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key takeaway

Policymakers avoided major cuts to critical services in the 2023-24 California state budget, but additional revenues are needed to make meaningful investments for Californians in the future.

The ink is now dry on the 2023-24 California state budget agreement. The Legislature has passed and the governor has signed the budget bills and a package of budget-related trailer bills. Policymakers avoided major cuts to critical services, but additional revenues are needed to make meaningful investments for Californians in the future.

The enacted budget includes $225.9 billion in General Fund spending, down from $234.6 billion in 2022-23. Surpluses turned to deficits as revenue estimates fell, creating a $30 billion budget problem. The enacted budget includes a variety of solutions to close this shortfall without any major cuts to core services. These solutions include delaying or reducing some previously committed spending, shifting some spending between state funds, and internal borrowing.

The budget also extends the Managed Care Organization (MCO) tax, which will draw down additional federal dollars and offset state Medi-Cal spending (see Health section). Some spending items that were reduced in the budget may be restored if sufficient resources are available in 2024. The governor’s administration can delay one-time spending items until March 1, 2024, if a major revenue shortfall arises when the Legislature is not in session. However, the Legislature must approve further delays or reductions. State leaders must address significant budget shortfalls in the coming years, despite the balanced nature of the 2023-24 budget.

This report highlights key components of the budget agreement that help to improve the social and economic well-being of:

  • Californians with low incomes,
  • Californians of color,
  • women,
  • immigrants,
  • and others historically excluded from economic opportunities.

Areas where the budget agreement misses opportunities to support Californians are also highlighted.


Budget Overview

Revenues

What does the state budget include?

The enacted budget assumes General Fund revenues, including transfers, of $208.7 billion for 2023-24, in line with the governor’s May Revision estimates. Revenues for the 2022-23 fiscal year were also revised down significantly from the 2022 budget estimates. This reflects economic challenges including:

  • High inflation
  • Interest rate increase
  • Collapse of the Initial Public Offering (IPO) market

The final budget did not adopt the more conservative revenue estimates of the Legislative Analyst’s Office (LAO). According to the LAO, the state’s primary General Fund revenue sources would be about $11 billion lower across 2021-22 to 2023-24 than the administration’s estimates. So if revenues fall short, budget amendments may be needed.

How can state leaders better support Californians?

Making tax policy changes to significantly increase revenues. This would be needed to make substantial new investments to improve the lives of Californians. Such changes could also make the tax system more fair. The Senate’s April proposal to restructure corporate taxes and raise revenues was not included in the final budget. This would have addressed some of the state’s most pressing challenges.

Reserves

What does the state budget include?

The budget does not withdraw any funds from the state’s budget reserves. This leaves them fully available to help prevent budget cuts in the future during an economic downturn or budget emergency. This is in contrast to the governor’s May proposal to withdraw $450 million of the current $900 million balance of the Safety Net Reserve, which is intended to be used to maintain CalWORKs and Medi-Cal benefits during economic downturns.

Under the enacted budget, the 2023-24 combined balance of the state’s four budget reserves — the Budget Stabilization Account, the Public School System Stabilization Account, the Special Fund for Economic Uncertainties, and the Safety Net Reserve — is estimated to total nearly $38 billion.

Health

Managed Care Organization (MCO) Tax

What does the state budget include?

The budget includes the renewal of the MCO tax, effective April 1, 2023 through December 31, 2026. The MCO tax essentially reduces — or “offsets” — state General Fund spending on Medi-Cal by well over $1 billion per year. The MCO tax renewal, which requires federal approval, would result in $19.4 billion over the proposed tax period. Of this amount, $8.3 billion would support the Medi-Cal program, and $11.1 billion would support provider rate increases to drive greater Medi-Cal provider participation. For 2023-24, the budget includes $237.4 million to increase Medi-Cal provider rates effective January 1, 2024 for primary care, maternity care (including doulas), and non-specialty mental health services.

How can state leaders better support Californians?

Increasing education and training to prepare health workers to meet California’s health needs. In 2019, the California Future Health Workforce Commission developed a strategic plan for addressing health workforce gaps. According to a recent progress report, policymakers have made progress on many of the priority recommendations. However, state leaders can do more to recruit and train students from rural areas and other historically underserved communities to practice in community health centers.

Access to Medi-Cal

What does the state budget include?

The budget maintains the commitment to expand full-scope Medi-Cal eligibility to undocumented immigrants ages 26 to 49 starting January 1, 2024. This builds on previous steps state leaders have taken to end the racist and exclusionary policy that blocks Californians from accessing vital health services. To provide Medi-Cal for adults age 26 and over, the state is estimated to allocate $1.4 billion ($1.2 billion General Fund) in 2023-24 and $3.4 billion ($3.1 billion General Fund) at full implementation, inclusive of In-Home Supportive Services costs.

How can state leaders better support Californians?

Removing barriers to Covered California — the state’s health insurance marketplace — based on immigration status. Undocumented Californians who are not income-eligible for Medi-Cal are unjustly excluded from accessing and purchasing health care coverage plans through Covered California.

Covered California Affordability

What does the state budget include?

The budget provides $82.5 million in 2023-24 and $165 million annually thereafter to reduce the cost of health coverage through Covered California. The budget also includes a $600 million loan to the General Fund to help address the state budget shortfall, which will be repaid in 2025-26. This compromise between the Legislature and the governor’s administration will provide affordability assistance to Californians who lack access to affordable health care.

How can state leaders better support Californians?

Providing greater financial assistance for Californians who are uninsured and struggling to purchase coverage. Additionally, providing assistance for those who are insured but can’t afford to access the care they need. Policymakers should ensure that dollars raised from the state’s individual mandate penalty help people afford health insurance through Covered California, as was intended when the penalty was established.

related content

Want to learn more about each of California’s budget reserve accounts? View our Report: California’s State Budget Reserves Explained.

Homelessness and Housing

Homelessness

What does the state budget include?

The budget upheld previously promised funds for critical homelessness services and supports, including another $1 billion one-time investment in local flexible funding to address homelessness in 2023-24. These funds will be contingent on local jurisdictions developing regionally coordinated homelessness action plans. Also allocated is $400 million one-time General Fund for local encampment resolution grants, and $265 million one-time for the Mental Health Services Fund in 2023-24 and $235 million General Fund in 2024-25 for bridge housing for people experiencing homelessness with serious mental illness. Funding adjustments were also made to support the CARE Act implementation starting in select counties this fall.

How can state leaders better support Californians?

Centering ongoing, at-scale funding to adequately resource local response systems and enable long-term planning for future years. Expanding affordable permanent housing, especially for Californians with the lowest incomes, is also needed to end to homelessness.

Affordable Housing

What does the state budget include?

The 2023-24 enacted budget largely maintains prior allocated funding for affordable housing development. It provides an additional $500 million for the state’s Low Income Housing Tax Credit program and supplemented $100 million for the Multifamily Housing program for a total of $325 million in 2023-24. Other allocations in 2023-24 include:

  • $250 million for adaptive reuse of underutilized commercial spaces
  • $225 million for infrastructure for infill housing
  • $82.5 million (for a total of $330 million over four years) to help preserve affordable housing and promote residential property ownership

The budget sustained $500 million one-time General Fund for the Dream for All program. It also reduced the CalHome program to $300 million one-time General Fund in 2023-24. Both of these programs promote first-time homeownership for low or moderate income Californians.

How can state leaders better support Californians?

Scaling affordable housing development and preservation investments to match our housing needs. Many Californians — especially those with low incomes, renters and people of color — continue to struggle to afford their homes. Addressing our housing shortage must be prioritized.

Economic Security

Safety Net

What does the state budget include?

The budget protects a 10 percent increase to the California Work Opportunity and Responsibility to Kids (CalWORKs) program grant. This grant increase was set to expire in 2024. Regarding food assistance, the budget allocates $47 million to phase in a Summer Electronic Benefit Transfer (EBT) program for children who qualify for free or reduced-price school meals, and $15 million for a pilot program that will increase the CalFresh minimum from $23 to $50 for selected participants.

The budget also moves up the expansion of the California Food Assistance Program (CFAP) to October 2025. This expansion will extend benefits to undocumented adults over 55. The budget also includes the governor’s proposal of an 8.6% increase to the Supplemental Security Income/State Supplementary Payment (SSI/SSP) grants.

How can state leaders better support Californians?

Reforming CalWORKs. The exclusion of the Reimagine CalWORKs effort from this year’s final budget was a significant missed opportunity. The effort could have impacted thousands of children by transforming the CalWORKs participation requirements to make the program more family-centered, anti-racist, and participant-inclusive.

Tax Credits

What does the state budget include?

The budget clarifies that recipients of the Foster Youth Tax Credit (FYTC) – in addition to recipients of the CalEITC and Young Child Tax Credit (YCTC) – cannot have their tax refunds intercepted for debt payments (with the exception of child or family support payments). This will provide critical relief for low-income foster youth once this provision goes into effect.

How can state leaders better support Californians?

Strengthening and expanding California’s refundable tax credits. Important next steps include:

  • Increasing the minimum CalEITC to provide a more meaningful credit to workers with low incomes.
  • Extending the YCTC to all CalEITC-eligible families with children, not just those with kids ages 0 to 5.
  • Increasing the renter’s tax credit and making it refundable. This would help Californians with the lowest incomes who are currently excluded from the credit, even though they have the greatest difficulty affording rent.

Senate Bill 220 (Committee on Budget and Fiscal Review) would implement these CalEITC and renter’s tax improvements as part of a broader package of policy changes.

Child Care

What does the state budget include?

The budget includes $56 million from the General Fund for permanent family fee reform beginning October 1, 2023. Under the new family fee structure, families below 75% of the state median income (SMI) will no longer pay a fee for subsidized child care. Additionally, families at or above 75% of the SMI will have fees capped at 1% of monthly income.

The budget also provides a total of nearly $1.4 billion in one-time funds for rate increases for providers reimbursed through the California Department of Social Services (CDSS). The agreement with Child Care Providers United, signed by the governor on September 14, 2023, specifies the amount of additional funds providers will receive per child, per month. The budget also authorizes CDSS to develop an alternative methodology for child care program reimbursement rates.

How can state leaders better support Californians?

Continuing to expand child care slots. While the slots created during the past two cycles (over 100,000) will be maintained, the budget delays 20,000 additional slots until 2024-25. Notably, the legislative budget agreement included these additional slots for 2023-24. However, this did not make it into the enacted budget.

Immigrant Californians

What does the state budget include?

The enacted budget maintains and further invests in funding for a variety of programs and services to support immigrant Californians. New investments include:

  • $150 million in funding for shelters and services for people at the border.
  • $5 million for organizations to provide education and employment services to all workers, regardless of immigration status.
  • $5 million in one-time funding to support unaccompanied undocumented minors.

Additional support for immigrant Californians include further investments in food assistance, health insurance, and worker services. More details are available in the Safety Net, Health, and Labor sections, respectively.

How can state leaders better support Californians?

Better supporting  undocumented Californians. This year’s budget missed an opportunity to expand eligibility of the Cash Assistance Program for Immigrants (CAPI) to include immigrants who are undocumented. Another missed opportunity was failing to extend unemployment benefits to excluded immigrant workers (see Labor section).

state budget terms defined

What’s the difference between a trailer bill and a policy bill? And what exactly is a “Budget Bill Jr.”? Our Glossary of State Budget Terms answers these questions and more.

Education

Early Learning and Pre-K

What does the state budget include?

The family fee and rate reform changes described in the child care section also apply to the California State Preschool Program (CSPP). Specifically, $22.4 million is allocated for family fee reform and $1.47 billion is provided for CSPP provider rate increases. The budget also provides $597 million for Transitional Kindergarten (TK) enrollment growth — 42,000 new enrollments — in 2023-24.

How can state leaders better support Californians?

Following up on the delays noted in the 2023-24 budget, including:

  • Delaying the requirement to lower TK classroom ratios to 1:10 until 2025-26. 
  • Extending the deadline for TK teachers to earn 24 units (or equivalent), a child development permit, or an early child childhood education specialist credential from August 2023 to August 2025.  
  • Delaying $550 million to 2024-25 in facilities funding for TK, CSPP, and Kindergarten.
  • Delaying the requirement that at least 7.5% of enrollment in CSPP enrollment is reserved for children with exceptional needs to July 1, 2025.

K-12 Education

What does the state budget include?

The budget provides some notable investments in K-12 education, including:

  • An 8.22 percent cost-of-living adjustment (COLA) for the Local Control Funding Formula (LCFF). This is the largest COLA since the establishment of the LCFF a decade ago.
  • $300 million ongoing for an “Equity Multiplier” add-on to the LCFF. This will be allocated to school sites on a per pupil basis based on a metrical called the “nonstability” rate.1The definition of “nonstability rate” includes the percentage of pupils who are enrolled for less than 245 continuous days between July 1 and June 30 of the prior school year.
  • $20 million one-time for a Bilingual Teacher Professional Development program. This will provide professional learning opportunities to increase the number of teachers authorized to teach in bilingual settings.

Lastly, the budget reduces two one-time block grants provided in last year’s budget agreement:

  • A $1.7 billion cut to the Learning Recovery Emergency Block Grant, from $7.94 to $6.25 billion.
  • A $200 million cut to the Arts, Music, and Instructional Materials Discretionary Block Grant, from $3.56 billion to $3.36 billion.

How can state leaders better support Californians?

Targeting efforts to address major issues that impact student learning, including:

  • High rates of absenteeism, especially among students of color and students from low-income households.
  • Addressing staffing shortages in areas with high need.

Higher Education

What does the state budget include?

The budget maintains funding for the Higher Education Student Housing Grant program for the construction of affordable student housing at all three segments of higher education. However, funding for these projects will shift from the General Fund to bonds.

The 2023-24 budget also includes base funding increases for public colleges and universities. Specifically:

  • $790 million for the California Community Colleges (CCCs), reflecting an 8.22 percent cost-of-living adjustment for the Student Centered Funding Formula. 
  • An increase of $227 million California State University (CSU) system.
  • An increase of $215 million for the University of California (UC) system.

Notably, the budget also includes:

  • An increase of $227 million one-time for the Middle Class Scholarship (MCS). This provides aid to eligible students who attend a UC or CSU university or those pursuing a bachelor’s degree at the CCCs.
  • Funding through the MCS and the Student Success Completion Grant program to cover the cost of college for current and former foster youth students.

How can state leaders better support Californians?

Ensuring next year’s budget enacts the Cal Grant reform. Additionally, making the state’s financial aid system more equitable for students from families with low incomes.

Other

Labor and Workforce

What does the state budget include?

The budget invests $35 million in the Domestic Worker and Employer Education and Outreach Program and makes this program permanent. This will help community based organizations ensure that domestic workers’ rights and protections are upheld throughout the state.

How can state leaders better support Californians?

Providing unemployment benefits to Californians who lose their jobs and are undocumented. Especially those who continue to be excluded from unemployment insurance benefits.

All California workers should have a financial cushion to help them stay housed and put food on the table when they lose a job. Establishing an Excluded Workers Program to provide this vital safety net was prioritized by the Senate, but was not included in the final budget deal with the governor. A joint house legislative agreement to establish a work group to explore options for establishing a permanent excluded workers fund was also left out of the final deal.

State Corrections

What does the state budget include?

The 2023-24 enacted budget continues plans to downsize the state’s prison system. The budget addresses prison closures by declaring an intent to shut down additional prisons. This is accompanied by a requirement for the California Department of Corrections & Rehabilitation (CDCR) to assess the state prison system’s capacity and needs and report back to the Legislature during 2023. This report should provide a foundation to understand where opportunities lie in closing more state prisons. Additionally, the enacted budget includes $361 million from the Public Buildings Construction Fund to build an educational and vocational center at San Quentin State Prison, which will be renamed the San Quentin Rehabilitation Center.

How can state leaders better support Californians?

Further downsizing the prison system. According to a report by the Legislative Analyst’s Office, the state can safely close up to five additional prisons, saving the state around $1 billion per year. These savings could be used to provide services and supports for individuals after they are released from prison in order to help them rebuild their lives in their communities.

Public Safety

What does the state budget include?

The enacted budget funds a variety of public safety measures designed to improve the safety of all Californians, including:

  • An additional $12 million to assist tribal police and prosecutors in cases of missing/murdered Indigenous persons.
  • $20 million in one-time funding to enhance security at nonprofits that are at risk of hate-motivated violence.
  • Restoring $40 million in one-time funding for the third year of a three-year Public Defense Pilot Program. This allocates funding to counties to provide public defenders for those who cannot afford legal services.
  • Restructuring a gun buyback program in order to more quickly address mass shootings.
  • Providing $113 million for the Safe Neighborhoods and Schools Fund (Proposition 47 of 2014) to help reduce recidivism, support truancy and dropout prevention programs, and fund services for crime victims. This funding reflects state-level savings due to declining incarceration following the implementation of Prop. 47.

Tax Policy Changes

What does the state budget include?

Although the budget agreement does not contain substantial tax revenue increases to support new spending, state leaders did take a positive step by limiting one strategy that wealthy people use to avoid state income taxes, which will increase state revenues by an estimated $17 million annually.

However, the enacted budget also commits the state to five additional years of the film tax credit starting in 2025-26 and will even allow businesses to get cash back if their credit amount exceeds the taxes they owe. The extension of this credit — which has not been shown to be very cost-effective — will cost the state around $1.6 billion over 12 years at a time when the state is facing budget shortfalls in future years.

How can state leaders better support Californians?

Meaningfully and equitably raising revenues to support the services that Californians need —including by reducing or eliminating tax breaks that mainly benefit highly profitable corporations and wealthy people.

  • 1
    The definition of “nonstability rate” includes the percentage of pupils who are enrolled for less than 245 continuous days between July 1 and June 30 of the prior school year.

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Introduction

Governor Gavin Newsom released the May Revision to his proposed 2023-24 California state budget on May 12, projecting a $31.5 billion shortfall, up from a projected $22.5 billion shortfall in January. The administration proposes to resolve the shortfall through a series of spending reductions, trigger cuts, and delays or deferrals of spending authorized in earlier years as well as through internal borrowing and fund shifts. The $224 billion General Fund spending plan would protect many ongoing investments made in prior years, mostly maintains state reserves that are projected to total $37.2 billion, and rejects raising revenues to continue to invest in Californians.

Despite the growing shortfall, the governor’s revised budget manages to protect and maintain much of the progress made in prior years to help improve economic security and opportunities for Californians with low incomes, including investments in health care and behavioral health, safety net and cash assistance programs, homelessness and housing, and cradle-to-career education.

Each year the state budget provides state leaders with an opportunity to fund the vision of California they aspire to create. As Californians continue to experience the rising costs of basic needs like food, child care, and housing, our state’s leaders face increasing demands for essential services to meet the needs of our communities. This is especially important for Black, Latinx, and other Californians of color as well as for Californians with low incomes, who repeatedly bear the brunt of economic downturns, rising cost of living, and austerity policies.

Yet, the governor’s proposal misses an opportunity to consider additional revenues and ensure large and highly profitable corporations pay their fair share, as proposed in the state Senate’s budget plan. The Senate’s proposal proves that state policymakers can take steps to make critical investments to improve economic security, address homelessness and unaffordable housing costs, and support child care providers.

Budget shortfalls should not be addressed solely through spending solutions. State leaders should consider other tools, like raising revenues and redirecting spending that supports the wealthy and corporations, to further protect essential services and continue to make progress toward a more equitable California.

This First Look report outlines key pieces of the May Revision and explores how the governor prioritizes spending amid the first budget shortfall of his tenure.

WHat is the May Revision?

Released on or before May 14, the May Revision updates the governor’s economic and revenue outlook; adjusts the governor’s proposed expenditures to reflect revised estimates and assumptions; revises, supplements, or withdraws policy initiatives that were included in the governor’s proposed budget in January; and outlines adjustments to the minimum funding guarantee for K-14 education required by Proposition 98 (1988).

Contents

Budget Overview

Health

Homelessness & Housing

Economic Security

Education

Workforce & Other Proposals


Budget Overview

Governor’s Updated Economic Forecast Assumes Slow Growth but No Recession

The governor’s May Revision highlights several risks to the economic outlook — including the federal debt ceiling standoff, high interest rates, bank failures, and tech sector layoffs — but does not anticipate a recession. The forecast assumes nationwide economic growth to be slow but positive through most of 2023, then to recover to more normal rates (1.5% – 2%) beginning later in the year as inflation continues to moderate and monetary policy eases, continuing through the forecast period ending in 2026.

The administration notes several reasons for cautious optimism: inflation has been slowing, consumer spending is still strong, and the state is continuing to add jobs, albeit at a slower rate than during the recovery from the dramatic losses early in the pandemic. The revised budget also maintains that despite some high-profile tech layoffs, employment in the information sector is still above pre-pandemic level, many of the layoffs have occurred outside of California, and they likely represent a “correction to apparent over-hiring at some firms during the pandemic.” The forecast does not anticipate any major banking or tech sector crises that would disrupt the economy.

The forecast assumes that job growth will continue to slow throughout 2023 and 2024 and revert to its historical trend, and that the state’s unemployment rate will increase through 2025 to a peak of 5.2% due to the effects of higher interest rates and more cautious lending activity on business investment and the labor market.

Average wage growth in the state fell to almost zero in 2022 after strong growth in previous years, largely reflecting declines in the highest-paying sectors that have seen reductions in bonuses and stock options. The forecast anticipates that wage growth will recover to around 3% in 2023 and 2024 and 4% in 2025. Taking into account inflation, real average wage growth was negative in 2022 and the forecast doesn’t project positive real wage growth until 2025.

Revised Budget Downgrades Revenue Estimates, Includes No New Tax Proposals

The governor’s January budget proposal projected a $29.5 billion shortfall in state General Fund revenue relative to the estimates in the enacted 2022 budget. Since then, revenue collections have come in even lower than anticipated, reflecting weaker stock market performance and inflation-adjusted wage growth. Due to the weaker revenue collections and the risks to the economic outlook, the revised budget assumes General Fund revenues for the three-year budget window ending with the 2023-24 fiscal year will be $8.4 billion lower than expected in January.

Relative to the January projections, the revised budget anticipates revenues for the state’s “Big Three” revenue sources to be:

  • $14.3 billion lower for the personal income tax ($3.2 billion lower excluding the impact of the pass-through entity elective tax, which shifts some revenue from the personal income tax system into the corporate tax system),
  • $6.2 billion higher for the corporation tax ($4.3 billion lower excluding the impact of the pass-through entity tax), and
  • $100 million higher for the sales and use tax.

These estimates are based on the assumption that the economy does not go into recession. The administration notes that in the case of a mild to moderate recession, General Fund revenues could fall below these estimates by $20 billion to $40 billion. Also notable, updated estimates of the state’s “Big Three” tax revenues across the budget window from the Legislative Analyst’s Office are $11 billion lower than the governor’s May Revision estimates, suggesting that the actual budget problem could be substantially larger than the governor is projecting.

The updated revenue estimate is subject to additional uncertainty this year as a result of the extension of tax payment deadlines for most Californians into October, giving estimators less complete information about the state’s revenue situation than they usually have at this point in the year. The May Revision assumes that these extensions will result in about $42 billion of personal and corporation income tax revenues being delayed until October. This uncertainty increases the likelihood that the 2023-24 budget will be subject to more substantial adjustments after being signed into law than in most years.

The governor does not propose any substantial revenue increases to protect or strengthen services and supports for Californians, nor does he propose any additional tax policy changes beyond his January proposals. These proposals included closing a tax loophole related to income from certain trusts, exempting forgiven student loan debt from state taxation, extending and making refundable the state’s film and television tax credit, and changing the rules for the state’s existing New Employment Credit.

In stark contrast to the governor’s proposal, the state’s Senate Budget Plan released on April 26 includes a proposal to move from a single tax rate on general corporations to a graduated tax rate where the first $1.5 million of a corporation’s state profits would be taxed at 6.63% while profits above that level would be taxed at 10.99%. This change is estimated to raise several billion dollars in state revenue and would support proposals to increase tax credits for Californians with low- and middle-incomes (see the refundable tax credits section), ongoing funding to address homelessness, child care provider rate increases, K-14 education funding, and shoring up the state’s Safety Net Reserve.

May Revision Mostly Maintains State’s Reserves, but Draws Down Safety Net Reserve

California has a number of state reserve accounts that set aside funds intended to be used for a “rainy day,” when economic conditions worsen and state revenues decline. Some reserves are established in the state’s Constitution to require deposits and restrict withdrawals, and some are at the discretion of state policymakers.

California voters approved Proposition 2 in November 2014, amending the California Constitution to revise the rules for the state’s Budget Stabilization Account (BSA), commonly referred to as the rainy day fund. Prop. 2 requires an annual set-aside equal to 1.5% of estimated General Fund revenues. An additional set-aside is required when capital gains revenues in a given year exceed 8% of General Fund tax revenues. For 15 years — from 2015-16 to 2029-30 — half of these funds must be deposited into the rainy day fund and the other half is to be used to reduce certain state liabilities (also known as “budgetary debt”). Prop. 2 also established a new state budget reserve for K-12 schools and community colleges called the Public School System Stabilization Account (PSSSA). The PSSSA requires that when certain conditions are met, the state must deposit a portion of General Fund revenues into this reserve as part of California’s Prop. 98 funding guarantee (see section on Prop. 98).

In addition, Prop. 2 increased the maximum size of the BSA to approximately 10% of estimated General Fund revenues. If this limit is reached, any dollars that otherwise would have gone into the BSA would have to be spent on infrastructure, including spending related to deferred maintenance. Similarly, Prop. 2 caps the size of the PSSSA at 10% of the estimated Prop. 98 minimum funding guarantee for schools and community colleges. If this limit is reached, state policymakers are required to use the dollars that would otherwise have been deposited into the PSSSA to instead support schools and community colleges.

The BSA is not California’s only reserve fund. The 2018-19 budget agreement created the Safety Net Reserve, which holds funds intended to be used to maintain benefits and services for CalWORKs and Medi-Cal participants in the event of an economic downturn. Additionally, each year, the state deposits additional funds into a “Special Fund for Economic Uncertainties” (SFEU) — a reserve fund where state leaders have a lot of flexibility and discretion as to when and how they can use the available funds.

The governor’s May Revision does not draw down the BSA to cover the projected state revenue shortfall and projects an increase in the PSSSA balance. For 2023-24, the proposal projects a BSA balance of $22.3 billion — the same as the 2022-23 level — and a PSSSA balance of $10.7 billion — up from $9.9 billion in 2022-23. The administration estimates the BSA in 2023-24 will continue to top out at 10% of estimated General Fund revenues, requiring that $2.3 billion that would exceed that level be spent on infrastructure projects. In addition, the PSSSA is expected to reach 10% of the Prop. 98 minimum funding guarantee.

The May Revision does propose to draw down $450 million from the Safety Net Reserve, leaving $450 million in that account. In contrast, the state’s Senate Budget Plan released in late April would increase the Safety Net Reserve to $1.9 billion.

The SFEU is projected to be $3.8 billion in 2023-24, down significantly from its current year (2022-23) projected total of $18.8 billion.

Taking into account the BSA, PSSSA, Safety Net Reserve, and SFEU, the governor’s proposal would include total reserves of $37.2 billion in 2023-24.

Health

Governor Maintains Commitment to Expand Medi-Cal to All Undocumented Californians

California has expanded access to health coverage in recent years, building on the federal Affordable Care Act (ACA). More than 15 million Californians with modest incomes — nearly half of whom are Latinx — are projected to receive free or low-cost health care through Medi-Cal (California’s Medicaid program) in 2022-23. Another 1.7 million Californians purchase health coverage through Covered California, our state’s health insurance marketplace. Nonetheless, many Californians — including immigrants who are undocumented — remain uninsured, while those with health coverage often face high monthly premiums and excessive out-of-pocket costs, such as copays and deductibles, when they seek health care services.

The governor’s revised budget protects major health care investments that were enacted in the 2022 Budget Act. Most notably, the budget maintains the commitment to expand full-scope Medi-Cal eligibility to undocumented immigrants ages 26 to 49 starting January 1, 2024. In recent years, California has expanded eligibility for comprehensive Medi-Cal coverage to certain immigrants who qualify for the program except for their immigration status, including children and young adults up to age 25 as well as adults age 50 and older. However, undocumented adults ages 26 to 49 continue to be excluded. The enacted 2022-23 budget began the process of closing this eligibility gap by extending full-scope coverage to these adults no sooner than January 1, 2024. The May Revision includes additional funding for the two most recent Medi-Cal expansions: $1.6 billion General Fund in 2023-24 and an estimated $2.4 billion General Fund annually. These figures include the cost of providing In-Home Supportive Services to newly eligible adults who are anticipated to enroll in the program.

In addition, the governor’s revised budget maintains the proposal to renew California’s Managed Care Organization (MCO) tax, effective April 1, 2023 through December 31, 2026. The May Revision advances the effective date nine months earlier than planned in the governor’s proposed budget. The MCO tax essentially reduces — or “offsets” — state General Fund spending on Medi-Cal by well over $1 billion per year. The renewal of the MCO tax, which requires federal approval, would result in $19.4 billion to maintain Medi-Cal funding. Of this amount, $10.3 billion, including $922.7 million in 2023-24,  would be set aside for future use and $8.3 billion over the proposed MCO tax period would support the Medi-Cal program, offsetting General Fund spending. The remaining funding would be allocated as follows: $237 million ($98 million General Fund) in 2023-24 and $580 million ($240 million General Fund) annually thereafter to increase provider rates for primary care, obstetric care (including doulas), and non-specialty mental health services.

While the revised budget proposal would improve health care access and affordability for many Californians, it fails to use dollars raised from the state’s individual mandate penalty as intended when the penalty was established: to help people afford health insurance through Covered California. Penalizing Californians with low-to-moderate incomes for not obtaining health coverage and then failing to use the penalty revenue to address the high cost of coverage and care is an injustice. As outlined in the state Senate’s budget plan, the governor should provide greater financial assistance to Californians who are uninsured and struggling to purchase coverage given that premiums, deductibles, and other out-of-pocket costs are on the rise. Access to timely, quality, and comprehensive health care services is critical because it promotes overall physical and mental health. When people do not have access to health coverage, they are less likely to receive preventive care, less likely to receive treatment for chronic health conditions, and more likely to report a poor health status.

Revised Budget Sustains Major Behavioral Health Initiatives

Behavioral health services — mental health care and/or treatment for substance use — are primarily provided by California’s 58 counties, with funding from the state and federal governments. These services support millions of Californians who cope with mental illness or substance use disorders. Unfortunately, many Californians experience barriers to accessing the behavioral health care services they need in order to thrive, particularly individuals experiencing or at risk of homelessness. In addition, LGBTQ+ people and people of color disproportionately experience barriers to care due to the legacies of discrimination.

In recent years, the administration launched various behavioral health initiatives to transform California’s behavioral health system. This summer, the administration will seek approval of a new federal waiver called the Behavioral Health Community-Based Organized Networks of Equitable Care and Treatment (BH-CONNECT) Demonstration — previously known as California’s Behavioral Health Community-Based Continuum (CalBH-CBC) Demonstration. This initiative would complement the administration’s ongoing efforts to expand access to Medi-Cal behavioral health services with a focus on children and youth, individuals experiencing or at risk of homelessness, and justice-involved individuals. The waiver is estimated to cost $6.1 billion ($306.2 million General Fund) over five years and is expected to be implemented no sooner than January 2024. Major reforms to the Medi-Cal program as well as the level of federal funding that will be provided must be negotiated with the federal government through the Medicaid waiver process. As such, implementation of BH-CONNECT will depend on the availability of funding and federal approval.

The administration’s revised budget also includes the following:

  • $500 million from the Mental Health Services Fund to support the Behavioral Health Bridge Housing Program, which aims to address the immediate housing and treatment needs of people with serious behavioral health conditions who are also experiencing unsheltered homelessness. In January, the governor’s administration proposed to postpone $250 million for this program to 2024-25. The revised budget eliminates this delay by using Mental Health Service Fund dollars in lieu of General Fund support. (See the homelessness section for more information about supports for Californians who are experiencing or at risk of homelessness.)
  • $250.3 million Opioid Settlements Fund for opioid and fentanyl response. Of this amount, $220.3 million would be allocated over four years to support the Naloxone Distribution Project. Naloxone is a life-saving medicine that reverses an opioid overdose, which is urgently needed. Over 7,000 Californians died due to opioid overdose and nearly 6,000 Californians died due to a fentanyl overdose in 2021. The remaining $30 million would be available in 2023-24 to support the development of a generic naloxone nasal spray product.
  • $50.5 million Mental Health Services Fund to support the CalHOPE program, which provides crisis support for communities impacted by a national disaster.
  • $50 million General Fund over three years to support behavioral health for older adults. Specifically, the revised budget allocates $20 million General Fund in 2023-24, $20 million General Fund in 2024-25, and $10 million General Fund in 2025-26 to support a targeted media campaign for older adults as well as competitive grants to local governments to identify and address the unique behavioral health needs of older adults.
  • $40 million ($20 million General Fund) to support the governor’s proposal to modernize the state’s behavioral health system. This allocation reflects initial funding to support the governor’s proposed 2024 ballot initiative, which would authorize a general obligation bond to build mental health treatment residential settings for Californians with behavioral health conditions. It would also reform the Mental Health Services Act (Prop. 63 of 2004) by overhauling the funding structure, leading to at least $1 billion annually in local assistance for housing and residential services for people experiencing behavioral health conditions.
  • $15 million one-time 988 State Suicide and Behavioral Health Crisis Services Fund in 2023-24 to support the 988 Suicide & Crisis Lifeline, which helps connect Californians to trained crisis counselors who can help people experiencing a mental health crisis or emotional distress. This funding would support 988 call centers for a total of $19 million in 2023-24 and $12.5 million in 2024-25 and ongoing.

Investments in our behavioral health system are critical. The governor’s commitment to improving access to behavioral health services can support Californians who are coping with mental health conditions or substance use disorders. These investments can also reduce hospitalization or even incarceration due to behavioral health conditions.

May Revision Maintains Public Health Infrastructure Investment, Restores Funding to Rebuild Workforce

Everyone should have the opportunity to be healthy and thrive, regardless of their race, gender identity, sexual orientation, income, or zip code. The California Department of Public Health as well as local public health departments play a critical role in protecting and promoting Californians’ health and well-being. Their responsibilities include infectious disease control, chronic disease prevention, health promotion, and more.

The May Revision maintains $300 million ongoing General Fund to strengthen public health infrastructure at the state and local level. The governor’s revised budget also restores $49.8 million over four years for various public health workforce training and development programs. This is critical because public health funding has historically not kept pace with the cost of responding to ongoing and emerging health threats.

The governor’s revised budget scales back resources for COVID-19 response by $50 million General Fund due to the end of the state of emergencies at the federal and state level. It is important to note that reducing funding for COVID-19 response may have potential implications for managing the virus in the future. State leaders should continue to monitor COVID-19 and make funding adjustments as needed. This includes ongoing funding for state and local public health needs to ensure that California is better prepared to address current and future public health emergencies.

State leaders can do more to make sure all Califorrnians have the opportunity to be healthy and thrive. Given that structural racism continues to have a profound impact on the health and well-being of many communities across the state, the governor’s administration and other state leaders can employ a variety of strategies to combat the effects of historical and ongoing racist policies and practices. Such strategies include declaring racism a public health crisis at the state level and establishing dedicated funding to support community-based organizations, clinics, and tribal organizations in their efforts to advance health equity.

Homelessness & Housing

Proposal Keeps Previous Homelessness Commitments but Lacks Ongoing Funding

Having a safe and stable place to call home is core to living a dignified and healthy life. Yet, over 171,000 Californians were counted as experiencing homelessness at a point-in-time in early 2022. Over the same year, local homeless service providers made contact with more than 315,000 Californians needing to find a home or search for other life-sustaining services. While people of all ages and backgrounds are pushed into homelessness for varying reasons, deeply rooted inequities have placed Black, American Indian or Alaska Native, and Pacific Islander Californians, adults without children, older adults, and LGBTQ+ individuals at higher risk of facing homelessness and its destructive effects. Still, the May Revision does not build on the governor’s earlier commitments to address homelessness. The administration instead continues to focus on establishing stronger local accountability measures around homeless services and regional coordination.

Most notably, the administration sustains $1 billion one-time General Fund for the Homeless Housing, Assistance and Prevention (HHAP) Grant Program in 2023-24, which provides local jurisdictions with flexible funds to address homelessness. In conjunction, the administration will propose trailer bill language so these funds prioritize high need populations —specifically unsheltered individuals — through permanent housing supports and programs like Homekey and the Community Assistance, Recovery, and Empowerment (CARE) Act. This is in contrast to the state Senate budget plan that proposes $1 billion ongoing for HHAP which is needed as effectively addressing homelessness requires adequate capacity and services at a scale that meets the need as well as reliable ongoing funding so that efforts can be sustained.

Other maintained homelessness-related allocations in 2023-24 include:

  • $500 million one-time Mental Health Services Fund for the Behavioral Health Bridge Program, which supports people experiencing homelessness with serious behavioral health conditions through short-term bridge housing and services. This amount reflects a $250 million restoration that was not reflected in the January proposed budget but was included in the 2022 Budget Act. These funds were previously proposed through General Fund dollars (see Behavioral Health section).  
  • $400 million General Fund for encampments resolution grants for local jurisdictions.

The May Revise also moves forward with the CARE Act that is set to start in select counties in October 2023 and expand statewide by 2024. The proposed budget augments funding for the Department of Health Care Services and the Judicial Branch for implementation. This includes $128.9 million General Fund in 2023-24, $234 million General Fund in 2024-25, $290.6 million General Fund in 2025-26, and $290.8 million General Fund in 2026-27 and annually ongoing after.

Lastly, the administration upholds proposals that leverage potential federal and state Medicaid funds for homelessness prevention and rehousing assistance for select populations if waivers are approved by the federal government. This includes various initiatives within California Advancing and Innovating Medi-Cal (CalAIM) , such as the Transitional Rent Waiver Amendment and the Behavioral Health Community-Based Organized Networks of Equitable Care and Treatment (BH-CONNECT) Demonstration (see Behavioral Health section).

Housing

May Revise Proposes No New Investments for Affordable Housing Production

Safe and stable housing is a basic need for all individuals, but many Californians are unable to maintain stable housing because of unaffordable housing costs. Renters, people with low incomes, Black and Latinx Californians, and Californians who are undocumented are especially likely to struggle to keep up with housing costs. Despite noting California’s serious housing affordability challenges, the governor proposes no additional or expanded investments to increase the supply of affordable housing.

The May Revision maintains the funding for affordable housing development that was included in the 2022-23 budget agreement for use in 2023-24. This includes $225 million for multifamily housing, $410 million over two years for adaptive reuse of underutilized commercial space, and $225 million infrastructure for infill housing. It also continues the $500 million boost to the state Low-Income Housing Tax Credit program, as in recent previous years, but no further increase is proposed. The governor also does not augment other state funding that directly supports the development of affordable housing.

The administration continues to propose a $350 million reduction in 2023-24 for homeownership programs and accessory dwelling units that were included in the 2022-23 state budget agreement. These reductions would be restored if sufficient General Fund is available in January 2024. One-time funds for the Foreclosure Intervention Housing Prevention Program are also newly impacted. The governor proposes deferring $345 million — of the $500 million included in the 2021 Budget Act — over four fiscal years for a revised allocation of $50 million in 2023-24, $100 million in 2024-25, $100 million in 2025-26, and $95 million in 2026-27. Additionally, the administration shifts and restructures funds included in the 2022-23 budget agreement that support affordable housing for public college students (see CSU/UC section).

In contrast, the Senate budget plan proposes allocating an additional $500 million towards the state Low-Income Housing Tax Credit Program as well as an additional $300 million flexible funding for affordable housing production programs. Additionally, the Senate budget plan proposes restoring or augmenting homeownership programs delayed by the governor. It also allocates $700 million to expand the Renters Tax Credit and makes it refundable, so that it would benefit renters with the lowest incomes (see Refundable Tax Credits section).

The state capital

making sense of the governor’s may revision

Join us on May 18th as out Budget Center experts explore how the governor’s budget proposals adapt to the challenges facing the state and support the well-being of all Californians.

Economic Security

May Revision Makes No New Investments in Tax Credits for Low-Income Californians

California’s Earned Income Tax Credit (CalEITC), Young Child Tax Credit, and Foster Youth Tax Credit are refundable income tax credits that collectively help millions of families and individuals with low incomes pay for basic needs like food each year. These credits also promote racial and gender equity by targeting cash to Californians of color, immigrants, and women who face racism, sexism, and other structural barriers to advancement in the labor market.

The administration does not propose to make any new investments in these tax credits even though Californians’ need for cash support remains high. About 2 in 3 households with incomes under $35,000 reported difficulty affording basic needs like groceries last fall and the economic challenges facing millions of Californians have worsened since then with the expiration of federal supports, such as emergency SNAP/CalFresh food assistance. The end of this and other federal policies are key factors expected to push more Californians into poverty this year.

In contrast with the governor’s May Revision, the Senate’s budget proposal would invest $1.9 billion ($1.5 billion ongoing) in tax credits that would boost the incomes of millions of Californians with low and moderate incomes. This includes:

  • A $700 million expansion of the state’s renters credit that would help 3.25 million households better afford rent;
  • A $400 million increase in the amount of money provided through the CalEITC that would help more than 3 million low-paid workers pay for basic needs; and
  • A $400 million investment to begin providing California’s new Workers Tax Fairness  Credit, which was signed into law last year and would extend a tax benefit to as many as 2.5 million union workers who are not eligible for an existing tax deduction that largely benefits high-income union workers.

No Significant Investments in CalWORKs Despite Safety Net Reserve Withdrawal

The California Work Opportunity and Responsibility to Kids program (CalWORKs) is a critical support that provides modest cash assistance for families with low incomes, particularly families of color.

The May Revision:

  • Includes a slight increase of 3.6% to CalWORKs grants (at an estimated $111.2 million cost in 2023-24), up from 2.9% in January, as is required by AB 85 of 2013, which links CalWORKs grant increases to projected sales tax revenues.
  • Proposes pulling back approximately $280 million in unspent funds from the 2021-22 CalWORKs Single Allocation, which funds employment services, eligibility determination, and administrative costs. 
  • Delays the start of a previous proposal, which would redirect collected child support payments from the state back to former CalWORKs parents. Implementation is expected to begin April 2024. This delay results in approximately $70 million General Fund revenue — dollars that otherwise would have gone to families. 
  • Withdraws $450 million from the Safety Net Reserve designed to maintain existing CalWORKs and Medi-Cal benefits and services during an economic downturn (see Reserves section for more).

The governor’s proposal falls short in meeting the minimal needs of CalWORKs families. In recent years, state policymakers have raised the maximum CalWORKs grant above the deep poverty threshold (50% of the federal poverty line) for some CalWORKs families, but not for many of those with an excluded family member, unfairly leaving these children and families behind with less assistance to meet basic needs. The governor’s revised budget again fails to raise CalWORKs grants above the deep poverty threshold for all families.

The initial proposal to redirect collected child support payments to formerly assisted families was a step forward from a policy that routed outstanding child support debt to the state, county, and federal governments as “reimbursement” for the costs associated with the CalWORKs program. The delay in redirecting collected child support to former CalWORKs families, however, perpetuates a racist policy that blocks Black, Latinx, and other families from economic security.

The governor’s proposal also misses an opportunity to provide funding to end the CalWORKs work participation rate penalty for counties, a racist and sexist policy that works against recent CalWORKs program reforms and hinders the CalWORKs program from helping parents address barriers.

Governor Proposes Investments in Anti-Hunger Programs, but More Is Needed

No Californian should have to worry about whether they’ll be able to put food on the table. But about 1 in 10 California households sometimes or often do not have enough to eat, according to a recent Census Bureau survey. The recent end of several federal programs that provided additional food assistance since the beginning of the COVID-19 pandemic has left many Californians on the brink of a hunger cliff.

The revised budget proposes several changes from the January proposal to improve food assistance programs, including:

  • Additional support for the Universal School Meals Program (see K-12 section).
  • $47 million ($23.5 million General Fund) to phase in a new federal Summer EBT program for children who qualify for free or reduced lunch. The program would begin in the summer of 2024.
  • An updated timeline for the expansion of the California Food Assistance Program (CFAP), which would extend benefits to undocumented adults over the age of 55, to begin in October 2025. This includes a $40 million investment for automation and outreach efforts.

While the May Revision makes some improvements to the January budget proposal, which proposed no new food assistance funding, it does not include any new commitments to further expand CFAP and fully end the exclusion of undocumented households from vital food supports. It also misses an opportunity to increase CalFresh monthly benefits. This is particularly important given the recent end of pandemic emergency allotment support, which had increased a household’s benefits to the maximum allotment for its family size. The recent end of this program means some households participating in CalFresh have seen their food assistance benefits plummet, from $281 to just $23 in some cases. The governor’s proposal does not include any additional food assistance to help support families during this transition.

Governor Maintains Increase to SSP, but Falls Short of Prior Commitments

Supplemental Security Income/State Supplementary Payment (SSI/SSP) grants help well over 1 million low-income seniors and people with disabilities to pay for housing and other necessities. Grants are provided to individuals and couples and are funded with both federal (SSI) and state (SSP) dollars. State policymakers made deep cuts to the SSP portion of these grants in 2009 and 2011 to help close budget shortfalls caused by the Great Recession. Except for a small increase provided in 2017, the recession-era cuts to SSP grants remained in effect for more than a decade.

State leaders changed course in 2021 and adopted a substantial (24%) increase to SSP grants that took effect on January 1, 2022. Also in 2021, state leaders committed to providing an additional increase to SSP grants in January 2024, subject to funding being provided in the 2023-24 state budget. Part of this increase has already taken effect, with state leaders raising the maximum monthly SSP grants for individuals from $160.72 in 2021 to $219.73 in 2023. For couples, the maximum monthly SSP grant rose from $407.14 in 2021 to $556.62 in 2023.

In line with the governor’s January proposal, the May Revision:

  • Increases the state’s portion of SSI/SSP grants in 2024, but not as much as previously committed. As noted above, an increase to the maximum monthly SSP grants took effect on January 1. The governor calls for an additional increase to take effect on January 1, 2024, raising the maximum SSP grants for individuals from $219.73 in 2023 to $238.62 in 2024. For couples, the maximum monthly SSP grant would increase from $556.62 in 2023 to $604.49 in 2024. These new maximum SSP grant levels would fall somewhat short of the 24% increase originally anticipated by state lawmakers. For example, assuming the January 2022 grant levels were raised by 24%, the maximum grant for individuals should rise to roughly $247 and the maximum grant for couples should go up to nearly $626 as of January 2024.
  • Does not commit to future increases that would allow grants to keep up with the cost of living and fully make up for prior grant reductions. Even with an increase in SSP grants in 2022, 2023, and 2024, the maximum SSP payment for individuals in 2024 — $238.62 — falls far short of the level it would have reached — more than $400 — if state leaders had consistently adjusted this grant for annual changes in the cost of living since 2008, according to Budget Center calculations. In other words, grants have not kept pace with the cost of living in California due to state policy choices, leaving many low-income seniors and people with disabilities less able to make ends meet.

Governor Extends the Family Fee Waiver but Does Not Boost Provider Rates

California’s subsidized child care and development system is a critical resource for families with low to moderate incomes seeking to access affordable, nurturing early care and education. Despite child care’s critical role for California families, too few families can access affordable child care options and many are unable to pay high family fees, prompting families to make sacrifices in other areas of need (i.e., housing and food). Furthermore, provider reimbursement rates have not kept pace with the rising minimum wage, resulting in many providers struggling to make ends meet. Child care providers are integral to supporting the development of California’s children and the economic well-being of families. Current provider rates do not reflect their vital profession.

The governor’s proposed budget: 

  • Waives family fees for child care and development programs. The governor proposes to extend the 2022-23 policy to waive family fees using $29.4 million of one-time federal funds. The current fee waiver was set to expire on June 30, 2023, and the proposal extends the waiver until September 30, 2023. In fact, two bills recently passed by the Legislature — Assembly Bill 100 and Assembly Bill 110 — will waive family fees until September 30, 2023. The governor signed both bills into law on May 15, thereby implementing the policy change assumed in the May Revision.
  • Includes temporary stipends to state-subsidized child care providers. The governor will authorize the California Department of Social Services (CDSS) to use around $169 million in federal funds to provide stipends for state-subsidized providers. The 2023-24 stipends follow previous years of similar funding, allocated on a per child-basis. Specifically, state-subsidized child care provider stipends were also provided in 2022-23 ($1,442 per child) and 2021-22 ($600 per child). Assembly Bill 100 and Assembly Bill 110, referenced above, include the temporary stipends. With the governor’s May 15th signature, this funding will officially be implemented as planned.
  • Does not add any new child care slots for 2023-24. The governor indicated in January that the slots created during the past two cycles (over 100,000) will be maintained. The January budget proposed that 20,000 additional slots be added for 2024-25.
  • Does not increase child care provider rates for 2023-24. The Senate Budget Plan proposes over $1 billion to increase child care rates “to support and stabilize child care providers.” The Assembly’s Child Care Funding Budget Plan  (“Care COLA”) proposes a $1 billion cost of living adjustment, increasing child care funding by 25.44%. This effort is intended to move providers away from poverty wages. Despite the Senate and Assembly’s plans, the governor’s proposed budget does not incorporate increases to provider rates. The Assembly described the Care COLA proposal as a “first step in a multi-year effort currently being collectively bargained by the Governor and Child Care Providers United.” The state plans to continue to work with Child Care Providers United (CCPU) to negotiate a successor agreement to the current contract, which expires on June 30, 2023. Rate increases could be considered as a part of these negotiations.
  • Includes over $184 million from the General Fund to support an estimated 8.22% statutory cost-of-living adjustment (COLA). This increase would be provided to child care and development programs ($183.3 million) as well as the Child and Adult Care Food Program ($840,000).

While the proposed budget includes a 8.22% COLA, this increase only applies to the rates received by providers that contract directly with the state. Providers that are a part of the state subsidy system will not see an increase in rates in the proposed budget, despite the roughly $1 billion for rate increases named in the Senate budget plan and the Assembly’s “Care COLA.”

May Revision Fails to Expand Paid Sick Leave

Most California workers are entitled to at least 24 hours of paid sick leave per year. State policymakers temporarily expanded the amount of paid sick leave available to California workers during the COVID-19 pandemic, providing up to 80 hours of annual leave for COVID-related reasons. However, this supplemental paid sick leave expired at the end of 2022, leaving many workers with just three days of paid sick leave to care for themselves or a family member.

The May Revision does not propose to expand paid sick leave. As a result, under the governor’s plan many workers would continue to have just three days of paid sick leave per year. In contrast, a bill moving through the Legislature would expand sick leave from three days to seven. California lags behind every other state that has paid sick leave — leaving workers with the impossible choice of going to work while sick or losing their paycheck. State leaders should require employers to provide additional paid sick days for workers so that all Californians are able to care for themselves or their loved ones when they are ill.

May Revision Boosts State’s Commitment to Addressing Needs of Migrants

California has the largest share of immigrant residents of any state, and over half of California workers are immigrants or children of immigrants. More than 2 million Californians are undocumented, according to estimates.

The May Revision boosts California’s commitment to addressing the needs of migrants along the border. Specifically, the governor proposes to spend $150 million from the General Fund in 2023-24 to provide respite sheltering for migrants and “support their safe passage through border regions.” This initiative will prioritize vulnerable groups, including families with young children and LGBTQ+ individuals.

The revised budget also maintains some recent key commitments to immigrant Californians. Specifically, the May Revision:

  • Continues to fund full inclusion in Medi-Cal for otherwise eligible Californians regardless of immigration status. This expansion is set to take effect beginning in January 2024 (see the Coverage, Affordability & Access section).
  • Moves up the start date for expanding food assistance to otherwise eligible undocumented Californians age 55+. These Californians are now anticipated to begin receiving benefits through the California Food Assistance Program in October 2025 rather than the initial date of January 2027 (see the Food Assistance section).

The May Revision does leave some urgent needs of immigrant Californians unmet, however. There is no funding to provide a basic safety net for California workers who lose their jobs and are undocumented, who continue to be excluded from unemployment insurance (UI) benefits despite their critical contributions to the state’s economy and our communities. In contrast, the Senate budget plan envisions extending UI benefits to these excluded workers.

Education

Governor Continues to Focus Investments in Transitional Kindergarten

The governor’s 2021-22 budget included a plan to implement universal transitional kindergarten (TK) for all 4-year-olds over a four-year period. The 2023-24 proposed budget aligns with year two of TK implementation (2021-22 was considered a planning year). TK eligibility is based on age alone in public schools and is not dependent on family income. In addition to TK, the state also funds the California State Preschool Program (CSPP). CSPP provides preschool to children ages 3 and 4 for families with low to moderate incomes. While CSPP and TK reflect the two state-funded pre-kindergarten programs, they are among several early learning options available to California families with low to moderate incomes (see section on Child Care).

The governor’s revised budget:

  • Continues to fund the implementation of TK expansion. The initial year one expansion took effect during the current fiscal year — 2022-23 — and covered children whose fifth birthdays fell between September 2 and February 2 (the previous cut-off was December 2). The year two 2023-34 expansion will provide eligibility to children who turn 5 between September 2 and April 2 (about 42,000 children). The governor proposes approximately $762 million for 2023-24 costs to expand TK access. Of this total, roughly $597 million will support expanded eligibility and $165 million will support one additional certificated or classified staff person in TK classrooms. The $597 million to support expanded eligibility is a reduction from the $690 million proposed in the January budget. This difference is due to reduced TK enrollment projections at the time of the May Revision (roughly 4,000 children).
  • Includes roughly $95 million to support an 8.22% statutory cost-of-living adjustment for the state preschool program. This increase reflects $60 million Proposition 98 General Fund and $35.3 million General Fund. The total funding amount is an $80 million reduction from the January 2023 estimates. The May Revision states that this reduction is due to a lower number of state preschool program contractors being reimbursed at the State Reimbursement Rate than originally expected. 
  • Includes $9.7 million to waive family fees for the state preschool program. In addition to the proposal to waive family fees for child care and development programs (see Child Care section), the May Revision proposes to continue to waive family fees for CSPP from July 1, 2023 through September 30, 2023. The governor proposes that a total of $4.4 million non-Proposition 98 General Fund and $5.3 million Proposition 98 General Fund from the 2022 Budget Act be used to waive CSPP family fees.
  • Includes temporary stipends to state preschool program providers. The governor authorizes the California Department of Education (CDE) to use around $112 million in federal funds to provide stipends for CSPP providers. As mentioned in the Child Care section, Assembly Bill 100 and Assembly Bill 110 were recently signed by the governor, confirming temporary stipend funding for both state preschool and child care and development providers.
  • Continues to implement a multiyear plan to ensure CSPP serves a greater diversity of children. The 2022-23 budget package increased payment rates for certain children enrolled in state preschool, including children with disabilities, dual language learners, and 3-year-olds. In exchange, preschool providers have begun enrolling more children with disabilities and providing enhanced services to dual language learners. In January, the governor proposed to continue implementing this plan in 2023-24, at a cost of $64.5 million Proposition 98 General Fund and $51.8 million General Fund.
  • Delays a planned $550 million investment in preschool, TK, and full-day kindergarten facilities from 2023-24 to 2024-25. This delay was included in the governor’s January budget. Facilities investments are intended to help build new school facilities or retrofit existing buildings in order to provide appropriate spaces for preschool, TK, and full-day kindergarten.
  • Does not include funding for educator (including early educator) recruitment needs. The Senate budget plan includes $1.1 billion one-time Proposition 98 General Fund for resources such as incentives and staff training to support educators with earning units at institutions of higher education. The Senate budget plan states that this funding may support developing micro-credential programs for transitional kindergarten. The governor’s plan does not include funds for the Senate’s outlined educator recruitment needs.

K-14 Education’s Minimum Funding Level Drops Due to Lower Revenue Estimates

Approved by voters in 1988, Proposition 98 constitutionally guarantees a minimum level of funding for K-12 schools, community colleges, and the state preschool program. Changes in state General Fund revenues tend to affect the Prop. 98 guarantee, and the May Revision’s estimates of 2022-23 and 2023-24 revenues are lower than those estimated in January’s budget proposal. As a result, the May Revision assumes a 2023-24 Prop. 98 funding level of $106.8 billion, approximately $2 billion below the level assumed in the governor’s January budget proposal, and a 2022-23 Prop. 98 funding level of $106.8 billion, slightly lower than the $107 billion funding level assumed in January. The revised budget assumes a 2021-22 Prop. 98 funding level of $110.6 billion, slightly above the $110.4 billion funding level assumed by the governor in January.

Revenue projections in the governor’s January budget proposal would have required a deposit into the Public School System Stabilization Account (PSSSA) — the state budget reserve for K-12 schools and community colleges — raising the account balance to $8.5 billion. However, the May Revision projects an increase in capital gains revenues as a share of General Fund revenues. This increase would boost the required PSSSA deposit and bring the total account balance to approximately $10.7 billion in 2023-24, which would reflect its constitutional limit. (See Reserves section.) Moreover, because the PSSSA balance is projected to exceed 3% of the total K-12 share of the Prop. 98 minimum funding level in 2022-23, current law would prevent K-12 school districts from maintaining more than 10% of their budgets in local reserves beginning in 2023-24.

Revised Budget Funds a Large Cost-of-Living Adjustment for K-12 Education

The largest share of Prop. 98 funding goes to California’s school districts, charter schools, and county offices of education (COEs), which provide instruction to 5.9 million students in grades kindergarten through 12. The governor’s revised spending plan uses one-time dollars to help fund a large cost-of-living adjustment (COLA) to the state’s K-12 education funding formula — the Local Control Funding Formula (LCFF). Specifically, the May Revision:

  • Provides a $3.4 billion year-over-year increase for the LCFF. The LCFF provides school districts, charter schools, and COEs a base grant per student, adjusted to reflect the number of students at various grade levels, as well as additional grants for the costs of educating English learners, students from low-income families, and foster youth. The May Revision would fund an 8.22% COLA for the LCFF in 2023-24, up from the 8.13% COLA estimated in the January budget proposal. The revised spending plan proposes to use $2.7 billion in one-time dollars to help pay for the large increase in ongoing support for the LCFF. According to the Assembly Budget Committee, the May Revision would provide an estimated $79.8 billion in funding for the LCFF in 2023-24.
  • Cuts approximately $2.5 billion from the Learning Recovery Emergency Block Grant. The 2022-23 budget agreement provided $7.9 billion for a one-time block grant to K-12 school districts, COEs, and charter schools allocated based on the percentage of enrolled students who are English learners, students from low-income families, or foster youth. The May Revision proposes to reduce this funding to approximately $5.4 billion. 
  • Cuts the Arts, Music, and Instructional Materials Discretionary Block Grant by approximately $600 million more than proposed in January. The governor’s January budget proposed reducing, from nearly $3.6 billion to approximately $2.3 billion, one-time funding for a per pupil discretionary block grant provided to local educational agencies (LEAs) in the 2022-23 budget agreement. The May Revision proposes to reduce funding for the block grant to approximately $1.8 billion. 
  • Increases funding by approximately $300 million for school nutrition programs. For the 2022-23 school year, California established a Universal Meals Program that provides two free meals per day to any public K-12 student regardless of income eligibility.  The revised spending plan includes an additional $110 million in one-time dollars and approximately $191 million in ongoing dollars to fully fund increased demand for the program in 2022-23 and 2023-24. 
  • Provides $80 million in ongoing funding for COEs serving students in juvenile court. The revised spending plan states these additional resources would be used to support staffing and programming requirements for students in alternative school settings. The May Revision also proposes to increase COEs’ LCFF base grants by 50% for the additional year of assistance they would provide, based on a proposal in the governor’s January budget, to school districts with performance issues. 
  • Provides $20 million for the Bilingual Teacher Professional Development Program (BTPDP). The BTPDP was established in 2018, but it expired in June 2021. The May Revision would reinstitute the program and make funding available through 2028-29.  
  • Funds an increase in the COLA for non-LCFF programs. The May Revision increases the COLA for several categorical programs that remain outside of the LCFF to 8.22% from the 8.13% COLA provided in January.
  • Maintains $300 million for a proposed “equity multiplier” add-on to the LCFF. The revised spending plan would continue to provide ongoing funding proposed in January for LEAs with large shares of students from families with low incomes. Additionally, the May Revision states that it reflects changes to the state’s K-12 accountability system to clarify those proposed in January “including additional assurances that all LEAs with low student performance address disparities in the preparation of their educators.” 
  • Proposes to screen students in kindergarten through 2nd grade for risk of reading difficulties. The May Revision proposes to make these screenings mandatory by the 2025-26 school year and would require LEAs to provide services to identified students, including those at risk of dyslexia. 
  • Extends the deadline for spending Expanded Learning Opportunities Program (ELOP) funds. The 2022-23 budget agreement provided $4 billion for the ELOP. The May Revision extends the  June 30, 2023 deadline for spending ELOP funds received in 2021-22 and 2022-23 to June 30, 2024.

The Revised Spending Plan Reduces Several One-Time Investments for Community Colleges

A portion of Proposition 98 funding provides support for California’s Community Colleges (CCCs), the largest postsecondary education system in the country, which serves high percentages of students of color and students with low incomes. CCCs prepare approximately 1.8 million students to transfer to four-year institutions or to obtain training and employment skills.

The 2023-24 May Revision proposes reductions to several one-time investments and also provides additional funds for a cost-of-living adjustment (COLA) for apportionments. Specifically, the revised spending plan:

  • Reduces the COVID-19 Recovery Block Grant by more than half in 2022-23. The 2022 Budget Act included $650 million one-time Prop. 98 for a flexible block grant for community college districts to address the impacts of COVID-19 on students. The revised plan reduces funding for this grant by $345 million in the current fiscal year.
  • Reduces proposed funding to support student enrollment and retention. The revised budget includes a reduction of $100 million of the proposed $200 million one-time Prop. 98 that would support colleges in increasing enrollment and retention rates. While recent CCC enrollment rates have shown modest increases, the CCC system experienced significant drops in enrollment as a result of the COVID-19 pandemic.
  • Proposes additional reductions for deferred maintenance projects. The May Revision decreases funding for these projects by $239 million one-time Prop. 98 dollars, for a total reduction of $452 million. 
  • Includes approximately $28 million for an 8.22% COLA for apportionments and other programs. These funds reflect an increase of $25.4 million ongoing Prop. 98 dollars for the Student Centered Funding Formula (SCFF) for a total of $678 million. The proposal also provides the same percentage COLA to other CCC categorical programs and the Adult Education Program, and allocates an additional $3 million ongoing Prop. 98 dollars for that purpose.
  • Allocates one-time dollars for apportionments in 2023-24. The spending plan also includes an increase of about $503 million one-time Prop. 98 dollars for the Student Centered Funding Formula in 2023-24.

The May Revision also includes details on proposed spending flexibilities for CCC districts. The revised spending plan proposes statutory changes that would allow CCC districts to spend flexibly among the Student Equity and Achievement Program, Student Financial Aid Administration, and Student Mental Health Resources. This expanded flexibility would begin in 2023-24. Districts not making “sufficient” progress toward the CCC roadmap goals that were established in the 2022 Budget Act would have that flexibility revoked.

May Revision Maintains Multiyear Funding Investments for the CSU and UC Systems

California supports two public four-year higher education institutions: the California State University (CSU) and the University of California (UC). The CSU provides undergraduate and graduate education to roughly 462,000 students on 23 campuses, and the UC provides undergraduate, graduate, and professional education to about 290,000 students on 10 campuses.

The revised spending plan maintains the 5% base increases to both the CSU and the UC, $227 million and $216 million, respectively. This increase is part of the multiyear funding investments established through the compacts between the administration and the CSU and UC systems. The compacts outline major goals, including increasing access; improving student success and advancing equity; increasing affordability; improving collaboration among systems of higher education; and supporting workforce preparedness.

To address the budget shortfall, both the CSU and UC budgets include funding shifts totaling approximately $1.8 billion. Specifically, the funding shifts include:

  • Approximately $856 million General Fund support to CSU-issued bonds for infrastructure projects and affordable student housing grants. The spending plan includes $61 million ongoing General Fund for debt service on those bonds.  
  • Approximately $935 million General Fund support to UC-issued bonds for capital outlay projects and affordable student housing grants. The spending plan also includes $63.3 million ongoing General Fund for debt service on those bonds.

Other higher education proposals in the revised spending plan include:

  • $545 million for affordable student housing projects at the California Community Colleges (CCCs). This includes $450 million one-time General Fund in 2023-24 and $95.4 million one-time General Fund in 2024-25. The 2022-23 budget agreement allocated these funds to support all three segments of higher education for the construction of, or renovation of commercial properties into, affordable student housing.  See CCCs section for other CCC proposals. 
  • Maintains a delay — to 2025-26 — of $900 million in 2023-24 and $250 million in 2024-25 for the student housing revolving loan program that was established in the 2022 Budget Act to support all three systems of higher education.
  • A decrease of $480 million one-time General Fund in the current fiscal year to the Golden State Education and Training Program. This program supports Californians who lost their jobs as a result of the pandemic to reskill, upskill, or access educational or training programs. 
  • Maintains an increase of $227 million one-time General Fund for the Middle Class Scholarship that the administration committed to in the 2022 Budget Act.

Workforce & Other Proposals

Governor Reverses Some Workforce Cuts Proposed in January

The May Revision proposes to restore funding to two programs the Administration proposed cutting in January. The first is a reversal of a proposed $49.8 million General Fund cut over four years to various public health workforce training and development programs. The second is a reversal of a proposed $30 million General Fund cut ($15 million in each of 2023-24 and 2024-25) to the Department of Industrial Relations’ Women in Construction Unit, which promotes and supports women and non-binary individuals in skilled trade careers.

See additional workforce proposals in the early learning and Pre-K section.

May Revise Makes Modest Adjustments to CalKids Proposal

The California Kids Investment and Development Savings Program (CalKIDS) establishes college savings accounts for California children with an initial seed deposit provided by the state. All newborns receive a seed deposit of at least $25, while first graders living in low income families receive $500 seed deposits. First graders who are foster youth get an additional $500, and those who are homeless get an additional $500 for a maximum deposit of $1,500.

In January, the governor proposed increasing the seed deposit for all newborns from $25 to $100, funded by redirecting $30 million ongoing General Fund beginning in 2023-24 that was intended for seed deposits for first graders. The administration projected that there would be fewer eligible first graders than originally expected and that less money would be needed to provide seed deposits to them.

The May Revision includes a new adjustment that further revises down the number of eligible students, resulting in a decrease of $30 million in the General Fund in 2022-23. The administration does not propose a particular use of this savings.

Revised Spending Plan Maintains Delays for Broadband Infrastructure Projects

The pandemic exposed the inequities in access to computers and high-speed internet, also known as the digital divide. Access to such technology is necessary to participate in education and other essential activities, such as remote work, applying for jobs, virtual health appointments, and access to many other services. The digital divide disproportionately impacts low-income and Latinx households, as well as children and youth, seniors, and people with disabilities.

The 2023-24 revised spending plan maintains funding delays of more than $1.1 billion in funding to future years for last-mile infrastructure grants and the Loan Loss Reserve Fund. Both programs support the expansion of broadband infrastructure at the local level and are overseen by the California Public Utilities Commission (CPUC).

Last-mile infrastructure (wires, poles, cables, and other components) refers to the final section of a network that connects to middle-mile infrastructure (fiber-optic cables laid over hundreds of miles) and provides high-speed internet access to individual communities and households. The Loan Loss Reserve Fund supports local governments, tribes, and nonprofits in financing local broadband infrastructure development.

In contrast to the May Revision, the Senate budget plan proposed additional funding for infrastructure, including more than $1.1 billion for last-mile broadband projects and the Loan Loss Reserve Fund.

May Revision Does Not Propose or Plan for Additional Prison Closures

More than 96,200 adults who have been convicted of a felony offense are serving their sentences at the state level, down from a peak of 173,600 in 2007. American Indian, Black, and Latinx Californians are disproportionately represented in state prisons — a racial disparity that reflects implicit bias in the justice system, structural disadvantages faced by these communities, and other factors.

Among all incarcerated adults, most — 91,980 — are housed in state prisons designed to hold fewer than 80,000 people. This level of overcrowding equals 115.2% of the prison system’s “design capacity,” which is below the prison population cap — 137.5% of design capacity — established by a 2009 federal court order. California also houses more than 4,300 people in facilities that are not subject to the cap, including fire camps, in-state “contract beds,” and community-based facilities that provide rehabilitative services. The sizable drop in incarceration has resulted from both 1) a series of justice system reforms enacted by voters and state leaders and 2) changes adopted in 2020 to further reduce prison overcrowding in response to the COVID-19 pandemic, such as suspending intakes from county jails and implementing early releases.

The governor’s May Revision includes a previously announced plan to reduce prison capacity in the following ways:

  • By the end of 2023, the state will complete the deactivation of certain facilities within six state-owned prisons, generating ongoing annual General Fund savings of roughly $170 million.
  • By March 2024, the state will end its contract for the use of the California City Correctional Facility. California City is the last of several private prisons that the state began leasing to help alleviate overcrowding in state-owned prisons, generating ongoing General Fund savings of roughly $156 million.
  • By March 2025, the state will shut down the Chuckawalla Valley State Prison in Blythe.

Adults who are housed in these various facilities will be moved to “appropriate level” state-owned prisons.

This planned downsizing of the prison system follows the closure of one state prison in September 2021 — Deuel Vocational Institution in Tracy — and the anticipated shutdown of another state prison — California Correctional Center in Susanville.

But California can do more. The state can safely close up to five additional state prisons, according to a recent report  by the Legislative Analyst’s Office. The ongoing savings from closing five additional prisons — around $1 billion per year — could be redirected to help people make the transition back to their communities more successfully and boost services to support survivors of crime, reduce poverty, increase housing stability, address substance use and mental health issues, and enhance the safety and well-being of our communities.

Revised Budget Doubles Funding to Address Missing Indigenous Persons

California is home to more people of American Indian/Alaska Native heritage than any other state in the country. There are currently 109 federally recognized Indian tribes in California, including several tribes with lands that cross state boundaries. There are also about 45 tribal communities of formerly recognized tribes that were terminated as part of the United States’ termination policy in the 1950s, as well as tribal communities that were never recognized by the federal government. The diverse array of tribal nations in California currently have nearly 100 separate reservations or rancherias and a number of individual Indian trust allotments. These lands constitute Indian Country.

American Indian/Alaska Native communities experience crime and victimization at higher rates than other populations. In particular, community members and researchers have long identified a crisis of missing and murdered Indigenous peoples, particularly among women. Community advocates describe this crisis “as a legacy of generations of government policies of forced removal, land seizures, and violence inflicted on Native peoples.”

In order to help address this crisis among tribal nations in California, the state recently provided $12 million from the General Fund over three years to help tribal police and prosecutors collect data and investigate cases of missing Indigenous persons. These funds may also be used for counseling services and other activities. The May Revision proposes an additional $12 million General Fund for these purposes — doubling the total allocation to $24 million.

In terms of other local public safety measures, the governor’s revised budget:

  • Proposes to restructure a new gun buyback program to get firearms out of circulation more quickly. In 2022, the state provided $25 million General Fund to buy back guns using a competitive grant model overseen by the Board of State and Community Corrections. However, citing recent mass shootings and the need for faster action, the governor proposes to shift these funds to the Office of Emergency Services to “work directly with local law enforcement agencies to expedite targeted, coordinated gun buybacks.”
  • Provides $10 million one-time General Fund to enhance security among nonprofits that are at risk of hate-motivated violence. This includes organizations that represent Asian American and Pacific Islander, Black, Jewish, Latinx, and LGBTQ+ communities. The funds could be used for reinforced doors, alarms, and other security improvements.
  • Projects state savings of nearly $113 million in 2023-24 due to reduced incarceration stemming from Proposition 47, with these dollars required to be invested in a broad array of services. Approved by voters in 2014, Prop. 47 reduced penalties for six nonviolent drug and property crimes from felonies to misdemeanors. Consequently, state prison generally is no longer a sentencing option for these crimes. Instead, individuals convicted of a Prop. 47 offense serve their sentence in county jail and/or receive probation. By decreasing state-level incarceration, Prop. 47 reduced the General Fund cost of the state prison system (relative to the expected cost if Prop. 47 had not been approved). The state Department of Finance is required to annually calculate these savings, which are then deposited into the Safe Neighborhoods and Schools Fund and allocated as follows: 65% to mental health and drug treatment programs, 25% to K-12 public school programs for at-risk youth, and 10% to trauma recovery services for crime victims.

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Health care should be accessible and affordable to all Californians. No one should ever have to skip or delay health care due to the cost. Forgoing preventive care or treatment for health conditions is harmful to health and well-being.

Unfortunately, many Californians lack access to affordable health care. For some, monthly health insurance premiums are too high, and so they go without coverage. But even when people have health insurance, steep out-of-pocket costs — such as copays and deductibles — often deter individuals from obtaining the care they need. The impact of unaffordable care falls disproportionately on Californians of color due to a legacy of racist policies and practices:

  • Latinx Californians are most likely to experience problems paying medical bills, followed by Black, white, and Asian Californians.
  • Latinx and Black Californians are more likely to report having medical debt.
  • Black and Latinx Californians are most likely to skip health care services due to the cost.

Ensuring that all Californians have access to affordable health coverage and that they can access care when they need it will require additional state investments. In fact, funds are already available to make coverage more affordable for hundreds of thousands of Californians. Yet, Governor Newsom has blocked efforts to use these funds to boost affordability assistance.

California’s Individual Mandate Penalty: A Funding Source to Help Make Health Coverage More Affordable

In 2019, state policymakers created a penalty that applies, with certain exceptions, to people who lack minimum essential health coverage. This penalty is formally called the “Individual Shared Responsibility Penalty,” but is more commonly known as the “individual mandate penalty.”

The individual mandate penalty has two primary purposes:

  • Encourage young and healthy people — who might be inclined to go without health insurance — to enroll in coverage in order to ensure a more balanced “risk pool” and prevent premiums from spiraling upward.
  • Provide a funding source to reduce the cost of health insurance for people who buy coverage through Covered California, our state’s health insurance marketplace.

The individual mandate penalty can be costly. An adult who lacks coverage for an entire year and doesn’t qualify for an exemption must pay at least $850 plus $425 per dependent child under 18 in the household. This means that a family with two adults and two children could face a penalty of at least $2,550.

Many Californians with low-to-moderate incomes are penalized for lacking health coverage. Specifically, nearly 2 in 5 households who reported that they owed the penalty for tax year 2020 had incomes at or below 266% of the federal poverty level (FPL). In 2020, 266% FPL reflected an annual income of around $34,000; for a family of four, it was about $69,700.

A bar chart showing the individual shared responsibility penalty by federal poverty level during the tax year 2020, where about 2 in 5 households penalized for not having minimum essential health care coverage had low-to-moderate incomes.

Individual Mandate Penalty Revenue Has Not Been Used for Its Intended Purpose

California is expected to raise a total of $1.4 billion in individual mandate penalty revenue across four state fiscal years: 2020-21 through 2023-24, which begins on July 1, 2023. (The penalty revenue is deposited into the state’s General Fund.) However, none of these dollars have been specifically budgeted to reduce the cost of insurance purchased through Covered California. Instead, some penalty revenue appears to have been absorbed by the state’s General Fund and used to support other public systems and services.

Notably, state leaders did agree in 2021 to deposit $334 million in penalty revenue into a new Health Care Affordability Reserve Fund. These dollars were explicitly set aside to fund affordability assistance for Covered California enrollees.

However, last year the governor halted implementation of an affordability assistance program that would have been supported with the penalty reserve funds. This program would have eliminated deductibles and reduced copays for hundreds of thousands of Californians who purchase health insurance through Covered California — including people with low-to-moderate incomes.

Moreover, the governor now proposes to transfer all $334 million in penalty revenue from the Health Care Affordability Reserve Fund to the state’s General Fund in order to help address the projected budget shortfall. With this proposal, the governor makes clear that he does not prioritize using the penalty revenue for its intended purpose: further reducing the cost of health coverage for Californians who are struggling to afford the cost of care.

The governor also has failed to outline a plan for how to use the hundreds of millions of dollars in penalty revenue that the state will continue to receive each year from Californians who lack minimum essential health coverage. Without a plan, penalty dollars will end up supporting general state budget costs rather than being targeted to assist Californians struggling with the high cost of health care.

Penalizing Californians with Low-to-Moderate Incomes Without Addressing Health Care Affordability Is an Injustice

Penalizing Californians with low-to-moderate incomes for not obtaining health coverage and then failing to use the penalty revenue to address the high cost of coverage and care is an injustice. Additional financial assistance is critical for Californians who are uninsured and struggling to purchase coverage as well as for those who are insured but can’t afford to access the care they need. Governor Newsom should ensure that dollars raised from the state’s individual mandate penalty help people afford health insurance through Covered California, as was intended when the penalty was established.

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Californians from all corners of the state — of all races and ethnicities, genders, ages, and abilities — deserve to be able to afford the basics and thrive in their communities, and a more equitable tax and revenue system would help make that a reality. All Californians share in the responsibility of paying taxes to support public services that keep the state running and help families to be financially secure. This responsibility also extends to the corporations earning profits in the state. These corporations benefit from the fruits of the state’s public investments, which provide them with an educated workforce; a transportation infrastructure to transport goods; a functional legal system, and much more.

As millions of people struggle with the high costs of living and recovery from the health and economic effects of the pandemic, corporate profits have surged to historic new highs in recent years. However, corporations now pay just about half of what they did in the early 1980s in California taxes as a share of their income. This decline is a result of cuts to the corporate tax rate and the creation and expansion of corporate tax breaks. In addition, corporations were granted significant federal tax cuts as part of the “Tax Cuts and Jobs Act” of 2017, and some corporations even manage to pay nothing in federal taxes.

Policymakers have many options to ensure that profitable corporations are adequately contributing to California’s tax revenues and supporting the services that we all benefit from. These options include — but are not limited to — increasing tax rates for the most profitable corporations, ensuring that all profitable corporations pay a minimum level of taxes, and combating corporate tax avoidance. Increasing tax rates and limiting tax breaks for corporations only affects those corporations that make profits in California, so these actions will not harm struggling businesses that are operating in the red.

Increasing corporate tax revenues would provide more resources to support solutions to the most significant challenges facing Californians, such as unaffordable housing, child care, and health care costs.

1. Raise Corporate Tax Rates for the Most Profitable Corporations

When individuals and families pay their taxes, higher levels of income are subject to higher tax rates. This is not the case for corporations, which generally pay the same official tax rate regardless of the size of their profits.1Some types of corporations are subject to different rates, such as banks and other financial institutions, which pay an additional 2% in state tax because they are exempt from local taxes that other businesses pay. Corporations that are organized under Subchapter S pay only a 1.5% rate, but their shareholders pay personal income taxes on their shares of the business’ income. Additionally, the effective tax rate — the share of overall income paid in tax — varies from corporation to corporation based on the extent to which they are able to take advantage of corporate tax breaks. Just as a small share of households receive an outsized share of total income in the state, a small share of corporations earn the majority of profits in California. Corporations with California profits of more than $10 million represented 0.3% of corporations operating in the state but made 62% of all statewide corporate profits in 2019, according to Franchise Tax Board data.2Franchise Tax Board, Corporation Tax Annual Report, Tax Year 2019, Table C-8, https://data.ftb.ca.gov/California-Corporation-Tax/CORP-Annual-Report-2020/6mcf-cr69 Adding a surtax — a higher tax rate — on just these corporations could raise substantial revenues without affecting the vast majority of businesses.3Jonathan Kaplan, Why Aren’t Large Corporations Paying Their Fair Share of Taxes and What Can California Policymakers Do About It?, (California Budget & Policy Center, April 2021), 6, https://calbudgetcenter.org/app/uploads/2021/03/IB-FP-Corporate-Taxes.pdf.

Of course, policymakers could set the threshold for a surtax lower than $10 million, or move to a graduated corporate tax structure where higher increments of profits are subject to higher rates. Several states already have graduated corporate tax structures and a few states have enacted temporary surtaxes on highly profitable corporations. Asking those corporations that are immensely profitable to contribute more to support state services would improve tax fairness and protect small and struggling businesses.

2. Ensure That Corporations Pay an Adequate Minimum Level of State Taxes

Based on the premise that corporations that take advantage of certain tax preferences should still pay a minimum level of taxes, the state put into place different rules to compute tax liability for these corporations.4This alternative minimum tax system is in addition to the $800 “minimum franchise tax” that must be paid by all corporations incorporated in, registered in, or doing business in California. However, state law still allows corporations to use many tax credits to reduce the minimum tax they would owe under these rules. This includes the research and development credit — the state’s largest credit, representing about 4 in 5 dollars of the total cost of California’s corporate tax credits.5Franchise Tax Board, Corporation Tax Annual Report, Tax Year 2019, Table C-7. As a result, California does not actually ensure that profitable corporations pay an adequate minimum level of tax. Policymakers could strengthen the minimum tax by not allowing credits to reduce a corporation’s tax liability below the minimum tax.6Specifically, credits could not be allowed to reduce taxes owed below the “tentative minimum tax,” which is the amount resulting by applying a 6.65% tax rate (or 8.65% for financial institutions) to an alternative income calculation which removes certain tax preferences. Credits could also not be allowed to reduce the “alternative minimum tax,” which is the additional amount that a corporation generally must pay when their tentative minimum tax exceeds their regular tax liability.

Another approach would be to simply limit the extent to which a corporation can use tax credits to reduce their tax bill in any given year. For example, California temporarily prohibited businesses from using more than $5 million in tax credits — excluding the low-income housing credit — to reduce their tax liability in 2020 after the COVID-19 pandemic hit when the state’s finances were expected to suffer. Policymakers could institute such a limit on a permanent basis, or limit the credits that can be claimed in a given year to a specific percentage of the tax that a corporation would otherwise owe. For example, credits could be limited to one-half of a corporation’s pre-credit tax liability in any given tax year.

3. Limit the Ability of Corporations to Avoid State Taxes by Using Tax Havens

Corporations doing business in multiple countries can minimize or even eliminate the taxes they owe to the US federal and state governments by shifting their profits into subsidiaries in jurisdictions with low or zero tax rates, known as tax havens. One recent estimate suggests that about one-quarter of the profits of US multinational corporations are booked abroad, and that about half of these foreign profits are booked in tax havens.7The authors also estimate that around 13-15% of the total worldwide profits of US corporations were booked in tax havens across 2015-2020, which they note represents a historically high level. Javier Garcia-Bernardo, Petr Janský, and Gabriel Zucman, Did The Tax Cuts And Jobs Act Reduce Profit Shifting By US Multinational Companies? (National Bureau of Economic Research, Working Paper 30086, May 2022), 3, https://www.nber.org/system/files/working_papers/w30086/w30086.pdf. Much of these shifted profits are not actually earned in these foreign jurisdictions, but have been artificially shifted out of the United States using creative accounting techniques.8One such technique is transferring intellectual property rights — such as patents and trademarks — to their foreign subsidiaries, which can then charge the US parent company for the use of that intellectual property. See, for example, Ana Maria Santacreu and Jesse LaBelle, “Profit Shifting Through Intellectual Property,” Federal Reserve Bank of St. Louis, Economic Synopses, no. 22 (July 2022), https://doi.org/10.20955/es.2022.22.

California and many other states allow corporations to take advantage of a loophole known as the water’s edge election, which enables this type of tax avoidance. This provision allows corporations to choose whether or not to include the income held by their foreign subsidiaries in their overall income when calculating the share that is taxable in California.9Generally, corporations determine the share of their total income that is taxable in California based on the share of their total sales that are made to California customers. This gives these corporations an incentive to shift profits abroad to avoid state taxes, and also gives them the option of choosing whichever of the two methods will result in the lowest tax liability. The water’s edge election is projected to cost the state an estimated $4.4 billion in 2022-23.10Department of Finance, Tax Expenditure Report 2022-23, 11, https://dof.ca.gov/wp-content/uploads/sites/352/Forecasting/Revenue_and_Taxation/TaxExpenditureReport.pdf.

The most comprehensive option to address this type of tax avoidance would be to eliminate the water’s edge election and require corporations to include their worldwide income as a starting point when calculating the share of their income subject to California taxes. This approach is known as “worldwide combined reporting,” and was used by California and other states in the past.11See, for example, Darien Shanske, White Paper on Eliminating the Water’s Edge Election and Moving to Mandatory Worldwide Combined Reporting (August 2, 2018), https://dx.doi.org/10.2139/ssrn.3225310. There are also less comprehensive measures that policymakers could consider. One approach that some other states have taken is requiring corporations to just include the profits they have booked in known tax havens for the purpose of computing their state taxes.12See Richard Phillips and Nathan Proctor, A Simple Fix for a $17 Billion Loophole How States Can Reclaim Revenue Lost to Tax Havens (Institution on Taxation and Economic Policy, U.S. PIRG Education Fund, SalesFactor, and American Sustainable Business Council, January 17, 2019), 7-8 and 11-13, https://itep.org/a-simple-fix-for-a-17-billion-loophole/. Another is to explore following the approach that the federal government adopted in 2017 of taxing  “global intangible low-taxed income” or “GILTI.”13See Darien Shanske and David Gamage, “Why States Should Tax the GILTI,” State Tax Notes (March 4, 2019), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3374987; and Darien Shanske and David Gamage, “Why States Can Tax the GILTI,” State Tax Notes (March 18, 2019), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3374991. The GILTI regime is, however, complex and imperfect, so this option requires careful consideration and potential modifications to ensure the policy is effective and legally permissible.

Corporate Tax Transparency, Corporate Tax Breaks, and Barriers to Raising Revenues

Beyond the three options discussed here, policymakers should also increase corporate tax transparency, scale back corporate tax breaks, and address barriers to raising revenues. These steps would help make the state’s corporate tax system — and the state’s revenue system as a whole — more fair and effective.

First, greater transparency is needed to shed light on the extent to which corporations are engaging in questionable tactics to minimize or wipe out their state liability. This includes stronger data reporting requirements, which can be structured to avoid jeopardizing taxpayer privacy. 

Policymakers should also examine the specific corporate tax breaks that already exist in the state’s tax code. These tax breaks should be regularly reviewed and subject to nonpartisan evaluation to determine if and how well they are achieving their policy goals, what types of corporations receive the most benefits, and whether they should be retained, reformed, or eliminated.

Finally, the state’s constitutional spending cap (the Gann Limit) poses challenges to any policy change that raises significant revenues, since substantial new revenues will push the state closer to or above the spending cap, and revenues above the cap are restricted to being spent in specific ways. This limits the ability of state leaders to use revenues to address the most pressing challenges faced by Californians. Policymakers could raise significant revenues and avoid this limitation by using the new revenues for tax benefits that improve the economic and social well-being of Californians with low and middle incomes — such as expanding the California Earned Income Tax Credit and Young Child Tax Credit. With this approach, revenues would not increase on net, allowing the state to avoid going over the spending cap and facing a restriction on how those revenues could be used. For policymakers to have more flexibility in spending significant new revenues — beyond investing them in tax benefits for people with low or moderate incomes — it will be necessary to reform the Gann Limit.

  • 1
    Some types of corporations are subject to different rates, such as banks and other financial institutions, which pay an additional 2% in state tax because they are exempt from local taxes that other businesses pay. Corporations that are organized under Subchapter S pay only a 1.5% rate, but their shareholders pay personal income taxes on their shares of the business’ income. Additionally, the effective tax rate — the share of overall income paid in tax — varies from corporation to corporation based on the extent to which they are able to take advantage of corporate tax breaks.
  • 2
    Franchise Tax Board, Corporation Tax Annual Report, Tax Year 2019, Table C-8, https://data.ftb.ca.gov/California-Corporation-Tax/CORP-Annual-Report-2020/6mcf-cr69
  • 3
    Jonathan Kaplan, Why Aren’t Large Corporations Paying Their Fair Share of Taxes and What Can California Policymakers Do About It?, (California Budget & Policy Center, April 2021), 6, https://calbudgetcenter.org/app/uploads/2021/03/IB-FP-Corporate-Taxes.pdf.
  • 4
    This alternative minimum tax system is in addition to the $800 “minimum franchise tax” that must be paid by all corporations incorporated in, registered in, or doing business in California.
  • 5
    Franchise Tax Board, Corporation Tax Annual Report, Tax Year 2019, Table C-7.
  • 6
    Specifically, credits could not be allowed to reduce taxes owed below the “tentative minimum tax,” which is the amount resulting by applying a 6.65% tax rate (or 8.65% for financial institutions) to an alternative income calculation which removes certain tax preferences. Credits could also not be allowed to reduce the “alternative minimum tax,” which is the additional amount that a corporation generally must pay when their tentative minimum tax exceeds their regular tax liability.
  • 7
    The authors also estimate that around 13-15% of the total worldwide profits of US corporations were booked in tax havens across 2015-2020, which they note represents a historically high level. Javier Garcia-Bernardo, Petr Janský, and Gabriel Zucman, Did The Tax Cuts And Jobs Act Reduce Profit Shifting By US Multinational Companies? (National Bureau of Economic Research, Working Paper 30086, May 2022), 3, https://www.nber.org/system/files/working_papers/w30086/w30086.pdf.
  • 8
    One such technique is transferring intellectual property rights — such as patents and trademarks — to their foreign subsidiaries, which can then charge the US parent company for the use of that intellectual property. See, for example, Ana Maria Santacreu and Jesse LaBelle, “Profit Shifting Through Intellectual Property,” Federal Reserve Bank of St. Louis, Economic Synopses, no. 22 (July 2022), https://doi.org/10.20955/es.2022.22.
  • 9
    Generally, corporations determine the share of their total income that is taxable in California based on the share of their total sales that are made to California customers.
  • 10
  • 11
    See, for example, Darien Shanske, White Paper on Eliminating the Water’s Edge Election and Moving to Mandatory Worldwide Combined Reporting (August 2, 2018), https://dx.doi.org/10.2139/ssrn.3225310.
  • 12
    See Richard Phillips and Nathan Proctor, A Simple Fix for a $17 Billion Loophole How States Can Reclaim Revenue Lost to Tax Havens (Institution on Taxation and Economic Policy, U.S. PIRG Education Fund, SalesFactor, and American Sustainable Business Council, January 17, 2019), 7-8 and 11-13, https://itep.org/a-simple-fix-for-a-17-billion-loophole/.
  • 13
    See Darien Shanske and David Gamage, “Why States Should Tax the GILTI,” State Tax Notes (March 4, 2019), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3374987; and Darien Shanske and David Gamage, “Why States Can Tax the GILTI,” State Tax Notes (March 18, 2019), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3374991.

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Introduction

Every Californian deserves a safe and stable place to call home in order to have the opportunity to live a dignified and healthy life. Yet, over 171,000 Californians were counted as experiencing homelessness in early 2022.

These Californians were either residing in shelters or transitional housing — or considered unsheltered, residing on the street, in encampments, vehicles, or other places not meant for habitation. During calendar year 2021, local homeless service providers made contact with over 270,000 individuals needing to find a home or search for other life-sustaining services — and even more were likely served in 2022.1This publication utilizes two separate sources of data for our analysis: 1) US Housing and Urban Development Point-in-Time Count which provides the number of unhoused people counted on a single night in January, and 2) the California Homeless Data Integration System through which local Continuums of Care report data to the state collected by homeless service providers throughout a year. The terms homeless and unhoused are also used interchangeably.

As people of all ages and backgrounds are pushed into homelessness, understanding their diverse characteristics is fundamental to effectively addressing their housing needs. Unhoused individuals require interventions of different types and at different scales to become and stay housed. Californians who are unhoused are more than their current living situation. State policymakers have a responsibility to support all Californians and persist in ending homelessness across the state.

1. Homelessness is temporary for most who experience it, but some face long-term, chronic homelessness

Most unhoused individuals experience relatively short-term homelessness (64%), but over a third (36%) experience chronic homelessness exacerbated by a disability. Individuals and families are considered homeless if they do not have a fixed, regular, and adequate nighttime residence — for example, if they are living in a shelter, vehicle, or other places not meant for habitation. Unhoused individuals are considered chronically homeless if:

  • They have a long-standing disability that significantly impedes their ability to live independently.
  • They have been unhoused continuously for a year or on at least four occasions within a three-year period.

Different interventions are typically needed to ensure individuals experiencing temporary or chronic homelessness secure and remain in housing. For the majority of unhoused Californians who are experiencing short-term homelessness and have extremely low incomes, deeply affordable permanent housing is needed. For those who are chronically homeless, effective evidence-based strategies are needed. This includes supportive housing that combines robust housing interventions with wrap-around supportive services.

A graphic showing the total number of Californians experiencing homelessness in February 2022 where roughly 2 in 3 unhoused Californians experience short-term homelessness.

2. Single adults make up the vast majority of unhoused Californians

Adults not with children make up 80% of the people experiencing homelessness in California at a point in time, followed by families with children (14%) and unaccompanied youth (7%). Adults (aged 25 and over) in households not with children include sole individuals, couples, and groups of adults and can include noncustodial parents.2In the data presented here, “adults not with children” excludes young adults aged 18 to 24 who are only with other individuals under age 25 (and so are considered “unaccompanied youth”). “Adults not with children” includes a small number of young people aged 18 to 24 who are accompanied by adults aged 25 or older. They are particularly vulnerable to experiencing severe housing insecurity since they do not often qualify for many social safety net programs or are only eligible for short-term, small-sum assistance.

Unhoused families with children often fall into homelessness because of the lack of affordable housing and compounding economic challenges. Unaccompanied youth, aged 24 and younger, include youth that left home due to neglectful or unsafe family dynamics, including many LGBTQ+ youth and some parenting youth. Experiencing homelessness at any age causes trauma and negative health, educational, and economic outcomes, and these are especially exacerbated in children and youth.

Close attention should be placed on how many unhoused Californians fall into each of these three subpopulations of people experiencing homelessness — single adults, families with children, and unaccompanied youth — to appropriately build the capacity of housing and service system needs, especially for adults without children who represent the vast majority of individuals experiencing homelessness.

A pie chart showing the percentage of Californians who are homeless by household type where over 3 in 4 Californians experiencing homelessness are adults with no children as of February 2022.

3. Racial disparities are stark within California’s homeless population

Black Californians are disproportionately likely to experience homelessness, and American Indian and Pacific Islander Californians are also especially affected. While Black Californians make up roughly 5% of the state’s population, they comprised over 1 in 4 unhoused people who made contact with a homelessness service provider in the 2021-22 fiscal year. Separate data from the 2022 point-in-time count show a particularly large increase in the share of Californians experiencing homelessness who are Latinx. These stark racial disparities reflect harmful current and past racist policies that have created educational, housing, economic, and health barriers for people of color – all of which directly affect an individual’s ability to obtain and sustain stable, affordable housing.

Long-standing racist policies and practices have also concentrated marginalized communities in undervalued occupations, increasing their economic insecurity which is a primary driver of experiencing homelessness. We see this today as people of color are largely pushed into lower-paying occupations, the first to lose their jobs during economic downturns, and experience the highest rates of unemployment. Consequently, Californians of color face higher risk of housing instability and are more likely to pay unaffordable portions of their income towards rent. Institutionalized practices have also placed Black and other communities of color at highest risk of justice system-involvement, which can cause and exacerbate the length of homelessness.

A line chart showing the percentage of unhoused individuals being assisted by homeless service providers where Black, America Indian or Alaska Native, and Pacific Islander Californians disproportionately experience homelessness in the 2021-22 fiscal year.

more in this series

See our Q&A: Understanding Homelessness in California & What Can Be Done to learn how California can leverage its resources to ensure all Californians have a home.

4. Californians experience homelessness in every county throughout the state, with the most residing in Los Angeles County

Homelessness is a statewide problem that affects Californians in every county throughout the state — rural, suburban, and urban alike. In February 2022, the Los Angeles and South Coast region (49.9%) and the San Francisco Bay Area (22.2%) had the highest shares of unhoused individuals, followed by the Sacramento Region (7.2%). Los Angeles County specifically is home to more than 40% of unhoused Californians, based on point-in-time data. This is in part due to its dense population, high housing costs, and general lack of affordable housing. Understanding the geographic distribution of where people experiencing homelessness reside is needed to appropriately design the allocation of state funding in ways that account for the proportional share of the homeless population in each local area.

A line chart showing the percentage of people experiencing homelessness by state region where most unhoused Californians reside in the Los Angeles and South Coast region and the San Francisco Bay Area as of February 2022.

5. California’s unhoused population is aging and increasingly composed of older adults

Over 40% of unhoused Californians in adult-only households who came in contact with the homelessness response system in the 2021-22 fiscal year were aged 50 and older.3Data point from custom tabulations from the California Homeless Data Integration System. Financial and medical emergencies later in life can push those who were already struggling to make ends meet into homelessness. Challenges in accessing support and social safety net programs for older adults in crisis and inadequate benefit amounts are also a driving factor.

Older adults are more likely to have underlying health conditions and disabilities that may be exacerbated by the additional stressors of being unhoused. Experiencing homelessness is already tied to severe health declines as research shows unhoused adults develop similar rates of geriatric conditions as housed adults who are 20 years older. The distinctive circumstances older adults face require more assistive services to obtain and maintain housing. As such, older unhoused Californians have significant implications for current homeless intervention practices as specific service needs should be integrated with other service systems and funding sources.

Conclusion

Lifting all Californians out of homelessness is possible. However, this cannot be done without persistence and understanding the diverse needs and housing support required for each distinct group of Californians that is unhoused. Interventions must also target overrepresented Californians, including people of color and single adults who comprise the majority of the homeless population. The challenges unhoused individuals face are not theirs alone as severe shortages of affordable housing, stagnating wages, disinvestment in mental health services, and historical and current racist policies and practices that touch on every aspect of life in California further exacerbate homelessness across communities. And while recent state budgets have included significant funding for various homeless-related services and programs, there is still a need for more investments, capacity building, and tailored interventions.

Ending homelessness through effective and respectful practices has proven to be possible through evidence-based approaches supported by sufficient ongoing funding, and it fundamentally begins with housing. By understanding the needs of unhoused Californians and focusing on solutions that work, state policymakers have the opportunity to leverage our resources to ensure all Californians have access to a home.


Support for this report was provided by the Conrad N. Hilton Foundation.

  • 1
    This publication utilizes two separate sources of data for our analysis: 1) US Housing and Urban Development Point-in-Time Count which provides the number of unhoused people counted on a single night in January, and 2) the California Homeless Data Integration System through which local Continuums of Care report data to the state collected by homeless service providers throughout a year. The terms homeless and unhoused are also used interchangeably.
  • 2
    In the data presented here, “adults not with children” excludes young adults aged 18 to 24 who are only with other individuals under age 25 (and so are considered “unaccompanied youth”). “Adults not with children” includes a small number of young people aged 18 to 24 who are accompanied by adults aged 25 or older.
  • 3
    Data point from custom tabulations from the California Homeless Data Integration System.

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California’s subsidized child care providers offer vital early learning and care options for families struggling to make ends meet. These early educators — who are primarily women and disproportionately women of color — deserve fair and just wages for essential work that helps children learn and grow while parents are working or going to school to support their families.

Despite providers’ critical role in nurturing children and assisting families, state leaders have failed to consistently and adequately increase provider payment rates in recent years. Without sufficient payments, child care providers are unable to offer early educators fair wages, struggle to keep pace with the rising statewide minimum wage, and can’t afford the increasing price of food and supplies. Ultimately, California providers and families suffer when affordable child care is limited in their communities because of policymakers’ lack of investment.

How Are Subsidized Child Care Providers Paid in California?

Subsidized child care providers are paid in one of two ways in California: 1) by accepting vouchers from families or 2) by contracting directly with the state. Providers who accept vouchers are reimbursed by the state based on the Regional Market Rate (RMR) Survey. The RMR survey — administered every two to three years — provides “rate ceilings” based on provider setting and the age of the child for all 58 California counties. The rate ceiling is the highest payment a provider can receive from the state for the care of a child. Providers who contract directly with the state are paid based on a Standard Reimbursement Rate (SRR). The SRR is adjusted to reflect the additional cost of serving certain children.1In 2018-19, policymakers also increased the Standard Reimbursement Rate adjustment factors for certain higher-cost groups of children, such as infants and children with disabilities. However, some (but not all) of these adjustment factors were eliminated in the 2021-22 budget agreement as part of the transition to a single reimbursement rate system for subsidized child care providers. See Assembly Bill 1808 (Committee on Budget, Chapter 32, Statutes of 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180AB1808; and Assembly Bill 131 (Committee on Budget, Chapter 116, Statutes of 2021), https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202120220AB131. Moreover, beginning in 2022-23, state law requires an annual cost-of-living adjustment to the SRR, although the Legislature may suspend it for a given fiscal year.

Payment Rates for Voucher-Based Child Care Providers Are Not Keeping Pace Across 58 Counties

State leaders have updated voucher-based payment rates for child care providers just twice since the 2016-17 state fiscal year. During this same period, the state law requiring annual increases to the statewide minimum wage went into effect, raising the wage by 55% from 2016-17 to 2022-23 and increasing costs for providers.2Calculations are based on the minimum wage for employers with 25 employees or less. Senate Bill 3 (Leno, Chapter 4, Statutes of 2016), https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201520160SB3.

The rate ceilings for child care providers across all 58 counties generally have not kept pace with the rising minimum wage even after the most recent increase to payment rates enacted in 2021-22. In the state’s most populous county — Los Angeles — payment rates for licensed centers caring for preschool-age children increased by less than half as much as the statewide minimum wage. Providers in some counties, such as Riverside County, saw miniscule rate increases of less than 5%. And in 27 counties, due to weaknesses in the rate-setting methodology, licensed centers have not received a single rate increase for care for preschool-age children since 2016-17.3Market rate surveys collect data on the tuition and fees that families can afford to pay for child care in a geographic area. These rates typically do not cover the true cost of care, as many providers supplement tuition and fees with other sources of revenue, such as grants or donations. See Bipartisan Policy Center, The Limitations of Using Market Rates for Setting Child Care Subsidy Rates (May 2020), 4-6, https://bipartisanpolicy.org/report/the-limitations-of-using-market-rates-for-setting-child-care-subsidy-rates/

A bar chart showing a percentage change where payment rates for voucher-based child care providers have fallen short of increases to the minimum wage.

State Rate for Contract Providers Doesn’t Match Rising Child Care Business Costs

Policymakers have not consistently updated the SRR each year so that contract providers can keep pace with rising staff costs and the increasing price of food and supplies. From 2016-17 to 2022-23, the SRR increased by 36.6%, falling short of the 55% increase in the state minimum wage.

A line chart showing the percent increase in minimum wage and standard reimbursement rate from 2016-17 to 2022-23 where the rising minimum wage has outpaced increases to the payment rate for contract child care providers.

Even though contract-based providers are required to meet more program standards than voucher-based providers do, the payment rate is lower than the RMR ceiling in many counties, illustrating a key problem with the state’s bifurcated rate system. To correct for this, policymakers included a provision in the 2021-22 budget agreement to reimburse contract-based providers with either the SRR or the rate for voucher-based providers, whichever is higher.4Assembly Bill 131 (Committee on Budget).

Child Care Providers Urgently Need a Substantial Pay Raise

Child care provider rates are inadequate and further destabilize the state’s early care and learning system. Policymakers should significantly increase rates in 2023-24 to ensure child care providers can keep up with costs and continue to offer invaluable care to children and families. Doing so would offer needed relief to providers and support the longer-term implementation of a new rate system that will reflect the actual cost of providing care, including paying educators fair wages.

To fully and consistently fund these critical investments in child care, state leaders will have to develop solutions that raise ongoing revenues. One option is to scale back or eliminate costly tax breaks that provide outsize benefits to wealthy people and profitable corporations. Each dollar that goes to these poorly targeted tax breaks is a dollar that is not available to bolster core state services — such as subsidized child care. Moreover, the State Appropriations Limit (“Gann Limit”) may be a barrier to boost investments in child care and other public services. Policymakers should work to remove or significantly reform this spending cap so the state can plan and make bold investments that help families be healthy and thrive.

  • 1
    In 2018-19, policymakers also increased the Standard Reimbursement Rate adjustment factors for certain higher-cost groups of children, such as infants and children with disabilities. However, some (but not all) of these adjustment factors were eliminated in the 2021-22 budget agreement as part of the transition to a single reimbursement rate system for subsidized child care providers. See Assembly Bill 1808 (Committee on Budget, Chapter 32, Statutes of 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180AB1808; and Assembly Bill 131 (Committee on Budget, Chapter 116, Statutes of 2021), https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202120220AB131.
  • 2
    Calculations are based on the minimum wage for employers with 25 employees or less. Senate Bill 3 (Leno, Chapter 4, Statutes of 2016), https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201520160SB3.
  • 3
    Market rate surveys collect data on the tuition and fees that families can afford to pay for child care in a geographic area. These rates typically do not cover the true cost of care, as many providers supplement tuition and fees with other sources of revenue, such as grants or donations. See Bipartisan Policy Center, The Limitations of Using Market Rates for Setting Child Care Subsidy Rates (May 2020), 4-6, https://bipartisanpolicy.org/report/the-limitations-of-using-market-rates-for-setting-child-care-subsidy-rates/
  • 4
    Assembly Bill 131 (Committee on Budget).

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All parents should have the support they need to ensure economic security for their children and themselves. CalWORKs is California’s primary program to help families with children that are struggling to secure a basic income to meet their needs. Recent state reforms to CalWORKs are designed to improve the program’s capacity to effectively focus on supporting parents to identify goals, address barriers, and secure durable improvements in economic stability and family well-being.

However, state CalWORKs policy continues to threaten counties with financial penalties tied to the federally-defined Work Participation Rate (WPR), incentivizing counties and caseworkers to direct CalWORKs participants away from supportive activities to address barriers that do not fully count toward meeting the federal WPR.

Removing this threat of financial penalty could better align state policy with the CalWORKs program’s current focus, facilitating full implementation of strategies designed to effectively support parents and families in securing long-term stability and well-being. Policymakers also have options to build on these reforms to further support families participating in CalWORKs.

CalWORKs Participants Face Multiple Challenges to Securing Economic Security

CalWORKs is California’s version of the federal Temporary Assistance for Needy Families (TANF) program and supports more than 300,000 families throughout the state, providing modest monthly cash grants while helping stabilize families and supporting parents in addressing barriers to employment and finding jobs.1For additional discussion of the CalWORKs program, recent reforms, work requirements, and the federal WPR, see also Esi Hutchful, Undercutting the Needs of California Families: The Harm of Racist, Sexist Work Requirements & Penalties in CalWORKs (California Budget & Policy Center, 2022). CalWORKs parents face a labor market in which gender- and race-based discrimination are ongoing, as well as workplace expectations and practices that make it difficult for parents to balance work with caregiving responsibilities. These dynamics significantly affect CalWORKs parents, who are predominantly women, people of color, and parents of young children.

A column chart showing the percentage of CalWORKS clients with welfare-to-work participation requirements in 2020 where CalWORKs clients are particularly exposed to an economy that discriminates against women, people of color and parents.

CalWORKs parents also face an economy where a postsecondary credential is increasingly required to access all but the lowest-paying jobs. Yet nearly half of CalWORKs household heads do not have a high school degree or equivalent, reflecting structural barriers to education that many have encountered, again pointing to the effects of racism and sexism embodied by past and ongoing policies and practices across a variety of domains.2Adriana Ramos-Yamamoto and Monica Davalos, Confronting Racism, Overcoming COVID-19, & Advancing Health Equity (California Budget & Policy Center, 2021).

A donut chart showing that nearly half of CalWORKs household heads have not completed high school.

In addition, many CalWORKs parents also experience significant health challenges. Among parents completing appraisals of strengths and barriers at program entry, 28% faced mental health challenges, 5% struggled with substance abuse, and 18% had faced domestic abuse.3Data reflect the share of CalWORKs participants recommended for services to address mental health, substance abuse, or domestic abuse among those completing Online CalWORKs Appraisal Tool (OCAT) assessments during fiscal year 2019-20. Source: Budget Center analysis of Department of Social Services data from Department of Social Services, CalWORKs Annual Summary (November 2022). These additional barriers can negatively affect both parents’ employment prospects and their families’ broader well-being.

Supporting Parents to Address Barriers Can Improve Long-Term Employment and Child and Family Well-Being

There are multiple reasons for the CalWORKs program to prioritize supporting parents in addressing the barriers they face:

  • Challenges related to limited education and mental health, substance use, and domestic abuse barriers limit parents’ capacity to work at all and limit the quality of jobs parents can secure. Addressing these barriers improves parents’ likelihood of success in securing and retaining jobs and improves parents’ access to jobs with higher pay and more job security over the short-term and the long-term.
  • Addressing these challenges also promotes child well-being and family stability. Parental struggles with mental health, substance use, and domestic abuse are risk factors linked to child neglect leading to child welfare involvement.4Lindsey Palmer, et al. “What Does Child Protective Services Investigate as Neglect? A Population-Based Study.” Child Maltreatment (July 13, 2022), doi: 10.1177/10775595221114144. Supporting parents to address these challenges can help families stabilize and safely remain intact, facilitating prevention of child maltreatment and the need for child removal and foster care placement.

Recent State Reforms to CalWORKs Recognize that Effective and Respectful Services Should Focus on Supporting Families…

Recognizing the significant challenges facing CalWORKs families – and the importance of respectfully addressing these challenges to enable families to secure long-term stability – in recent years state policymakers have made several changes to CalWORKs policy intended to improve support for participants.

Through Senate Bill 1041 of 2012, California established its own CalWORKs participation standards that are distinct from federal standards.5Senate Bill 1041 (Committee on Budget and Fiscal Review, Chapter 47, Statutes of 2012). These state standards include no rigid time limits on activities to address barriers or advance education, treating these activities as equal to employment activities for demonstrating engaged program participation.

The state has also adopted an evidence-based behavioral approach to guide families in setting goals (CalWORKs 2.0) and created more holistic outcome measures to evaluate the program (the California CalWORKs Outcome and Accountability Review or Cal-OAR). California also implemented a voluntary home visiting program to support family health and engaged parenting.

… But Continued Threat of County Penalties Linked to the Federal Work Participation Rate Hinders Full Implementation of Reforms

These recent constructive CalWORKs reforms are hindered from full implementation, however, because state policy continues to threaten counties with potential financial penalties linked to the Workforce Participation Rate as defined by federal TANF rules.

The federal government defines success for state TANF programs not based on how well the programs meet families’ needs, but only based on whether programs meet specific WPR targets, determined by the percentage of parents receiving assistance that are engaged in a narrowly-defined set of welfare-to-work activities. These federal activities focus on getting parents into paid employment as quickly as possible, despite the fact that such work requirements have racist and sexist roots and research suggests they do not lead to meaningful long-term improvements in employment and are linked to increases in deep poverty.6Elisa Minoff, The Racist Roots of Work Requirements (Center for the Study of Social Policy, February 2020); LaDonna Pavetti, TANF Studies Show Work Requirement Proposals for Other Programs Would Harm Millions, Do Little to Increase Work (Center on Budget and Policy Priorities, November 2018). Like many other states, California has sometimes struggled to meet its federal WPR targets. The state has at times been required to submit appeals and corrective plans, but has never had to pay a WPR penalty.

Current state policy would require counties that miss federal WPR targets to pay half of any financial penalty the state received for not meeting targets. This policy incentivizes counties and caseworkers to direct CalWORKs participants into the narrowly-defined activities that count toward meeting the federal WPR. However, the federal WPR does not acknowledge the value of fully supporting parents to address education and health barriers. Many activities to address barriers faced by large shares of CalWORKs participants – that the state approves without time limits for participants to meet state CalWORKs participation expectations – do not fully count toward meeting the federal WPR.

The Federal WPR Does Not Fully Count Activities That Address Barriers Faced by Many CalWORKs Participants

State-Approved Barrier Removal That Does Not Fully Count for Federal WPRShare of CalWORKs Participants Assessed With Need for Barrier Removal
Adult basic education or secondary education (e.g., high school or GED), for participants without a high school or equivalent degreeNearly 1 in 2 heads of household lack a high school or equivalent degree
Mental health servicesMore than 1 in 4 participants recommended for mental health services
Substance abuse servicesAbout 1 in 20 participants recommended for substance abuse services
Domestic abuse servicesMore than 1 in 6 participants recommended for domestic abuse services

*Note: Federal rules limit countable participation in listed education activities to no more than 10 hours per week, and limit countable participation in mental health, substance abuse, and domestic abuse services to no more than four consecutive weeks, not to exceed six weeks in a 12-month period. CalWORKs participant data reflect the share of CalWORKs participants recommended for services to address mental health, substance abuse, or domestic abuse among those completing Online CalWORKs Appraisal Tool (OCAT) assessments during fiscal year 2019-20.
Source: Budget Center analysis of Department of Social Services data, Congressional Research Service

Removing County Liability for Federal WPR Targets Could Better Align State Policy with Recent CalWORKs Reforms

Threatening to penalize counties financially for not meeting federal WPR targets creates an incentive for counties to direct parents away from activities to address barriers that may be their best investments to improve stability and long-term employment prospects – and toward more narrowly-defined “work-first” activities that may not be in families’ best long-term interests but will meet rigid federal WPR criteria. This financial penalty policy therefore works at cross-purposes with extensive recent CalWORKs reform efforts. Repealing this policy could better align state policy with the CalWORKs program’s current focus, facilitating full implementation of strategies designed to effectively support parents and families in securing long-term stability and well-being.

State Policymakers Have Options to Further Build on Recent Reforms to Support CalWORKs Parents and Families

Additional state changes to CalWORKs program rules could extend recent reforms to further bolster support for parents and children. Examples include:

  • Continuing to increase the size of cash grants to enable families to cover their costs to meet basic needs,
  • Expanding policies and practices that help parents avoid and quickly resolve sanctions that reduce access to cash grants,
  • Reducing sanction penalties in order to minimize negative impacts on child and parent basic needs and well-being, and
  • Recognizing county performance that demonstrates strong participant engagement and effectively identifies and addresses participant barriers.

As California’s primary program to help families that are struggling to secure a basic income to meet their needs, CalWORKs provides a unique opportunity to support thousands of children and parents in addressing the challenges of poverty and the barriers put before them. Continuing to align state policy and build on recent reforms can help CalWORKs reach its potential to help ensure that every California child and family can thrive.


Support for this report was provided by the Conrad N. Hilton Foundation.

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Introduction

Governor Gavin Newsom released his proposed 2023-24 California state budget on January 10, projecting a $22.5 billion shortfall that the administration would solve through a series of trigger cuts, delays or deferrals of spending authorized in earlier years, and withdrawals or reductions of planned one-time spending. The $223.6 billion spending plan would protect many ongoing investments made in prior years, but would not draw down state reserves, which are projected to total $35.6 billion.

Slowing revenue due to economic conditions presents state leaders with a paradox for the 2023-24 state budget — closing the projected budget shortfall and preparing for the potential of larger shortfalls, while protecting and continuing to invest in essential public supports for the millions of Californians whose well-being is most vulnerable to deteriorating economic conditions. As Californians continue to experience the rising costs of basic needs like food and housing, and Congress eliminates critical programs like emergency food assistance, our state’s leaders face increasing demands for essential services to meet the needs of our communities. This is especially important for Black, Latinx, and other Californians of color, and Californians with low incomes who repeatedly bear the brunt of economic downturns, rising cost of living, and austerity policies.

The governor’s budget proposal would mostly protect and maintain progress made in the current and prior budget years to help improve economic security and opportunities for Californians with low incomes, including policy advances in health care and behavioral health, safety net and cash assistance programs, homelessness and housing, and cradle-to-career education.

However, state leaders have the tools and resources, such as using a portion of reserves and diverting spending that supports the wealthy and corporations, to further protect essential services and build upon this progress. In preparing for multiple scenarios, the Legislature and administration should reevaluate costly tax breaks for corporations and the wealthy, like the governor’s proposed extension of the film tax credit, and instead protect core services and make strategic investments in economic support to ensure all Californians are able to secure the resources they need to thrive.

Lastly, the governor’s proposal projects that the state will not exceed the constitutional spending limit — or Gann Limit. State leaders will eventually have to ask voters to reform the limit, particularly when economic conditions improve again, or it will constrain our state’s ability to invest in a vibrant and more equitable economic future.

This First Look report outlines key pieces of the 2023-24 California budget proposal, and explores how the governor prioritized spending and determined cuts amid the first budget shortfall of his tenure.

what is the governor’s proposed budget?

The budget proposal provides a detailed overview of the governor’s proposed expenditures for the upcoming fiscal year, estimated expenditures for the current fiscal year, and actual expenditures for the prior fiscal year. The proposed budget is released — along with the governor’s budget summary — on or before January 10.

Contents

Budget Overview

Health

Homelessness & Housing

Economic Security

Education

Workforce & Other Proposals


Budget Overview

Governor’s Budget Expects Slowing but Continued Economic Growth

The administration expects job and wage growth to continue in 2023 and is not projecting a recession. However, growth is projected to slow relative to the past year. The number of nonfarm jobs in California is forecast to increase by 1.6% in 2023 and 0.5% in 2024, down from 6.2% in 2022. In addition, the state’s unemployment rate is expected to rise to 4.5% in 2023 and 5.1% in 2024, up from 4.4% last year. Average wages are expected to increase by 3.4% in 2023 and 3.0% in 2024, up from 0.5% in 2022. However, after accounting for inflation, average wages are expected to decline by 1.9% in 2023 and 0.6% in 2024, following a 7.2% decline last year. Finally, the budget forecasts that the recent high rate of inflation in the state will begin to subside this year, with California CPI projected to rise by 5.3% in 2023 and 3.6% in 2024, down from 7.7% last year. Nevertheless, these projected inflation rates remain above typical annual inflation rates, which averaged around 2% in the decade leading up to the pandemic.

Economic forecasting is always subject to some uncertainty, and the administration highlights several risks to the economic outlook, including additional interest rate hikes by the Federal Reserve which could push the nation into a recession. On the other hand, factors that could lead to stronger economic growth than projected include “faster-than-expected easing of inflation and resolution of the Russian invasion of Ukraine.”

Proposed Budget Reflects Significant Downgrade of Revenue Estimates

After two years of strong state revenue growth, the administration is now projecting that General Fund revenues for the three-year budget window ending with the 2023-24 fiscal year will be $29.5 billion lower than estimated in the 2022 Budget Act, before accounting for transfers into the state’s rainy day fund. This is notably lower than the Legislative Analyst’s Office’s previous estimate of a $41 billion revenue shortfall for the same period.

The downgraded revenue estimate largely reflects a major decline in the personal income tax revenue forecast, consistent with slowing economic growth and a weaker stock market — in part resulting from multiple actions by the Federal Reserve raising interest rates in an attempt to moderate inflation. However, the revenue forecast does not anticipate that the economy falls into a recession, in which case the administration estimates that revenue losses could be anywhere from $20 billion to $60 billion greater, depending on the severity of the recession.

Relative to the 2022 Budget Act projections, the governor’s budget proposal anticipates revenues to be down across all of the state’s “Big Three” General Fund revenue sources for the three-year budget window by:

  • $25.4 billion for the personal income tax,
  • $3.8 billion for the corporation tax, and
  • $2.5 billion for the sales and use tax.

Additionally, the administration now expects federal reimbursements for emergency costs related to wildfires and COVID-19 to be $6.9 billion lower than expected at the enactment of last year’s budget.

The governor’s budget also includes several proposed tax policy changes, including:

  • A tax exemption for forgiven student loan debt under President Biden’s forgiveness plan — if litigation surrounding the plan is resolved. The proposed budget does not include an estimate of the revenue effect of this proposal.
  • An effort to reduce tax avoidance by wealthy Californians taking advantage of certain trust arrangements, expected to modestly raise revenues by $30 million in 2023-24 and $17 million annually ongoing.
  • A five-year extension of the state’s film and television tax credit beginning in 2025-26 after the current authorization expires. The total allocation of tax credits would continue to be capped at $330 million annually, but the governor proposes making the credits refundable, meaning production companies that owe less in state taxes than the credit they are allocated could receive part of the difference as a refund over several years. Although this proposal would not go into effect until 2025-26, at a time when the state’s revenue outlook is uncertain, it would be prudent for the state to refrain from committing future state resources to a tax credit program with little evidence to support its economic benefit to the state. Further, it is unnecessary to make the credit refundable; businesses that have low tax liabilities are not necessarily small or struggling businesses, so this could be a giveaway to profitable corporations.
  • An expansion of the existing New Employment Credit, which is intended to encourage businesses to hire certain categories of disadvantaged workers. The credits are currently only available to businesses in high-poverty and high-unemployment areas, and the credit has a low take-up rate. The governor proposes to eliminate the geographic restrictions for businesses engaged in semiconductor manufacturing and research and development. Even if this change does increase uptake of the credit, it should not impact overall state revenues, as the annual combined cost of this credit and two other business tax incentive programs is currently capped.

Governor’s Proposal Does Not Use State’s Reserves to Close Budget Shortfall

California has a number of state reserve accounts that set aside funds intended to be used for a “rainy day,” when economic conditions worsen and state revenues decline. Some reserves are established in the state’s Constitution to require deposits and restrict withdrawals, and some are at the discretion of state policymakers.

California voters approved Proposition 2 in November 2014, amending the California Constitution to revise the rules for the state’s Budget Stabilization Account (BSA), commonly referred to as the rainy day fund. Prop. 2 requires an annual set-aside equal to 1.5% of estimated General Fund revenues. An additional set-aside is required when capital gains revenues in a given year exceed 8% of General Fund tax revenues. For 15 years — from 2015-16 to 2029-30 — half of these funds must be deposited into the rainy day fund and the other half is to be used to reduce certain state liabilities (also known as “budgetary debt”). Prop. 2 also established a new state budget reserve for K-12 schools and community colleges called the Public School System Stabilization Account (PSSSA). The PSSSA requires that when certain conditions are met, the state must deposit a portion of General Fund revenues into this reserve as part of California’s Prop. 98 funding guarantee (see section on Prop. 98).

The BSA is not California’s only reserve fund. The 2018-19 budget agreement created the Safety Net Reserve Fund, which holds funds intended to be used to maintain benefits and services for CalWORKs and Medi-Cal participants in the event of an economic downturn. Additionally, each year, the state deposits additional funds into a “Special Fund for Economic Uncertainties” (SFEU) — a reserve fund where state leaders have a lot of flexibility and discretion as to when and how they can use the available funds.

The current year (2022-23) budget enacted in mid-2022 projected $23.3 billion in the BSA; $9.5 billion in the PSSSA; $900 million in the Safety Net Reserve; and $3.5 billion in the SFEU. However, revenue adjustments in the current year result in updated 2022-23 projections in the governor’s proposed budget — $21.5 billion in the BSA; $8.1 billion in the PSSSA; $900 million in the Safety Net Reserve; and $17.2 billion in the SFEU, which fluctuates throughout the year based on changes in revenues.

The Governor’s proposal does not draw down the BSA, PSSSA, or Safety Net Reserve to cover the projected state revenue shortfall. For 2023-24, the proposal projects a BSA balance of $22.4 billion, a PSSSA balance of $8.5 billion, and a Safety Net Reserve balance of $900 million. The SFEU is projected to be $3.8 billion.

Taking into account the BSA, PSSSA, Safety Net Reserve, and SFEU, the governor’s proposal would include total reserves of $35.6 billion in 2023-24.

While the administration does not propose to use any reserve funds to close the projected state budget shortfall, state leaders should consider whether using a portion of those funds will be needed in 2023-24. Building up healthy reserves during periods of economic growth is intended to help offset the fluctuations in state revenues that result from having a personal income tax system that asks those with higher incomes to pay more. The point is not to maintain high levels of reserves at all times, but to instead use available reserves in the event of budget shortfalls to ensure that essential services can be provided to Californians. State leaders should be cautious about using reserves with significant economic uncertainty about the period ahead, but using a portion of reserves during this window of declining state revenues may also be appropriate.

Press conference of governor of the state of California concept. Seal of the governor of the State of California on the tribune with flag of USA and California state. 3d illustration

Understanding Governor Newsom’s 2023-24 State Budget Proposal

Join us on January 19 as our Budget Center experts explore how the state is managing an uncertain revenue landscape.

Health

Governor Keeps Commitment to Expand Medi-Cal to All Undocumented Immigrants

Building on the federal Affordable Care Act (ACA), California has substantially expanded access to health coverage in recent years. More than 15 million Californians with modest incomes — nearly half of whom are Latinx — are projected to receive free or low-cost health care through Medi-Cal (California’s Medicaid program) in 2022-23. Another 1.7 million Californians purchase health coverage through Covered California, our state’s health insurance marketplace. Nonetheless, many Californians — including immigrants who are undocumented — remain uninsured, while those with health coverage often face high monthly premiums and excessive out-of-pocket costs, such as copays and deductibles, when they seek health care services.

The governor’s proposed budget protects major health care investments that were enacted in the 2022 Budget Act. Specifically, the budget:

  • Maintains the commitment to expand Medi-Cal eligibility to undocumented immigrants ages 26 to 49 starting January 1, 2024. In recent years, California has expanded eligibility for comprehensive Medi-Cal coverage to certain immigrants who qualify for the program except for their immigration status. This includes children and young adults up to age 25 as well as adults age 50 and older. However, undocumented adults ages 26 to 49 continue to be excluded. The enacted 2022-23 budget began the process of closing this eligibility gap by extending full-scope coverage to these adults no sooner than January 1, 2024. This expansion is estimated to cost $844.5 million ($635.3 million General Fund) in 2023-24, rising to $2.1 billion ($1.6 billion General Fund) in 2024-25, and $2.5 billion ($2 billion General Fund) ongoing. These figures include the cost of providing In-Home Supportive Services to newly eligible adults who are anticipated to enroll in the program.
  • Maintains $1.5 billion General Fund to expand the state’s health care workforce, but over more time than initially planned in the 2022 Budget Act. These investments include funding to increase nurses, community health workers, social workers, behavioral health providers, and primary care providers. The proposed budget defers $68 million in 2022-23 and $329.4 million in 2023-24 for certain workforce programs, with these funds proposed to be reallocated in 2024-25 and 2025-26 instead ($198.7 million each year).

In addition, the proposed budget:

  • Assumes the federal government will renew California’s Managed Care Organization (MCO) tax effective January 1, 2024 through December 31, 2026 to maintain Medi-Cal funding. The MCO tax essentially reduces — or “offsets” — state General Fund spending on Medi-Cal by well over $1 billion per year. The renewal of the MCO tax, which requires federal approval, is estimated to offset $6.5 billion in General Fund spending over the three years.
  • Proposes to invest $200 million ($15 million General Fund) in 2024-25 to support access to reproductive health services. Given the Supreme Court’s decision to end a constitutional right to an abortion as well as states’ actions to restrict access to abortion care — both of which severely undermine the health and economic security of pregnant people — California has seen an increase in patients seeking abortion and other reproductive health services. The administration plans to develop a federal demonstration waiver that would support access to family planning services for Medi-Cal enrollees as well as strengthen the state’s reproductive health safety net.

While the proposed budget will improve health care access and affordability for many Californians, a major missed opportunity is that the governor’s administration does not provide assistance to help Californians purchase health coverage through Covered California — even though the state already has the money set aside to do so. Specifically, the administration plans to transfer $333.4 million from the Health Care Affordability Reserve Fund to the General Fund. The revenue in this fund comes from the state’s individual mandate penalty and is intended to help lower the cost of care in Covered California. The administration suggests that these funds could be returned to the Health Care Affordability Reserve Fund as soon as 2025-26. However, state leaders should immediately provide greater financial assistance to Californians who are uninsured and struggling to purchase coverage through Covered California given that premiums, deductibles, and other out-of-pocket costs are on the rise. Access to timely, quality, and comprehensive health care services is critical because it promotes overall physical and mental health. When people do not have access to health coverage, they are less likely to receive preventive care, less likely to receive treatment for chronic health conditions, and more likely to report a poor health status.

Proposed Budget Sustains Major Behavioral Health Initiatives

Behavioral health services — mental health care and/or treatment for substance use — are primarily provided by California’s 58 counties, with funding from the state and federal governments. Even before the pandemic, millions of Californians were coping with mental health conditions or substance use disorders and too many also confronted challenges in accessing care. The pandemic heightened the need for behavioral health services, making support for Californians’ mental health and well-being a more urgent priority for state leaders.

In recent years, the administration launched various behavioral health initiatives, such as the Children and Youth Behavioral Health Initiative, which aims to transform California’s behavioral health system for all children and youth in California. This year, the administration will seek approval of a new federal waiver called California’s Behavioral Health Community-Based Continuum (CalBH-CBC) Demonstration to complement and build on existing behavioral health initiatives. The waiver is estimated to cost $6.1 billion ($314 million General Fund) over five years. Major reforms to the Medi-Cal program as well as the level of federal funding that will be provided must be negotiated with the federal government through the Medicaid waiver process. As such, CalBH-CBC implementation will depend on the availability of funding and federal approval.

The administration’s budget proposal also includes the following:

  • $375 million one-time General Fund to reform behavioral health payment in Medi-Cal. This funding will cover the non-federal share of behavioral health-related services and enable counties to participate in delivery system transformation, engage in value-based payment arrangements, and make long-term investments in behavioral health delivery systems at the local level.
  • $93 million in the Opioid Settlement Fund over four years beginning in 2023-24 for opioid and fentanyl response. This funding aims to increase access to naloxone, a life-saving medicine that reverses an opioid overdose, which is urgently needed. Over 7,000 Californians died due to opioid overdose and nearly 6,000 Californians died due to a fentanyl overdose in 2021.

Due to the state’s projected General Fund revenue decline, the proposed budget:

  • Maintains but partially delays funding for the Behavioral Health Bridge Housing Program, which aims to address the immediate housing and treatment needs of people with serious behavioral health conditions who are also experiencing unsheltered homelessness. Specifically, the proposed budget delays $250 million General Fund of the total $1.5 billion General Fund to 2024-25. The governor maintains $1 billion General Fund in 2022-23 and $250 million General Fund in 2023-24 for this program.
  • Delays funding the Behavioral Health Continuum Infrastructure Program. This program provides competitive grants to expand the community continuum of behavioral health treatment resources. The Department of Health Care Services is currently in the planning process to administer the last round of funding for this program. The governor delays $480.7 million General Fund for 2022-23 to $240.4 million in 2024-25 and $240.3 million in 2025-26.

Investments in our behavioral health system are critical, especially now. The governor’s commitment to improving access to behavioral health services can support Californians who are coping with mental health conditions or substance use disorders. These investments can also reduce hospitalization or even incarceration due to behavioral health conditions.

Governor Cuts Funding to Rebuild Public Health Workforce

The California Department of Public Health protects and promotes the health of all Californians through infectious disease control, chronic disease prevention, and more. Despite its important responsibilities, funding for this department has not kept pace with the cost of responding to ongoing and emerging health threats. In recent years, state leaders have taken initial steps to invest in the state’s public health infrastructure. Specifically, the 2022 Budget Act included $300 million ongoing General Fund for public health infrastructure at the state and local level. While this major infrastructure investment was sustained, the governor cuts funding for various public health workforce training and development programs by $49.8 million General Fund over four years.

COVID-19 continues to be an ongoing public health threat for communities across the state. The proposed budget includes $176.6 million General Fund in 2023-24 to sustain the state’s COVID-19 response efforts. This is consistent with the SMARTER Plan that the governor unveiled last year to continue efforts to increase access to COVID-19 vaccinations, boosters, testing, and treatment.

State leaders can do more to make sure all Californians have the opportunity to be healthy and thrive. Given that structural racism continues to have a profound impact on the health and well-being of many communities across the state, the administration and other state leaders can employ a variety of strategies to combat the effects of historical and ongoing racist policies and practices. Such strategies include declaring racism a public health crisis at the state level and establishing dedicated funding to support community-based organizations, clinics, and tribal organizations in their efforts to advance health equity.

Homelessness & Housing

Proposed Budget Maintains Earlier Commitments to Address Homelessness

Having a safe and stable place to call home is the most basic foundation for health and well-being no matter one’s age, gender, race, or ability. Still, over 171,000 Californians were experiencing homelessness at the last point-in-time count. Becoming unhoused has lasting and devastating effects on an individual’s physical and mental health and seriously disrupts individuals’ ability to remain employed, attend school, and access healthcare or other basic needs. Deeply rooted inequities have also placed Black, American Indian or Alaska Native, and Pacific Islander Californians, adults without children, older adults, and LGBTQ+ individuals at higher risk of facing homelessness within their lifetimes.

Yet, the proposed 2023-24 budget does not allocate new substantial funding to build on the governor’s commitment to address homelessness — including a lack of targeted funds for rental assistance or permanent housing adequate to meet needs. This year, the administration is primarily focused on establishing stronger accountability measures and maintains previously promised funds from the 2022-23 Budget Act for 2023-24, including:

  • $1 billion General Fund for the Homeless Housing, Assistance and Prevention (HHAP) Grant Program that provides local jurisdictions with flexible funds to address homelessness.
  • $400 million General Fund for encampments resolution grants for local jurisdictions.
  • $250 million General Fund for the Behavioral Health Bridge Housing Program, which supports people experiencing homelessness with serious behavioral health conditions through short-term bridge housing and services. This amount reflects a $250 million General Fund reduction from the 2022 enacted budget that is proposed to be reallocated in 2024-25 (see Behavioral Health section).

As homelessness is deeply interlinked with health, the proposed budget leverages potential federal and state Medicaid funds for homelessness prevention and rehousing assistance if select waivers are approved by the federal government. This includes:

  • The CalAIM Transitional Rent Waiver Amendment, which would provide up to six months of rent or temporary housing to eligible unhoused individuals or those at risk of homelessness who are transitioning out of institutions or foster care and are at risk of inpatient hospitalization or emergency care. This is estimated to cost $17.9 million ($6.3 million General Fund) in 2025-26 and will increase to $116.6 million ($40.8 million General Fund) at full implementation.
  • The California Behavioral Health and Community-Based Continuum (CalBH-CBC) Demonstration that would allow rental payments or temporary housing coverage for individuals enrolled in Medi-Cal with serious behavioral health conditions (see Behavioral Health section).

Additionally, the governor is moving forward with the Community Assistance, Recovery, and Empowerment (CARE) Act. Starting in October 2023, select counties will provide unhoused or at-risk of becoming unhoused Californians with untreated schizophrenia spectrum or other psychotic disorders with a court-ordered treatment plan that includes behavioral health treatment, housing, and other services. This framework will be implemented statewide by December 2024. This approach targets the small number of unhoused individuals who lack decision-making capacity due to an untreated serious behavioral health condition, though stakeholders still have concerns regarding adequacy of permanent housing resources, respect for participants’ rights, and other factors. The proposed budget builds on previous funding and allocates an additional $16.5 million General Fund in 2023-24, $66.5 million General Fund in 2024-25, and $108.5 million in 2025-26 ongoing to support county behavioral health department costs. The budget also adjusts the allocations to the Judicial Branch for CARE Act costs to $23.8 million General Fund in 2023-24, $50.6 million in 2024-25, and $68.5 million in 2025-26 and ongoing, while also adding $6.1 million General Fund in 2023-24 and $31.5 million in 2025-26 and ongoing to support legal counsel services for CARE participants provided by public defenders and legal services organizations.

Governor Proposes No New Investments in Affordable Housing

Safe and stable housing is a critical basic need for all individuals, but many Californians are unable to maintain stable housing because of unaffordable housing costs. Renters, people with low incomes, Black and Latinx Californians, and Californians who are undocumented are especially likely to struggle to keep up with housing costs.

The governor’s budget proposal generally maintains the funding for affordable housing development that was included in the 2022-23 budget agreement for use in 2023-24. However, despite noting California’s continuing, serious housing affordability challenges, the governor proposes no additional or expanded investments to increase the supply of affordable housing. The budget proposal does not include new funding to replace the Prop. 1 bond funds that are expected to be exhausted in spring 2023, which support the development of affordable multi-family housing.

Trigger reductions for 2023-24 are proposed for $300 million that was included in the 2022-23 state budget agreement for homeownership programs (specifically $200 million for the Dream for All program and $100 million for CalHome) and for $50 million that was included for 2022-23 for the CalHFA Accessory Dwelling Unit program. These reductions would be restored if sufficient General Fund is available in January 2024. The governor also proposes delaying to future years some of the funds included in the 2022-23 budget agreement that support construction or acquisition of housing for low-income public college students.

state budget terms defined

What’s the difference between a trailer bill and policy bill? A deficit and an operating deficit? And what exactly is a “Budget Bill Jr.?” Our Glossary of State Budget Terms answers that and more.

Economic Security

Governor’s Budget Makes No New Investments in Refundable Tax Credits for Low-Income Californians

California’s Earned Income Tax Credit (CalEITC), Young Child Tax Credit, and Foster Youth Tax Credit are refundable income tax credits that collectively help millions of families and individuals with low incomes pay for basic needs like food. These credits also help to promote racial and gender equity by targeting cash to Californians of color, immigrants, and women who are frequently blocked from economic opportunities and forced into low-paying jobs that fail to provide economic security.

The administration does not propose to make any new investments in these tax credits. Yet Californians’ need for cash support remains high. About 2 in 3 households with incomes under $35,000 reported difficulty affording basic needs like groceries this past fall and the economic challenges facing many will worsen with the expiration of federal supports, such as emergency SNAP/CalFresh food assistance benefits.

Proposed Budget Includes Only Modest Required Increase in CalWORKs Grants

The California Work Opportunity and Responsibility to Kids program (CalWORKs) is a critical support that provides modest cash assistance for families with low incomes, particularly families of color. The governor’s budget proposal includes a modest 2.9% increase to CalWORKs grants (at an estimated $87 million cost in 2023-24). This increase is required by AB 85 of 2013, which links CalWORKs grant increases to projected sales tax revenues.

This proposed grant increase falls short in meeting the minimal needs of CalWORKs families, however. In recent years state policymakers have raised the maximum CalWORKs grant above the deep poverty threshold (50% of the federal poverty line) for some CalWORKs families, but not for many of those with an excluded family member, unfairly leaving these children and families behind with less assistance to meet basic needs. The governor’s budget proposal again fails to raise CalWORKs grants above deep poverty for all families. The governor’s proposal also misses an opportunity to provide funding to end the CalWORKs work participation rate penalty for counties, a racist and sexist policy that works against recent CalWORKs program reforms and hinders the CalWORKs program from helping parents address barriers.

Budget Proposes No New Food Assistance Funding

No Californian should have to worry about whether they’ll be able to put food on the table. But about 1 in 10 California households sometimes or often do not have enough to eat, according to a recent Census Bureau survey.

The Supplemental Nutrition Assistance Program (SNAP) — known as CalFresh in California — is a federally funded program that helps eligible households with low incomes put food on the table, currently supporting around 5 million Californians. Since the beginning of the COVID-19 pandemic, CalFresh recipients have been receiving additional support through federal emergency allotments, which have increased a household’s benefits to the maximum allotment for its family size. This policy provided an additional $500 million in benefits to CalFresh households in December 2022 alone.  The recent federal spending package included a February 2023 end date for these emergency allotments, meaning some households participating in CalFresh will soon see their food assistance benefits plummet. For example, some one-to-two person households will see their monthly benefits drop from $281 to just $23, even as food costs have increased significantly over the past year. The governor’s proposal does not include any additional food assistance to help support families during this transition.

Additionally, federal law excludes undocumented immigrants from SNAP eligibility, and Californians in undocumented immigrant families were three times as likely to struggle to meet their basic needs than those in non-immigrant families even before the COVID-19 pandemic and recent inflation. Recent state budgets have taken steps toward ending this exclusion for undocumented adults ages 55 and older by planning to include them in the state-funded California Food Assistance Program (CFAP), which already provides CalFresh-equivalent benefits to some immigrants excluded from federally funded benefits.

The governor’s 2023-24 proposed budget indicates that this expansion will be implemented beginning January 1, 2027, after county benefits technology systems have been updated to handle this eligibility change. The budget proposal does not include any new commitments to further expand CFAP and fully end the exclusion of undocumented households from vital food supports.

The governor’s budget does include $50 million ($17.1 million General Fund) in 2023-24 to improve the security features for electronic benefit transfer (EBT) of CalFresh and CalWORKs benefits to protect recipients from benefits theft, which has been on the rise. The proposal also commits to another $23 million ($7.9 million General Fund) in 2024-25 and $3.5 million ($1.2 million General Fund) in 2025-26 for EBT security improvements.

Governor Increases SSP Grants, but Falls Somewhat Short of Prior Commitments

Supplemental Security Income/State Supplementary Payment (SSI/SSP) grants help well over 1 million low-income seniors and people with disabilities to pay for housing and other necessities. Grants are provided to individuals and couples and are funded with both federal (SSI) and state (SSP) dollars. State policymakers made deep cuts to the SSP portion of these grants in 2009 and 2011 to help close budget shortfalls caused by the Great Recession. Except for a small increase provided in 2017, the recession-era cuts to SSP grants remained in effect for more than a decade.

State leaders changed course in 2021 and adopted a substantial (24%) increase to SSP grants that took effect on January 1, 2022. Also in 2021, state leaders committed to providing an additional increase to SSP grants in January 2024, subject to funding being provided in the 2023-24 state budget. Part of this increase has already taken effect, with state leaders raising the maximum monthly SSP grants for individuals from $160.72 in 2021 to $219.73 in 2023. For couples, the maximum monthly SSP grant rose from $407.14 in 2021 to $556.62 in 2023.

The governor’s proposal:

  • Increases the state’s portion of SSI/SSP grants in 2024, but not as much as previously committed. As noted above, an increase to the maximum monthly SSP grants took effect January 1. The governor calls for an additional increase to take effect January 1, 2024, raising the maximum SSP grants for individuals from $219.73 in 2023 to $238.62 in 2024. For couples, the maximum monthly SSP grant would increase from $556.62 in 2023 to $604.49 in 2024. These new maximum SSP grant levels would fall somewhat short of the 24% increase originally anticipated by state lawmakers. For example, assuming the January 2022 grant levels were raised by 24%, the maximum grant for individuals should rise to roughly $247 and the maximum grant for couples should go up to nearly $626 as of January 2024.
  • Does not commit to future increases that would allow grants to keep up with the cost of living and fully make up for prior grant reductions. Even with an increase in SSP grants in 2022, 2023, and 2024, the maximum SSP payment for individuals in 2024 — $238.62 — falls far short of the level it would have reached — more than $360 — if state leaders had consistently adjusted this grant for annual changes in the cost of living since 2008, according to Budget Center calculations. In other words, grants have not kept pace with the cost of living in California due to state policy choices, leaving many low-income seniors and people with disabilities less able to make ends meet.

Proposed Budget Contains No Child Care New Slots or Rate Increases in 2023-24

California’s subsidized child care and development system has long been critical to the state’s economic infrastructure, helping families struggling to make ends meet cover the high cost of early care and education for their children. However, due to inadequate funding, relatively few eligible families receive subsidized care. In addition, payment rates for child care providers are too low despite recent increases to payment rates, leaving providers struggling to keep up with rising costs on thin financial margins and unable to pay fair and just wages that reflect the critical value of early educators’ profession.

The governor’s proposed budget:

  • Continues to fund over 100,000 child care slots that policymakers created during the past two budget cycles, but does not propose additional slots for 2023-24. The governor indicates that “thousands of newly available slots since 2021-22 have not yet been filled.” Instead, the governor proposes to fund 20,000 new slots during the following fiscal year — 2024-25 — rather than during 2023-24.
  • Does not call for child care provider rate increases during 2023-24. However, the state will continue developing — in partnership with the Child Care Providers United – California union — a single rate reimbursement structure for providers. In addition, rate increases could be considered as part of negotiations between the state and CCPU on a successor agreement to the current contract, which expires on June 30, 2023.
  • Does not propose to extend the current state policy waiving family fees for child care and development programs. The 2022-23 budget package used one-time federal funds to waive family fees, which can be unaffordable for families who are living paycheck to paycheck. The current fee waiver expires on June 30, 2023, and the governor does not propose to extend this policy.
  • Includes over $300 million General Fund to support an estimated 8.13% statutory cost-of-living adjustment. This increase would be provided to child care and development programs ($301.7 million) as well as the Child and Adult Food Program ($1.5 million).

The Governor Fails to Expand Paid Sick Leave

In California, the state’s paid family leave, disability insurance, and paid sick leave programs provide workers with paid time off from work to care for themselves or a family member. Paid family leave and disability insurance payments come from the state Disability Insurance Fund, which is made up entirely of worker contributions. State policymakers recently approved an increase in payment rates for these programs to 90% of earnings for workers with very low incomes and to 70% for all other workers starting in 2025. This avoids rates reverting to their previous levels of only 55% of earnings.

Most California workers are also entitled to at least 24 hours of paid sick leave per year. State policymakers temporarily expanded the amount of paid sick leave available to California workers during the COVID-19 pandemic, providing up to 80 hours of annual leave for COVID-related reasons. This expansion expired at the end of 2022, leaving many workers with just 3 days of paid sick leave to care for themselves or a family member.

In his proposed budget, the governor:

  • Reaffirms existing relief to small businesses and nonprofits for costs associated with the COVID-19 supplemental paid sick leave. In the 2022-2023 budget, the governor appropriated $250 million in relief grants to these organizations to help offset costs of employees taking paid sick leave due to COVID-19-related reasons. These grants have not yet been made available so the $250 million previously appropriated still remains as support for small businesses and nonprofits.
  • Does not expand paid sick leave. Despite providing relief for businesses to cover sick leave expenses related to COVID-19, the governor does not extend support for workers. By letting the supplemental paid sick leave expire and choosing not to expand the state’s inadequate paid sick leave policy, many workers are left with just three days of paid sick leave per year. State leaders should require employers to provide additional paid sick days for workers so that all Californians are able to care for themselves or their loved ones when they are ill, and no one has to choose between going to work while sick or losing their paycheck and maybe their job.

Budget Maintains Some Previous Commitments to Immigrant Californians

California has the largest share of immigrant residents of any state, and half of all California workers are immigrants or children of immigrants. More than 2 million Californians are undocumented, according to estimates.

The governor’s budget proposal maintains some key recent commitments to immigrant Californians. Specifically, the budget:

  • Continues to fund full inclusion in Medi-Cal for otherwise eligible Californians regardless of immigration status beginning in January 2024 (see the Health Coverage section).
  • Continues to plan the first step to end the exclusion of otherwise eligible undocumented Californians from food assistance by including undocumented individuals age 55+ in the California Food Assistance Program. The budget proposes beginning benefit distribution in 2027 (see the Food Assistance section).

In terms of new proposals, the governor notes that there are unmet needs for humanitarian support for migrants at the border, and proposes working with the federal government to leverage resources and “assess operational needs to inform a 2023-24 investment in these humanitarian efforts” to include in the May Revision.

The budget proposal leaves some urgent needs of immigrant Californians unmet, however. No funds are provided to provide a basic safety net for California workers who lose their jobs and are undocumented, who are excluded from unemployment insurance benefits despite their critical contributions to the state’s economy and our communities.

Education

Governor Continues Multiyear Plans to Boost Early Learning Opportunities

California funds two pre-kindergarten programs: transitional kindergarten (TK) and the California State Preschool Program. TK provides two years of kindergarten through local educational agencies (LEAs) and, reflecting a recent expansion, is currently available to children whose 5th birthdays fall between September 2 and February 2. The California State Preschool Program is an early learning program for 3- and 4-year-olds from low- and moderate-income families that is offered by LEAs and community-based organizations.

The governor’s proposed budget:

  • Continues to implement a phased-in expansion of the TK program. In 2021, state policymakers approved a multiyear plan to expand TK to all 4-year-olds in the state by 2025-26. The initial expansion took effect during the current fiscal year — 2022-23 — and covered children whose 5th birthdays fall between September 2 and February 2 (the previous cut-off was December 2). The proposed budget assumes the state will implement the next phase of the TK expansion in 2023-24, providing eligibility to children who turn 5 between September 2 and April 2 (about 46,000 children), at an estimated cost of over $850 million.
  • Continues to implement a multiyear plan to ensure the State Preschool Program serves a greater diversity of children. The 2022-23 budget package increased payment rates for certain children enrolled in state preschool, including children with disabilities, dual language learners, and 3-year-olds. In exchange, preschool providers have begun enrolling more children with disabilities and providing enhanced services to dual language learners. The governor proposes to continue implementing this plan in 2023-24, at a cost of $64.5 million Proposition 98 General Fund and $51.8 million General Fund.
  • Delays a planned $550 million investment in preschool, TK, and full-day kindergarten facilities from 2023-24 to 2024-25. This investment is intended to help build new school facilities or retrofit existing buildings in order to provide appropriate spaces for preschool, TK, and full-day kindergarten.
  • Includes roughly $175 million to support an 8.13% statutory cost-of-living adjustment for the state preschool program. This increase reflects $112 million Proposition 98 General Fund and $63.3 million General Fund.

K-14 Education’s Minimum Funding Level Drops Due to Lower Revenue Estimates

Approved by voters in 1988, Proposition 98 constitutionally guarantees a minimum level of annual funding for K-12 schools, community colleges, and the state preschool program. The governor’s proposed budget assumes a 2023-24 Prop. 98 funding level of $108.8 billion for K-14 education, $690 million above the 2023-24 minimum funding guarantee. Despite the governor’s proposal to provide more Prop. 98 funding in 2023-24 than is constitutionally required, the 2023-24 Prop. 98 funding level would be approximately $1.6 billion below the estimated 2021-22 Prop. 98 funding level of $110.4 billion. The Prop. 98 guarantee tends to reflect changes in state General Fund revenues and the proposed budget’s estimate of 2022-23 General Fund revenue is lower than estimates in the 2022-23 budget agreement. As a result, the Governor’s budget proposal assumes a 2022-23 Prop. 98 funding level of $106.9 billion, approximately $3.5 billion below the level assumed in the 2022-23 budget agreement.

Based on projections in the governor’s budget, funds in the Public School System Stabilization Account (PSSSA) — the state budget reserve for K-12 schools and community colleges — will total $8.5 billion by the end of 2023-24, $1 billion lower than the 2022-23 balance estimated in the 2022-23 budget agreement (see Reserves section). Because the PSSSA balance is projected to exceed 3% of the total K-12 share of the Prop. 98 minimum funding level in 2022-23, current law would continue to prevent K-12 school districts from maintaining more than 10% of their budgets in local reserves in 2023-24.

Proposed Budget Includes Large Cost-of-Living Adjustment for K-12 Education

The largest share of Prop. 98 funding goes to California’s school districts, charter schools, and county offices of education (COEs), which provide instruction to 5.9 million students in grades kindergarten through 12. The governor’s proposed budget would provide a large cost-of-living adjustment (COLA) to the state’s K-12 education funding formula — the Local Control Funding Formula (LCFF) — but to do so would significantly reduce one-time funding for the Arts, Music, and Instructional Materials Block Grant. Specifically, the governor’s proposed budget:

  • Increases LCFF funding by more than $4 billion. The LCFF provides school districts, charter schools, and COEs a base grant per student, adjusted to reflect the number of students at various grade levels, as well as additional grants for the costs of educating English learners, students from low-income families, and foster youth. The proposed budget would fund a 8.13% COLA for the LCFF, but uses $613 million in one-time dollars in 2022-23 and $1.4 billion in one-time dollars in 2023-24 to help pay for the large increase in ongoing support for the LCFF. According to the Assembly Budget Committee, total LCFF funding would reach $80.0 billion in 2023-24.
  • Cuts approximately $1.2 billion from the Arts, Music, and Instructional Materials Discretionary Block Grant. The governor proposes reducing one-time funding for a discretionary block grant provided to local educational agencies as part of the 2022-23 budget agreement from nearly $3.6 billion to approximately $2.3 billion. This proposed cut would free up one-time funding the administration allocates for LCFF costs in 2022-23 and 2023-24.
  • Provides $669 million to fund COLAs for non-LCFF programs. The governor’s proposed budget funds a 8.13% COLA for several categorical programs that remain outside of the LCFF, including special education, child nutrition, and American Indian Education Centers.
  • Includes $300 million for a new “equity multiplier” add-on to the LCFF. The governor’s proposal would provide ongoing funding to “be allocated to local educational agencies based on school-site eligibility, using a more targeted methodology than the existing supplemental grant eligibility.” The equity multiplier is intended to increase funding for the state’s highest-needs schools and would be accompanied by changes to the state’s K-12 accountability system intended to identify and address student group or school-level equity gaps within a local educational agency.
  • Provides $250 million to increase one-time funding for literacy programs. The governor’s proposal is intended for schools in high-poverty areas to hire additional personnel to improve the quality of reading instruction and would build upon $250 million in one-time funding for the Literacy Coaches and Reading Specialists Grant Program provided in the 2022-23 budget agreement.
  • Provides $100 million in one-time funding for cultural enrichment. The governor’s proposal would support local educational agencies to provide high school seniors access to experiences such as museum visits and art enrichment activities.
  • Reduces funding for the School Facility Program (SFP) by $100 million. The proposal would reduce a planned 2023-24 SFP allocation from approximately $2.1 to approximately $2.0 billion.

Additional Dollars to Support CCC Student Enrollment Included in Proposed Budget

A portion of Proposition 98 funding provides support for California’s Community Colleges (CCCs), the largest postsecondary education system in the country, which serves high percentages of students of color and students with low incomes. CCCs prepare approximately 1.8 million students to transfer to four-year institutions or to obtain training and employment skills.

The proposed 2023-24 spending plan proposes additional funds to support student enrollment and retention, a cost-of-living adjustment (COLA), and a decrease in funding for deferred maintenance projects. Specifically, the proposed spending plan:

  • Proposes a 8.13% COLA for apportionments and other programs. This percentage translates to $652.6 million ongoing Prop. 98 dollars for the Student Centered Funding Formula (SCFF) and $28.8 million ongoing Prop. 98 for enrollment growth. The proposal also provides $92.5 million ongoing Prop. 98 dollars to fund the same percentage COLA for other CCC categorical programs and the Adult Education Program.
  • Allocates $200 million one-time Prop. 98 dollars to support student enrollment and retention. This would be the third round of funding in the last three years to support strategies to increase enrollment and improve retention rates given the large declines in student enrollment since the beginning of the COVID-19 pandemic.
  • Proposes a decrease of $213 million one-time Prop. 98 for deferred maintenance projects. This reduction reflects a portion of one-time dollars allocated for this purpose in the 2022 Budget Act.

Other proposals included in the 2023-24 governor’s budget include:

  • Providing additional “flexibility” to CCC districts. This proposal would provide community college districts that are making progress toward meeting goals established in the CCC “roadmap” with “additional categorical spending flexibilities and the ability to consolidate reporting requirements.” More details on this plan will be provided in May.
  • Providing dual enrollment opportunities. The budget proposal also “requests” that community colleges establish dual enrollment agreements with Local Educational Agencies and offer service-learning opportunities through dual enrollment to all high school students.

Proposed Budget Continues Multiyear Funding Investments in the CSU and the UC

California supports two public four-year higher education institutions: the California State University (CSU) and the University of California (UC). The CSU provides undergraduate and graduate education to roughly 462,000 students on 23 campuses, and the UC provides undergraduate, graduate, and professional education to about 290,000 students on 10 campuses.

The 2023-24 budget proposal provides 5% base increases to both the CSU and the UC. This increase is part of the multiyear funding investments established through agreements between the administration and the CSU and UC systems. The “compacts” outline major goals, including increasing access, improving student success and advancing equity, increasing affordability, improving collaboration among systems of higher education, and supporting workforce preparedness.

For the CSU, the spending plan includes:

  •  $227.3 million ongoing General Fund dollars for a base increase to make progress toward meeting certain goals outlined in the multiyear agreement.
  • A proposal to shift $404.8 million in appropriated funds to CSU bond funds for six capital outlay projects at several CSU campuses — these budget appropriations were part of the 2022-23 Budget Act. The proposal includes $27 million ongoing General Fund for debt service on those bonds.

For the UC, the governor’s budget proposes:

  • $215.5 million ongoing General Fund dollars for operating costs and enrollment growth.
  • An increase of $30 million ongoing General Fund to support resident undergraduate enrollment growth.
  • Delaying a total of $366 million in 2022-23 and 2023-24 to 2024-25 for three capital outlay projects across four UC campuses.

Other higher education proposals in the spending plan include:

  • An increase of $227 million one-time General Fund for the Middle Class Scholarship — the 2022 Budget Act included intent to supplement funding for this program in 2023-24.
  • Delaying $250 million from 2023-24 to 2024-25 for affordable student housing, including conversion of commercial properties into affordable student housing for CCC, CSU, and UC students.
  • Delaying $1.15 billion in 2023-24 and 2024-25 to 2025-26 for the student housing revolving loan program established in the 2022 Budget Act to support all three systems of higher education.

related content

See our report Dollars and Democracy: A Guide to the California State Budget Process to learn more about the state budget and budget process.

Workforce & Other Proposals

Governor Reduces a Range of Workforce Development Investments

The administration proposes to reduce spending on a range of workforce development programs, with several reductions slated to be reversed next year if General Fund revenues are sufficient in January 2024. Reductions that are intended to be reversed include:

  • A $40 million General Fund cut ($20 million in each of 2023-24 and 2024-25) to the Apprenticeship Innovation Fund, which is housed at the Department of Industrial Relations and is used to invest in and expand non-traditional apprenticeships. This reduces the total three-year investment in the fund included in the 2022 Budget Act from $175 million to $135 million.
  • A $20 million General Fund cut ($10 million in each of 2023-24 and 2024-25) for the Employment Development Department to provide emergency medical technician training. This reduces the total three-year investment made in the 2022 Budget Act from $60 million to $40 million.
  • A $20 million General Fund cut ($10 million in each of 2023-24 and 2024-25) to the California Workforce Development Board for the California Youth Leadership Program. This reduces the total three-year investment made in the 2022 Budget Act from $60 million to $40 million.
  • A $30 million General Fund cut ($15 million in each of 2023-24 and 2024-25) to the Department of Industrial Relations’ Women in Construction Unit, which promotes and supports women and non-binary individuals in skilled trade careers.

Spending reductions that the governor is not proposing to be restored if there are enough revenues in 2024 include:

  • A $49.8 million General Fund cut over four years for various public health workforce development programs, reducing total four-year spending from $65.6 million to $15.8 million.
  • The elimination of $25 million General Fund committed to the Department of Industrial Relations for the COVID Workplace Outreach Program in 2023-24.

The administration also proposes to defer $68 million General Fund in 2022-23 and $329.4 million in 2023-24 for various Department of Health Care Access and Information (HCAI) workforce programs. The administration proposes to appropriate these funds later, with $198.7 million slated to be allocated in both 2024-25 and 2025-26.

The budget also proposes to shift $14 million General Fund for workforce training related to wildfire and forest resilience to Proposition 98, reducing overall funding for this purpose by $1 million General Fund, to about $53 million.

Finally, the administration proposes $78.1 million ongoing General Fund to make the CaliforniansForAll Youth Jobs Corps program permanent “while providing pathways for undocumented Californians with work authorization.” This program, which connects youth who may not have access to traditional career-building resources to job opportunities, was authorized in the 2021 Budget Act and funded with one-time federal American Rescue Plan Act of 2021 (ARPA) funds. The administration also proposes to eliminate $25 million one-time General Fund included in last year’s budget to support additional summer employment opportunities through this program, noting that such services can be achieved through the ongoing funding provided to the Youth Jobs Corps.

Proposed Spending Plan Delays Expansion of Broadband Infrastructure Support

The pandemic exposed the inequities in access to computers and high-speed internet, also known as the digital divide. Access to such technology is necessary to participate in learning and other essential activities such as remote work, applying for jobs, virtual health appointments, and access to many other services. The digital divide disproportionately impacts low-income and Latinx households, as well as children and youth, seniors, and people with disabilities.

The 2023-24 spending plan proposes to defer more than $1.1 billion in funding to future years for last-mile infrastructure grants and the Loan Loss Reserve Fund. Both programs support the expansion of broadband infrastructure at the local level and are overseen by the California Public Utilities Commission (CPUC).

Last-mile infrastructure (wires, poles, cables, and other components) refers to the final section of a network that connects to middle-mile infrastructure (fiber-optic cables laid out over hundreds of miles) and provides high-speed internet access to individual communities and households. The Loan Loss Reserve Fund supports local governments, tribes, and nonprofits in financing local broadband infrastructure development.

Specifically, the proposed spending plan includes:

  • A deferral of $550 million for last-mile infrastructure grants at the CPUC. Under this proposal, the $550 million in 2023-24 would be deferred to 2024-25 ($200 million), 2025-26 ($200 million), and 2026-27 ($150 million).
  • Deferrals totaling $575 million for the Loan Loss Reserve Fund at the CPUC. Under this proposal, $175 million in 2022-23 and $400 million in 2023-24 would be deferred to 2024-25 ($300 million) and 2025-26 ($275 million).

Proposed Budget Highlights Prison Closures

More than 96,000 adults who have been convicted of a felony offense are serving their sentences at the state level, down from a peak of 173,600 in 2007. American Indian, Black, and Latinx Californians are disproportionately represented in state prisons — a racial disparity that reflects implicit bias in the justice system, structural disadvantages faced by these communities, and other factors.

Among all incarcerated adults, most — 91,547 — are housed in state prisons designed to hold fewer than 82,000 people. This level of overcrowding equals 111.7% of the prison system’s “design capacity,” which is below the prison population cap — 137.5% of design capacity — established by a 2009 federal court order. California also houses more than 4,800 people in facilities that are not subject to the cap, including fire camps, in-state “contract beds,” and community-based facilities that provide rehabilitative services. The sizable drop in incarceration has resulted both from 1) a series of justice system reforms enacted by voters and state leaders and 2) changes adopted in 2020 to further reduce prison overcrowding in response to the COVID-19 pandemic, such as suspending intakes from county jails and implementing early releases.

The governor’s proposed budget includes a previously announced plan to reduce prison capacity in the following ways:

  • By the end of 2023, the state will complete the deactivation of certain facilities within six state-owned prisons, generating ongoing General Fund savings of $150 million.
  • By March 2024, the state will end its contract for the use of the California City Correctional Facility. California City is the last of several private prisons that the state began leasing to help alleviate overcrowding in state-owned prisons.
  • By March 2025, the state will shut down Chuckawalla Valley State Prison in Blythe.

Adults who are housed in these various facilities will be moved to “appropriate level” state-owned prisons, according to the administration.

This planned downsizing follows the closure of one state prison in September 2021 — Deuel Vocational Institution in Tracy — and the anticipated shutdown of another state prison — California Correctional Center in Susanville — later this year. But California can do more. The state can safely close up to five state prisons, according to a 2020 report by the Legislative Analyst’s Office. The ongoing savings from additional prison closures could be redirected to help people make the transition back to their communities more successfully and boost services to support survivors of crime, reduce poverty, increase housing stability, address substance use and mental health issues, and enhance the safety and well-being of our communities.

Governor Withdraws Unnecessary Payment on Federal Unemployment Insurance Loan

The proposed budget wisely withdraws a $750 million optional payment of a portion of the state’s outstanding federal loans for unemployment benefits that was slated for 2023-24, following a $250 million payment made in 2022-23. This payment would “provide no near-term economic relief to employers or workers,” according to the Legislative Analyst’s Office (LAO) in their assessment of an even larger optional payment proposed by the governor last year, making it a logical place to scale back spending to preserve services that help Californians meet basic needs.

Even if the state had significant discretionary revenues to spend, pre-paying federal unemployment insurance loans wouldn’t make sense. California had to borrow billions of dollars from the federal government to pay for the unemployment benefits workers needed during the pandemic because businesses — particularly large, profitable corporations — hadn’t been paying enough in state payroll taxes to cover the true cost of the unemployment benefits their workers needed. Since businesses didn’t contribute enough prior to the pandemic, federal law requires them to start to gradually pay down this debt this year through small increases in the federal payroll tax rate. Businesses’ first payment toward the debt will amount to just $21 per employee for all of 2023 — the equivalent of 0.07% of a full-time minimum wage worker’s annual earnings.

If California were to pay down any of this debt, it would essentially provide an across-the-board tax break for businesses that haven’t been paying enough in taxes to fund unemployment benefits for their workforce for decades. And it would especially benefit large profitable corporations, which are paying less than half the amount in state taxes, as a share of their income, than they did a generation ago. Moreover, making an unnecessary prepayment on federal unemployment loans would take critical resources away from investments that could address Californians’ urgent needs for affordable housing, health care, and child care and a strong safety net.

The governor also rescinds $500 million in rebates that policymakers agreed to include in the 2023-24 budget to reimburse small businesses for increased federal payroll taxes.

Governor Does Not Include Details on Price Gouging Penalty on Oil Companies

Last fall, Governor Newsom called for a windfall profits tax on oil companies after a major spike in gas prices in California. In December, he convened a special session of the Legislature to address the issue of high gas prices and tighten regulation of oil companies operating in the state. At that time, he modified the original proposal and introduced — along with Senator Nancy Skinner — a bill to institute a “price gouging penalty” on oil refiners. The stated goal of the penalty is to discourage oil refiners from engaging in price gouging, not to raise revenue for the state, but the proposal notes that any penalties collected would go into a special fund and be distributed back to Californians.

The governor’s budget proposal reiterates this intention but provides no further policy details on the proposal. Details still to be determined include the threshold at which the penalty would be triggered, the amount of the penalty, and the method for distributing penalty funds back to state residents. The governor notes that the details are to be worked out by the Legislature in special session convenings, and not through the budget process.

The Legislature may also decide to pursue a different approach to addressing high gas prices and their impact on Californians.

Proposal Includes More CalCompetes Grants, No New Small Business Funding

The governor proposes another $120 million for a third year of the California Competes (CalCompetes) grant program, which aims to increase jobs and business investments in the state by businesses that owe too little in state taxes to benefit from the CalCompetes Tax Credit program. The governor indicates that this extension is part of a strategy to leverage federal funding for semiconductor manufacturing and research and development.

At a time when the state’s revenue outlook is uncertain and many Californians continue to struggle with the basic costs of living, the dollars proposed for this grant program — which is not targeted to small business — may be more effectively used to support critical state services that help Californians meet their needs. While the CalCompetes program is better targeted than many other economic development incentives, there are still concerns about windfall benefits for businesses that would have created jobs in California even without receiving state assistance. And some research suggests that the positive employment effects of the California Competes credit are larger for workers living in areas with higher income and education levels, so workers with higher levels of need likely benefit less than well-off workers.

The governor’s proposal does not include any additional targeted small business aid, and it includes a $50 million reduction in previously committed funds for small business financial assistance through the state’s Infrastructure and Economic Development Bank (IBank). It also plans to recapture $92 million from the Small Business COVID-19 Relief Grant Program, which is the estimated amount of unused funds after all eligible businesses have received grants.

The governor also rescinds $500 million in rebates that policymakers agreed to include in the 2023-24 budget to reimburse small businesses for increased federal payroll taxes.

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