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/
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.
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.
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.
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.
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/
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.
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).
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 WPR
Share 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 degree
Nearly 1 in 2 heads of household lack a high school or equivalent degree
Mental health services
More than 1 in 4 participants recommended for mental health services
Substance abuse services
About 1 in 20 participants recommended for substance abuse services
Domestic abuse services
More 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.
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 from Department of Social Services, CalWORKs Annual Summary (November 2022).
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.
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.
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.
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.
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.
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 roughly462,000students on 23 campuses, and the UC provides undergraduate, graduate, and professional education to about290,000students 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 tosupport 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.
See our report Dollars and Democracy: A Guide to the California State Budget Process to learn more about the state budget and budget process.
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).
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.
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.
Every year, California’s governor and Legislature adopt a state budget that provides a framework and funding for critical public services and systems — from child care and health care to housing and transportation to colleges and K-12 schools.
But the state budget is about more than dollars and cents.
The budget expresses our values as well as our priorities for Californians and as a state. At its best, the budget should reflect our collective efforts to expand economic opportunities, promote well-being, and improve the lives of Californians who are denied the chance to share in our state’s wealth and who deserve the dignity and support to lead thriving lives.
State budget choices have an impact on all Californians and these decisions are particularly important for the nearly 6 million students in California’s K-12 public schools. Because the state budget provides the majority of funding that K-12 public schools receive each year, it is critical for Californians to understand and participate in the annual budget process to ensure that state leaders are making the strategic choices needed to allow every K-12 student — from different races, backgrounds, and places — to thrive and share in our state’s economic and social life.
This guide sheds light on the state budget, the budget process, and why they matter for K-12 students and schools with the goal of giving Californians the tools needed to effectively engage decision makers and advocate for fair and just policy choices.
the bottom line
The state spending plan is about more than dollars and cents.
Crafting the budget provides an opportunity for Californians to express our values and priorities as a state.
The state Constitution establishes the rules of the budget process.
Among other things, these rules allow lawmakers to approve spending with a simple majority vote but require a two-thirds vote to increase taxes. Voters periodically revise the budget process by approving constitutional amendments.
The governor has the lead role in the budget process
Proposing a state budget for the upcoming fiscal year gives the governor the first word in each year’s budget deliberations.
The May Revision gives the governor another opportunity to set the budget and policy agenda for the state.
Veto power generally gives the governor the last word.
The Legislature reviews and revises the governor’s proposals.
Lawmakers can alter the governor’s proposals and advance their own initiatives as they craft their version of the budget prior to negotiating an agreement with the governor.
Budget decisions are made throughout the year.
The public has various opportunities for input during the budget process.
This includes writing letters of support or opposition, testifying at legislative hearings, and meeting with officials from the governor’s administration as well as with legislators and their staffs.
In short, Californians have ample opportunity to stay engaged and involved in the budget process year-round.
California’s State Budget & Why It Matters for K-12 School Funding
The State Budget Consists of Three Types of State Funds
three types of state funds
General Fund — The state General Fund accounts for revenues that are not designated for a specific purpose.
Special Funds — Over 500 state special funds account for taxes, fees, and licenses that are designated for a specific purpose.
Bond Funds — State bond funds account for the receipt and disbursement of general obligation (GO) bond proceeds.
The state General Fund provides more than 95% of state spending that supports K-12 education.
The Largest Share of State General Fund Spending Supports K-12 Education
Under the enacted 2022-23 state budget:
Nearly one-third of General Fund dollars (33.1%) supports K-12 education.
Almost 3 out of every 10 General Fund dollars (29.3%) pays for health and human services.
Roughly 1 out of every 10 General Fund dollars (10.1%) goes to higher education.
Less than 1 out of every 10 General Fund dollars (6.3%) supports corrections, primarily the state prison system.
More than 1 out of 5 General Fund dollars (21.3%) goes to other essential services and institutions, such as transportation, environmental protection, the state’s court system, and so-called “General Government,” which consists of a variety of statewide expenses such as emergency expenditures.
Most General Fund Revenues Come From Three State Taxes
More than 9 out of every 10 General Fund dollars (just over 94%) under the enacted 2022-23 state budget are projected to come from:
The personal income tax (61.8%),
The corporation tax (17.3%); and
Sales and use taxes (15.3%)
The remaining General Fund dollars in 2022-23 are projected to come from smaller state revenue sources (5.7%), such as insurance and cigarette taxes.
The Majority of K-12 Education Funding Comes From the State
In 2020-21, K-12 school districts and county offices of education received:
More than half of their dollars (nearly 56%) from the state;
Nearly one-quarter of their dollars (24.6%) from local property taxes;
More than 1 in 10 (13.1%) of their dollars from the federal government, which included funding to mitigate effects of the COVID-19 pandemic; and
Only 6.5% of their dollars from other local sources of revenue, such as parcel taxes and fees for the use of school buildings.
Most K-12 Education Funding Is Allocated Through the Local Control Funding Formula
The Local Control Funding Formula (LCFF) is the primary funding formula for K-12 school districts and county offices of education.
State policymakers fundamentally restructured the state’s K-12 education finance system when they enacted the LCFF in 2013.
The LCFF is an equity-based formula that provides a base grant per K-12 student, adjusted to reflect the number of students at various grade levels, as well as additional grants for English learners, students from low-income families, and foster youth.
The Legislature determines LCFF grant levels in the annual state budget.
LCFF Dollars Come From the State and from Local Property Taxes
In 2020-21, nearly 2 out of every 3 dollars (66.2%) that K-12 school districts and county offices of education received were allocated through the LCFF.
Slightly less than two-thirds of LCFF dollars came from the state and slightly more than one-third came from local property taxes.
State Budget and Policy Choices Are Key to Determining the Allocation of K-12 School Funding
The state budget provides most of the funds that K-12 schools use to educate California’s 5.9 million K-12 students.
These funds go to more than 1,000 school districts, county offices of education, and charter schools.
The size of the state budget is a key factor that determines the total amount of annual funding K-12 schools receive.
However, the Legislature and governor decide how these state funds are allocated across the state.
Understanding the financial resources available to K-12 schools requires familiarity with the state budget and the state budget process.
Assembly Budget Committee and Senate Budget & Fiscal Review Committee
Review the governor’s budget proposals and develop each house’s version of the state budget. Most budget committee work is done through subcommittees that focus on specific policy areas.
The initial budget bill passed by the Legislature and signed into law by the governor, after any line-item vetoes. The Budget Act can be referred to by the year in which it becomes law (“Budget Act of 2021”) or by the fiscal year to which it applies (“2021-22 Budget Act”).
Budget Bill Jr.
The informal term to describe any budget bill that amends the Budget Act. Budget Bill Jrs. may be numbered sequentially using Roman numerals (e.g., Budget Bill Jr. I, Budget Bill Jr. II, etc.).
Budget-Related Bills ("Trailer Bills")
Generally make changes to state law related to the budget bill. Trailer bills typically move in tandem with the budget bill through the Assembly and Senate budget committees. Trailer bills also may move independently of the budget bill — such as through the Legislature’s policy bill process — and still be considered part of the overall “budget package.”
Department of Finance (DOF)
Leads the development of the governor’s budget proposals, prepares the governor’s budget documents, testifies on behalf of the governor at legislative budget hearings, develops the governor’s economic forecasts, and performs several other functions. The DOF’s director is the governor’s chief fiscal adviser.
Governor's Budget Summary
Provides the governor’s economic and revenue outlook, highlights major policy initiatives in the governor’s proposed budget, and summarizes proposed state expenditures. The budget summary is released on or before January 10.
Governor's Proposed Budget
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 on or before January 10
Legislative Analyst's Office (LAO)
An independent, nonpartisan office that conducts research and analysis on state budget issues, analyzes statewide ballot measures, and provides fiscal and policy advice to the Legislature. The LAO is overseen by the Legislature’s bipartisan Joint Legislative Budget Committee.
The governor’s power to reduce or eliminate specific items of appropriation while approving other portions of a bill. This power applies to any bill that contains an appropriation, including budget bills and budget-related bills. The Legislature may override a line-item veto with a two-thirds vote of each house.
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 Proposition 98 minimum funding guarantee for K-14 education.
The Constitutional Framework
The governor and legislators craft the state’s annual spending plan according to rules outlined in the state Constitution.
California voters periodically revise these rules by approving constitutional amendments that appear on the statewide ballot.
Proposals to amend the state Constitution can be placed on the ballot through a citizens’ initiative or by the Legislature.
A constitutional amendment takes effect if approved by a simple majority of voters.
Three Key Budget Deadlines
Two in the State Constitution (January 10 and June 15), One in State Law (May 14)
The governor must propose a budget for the upcoming fiscal year on or before January 10. The budget must be balanced: Estimated revenues (as determined by the governor) must meet or exceed the governor’s proposed spending.
The governor must release the May Revision on or before May 14.
The Legislature must pass a budget bill for the upcoming fiscal year by midnight on June 15. The budget bill must be balanced: Estimated General Fund revenues (as set forth in the budget bill passed by the Legislature) must meet or exceed General Fund spending.
Proposition 25: Simple Majority Vote for Budget Bill and Most Budget-Related Bills
The budget package generally may be passed by a simple majority vote of each house of the Legislature.
Prop. 25 of 2010 allows lawmakers to pass, by a simple majority vote, the budget bill as well as certain budget-related bills (“trailer bills”) that may take effect as soon as the governor signs them. Typically, the budget package consists entirely or primarily of such majority-vote bills.
To qualify as a budget-related bill under Prop. 25, a bill must (1) be listed in the budget bill and (2) contain an appropriation of any amount.
The budget package may include bills that require a two-thirds vote of each house, such as bills to raise taxes or to place constitutional amendments or general obligation bonds before the voters.
Proposition 25: Penalties for a Late Budget
Lawmakers face penalties if they fail to pass the budget bill on or before June 15.
Prop. 25 requires lawmakers to permanently forfeit both their pay and their reimbursement for travel and living expenses for each day after June 15 that the budget bill is not passed and sent to the governor.
These penalties do not apply to budget-related bills, which do not have to be passed on or before June 15.
Proposition 26: Supermajority Vote for Tax Increases
Any tax increase requires a two-thirds vote of each house of the Legislature.
Under the state Constitution, “any change in state statute which results in any taxpayer paying a higher tax” requires a two-thirds vote of each house.
This standard was imposed by Prop. 26 of 2010. This measure expanded the definition of a tax increase and thus the scope of the two-thirds vote requirement, which was originally imposed by Prop. 13 of 1978.
Prior to Prop. 26, only bills changing state taxes “for the purpose of increasing revenues” required a two-thirds vote. Bills that increased some taxes but reduced others by an equal or larger amount could be passed by a simple majority vote of each house.
Proposition 26: More Charges Are Classified as Taxes
Prop. 26 of 2010 also expanded the definition of a tax to include some fees.
Prior to Prop. 26, lawmakers could create or increase fees by a simple majority vote. These majority-vote fees included regulatory fees intended to address health, environmental, or other problems caused by various products, such as alcohol, oil, or hazardous materials.
Prop. 26 reclassified regulatory and certain other fees as taxes. As a result, a two-thirds vote of each house of the Legislature is now required for many charges that previously were considered fees and could be passed by a simple majority vote.
Additional Supermajority Vote Requirements
The state Constitution requires a two-thirds vote of each house of the Legislature in order to:
Appropriate money from the General Fund, except for appropriations that are for public schools or that are included in the budget bill or in budget-related bills that meet the requirements of Prop. 25.
Pass bills that take effect immediately (urgency statutes), except for the budget bill and Prop. 25 budget-related bills.
Place constitutional amendments or general obligation bond measures before the voters.
Override the governor’s veto of a bill or an item of appropriation.
A Bill Must Be Published for at Least 72 Hours Before the Legislature Can Act on It
Proposition 54 of 2016 requires bills to be distributed to legislators and published on the Internet, in their final form, at least 72 hours before being passed by the Legislature.
This rule applies to all bills, including the budget bill and other legislation included in the budget package.
This mandatory review period can be waived for a bill if:
The governor declares an emergency in response to a disaster or extreme peril, and
Two-thirds of legislators in the house considering the bill vote to waive the review period.
Proposition 98: A Funding Guarantee for K-12 Schools and Community Colleges
Prop. 98 of 1988 guarantees a minimum annual level of funding for K-14 education.
The amount of the guarantee is calculated each year based on one of three tests that apply under varying fiscal and economic conditions. Two of these tests include adjustments for changes in statewide K-12 attendance. Prop. 98 funding comes from the state General Fund and local property tax revenues.
The Legislature can suspend the guarantee for a single year by a two-thirds vote of each house and provide less funding. Following a suspension, the state must increase Prop. 98 funding over time to the level that it would have reached absent the suspension.
While the Legislature can provide more funding than Prop. 98 requires the guarantee has generally served as a maximum funding level.
Proposition 2: Saving for a Rainy Day, Paying Down Debt
Prop. 2 of 2014 revised the rules that apply to the Budget Stabilization Account (BSA) — the state’s constitutional rainy day fund — and also established a new requirement to pay down state budgetary debt.
The state is required to set aside 1.5% of General Fund revenues each year, plus additional dollars in years when tax revenues from capital gains are particularly strong.
Until 2029-30, half of the revenues go into the BSA and the other half must be used to pay down state budgetary debt, which includes unfunded pension liabilities. Starting in 2030-31, the entire annual transfer goes into the BSA.
State policymakers may suspend or reduce the BSA deposit and withdraw funds from the reserve, but only under limited circumstances that qualify as a “budget emergency.”
Proposition 2: A Budget Reserve for K-14 Education
Prop. 2 of 2014 also created a state budget reserve for K-12 schools and community colleges called the Public School System Stabilization Account (PSSSA).
Deposits come from state capital gains tax revenues in years when those revenues are particularly strong.
However, various conditions must be met before these dollars could be transferred to the PSSSA. For example, transfers could occur only in so-called “Test 1” years under Prop. 98, which have been rare.
Proposition 55: Potential New Funding for Medi-Cal from a Tax on the Wealthiest Californians
Prop. 55 of 2016 extends, through 2030, personal income tax rate increases on very high-income Californians and establishes a formula to boost funding for Medi-Cal, which provides health care services to Californians with low incomes.
Starting in 2018-19, General Fund revenues — including those raised by Prop. 55 — must first be used to fund (1) the annual Prop. 98 guarantee for K-12 schools and community colleges and (2) the cost of other services that were authorized as of January 1, 2016, as adjusted for population changes, federal mandates, and other factors.
If any Prop. 55 revenues remain after meeting these required expenditures, Medi-Cal would receive 50% of this excess, up to a maximum of $2 billion in any fiscal year.
Prop. 55 has not yet resulted in any additional funding for Medi-Cal.
State Appropriations Limit (SAL): A Cap on Spending
Appropriations are subject to a limit established by Prop. 4 of 1979, as modified by later initiatives. This spending cap is often called the Gann Limit.
The SAL limits the amount of state tax proceeds that can be appropriated each year. This limit is adjusted annually for changes in population and per capita personal income.
Some appropriations from tax proceeds do not count toward the limit, including debt service and spending that is needed to comply with court or federal mandates.
Revenues that exceed the SAL over a two-year period are divided equally between Prop. 98 spending and taxpayer rebates. The state last exceeded the SAL in 2020-21 (but did not do so in the prior year).
State Mandates: Pay for Them or Suspend Them
The state is required to pay for or suspend mandates that it imposes on local governments.
Prop. 4 of 1979 requires the state to reimburse local governments for costs related to a new program or a higher level of service that is mandated by the state.
Prop. 1A of 2004 expanded the definition of a mandate to include the transfer of financial responsibility from the state to local governments.
Prop. 1A also requires the state to suspend a mandate in any year in which local governments’ costs are not fully reimbursed.
What do the Governor and the Legislature Do?
Approves, modifies, or rejects spending proposals prepared by state departments and agencies through an internal process coordinated by the DOF.
Proposes a spending plan for the state each January, which is introduced as the budget bill in the Legislature.
Updates and revises the proposed budget each May (the “May Revision”).
Signs or vetoes the bills included in the budget package.
Can veto all or part of individual appropriations (line items), but cannot increase any appropriations above the level approved by the Legislature.
Approves, modifies, or rejects the governor’s proposals.
Can add new spending or make other changes that substantially revise the governor’s proposals.
Needs a simple majority vote of each house to pass the budget bill and Prop. 25 budget-related bills.
Needs a two-thirds vote to pass certain other bills that may be part of the budget package, such as bills that increase taxes or propose constitutional amendments.
Needs a two-thirds vote of each house to override the governor’s veto of a bill or an appropriation.
What Happens When?
The state budget process is cyclical. Decisions are made throughout the year.
State departments and agencies develop baseline budgets to maintain existing service levels in the upcoming fiscal year and may prepare “budget change proposals” intended to alter service levels. The DOF review these documents.
Following a series of meetings within the governor’s administration, the governor makes final decisions and the DOF prepares the proposed budget for release in January.
Independent of the governor, legislative leaders their budget priorities for the upcoming fiscal year.
The governor releases the proposed budget for the upcoming fiscal year.
January to Mid-May
Budget committees and their subcommittees hold dozens of headings to review the governor’s proposals and make initial decisions.
Mid-May to June
The governor releases the May Revision by May 14.
Each house of the Legislature then finalizes its version of the budget. A legislative conference committee may meet to resolve differences.
Legislative leaders and the governor meet to address outstanding issues.
The constitutional deadline for lawmakers to pass the budget bill.
This deadline does not apply to budget-related bills, which can be passed at any time.
The new fiscal year begins.
The governor may sign the budget bill and budget-related bills — as well as issue vetoes — by this date.
July and Beyond
The Legislature may pass, by a simple majority vote, amendments that change the spending levels in the adopted budget bill.
Lawmakers also may pass additional budget-related bills, thus increasing the size and scope of the original budget package.
State departments and agencies develop baseline budgets and budget change proposals for the following fiscal year and submit them to the DOF, starting the state budget process anew.
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