The 2024-25 Budget: Overview of the Spending Plan

2024-25 BUDGET The 2024-25 Budget: Overview of the Spending Plan GABRIEL PETEK | LEGISLATIVE ANALYST SEPTEMBER 2024 www.lao.ca.gov 1 2024-25 BUDGET 2 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET INTRODUCTION Each year, our office publishes the California All figures in this publication reflect actions taken Spending Plan to summarize the annual state through early July 2024, but we have updated budget. This publication provides an overview of the narrative to reflect actions taken later in the the 2024-25 Budget Act, gives a brief description legislative session. In addition to this report, we of how the budget process unfolded, and then have released a series of issue-specific, online highlights major features of the budget approved posts that give more detail on the major actions in by the Legislature and signed by the Governor. the budget package. THE BUDGET PROBLEM In this section, we present our estimates of the HOW THE SPENDING PLAN budget problem the Legislature addressed in the ADDRESSES THE BUDGET 2024 budget package. The state faced a budget PROBLEM problem, or deficit, this year. The estimates of the budget problem in this section are predicated on The state has several types of solutions—or the administration’s June 2024 revenue projections options—for addressing a budget problem, but and spending proposals. Our analysis also the most important include: reserve withdrawals, focuses on the three-year budget window under spending reductions, revenue increases, and cost consideration: 2022-23 through 2024-25. shifts (for example, between funds). Figure 1 on the next page summarizes the budget solutions that What Is a Budget Problem? In the context of the budget package used to address the $55 billion budget development, a budget problem occurs budget problem. Spending-related solutions when estimated resources are insufficient to (including both school and community college cover the costs of currently authorized services. spending and other spending) total $39 billion and Under the State Constitution, a budget problem represent about 70 percent of the total solutions. must be solved, for example, by increasing Spending-related solutions include reductions, revenues or reducing spending. fund shifts, delays, and reversions. In addition, $55 BILLION BUDGET PROBLEM the budget package includes about $6 billion in reserve withdrawals, $2 billion in cost shifts, and Budget Package Addressed a $55 Billion about $8 billion in revenue-related solutions. The Budget Problem. We estimate the Legislature remainder of this section describes each of these addressed a $55 billion budget problem in the solution types in more detail. Appendix 1 and 2, 2024-25 budget package. This budget problem available online, list all of the solutions by area. is essentially unchanged compared to the one addressed by the Governor in the May Revision Spending-Related Solutions ($20 Billion) ($55 billion). That said, our estimate of the budget The budget package includes $20 billion in problem is higher than the figure cited by the spending-related solutions (excluding school and administration ($47 billion). The reasons for community colleges spending, which is described this difference are the same as those we cited later in this section). Spending-related solutions in in our analyses of the Governor’s budget and the budget window include: $16 billion one time or May Revision. The main driver of differences is our temporary and $4 billion ongoing, which grow to differing treatment of baseline spending for schools about $6 billion over time. and community colleges. (For more information on this and other differences, see: The 2024-25 Budget: Initial Comments on the Governor’s May Revision.) www.lao.ca.gov 3 2024-25 BUDGET Reductions ($14 Billion). Figure 1 Under our definition, a spending reduction occurs when the state How the Budget Package Addresses the Deficit reduces spending relative to what was established under current law Reversion or policy. More colloquially, these Delay are spending cuts. We estimate the Fund Shift budget package includes about $14 billion in spending-related Spending-Related reductions. Of this total, about Solutions School and $10 billion in spending reductions Community College Spending are one time or temporary and Reduction $4 billion are ongoing, which grow to $6 billion over time. Some of the largest reductions include: $2 billion in ongoing reductions Reserve Withdrawal to state operations; about Revenue Related $1.7 billion in various adjustments related to past allocations for disaster response, including for Cost Shift fires, floods, and the pandemic; and a nearly $500 million proposal as a delay if it would shift the cost outside reduction to the learning-aligned of the multiyear window) Nearly $2 billion of the employment program. budget package’s spending-related solutions are Fund Shifts ($4 Billion). Fund shifts are budget delays. (As a result, proposed spending is higher in solutions that use other fund sources—for example, the out-years.) special funds—to pay for a cost typically incurred by Reversions ($1 Billion). Costs for state the General Fund. These shifts reduce expenditures programs sometimes come in lower than the from the General Fund as they simultaneously amount that was appropriated. This often occurs, displace spending that these other funds otherwise for example, when the state overestimates uptake would have supported. As a result, we consider in a new program or as a routine matter in programs these to be a type of spending-related solution where spending is uncertain due to factors like because they typically result in lower overall state caseload. When actual state costs are below spending, inclusive of all funds. We estimate the budgeted amounts, a reversion occurs after a budget package includes $3.6 billion in fund period of time—typically, three years. The reversion shifts. This primarily includes General Fund returns the unspent funds to the General Fund. costs that have been shifted to the Greenhouse This year’s budget package accelerates some Gas Reduction Fund (GGRF), federal funds, and reversions that would have otherwise occurred in other special funds. The budget also shifts some the future and proactively reverts certain funds that General Fund costs for child care to Proposition 64 otherwise are continuously appropriated (which and federal funds. has the effect of realizing savings from the unspent Delays ($2 Billion). We define a delay as an funds that would not otherwise occur). While not all expenditure reduction that occurs in the budget of these amounts represent lower state spending window (2022-23 through 2024-25), but has an over the long term, they do result in savings today at associated expenditure increase in a future year of a cost of forgone savings in the future. As a result, the multiyear window (2025-26 through 2027-28). we count them as spending-related solutions. That is, the Legislature has moved the spending to We estimate the budget package includes nearly a year in the near future. (We do not categorize a $1 billion in reversions. 4 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Reserve Withdrawals ($6 Billion) The largest revenue solution is a temporary increase in corporation tax revenues by about Budget Stabilization Account ($5 Billion). $6 billion in 2024-25. This is generated by not Proposition 2 (2014) governs deposits into and allowing (1) any businesses to use tax credits to withdrawals from the state’s general-purpose reduce their taxes by more than $5 million and constitutional reserve—the Budget Stabilization (2) businesses with $1 million or more in income Account (BSA). Under these rules, the state to use net operating loss (NOL) deductions. can make withdrawals from the constitutionally These limits apply to tax years 2024, 2025, required balance of the BSA in a fiscal emergency, and 2026. The budget package also creates a which occurs when estimated resources for the new mechanism for taxpayers to recoup these upcoming year are insufficient to cover the costs of temporary tax increases as tax refunds in future the previous three enacted budgets, adjusted for years. In addition, the May Revision includes a inflation and population. When a budget emergency proposal to increase the managed care organization is declared, the state can withdraw up to half of the (MCO) tax and use the nearly $2 billion in increased constitutional balance of the BSA. (The Legislature revenues to offset General Fund costs. also can withdraw the entire “discretionary” balance of the BSA at any time, which are amounts that School and Community College were deposited into the fund on top of Proposition 2 Spending ($19 Billion) requirements.) The Governor issued a budget emergency proclamation on June 26, 2024. Suspends Proposition 98 Requirement and The budget package suspends the BSA deposit for Reduces Spending ($13 Billion). Proposition 98 2024-25 and uses a withdrawal of about $5 billion (1988) sets a minimum funding requirement for from the fund to cover a part of the budget problem. schools and community colleges using a series of formulas in the State Constitution. The state Safety Net Reserve ($1 Billion). The budget meets the requirement through a combination of package withdraws the entire balance of the Safety state General Fund and local property tax revenue. Net Reserve—$900 million. The Safety Net Reserve For 2023-24, the budget invokes a provision was designed to help cover costs of increasing allowing the state to suspend the minimum caseload in Medi-Cal and the California Work requirement with a two-thirds vote of each house Opportunity and Responsibility to Kids (CalWORKs) of the Legislature. It then reduces spending on program in the event of an economic downturn. schools and community colleges by $8.3 billion Cost Shifts ($2 Billion) relative to the level otherwise required that year. Separate from this action, the budget makes a The budget package includes slightly more than $2.6 billion reduction attributable to 2022-23. $2 billion in cost shifts. We define cost shifts as This reduction does not require suspension budget actions that achieve savings in the present, because funding remains above the minimum but result in a binding obligation or higher cost for requirement that year. (The budget also contains the state in a future year. In that way, these actions numerous actions—primarily reserve withdrawals— can be similar to borrowing, but are often not to insulate school and community college budgets explicitly structured as such. For example, major from these reductions.) Both of these reductions categories of cost shifts include: an additional lower the Proposition 98 requirement on an ongoing $1.7 billion in special fund loans to the General Fund basis, though the suspension creates an obligation and $400 million in savings generated by extending to increase funding more quickly in the future. the repayment schedule for some existing loans. The combined effect of these reductions—including Revenue-Related Solutions ($8 Billion) their effect on 2024-25—is to reduce General Fund We estimate the May Revision includes spending by $12.7 billion over the 2022-23 through nearly $8 billion in revenue-related solutions. 2024-25 period. www.lao.ca.gov 5 2024-25 BUDGET Accrues Cost of Previous Payments to Future attributed to the non-Proposition 98 side of the Fiscal Years ($6 Billion). The budget introduces state budget. Though not formally structured as a new type of fiscal maneuver that accrues borrowing, the maneuver is similar to the state $6.2 billion in previous school and community taking an internal loan from its cash reserves. college payments to future fiscal years. Specifically, The maneuver does not delay or reduce any the state will not recognize these payments as a payments to schools or community colleges. cost to the General Fund in the year it provided It also does not reduce the Proposition 98 funding them (2022-23). Instead, it will recognize the cost requirement moving forward. It will, however, in equal installments over ten years, beginning in reduce funding available for other state programs 2026-27. These costs, when recognized, will be over the next ten years. BUDGET CONDITION In this section, we describe the overall condition state’s operating reserve and essentially functions of the General Fund budget, the condition of like an end-of-year balance.) the school and community college budget, General Fund Reserves $21 Billion Under and state appropriations limit (SAL) estimates Spending Plan. As mentioned earlier, the under the spending plan. As is the case in the budget package uses $5 billion from the BSA and previous section, all of the figures here use the $900 million from the Safety Net Reserve to help administration’s budget estimates as of June 2024. address the budget problem. This means the state would end 2024-25 with $21 billion in General General Fund Fund reserves. Figure 2 summarizes the condition of the Proposition 98 Reserve Has Small Balance. General Fund under the revenue and spending As required by the State Constitution, the budget assumptions in the June 2024 budget package, as also withdraws the entire balance from the estimated by the administration. The state would Proposition 98 Reserve ($8.4 billion) in 2023-24 to end 2024-25 with $3.5 billion in the Special Fund for supplement the funding provided to schools and Economic Uncertainties (SFEU). (The SFEU is the community colleges. In 2024-25, the budget begins to build back the Proposition 98 Reserve by making a discretionary deposit of nearly Figure 2 $1.1 billion. General Fund Condition Summary Revenues. Figure 3 displays the administration’s revenue (In Millions) projections as incorporated into 2022-23 2023-24 2024-25 the June 2024 budget package. Revised Revised Enacted As the figure shows, revenues from Prior-year fund balance $63,751 $47,119 $13,444 the state’s three major sources are Revenues and transfers 178,557 189,399 212,139 expected to grow from 2023-24 to Expenditures 195,189 223,075 211,504 2024-25, including with 5 percent Ending fund balance $47,119 $13,444 $14,078 growth in the personal income Encumbrances $10,569 $10,569 $10,569 SFEU Balance $36,550 $2,875 $3,509 tax, the state’s single largest revenue source. The reason the Reserves BSA $21,708 $22,559 $17,633 state faces a budget problem this SFEU 36,550 2,875 3,509 year, despite growing revenues in Safety net 900 900 — the budget year, is that revenue Total Reserves $59,158 $26,334 $21,142 shortfalls relative to past estimates SFEU = Special Fund for Economic Uncertainties and BSA = Budget Stabilization Account. have occurred in the prior year and current year. 6 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Figure 3 General Fund Revenue Estimates (Dollars in Millions) Revised Change From 2023-24 Enacted 2022-23 2023-24 2024-25 Amount Percent Personal income tax $100,451 $111,203 $116,556 $5,353 5% Sales and use tax 33,324 33,320 34,045 725 2 Corporation tax 36,337 33,282 42,557 9,274 28 Total, Major Revenue Sources $170,111 $177,805 $193,158 $15,352 9% Insurance tax $3,707 $3,905 $4,016 $110 3% Other revenues 5,409 6,788 7,004 216 3 Transfers and loans -670 900 7,961 7,061 784 Totals, Revenues and Transfers $178,557 $189,399 $212,139 $22,739 12% Note: Reflects administration estimates of budget actions taken through July 1, 2024. Spending. Figure 4 displays Figure 4 the administration’s June 2024 estimates of total state and federal Total State and General Fund Expenditures spending in the 2024-25 budget (Dollars in Millions) package. As the figure shows, the spending plan assumes total state Revised Enacted Change From 2023-24 spending of $295 billion in 2024-25. 2022-23 2023-24 2024-25 Amount Percent This is $31 billion lower than to General Fund $195,189 $223,075 $211,504 -$11,571 -5% the 2023-24 level, and includes a Special funds 74,899 103,594 83,985 -19,609 -19 19 percent decrease in special fund Budget Totals $270,089 $326,668 $295,489 -$31,179 -10% Bond funds $3,951 $5,319 $2,373 -$2,946 -55% spending and a 5 percent decrease Federal funds 139,741 162,163 152,988 -9,176 -6 in General Fund spending. Note: Reflects administration estimates of budget actions taken through July 1, 2024. Declines in state spending this year are generally attributable to School and Community College Budget the state’s budget problem. (The “Major Features” Reflects Decrease in Funding Compared section of this report also describes some of the With Previous Budget Estimate. Compared with major discretionary spending choices and budget the estimate the state made in June 2023, the solutions reflected in the spending plan.) June 2024 budget reflects a $9.8 billion decrease Bond Funds. The state is seeking approval of in Proposition 98 funding across the 2022-23 two bond measures on the November 2024 ballot: through 2024-25 period (Figure 5, on the next Proposition 2 and Proposition 4. Proposition 2 page). This reduction consists of an $11.7 billion would allow the state to borrow $10 billion to build decrease in state General Fund, partially offset by new facilities and renovate existing facilities at a $1.9 billion increase in local property tax revenue. school districts and community colleges. The cost Most of the General Fund reduction is attributable to repay this bond would be about $500 million to the suspension of the Proposition 98 funding each year for 35 years. Proposition 4 would allow requirement in 2023-24. the state to borrow $10 billion to pay for various Withdraws Funding From State School natural resources and climate activities. The cost Reserve to Mitigate Funding Drop. Proposition 2 to repay this bond would be about $400 million established a constitutional reserve account for each year for 40 years. The cost to repay both school and community college funding and set forth bonds would total about $900 million each rules requiring deposits and withdrawals under year. (New bond spending that would occur as certain conditions. One of these rules requires the a result of these measures are not part of the state to withdraw the entire balance of $8.4 billion estimates in Figure 4.) in 2023-24 to address the drop in funding that year. www.lao.ca.gov 7 2024-25 BUDGET Funds Small Cost-of-Living Figure 5 Adjustment (COLA) for Existing School and Community College Funding Levels Under Programs. After accounting for Proposition 98 the reduction in overall funding, (In Millions) reserve withdrawals and deposits, cost savings, and various other 2022-23 2023-24 2024-25 Totals baseline adjustments, the state has June 2023 $1.5 billion available to augment General Fund $78,117 $77,457 $79,739 $235,314 school and community college Local property tax 29,241 30,854 31,881 91,977 programs. The budget allocates Totals $107,359 $108,312 $111,621 $327,291 most this amount to cover a June 2024 1.07 percent COLA for existing General Fund $73,946 $67,095 $82,612 $223,653 programs. Most of the remaining Local property tax 29,774 31,389 32,670 93,834 Totals $103,720 $98,484 $115,283 $317,487 funds are allocated to cover enrollment- and caseload-driven Change From June 2023 General Fund -$4,172 -$10,362 $2,873 -$11,661 increases in a few specific areas. Local property tax 532 535 789 $1,856 Totals -$3,639 -$9,827 $3,662 -$9,804 THE STATE APPROPRIATIONS LIMIT The budget uses this funding to compensate for the reduction in state General Fund. In 2024-25, the Under Proposition 4 (1979), the Constitution budget begins to build back the reserve by making limits how the state can use revenues that exceed a discretionary deposit of nearly $1.1 billion. a certain limit—a set of formulas known as the SAL. The SAL was recently an important constraint Scores Savings Related to Attendance and in the budget process and has impacted the a Few Other Adjustments. The state allocates Legislature’s budget decisions. For the last couple most funding to schools based on their average of years, however, the SAL has not been salient daily attendance. In response to significant declines to the budget process. This is because declines in attendance over the past several years, the in revenues have meant the state has more room state adopted a series of policies temporarily under the limit. Figure 6 provides an overview of funding school districts based on the attendance the SAL estimates in this year’s budget. As the they reported prior to the COVID-19 pandemic. figure shows, the state is expected to have room For 2024-25, the budget assumes savings across all years in the budget window, including of $1.8 billion as these higher pre-pandemic $31 billion in 2022-23, $21 billion in 2023-24, and attendance levels phase out of district funding $16 billion in 2024-25. calculations. In addition, the budget obtains $1.2 billion in savings by Figure 6 (1) deferring some payments from 2024-25 to 2025-26, (2) reducing State Appropriations Limit (SAL) Estimates funding for State Preschool that (In Billions) is expected to go unused, and (3) repurposing certain unspent 2022-23 2023-24 2024-25 appropriations from previous years. SAL Revenues and Transfers $212.2 $227.6 $247.5 Under the Constitution, the state Exclusions -107.4 -106.5 -115.9 must dedicate all of these savings Appropriations Subject to the Limit $104.8 $121.0 $131.7 to other school and community Limit $135.7 $141.5 $147.6 college purposes. Room/Negative Room $30.8 $20.5 $15.9 Excess Revenues? No Note: Reflects administration estimates of budget actions taken through July 1, 2024. 8 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET EVOLUTION OF THE BUDGET This section provides an overview of the 2024-25 the budget season.) The Governor’s budget budget process. Figure 7 contains a list of the solutions focused on spending. Spending-related budget-related legislation passed on or before solutions (including both school and community July 2, 2024. college spending and other spending) totaled $41 billion and represented nearly three-quarters Governor’s January Budget Proposal of the total. In addition, the Governor’s budget Governor’s Budget Addressed a $58 Billion included $13 billion in reserve withdrawals, Budget Problem. In January, we estimated which represented about half of the reserve total; that the administration solved a budget problem $4 billion in cost shifts; and about $400 million in of $58 billion. (Our estimate of the Governor’s revenue-related solutions. budget deficit was larger than the administration’s The Governor’s Budget Planned for estimate—$38 billion—largely due to differences Significant Future Budget Deficits. The in what we considered to be baseline changes. Governor’s budget included the administration’s This basic difference persisted throughout estimates of multiyear revenues and spending. Under those projections, the state Figure 7 would have faced operating deficits of $37 billion in 2025-26, $30 billion Budget-Related Legislation Passed On or Before in 2026-27, and $28 billion in July 2, 2024 2027-28. (Our office also projected Bill Number Chapter Subject the budget’s multiyear position in Budget Bills and Amendments December. The administration’s AB 107 22 2024-25 Budget Act deficit estimates were very similar AB 106 9 Amendments to the 2022-23 Budget Act and to our December projections of the 2023-24 Budget Act SB 108 35 Amendments to the 2024-25 Budget Act budget’s multiyear position.) SB 109 36 Amendments to the 2023-24 Budget Act Early Action Package Early Action Trailer Bills (Passed Before June 1, 2024) SB 136 6 Managed care organization tax In April, the Legislature passed Other Trailer Bills Passed On or Before July 2, 2024 an early action package that AB 160 39 Managed care organization tax reduced the size of the budget AB 161 46 Human services problem by $17.3 billion (Chapter 9 AB 162 47 Developmental services AB 166 48 Housing of 2024 [AB 106, Gabriel]). Across AB 168 49 Public safety the three-year budget window, AB 169 50 Public safety: juvenile justice the early action package included AB 170 51 Courts $12.9 billion in spending-related AB 171 52 Employment AB 173 53 Transportation solutions and $4.4 billion in cost SB 153 38 Education finance shifts (see above for our definitions SB 154 27 Education finance: Proposition 98 suspension of these terms). Some the largest of SB 155 71 Higher education these actions included: $4 billion in SB 156 72 Resources SB 159 40 Health fund shifts and revenue increases SB 163 73 Early learning and childcare in the MCO tax package, about SB 164 41 State government $1.6 billion in General Fund savings SB 167 34 Taxation generated by deferring June 2025 SB 174 74 Resources SB 175 42 Taxation payroll into July 2025, and Note: This figure includes budget bills and trailer bills identified in Section 39.00 in the 2024-25 $1.3 billion in savings generated Budget Act that were passed by the Legislature on or before July 2, 2024. Ordered by bill number. by reallocating an existing 2023-24 www.lao.ca.gov 9 2024-25 BUDGET California Public Employees’ Retirement System problem across two years.) On a multiyear basis, payment made under Proposition 2. A complete under both our office’s and the administration’s list of the early action solutions are available projections, the state would face smaller operating in Appendix 3. deficits under the May Revision compared to January. Our office concluded that, under the Governor’s May Revision May Revision, the budget was likely balanced, We Estimated Governor Addressed a particularly in the near term. $55 Billion Budget Problem. In April, the Legislature’s Budget Legislature took early action on a number of budget items. This early action package reduced The Legislature passed an initial budget on the budget problem from January by $17 billion. June 15, 2024. The main structural difference However, erosions to the administration’s revenue between the legislative package and the May forecast—which declined by $12 billion—plus Revision was that the legislative package started increases to baseline costs, including in Medi-Cal, the proposed limitation on NOLs and tax credits nearly entirely offset this reduction. As a result, at one year earlier—resulting in roughly $5 billion in the May Revision, we estimated that the budget additional revenue. The Legislature’s budget used problem was $55 billion under the administration’s that additional budget capacity to reject some estimates and assumptions, only slightly lower than of the Governor’s spending solutions and/or the budget problem estimated in January. provide other augmentations. Those spending Governor Proposed Addressing This Deficit augmentations included, for example: $1 billion for by Adjusting Spending. The May Revision Homeless Housing, Assistance, and Prevention proposed primarily solving the budget problem by (HHAP) Program Round 6; about $800 million to adjusting spending. Spending-related solutions undo reductions to the Middle Class Scholarship (including both school and community college program; roughly $600 million to undo a spending and other spending) represented nearly delay to the implementation of Department of 90 percent of the total solutions. Of this total, Developmental Services service provider rate $22 billion were related to school and community reform; and $400 million for legislative district college funding changes and $16 billion were requests. The legislative package also included a spending reductions, while the remaining solutions large number of other smaller changes across a comprised other types, like fund shifts. Compared variety of programs. The legislative package used to January, the Governor proposed that the slightly more (nearly $1 billion) in general purpose state use much less in reserves. reserves than the May Revision. Specifically, the Governor reduced Figure 8 total reserve withdrawals from $13 billion proposed in January to Budget-Related Legislation Passed After July 2, 2024 $4 billion in May. Bill Number Chapter Subject May Revision Included Budget Bills and Amendments More Emphasis on Addressing AB 180 995 Amendments to the 2024-25 Budget Act Multiyear Deficits, Particularly AB 157 994 Amendments to the 2024-25 Budget Act in 2025-26. In addition to solving AB 158 996 Amendments to the 2022-23 Budget Act and 2023-24 Budget Act the budget problem in the budget window, the Governor’s May Trailer Bills AB 218 1002 Oil and gas Revision proposed actions to also AB 176 998 Education finance close the budget gap in 2025-26, AB 177 999 Health including a sizeable reserve AB 178 1000 Resources withdrawal in that year. (The AB 179 997 State government AB 181 1001 Bargaining unit agreements administration emphasized that Note: This figure includes budget bills and trailer bills identified in Section 39.00 in the 2024-25 the state was solving the budget Budget Act that were passed by the Legislature after July 2, 2024. Ordered by bill number. 10 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET Final Budget Package later in the legislative session, which are listed in Figure 8. The next section of this report describes The Legislature passed an amended budget act the major features of the final budget package. and associated trailer bills on June 26, 2024. The Legislature also took some additional actions MAJOR FEATURES OF THE 2024-25 SPENDING PLAN This section briefly describes the major spending Resources and Environment actions in the 2024-25 budget package, including Changes to Multiyear Climate-Related some actions that were part of the early action Budget Packages. To help address the budget package. We discuss these and other actions in problem, the spending plan makes a number more detail in a series of online publications. of changes to one-time and temporary funding that was agreed to in previous budgets for K-14 Education climate, resources, and environmental programs. Funds Modest COLA and a Few Smaller Specifically, the budget agreement both reduces Augmentations. The state calculates the statutory program support and shifts planned funding COLA each year based on a price index published from the General Fund to the GGRF, as well as by the federal government. For 2024-25, the delays the timing for some planned expenditures. budget provides $1 billion to cover a 1.07 percent These changes have the cumulative effect of COLA for existing school and community college lowering planned non-Proposition 98 General programs. For schools, the budget also provides Fund spending for these packages by roughly an increase of $300 million ($179 million ongoing $6.4 billion across the six-year period spanning and $121 million one time) to cover cost increases 2021-22 through 2026-27. (This total excludes an related to universal school meals. For community additional $2.3 billion in budget solutions resulting colleges, the budget also provides (1) $50 million from reductions and fund shifts to environmental ongoing for caseload increases in the Student programs that were not included as part of these Success Completion Grant program and thematic packages.) While the spending plan (2) $25 million ongoing to increase enrollment by includes less spending than previous budgets 0.5 percent. initially agreed upon for several activities— Implements Small Payment Deferral. The such as related to water, extreme heat, and budget reduces spending in 2024-25 by deferring coastal resilience—a heavy reliance on shifting $487 million in payments to 2025-26. Of this from General Fund to GGRF across multiple deferral, half applies to schools and half applies years allows it to maintain the majority of overall to community colleges. The state will implement intended funding for most of the original thematic the deferral by delaying a portion of the payment climate-related packages. In total, the spending districts ordinarily would receive in June 2025 to plan maintains a total of $29 billion for these July 2025. The law allows school districts to be packages across a seven-year period (2021-28), exempt from this deferral (meaning they would which represents 79 percent of the original receive all of their funding on time) if they can multiyear planned amounts ($36 billion). show the delay would cause fiscal insolvency. Some Notable New Fire Response and The purpose of the deferral is to reduce spending Other Spending. Despite the budget condition, in 2024-25 to the minimum level required by the spending plan does include some significant Proposition 98. new spending for environment-related activities, including from the General Fund. In particular, it provides $199 million ($197 million from the General Fund) and 338 positions in 2024-25 to www.lao.ca.gov 11 2024-25 BUDGET begin implementing a shift to a 66-hour workweek Engagement which now will house California for firefighters at the California Department Volunteers programs and the Office of Community of Forestry and Fire Protection (CalFire), as Partnerships and Strategic Communications. contemplated in a 2022 memorandum of Second, it transfers a zero-emission vehicle understanding (MOU) between the state and the program and the California Jobs First program to firefighter union. (CalFire’s current workweek the Governor’s Office of Business and Economic is 72 hours.) As of the budget act, the costs of Development and the Precision Medicine Program implementing the shift were anticipated to rise to the Health and Human Services Agency. Finally, to $770 million ($756 million General Fund) on it maintains the remaining OPR programs in the an ongoing annual basis and 2,457 permanent newly renamed Governor’s Office of Climate and positions by 2028-29. After approving the budget Land Use Innovation. The budget does not include act, the Legislature ratified an MOU between additional funding to implement these changes. the state and the union representing CalFire that Health includes additional provisions to implement the 66-hour duty week. The terms of this agreement Changes to MCO Tax Package. Last year’s will increase these costs as the reduction in duty budget renewed a tax on health plan enrollment week hours is put in place beyond the amounts known as the MCO tax. It extended this tax through envisioned in the budget act. The budget package 2026. The net revenue generated by the tax was to also includes $94 million in one-time General (1) help offset General Fund spending in Medi-Cal Fund for flood prevention activities, $65 million in and (2) augment funding for Medi-Cal and other one-time GGRF for projects at the Salton Sea, and health programs. Recognizing the substantial roughly $45 million in ongoing General Fund to budget problem facing the state, this year’s make recent temporary expansions of CalFire hand spending plan makes three key changes to this crews permanent. package. First, it increases the tax rate on health plan enrollment in Medi-Cal, generating more net State Operations revenue to the state ($2.8 billion through 2024-25 Unallocated Reduction to State Operations and $7.1 billion through 2026-27). Second, it Expenditures. The budget assumes that the notably reduces how much tax revenue is used for Department of Finance identifies and implements augmentations, instead using more money to help $2.2 billion in ongoing reductions to General offset General Fund spending ($3.5 billion through Fund state operations expenditures beginning 2024-25 and $7.7 billion through 2026-27). Third, in 2024-25. While this reduction generally is it changes which Medi-Cal services and health unallocated, the budget explicitly requires that programs receive augmentations and delays the $392 million of the total reduction be applied to start of some funding increases to 2026. As a result the California Department of Corrections and of these actions, the revised MCO tax package Rehabilitation (CDCR). provides a substantial budget solution to the state Reduction to State Positions. The budget ($6.3 billion through 2024-25 and nearly $15 billion assumes that sufficient positions are held through 2026-27). vacant in order to revert $762.5 million to the Transportation General Fund in 2024-25. Beginning in 2025-26, the budget assumes that this reduction is Changes to Multiyear Transportation achieved by permanently reducing the number of Infrastructure Package. To address the General Fund shortfall, the budget makes a few reductions state positions. to spending agreed to in prior years as a multiyear Reorganizes the Governor’s Office of transportation infrastructure package. Specifically, Planning and Research (OPR). The budget the budget cuts $400 million from the Active package reorganizes the activities formerly Transportation Program, $200 million planned housed under OPR. First, it establishes the for grade separation projects, and $75 million Governor’s Office of Service and Community from the Highways-to-Boulevards Pilot Program. 12 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET (The budget package also reduces $96 million in State Sets Enrollment Growth Expectations General Fund that had been provided outside of the for UC and CSU. The state expects UC and CSU transportation infrastructure package for projects to enroll more resident undergraduate students at the Port of Oakland.) The spending plan includes over the next few years. In 2024-25, UC is to additional changes to transportation expenditures increase by 2,927 full-time equivalent (FTE) that do not affect planned funding totals. These students (1.4 percent) and CSU is to increase by include delaying the timing of when some funding 6,338 FTE students (1.9 percent). UC is to continue will be provided (including for the Zero-Emission growing its resident undergraduate enrollment by Transit Capital Program established as part of the 1.4 percent annually through 2026-27. CSU is to 2023-24 budget package) and shifting funding from grow by 3 percent in 2025-26. Although UC’s and the General Fund to GGRF and the State Highway CSU’s base augmentations are to cover most of the Account (including a total of $1.3 billion across the associated cost, the budget includes $31 million competitive-based and formula-based Transit and in 2024-25 specifically for UC to replace 902 FTE Intercity Rail Capital Programs shifted to GGRF). nonresident undergraduate students with resident students at the Berkeley, Los Angeles, and San Universities Diego campuses (combined). Provisional language Base Funding Increases for Universities in authorizes the administration to reduce funding 2024-25, Decreases in 2025-26. The budget proportionally if any of these UC or CSU enrollment plan increases base General Fund support for expectations are not met. This EdBudget table the University of California (UC) and the California shows enacted higher education enrollment levels. State University (CSU) by a total of $468 million (As is the case with the base augmentations, (approximately 5 percent) in 2024-25. The the state plans to defer the UC nonresident universities may use these base augmentations for replacement funding for 2025-26.) any operating cost, including increases in employee Housing and Homelessness salaries and benefits. Provisional language requires the universities to report to the Legislature by Eliminates Most Remaining One-Time December 31, 2025 on how they used these funds. Funding for Housing. Previously enacted budgets These ongoing increases are partly offset by authorized significant, albeit primarily one-time and one-time base General Fund reductions totaling temporary, funding for housing and homelessness, $200 million in 2024-25. In a related budget including authorizing some spending actions for action, the state plans to reduce ongoing base 2024-25. The 2024-25 spending plan reduces General Fund support for UC and CSU by a total much of the one-time, unspent funding for several of $774 million in 2025-26. These reductions are major housing programs by a total of $1.4 billion part of a broader action to reduce state operations General Fund. Examples of the programs with spending across agencies by 7.95 percent. the largest reductions include the Foreclosure Out-Year Base Augmentations for Universities Intervention Housing Preservation Program Are Deferred. Under the budget agreement, ($400 million General Fund), Infill Infrastructure the state plans to defer UC and CSU base Program ($235 million General Fund), and augmentations over the subsequent two years. CalHome ($153 million General Fund). Although Specifically, the state plans to delay base university the Governor’s budget proposal initially included augmentations totaling $493 million from 2025-26 reductions that would essentially eliminate state until 2026-27. In 2026-27, the state plans to provide funding for the Multifamily Housing Program these base augmentations, as well as one-time (proposed reduction of $250 million General Fund), back payments to compensate for the forgone Housing Navigator and Maintenance Program funds in the previous year. The state then plans to (proposed reduction of $13.7 million), and Regional defer the same amount ($493 million) from 2026-27 Early Action Planning program ($300 million until 2027-28. This UC EdBudget table and this proposed reduction), the final budget did not CSU EdBudget table (both online) show all base include reductions of this magnitude. Instead, increases, decreases, and deferrals under the smaller than proposed reductions were made budget agreement. to the Multifamily Housing Program ($10 million www.lao.ca.gov 13 2024-25 BUDGET General Fund reduction) and the Regional Early 2023-24 budget.) Specifically, trailer legislation Action Planning Program ($40 million General Fund indicates intent to add 44,000 slots in 2026-27 and reduction), and no reductions were made to the 33,000 slots in 2027-28 to fully meet the goals of Housing Navigator and Maintenance Program. the expansion plan. Provides New, One-Time Augmentations Public Safety for Certain Homelessness Programs. The 2024-25 budget includes $1 billion General Fund Various Public Safety Reductions. The budget reflects numerous reductions to General Fund for a sixth round of local funding for the HHAP spending on public safety programs. Notable Program. Additionally, the 2024-25 budget includes examples include: $150 million for the Encampment Resolution Funding program. The spending plan includes • $169 million (increasing to $225 million in budget-related legislation aimed to increase 2025-26 and ongoing) in reductions to CDCR oversight and accountability for both programs. At a associated with prison capacity deactivations. high level, this legislation will require the reporting This consists of (1) $77 million (increasing to of additional performance measures, ongoing $132 million) from the planned deactivation monitoring by the Department of Housing and of Chuckawalla Valley State Prison in Blythe, Community Development, and increased reporting (2) $82 million from the deactivation of requirements for all recipients. Finally, the 2024-25 42 housing units across 11 state prisons, and budget continues the recent practice of providing (3) $10 million (increasing to $11 million) related an additional $500 million for the state Low-Income to reduced administrative costs resulting from Housing Tax Credit Program. (Because these these and previous deactivations. credits would not be claimed until the housing units • $97 million in ongoing reductions to trial court are complete, the General Fund impact of these tax operations funding. credits will occur in a few years.) • $93 million in one-time reductions to Child Care Governor’s Office of Emergency Services grant programs. This includes (1) $45 million Funds New Child Care Slots and Modifies from the Prepare California community Multiyear Expansion Plan. The budget package hardening grant program, (2) $21 million from includes $229 million ($117 million General a gun buyback program, (3) $15 million from Fund and $111 million federal funds) for 11,000 the Seismic Retrofitting Program for Soft new center-based child care slots beginning Story Multifamily Housing, and (4) $12 million October 1, 2024. These slots will have full-year from the California Wildfire Mitigation home costs of $305 million beginning in 2025-26. hardening program. The budget also modifies and adds into statute details related to the multiyear slot expansion plan. (In 2021-22, the Legislature and Governor agreed to add 206,500 child care slots by 2025-26. Full implementation was delayed to 2026-27 in the 14 LEGISLATIVE ANALYST’S OFFICE 2024-25 BUDGET APPENDIX Note: In the online version of this report, we include a series of Appendix tables that have detailed information on the budget solutions reflected in the 2024-25 Budget Act as well as early action taken in the legislative session. www.lao.ca.gov 15 2024-25 BUDGET LAO PUBLICATIONS This report was prepared by Ann Hollingshead with contributions from analysts across the office, and reviewed by Carolyn Chu. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, California 95814. 16 LEGISLATIVE ANALYST’S OFFICE