Governor Brown's May Revise 2017-18 Budget

This morning, Governor Jerry Brown released his May Revision to his January budget proposal for the 2017-18 fiscal year. Total budget spending amounts to $183.4 billion.

Governor Brown, an advocate of fiscal restraint in budgeting, utilized his well-known chart illustrating the historic "boom and bust" nature of California's volatile budgeting system. The introduction to his May Revision highlights that as the state's economy recovered from the Great Recession, his past four budgets increased spending. However, he is concerned that this growth cannot continue, stating that there have been ten economic recoveries and ten economic recessions since World War II and he expects California to have an economic downturn within the next two years. His May Revision reflects his belief in fiscal restraint coupled with his fear that an economic downturn is inevitable, by proposing to hold the line on new spending. He noted that it is the role of government to manage and keep an even keel on spending between good times and bad.

The Governor also spoke to ongoing pressures and instability in Washington and the unknown future of the Affordable Care Act. He utilized another chart that illustrated the severe cuts that would be necessary if the Affordable Care Act and the associated federal dollars flowing to California are eliminated.

New General Fund Revenues

The May Revision projects $7.37 billion in additional General Fund revenues, up 6.2% compared to last year's budget, much of the change due to a recently surging stock market that is currently driving higher than projected capital gains tax revenues, providing estimated new revenues of about $2.5 billion over his January budget proposal projection. Last year's revenues were $121.6 billion; this year's total revenues projected in the May Revise are $127.7 billion. The Governor proposes to use the increased revenues and shifts in existing reserve allocations to address some of the big concerns raised in his January budget, including:

• An additional $1.1 billion in Proposition 98 General Fund revenue allocation for K-12 schools and community colleges. Total Prop 98 spending would go from last year's $71.9 billion to $74.6 billion in 2017-18 under the May Revise.
• About $600 million to prevent an immediate, significant cost-shift from the state to counties for the cost of providing in-home supportive services to the elderly and disabled associated with the Governor's January proposal to eliminate the "Coordinated Care Initiative" (CCI) between the state and counties. Now, the Governor proposes to phase in most county cost-sharing responsibilities associated with CCI over five years.
• Restoration of $500 million in childcare funding augmented for the first time since the Great Recession just last year, but originally proposed for suspension in the January budget proposal.
• A reduction of $1.78 billion in the amount from revenues proposed in January for transfer into the state's "rainy day fund," to instead be used to pay-down state debts and liabilities, including a very significant new proposal to pay down a large fraction of the state's pension liabilities. (See next section for more on this.)
• Notably, the Governor has not changed his position on using more than $1.2 billion in new revenues from the Proposition 56 tobacco tax increase approved last November—projected slightly higher than in January—to offset costs for existing Medi-Cal programs and services rather than using some or all of the new funds to increase rates paid to Medi-Cal doctors, dentists and other providers, and improve access to care as the ballot measure's text appears to require.

More New or Updated Spending Proposals

Governor Brown's May Revision includes few new or substantially changed proposals from his January Budget Proposal, but he does propose new or additional spending in the following areas:

• Unfunded Liabilities: The May Revision proposes a $6 billion supplemental payment to CalPERS with a loan from the Surplus Money Investment Fund to partially reduce unfunded liabilities. The liabilities, presently estimated at $59.5 billion, would be paid down using loaned funds from the Surplus Money Investment Fund, which would be paid back at low annual interest rates but earn much higher returns when invested by CalPERS, in turn reducing the state's pension contribution rates—a net savings for state estimated at $11 billion over the next 20 years.
• Higher Education: The May Revision sets aside $50 million from the funds appropriated to the UC to be released only once the Director of Finance certifies that the UC has made progress in implementing reforms and the State Auditor's recommendations.
• Cal Grants: The May Revision also reverses a scheduled reduction in the maximum Cal Grant tuition award for new students attending private institutions, which keeps the award at $9,084 (instead of $8,056) at a cost of $8 million in 2017-18.
• HHS: The May Revision includes $158.7 billion for all health and human services programs, a decrease of $324.8 million in General Fund dollars compared to the Governor's January budget.
• Housing: While the Governor's May Revision makes repeated reference to the impact of the housing shortage on the state's economic forecast, his proposal makes no changes to his January budget which recouped $400 million allocated to affordable housing in the 2016-17 budget.
• Cannabis: The May Revision allocates an additional $43.2 million for cannabis-related activities, for a total of $94.6 million in 2017-18 to implement Proposition 64 and support ongoing efforts to address environmental and public safety concerns.
• K-12 Education: The May Revision includes total funding of $92.3 billion ($54.2 billion General Fund and $38.1 billion other funds) for all K-12 education programs, including increases in local property tax adjustments and cost of living increases as compared to the January proposal.

Significant Non-General Fund Items in the May Revise Including New Revenues and Spending Plan for Transportation Improvements

In addition to the all-important General Fund revenues and expenditures which provide the least restricted source of state spending, the total state budget spending includes funds from the Federal Government earmarked for spending under the state's direction, bond funds ($3.44 billion proposed), and other special funds ($55.96 billion proposed), from which the state spends money for statutorily or constitutionally restricted purposes, using dedicated taxes and fees.

Two items have particular significance in this year's spending plan:

• The Road Repair and Accountability Act of 2017, enacted just last month, is projected to provide an average of $5.4 billion per year for state and local transportation in the coming decade. The package includes a combination of new revenues, including a 12-cent increase in gas taxes, a new annual sliding scale vehicle fee, and accelerated repayment of loans made to the General Fund during the recession. Transportation spending using the new revenues will be split evenly between state and local transportation priorities, and the 10-year funding plan provides $54 billion, with the priority on a "fix-it first" strategy focusing on repairing and maintaining the existing transportation infrastructure. Also included are significant investments in public transit. The spending plan for 2017-18 proposes to invest $2.8 billion on "fix-it first" priorities including repairs on local roads, state highways and bridges.
• The future of cap and trade revenues aimed at reducing California greenhouse gas emissions to 1990 levels or lower will likely be determined separately from the State Budget this year, but on the same timetable, with the Governor hoping to stabilize revenues for this multi-billion dollar revenue-producer by getting a 2/3 vote re-authorization for the program in the Legislature before June 30. The 2/3 vote should insulate the program from legal challenges that cap and trade amounts to a tax and therefore requires a 2/3 legislative vote to be legal.

Reaction of the Legislative Leadership

Assembly Speaker Anthony Rendon (D)
"This is a better budget than the one the Governor proposed in January, and it shows the benefits of the responsible approach that we've been taking. While revenues are below what was projected, the state's fiscal position is strong, giving us the flexibility to avoid cuts and to make targeted investments."

Assemblyman Phil Ting (D), Chair of the Assembly Budget Committee
"California is in good shape. Our economy is growing and our people are working. After reaching an agreement on transportation funding that evaded us for decades, we must harness this momentum and craft a budget that helps more of our people prosper and build a better future for their kids. With Washington pursuing an agenda of self-sabotage, our budget must protect California and persist onward to a future with liberty, opportunity and justice for all. We differ with Governor Brown on some key areas, notably preserving middle class scholarships for college, raising reimbursement rates in Medi-Cal and investing in affordable housing. We also seek new investments in debt free college and poverty reduction. Whatever disagreements come to light over the next month, they won't change the fact that this budget will keep California moving forward."

Senate President Pro Tempore Kevin de Leon
"This is an improvement on the January proposal and I thank Governor Brown for recognizing the importance of quality child care in improving the lives of working families and creating a path for success for future generations. Today's revised budget proposal also includes new investments in K-12 education, and buys down the CalPERS pension debt. And because of leadership taken in passing SB 1, California will be adding almost $3 billion to fix our roads and bridges immediately and creating jobs for the middle class. I look forward to working with Senate Budget Chair Holly Mitchell, the Governor, the Speaker and my colleagues in the Senate and Assembly to pass an on-time and balanced budget next month."

Next Steps

Pursuant to the California Constitution, Art. IV, Sec. 12(c)(3), the Legislature has until Midnight on June 15 to pass the budget. Once signed by the Governor, the new spending plan will take effect July 1, 2017, the start of the 2017-18 budget year. According to our sources in the Legislature, the current goal is for budget sub-committees in both houses to complete their work and recommendations next week in preparation for a preliminary budget vote on the Legislature's proposed budget the following week. After that, this legislative budget proposal will go to a two-house conference committee to iron out differences between Senate and Assembly versions, and also to incorporate any elements of the Governor's May Revision Budget Proposal negotiated and agreed upon between the legislative leadership and Governor, prior to a final vote by the Legislature on the 2017-18 State Budget no later than June 15 and final action by the Governor no later than June 30.