2023–24 California State Budget Finalized—At Least for Now

Governor and Legislature’s State Budget Deal—Overview

After around-the-clock weekend negotiations between Democratic legislative leaders and Governor Gavin Newsom, working against a looming June 30 constitutional deadline, leaders announced a budget agreement late Monday night. On Tuesday, the Governor signed the first version of the state budget bill, passed by the Legislature two weeks ago.  Legislators then began voting on Tuesday on a series of budget amendments and budget “trailer” bills to make statutory changes to implement the negotiated final budget deal in time for the start of the fiscal year on July 1.

The overall state spending plan totals $310 billion ($226 billion General Fund/$84 billion Special Fund) and solves a $31.5 billion deficit problem. The deficit is mostly the result of falling state revenues in recent months due to a downturn in the stock market and resulting decreased capital gains, which is a volatile yet significant source of the state’s revenues. The budget agreement maintains the largest-ever reserves aimed at weathering projected deficits in the out-years as well as a potential economic recession in the coming year or two.

This year’s budget marked a major turnabout from several previous years of record surpluses, big ongoing program commitments, and major one-time augmentations for projects such as broadband expansion in the current and future budget years. Adding to the uncertainties for this season’s budget negotiations was the delayed income tax return filing date due to the federal and state winter storm disaster declarations. As a result, actual revenues in the new budget can be only an educated guess until October 15, and further adjustments may be necessary early next year if revenues continue to underperform projections.

Last year’s state budget featured a $100 billion surplus, so this year’s shortfall was an unpleasant surprise for state budget makers, and solving the big deficit required some tough choices—for public and private interests as well as policymakers.

The deficit gap was closed with a combination of spending reductions totaling $8 billion, including a planned $750 million payment to the federal government to reduce the state’s $20 billion unemployment insurance debt and about $4 billion in funding previously earmarked for climate change and zero-emission programs; delayed spending of nearly $8 billion previously approved for coming years, including funding for building facilities for transitional and full-day kindergarten; postponement in spending $500 million in broadband expansion funding; and more than $15 billion in revised revenue estimates, internal fund shifts and internal borrowing.

SIGNIFICANT HIGHLIGHTS OF THE NEW BUDGET

Public Education

• In spite of the deficit, the legislature was able to continue full funding for public K–14 education, which will see an 8.4% increase in state funding, and keep commitments to previously authorized spending increases for the University of California and California State University.

Health Care

The state budget also provides continued funding for other previous multiyear health care commitments, including:

• Increases to fund California’s universal access to affordable health care, such as the state’s Medi-Cal eligibility expansion for undocumented adults and significant reforms under the Governor’s California Advancing and Innovating Medi-Cal (CalAIM) to better integrate physical and behavioral health care and improve the delivery of managed care, as well as increased premium subsidies for low- and middle-income members of Covered California, the state’s health benefits exchange.
• The Governor and legislature have also agreed to place a bond measure on the March ballot asking voters to increase bond funding for more behavioral health beds and transitional housing aimed at reducing the incidence of homelessness. 

Managed Care Organization (MCO) Tax

The budget agreement implements allocations of available funds from the renewal of the Managed Care Organization (MCO) tax to provide $2.7 billion in state funds (and billions of matching federal dollars) for reimbursement rate increases and other investments annually, beginning in 2025 and going through 2029. Allocations include (state funds only):

• $3.5 billion to the general fund to balance the budget.
• $240 million to raise 2024 reimbursement rates for primary, OB-GYN and some mental health care services. This would put them at 87.5% of what the federal government pays through Medicare.
• $150 million to the Distressed Hospital Loan program (in addition to the $150 million that was allocated earlier this year).
• $50 million into the hospital loan program for seismic retrofitting. 
• $75 million for new medical residency slots. These will likely be focused around Los Angeles, the Imperial Valley and the Central Valley. These funds will start in 2024 and continue for the next four years.

Starting in 2025, for about five years, MCO tax revenue will flow annually to these purposes:

• $1.5 billion to $1.7 billion for the general fund
• $450 million for primary, OB-GYN and non-specialty mental health care services 
• $575 million for other specialties with the biggest physician shortages as determined by the health plans and the Department of Health Care Services 
• $245 million for outpatient services in hospitals
• $90 million for abortion and family planning clinics
• $255 million for emergency rooms
• $100 million for emergency room doctors
• $50 million for hospitals to handle mental health care
• $150 million for public hospitals
• $50 million for ambulances
• $75 million to help with health care workforce shortages
• $300 million for behavioral health slots in skilled nursing facilities, psychiatric facilities or outpatient facilities 

Climate Change

• Last year’s multiyear commitment of more than $6 billion toward battling climate change was reduced by $2.9 billion in the final agreement between the Governor and Democratic leadership.
• Governor Newsom has indicated that he is seeking federal funding from the Inflation Reduction Act and the Infrastructure and Investment and Jobs Act to make up for the cuts. He also asked the legislature to seek voters’ approval of a climate bond ranging from $6 billion to $16 billion.

California Environmental Quality Act (CEQA)

During his May Revise release, the Governor teased upcoming proposals to overhaul the landmark CEQA with the hopes of speeding up infrastructure projects, including the highly controversial Delta tunnel. His package included 11 proposals that, among other things, sought to streamline the permitting process among federal, state and local levels of government.

Legislative leaders made clear their preference was to have CEQA reform separate and distinct from the state budget negotiations and were ultimately successful at having the fast-tracked tunnel project proposal dropped from the final deal, but several other environmental protection, mitigation and funding bills, including some CEQA changes, are part of the final budget deal:

• AB 122 – Omnibus Resources Bill including CEQA exemption for some drought and flood projects
• AB 124 – Green Bank and Energy (Committee on Budget)
• AB 126 – Clean transportation (Reyes) – Reauthorizes the Clean Transportation Program with changes in the funding and timetable for deployment of infrastructure for hydrogen and other zero-emission light-, medium- and heavy-duty vehicle technology
• SB 145 – Caltrans Advanced Mitigation and I-15 Wildlife Crossings (Newman)
• SB 146 – Progressive Design Build, Job Order Contracting, NEPA Assignment (Gonzalez and Friedman)
• SB 147 – Fully Protected Species (Ashby)
• SB 149 – Expedited Judicial Review, Administrative Record Reform (Caballero and Becker)
• SB 150 – Equity (Durazo, Smallwood Cuevas, Gonzalez, Cortese and L. Rivas) 

Housing and Homelessness

• The budget agreement includes $1 billion for local homeless programs; however, that is significantly less than the $3 billion ongoing commitment that cities aggressively lobbied for in state funding. Local representatives argue that one-time funding will not solve the ongoing issues with homelessness and that ongoing dedicated funding is needed to help solve the state’s homeless crisis.
• The agreement also directs $100 million to the Housing and Community Development Department’s flagship Multi-Family Housing Program for developing additional affordable housing and leveraging additional public and private investment dollars.
• It also invests $50 million in the Fresno Public Infrastructure Plan designed to revitalize downtown Fresno and lay the groundwork for infill housing development through transportation, water and green space public works projects.

Hollywood: Film and Television Tax Credit

The legislature and the Governor reached a compromise that has combined the extension of California’s film and television tax credit for an additional five years along with new on-set safety protocols and industry employment diversity targets.

In an effort to win back entertainment business lost to other states, California’s extended film tax credit program will become “refundable” in 2025. In addition to giving qualifying film and TV productions credits toward their state tax liability, the state would give cash payments if studios’ credits are larger than their tax bills. In previous years, only Disney and and one other American mass media company benefited from the tax credit, due to their larger tax bills generated from theme parks. Making the program refundable will allow Netflix, Warner Bros., Discovery, Sony and Paramount to benefit as well.

Eligible productions would need to adhere to new safety rules including hiring a safety advisor to perform a risk assessment prior to filming and be on set during filming. A dedicated portion of the tax credit that productions would receive will depend on meeting diversity targets as well as conducting industry job training at community colleges with enrollment that is predominantly students of color.

Public Transit

Provides $5.1 billion for transit across four years, with 100% flexibility for capital and operations expenses and accountability provisions.