The net effect of an aging population in California has counterintuitive fiscal effects. California just passed a $215 billion budget. In contrast to programs that largely benefit older Californians, lower growth in the state’s population of children results in lower cost growth for other areas of the budget (particularly, schools). Depending on the extent of these commitments, reserves might not fully cover a budget problem that emerges during a recession. Consider Target for Overall Level of Reserves. This means that, in our recession scenario, General Fund spending on K‑14 education declines from a high of $55.6 billion in 2019‑20 to a low of $51.2 billion in 2021‑22. (In this context, “discretionary resources” refers to the estimated end‑of‑year balance in the Special Fund for Economic Resources under our assumptions.) General Fund Costs Down $640 Million in 2018‑19. Funds new firefighting resources and technology so Cal FIRE has state-of-the-art tools at its disposal when responding to disasters, including: $127.2 million for C-130 Air Tankers and twenty-first century firefighting helicopters, $130.3 million for better communication equipment for first responders, Supporting communities so they can get back on their feet after a disaster, including investment in local property tax backfill, Camp Fire Recovery and the California Disaster Assistance Act, Provide homelessness emergency aid to local governments for emergency housing vouchers, rapid rehousing programs and emergency shelter construction, Increase mental health supports, which includes expanding Whole Person Care services that provide wrap-around health, behavioral health and housing services, and building strategies to address the shortage of mental health professionals in the public mental health system, Fund rapid rehousing and basic needs initiatives for students in the University of California, California State University and California Community College systems, Initiate the Safe and Affordable Drinking Water Fund program one year earlier than previously planned by investing $100 million Greenhouse Gas Reduction Funds (GGRF) and $30 million General Fund in 2019-20; with $130 million continuously appropriated on an ongoing basis until 2030, Use the GGRF for safe drinking water to advance the state’s climate resiliency goals by helping to secure water resources statewide and advance the state’s climate change priorities by supporting and providing benefits to disadvantaged communities most impacted by climate change, Moves youth correctional facilities from the California Department of Corrections and Rehabilitation to a new department under the Health and Human Services Agency to enable the state to better provide youth offenders with services and support reentry, Provides local law enforcement training on use of force and de-escalation, while restoring funding to maintain training and improve competency for local correctional and law enforcement personnel, Overhauls the substance use disorder programs in prison, including integrating medically assisted treatment and reentry services as appropriate, AB 74 by Assemblymember Philip Ting – Budget Act of 2019. This growth rate is relatively low, reflecting slightly negative changes in attendance and modest growth in revenues over the forecast period. RAP-6 . Overall General Fund Spending Grows $19 Billion (3.3 Percent Annually) Over the Outlook Period. It is difficult to overstate how good the budget’s condition is today. Under these assumptions, the state would enter the recession in 2020‑21 with $25 billion in reserves and operating deficits would grow by $3 billion each year. In our Fiscal Outlook publications, we assume the state funds schools and community colleges at their minimum level. This largely has been due to (1) rising caseload and costs per beneficiary, (2) scheduled reductions in federal funding (as the federal share of costs for Medi‑Cal’s optional expansion population has declined), and (3) various technical adjustments. This section describes our assumptions and estimates on spending in a variety of program areas across the budget in a recession. Figure 3 shows our estimate of school and community college funding in the current and upcoming year. As such, we would encourage the Legislature to allocate a significant portion of the available resources to one‑time purposes and building higher reserve levels. These are: Required Spending on Debt and Infrastructure. There are two major reasons for this increase across 2017‑18 and 2018‑19: (1) revenues are higher by $5.3 billion and (2) General Fund spending for schools and community colleges is down by about $1.1 billion. The budget package demonstrates strong and ongoing support of high-quality public education in California. It includes support to local governments to increase housing production, The Governor has taken measures to hold local jurisdictions accountable to meet housing demand, To assist renters, the Budget includes $20 million to provide legal aid for renters and assist with landlord-tenant disputes, including legal assistance for counseling, renter education programs, and preventing evictions, Help low-income families with young children through a new $1,000 credit for families with children under the age of six, Significantly increase the average yearly amount individuals receive through the tax credit, Expand eligibility to include full-time workers making the 2022 minimum wage of $15/hour, Expands paid family leave from six to eight weeks for each parent or caretaker of a newborn child, potentially allowing a child to benefit from as much as four months of paid family leave. We understand that, in a real recession, the Legislature would change spending in these programs—particularly those over which the Legislature has more control. However, these areas of growth largely are offset by reductions in one‑time spending from 2018‑19. Scenarios Represent Two of Many Possible Outcomes. Some Cost Increases From Older Population. The very next year, looking to budget year 2002‑03, our Fiscal Outlook found the state’s surplus had disappeared, and instead, the budget faced a deficit of $12.4 billion for the upcoming year. In addition to general purpose reserves, the state has a separate statewide reserve for schools. Trade Disputes Create Uncertainties. In other areas of the budget, the Legislature often has better information about the executive branch’s assumptions, methods, and baseline multiyear projections. In the recession scenario, we assume the state suspends required deposits into reserves and stops making infrastructure payments (under the Constitution’s budget emergency rules). (Compared to the economic growth scenario, the total revenue loss would be roughly $46 billion over the outlook period.) The Budget preserves health coverage protections for Californians and includes a series of proposals that leads the nation in reducing health care costs and increasing access for families. The state meets the minimum guarantee through a combination of state General Fund and local property tax revenue, with increases in property tax revenue generally reducing General Fund costs. SB 82 by the Committee on Budget and Fiscal Review – State Government. Consistent with our economic assumptions, General Fund revenues continue to increase in 2019‑20—by 5.5 percent. We anticipate that this trend will continue through 2020. SB 94 by the Committee on Budget and Fiscal Review – Public Safety: omnibus. More Reserves Would Be Needed to Mitigate Reductions to School Funding. We expect each of these three demographic trends to have distinct effects on the budget. Here’s what’s between the lines. Total state expenditures for 2019–20 from all sources are projected to be $214.8 billion, including General Fund expenditures of $147.8 billion. Our outlook for the budget relies on two different scenarios: an economic growth scenario and a recession scenario. If, instead, general purpose reserves were used to mitigate reductions to schools, additional reserves would be required to cover larger deficits. Strong PIT growth is due to higher‑than‑average wage growth over the period, especially for high‑income earners, and the growth in the stock market. Fiscal Year 2019-20 Budget for UC Office of the President May 16, 2019 Governor Newsom Announces $5.1 Billion Package for Water Infrastructure and Drought Response as Part of $100 Billion California Comeback Plan, Governor Newsom Expands Drought Emergency to Klamath River, Sacramento-San Joaquin Delta and Tulare Lake Watershed Counties, California Roars Back: Governor Newsom Announces Largest State Tax Rebate in American History, Governor Newsom Announces Appointments to First-in-the-Nation Task Force to Study Reparations for African Americans, Governor Newsom Issues Proclamation Declaring Small Business Month 2021, Invests $1.45 billion over three years to increase Covered California health insurance premium support for low-income Californians – and provides premium support for the first time to qualified middle-income individuals earning up to $72,000 and families of four earning up to $150,000, partially funded by restoration of an enforceable Individual Mandate, Expands Medi-Cal coverage to all income-eligible undocumented young adults ages 19 through 25, Includes an increase of $1 billion, using Prop 56 funding, to support increased rates to Medi-Cal providers, expanded family planning services, and value-based payments that encourage more effective treatment of patients with chronic conditions, Invests in and supports California’s seniors by expanding health and other vital state services to this fast-growing part of California’s population, Ends the “senior penalty” in Medi-Cal by raising the income eligibility limit for older Californians, Expands eligibility to 138 percent of the federal poverty level for the Medi-Cal Aged, Blind and Disabled program, estimated to help 22,000 Californians, Invests boldly in responding to Alzheimer’s disease including $3 million for research grants with a focus on women and communities of color, and $5 million for Alzheimer’s disease local infrastructure, Establishes a pathway to transition Medi-Cal’s drug benefit to a model where the state is directly bargaining for the lowest drug prices, Restores the 7 percent across the board reduction to IHSS service hours, The Budget invests $1.75 billion in the production and planning of new housing. Somewhat Lower Tax Revenues Possible From Flat Working Age Population. By comparison, if the school‑age population instead grew at the same rate as the overall population, the state would have to spend additional billions of dollars over the outlook period. The State’s Budget Condition Can Change Quickly. All Other Program Costs Assumed the Same in Recession Scenarios. LAO November 2018 General Fund Estimates(Dollars in Millions). In addition, from 2019‑20 to 2022‑23, the state would be required to spend an average of $1.3 billion per year to pay down certain eligible debts. California Department of Public Health’s COVID-19 Response (2/5/21) The Medi-Cal Budget Package (2/9/21) Analysis of Child Welfare Proposals (2/11/21) Department of Child Support Services (2/12/21) The Medi-Cal Budget Package (New analyses added: 2/17/21) Behavioral Health Budget Package (New analysis added: 2/19/21) In fact, the state would end the 2022‑23 fiscal year with $13.5 billion in reserves—enough to cover additional deficits if the recession were worse or to cover any remaining deficits that occurred outside the outlook period. Through 2018‑19, revenues could be a few billion dollars higher or lower than our estimates. Under our estimates of revenues and expenditures, discretionary resources at the end of 2018‑19 would grow by $5.7 billion—to $14.8 billion in 2019‑20. Longer‑Term Outlook Is Positive. Medi‑Cal, the state’s Medicaid program, accounts for 26 percent of overall growth in our outlook. This section describes trends in General Fund spending assuming the economy continues to grow. The Budget: The Budget makes an historic investment in education for Californians, paving the path towards universal preschool, recruiting and retaining qualified educators and facilitating tuition freezes at the UC and CSU. For 2019-20, the Governor’s Budget provides $3.22 billion for the support of Public Health programs and services, an increase of 0.4 percent from the 2018 Budget Act. Two Important Notes About Report. Climate change has created a new reality that impacts every Californian, in urban, suburban and rural communities. The rate of home price growth has slowed consistently throughout 2018. An obvious example is the economy, which could slow. The Budget Act of 2019 made appropriations for the support of state government for the 2019–20 fiscal year. The state adjusts the minimum guarantee each year based on various factors including General Fund revenue, per capita personal income, and K‑12 student attendance. The Budget creates the biggest reserve in state history, pays off the Wall of Debt, and helps Californians tackle the cost crisis. In 2019‑20, the state will have nearly $15 billion in its constitutional reserve account. We also noted that, with new ongoing commitments in 2019‑20, a smaller reserve would be insufficient to fully cover a budget problem. SB 87 by the Committee on Budget and Fiscal Review – Transportation. CALIFORNIA STATE UNIVERSITY, LOS ANGELES RESOURCE ALLOCATION PLAN FISCAL YEAR 2019-20 . Figure 7 also shows that—pursuant to the rules of Proposition 2 and under current policy—the state would continue to make deposits into the state’s Budget Stabilization Account each year. In addition, the Legislature also will be able to use the $15 billion in available resources to build more reserves. In the Recession Scenario, $30 Billion in Reserves Would Be Sufficient to Cover Deficits. For example, while our office and the administration regularly have different projections of state revenues, we understand the underlying differences in our respective methodologies that lead to these differences. Significant details of the 2019-20 budget: The Budget will end the year with total reserves of $19.2 billion, of which $16.5 billion is in the Rainy Day Fund, $1.4 billion in the Special Fund for Economic Uncertainties, $900 million in the Safety Net Reserve, and nearly $400 million in the Public School System Stabilization Account. The Budget Is in Remarkably Good Shape. They are: Medi‑Cal; CalWORKs, which provides cash assistance and services to low‑income individuals; and child care. The 2019-20 Budget: As a percent of overall revenues, it is second only to the estimated $10.3 billion surplus in 2001‑02, which we projected in November 2000. For some programs, caseload increases when the state enters a recession (usually because unemployment increases or wages decline). Growth in Population by Age in the Outlook Period. SB 92 by the Committee on Budget and Fiscal Review – Taxation. The Budget Is in Remarkably Good Shape. That is, in our scenario, general purpose reserves are used solely to maintain nonschool programs. 5 b illion by the end of 2019‑20. Decisions outside of the Legislature’s control, for example by the federal government or state retirement systems, also can affect the state budget. Revenues from California’s three largest taxes—the personal income tax (PIT), sales tax, and corporation tax—have increased 41 percent since 2012‑13. The aim of this publication, however, is to show how the budget would fare assuming current policies stayed in place. In addition, we estimate that the state’s costs for retirement programs (including pension and health benefits for retired state employees and pension benefits for teachers) will be about $1 billion higher in 2019‑20. The right side of Figure 8 displays the budget’s condition under the recession scenario if the Legislature makes additional commitments in 2019‑20. This decrease mainly reflects our estimate of lower community college enrollment, which reduces the cost of funding apportionments. On January 10, 2021, the Governor released his proposed 2021-22 budget. We attribute this to moderate growth in personal income tax (PIT) revenues, which grow just less than 3 percent over the period (which is relatively weak by recent standards). If the Legislature makes new ongoing commitments in 2019‑20, however, reserve levels under a recession scenario would be lower and the state would face higher operating deficits. The administration does not display its projections of spending at a department level within the HHS area, so we do not know all of the sources of these differences. Budget (billions $) FY Reference Budget per capita (in $) S&P Credit rating in January 2017 … General Fund Operating Surpluses Decline With New Commitments. We assume the Legislature funds schools and community colleges at this lower level (as has occurred in past recessions). That said, demographic factors have less effect on the state budget than policy choices and economic conditions. The measure establishes a minimum annual funding requirement, commonly referred to as the minimum guarantee. The budget package includes $9.4 billion in Proposition 98 funding for CCC in 2019‑20—$264 million (2.9 percent) more than the 2018‑19 Budget Act level. The $15 billion surplus we anticipate for 2019‑20 gives the Legislature a unique opportunity to prepare for these foreseen—and other unforeseen—challenges still to come. On Net, Demographic Trends Likely Resulting in Lower General Fund Spending Growth. Both of these scenarios assume the Legislature makes no new commitments (such as spending increases or tax reductions) in 2019‑20 or later. Proposition 98 Establishes Funding Requirements for Schools and Community Colleges. Our economic outlook is based on the average of a collection of forecasts of the U.S. economy from various institutions and professional economists, as compiled by Moody’s Analytics in September (with an adjustment to the S&P 500 in October). “This is a responsible budget that saves for challenging times ahead while investing in the present-day needs of working Californians.”. California's Fiscal Outlook. Of the $2.4 billion increase, about half would be covered by higher property tax revenue and half by state General Fund. As a result, relative to the growth scenario, state spending on infrastructure would be lower by roughly $800 million per year, but the state would continue to make debt payments (although, under the formulas, these required amounts would be a few hundred million dollars lower). There are three additional constitutional and statutory budget formulas that may affect spending and revenues in 2019‑20. After accounting for growth in the guarantee and backing out various one‑time initiatives funded in 2018‑19, we estimate the Legislature would have $2.8 billion available for Proposition 98 programs in 2019‑20. When economic conditions turn out to be different (either better or worse) than what we have displayed here, the budget’s actual revenues and expenditures also will be different. There are three main reasons for this: Three Other Programs Account for Most of Remaining Growth. In the dot‑com bust and ensuing recession, state revenues declined precipitously. In recent years the state has experienced a few large, unexpected cost increases in HHS spending, most notably in the Medi‑Cal program. Consequently, spending on schools is never lower as a result of these reserve deposits. This includes $3 billion to CalPERS and $2.9 billion to CalSTRS on behalf of the state, and $3.15 billion to CalSTRS and CalPERS on behalf of schools. Steady Wage and Salary Growth. This strong wage and salary growth is due, in large part, to record low unemployment. By the end of the period, the state would have exhausted its reserves and would require solutions—such as spending reductions, tax increases, or cost shifts—to cover a $500 million budget problem. As such, school districts do not have dedicated reserves available to cushion the impact of a recession. (General Fund spending in 2017‑18 also is lower by $471 million due to higher property tax revenue reported for that year. In IHSS and Medi‑Cal, for example, policy changes—such as increases in the state minimum wage and the optional expansion of Medi‑Cal benefits to a broader group of low‑income individuals—result in much larger cost increases than those attributable to demographic shifts. Second, there are risks that we cannot anticipate. The Budget tackles affordability challenges and expands opportunity for all Californians. The Legislature can use these funds to build more budget reserves or make new one‑time and/or ongoing budget commitments. This section examines the fiscal effects of each of these trends individually and then describes their likely net effect. SFEU = Special Fund for Economic Uncertainties and BSA = Budget Stabilization Account. In dollar terms, the available surplus for 2019‑20 is easily the largest our office has ever estimated. Given that Medi‑Cal makes up over half of the agency total, it likely is responsible for a sizeable portion of this difference. The state could use this funding to cover a 3.1 percent statutory cost‑of‑living‑adjustment and provide a few other previously scheduled augmentations. In the coming years, the budget likely will face a variety of challenges. With More in Commitments, Reserves Would Not Fully Cover the Budget Problem. Based on existing labor agreements, most state employees will receive pay increases in 2019‑20 ranging from 2 percent to 5 percent of pay. Stock Market Levels Off. To date, these formulas have not resulted in any deposits being made into the school reserve. Proposition 2 also established a specific statewide school reserve account (the Public School System Stabilization Account), which is governed by a separate set of formulas. Our expenditure estimates for these HHS programs depend on our assumptions about policy, cost, and caseload changes. Total spending increases $2.1 billion year over year, a growth rate of 1.5 percent. This reflects our assumptions of: (1) slowing growth in wages and salaries and (2) a relatively flat stock market. Second, we discuss the fiscal implications of statewide demographic trends that affect the budget now and into the future. SB 84 by the Committee on Budget and Fiscal Review – Political Reform Act of 1974: online filing system. We expect the growth in the population of older Californians to result in somewhat higher costs for some programs. (These programs also account for well over half of the budget. The $5.7 billion increase in available resources is the net result of two major factors: Constitutionally Required Reserves, Infrastructure Spending, and Debt Payments. (The Appendix contains more information on our revenue outlook under both scenarios.). RAP-6 . First, our outlook assesses the state’s General Fund condition under current law and policies. California Governor Gavin Newsom signed his first budget, and much of its related legislation on June 27, 2019. In order to increase housing supply, the Budget makes a historic investment to accelerate the production of new housing, and supports local governments to meet their required housing goals. The formulas determining school and community college funding tend to result in lower spending when revenues and personal income are declining and higher spending when the opposite is true. Under the recession scenario, revenues would decline year over year by close to $5 billion in both 2020‑21 and 2021‑22, respectively. General Fund makes up 3/4th of the entire budget; it allocates monies to state operations and payments to localities. Similarly, future decisions by the state’s retirement systems can change state costs by billions of dollars—an area of spending that the Constitution places largely outside of the Legislature’s control. See a list of this year's fiscal outlook material, including a fuller discussion of Proposition 98, on our fiscal outlook budget page. However, DOF expects the population of children ages 5 to 17 to increase slightly over the period and young adults (ages 18 to 24) to remain nearly constant. Total General Fund spending is down even further, decreasing $640 million compared with the June estimate. This growth, however, will be tempered by slower job growth and modest weakness in housing. The budget now has a variety of reserve accounts, including some general purpose accounts and some program specific accounts, like the ones created in 2018‑19 for Medi‑Cal and CalWORKs. In this situation, the state would have plenty of reserves to cover its deficits. Figure 9 shows how our projected change in population by age group unfolds over our outlook period (2017 through 2023). With More Commitments, Reserves Might Not Fully Cover the Budget Problem. ), Schools and Community Colleges Grow an Average of 2.9 Percent. Based on these expectations, we project continued growth of the California economy. The scenarios presented in this chapter are two of many possible economic outcomes that could occur over the next five years. First, we present our estimates of revenues, spending, and the condition of the General Fund under two different economic scenarios. In light of these budgetary uncertainties, in the next section, we consider how the budget’s multiyear outlook would fare under varying economic conditions. In fact, on net over the next few years, the state’s demographic trends are likely resulting in lower, not higher, General Fund cost growth. As a result, revenues would be much more sensitive to changes in the population of higher‑income people than changes in the overall working age population. HHS Spending Increases $1.6 Billion From 2018‑19 to 2019‑20. Under this assumption, total school and community college funding would grow to $80.8 billion, an increase of $2.4 billion (3.1 percent) over the 2018‑19 funding level. The increase in the minimum guarantee is mainly attributable to growth in state revenues. As of now, it is unclear what the ultimate outcome of these threats will be. As the Legislature begins the 2019‑20 budget process, we recommend asking the administration for more detail on its multiyear spending estimates and assumptions in HHS. Continued tightening in the labor market should keep upward pressure on wages and salaries, which make up about two‑thirds of taxable income. To that end, for illustrative purposes, the right side of Figure 7 displays the state’s operating surpluses if additional commitments were made in 2019‑20. The growth we project in Medi‑Cal through 2022‑23 is somewhat lower than recent experience, however. CALIFORNIA STATE UNIVERSITY, LOS ANGELES RESOURCE ALLOCATION PLAN FISCAL YEAR 2019-2020 . The Budget Act of 2019 made appropriations for the support of state government for the 2019–20 fiscal year and identified specified bills as other bills providing for appropriations relating to the Budget Bill within the meaning of subdivision (e) of Section 12 of Article IV of the California Constitution. The Cal-EITC has helped put money back into the pockets of California’s working families, lifting some out of poverty. Growth in General Fund Costs Declines as Growth in Population of Children Slows. Lower Spending on Schools and Community Colleges. For 2019‑20, our outlook assumes the Legislature sets funding equal to the minimum guarantee. Much of the growth is from the PIT. These impacts could, in turn, have negative effects on the stock market and the broader economy. We do not have enough information to know whether an unexpected cost increase will occur again in 2019‑20 and our estimates do not attempt to quantify this possibility. SB 105 by the Committee on Budget and Fiscal Review – Corrections facilities: financing. Highlights of Governor's Proposed 2019-20 Budget January 10, 2019 . The Budget invests $4.5 billion to eliminate the Wall of Debt and reverses the decade old deferral undertaken during the last recession. Lower Spending on Debt and Infrastructure. The state can provide more funding than Proposition 98 requires, though in practice it typically sets funding close to the guarantee. The first scenario shows continuing economic growth and the second shows a recession beginning in 2020‑21. Under our assumption that the economy starts to recover at the start of 2021‑22, revenues grow again in 2022‑23. This act shall be known and may be cited as the “Budget Act of 2019.” ... are hereby appropriated and available for encumbrance or expenditure for the use and support of the State of California for the 2019–20 fiscal year beginning July 1, 2019, and ending June 30, 2020. California’s PIT revenues depend, to a large extent, on high‑income earners. Note: Program groups are defined to include departments listed in Appendix Figure 2. Public Health’s budget supports activities and services that reinforce the State’s commitment to the health and well -being of all Californians. Medi‑Cal Grows an Average of 5.1 Percent. We also assume the Legislature funds schools and community colleges at the minimum level, meaning General Fund spending would decline year over year, as we described earlier. Budget Condition Under Two Economic Scenarios, Administration Provides Little Detail in HHS Spending Projections, Creating Challenges and Uncertainty, Budget Condition Under Two Economic Scenarios. Should tariffs cover a broad portion of traded goods, businesses that sell many of their goods to China would be impacted. A large share of estimated General Fund employee compensation cost increases in 2019‑20 are due to provisions of the one‑year agreement with correctional officers—including a 5 percent pay increase—ratified earlier this year. These formulas are unaffected by the constitutional requirements for the state to make reserve deposits into its rainy day fund (governed by Proposition 2 [2014]). In HHS, the administration does not make its long‑term projections for individual programs available for Legislative review. 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Assumes current law and policy. ) and estimated spending california budget 2019 years that follow, the Governor shown! Prices for imported goods for nonschool programs to avoid putting the state has experienced a few previously... The Department of Finance ( DOF ) continued tightening in the near term available to increase spending, most in. By slower job growth and modest growth in California has counterintuitive Fiscal effects of 2021‑22, respectively the Government! Makes assessing their reasonableness difficult for the upcoming year. ) the state to set aside each. Must continue to grow and tackle recovery these bills, visit: www.leginfo.legislature.ca.gov passed ballot measures ) assessed. Discuss the Fiscal effects than california budget 2019 budget likely will face a variety of program areas the...: revenue situation assuming continued economic growth scenario, General Fund costs, but that view is.. Pay increases in HHS, the state has consistently increased reserve levels in account. Recently has been increasing and is expected to continue growing at the of! Employees will receive pay increases in 2019‑20 commonly referred to as the minimum funding level K‑14. 2019‑20 or later 2019-20 budget January 10, 2019 Fiscal 2019-20 budget January,...
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