ca.gov 13 2024-25 BUDGET legislation, the Legislature’s oversight of the …But Requires Additional Information. administration’s implementation of these programs CDT expects to use the $250 million General Fund and projects will be critical to their success. in 2024-25 for standalone Caltrans construction As part of our assessment and recommendations, projects. However, key information about these we provide several different opportunities for the projects is unavailable. First, CDT acknowledges Legislature to perform this oversight role. that the RFI2 process might identify other joint-build construction projects, leases, or purchases that MIDDLE-MILE are available at lower cost and could replace at NETWORK PROPOSALS least some of the Caltrans construction projects. CDT does not expect to finish reviewing RFI2 CDT Proposed Alternative Approach to proposals until 2024-25, so this information will Middle-Mile Network Implementation… remain unknown for some time. Second, CDT is On July 21, 2023, CDT proposed to implement the unable to provide the Legislature with more detailed middle-mile network in two phases—approximately information about each standalone Caltrans 8,300 miles in the first phase and 1,700 miles in construction project until Caltrans completes its the second phase. The first phase would be an pre-construction work. Therefore, it is unclear operational network built, leased, and purchased which projects would be funded by this $250 million using $3.87 billion in funding appropriated or General Fund or, for that matter, by the $950 million planned to be appropriated through 2024-25. currently allocated for these projects in Figure 3. (The $3.87 billion includes a planned appropriation This information will be critical for the Legislature of $250 million General Fund in 2024-25 that we to obtain as it considers whether or not to fund this discuss later in this brief.) The second phase would appropriation and CDT’s MMBI proposal. be built, leased, and/or purchased with alternative $1.5 Billion General Fund Requested Does funding sources such as design changes and Not Meet the Very High Bar Required for efficiencies to standalone Caltrans construction Discretionary Spending Proposals. We find projects in the first phase and last-mile grant that the Governor’s request for an additional program funding for middle-mile infrastructure that $250 million General Fund in 2024-25 and is required to connect to a last-mile project. $1.25 billion General Fund requested to be allocated …But Abandoned the Approach Shortly in 2025-26 would not be sustainable under current Thereafter. However, by October 20, 2023, the revenue and expenditure projections. Furthermore, negative response from members of the Legislature we do not find that this proposal meets the very and stakeholders to the two-phased approach high bar we set in our overview publication for resulted in CDT abandoning this approach. discretionary spending proposals included in the CDT committed instead to bring forward the Governor’s budget. First, CDT expects to use MMBI proposal in the Governor’s budget to fund all the requested funding for standalone Caltrans remaining miles of the middle-mile network. construction projects absent any additional $250 Million General Fund Appropriation information about changes from the RFI2 proposals in 2024-25 Consistent With Legislative or the status of pre-construction work. Second, Goal… We find that the planned appropriation of CDT expects funding for these projects will be first $250 million General Fund included in CDT’s state come, first served as Caltrans pre-construction operations budget for the middle-mile network work is completed. A first-come, first-served is consistent with uncodified statutory language approach limits the ability of the Legislature adopted in SB 189. This language separates to prioritize projects based on, for example, this appropriation from the additional $1.5 billion ensuring a middle-mile network connection to General Fund requested in the Governor’s budget, last-mile projects funded through the federal but does not require the Legislature to fund this BEAD program or FFA grant program. Third, the amount as it remains an uncodified statement of two-phased approach CDT presented in July 2023 legislative intent. suggests that an operational middle-mile network 14 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET of approximately 8,300 miles can be developed the replacement project will cost than the with existing and planned funding, and that the Caltrans construction project; and how those additional miles can be funded with alternative cost savings will be used for the remainder of funding sources. Given the serious budget problem middle-mile network implementation. in 2024-25 and significant projected budget deficits • FFA Grant Applications Anticipating in future years, this proposed use of General Fund Connection to State’s Middle-Mile is not advisable. Network. Specifically, information is required Proposed Provisional Budget Bill Language about how many of the projects in the nearly Does Not Reflect Administration’s Intent 500 FFA grant applications are expected and Complicates Legislative Oversight. to connect to the state’s middle-mile The proposed provisional budget bill language network; whether currently planned and/or would allow the Department of Finance to increase implemented middle-mile network projects are the middle-mile network appropriation in 2024-25 sufficiently available; and, if not, what amount by up to $500 million General Fund but apparently of FFA grant program funding may be available without a commensurate reduction in the proposed for middle-mile infrastructure to connect appropriation in 2025-26. The proposed language last-mile projects. also does not include legislative notification • Business Plan and Market Research requirements. While we understand CDT intended Information. Specifically, information is for this provisional budget bill language to allow required about when an initial draft of the middle-mile network project implementation to business plan for the middle-mile network accelerate, the administration drafted language that will be available; what information will be does not accomplish this intent and ignores the contained in the business plan; and what Legislature’s role in reviewing current-year changes key assumptions will be made such as to enacted appropriations. customer churn and subscription rates, Legislative Oversight of Middle-Mile operating expenditures, and the timing of Network Requires Even More Information… network activation. To provide oversight of CDT’s middle-mile network …Including Evaluation of Alternative implementation, the Legislature must have more Approaches to Network Implementation. information about key aspects of the project. Given the current budget problem and projected This information includes: future budget deficits, the Legislature also could • Standalone Caltrans Construction Project direct the administration to evaluate alternative Details. Specifically, information is required approaches to network implementation. about when Caltrans expects to complete For example, one alternative might be lease revenue pre-construction work on each project, bond financing that uses network customer how much funding is needed to complete revenues to finance its expansion without using the project, and whether last-mile projects General Fund. This evaluation could provide the funded through the federal BEAD program Legislature with opportunities to determine whether or FFA grant program will be served by the the current implementation approach is the most construction project. We advise prioritizing cost-effective and efficient given the fiscal pressure information about the first 1,800 miles or so of facing the state. projects, as these are funded or to be funded consistent with legislative intent. LAST-MILE PROJECT • RFI2 Proposal Effects on Standalone GRANT PROPOSALS Caltrans Construction Projects. Specifically, Proposed Delay of FFA Grant Program information is required about whether any Funding Likely Unsustainable in 2026-27. standalone Caltrans construction projects will The proposed delay of $100 million General Fund be replaced with a joint-build construction of FFA grant program funding from 2024-25 to project, lease, or purchase; how much less www.lao.ca.gov 15 2024-25 BUDGET 2026-27 in the Governor’s budget represents the budget problem and future budget deficits, the a relatively small solution to the serious budget Legislature also could provide additional oversight problem in 2024-25. Furthermore, both the of how the federal BEAD program and the FFA grant administration and our office are forecasting a program complement one another. While the BEAD nearly $30 billion budget deficit in 2026-27, which program requirements and rules are largely set by means the delayed funding is unsustainable under NTIA, CPUC can administer the FFA grant program current revenue and expenditure projections. based on the program requirements and rules Therefore, based on these projections, this delay set through its rulemaking procedures (with the in FFA grant program funding could be viewed partial exception of the $550 million in federal ARP reasonably as a reduction. fiscal relief funds). Moreover, while the federal ARP Federal BEAD Program Funding Will Be fiscal relief funds must be encumbered by the end Made Available in 2024-25. CPUC anticipates the of 2024 and expended by the end of 2026, these state will receive at least 20 percent of its federal deadlines do not apply to $900 million General BEAD program allocation of $1.86 billion (about Fund in appropriations for the FFA grant program. $370 million) in May 2024 when NTIA approves How these two programs complement one another its second initial proposal volume. This amount of to distribute last-mile project funding to unserved additional federal funding would exceed the amount and underserved areas and households in the state of General Fund support proposed for delay in the is one key area for legislative oversight during the Governor’s budget. Moreover, if NTIA also approves budget process, particularly if additional reductions CPUC’s request to make available to the state its in one-time spending are needed to address the entire BEAD program allocation, $1.86 billion in budget problem. additional federal funding could be allocated for Anticipated Budget Control Section Process last-mile project grants before the end of 2024-25. Limits Legislative Oversight. The Legislature This amount far exceeds all of the proposed and also might consider whether the budget control scheduled General Fund appropriations for FFA section process CPUC expects to use to receive grant program awards, which total $550 million and expend the federal BEAD program allocation from 2024-25 to 2026-27. Any reductions in these is appropriate for this amount of federal funds. proposed and scheduled appropriations could help We find that this process limits legislative oversight, address the immediate budget problem in 2024-25 as CPUC will not be required to submit a budget and the significant future budget deficits in 2025-26 proposal to the Legislature for consideration and 2026-27. and deliberation during the budget process. Federal BEAD Program Non-Supplantation Furthermore, the legislative notification required Language Does Not Preclude Prospective by the budget control section only occurs after the General Fund Reductions. Federal BEAD program Department of Finance approves CPUC’s proposed documentation does include language that requires use of the funds. Given that the federal BEAD states and other program funding recipients to program allocation is not unanticipated and that at use their allocations to supplement, not supplant, least 20 percent of the state allocation will be made amounts otherwise made available for last-mile available to the state in May 2024 when the budget project grants. However, based on our review process is still underway, the Legislature could of this non-supplantation language, reductions consider an alternative approach to this process in proposed and scheduled General Fund through provisional budget bill language or trailer appropriations from 2024-25 to 2026-27 would not bill language. be deemed supplantation because these funds have not yet been appropriated by the Legislature. LLRF PROPOSALS Legislative Oversight of How Federal BEAD Proposed Reductions in LLRF Reasonable. Program and FFA Grant Program Work Together Given the serious budget problem, we find the Is Necessary. In addition to the need for the reductions to the LLRF that are proposed in the Legislature to consider last-mile project grant Governor’s budget to be a reasonable start. funding from the General Fund within the context of 16 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET As shown in Figure 7, none of the appropriated established permanent positions that support LLRF is encumbered or has been expended. CDT’s middle-mile network implementation. A $250 million General Fund reduction to the LLRF Completion of the middle-mile network projects over two fiscal years, however, does not maximize will take several more years and the maintenance, one-time spending reductions as we recommend in management, and operation of the network will be our budget overview publication. ongoing. We think the permanent positions that Additional Reductions or Elimination of were established, based on an analysis of their LLRF Also Worthy of Consideration. Given the workload, are warranted. We also have no concerns significant projected budget deficits across the with related proposed provisional budget bill three years for which LLRF funding is appropriated, language allowing the administration to authorize consideration of additional reductions or even the up to three additional permanent positions. (The elimination of the LLRF is warranted. CPUC does exact amount of funding to appropriate from CDT’s anticipate some demand for the LLRF in March, MMBI proposal for these positions is unclear, but is but this demand has yet to be demonstrated likely in the millions of dollars.) because rule-making for the program only recently No Concerns With CPUC’s CASF Local concluded in November 2023. Furthermore, Assistance Budget Authority Augmentation LLRF awards are not grants and will depend on Proposal. We have no concerns with CPUC’s applicants applying for and securing financing request to increase its local assistance expenditure for their own broadband infrastructure projects. authority to provide additional CASF program Some applicants might instead receive last-mile grants. The requested amount of grant funding project grant funding from the FFA, federal BEAD in applications for CASF program accounts in program, or other CASF program accounts which 2023 far exceeded CPUC’s expenditure authority. might negate the applicants’ need for credit Moreover, there is statutory authorization to enhancement offered by LLRF. To address the collect the amount of surcharge revenues that budget problem and/or preserve funding for could be disbursed as grant awards with this other broadband programs and projects, the expenditure authority. Legislature could consider additional reductions of No Concerns With CPUC’s Ongoing LLRF appropriations and/or redirection of funding Implementation of Broadband for All Proposal. to the state’s middle-mile network and/or FFA We have no concerns with CPUC’s request to make grant program. permanent limited-term funding for 50 positions that support CPUC’s broadband-related efforts. OTHER PROPOSALS Several of the broadband programs and projects No Concerns With Positions Requested in led by CPUC have long or ongoing implementation CDT’s MMBI Proposal. We have no concerns periods and will require permanent staff. with ongoing funding for the 36 administratively RECOMMENDATIONS Approve $250 Million General Fund in 2024-25 operational middle-mile network. However, given the for Middle-Mile Network With New Provisional lack of critical information about middle-mile network Budget Bill Language. We recommend the construction, we also recommend the Legislature Legislature approve the $250 million General Fund adopt provisional budget bill language that included in CDT’s operating budget as a planned conditions this funding on more information about appropriation in 2024-25. This funding would meet standalone Caltrans construction projects and other the Legislature’s stated goal in SB 189 to provide information that is deemed necessary for legislative additional funding for increased middle-mile network oversight of middle-mile network implementation costs and, as presented in July 2023, allow CDT to such as an initial draft of the business plan. build, lease, and purchase enough miles to deliver an www.lao.ca.gov 17 2024-25 BUDGET Reject Additional $250 Million General Consider Other Budget Solutions Using Fund in 2024-25, $1.25 Billion in 2025-26 for Planned Appropriations, Unencumbered and Middle-Mile Network. We recommend the Unspent Funds. We recommend the Legislature Legislature reject the $1.5 billion General Fund in consider other General Fund budget solutions using CDT’s MMBI proposal—$250 million in 2024-25 some of the remaining broadband infrastructure and $1.25 billion in 2025-26. The serious budget funding available. These solutions include: problem in 2024-25 and significant projected • Reductions in Last-Mile Project Funding. budget deficit in 2025-26 do not support the Additional federal BEAD program funds of up substantial General Fund investment in this to $1.86 billion will be made available to the proposal, particularly when detailed information is state in 2024-25. Reductions in proposed or unavailable and alternative funding sources may scheduled appropriations of up to $550 million be explored. General Fund in last-mile project funding Reject Provisional Budget Bill Language from 2024-25 through 2026-27 would help Allowing for Increases in 2024-25 with the budget problem and projected future Appropriation. We recommend the Legislature budget deficits. reject the provisional budget bill language that • Reductions in or Elimination of LLRF. allows the Department of Finance to increase Additional reductions to, or the complete CDT’s 2024-25 middle-mile network appropriation elimination of, the LLRF would maximize by up to $500 million. This is consistent with our one-time General Fund spending reductions recommendation on the $1.5 billion in CDT’s MMBI already begun in the proposed Governor’s proposal, as well as our assessment that the budget. Up to $500 million General Fund from language does not reflect the administration’s intent 2023-24 to 2025-26 could be made available and complicates legislative oversight. to close budget deficits. Consider Provisional Budget Bill Language Approve Other Proposals as Budgeted. As we or Trailer Bill Language as Alternative to Budget have no concerns with them, we recommend the Control Section Process. We recommend the Legislature approve the following other proposals: Legislature consider adopting provisional budget bill language or trailer bill language clarifying the • Funding for the 36 administratively appropriation and allocation of federal BEAD created positions in CDT’s MMBI proposal program funds once received. The language also that support its middle-mile network could request specific information from CPUC as implementation efforts. the state entity administering the funds, such as any • CDT’s proposed provisional budget bill conditions placed on the funding by NTIA and any language that allows the administration to required changes by NTIA to state-administered authorize up to three additional permanent BEAD program processes. positions for CDT’s middle-mile network implementation efforts. • CPUC’s CASF Local Assistance Budget Authority Augmentation proposal. • CPUC’s Ongoing Implementation of Broadband for All proposal. 18 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET www.lao.ca.gov 19 2024-25 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. 20 LEGISLATIVE ANALYST’S OFFICE