In January, California was propelling the American economic resurgence—with 118 consecutive months of growth, stratospheric job creation, and its highest credit rating in nearly two decades. Because of prudent one-time investments which enabled the state to attain the largest rainy day fund in its history, California in a far stronger fiscal position today than it has been during previous downturns.

In this blog post, we will go over:

California’s January Budget Proposal

California began 2020 with a solid fiscal foundation—a strong and diverse economy, historic reserves, and a structurally balanced budget. It had eliminated past budgetary debts and deferrals and was making extraordinary payments to reduce pension liabilities. In January, a budget surplus of $5.6 billion was projected for the 2020-21 fiscal year. Revenues through March were running $1.35 billion above projections.

COVID-19 Impact

Unemployment claims have surged—with increased claims of 4.4 million from mid-March to May 9, and a projected 2020 unemployment rate of 18 percent. Job losses have occurred in nearly every sector of the economy, but they have been most acute in sectors not fully able to telework such as leisure and hospitality, retail trade, and personal services. Lower-wage workers have disproportionately borne the impact of job losses. COVID-19 has amplified the wage disparity that existed before the pandemic—a fact that is particularly concerning as state median income did not return to the pre-Great Recession level until 2018. Personal income is projected to decline by 9 percent in 2020; in 2023, personal income is expected to return to the 2019 level of $2.6 trillion—$470 billion or 15 percent below the level expected in the Governor’s Budget.

Job losses and business closures are sharply reducing state revenues. Compared to the January forecast, General Fund revenues are projected to decline over $41 billion. This revenue drop, combined with increased costs in health and human services programs and the added costs to address COVID-19, leads to a projected budget deficit of approximately $54 billion before the changes proposed in the May Revision. Without the actions below, the out-year structural deficit would be approximately $45 billion annually.

Balancing the Budget Gap: The state is constitutionally required to enact a balanced budget. Consistent with this obligation, the May Revision proposes to:

Protecting the Public Health, Public Safety, and Public Education: The May Revision protects public health and public safety. It provides needed funds to contain the spread of COVID-19 and its effects. To that end, the May Revision proposes to:

Invest in wildfire prevention and mitigation as well as other emergency response capabilities.

Prioritize $4.4 billion in federal funding to address learning loss and equity issues exacerbated by the COVID-19 school closures this spring. These funds will be used by districts to run summer programs and other programs that address equity gaps that were widened during the school closures. These funds will also be used to make necessary modifications so that schools can reopen in the fall and help support parents’ ability to work.

Reallocate $2.3 billion in funds previously dedicated to paying down schools’ long-term unfunded liability to California State Teachers’ Retirement System (CalSTRS) and CalPERS to instead pay the school employers’ retirement contributions, to address the decline in the constitutionally required funding for schools and community colleges resulting from the COVID-19 Recession.

Create a new obligation of 1.5 percent of state appropriation limit revenues starting in 2021-22 to avoid a permanent decline in school funding that grows to $4.6 billion in additional funding for schools and community colleges in 2023-24.

Preserve the number of state-funded childcare slots and expand access to childcare for first responders.

Preserve community college free-tuition waivers and maintain Cal Grants for college students, including the grants for students with dependent children established last year. Since many workers return to higher education and job training after losing a job, continuing these programs and initiatives will prioritize affordability and access to higher education and job training opportunities.

K-12 Education

California provides instruction and support services to roughly six million students in grades kindergarten through twelve in more than 10,000 schools throughout the state. A system of 58 county offices of education, 1,000 local school districts, and more than 1,200 charter schools provides instruction in English, mathematics, history, science, and other core competencies. The May Revision includes total funding of $99.7 billion ($47.7 billion General Fund and $52 billion other funds) for all K-12 education programs.

Proposition 98: Proposition 98 is a voter-approved constitutional amendment that guarantees minimum funding levels for K-12 schools and community colleges. The Guarantee, which went into effect in the 1988-89 fiscal year, determines funding levels according to multiple factors including the level of funding in 1986-87, General Fund revenues, per capita personal income, and school attendance growth or decline. The Local Control Funding Formula is the primary mechanism for distributing these funds to support all students attending K-12 public schools in California. The COVID-19 Recession is having a massive impact on the economy and the state’s General Fund revenues. This is having an equally significant negative impact on the state’s K-14 Proposition 98 Guarantee. The May Revision estimates that the Guarantee will decline by $19 billion from the Governor’s Budget. This decline in funding is approximately 23 percent of the 2019 Budget Act Proposition 98 funding level. Even more troubling, is that declining average daily attendance and declining per capita income numbers cause the Guarantee to stay at a depressed level for the entire forecast period. To mitigate the deleterious impacts of the state’s revenue decline impacts on funding for K-14 schools immediately, the May Revision proposes the following:

The May Revision also proposes a significant new obligation for schools to avoid a permanently depressed level of funding for K-14 schools. In 2019-20 and 2020-21, the Proposition 98 funding level drops below the target funding level (Test 2), by a total of approximately $13 billion. To accelerate the recovery from this funding reduction, the May Revision proposes to provide supplemental appropriations above the constitutionally required Proposition 98 funding level, beginning in 2021-22, and in each of the next several fiscal years, in an amount equal to 1.5 percent of General Fund revenues per year, up to a cumulative total of $13 billion. This will accelerate growth in the Guarantee, which the Administration proposes to increase as a share of the General Fund. Currently, Proposition 98 guarantees that K-14 schools receive approximately 38 percent of the General Fund in Test 1 years. The May Revision proposes to increase this share of funding to 40 percent by 2023-24. The May Revision also reflects the withdrawal of all of the funding in the Public School System Stabilization Account, which was projected at the Governor’s Budget to be approximately $524 in 2019-20. The May Revision projects that no additional deposits will be required and the entire amount is available to offset the decline in the Guarantee.

Impacts of COVID-19 on Education: Since the beginning of the COVID-19 pandemic in early March, local educational agencies across the state have closed for classroom instruction, transitioning students and teachers to distance learning models. The loss of classroom-based instruction has had unprecedented impacts on students and families, with significant learning loss for low-income students and students with disabilities. To provide local educational agencies with flexibility to meet the challenges of serving students in this new environment, the Administration and the Legislature have authorized resources and waivers over the last two months designed to support distance learning. These actions include:

The Administration will engage with stakeholders and the Legislature through the spring and summer to determine an appropriate process for the development and adoption of local control and accountability plans and budget overviews for parents that are due December 15, 2020, pursuant to Executive Order N-56-20. The Administration’s priorities for education will include a strong focus on equity for vulnerable students, stability for core instructional programs, learning loss mitigation, and support for helping schools through the current economic downturn. The following May Revision proposals reflect these priorities and provide a roadmap for academic and fiscal recovery.

Learning Loss Mitigation: The May Revision proposes a one-time investment of $4.4 billion ($4 billion federal Coronavirus Relief Fund and $355 million federal Governor’s Emergency Education Relief Fund) to local educational agencies to address learning loss related to COVID-19 school closures, especially for students most heavily impacted by those closures. Specifically, funds may be used for:

Funds will be allocated to local educational agencies offering classroom-based instruction based on a formula that takes into account the share of students most heavily impacted by school closures, including students with disabilities, low-income students, English learners, youth in foster care, and homeless youth. Additionally, California received $1.6 billion in federal Elementary and Secondary School Emergency Relief funds. Of this amount, 90 percent ($1.5 billion) will be allocated to local educational agencies in proportion to the amount of Title I-A funding they receive for COVID-19 related costs. The remaining 10 percent ($164.7 million) is available for COVID-19 related state-level activities. The May Revision proposes to allocate these funds in the following manner:

Aligning K-12 Appropriations With Available Resources: The reduction in the Proposition 98 minimum guarantee, when combined with statutory technical adjustments, creates a shortfall of $15.1 billion ($14.8 billion General Fund) for K-12 schools over 2018-19, 2019-20, and 2020-21. Addressing this gap requires a balance of solutions, including the withdrawal of new proposals, deferrals, and absent additional federal funds, base reductions. The state is not in a fiscal position to increase rates or expand programs given the drastic budget impacts of the COVID-19 Recession. The following proposals are withdrawn from the Governor’s Budget:

Additionally, the May Revision suspends the statutory cost-of-living adjustment of 2.31 percent in 2020-21 for all eligible programs.

Local Control Funding Formula: Absent additional federal funds, the COVID-19 Recession requires a 10 percent ($6.5 billion) reduction to LCFF. This reduction includes the elimination of a 2.31 percent cost-of-living adjustment. This reduction will be triggered off if the federal government provides sufficient funding to backfill this cut.The May Revision also proposes apportionment deferrals to align Proposition 98 expenditures and resources with the need of local educational agencies to maintain a level of fiscal stability. In 2019-20, the Budget proposes to defer $1.9 billion of LCFF apportionments to 2020-21. An additional $3.4 billion is added to the 2019-20 deferral in 2020-21, for a total of $5.3 billion in LCFF deferrals scheduled for payment in 2021-22.

Special Education: The May Revision maintains the Administration’s commitment to increasing special education resources and improving special education financing, programs, and student outcomes. Specifically, the May Revision sustains the Governor’s Budget proposal to increase special education base rates, updated at May Revision to $645 per pupil (reflecting the suspension of the 2.31 percent cost-of-living adjustment), apportioned on a three-year rolling average of local educational agency ADA (allocated to Special Education Local Plan Areas). This new base rate represents a 15 percent increase in the Proposition 98 General Fund contribution to the base formula funding over the amount provided in the 2019 Budget Act.

As in the Governor’s Budget, the May Revision proposes that all other existing AB 602 special education categorical funding sources remain as in current law until a finalized formula is adopted.

Further, the May Revision includes $15 million federal Individuals with Disabilities Education Act (IDEA) funds for the Golden State Teacher Scholarship Program to increase the special education teacher pipeline, and $7 million federal IDEA funds to assist local educational agencies with developing regional alternative dispute resolution services and statewide mediation services for cases arising from the COVID-19 pandemic special education distance learning service delivery models.

Finally, the May Revision maintains funding for a study of the current special education governance and accountability structure, and two workgroups to study improved accountability for special education service delivery and student outcomes. The $1.1 million Proposition 98 General Fund used to fund these proposals is replaced with federal IDEA funds. An additional $600,000 federal IDEA funds is proposed for: (1) a workgroup to study the costs of out-of-home care, and how these services can be funded in a way that better aligns with the existing provision of these services, and (2) the development of an individualized education program addendum for distance learning.

K-12 Categorical Programs: Absent additional federal funds, to limit base reductions to the LCFF, the May Revision includes the following Proposition 98 reductions to K-12 categorical programs, totaling $352.9 million:

Other K-12 Budget Issues:

Significant Adjustments:

Flexibilities for Local Educational Agencies: The COVID-19 Recession is going to create tremendous challenges at the local level. The Administration is committed to working with local educational agencies, labor organizations and other stakeholders during this difficult time to offer flexibilities that will minimize impacts to students and allow local educational agencies to continue to make progress on closing the achievement gap for students with disabilities, low-income students, English learners, youth in foster care, and homeless youth. The May Revision includes the following fiscal and programmatic flexibilities:

Early Childhood Education & Child Care

To address the impacts of the COVID-19 pandemic on child care providers, the state took immediate action to protect providers and families and expand access to care for vulnerable, at-risk children and children of essential workers. Specifically, the Administration and the Legislature authorized SB 117 and Executive Orders N-45-20 and N-47-20 that accomplish the following:

The Administration also provided $100 million General Fund, pursuant to SB 89, to clean and sanitize child care facilities, provide protective supplies for child care workers, and increase access to subsidized child care for at-risk children and children of essential workers.

To assist with the child care needs of families outside of the subsidized system, the Department of Social Services worked with employers of essential workers to set up pop-up child care programs. To date, there are close to 500 temporary pop-up child care programs throughout California. The state also released a web portal to help parents locate open child care providers near their home or work.

CARES Act Funding for Child Care: California received $350.3 million through the federal CARES Act for COVID-19 related child care activities. To maximize the benefits of these funds to providers and families, the May Revision proposes the following expenditure plan:

Department of Early Childhood Development: The Governor’s Budget proposed to establish the Department of Early Childhood Development under the California Health and Human Services Agency effective July 1, 2021, to promote a high-quality, affordable, and unified early childhood system. The Governor’s Budget included $6.8 million General Fund in 2020-21 and $10.4 million ongoing General Fund to transition the existing early learning and child care programs from the Department of Education and the Department of Social Services to the new department.

To achieve General Fund savings while maintaining the goal of consolidating the state’s early learning and child care programs under one agency, the May Revision proposes to modify this proposal by transferring the child care programs to the Department of Social Services. This will align all child care programs within a single department in state government and will ease the administration of collective bargaining commencing later this year. The May Revision maintains $2 million General Fund in 2020-21 to support this transition.

State Preschool: The May Revision protects access to the State Preschool program for income-eligible children. While the current fiscal situation requires a pause in the state’s planned early education investments, the Administration’s priority to work toward universal preschool access for all children in unchanged.

Absent additional federal funds, the COVID-19 Recession makes the following reductions necessary to balance the state budget. These reductions will be triggered off if the federal government provides sufficient funding to restore them:

Child Care: When considering the availability of state General Fund and federal resources at May Revision, the Administration prioritizes access to subsidized child care for income-eligible families. State subsidized child care is critical to keeping low-income women in the workforce, which is more important than ever given the COVID-19 Recession. California received an increase of $53.3 million federal Child Care and Development Block Grant funds for federal fiscal year 2020, which the May Revision proposes to increase access for approximately 5,600 children in the Alternative Payment Program. Absent additional federal funds, the COVID-19 Recession makes the following reductions necessary to balance the state budget. These reductions will be triggered off if the federal government provides sufficient funding to restore them:

Higher Education
Higher Education includes the California Community Colleges (CCC), the California State University (CSU), the University of California (UC), the Student Aid Commission, and several other entities. The May Revision includes $18.6 billion General Fund and local property tax for all higher education entities in 2020-21.

Additionally, the May Revision appropriates $13.4 million federal funds through the Health and Human Services Agency to reflect the state’s 2020 Preschool Development Grant award.

Financial Aid Committment: The May Revision reflects the Administration’s commitment to supporting equity and access at the UC, CSU, and CCCs. The May Revision maintains the state’s investment in two years of free community college while also providing students with continued access to major financial aid programs, including the California College Promise fee waiver, Cal Grant awards, the students with dependent children Cal Grant supplement, and the Middle Class Scholarship. Protecting these programs ensures that hundreds of thousands of low and middle income Californians can still attend a CCC, CSU, or UC campus without the burden of paying tuition.

Expanding Access Through Technology & Innovative Practices: The May Revision reflects the state’s need to accommodate more students while resources are constrained. Although the economic response from the COVID-19 pandemic will constrain the state’s financial resources, the number of students seeking to enroll at UC, CSU, and CCC campuses is expected to grow in the coming years. CCCs, in particular, will likely see notable increases because their enrollment tends to rise when economic challenges emerge.

The Administration expects that the UC, CSU, and CCCs will continue to work toward maximizing access and maximizing equity, even in an era of constrained state resources. Each segment is expected to harness its innovative strength in order to:

Use of Restricted Fund Sources: Numerous statutes authorize the CSU and the CCCs to charge fees to support specific operating and/or enterprise activities, such as campus health services, student parking, student housing, and meal services. The UC’s broad autonomy also enables the UC to charge similar fees. To assist the UC, CSU, and CCCs, the Administration will pursue statutory changes to enable the UC, CSU and CCCs to use restricted fund balances, except lottery balances, to address COVID-19 related impacts and the loss of revenue from university enterprise functions.

Coupled with this, restricted fund balance flexibility would be a requirement for the CSU and the CCCs, and a request of the UC, that any restricted fund balances first be used to mitigate the impacts to programs and services that predominantly support underrepresented student access to, and success at, a college or university, and to expand the number of students annually served in online courses and programs.

Additionally, the Administration will pursue statutory changes authorizing the UC to temporarily use the savings from the refinancing of specified debt to address COVID-19 related impacts and the loss of revenue from university enterprise functions.

Federal CARES Act Funds: The CARES Act included a national total of $30.8 billion to support an Education Stabilization Fund. Of this funding, roughly $14 billion is allocated to a Higher Education Emergency Relief Fund, roughly $13.2 billion is allocated to an Elementary and Secondary School Emergency Relief Fund and $3 billion is allocated to a Governor’s Emergency Education Relief Fund. The UC, CSU, and CCC’s are expected to receive at least $260 million, $525 million, and $579 million, respectively, from the Higher Education Emergency Relief Fund. The federal methodology for allocating these funds to schools and institutions varies, and institutions of higher education are required to expend half of the higher education funds to provide emergency grants to students. The Administration expects CCCs, CSU, and UC to set-aside a portion of the funding for emergency grants to students to provide emergency grant assistance to foster youth.

University of California: Significant Adjustments:

The state is not in a fiscal position to expand programs given the drastic budget impacts of the COVID-19 Recession. The following proposals are withdrawn from the Governor’s Budget:

Absent additional federal funds, the COVID-19 Recession makes the following reductions necessary to balance the state budget. These reductions will be triggered off if the federal government provides sufficient funding to restore them:

California State University: The state is not in a fiscal position to expand programs given the drastic budget impacts of the COVID-19 Recession. The following proposals are withdrawn from the Governor’s Budget:

Absent additional federal funds, the COVID-19 Recession makes the following reductions necessary to balance the state budget. These reductions will be triggered off if the federal government provides sufficient funding to restore them:

California Community Colleges: To assist CCCs in their recovery from the impacts of the COVID-19 pandemic and provide CCCs with additional near term certainty, the May Revision proposes statutory changes to:

Significant Adjustments:

Other adjustments:

The state is not in a fiscal position to expand programs given the drastic budget impacts of the COVID-19 Recession. The following proposals are withdrawn from the Governor’s Budget:

Absent additional federal funds, the COVID-19 Recession makes the following reductions necessary to balance the state budget. These reductions will be triggered off if the federal government provides sufficient funding to restore them:

The May Revision also proposes to defer $330 million from 2019-20 to 2020-21 and $662.1 million from 2020-21 to 2021-22. These deferrals will help to maintain programs given the magnitude of the reduction proposed to the schools. Also, the community colleges will benefit from supplemental payments to increase the Proposition 98 guarantee starting in 2021-22.

California Student Aid Commission: The California Student Aid Commission administers financial aid programs, including the Cal Grant program and the Middle Class Scholarship Program. The state’s Cal Grant program is estimated to provide over 394,000 financial aid awards to students who meet specified eligibility criteria in 2019-20.

The Administration remains committed to fostering equity and access within the state’s higher education institutions. In an effort to support college affordability, the May Revision maintains all financial aid programs, adjusted for caseload.

Significant Adjustments

Cal Grant Program Costs—An increase of $599.7 million General Fund in 2020-21 to account for the following:

Tuition Award for Students at Private Nonprofit Institutions—A decrease of $8.9 million General Fund to reflect the reduction of the maximum Cal Grant award for private nonprofit institutions from $9,084 to $8,056. Current law specified the application of this adjustment because required students with associates degree for transfer admittance levels were not met.

The state is not in a fiscal position to expand programs given the drastic budget impacts of the COVID-19 Recession. The following proposals are withdrawn or modified from the Governor’s Budget:

Scholarship Investment Board: The ScholarShare Investment Board administers the Golden State ScholarShare 529 College Savings Trust Program, the Governor’s Scholarship Programs, and the California Memorial Scholarship Program.

The state is not in a fiscal position to expand programs given the drastic budget impacts of the COVID-19 Recession. The following proposal is withdrawn from the Governor’s Budget:

Fresno Drive: The May Revision maintains $2 million one-time General Fund to support the Fresno Developing the Region’s Inclusive and Vibrant Economy (DRIVE) initiative’s Fresno-Merced Food Innovation Corridor concept. While the Administration recognizes the significance of this project to economic development, the state is not in the fiscal condition to allocate funding levels proposed in the Governor’s Budget and the May Revision proposes reducing the remaining funding allocated for this project as follows:

Financial Stability

During this time of unprecedented unemployment, the Administration will work in partnership with the Legislature to help get people back to work and support the creation of good-paying jobs. It will develop proposals and actions to support a robust and equitable recovery both in the near term and the long term. To this end, the Administration is considering options to support job creation including: assistance to help spur the recovery of small businesses and the jobs they create, support for increased housing affordability and availability and investments in human and physical infrastructure. Any investments and actions will focus on equity, shared prosperity and long-term growth.

Small businesses have suffered massive losses as a result of the COVID-19 Recession. They will face increased costs to modify their operations to reduce the risk of COVID-19 transmission and spread. Given the critical role of small business in California’s economy, the May Revision proposes to:

The Governor has convened a Task Force on Business and Jobs Recovery—a diverse group of leaders from business, labor, and the non-profit sector—to develop actionable recommendations and advise the state on how economic recovery can be expedited and address the effects of wage disparity that were made even worse by COVID-19. The Administration is committed to additional actions, informed by the Task Force and other stakeholders, to support a safe, swift and equitable economic recovery. The Administration is also committed to working with colleges and universities to build on their experience with distance learning and develop a statewide educational program that will allow more students to access training and education through distance learning. This will allow non-traditional students who are working and parenting the opportunity to complete coursework at their own pace and after hours.

The COVID-19 Recession is making the effects of wage disparity even worse and is having a disproportionate impact on families living paycheck to paycheck. The May Revision prioritizes direct payments to families, children, seniors and persons with disabilities by doing the following:

Labor & Workforce Development: The Labor and Workforce Development Agency addresses issues relating to California workers and their employers. The Agency is responsible for labor law enforcement, workforce development, and benefit payment and adjudication. The Agency works to combat the underground economy and to help businesses and workers in California.

Since 2019, the Budget has included targeted investments to strengthen the states’ workforce training programs and health care and safety net services. Increases of $35 million in pre-apprenticeship and apprentice training, $36 million in prison to employment training, and over $60 million in Mental Health workforce investments continue to provide the needed resources for the state to meet its ever-changing workforce needs and supplying a pathway for Californians to improve their upward economic mobility.

In light of the unprecedented increase in unemployment due to the COVID-19 Recession, the state must continue to show leadership in addressing workforce health and safety concerns of all Californians as well as support and promote high-quality jobs so workers, families, and communities can secure and maintain economic security. The May Revision continues to move forward with many of the Governor’s Budget proposals to strengthen the state’s workforce and benefit systems as California looks to recover from this recession.

Unemployment Insurace: As a result of the COVID-19 pandemic, the Employment Development Department (EDD) has been inundated with an unprecedented surge in unemployment insurance (UI) claims. As of May 9, EDD has processed and approved approximately 4.4 million UI claims that will provide over $12.2 billion in UI benefits. In an effort to address the nationwide impacts of the COVID-19 pandemic, the federal government enacted the Families First Act and the CARES Act, both providing temporary program enhancements and expanded unemployment insurance benefits to millions of workers who are no longer employed due to the COVID-19 Recession. Most notably, the CARES Act included a federally funded temporary emergency benefit increase of $600 per week through July 31, 2020 and a federally funded Pandemic Unemployment Assistance (PUA) program to provide up to 39 weeks of UI benefits to individuals who do not qualify for traditional unemployment compensation, including business owners, the self-employed, independent contractors, individuals with limited work history, and other individuals not usually eligible for regular state UI benefits who are unemployed as a direct result of the COVID-19 pandemic. The PUA program runs through December 31, 2020.

These federal investments will help stabilize income for the affected workforce in the short term. However, enhanced and expanded benefits are temporary. Additionally, the CARES Act allows states to borrow from the federal government to pay state UI benefits with no interest, but only through the end of 2020. California, like other states, has already begun borrowing and similar to the Great Recession, the state will likely need to borrow in the tens of billions of dollars, resulting in significant future annual interest payments until the loans are repaid. For context, the state borrowed over $65 billion from 2009-2017 and paid total interest of $1.4 billion from 2011-2018.

To address the increased volume of UI claims, EDD has implemented several strategies to increase efficiencies and maintain program continuity. EDD has launched a new call center and expanded hours at existing call centers that will now operate seven days a week from 8:00 a.m. to 8:00 p.m. It has implemented a one-stop shop for those applying for unemployment insurance as well as the new federal PUA program and streamlined the eligibility requirements for claimants allowing for expedited approvals. Additionally, EDD has administratively redirected hundreds of staff internally and added hundreds more from across various state departments to review and process claims.

The May Revision maintains $46 million to continue implementation of the Benefit Systems Modernization Project. This project will modernize and consolidate the department’s Unemployment Insurance (UI), Disability Insurance (DI), and PFL benefit systems. The state of this legacy system and the need to replace it has come into sharp focus during the COVID-19 pandemic as millions of Californians have accessed the system to apply for UI benefits.

Realigning Workforce Training: The COVID-19 Recession is causing unemployment levels the state has never seen. As the economy recovers, it is critical that the state’s workforce training programs are aligned to the jobs that employers need. For these reasons, the Administration is prioritizing the reorganization of various entities under California’s Labor Agency that aligns fragmented programs and services to better support data, policy, and program analysis of the state’s workforce training programs. The proposed consolidation of the state’s workforce training programs under a new Department of Better Jobs and Higher Wages is needed more now than ever given the underlying changes in the state’s economy. The Department will be comprised of the California Workforce Development Board, the Employment Training Panel, Workforce Services Branch, and Labor Market Information Division, which are currently in the Employment Development Department, and the Division of Apprenticeship Standards, currently in the Department of Industrial Relations.

Paid Familiy Leave: The May Revision continues to include the expansion of job protections for any worker eligible for paid family leave (PFL) benefits and resources to support small businesses that extend these benefits to their employees. It also maintains a $10 million General Fund investment for the Social Entrepreneurs for Economic Development initiative, providing entrepreneurial training for individuals, including those who are undocumented.

Health & Human Services

Health Care Services: Medi-Cal, California’s Medicaid program, is administered by the Department of Health Care Services. Medi-Cal is a public health care program that provides comprehensive health care services at no or low cost for low-income individuals. The federal government mandates basic services be included in the program, including: physician services; family nurse practitioner services; hospital inpatient and outpatient services; laboratory and radiology services; family planning; and early and periodic screening, diagnosis, and treatment services for children. In addition to these mandatory services the state provides optional benefits, such as outpatient drugs and medical equipment. The Department also operates the California Children’s Services and the Primary and Rural Health programs, and oversees county-operated community mental health and substance use disorder programs.

The Medi-Cal budget is $99.5 billion ($22.7 billion General Fund) in 2019-20 and $112.1 billion ($23.2 billion General Fund) in 2020-21. The May Revision assumes that caseload will increase significantly due to economic conditions associated with the COVID-19 Recession. Specifically, the May Revision assumes that caseload will peak at 14.5 million in July 2020, or about 2.0 million above what caseload would have been absent the COVID-19 pandemic.

The May Revision maintains Medi-Cal program eligibility, including for the optional expansion and undocumented children and young adults, in order to help the state’s low income residents respond to the COVID-19 pandemic.

The state is not in a fiscal position to increase rates or expand programs given the drastic budget impacts of the COVID-19 Recession. The following proposals are withdrawn from the Governor’s Budget:

Absent additional federal funds, the COVID-19 Recession makes the following reductions necessary to balance the state budget. These reductions will be triggered off if the federal government provides sufficient funding to restore them:

To reduce costs, the May Revision also proposes efficiencies, as follows:

The May Revision also contains the following adjustments:

Social Services: The Department of Social Services (DSS) serves, aids, and protects needy and vulnerable children and adults in ways that strengthen and preserve families, encourage personal responsibility, and foster independence. The Department’s major programs include CalWORKs, CalFresh, In-Home Supportive Services (IHSS), Supplemental Security Income/State Supplementary Payment (SSI/SSP), Child Welfare Services, Community Care Licensing, and Disability Determination. The May Revision includes $32.1 billion ($13 billion General Fund) for DSS programs in 2020-21.

The Department administers a wide array of federal and state-funded services that provide cash assistance; food and nutrition; services to help protect children and assist families; care and assistance programs for adults; services for foster parents, youth and families; adoption services; hearings and appeals; and services for refugees, immigrants, trafficking victims, disaster victims, and housing and homelessness services. The May Revision maintains eligibility for these critical services as the state recovers from the COVID-19 pandemic. The May Revision also maintains critical social services as many families are in need as the state recovers from the COVID-19 Recession.

CalWORKs: The CalWORKs program, California’s version of the federal Temporary Assistance for Needy Families (TANF) program, provides temporary cash assistance to low-income families with children to meet basic needs. Eligibility requirements and benefit levels are established by the state. Counties have flexibility in program design, services, and funding to meet local needs.

Total TANF expenditures are $11.2 billion (state, local, and federal funds) in 2020-21. The amount budgeted includes $9.2 billion for CalWORKs program expenditures and $2 billion in other programs. Other programs include Child Care, Child Welfare Services, Foster Care, Department of Developmental Services programs, the Statewide Automated Welfare System, Work Incentive Nutritional Supplement, California Community Colleges Child Care and Education Services, Cal Grants, and the Department of Child Support Services. Average monthly CalWORKs caseload is estimated to be approximately 724,000 families in 2020-21, a 102 percent increase from the Governor’s Budget projection due to the COVID-19 pandemic.

The May Revision maintains CalWORKs program eligibility, in order to support the state’s low-income residents respond during the COVID-19 pandemic. In addition, the May Revision includes an increase of $82.3 million General Fund/TANF Block Grant for CalWORKs county administration to facilitate enrollment in the program and services to beneficiaries.

The May Revision assumes the Safety Net Reserve is used to support health and social services programs over the course of two years. This proposal would result in a savings of $450 million General Fund in 2020-21 and $450 million in 2021-22.

Absent additional federal funds, the COVID-19 Recession makes the following reductions necessary to balance the state budget. These reductions will be triggered off if the federal government provides sufficient funding to restore them:

In-Home Support Services: The IHSS program provides domestic and related services such as housework and transportation, and personal care services to eligible low-income aged, blind, and disabled persons. These services are provided to assist individuals to remain safely in their homes. The May Revision includes $14.7 billion ($4.3 billion General Fund) for the IHSS program in 2020-21. Average monthly caseload in this program is estimated to be 581,901 recipients in 2020-21, a 0.4-percent decrease from the Governor’s Budget.

To reduce costs, the May Revision also proposes efficiencies, as follows:

Absent additional federal funds, the COVID-19 Recession makes the following reductions necessary to balance the state budget. These reductions will be triggered off if the federal government provides sufficient funding to restore them:

Supplemental Security Income & State Supplementary Payment(SSI/SSP): The federal SSI program provides a monthly cash benefit to eligible aged, blind, and disabled persons who meet the program’s income and resource requirements. In California, the SSI payment is augmented with an SSP grant. These cash grants assist recipients with basic needs and living expenses. The federal Social Security Administration administers the SSI/SSP program, making eligibility determinations, computing grants and issuing combined monthly checks to recipients. The state-only Cash Assistance Program for Immigrants provides monthly cash benefits to aged, blind, and disabled legal noncitizens who are ineligible for SSI/SSP due solely to their immigration status.

The May Revision includes $2.7 billion General Fund in 2020-21 for the SSI/SSP program. This represents a 0.4-percent increase from the Governor’s Budget. The average monthly caseload in this program is estimated to be 1.2 million recipients in 2020-21, a 0.7-percent increase from the Governor’s Budget. The May Revision preserves funding for the expansion of CalFresh eligibility to SSI recipients.

Absent additional federal funds, the COVID-19 Recession makes the following reductions necessary to balance the state budget. This reduction will be triggered off if the federal government provides sufficient funding to restore them:

Children’s Program: Child Welfare Services include family support and maltreatment prevention services, child protective services, foster care services, and permanency programs. California’s child welfare system provides a continuum of services for children who are either at risk of, or have suffered, abuse, neglect, or exploitation. Program success is measured in terms of improving the safety, permanence, and well-being of children and families. The May Revision includes $506.1 million General Fund on 2020-21 for these programs, an decrease of $90.5 million General Fund since the Governor’s Budget. When federal, state, 1991 Realignment, and 2011 Realignment funds are included, total funding for children’s programs is over $6.7 billion in 2020-21.

The state is not in a fiscal position to increase rates or expand programs given the drastic budget impacts of the COVID-19 Recession. The following proposals are withdrawn from the Governor’s Budget:

Absent additional federal funds, the COVID-19 Recession makes the following reductions necessary to balance the state budget. This reduction will be triggered off if the federal government provides sufficient funding to restore them:

Department of Developmental Services: The Department of Developmental Services (DDS) provides individuals with developmental disabilities a variety of services that allow them to live and work independently or in supported environments. California provides services to individuals with developmental disabilities as an entitlement. The May Revision includes $9.2 billion ($5.5 billion General Fund) and estimates that approximately 366,353 individuals will receive developmental services in 2020-21.

Prior to 1969, services for individuals with developmental disabilities were primarily limited to those provided in state‑operated institutions. The Lanterman Developmental Disabilities Services Act established a statewide network of regional centers and related services to allow consumers to live independent and productive lives in the community. The May Revision maintains the entitlement to services for individuals with developmental disabilities despite the economic and budgetary challenges resulting from the COVID-19 pandemic.

The state is not in a fiscal position to increase rates or expand programs given the drastic budget impacts of the COVID-19 Recession. The following proposals are withdrawn from the Governor’s Budget:

Absent additional federal funds, the COVID-19 Recession makes the following reductions necessary to balance the state budget. These reductions will be triggered off if the federal government provides sufficient funding to restore them:

To reduce costs, the May Revision also proposes efficiencies, as follows:

Department of Public Health: The Department of Public Health is charged with protecting and promoting the health and well-being of the people of California. The Budget includes $3.2 billion ($209.1 million General Fund) in 2020-21 for the Department.

The Department has been at the forefront of the state’s response to the COVID-19 pandemic. The Department has been extensively planning, preparing, and responding to the COVID-19 pandemic since mid-January. The Department’s efforts include issuing a stay-at-home order to save lives, increasing testing capacity, increasing hospital surge capacity, and issuing state guidance for the many sectors of our communities impacted by COVID-19.

The May Revision maintains and increases the Department’s disease surveillance and identification workforce. Specifically, the May Revision proposes $5.9 million General Fund for 2020-21 and $4.8 million General Fund ongoing, to support laboratory staff to increase the laboratories’ testing capacity, and to purchase equipment and laboratory supplies that are specifically utilized for COVID-19 testing. Additionally, resources will support emergency coordination, communication, and response, and provide ongoing support for public health laboratory capacity and disease surveillance.

Despite the budget challenges the state will face in the immediate future as a direct result of the COVID-19 pandemic, the May Revision continues to prioritize funding augmentations for infectious disease prevention and control that were included in the 2019 Budget Act. Specifically, the May Revision maintains $5 million General Fund each for STD, human immunodeficiency virus (HIV), and hepatitis C virus prevention and control.

The state is not in a fiscal position to increase rates or expand programs given the drastic budget impacts of the COVID-19 Recession. The following proposal is withdrawn:

State Hospitals: The Department of State Hospitals administers the state mental health hospital system, the Forensic Conditional Release Program, the Sex Offender Commitment Program, and the evaluation and treatment of judicially and civilly committed patients. The May Revision includes $2.1 billion ($1.9 billion General Fund) in 2020-21 for the support of the Department’s programs. The patient population is expected to reach 6,791 by the end of 2020-21, including patients receiving competency treatment in jail-based settings.

The Administration continues to promote the safety of State Hospital patients and staff during the COVID-19 pandemic. The May Revision includes investments in the Conditional Release Program community program directors, pharmacy modernization, statewide roof repairs and replacement, statewide ligature risk mitigation special repair funding (suicide prevention retrofitting), protective services staffing, and the post-incident debriefing and support (violent incident response peer-support network).

The state is not in a fiscal position to implement new programs given the drastic budget impacts of the COVID-19 Recession. The following proposals are reduced or withdrawn from the Governor’s Budget:

Department of Aging: The California Department of Aging (CDA) contracts with the network of 33 county and non-profit Area Agencies on Aging, that directly manage an array of federal and state‑funded services that provide nutritious meals at home and in the community; help older adults find employment; support older and disabled individuals to live as independently as possible; promote healthy aging and community involvement; and assist family members in their care giving role.

The May Revision includes $218.4 million ($30.8 million General Fund) for CDA, a decrease of $36.5 million General Fund from the 2020-21Governor’s Budget.

The May Revision maintains critical services delivered through the Area Agencies on Aging. Maintaining many of these core services will be particularly critical in serving older adults, people with disabilities, and families in the state as this population navigates and recovers from the COVID-19 pandemic.

Absent additional federal funds, the COVID-19 Recession makes the following reductions necessary to balance the state budget. This reduction will be triggered off if the federal government provides sufficient funding to restore them:

Department of Child Support Services: The Department of Child Support Services promotes parental responsibility to enhance the well-being of children by providing child support services to establish parentage and collect child support. The May Revision includes $316.6 million General Fund on 2020-21 for child support programs, an increase/decrease of $47.7 million General Fund since the Governor’s Budget.

The state is not in a fiscal position to increase rates or expand programs given the drastic budget impacts of the COVID-19 Recession. The following proposal is withdrawn from the Governor’s Budget:

Absent additional federal funds, the COVID-19 Recession makes the following reductions necessary to balance the state budget. These reductions will be triggered off if the federal government provides sufficient funding to restore them:

To reduce costs, the May Revision also proposes efficiencies, as follows:

Covered California: The May Revision maintains expanded subsidies in the Covered California Marketplace, including the extension of subsidies to individuals who are between 400 and 600 percent of poverty, up to approximately $75,000 for individuals and $150,000 for a family of four. The May Revision also includes the following significant policy proposals and workload adjustments.

The state is not in a fiscal position to increase rates or expand programs given the drastic budget impacts of the COVID-19 Recession. The following proposal is withdrawn from the Governor’s Budget:

Absent additional federal funds, the COVID-19 Recession makes the following reductions necessary to balance the state budget. This reduction will be triggered off if the federal government provides sufficient funding to restore them:

Housing & Homelessness

California has experienced significant increases in the number of unsheltered individuals in recent years, a problem inextricably linked to the state’s underproduction of affordable housing. The Administration’s response has simultaneously focused on preservation and production of new affordable housing while also investing in comprehensive solutions to address homelessness. The Governor’s State of the State address in February 2020 laid out a clear, comprehensive agenda on homelessness: greater investment in solutions, more accountability at all levels of government, and streamlining to facilitate the implementation of innovative approaches.

Over the past two years, the Budget has included over $1.15 billion General Fund in direct homelessness funding to local governments and Continuums of Care, including $500 million for the Homeless Emergency Aid Program (HEAP) and $650 million for the Homeless Housing, Assistance and Prevention Program (HHAP). The Governor’s Budget proposed another substantial infusion of funding for homelessness, including $750 million General Fund to establish the California Access to Housing Fund.

The Governor’s Budget also included $695 million ($348 million General Fund) for California Advancing and Innovating Medi-Cal, which would have expanded the whole person care model statewide among other changes to address social determinants of health in the state’s Medi-Cal system.

The COVID-19 Recession has substantially altered the state’s fiscal outlook. Nevertheless, the Administration’s broad goals to reduce homelessness have not changed; moving individuals and families experiencing homelessness into stable housing and providing support to help stabilize and prevent homelessness. But, given the state’s current fiscal constraints, the strategy to achieve those goals has needed to evolve.

Project Roomkey: At the outset of the COVID-19 pandemic, the Administration acted quickly to prioritize protecting the spread of the virus in the homeless population. Project Roomkey is a multi-agency state effort to provide safe isolation motel rooms for vulnerable individuals experiencing homelessness. This occupancy program is currently supported by the Federal Emergency Management Agency (FEMA) through May 31, 2020. The state will request 30-day extensions as necessary.

Early in the COVID-19 pandemic, $100 million was allocated to local governments and Continuums of Care to help reduce the spread of COVID-19 among Californians experiencing homelessness using the existing HHAP allocation formulas. This funding was provided to implement social distancing and increased sanitation at shelters and to support Project Roomkey. In addition, $50 million was provided to the Department of Social Services to secure hotel and motel rooms and acquire trailers to safely house homeless populations most at risk due to COVID-19.

As of mid-May, Project Roomkey and its county partners have secured over 15,000 hotel and motel units, of which more than 7,200 are occupied, and purchased and disbursed 1,305 trailers to local governments for the same purpose. Local governments are paying only for the occupied motel rooms, and these expenditures will leverage federal reimbursements through FEMA.

These units are providing short-term emergency shelter for homeless individuals to mitigate the spread of COVID-19 among this vulnerable population and maintain hospital and emergency room capacity in the event a surge of critically ill COVID-19 patients.

Leveraging Federal Funds for a Permanent Housing Solutions: The state is not in a fiscal position to expand programs given the drastic budget impacts of the COVID-19 Recession. Instead of General Fund, the May Revision proposes $750 million in federal funding and directs the use of these funds to purchase hotels and motels secured through Project Roomkey, to be owned and operated by local governments or non-profit providers. The state will also use these funds to provide significant technical assistance to local jurisdictions or other parties seeking to purchase and operate former Project Roomkey hotels and motels to address homelessness in their localities. The state has worked with local governments to include purchase options where feasible. These purchases are necessary to protect public health and stop the spread of COVID-19 in the homeless population. These efforts also help to maintain hospital and emergency room capacity in the event of a surge of critically ill COVID-19 patients.

In addition to Project Roomkey, the state will continue to work with local governments and service providers to maximize federal funding to provide safe interim housing options, rapid rehousing opportunities and rental subsidies for individuals and families experiencing homelessness.

The May Revision includes:

Other Notable Adjustments

Broadband Expansion: The COVID-19 pandemic requires significant numbers of Californians to telework, learn via distance education, and receive healthcare through telehealth. The drive toward these technology platforms highlights the state’s inequities in access to computers, technology tools, and connectivity. In response, the California Public Utilities Commission (Commission) took action in April to help bridge this digital divide by making $25 million available from the California Teleconnect Fund for hotspots and Internet service for student households, prioritizing rural, small, and medium-sized school districts. The Commission also made $5 million available from the California Advanced Services Fund Adoption Account to help cover the cost of computing and hotspot devices. The Commission coordinated with the California Department of Education andthis funding will be prioritized toward low-income communities and communities with high percentages of residents with limited English proficiency.

To identify which areas of the state lack sufficient access to broadband, the May Revision includes $2.8 million and 3 positions in additional resources from the Public Utilities Commission Utilities Reimbursement Account for the Commission to enhance its broadband mapping activities. This additional information will better inform the state’s broadband infrastructure grant program, improve safety by providing broadband speed data at emergency response locations such as fairgrounds, and enhance the state’s ability to compete for federal broadband funding.

The May Revision proposes statute intended to increase the ability of the state to compete for federal funding to improve access to broadband Internet in California.

California Consumer Financial Protection: The May Revision sustains the Governor’s Budget proposal for $10.2 million Financial Protection Fund and 44 positions in 2020-21, growing to $19.3 million and 90 positions ongoing in 2022-23, to revamp the Department of Business Oversight (DBO) as the Department of Financial Protection and Innovation, and empower the Department to provide consumers greater protection from predatory practices while facilitating innovation and ensuring a level playing field for all companies operating responsibly in California.

This proposal, known as the California Consumer Financial Protection Law, seeks to cement California’s consumer protection leadership amidst a consumer-protection retreat by federal agencies, including the Consumer Financial Protection Bureau. The fragmented oversight of financial services has left consumers vulnerable to abuse. These problems are further exacerbated in times of crisis, including the ongoing COVID-19 pandemic.

The goals of this proposal are to:

The Department expects that initial start-up costs for the first three years of the new program will be covered by using the available settlement proceeds in the State Corporations and Financial Institutions Funds (which will become the new Financial Protection Fund), cost recovery on examinations, and potential new settlements; future costs are expected to be covered by fees on the newly covered industries.

The May Revision includes budget bill language that makes the funding and positions contingent upon the Legislature passing the necessary statutory language to implement the new program. This approach is intended to continue the discussion on the proposal’s statutory language into the summer to give the Legislature more time to evaluate the proposal.

Economic Outlook For The Future

The longest economic expansion in U.S. history ended in March 2020 with the onset of the COVID-19 pandemic. Just one month earlier, both the U.S. and California were at historic low unemployment rates, at 3.5 percent and 3.9 percent, respectively. California in particular had an extraordinarily strong economy with a nominal Gross Domestic Product of $3.1 trillion in 2019, and employment growth rates that had consistently outpaced the rest of the nation.

The first U.S. case of COVID-19 was confirmed on January 20, 2020 and on January 26, 2020 in California. California immediately began implementing its pandemic plan, which had been developed over the last 10 years to ensure that public health would be protected in the case of a pandemic. This planning included implementing policies necessary to protect the public health, such as stay-at-home orders—first for the most vulnerable and then the general population, social distancing guidelines for when Californians had to leave their home and the closure of non-essential businesses. These policies resulted in a COVID-19 incidence that was lower in California than the rest of the United States. As of May 1, over 1 million cases and 67,000 deaths were reported in the nation. In California, 55,000 cases had been reported by May 1 (5 percent of the nation’s total cases), and over 2,000 deaths (or 3 percent of all U.S. deaths). The public health measures put in place to slow the spread of the pandemic also had an immediate impact on the state’s economy. And, the continuing pandemic—with no treatment or vaccine currently available—will have an ongoing impact on California’s economic outlook.

Over 30 million Americans filed an initial unemployment claim from mid-March through early May. This includes 4.0 million claims from California—one out of every five California workers has filed an unemployment claim since mid-March. California’s economic outlook has been affected dramatically by the pandemic.

California unemployment rate is expected to peak at 24.5 percent in the second quarter of 2020, before slowly decreasing to 10.6 percent by the fourth quarter of 2023. California personal income and construction permits are expected to decrease by around 9 percent and 21 percent, respectively in 2020, while inflation is projected to decelerate from 3 percent in 2019 to 1 percent in 2020.

Economic recovery from the COVID-19 Recession is projected to be only slightly faster than during the Great Recession. Recognizing uncertainty around current unprecedented events and subsequent policy actions, an extended disruption scenario was modeled to illustrate how the pace and type of recovery may vary given different policy environments, business choices, and consumer behaviors.

California: The state’s unemployment rate rose to 5.3 percent in March following six consecutive months at a record low 3.9 percent. The number of initial unemployment claims filed since then suggests that unemployment will rise rapidly in the short-term. Initial unemployment claims data show that 4.0 million Californians, or one in five workers, applied for unemployment insurance in mid-March through early May. Independent contractors and self-employed workers have also been able to claim benefits under the federally-funded Pandemic Unemployment Assistance program launched on April 28, 2020.

The May Revision forecast projects the negative economic impacts due to the pandemic to be largest in the second quarter of 2020 and to persist throughout the forecast. A slow recovery is projected as restrictions gradually begin to ease.

The unemployment rate is projected to reach 24.5 percent in the second quarter of 2020, meaning that one in four California workers will be out of work, or around 4.8 million people. This is more than twice the 2.2 million Californians unemployed during the height of the Great Recession in the fourth quarter of 2010— with a peak unemployment rate of 12.3 percent. Following this peak, the unemployment rate is expected to gradually decline, reaching 10.6 percent in the fourth quarter of 2023. (See figure on U.S. and California Unemployment Rates.)

Around 3.7 million nonfarm jobs are expected to be lost over the first two quarters of 2020, around one in five of the jobs that existed in 2019. While job losses are expected to occur in most sectors, the most severe losses will fall disproportionately on lowerincome workers. The number of jobs in the leisure and hospitality sector is expected to decrease by 53 percent in the first two quarters of 2020 or by around 1.1 million jobs. Similarly, nonfarm employment in administrative, waste, and remediation services is expected to contract by 52 percent or by 590,000 jobs, retail trade by 39 percent or by 655,000 jobs, and other services by 54 percent or by 314,000 jobs. These sectors are not as adaptable to teleworking as other affected industries such as information or professional, scientific, and technical services. While the forecast projects 3.6 million nonfarm jobs lost in the second quarter, the total number of unemployed Californians will reach 4.8 million due to self-employed and independent contractors who will lose work, and to account for the additional 750,000 Californians who were already seeking work in early 2020.

The sudden job losses in 2020 are expected to largely undo a decade of job growth in many sectors since the Great Recession, and to exacerbate ongoing job losses in some others. (See figure on Change in Jobs by Sector: 2020 Relative to 2007.) For example, between 2007 and 2019, the leisure and hospitality sector added 473,000 jobs to reach 2 million jobs. In 2020, the sector is projected to contract by around 765,000 jobs, meaning that the sector will average almost 300,000 fewer jobs this year than in 2007 just prior to the onset of the Great Recession. An exception to this is the educational and health services sector, which is expected to continue to grow slightly in 2020 as demand for services in this sector remains high. This was also the only sector that continued to add jobs throughout the Great Recession and recovery, adding 835,000 jobs from 2007 to reach 2.8 million jobs in 2019.

After falling by 14.3 percent in 2020, nonfarm employment is expected to grow by 0.6 percent in 2021. Job growth is expected to accelerate to 3.2 percent in 2022 and 3.8 percent in 2023; however, the level of nonfarm jobs in 2023 is still expected to remain 8 percent lower than the 2019 level. The May Revision forecast projects that it will take six years to return to the level of jobs California had before the outbreak of COVID-19, one year faster than the recovery from the Great Recession. (See figure on California Job Losses.)

This forecast assumes that the public health crisis of the pandemic will be controlled and economic activity will increase as statewide stay-at-home orders are modified and eased. The recovery is expected to be gradual, fairly measured, and restrained as firms repair business ties, and consumers and businesses slowly regain the confidence to spend money. The ongoing risks of potential future outbreaks are also expected to cause businesses to make fundamental changes in their operations, such as reducing restaurant capacity, implementing temperature checks and/or health screenings, and purchasing personal protective equipment for their employees. This also includes increasing adoption of automation and online sale channels which are expected to permanently lower the number of jobs from 2019 levels in public-serving sectors such as retail, administration, and leisure and hospitality. Other sectors, including information, transportation and warehousing, professional, scientific and technical services, and management of companies, are expected to have more jobs in the long run as demand for services in these industries increases in the near future. For example, regular teleworking may become a permanent arrangement for some industries.

While the state will experience an unprecedented increase in unemployment and loss of jobs, the average wage per job in California is projected to grow slightly by 1.4 percent in 2020 after growing by 3.9 percent in 2019. Average wage growth is then expected to rise gradually each year—by 2.6 percent in 2021, 3.1 percent in 2022 and 3.4 percent in 2023. By comparison, during the Great Recession, wage growth slowed to 0.4 percent in 2009, before rising each year to reach a growth of 4.2 percent by 2012. The slight positive wage growth in 2020 largely reflects the changing composition of jobs, as businesses in higher-paying sectors are more likely to retain staff due to the ability to telework, while job losses will be greater in lower-paying sectors.

Average wages in most sectors are projected to decline as firms freeze hiring, postpone bonus and salary increases, and cut hours for hourly wage earners. In 2020, the average leisure and hospitality job is expected to lose around $1,800 or 5 percent of its 2019 average yearly wage of around $37,000. By comparison, during the Great Recession in 2009, leisure and hospitality jobs lost around 1.5 percent of their average yearly wage.

The forecast assumes that the minimum wage will continue to rise progressively by $1 each year until it reaches $15 an hour. Further, it assumes the minimum wage increases to $14 an hour for large employers and $13 an hour for small employers, with up to 25 employees, on January 1, 2021, despite meeting the criteria for job losses and sales tax revenue declines that would allow the minimum wage increases to be paused for a year.

Under the assumption of continued increases, the average wage in leisure and hospitality—a sector with one in five workers earning the state minimum wage— is expected to recover to 2019 levels by 2022. Salaries in high-paying sectors are also expected to fall in 2020. For example, the average wage in professional, scientific, technical and management services is projected to fall by $2,200 or 1.7 percent of the 2019 yearly average wage of $131,000. This is also more than the Great Recession, when salaries in the sector fell by only 0.1 percent. Despite wages falling in most sectors, the state average wage is projected to rise in 2020, reflecting the fact that job losses are expected to be more severe in lower-paying sectors while employers in higher-paying sectors are more likely to retain staff.

The economic consequences of the pandemic are also expected to negatively impact other sources of income beyond wages and salaries. California personal income, which includes income from wages and salaries, businesses ownership, property ownership, and government transfers, grew by 4.8 percent in 2019 but is expected to decrease by 9 percent or $230 billion in 2020. Personal income is expected to gradually recover starting in 2021 and return to pre-pandemic levels in 2023. (See figure on Contributions to California Personal Income Growth.)

As Californians have stayed home due to the COVID-19 pandemic, there has been an unprecedented decline in business sales and revenues. Many companies have furloughed or laid off workers, and otherwise tried to navigate the current pandemic environment. Following a growth of 5.2 percent in 2019, total wages and salaries are projected to decrease in 2020 by 12.8 percent or $170 billion, greater than the 6-percent peak-to-trough decline in the Great Recession. As firms begin to recall or re-hire workers in mid-2020, total wages and salaries are projected to increase by 3.2 percent in 2021 and to reach a growth of 7.2 percent by 2023.

Californians who own their own businesses are also expected to see their income decrease in 2020. Reductions in consumer spending and restrictions on non-essential activities will disrupt proprietors’ business activity resulting in loss of income. Businesses not able to successfully navigate the pandemic environment will have to shut down or declare bankruptcy. As a result, proprietorship income is projected to decrease by 26 percent or by $66 billion in 2020 and to continue shrinking by 8 percent in 2021 before rebounding and reaching a 6-percent growth rate by 2023. Proprietorship income increased by 4.9 percent in 2019.

Property income includes income received from corporate dividend payouts, interest income, and rental value of property. Following a growth of 2.2 percent in 2019, property income is projected to decrease by 9 percent or by $50 billion in 2020. Due to the sharp drops in the stock market early in the year, and due to ongoing uncertainties impacting business income and decisions, dividend income is expected to decrease by 27 percent or by $46 billion in 2020. Dividend income is expected to continue shrinking in 2021, by 11 percent, before recovering in 2022 and reaching a 12-percent growth rate by 2023. In line with the Federal Reserve’s interest rate decisions, interest income is expected to decrease by about 7 percent in 2020 and to grow slowly through 2023.

Housing costs have been historically higher in California than for the nation. The share of households that were homeowners in the state decreased from 58 percent in 2007 to 55 percent in 2018. The median renting household in California paid around $17,000 in rent in 2018—about 32 percent of median household income for renters. In 2007, just before the Great Recession, the median renting household paid around $14,200 in 2018 dollars—about 29 percent of median household income for renters. With unprecedented job and income losses across almost all sectors, a shrinking share of Californians will be able to purchase new homes and keep up with mortgage payments, leading to even more Californians becoming renters, resulting in increased pressures on the rental market. As a result, rental income is expected to increase by 7 percent or by $12 billion in 2020. Rental income is expected to remain around that level in 2021 before slowing to 3.6 percent by 2023.

Transfer payments are expected to rise due to increased unemployment insurance payouts as well as other forms of government assistance. The federal CARES Act provided many Californians with one-time direct payments and temporarily expanded the state’s unemployment insurance program in 2020. After increasing by 7.9 percent in 2019, transfer payments are expected to increase by 17 percent or by $64 billion in 2020 before gradually decreasing through 2023 as government assistance ends and unemployed Californians reintegrate into the job market.

Personal income is not expected to return to 2019 levels until 2023. In comparison, personal income fell by 3.3 percent during the Great Recession and recovered to 2007 levels by 2011. The forecast projects the impacts of the pandemic on personal income and its components to be larger in magnitude and in percentages compared to the Great Recession.

The forecast projects that California permits for residential single-family and multi-family units will decrease by 21 percent or 24,000 units to around 90,000 in 2020. In comparison, during the housing shock associated with the Great Recession, residential permits decreased by 44 percent or 29,000 units in 2009. The state has built far fewer units than implied by population growth over the last ten years, and pent-up demand is expected to continue to support the housing sector despite the recession. California authorized the construction of around 113,400 units in 2019 and homebuilding activity in the first two months of 2020 was exceptionally strong, averaging 133,700 units annually. However, the number of authorized units decreased in March by 30 percent from February to only 87,700 units. Permits are expected to grow by 6 percent in 2021 and to reach a growth of 14 percent by 2023.

With the state’s ongoing housing imbalance and climate change regulations, California’s overall inflation will remain higher than the nation’s over the forecast period. California inflation reflects the rate of change in the Consumer Price Index (CPI) for the metropolitan areas of Los Angeles, Riverside-San Bernardino, San Diego, and San Francisco. In March 2020, headline inflation in the Los Angeles metropolitan area slowed to 1.9 percent following 3.2 percent average growth in January and February 2020 and 3.1 percent annual growth in 2019; in Riverside-San Bernardino, headline inflation slowed to 2.3 percent in March 2020 following 3.0 percent in January 2020 and 2.9 percent annual growth in 2019; and in San Diego, headline inflation slowed to 1.8 percent in March 2020 following 2.3 percent in January 2020 and 2.4 percent annual growth in 2019. The CPI for San Francisco for March 2020 is not available.

Assuming statewide that the stay-at-home order is in place through most of the second quarter of 2020, California headline inflation is expected to turn negative in the second quarter (-2 percent) and in the third quarter (-0.6 percent). As consumer demand ramps up in the fourth quarter 2020, California headline inflation is expected to rise to around 2.1 percent in the fourth quarter bringing annual 2020 inflation to 1 percent, following 3 percent in 2019.

Driving slower headline inflation in 2020 are lower prices for gasoline, dining-out, apparel, household furnishings and appliances, and other discretionary goods (e.g. televisions, new cars, jewelry) and discretionary services and services that require close contact with customers (e.g. hair and nail salons and fitness centers). However, prices for some essential goods and services (e.g. groceries, housekeeping supplies, medical care) are expected to rise in 2020 due to increased demand. In 2021, consumer demand is expected to remain subdued as economic uncertainties remain. California headline inflation is expected to remain slow through the first half of 2021 before rebounding in the second half bringing the annual average headline inflation to 2.9 percent in 2021. As economic growth returns and consumer demand recovers going forward, California headline inflation is expected to rise to around 3.5 percent on average in 2022 and 2023.

During the Great Recession, California’s annual headline inflation turned negative for the first time on record in 2009 (-0.3 percent). This negative inflation was driven by a sharp and sustained drop in energy prices and a rapid deceleration in shelter inflation. The May Revision expects energy prices to rebound in early 2021 and shelter inflation to remain relatively stable throughout the forecast period.