The State Budget: Governor Newsom's State Budget

Jeff Frost

Governor Newsom released the “May Revision” to his 2020-21 January budget proposals, which included his adjusted plans for public education. This May Revision budget correction is based upon the updated General Fund revenues that were first released to the public on May 7. Last week, the Department of Finance reported that the administration had revised General Fund (GF) revenue estimates for the current budget years due to the “national recession” caused by the COVID-19 pandemic. As a result of the health emergency, we are seeing a precipitous decline in personal income and General Fund revenue collection, rapidly rising health, and human services caseloads and substantial COVID-19-driven costs. Specifically, the May Revision confirms that the General Fund revenues will decline by $41.2 billion below January projections, as follows:

2018-19: +$0.7 billion
2019-20: -$9.7 billion
2020-21: -$32.2 billion

The $41.2 billion General Fund (GF) revenue shortfall is exacerbated by another $13.1 billion in new COVID-19 related expenditures ($7.1 billion in Health and Human Service caseload increases and $6.0 billion in other expenses). Consequently, California has a $54.3 billion budget problem that is addressed in the May Revision. This is also nearly three and one half times the revised balance in the Rainy Day Fund ($16 billion).

This initial summary is based upon information obtained from the Governor’s written summary materials and press conference. I will prepare a more detailed summary and analysis later this afternoon following briefings with Department of Finance staff and a more thorough review of the K-12 education, economic outlook and revenue estimate sections of the May Revision document. I will send you the final May Revision Summary and Analysis later this evening and we will discuss at Senior Cabinet on Friday morning.

2020-21 May Revision Overview

The May Revision confirms that the rapid onset of the COVID-19 pandemic has had an immediate and severe impact on the global, national, and state economies. In California, COVID-19 has resulted in:

Nearly 4.4 million unemployment claims were filed in California for state and federal unemployment benefits since mid-March.
Job losses that have occurred disproportionately in the lower-wage sectors of the economy—amplifying the wage disparity that existed before the pandemic.
Finance projects that the 2020 unemployment rate will be 18%, considerably higher than Great Recession levels.
Compared to the January forecast, the state’s three main General Fund revenue sources that make up over 90% of GF revenue are projected to drop for the 2020-21 fiscal year as follows:
- Personal Income Tax: -25.5 percent.
- Sales and Use Tax: -27.2 percent.
- Corporation Tax: -22.7 percent.

The May Revision economic forecast reflects that COVID-19 impacts will continue to cause economic losses in 2020:

California personal income is projected to fall by nearly 9% on an annual basis in 2020.
Permits for new housing construction, a key economic indicator, are forecast to drop by more than 21% this year.

In his press conference, the Governor once again stressed the need for additional federal assistance. On Tuesday, Governor Newsom joined with the Governors of four western states asking Congress for an additional $1 trillion in aid to state and local governments. The Governor proposes a 10% pay cut for state workers today to address the projected $54.3 billion budget deficit caused by the coronavirus-induced economic downturn while acknowledging the pay reduction would have to be negotiated through collective bargaining with state employee unions. If the negotiations fail to achieve the necessary savings, the governor could order furloughs instead as per previous Governor’s. In addition, the Governor indicated that should the federal government approve another aid package for state and local governments, the pay reductions/furloughs could be revisited in July/August.

The Governor’s May Revision solutions to address the $54.3 billion shortfall come from five combined sources:

Cancel $6.1 billion in new program expansions and spending increases proposed in January,
Use all $16.2 billion in State Reserves over a three-year period.
Defer apportionments (including school funding), borrow and transfer $4.1 billion from special funds.
Temporarily suspend net operating losses and temporarily limit to $5 million the amount of credits a taxpayer can use in any given tax year.
Make $14 billion in cuts (including $6.5 billion from K-12 schools) to base programs and employee compensation unless sufficient federal fiscal relief does not materialize.

May Revision K-12 Education Adjustments

Specifically, Governor Newsom’s May Revision includes the following changes/augmentations to his January K-12 education proposals.

Education Budget Reductions

The overall COVID-19 induced General Fund revenue decline results in a K-14 education funding level (Proposition 98) reduction of $19.0 billion. Today’s May Revision materials reveal that this overall decline in K-14 spending will be distributed as follows:

$ million above January budget in 2018-19
$ billion below January budget in 2019-20 (current year)
$ billion below January budget in 2020-21 (budget year)

Local Control Funding Formula (LCFF) - Absent additional federal stimulus funds, the May Revision eliminates the 2.31% statutory COLA in 2020-21 on all programs, including the LCFF. In addition, the May Revision proposes an approximate 7.69% reduction in the current LCFF funding level absent additional federal fiscal relief. These reductions achieve a savings of approximately $6.5 billion in Proposition 98. Again, the Governor made it clear in his press conference and in the budget summary that these LCFF reductions will be “triggered off” if the federal government provides sufficient funding to backfill this cut.

Apportionment Deferrals – The May Revision proposes apportionment deferrals to achieve additional savings and avoid deeper cuts. In 2019-20, the Budget proposes to defer $1.9 billion of current year (presumably June) 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. The exact months that these additional 2020-21 deferrals will be taken have not yet been determined.

Use of Public School System Stabilization Account - The May Revision proposes using all of the $524 million funding in the Public School System Stabilization Account to offset 2019-20 reductions. The May Revision projects that no additional deposits will be required and therefore the entire amount is available to offset the decline in the Guarantee.

Eliminates New Programs – In January, the Governor proposed over $1 billion in new K-12 investments. The May Revision eliminates most of those programs, as follows:
Educator Workforce Investment Grants: $350 million

Opportunity Grants: $300.3 million
Community Schools Grants: $300 million
Special Education Preschool Grant: $250 million
Workforce Development Grants: $193 million
Teacher Residency Program: $175 million
Credential Award Program: $100 million
Child Nutrition Programs: $70 million
Classified Teacher Credential Program: $64.1 million
Local Services Coordination (CCEE): $18 million
Computer Science Supplementary Authorization Incentive: $15 million
Online Resource Subscriptions for Schools: $2.5 million
California College Guidance Initiative: $2.5 million
Computer Science Resource Lead: $2.5 million
School Climate Workgroup: $150,000

K-12 Categorical Program Reductions - Absent additional federal stimulus funds to limit base reductions to the LCFF (e.g., first priority), the May Revision includes $352.9 million in additional Proposition 98 reductions to K-12 categorical programs:

After School Education and Safety: $100 million
K-12 Strong Workforce Program: $79.4 million
Career Technical Education Incentive Grant Program: $77.4 million
Adult Education Block Grant: $66.7 million
California Partnership Academies: $9.4 million
Career Technical Education Initiative: $7.7 million
Exploratorium: $3.5 million
Online Resource Subscriptions for Schools: $3 million
Specialized Secondary Program: $2.4 million
Agricultural Career Technical Education Incentive Grant: $2.1 million
Clean Technology Partnership: $1.3 million

Full-Day Kindergarten Facilities - A decrease of $300 million one-time non-Proposition 98 funding for construction of new, or retrofit of existing, facilities for full-day kindergarten programs. This is roughly the amount that is unexpended from $400 million provided for this purpose in the 2018 and 2019 Budget Acts. The May Revision proposes sweeping these unexpended program funds to facilitate budgetary resiliency.

Categorical Program ADA - A decrease of $10.9 million in Proposition 98 funds for selected categorical programs, based on updated estimates of average daily attendance.

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:

$159.4 million General Fund to eliminate 10,000 slots scheduled to begin April 1, 2020 and 10,000 additional slots scheduled to begin April 1, 2021.
$130 million Proposition 98 General Fund to align State Preschool funding with demand.
$94.6 million Proposition 98 General Fund and $67.3 million General Fund to reflect a 10 percent decrease in the State Preschool daily reimbursement rate.
$20.5 million Proposition 98 General Fund and $11.6 million General Fund to reflect suspension of a 2.31 percent cost-of-living adjustment.
$3.3 million Proposition 98 General Fund and $3 million General Fund to eliminate a 1 percent add-on to the full-day State Preschool reimbursement rate.

Budget Enhancements

Special Education. The Governor proposes to sustain his January budget proposal to increase special education base rates by another $493 million in addition to the $152 million included in the 2019-20 budget and would result in a total of $645 million to level up special education base rates over two years. These new special education funds would be apportioned on a three-year rolling average of local educational agency ADA (allocated to Special Education Local Plan Areas). According to the DOF, this new base rate represents a 15% increase in the Proposition 98 contribution to the base formula funding over the amount provided in the 2019 Budget Act. The May Revision proposes to:

Sustain all other existing AB 602 special education categorical funding sources as in current law until a finalized formula is adopted.
Provides $15 million in federal Individuals with Disabilities Education Act (IDEA) funds for the Golden State Teacher Scholarship Program to increase the special education teacher pipeline,
Provides $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.
Maintain 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 in Proposition 98 funding used to fund these proposals is replaced with federal IDEA funds.
Provides $600,000 in federal IDEA funds 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.

Revising CalPERS/CalSTRS Contributions - The current budget included $850 million to buy down local educational agency employer contribution rates for CalSTRS and CalPERS in 2019-20 and 2020-21, as well as $2.3 billion towards the employer long-term unfunded liability. To provide schools with increased fiscal relief, the May Revision proposes redirecting the $2.3 billion paid to CalSTRS and CalPERS towards long-term unfunded liabilities to further reduce employer contribution rates in 2020-21 and 2021-22. This reallocation will reduce the CalSTRS employer rate from 18.41% to approximately 16.15% in 2020-21 and from 18.2% to 16.02% in 2021-22. The CalPERS Schools Pool employer contribution rate will be reduced from 22.67% to 20.7%in 2020-21 and from 25% to 22.84% in 2021-22.

Temporary Revenue Increases to Mitigate Proposition 98 Cuts - The May Revision proposes the temporary three-year suspension of net operating losses and limitation on business incentive tax credits to offset no more than $5 million of tax liability per year. These measures along with other more minor tax changes will generate $4.5 billion in General Fund revenues and provide approximately $1.8 billion in benefit to the Proposition 98 Guarantee.

Mitigating Student Learning Loss - The May Revision proposes allocating $4.4 billion ($4 billion of federal CARES Act Coronavirus relief and $355 million from the 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:

Learning supports that begin prior to the start of the school year, and the continuing intensive instruction and supports into the school year.
Extending the instructional school year, including an earlier start date, by increasing the number of instructional minutes or days.
Providing additional academic services for pupils, including diagnostic assessments of student learning needs, intensive instruction for addressing gaps in core academic skills, additional instructional materials or supports, or devices and connectivity for the provision of in-classroom and distance learning.
Providing integrated student supports to address other barriers to learning, such as the provision of health, counseling or mental health services; professional development opportunities to help teachers and parents support pupils in distance-learning contexts; access to school breakfast and lunch programs; or programs to address student trauma and social-emotional learning.
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 state-level activity funds in the following manner:

$100 million for grants to county offices of education for the purpose of developing networks of community schools and coordinating health, mental health, and social service supports for high-needs students.
$63.2 million for training and professional development for teachers, administrators, and other school personnel, focused on mitigating opportunity gaps and providing enhanced equity in learning opportunities, addressing trauma‑related health and mental health barriers to learning, and developing strategies to support necessary changes in the educational program, such as implementing distance learning and social distancing.
$1.5 million for the Department of Education for state operations costs associated with COVID-19 pandemic.

Budget and Program Flexibility
The May Revision includes the following fiscal and programmatic flexibilities:

Exemptions for local educational agencies if apportionment deferrals create a documented hardship.
Authority for local educational agencies to exclude state pension payments on behalf of local educational agencies from the calculation of required contributions to routine restricted maintenance.
Subject to public hearing, increases on local educational agency internal inter-fund borrowing limits to help mitigate the impacts of apportionment deferrals.
Authority to use proceeds from the sale of surplus property for one-time general fund purposes.
Options for specified special education staff to utilize technology-based options to serve students.
Extension of the deadline for transitional kindergarten teachers to obtain 24 college units of early childhood education, from August 1, 2020 to August 1, 2021.
The May Revision also express the administration’s intent to work with the Legislature and education stakeholders on other options, including expanded flexibility, to protect core services and minimize impacts on students in the context of reduced funding.

Child Care
The Governor’s January 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 (non-Proposition 98) included $6.8 million in 2020-21 and $10.4 million ongoing 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.

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:

Provide 30 days of payment protection to providers who experienced closures or reduced attendance due to the COVID-19 pandemic.
Suspend family fees for 60 days.
Allow children of essential workers and additional populations of vulnerable children to be eligible for subsidized care, regardless of income.
Direct the Department of Social Services and the Department of Education to publish guidance on health and safety practices to keep families accessing child care safe during the COVID-19 pandemic.

The Administration also provided $100 million in non-Proposition 98 funding, 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.

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:

$144.3 million for state costs associated with SB 89 expenditures, family fee waivers, and provider payment protection.
$125 million for one-time stipends for state-subsidized child care providers offering care during the COVID-19 pandemic.
$73 million for increased access to care for at-risk children and children of essential workers.
$8 million to extend family fee waivers until June 30, 2020.

K-12 Facilities & School Bond. The January Budget proposed allocate $1.5 billion Prop 51 bond funds to support school construction projects, more than double the amount allocated in 2018-19. Presumably this plan remains unchanged