Key Investments Brief For UWCA Members

Executive Summary

On January 8, 2021, Governor Newsom unveiled his proposed 2021-2022 budget, amounting to a $227 billion spending plan, thanks in large part to an estimated $26 billion windfall in tax revenues according to the Legislative Analyst’s Office estimates from November 2020. The Budget closes a $54.3 billion gap in 2020-21 and significantly reduces the state’s ongoing structural deficit to $8.7 billion in 2021-22, after accounting for reserves.

The Governor’s Budget includes a $14 billion investment – including early action beginning this month – to provide immediate economic relief for individuals and small businesses disproportionately impacted by the pandemic, the safe reopening of schools and for extended learning time, and investment in strategies for creating jobs. The Budget also continues the Governor’s sustained focus on expanding opportunity with investments for Californians from early childhood to college – including expanded transitional kindergarten programs and more funding for the University of California, California State University, and California Community College system.

The Budget makes new proposals to address the affordability of health care and housing, and supports the increase in the state’s minimum wage to $14 per hour. It also includes significant new strategies to reduce the impacts of climate change, with focused investments to support the state’s zero-emission vehicle goals and an additional $1 billion to address a comprehensive wildfire and forest resilience strategy.

The overall fiscal forecast for California is cautiously optimistic for the current budget year. The economic outlook and revenue forecast have improved; however, risks to the forecast remain higher than usual, and economic inequality has intensified since the COVID-19 pandemic. The Governor outlined $34 billion in budget resiliency funds – budgetary reserves and discretionary surplus – that will advance a broad-based and equity-minded recovery. Specifically it would include $15.6 billion for the Rainy day fund, $450 million from the Safety Net Reserve, $3 billion from the Public School System Stabilization Account, and $2.9 billion from the state’s operating reserve.

The proposed budget is just the starting point for the budget process as the Legislature has until June to negotiate and approve the final 2021-22 budget. Governor Newsom must sign it into law by July 1, 2020 per the California constitution. It is in this 5-6 month window that our collective voice needs to be heard by decision-makers to ensure our communities are invested in appropriately at such a challenging time for our state and nation.

Of critical note, in a fairly unprecedented move, the Governor is also including what are being called “mid-year adjustments” to the current fiscal year budget of 2020-2021. This will add revenue to the budget through June 30, 2021, as we understand it based on initial reports. This will include some aspects of the budget proposal discussed below, but will require a wholly separate budget negotiation process with the legislature and a very aggressive timeline for budget hearings, etc so funds will be available to be disbursed as early as February for things like the Golden State Stimulus.

Policy Area Investments

Education

The Budget’s improved revenue estimate results in not only significantly more funding for schools, but also the highest funding level ever at $85.8 billion. This is an increase of $14.9 billion from 2020.

Early Childhood Education: The Budget includes a number of one-time investments, from multiple sources, for a total of approximately $400 million over multiple years. The proposals include the following:

Student Mental Health: $400 million in one-time funding to implement an incentive plan through Medi-cal managed care plans, in partnership with county behavioral health departments, to increase the number of students receiving preventative and early intervention behavioral health services by schools.

Professional Development: $315 million for educator professional development, with emphasis on developing quality training in high-needs areas and providing timely access to training, specifically:

Teacher Pipeline: $225 million one-time Prop 98 GF to prove the state’s teacher pipeline.

FAFSA: The Budget requires LEAs to confirm that all high school seniors complete a FAFSA or CA Dream Act Application beginning in the 2021-22 academic year.

Higher Ed: The Budget proposes total funding of $36.1 billion for higher education. The total reflects a change of $951 million compared to revised 2020-2021 expenditures. Does not include the estimated $2.9 billion included in recent federal COVID-19 relief bill.

UC System: $136 million ongoing to provide a 3% increase in base resources to support base resources.

Ongoing Adjustments:

CSU System: $425 million

These investments are provided with the expectation that CSU:

Graduation Initiative 2025: $15 million ongoing GF to sustain and expand support for the Basic Needs Initiative component.

One-Time Adjustments

Community College System: Fall 2020 CCC enrollment was down by 8% from the prior fall term. Preliminary year-over-year FAFSA completion for first-time freshmen application completion is down by nearly 4.5%. To mitigate these concerns:

Expanding Work-Based Learning Opportunities: The Budget includes $35 million Prop 98 GF to support the following investments in work-based learning:

Other Budget Adjustments

Financial Stability + Labor & Workforce Development

CalEITC: The Budget proposes a $2.4 billion Mid-Year Action. This investment would provide low-income filers making less than $30,000 annually to receive an additional $600 payment. (estimated 4 million Californians to receive).

Employment Development Department: Budget proposal includes $46,348,574

California Jobs Initiative: Governor proposes $777.5 Million to fund this initiative. Details of the initiative are as follows:

California Rebuilding Fund: Proposed $12.5 Million. This fund is a public-private partnership meant to provide loans to the small businesses.

Small Business COVID-19 Relief Grant Program: Proposed $575 million. This program would provide grants of up to $25,000 for small businesses and nonprofit organizations that have been impacted by COVID-19, with priority given to regions and industries particularly hard-hit as well as disadvantaged communities and “underserved small business groups.” The Governor is additionally proposing these investments be included in the mid-year budget action.

Financial Health & Human Services

The Budget includes $195 billion ($64 billion GF and $131 billion other funds) for all health and human services programs. The Budget assumes that the COVID-19 Pandemic response continues at some level until December 2021.

Behavioral Health: $750 million one-time General Fund, available over three years, for competitive grants to support acquisition and rehabilitation of properties for behavioral health treatment facilities, including community-based residential facilities.

Proposed Budget fails to expand Medi-Cal coverage to undocumented senions, delays potenial suspension of state funing for Medi-Cal Provider Payments.

Department of Health Care Services: Medi-Cal budget is $118 billion in 2020-21 and $122 billion in 2021-22. Budget assumes that caseload will increase by 10% from 2019-20 to 2020-21 and increase 11.7% from 2020-21 to 2021-22.

CalAIM: The administration assumes that implementation of these various reforms would begin on January 1, 2022, and that $1.1 billion ($531.9 million General Fund) would be available during the initial fiscal year (2021-22) to:

Social Services: The Budget includes $36.2 billion ($14.4 billion GF) for Department of Social Services Programs.

Homelessness:

Housing:

Emergency Preparedness & Response The Budget includes $1 billion for wildfire resiliency and emergency response.

$4.4 B: COVID-19 Emergency Response

Economic Outlook for California

The governor’s economic outlook expects Californians to gain back jobs slowly, with the total number of jobs in the state not returning to pre-pandemic levels until 2025. The forecast also expects that increased automation and the shift to online retail will permanently eliminate some jobs in the low-paying leisure and hospitality, retail, and “other services” industries. This means that some unemployed workers will not have jobs to come back to once the pandemic is over and will have to find employment elsewhere. For this reason, the administration projects that employment in these industries will remain below their pre-pandemic levels beyond 2025. The outlook also points out that the recent approval of Proposition 22, which allowed gig economy companies to classify their workers as independent contractors, will lead to a decline in the quality of many jobs in the state.

It is important to consider that the governor’s outlook may be overly pessimistic because it did not take into account the impact of the federal economic relief bill that was enacted in December. This means, for example, that it incorrectly assumed that millions of Californians would lose access to unemployment benefits beginning late last year. That said, the administration points to a number of factors that could cause the economic outlook to worsen, including more widespread job losses than anticipated, more business closures than expected, or a “failure to address structural inequality.”

The 2020-21 budget agreement enacted in June included actions to close a $54 billion budget gap that was projected as a result of expected revenue losses and spending increases due to the COVID-19 pandemic and recession. However, the governor’s 2021-22 budget proposal reflects an improved revenue outlook over the 2020 Budget Act assumptions and a one-time $15 billion “windfall” that can be allocated during the current budget cycle.

This improved outlook and windfall are due to two main factors. First, while many Californians are facing severe struggles in the COVID-19 economy, those with high incomes have continued to fare well, and this group is responsible for a large share of the state’s General Fund revenue due to the progressive personal income tax (PIT) system. Second, the recession has been less severe than expected, largely due to federal assistance to workers, families, and businesses. As a result, the administration projects General Fund revenue will be $71 billion higher than anticipated in the 2020 Budget Act over the three-year budget period, covering fiscal years 2019-20 through 2021-22. This includes higher estimates over the budget period for the three primary General Fund revenue sources, including $58 billion in personal income tax revenue, $9 billion in sales tax revenue, and $1.3 billion in corporation tax revenue.

The budget proposal warns that the revenue situation could deteriorate in the case of a sharp decline in the stock market, a rise in bankruptcy, or more widespread unemployment affecting higher-income Californians. The proposal also notes that the revenue estimates were completed prior to the enactment of the recent federal COVID-19 relief package, which should reduce the likelihood of a more severe recession scenario in the short-term.

Although the outlook for the current budget is improved, the administration conservatively projects that the three main General Fund revenue sources will grow by only 1.9% annually between 2019-20 and 2024-25, significantly slower than the 6.4% average growth rate since 2009-10. Additionally, expenditures are expected to grow faster than revenues over this time, resulting in a structural deficit of $7.6 billion for 2022-23, growing to $11 billion by 2024-25 without actions to increase revenues, reduce spending, or a combination of the two.