Unaffordable housing costs are one of California’s most pressing challenges. The high cost of housing is one of the primary drivers of California’s high poverty rate — ranked first among the 50 states — under the Supplemental Poverty Measure, which accounts for differences in the local cost of living.[1] The lack of affordable housing increases economic insecurity among California families and also creates challenges for California employers striving to retain and recruit workers. Housing affordability is a problem throughout the state when housing costs are compared to incomes, and the Californians who are most affected by the housing affordability crisis are renters and households with the lowest incomes. Policy solutions that particularly target these households represent a promising approach to tackling the state’s housing crisis strategically, with a focus on those most deeply affected.
Renters Are Especially Likely to Have Unaffordable Housing Costs, While Homeowners Without Mortgages Are Least Affected
Determining whether housing is affordable requires considering both housing costs and household incomes. For renters, housing costs include monthly rent payments, plus the cost of utilities if not included in the rent. Housing costs for homeowners include monthly mortgage principal and interest payments, plus property tax, property insurance, utilities, and condo or mobile home fees (if applicable). To understand California’s housing affordability challenges, it is important to consider these housing costs relative to incomes. If high housing costs are matched by high incomes, then expensive housing may be affordable to many households. At the same time, even relatively low housing costs may be unaffordable if local incomes are also low.
For housing costs to be considered affordable, a household’s total housing costs should not exceed 30 percent of household income, according to the US Department of Housing and Urban Development. Households paying more than 30% of income toward housing are considered housing “cost-burdened,” and those with housing costs that exceed half of their income are considered “severely cost-burdened.” By these standards, more than 4 in 10 households statewide had unaffordable housing costs in 2017. Furthermore, 1 in 5 households across California faced severe housing cost burdens, spending more than half of their income toward housing expenses.
California’s renters are substantially more likely to struggle with housing affordability than homeowners in California. More than half of renter households paid over 30% of income toward housing in 2017, and more than a quarter were severely cost-burdened, paying more than half of household income toward housing costs. California homeowners generally struggle less to afford their housing, though more than a third of homeowners with mortgages were housing cost-burdened in 2017. Owners without mortgages are least likely to face high housing burdens in California. Besides not having the monthly expense of a mortgage, many of these homeowners have been in their homes for decades and therefore benefit from relatively low property taxes due to Proposition 13’s limitation on property tax increases.
Low-Income Households Are Particularly Affected by Unaffordable Housing
Households with the lowest incomes are by far the most likely to have housing costs that are unaffordable. Eight in 10 households with low incomes (those with incomes of less than 200% of the federal poverty line) were housing cost-burdened in 2017, and more than half of these households spent more than half their income on housing. At the same time, only about 16% of high-income households (with incomes of 400% or more of the federal poverty line) were housing cost-burdened in 2017, and less than 3% were severely cost-burdened.
Housing Affordability Is a Problem in All Regions of California, and Many of Those Affected Are People of Color
Housing costs vary substantially throughout California, with the highest costs in coastal urban areas and the lowest costs in inland rural areas. But incomes also vary regionally, and areas with relatively lower housing costs also tend to have lower typical incomes. The result is that housing affordability is clearly a problem throughout the state when housing costs are compared to incomes. Across every region of California, from the high-cost San Francisco Bay Area and Los Angeles and South Coast to the lower-cost Central Valley and Far North, at least a third of households spent more than 30% of their incomes toward housing in 2017, and more than 1 in 6 spent more than half of their incomes on housing costs.
Throughout the state, many of the individuals affected by unaffordable housing costs are people of color. Among all Californians living in households paying more than 30% of income toward housing costs in 2017, more than two-thirds were people of color, and about 45% were Latinx.
High Housing Cost Burdens Call for Policies Designed to Help Those Who Are Most Affected
What problems arise when households struggle to afford housing? Unaffordable housing costs can force families to spend less on other basic necessities like health care or food, to cut costs by seeking lower-quality child care, and to under-invest in important long-term assets like education or retirement savings. Unaffordable housing costs can also force families and individuals to accept substandard housing or live in neighborhoods that lack basic safety and offer limited opportunities. In the most serious cases, unaffordable housing can push households into homelessness. All of these consequences can have cascading effects on health and can shape both short-term well-being and long-term outcomes for affected individuals.[2]
Given the challenges of housing affordability across all regions of California — especially for renters, households with the lowest incomes, and people of color — strategies to increase affordability are urgently needed, particularly for the most-affected Californians. Housing affordability policy solutions can focus on protection of affordability for current residents, preservation of existing affordable housing, and production of more housing, particularly homes targeted to the households that struggle most to find and retain affordable housing, including renters and those with the lowest incomes. Specific policy solutions that can make a difference include tenant protections against excessive rent increases, funding to support affordable housing construction and preservation, and policies that increase local incentives and local accountability for accommodating more housing development, particularly for housing affordable to low-income households. Moreover, policies outside of the housing arena that help families make ends meet — by reducing costs for child care, food, health care, or other necessities, or by supplementing incomes — represent another important approach to helping Californians who are struggling to afford the cost of housing.
As state leaders craft budget and policy proposals, it is important to acknowledge that a mix of policies is needed to address California’s housing affordability challenges and that doing so is particularly important for California’s renters, low-income households, and people of color.
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Introduction
The 2017 federal Tax Cuts and Jobs Act (TCJA) included a provision creating a new program designed to encourage private investments in economically distressed communities. The Opportunity Zones program provides federal tax incentives for investments in areas that meet certain criteria and have been designated as Opportunity Zones (OZs). Additionally, Governor Gavin Newsom’s 2019-20 budget proposal would provide state-level tax incentives for investments in OZs. There are 879 designated OZs in California, located in nearly all of the state’s counties. More than 4 million Californians live in these areas and will be potentially impacted by new investments eligible for Opportunity Zones tax incentives. The Opportunity Zones program has the potential to encourage new investments in eligible communities that improve the lives of residents with low incomes. However, the vast majority of the tax benefits will be realized by wealthy investors, and the program may accelerate gentrification in some areas or subsidize investments that offer little or no benefit to community residents.
This Issue Brief, the first in a series of Budget Center publications exploring the Opportunity Zones program, explains the structure of the program, its tax incentives, and how California’s communities may be affected.
The Basics: Opportunity Zones, Qualified Opportunity Funds, and Qualified Opportunity Zone Businesses
The TCJA allowed governors to nominate census tracts for OZ designation following certain federal criteria.[1] To qualify, census tracts must generally be low-income communities, defined as having a poverty rate of at least 20% or a median family income of 80% or less of the metropolitan area or state median family income.[2] States were also permitted to select a limited number of “contiguous tracts” that are not low-income communities but border a qualified low-income community and have a median family income that does not exceed 125% of that of the adjacent qualified low-income tract. Contiguous tracts may not comprise more than 5% of a state’s total selected OZs. Each state was permitted to nominate a total number of OZs not exceeding one-quarter of all eligible low-income tracts. In California, Governor Jerry Brown’s administration nominated 879 census tracts to become OZs, and the US Treasury Department certified all of them. One-tenth of California’s population (10.7%), nearly 4.2 million residents, live in OZ census tracts.[3] These designations will remain in effect for 10 years.
Individuals and corporations that invest in a Qualified Opportunity Fund (QOF) — an entity that in turn makes investments in OZs — are eligible for several tax benefits, discussed below. To be a QOF, at least 90% of the fund’s assets must be invested in “Qualified Opportunity Zone Property,” which may include either a stock or partnership interest in a “Qualified Opportunity Zone Business” that holds tangible property — such as buildings and equipment — in an OZ (known as “Qualified Opportunity Zone Business Property”) or direct holdings of such business property (Figure 1). A QOF, which may be a corporation or partnership, does not need to apply for QOF designation and may self-certify with the Internal Revenue Service (IRS).
Figure 1
The TCJA statute is vague about how much of a QOF’s or Qualified Opportunity Zone Business’ property must be located in an OZ, but the IRS has issued proposed regulations that seek to clarify this issue. If these proposed regulations go into effect, a QOF could have less than half of its assets in use within an OZ and its investors would still be eligible for the full tax benefit.[4]
The law also specifies that, if the original use of the Qualified Opportunity Zone Business Property does not start with the QOF investment, the property must be “substantially improved” — requiring the QOF to spend at least as much to improve the property as it spent to acquire it. Ostensibly, this requirement aims to prevent investors from getting tax benefits by simply buying property in an OZ without adding any value for the community. The IRS’ proposed regulations would make this requirement more flexible, which could increase the likelihood that tax subsidies will go to investments that provide few community benefits.[5]
The broad definitions in the law and the flexibility offered in the proposed regulations mean there will likely be few limitations on the types of investments that will qualify for preferred tax treatment. For example, investments in startup businesses, expansions of existing businesses, construction or substantial rehabilitation of residential or commercial properties, and infrastructure improvements are all likely to qualify. The only businesses explicitly prohibited from receiving Opportunity Zone tax benefits are so-called “sin businesses” including liquor stores, gambling facilities, golf courses, country clubs, tanning facilities, and massage parlors.
The regulations for the Opportunity Zones program have not been finalized at the time of this publication, and the IRS will issue further proposed regulations to clarify other aspects of the law in the coming months. The final regulations will impact the degree to which tax-privileged investments substantively benefit OZ residents and the generosity of the tax benefits for investors.
Tax Incentives for Investors Can Be Lucrative
The Opportunity Zones program attempts to promote investments in OZ census tracts by providing several tax breaks on capital gains that are reinvested into a QOF. A capital gain results when a taxpayer sells or exchanges an asset — such as corporate stock shares or real estate — at a price higher than its purchase price.[6] For federal tax purposes, the short-term capital gains tax rate, which applies to gains on assets held for one year or less, is equal to the taxpayer’s ordinary income tax rate, with a maximum rate of 37%. Lower federal rates apply to long-term capital gains on assets held for more than one year. The maximum rate for long-term capital gains is 20% plus a 3.8% surtax related to the Affordable Care Act.[7] Under the Opportunity Zones program, taxpayers reinvesting capital gains into a QOF within 180 days of the sale or exchange of the original investment are eligible for three federal tax benefits:
Deferral of tax on the capital gain on the original investment until 2026 (or the time the QOF investment is disposed of, if earlier) — allowing the reinvestment of the entire capital gain into a QOF with the potential benefit of a higher return.
Reduction of tax on the capital gain on the original investment if the QOF investment is held long enough (the taxable value of the capital gain — and thus the tax liability — is reduced by 10% if the QOF investment is held for five years and by 15% if the QOF investment is held for seven years).
Elimination of tax on the capital gain on the QOF investment if it is held for 10 years.
There is no upper limit on the tax benefits any QOF investor can receive, nor on the overall cost to the federal government in foregone tax revenues. (See text box for an example of the potential tax benefits from investing in a QOF.)
Wealthiest Investors Will Reap Greatest Share of Tax Savings While Community Benefits Are Uncertain
Taxpayers with holdings of appreciated assets will be the direct beneficiaries of Opportunity Zones tax incentives. Most of these benefits will accrue to very well-off investors, who hold a disproportionate share of such assets. Only 9.2% of all taxpayers report realizing any long-term capital gains, according to estimates from the Urban-Brookings Tax Policy Center.[8] In addition, capital gains are highly concentrated at the top of the income distribution. The top 20% receive 90.2% of all reported long-term capital gains, with the top 1% collecting 68.7% of these gains (Figure 2). Thus, very few low- or middle-income families will receive any tax benefits from the Opportunity Zones incentives.
Figure 2
While the benefits to wealthy investors are clear, there is no guarantee that the subsidized investments will positively impact current residents of designated OZs. The Opportunity Zones program is not the first attempt to bring investment and employment into areas that lack financial resources and jobs. A variety of federal and state programs have provided tax incentives and other benefits to attract business and capital investment and to increase employment in such areas, including Empowerment Zones, Enterprise Communities, Renewal Communities, New Market Tax Credits, and state-level enterprise zones. Research on the community impacts of these programs has reached mixed conclusions. Some studies have found increases in employment and wages and reductions in poverty in designated zones relative to similar communities where these incentives were unavailable, while others have found little evidence that the incentives led to statistically significant community improvements.[9] The inconclusiveness of the research exploring the connection between economic development tax incentives and community outcomes suggests that the costs of such incentives may outweigh the benefits.
A primary concern is investors may be drawn to projects or businesses in areas already in the process of gentrification, as these investments will likely yield the highest returns.[10] If investors do prioritize projects in gentrifying areas, a large portion of the tax-preferred investments could flow into communities that have fewer challenges attracting capital, meaning US taxpayers would be unnecessarily subsidizing investments that likely would have occurred without the incentives. The extent to which this occurs will partially depend on which census tracts states designated as OZs. (The next publication in this series will examine California’s selection of OZs, including the share of selected areas showing signs of gentrification.)
Since the professed goal of the Opportunity Zones program is to improve economically distressed communities, and not to give tax breaks to wealthy investors, the primary question should be whether the inflow of funds meaningfully improves the circumstances of residents in those communities. For instance, if the incentive results in more affordable housing or local businesses that create job opportunities for low-income residents, this would be considered a successful outcome — even if wealthy investors become wealthier in the process. However, given the few restrictions placed on the investments that can be made, and the laxness of some of the regulations proposed by the IRS, there is a real possibility that some of these new investments will contribute to the gentrification of communities. For example, QOFs may invest in luxury condominiums or companies that mostly employ high-skilled workers from outside the community. In fact, these types of investments may be more attractive than “social impact” investments due to potentially higher returns. This could put low-income residents at risk of facing increased costs of living or being displaced, harming the very people the incentive is intended to help. And since OZ census tracts have higher concentrations of black and Latinx residents than other communities, this could exacerbate existing racial and ethnic inequities.[11]
Some of the most disadvantaged communities may not see any new investment at all. These communities have a scarcity of assets to attract investors, present higher risks, and offer potentially lower returns. Therefore, investors are more likely to choose projects in areas that are already more advantaged or showing signs of revitalization over neighborhoods that have the greatest need for new resources.
Another consideration is the overall cost of the Opportunity Zones incentives in the form of foregone federal revenues from capital gains taxes. These lost revenues — mostly benefiting high-income investors — could instead help pay for other services that may have a greater impact on vulnerable communities in California and across the nation. The official cost estimate for the tax incentives is small relative to total cost of the TCJA — $1.6 billion over 10 years in a package of nearly $2 trillion in tax cuts.[12] However, the long-run costs could be much greater given that this estimate does not include revenue losses from the complete exclusion of gains on QOF investments held for 10 years, which fall outside the 10-year period for which budget estimates were made.
The high levels of flexibility for investors and uncertainty regarding the potential benefits and harms to OZ residents elevate the need for strong reporting and data collection requirements. The law does not include such requirements, but the US Treasury Department has the discretion to issue them in forthcoming regulations. Thus, until the final regulations are released, it is unknown whether there will be sufficient and transparent information available to determine how the tax incentives are being used and how subsidized investments are affecting the communities in which they are made.
What’s Next for California’s Opportunity Zones?
Now that the selection of OZ census tracts in California has been finalized, state and local leaders are contemplating how to encourage meaningful investments that will improve the lives of people in struggling communities. Policymakers are considering whether to provide state-level tax incentives to make QOF investments even more attractive, how to align existing state and local resources with those investments, and how to ensure transparency and accountability. Given that the federal tax benefits are heavily skewed toward wealthy investors (as would be state-level capital gains tax breaks) and that residents of affected communities may face affordability pressures and displacement risks, any state-level Opportunity Zones incentives should be structured to 1) provide greater opportunities for lower-income community members, 2) safeguard residents against displacement, and 3) avoid providing a windfall for the wealthy at the expense of the state’s finances. Finally, if state and local governments provide additional incentives to encourage investments in OZs, such incentives should be more narrowly targeted to investments likely to benefit current residents, and data collection and evaluation requirements should be established to enable an assessment of whether the incentives are achieving their intended purpose.
[1] The statute governing Opportunity Zones is found in the new Section 1400Z of the US Internal Revenue Code (26 US Code Section 1400Z).
[2] The definition of “low-income community” for the Opportunity Zones program comes from the statute governing the New Markets Tax Credit (26 US Code Section 45D(e)). For a census tract located in a metropolitan area to qualify, it must have a poverty rate of at least 20% or a median family income not exceeding 80% of the greater of the statewide median family income or the metropolitan area median family income. For a census tract not located in a metropolitan area to qualify, it must have a poverty rate of at least 20% or a median family income not exceeding 80% of the statewide median family income.
[4] The TCJA requires that “substantially all” of a business’ tangible property be Qualified Opportunity Zone Business Property, “substantially all” of which is in use in an OZ. The law does not define “substantially all,” but the IRS’ proposed regulations would define it as 70% in both cases. This means a business would only need to have 49% of its tangible property in an OZ (70% times 70%). Since the law requires only 90% of a QOF’s assets to be Qualified Opportunity Zone Property, a QOF holding property through an operating business could have as little as 44.1% of its assets being used in an OZ. US Department of the Treasury, Internal Revenue Service, REG-120186-18: Investing in Qualified Opportunity Funds (April 17, 2019), pp. 77-78.
[5] The proposed regulations released in October 2018 specify that only the value of buildings, excluding the value of the underlying land, would be considered in the calculation to determine whether a property has been substantially improved, which would allow more real estate investments to meet this test. Brett Theodos, Steven M. Rosenthal, and Brady Meixell, The IRS Proposes Generous Rules for Opportunity Zone Investors but What Will They Mean for Communities? (Urban-Brookings Tax Policy Center: October 23, 2018). Additionally, proposed regulations released in April 2019 clarify that unimproved land does not need to be substantially improved, but that such land must be used in a trade or business and would not be considered Qualified Opportunity Zone Business Property if it were being held for investment. The IRS is seeking comments on whether additional rules are needed to prevent QOFs from acquiring land in an OZ without adding any value or economic activity. US Department of the Treasury, Internal Revenue Service, REG-120186-18: Investing in Qualified Opportunity Funds (April 17, 2019), pp. 12-14.
[6] Technically, a capital gain is the difference between an asset’s sale price and its “basis,” which equals the asset’s purchase price with some adjustments, such as the cost of commissions for stocks or the cost of improvements minus depreciation for real property.
[7] Thus, the maximum federal tax rate on long-term capital gains is 23.8%. This includes the top long-term capital gains rate of 20%, which for the 2019 tax year applies to taxpayers with incomes above $434,550 ($488,850 for married taxpayers filing jointly). An additional 3.8% surtax on net investment income, including capital gains, helps fund Affordable Care Act benefits. This surtax applies to single taxpayers with incomes over $200,000 ($250,000 for married taxpayers filing jointly). In contrast to federal law, California taxes all capital gains as ordinary income, at a maximum rate of 13.3%.
[10] As described by the Urban Displacement Project, gentrification is “a process of neighborhood change that includes economic change in a historically disinvested neighborhood — by means of real estate investment and new higher-income residents moving in — as well as demographic change — not only in terms of income level, but also in terms of changes in the education level or racial make-up of residents.” Gentrification can lead to displacement, meaning long-term community residents are no longer able to live in gentrified communities. See Miriam Zuk and Karen Chapple, “Gentrification Explained” (Urban Displacement Project: 2015).
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Introduction
The California Work Opportunity and Responsibility to Kids (CalWORKs) program provides modest cash assistance to about 755,000 low-income children and their parents. It also helps parents overcome barriers to work and find jobs through key support services such as subsidized child care and transportation reimbursement.[1] As this Brief outlines, although Governor Newsom proposed new funding for CalWORKs grants in his 2019-20 budget proposal, the declining value of the earned-income disregard (EID) would reduce the economic impact of these investments, especially in the face of a rising state minimum wage.
A Fixed Earned-Income Disregard Does Not Serve CalWORKs Families
As parents who are participating in CalWORKs enter the workforce, the earned-income disregard allows families to continue to receive benefits while earning a paycheck — up to a certain limit. Specifically, the EID is the amount of a recipient’s gross monthly earnings that is overlooked when their grant levels are calculated. Since CalWORKs’ implementation in 1997-98, state law has exempted the first $225 of monthly earnings, then 50% of the remainder.[2] As a family’s earnings increase, their grant amount decreases until they reach the CalWORKs income limit. The income limit, which is partly based on the maximum monthly grant and the earned-income disregard, determines when a family is no longer eligible for CalWORKs cash assistance. The greater the value of the disregard, the smaller the reduction in the monthly grant and the more parents can earn before losing eligibility. This allows for a smoother transition out of the CalWORKs program.
Unfortunately, the value of the EID has not changed in more than 20 years, leaving families with fewer resources (Figure 1). With the current $225 disregard, the annualized income limit in 2019-20 will be $23,772 (or $1,981 a month) for a family of three in a high-cost county. If policymakers had increased the disregard each year to account for inflation, the EID would have been $399 in 2019-20. Families would have had up to $25,858 in annual income (or $2,155 a month) before reaching the income limit. For working families who face rising rents and find it harder each year to keep a roof over their heads, that extra $174 a month is substantial.[3] In other words, policymakers’ failure to increase the disregard to keep up with the rising cost of goods and services has left already struggling families with even fewer resources to make ends meet in our state.
Figure 1
The Earned-Income Disregard Has Fallen Behind the State Minimum Wage
However, with a rising state minimum wage, policymakers would need to do more than adjust the EID for inflation if CalWORKs is to better support families pursuing employment (Figure 2). When CalWORKs was first implemented in 1997-98, a parent working a minimum wage job full-time and year-round earned $11,960 a year (or $5.75 an hour), well-below the annualized income limit of $16,020 (or $7.70 an hour). In 2019-20, that same parent would be ineligible for assistance because the annualized income limit of $23,772 (or $11.43 an hour) would be below minimum wage earnings of $27,040 (or $13.00 an hour). Even if the disregard had been adjusted for inflation, the annualized income limit would still fall short.[4] The gap between minimum wage earnings and the CalWORKs income limit is only projected to grow in the coming years. By 2021-22, when the minimum wage hits $15.00 an hour, working more than the required 30 hours a week at minimum wage could mean a single-parent family automatically loses support.[5]
Figure 2
State Policymakers Should Raise the CalWORKs Income Limit by Increasing the Earned-Income Disregard and Tying the Disregard to Inflation
During and after the Great Recession, state leaders made cuts to the CalWORKs program that undermined economic security for families with very low incomes. In recent years, policymakers have begun to reinvest in the program by boosting the value of CalWORKs grants. California’s leaders should continue to invest in CalWORKs by also increasing the earned-income disregard to better reflect changes made to the state minimum wage. An increase to the disregard would raise the income limit without penalizing parents for working more hours, especially for minimum-wage earners. Furthermore, to keep the disregard from losing value in the future, policymakers should ensure that the EID is increased annually to keep pace with inflation.
Esi Hutchful prepared this Issue Brief. The Budget Center was established in 1995 to provide Californians with a source of timely, objective, and accessible expertise on state fiscal and economic policy issues. The Budget Center engages in independent fiscal and policy analysis and public education with the goal of improving public policies affecting the economic and social well-being of low- and middle-income Californians. General operating support for the Budget Center is provided by foundation grants, subscriptions, and individual contributions. Support for this Issue Brief was provided by First 5 California.
[2] For example, if a single mother with two children earns $500 a month, the first $225 she earned that month would not count towards the calculation of her grant, leaving $275. Then, half of that ($137.5) would be subtracted from the grant. The $225 disregard was reduced to $112 in 2011-12 but restored the year after. See Legislative Analyst’s Office, Review of CalWORKs Changes in the 2012-13 Budget (March 13, 2013), p. 7.
[4] If the earned-income disregard had been adjusted for inflation each year since 1997-98, the annualized CalWORKs income limit would be $25,858 in 2019-20. The hourly wage equivalent would be $12.43 an hour.
[5] Unless otherwise exempt, single parents must spend on average 30 hours a week each month engaged in welfare-to-work activities if they have a child over age 6 or 20 hours per week each month if the child is under age 6. Welfare-to-work activities include unsubsidized and subsidized employment, job training, and other activities to help participants with employment. See California Department of Social Services, CalWORKs Annual Summary: February 2018 (February 2018), p. xv.
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Executive Summary
California Budget Perspective is the Budget Center’s annual “chartbook” publication that takes a wide-ranging look at the Governor’s proposed state budget.
California Budget Perspective 2019-20 examines the social, economic, and policy context for this year’s budget; discusses key elements of — and priorities reflected in — the Governor’s proposal; and highlights issues to watch in the coming months.
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The California Earned Income Tax Credit (CalEITC) is a refundable state tax credit that helps people who earn little from their jobs to pay for basic necessities. The CalEITC builds on the proven success of the federal earned income tax credit (EITC), which reduces poverty and boosts employment, and may even improve children’s health and educational attainment.
A new California Budget & Policy Center guide, Expanding the CalEITC: A Smart Investment to Broaden Economic Security in California, provides an overview of how EITCs support families, children, and communities; examines key features of the CalEITC; and shows how Governor Gavin Newsom’s 2019-20 budget proposal to significantly expand the credit will impact state residents with low incomes. The guide also highlights several ways that the CalEITC could be further strengthened, including by extending the credit to working immigrants who pay taxes and to unpaid family caregivers.
Historically, the state paid most of the cost of higher education at California’s public institutions: the California Community Colleges (CCC), the California State University (CSU) and the University of California (UC). However, years of budget cuts and tuition hikes have shifted more of the cost to students and their families, especially at the state’s four-year institutions: the CSU and the UC. This cost-shift undermines California’s commitment — as outlined in the Master Plan for Higher Education — to ensuring that a quality higher education is accessible and affordable to all eligible Californians. It also means that more students are graduating with increasing amounts of student loan debt and working excessive hours that impact their ability to graduate on time while others are forgoing higher education altogether.[1] A well-educated workforce is critical to the state’s economic future. Yet, at current rates, California will not produce enough college graduates to meet the demands of the state’s economy in the years ahead.[2]
In order to meet the state’s workforce demands, reforms must be made to ensure all students have access to an affordable higher education that will prepare them to enter the workforce with the skills they need to be successful. One of the greatest challenges for students seeking a higher education, and one of the greatest opportunities for reform, is the design of the financial aid system. Most state and federal student financial aid is linked primarily to tuition and largely fails to assist students with other major costs of college attendance, including housing, food, and transportation. Understanding the full cost of college is essential for decision-makers, advocates, and others who seek to expand college opportunities for all Californians.
This analysis estimates the cost of implementing a state financial aid program designed to enable qualified Californians to pursue undergraduate study full time at any of the three public higher education sectors — the CCC, CSU and UC — eliminating the need for students to take out loans or work unmanageable hours. This analysis develops two models to estimate the cost of an affordable-college program in California. One model estimates the cost of a “shared responsibility” program, in which the state covers students’ remaining unmet financial need after taking into account selected federal grants, an expected parent contribution, an expected student contribution from work earnings, and any currently available state and institutional aid. The second model estimates the cost of a “government responsibility” program, in which the state covers students’ remaining unmet financial need after taking into account only selected federal grants and any currently available state and institutional aid, with no student or parent contribution.
These models are intended to show how the state might calculate the cost of reforms (see the “cost of college” and “paying for college” tables) as well as the total cost of any such changes (see the “total costs” tables). As a point of departure, both of these models assume that all qualified students — based on current estimated enrollment levels at the CCC, the CSU, and the UC during the 2018-19 academic year — would be eligible for new state assistance, regardless of family income. Of course, policymakers could pursue other options. For example, policymakers could choose to focus new state resources on low- and middle-income students, rather than all students, in which case total costs would be lower.
This analysis provides estimates on a per-student, per-sector, and statewide basis. The estimates regarding 1) the cost of college and 2) paying for college are based on the most recent data available from multiple sources. The “cost of college” category consists of institutional costs, such as tuition and fees, and living costs, such as housing and food. The “paying for college” category consists of financial aid as well as expected parent and student contributions (the latter of which are estimated only for the shared responsibility model). A full description of the methodology used to develop this analysis can be found in the Technical Appendix.
Cost of College
Students pursuing a college degree face two main costs: tuition and fees charged by the institution and student-related living expenses such as housing, food, transportation, and books and supplies (often referred to as “non-tuition and fees”). The following table estimates the per-student cost of attendance for each sector. These estimates are for California residents who attend full-time (12 units or more) as an undergraduate at one of the state’s public colleges. This analysis uses full-time enrollment to weight per-student costs by housing type (on-campus, off-campus, or with family), dependency status (dependent or independent), and income (low-income, middle-income, or high-income).
Paying for College
This analysis incorporates three financial resources that help students to cover the cost of college: an expected parent contribution, students’ earnings from work, and financial aid. Parent contribution refers to the amount a student’s parents are estimated to be able to contribute toward college expenses. Expected parent contributions vary by income level — the estimates displayed in the table below are average contributions weighted by family income level. The student earnings figures assume that all students work 15 hours per week at the California minimum wage ($11 per hour) during the academic year and 40 hours per week at the minimum wage during the summer, though some students may choose to make their contribution through borrowing or other means.[3]
The following table shows the average annual amount students and parents are estimated to contribute towards students’ total cost of attendance.
In addition to student and parent contributions, many students pay for college with assistance from federal financial aid. This analysis assumes that all eligible students receive some federal gift aid from the Pell Grant and the Federal Supplemental Educational Opportunity Grant (FSEOG). The following table shows average per-student federal award amounts.
California and its public institutions provide a generous amount of financial aid to students from families with low incomes, administering over $4 billion in need-based aid annually. However, most of this aid is targeted towards tuition and fees. Because the goal of this analysis is to estimate the cost of a new state financial aid program that covers any remaining unmet financial need for students’ total cost of attendance, state and institutional aid estimates are not provided on a per-student level.
Affordable College: Two Models
This analysis provides detailed cost estimates for a new state program that allows full-time resident undergraduate Californians to receive an affordable college education at one of the state’s public higher education institutions. This section presents two models for achieving this goal. Each model displays the estimated costs and unmet financial need per sector, based on 2018-19 full-time resident enrollment (430,000 at CCC; 370,000 at CSU; and 180,000 at UC).
Option #1: Shared Responsibility Model
Option #1 estimates the total unmet financial need for qualified students after accounting for an expected parent contribution, an expected student contribution, and existing federal, state, and institutional aid.
Option #2: Government Responsibility Model
Option #2 estimates the total unmet financial need for qualified students after accounting for existing federal, state, and institutional aid, with no parent or student contribution.
Total Costs
The following table displays the total unmet financial need for all three sectors combined, after accounting for existing state and institutional aid, federal aid, and — where applicable — parent and student contributions. The total estimated unmet financial need for the shared responsibility model is $1.8 billion ($411 million at CCC, $939 million at CSU, and $475 million at UC). The total estimated unmet financial need for the government responsibility model is $15 billion ($4.5 billion at CCC, $7 billion at CSU, and $3.5 billion at UC). Both sets of estimates are on top of existing need-based state and institutional aid.
The program costs associated with these two models rely on several assumptions and the best available data regarding costs and enrollment. Actual program costs could vary considerably — increasing or decreasing the estimates presented here. Costs could be higher if enrollment increased significantly due to the availability of additional state-funded financial aid; living costs increased significantly (or were adjusted to reflect regional cost variations); more students lived off-campus; tuition increased; or federal and institutional aid decreased. Alternatively, costs could be lower if more students applied for and received federal financial aid due to increased outreach efforts; the minimum wage increased; more campuses participated in the FSEOG program; parents’ contributions exceeded expectations; federal or institutional aid increased significantly; or the program were limited to students from low-income families.
Conclusion
Ensuring that higher education is accessible and affordable for all Californians who wish to pursue a college degree is a widely shared goal among policymakers. Even with state and institutional aid, students experience significant unmet financial needs that create a barrier to success. Understanding how the current system falls short in helping students to afford a college education is essential to addressing California’s college affordability challenges. This analysis provides two estimates of what an affordable-college program might cost California if the state were to cover unmet financial need for qualified students. While the path forward requires significant investments, California’s students and economy cannot afford to wait.
[1] Estimate based on California’s 2018 minimum wage for employers with 26 employees or more. For more information, see the Technical Appendix.
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At the end of 2017, President Trump signed into law the Tax Cuts and Jobs Act (TCJA), passed with solely Republican support in Congress. As the Budget Center has previously noted, the TCJA — the most extensive revision of the tax code since 1986 — primarily cuts taxes for the wealthy and corporations while increasing the federal deficit by $1.9 trillion over 10 years, putting at risk funding for services that support low- and middle-income families.
Given the severe deficiencies of the TCJA, Californians may be surprised to learn that the new federal tax law has some potential benefits for our state — if our policymakers choose to act. There is much in the TCJA for advocates of tax fairness to dislike, including the large cut in the corporate tax rate (from 35% to 21%), the new deduction for income from “pass-through businesses,” and the reduction in the top personal income tax rate. All of these changes will lead to massive federal revenue losses. However, the new law also includes some reasonable changes that raise federal tax revenue in order to partially offset these losses, including limiting federal tax breaks that are costly, unfair, or economically inefficient. California now has the opportunity to increase state revenue by adopting (or “conforming to”) some of these provisions.
Unlike many other states, California does not automatically conform to changes in the federal tax code. Instead, it selectively conforms to the Internal Revenue Code as of a fixed date, which is currently January 1, 2015, meaning most of the changes made by the TCJA are not in effect for the purposes of calculating state taxes for California taxpayers. Conforming to federal tax law increases simplicity for tax filers, but there are many provisions of the federal code that don’t align with the state’s policy goals. California practices “selective conformity,” allowing policymakers to conform to some federal tax provisions, but not others. Since the state sets its own tax rates on personal and corporate income, the reductions in federal rates do not apply to state-level taxes. Thus, California can end up with more income tax revenue by conforming to those TCJA provisions that limit tax deductions and exclusions while maintaining current state tax rates.
Corporations that have profits in California currently pay significantly less in state income taxes as a portion of their state profits than they did in the 1980s, partly reflecting the increase in the number and generosity of state tax breaks that have been created over the past few decades. The state can narrow some of these tax breaks by selectively conforming to federal law. While the state’s fiscal situation is currently very positive (the Legislative Analyst’s Office estimates that over $20 billion in discretionary resources is available to allocate through the 2019-20 budget process), Governor Newsom has proposed ambitious new investments that will require new ongoing expenditures, such as more than doubling the total amount of credits provided under the state’s Earned Income Tax Credit (CalEITC). The Governor proposes to offset revenue losses from the CalEITC expansion by conforming to certain federal tax law changes mainly affecting businesses. These include “flexibility for small businesses; capital gains deferrals and exclusions for Opportunity Zones; and limitations on fringe benefit deductions, like-kind exchanges, and losses for non-corporate taxpayers; among others.”
The three revenue-raisers in the Governor’s proposed conformity package — the limitations on fringe benefit deductions, like-kind exchanges, and non-corporate losses — would increase state revenue by $1.2 billion, according to recently-released estimates. The other two provisions noted would cost the state revenue and reduce the net gain to closer to $1 billion. Not mentioned in the budget proposal are two other business-related TCJA provisions that could together bring in another $1.3 billion, according to Franchise Tax Board (FTB) estimates: limitations on Net Operating Losses (NOLs) and business interest deductions. If California were to conform to these two provisions in addition to the three revenue-raisers included in the Governor’s budget proposal, the state treasury could see approximately $2.5 billion in increased annual revenue, which could be used to support investments that improve economic security and opportunity for Californians.
The remainder of this post examines these five revenue-raisers, the two revenue-losing provisions proposed by the Governor, and other revenue-losers in the TCJA that California should avoid adopting.
Revenue-Increasing Conformity Provisions
Limitations on Fringe Benefit Deductions
The TCJA places new restrictions on federal tax deductions employers may take for certain expenses, including entertainment-related activities, transportation benefits, and some meals. Under prior federal law, businesses could deduct 50% of the costs of activities “generally considered to constitute entertainment, amusement, or recreation” (for example, a sporting event or theater performance) as long as they were directly related to the active conduct of the taxpayer’s trade or business. The TCJA disallowed this deduction. The previous federal deduction for transportation-related fringe benefits, such as parking and commuter benefits, is also disallowed except to ensure an employee’s safety. Additionally, expenses related to meals provided to employees through certain on-site eating facilities or for the convenience of the employer, which were previously fully deductible, are now limited to 50% through 2025 and are not deductible in subsequent years. Taken together, conforming to these limitations would raise an estimated $160 million in state revenue.
Limitation on Like-Kind Exchanges
Generally, when taxpayers sell or exchange an asset and make a profit, they owe tax on that capital gain at the time of the transaction. Prior federal law (to which California currently conforms, with modifications) allowed taxpayers to defer taxes on gains from an exchange of a business or investment property (excluding inventory, stocks, bonds, and other securities, and other specified types of property) if it was exchanged for a similar (“like-kind”) property. The capital gain would only be recognized once the taxpayer sold or exchanged the new asset in a later taxable transaction. However, if the new asset was held until the taxpayer’s death and passed on to an heir, the capital gain would escape taxation completely. This is because the federal government and California do not levy capital gains taxes when an heir inherits property — the heir only owes tax on the increase in value between the time the property is inherited and the time it is sold.
Under post-TCJA federal tax law, only real estate properties are eligible for like-kind exchange deferrals. For instance, an exchange of a vehicle used in connection with a business is now taxable at the federal level, but not at the state level. If California conformed to this limitation, FTB estimates that the state could gain $200 million in revenue. FTB’s latest tax expenditure report estimates the total state cost of like-kind exchange deferrals (including real estate property) for 2019-20 to be nearly $1.2 billion, suggesting that the state could gain significantly more revenue by going beyond conforming to the new federal law and simply eliminating tax deferrals for all types of like-kind exchanges. As the FTB report notes, allowing tax deferral for exchanges of some types of property and not others can be economically inefficient because it may encourage unnecessary investment in properties eligible for favorable tax treatment. And let’s not forget that the real estate industry fared quite well in the TCJA (see here and here), being exempted from several restrictions in the new law.
Limitation on Business Interest Deductions
Prior to the TCJA, businesses were generally able to fully deduct business-related interest expense from their taxable income. The new law limits the federal deduction for net interest expense (that is, interest expense minus interest income) to 30% of the taxpayer’s “adjusted taxable income” in a given tax year. Adjusted taxable income is essentially defined as business-related income before taking into account interest expense, interest income, and certain other deductions. An exception is made for interest expense incurred by vehicle dealers who finance their inventory of vehicles held for sale, known as “floor plan financing interest,” which continues to be fully deductible. The TCJA also allows any federal business interest deduction that cannot be used in a taxable year to be carried forward indefinitely and used in future tax years. Special rules apply to partnerships and S corporations to prevent partners and shareholders from double-counting deductions. Businesses with less than $25 million in gross receipts (averaged over the previous three tax years) are exempt from the new limitations, as are certain public utilities. Additionally, real estate companies and farming businesses may opt out of the new limitation.
The major justification for limiting interest deductions is that doing so reduces the tax incentive for companies to take on excessive debt. Since deductions are allowed for interest expense but not for returns to equity (in the form of dividends and capital gains paid to shareholders), the tax code makes it more attractive for businesses to finance investments with debt rather than equity. Businesses that take on high levels of debt are more susceptible to bankruptcy, and this can have ripple effects throughout an entire economy. As discussed in an International Monetary Fund report, the bias toward debt financing likely exacerbated the global financial crisis of 2007-2008 by encouraging high debt levels. Although the TCJA’s limitation on interest deductions will not fully equalize the tax treatment of debt and equity, it will at least reduce the debt bias. Conforming to this provision can raise $650 million for California while further limiting the overall tax preference toward debt.
Limitation on Net Operating Loss Deductions
A net operating loss occurs when a taxpayer’s total tax deductions exceed total income for the tax year. NOLs can be claimed by both corporate and individual taxpayers, but are usually related to losses from operating a business. Pass-through businesses like S corporations and partnerships cannot claim NOLs at the entity level, but their shareholders or partners can claim NOLs based on their respective shares of the businesses’ income and deductions. Before the TCJA, taxpayers were permitted to carry back these NOLs to offset federal taxable income, dollar-for-dollar, for up to two years prior to the year the NOL was incurred. In addition, they were able to carry forward NOLs to offset taxable income for up to 20 years into the future. As a simple example, if a corporation had an NOL of $500,000 in tax year 2017 (prior to the passage of the TCJA) and taxable income of $250,000 in each of the two previous tax years, it could file amended tax returns to claim a deduction of $250,000 in tax years 2015 and 2016, zeroing out its federal tax liability in both years. The corporation would then get a refund for previously paid taxes for those years. If it had no taxable income in the two prior years or if the NOL exceeded the corporation’s aggregate taxable income for those years, it could carry the remainder forward to reduce its tax bill in future years.
Under the TCJA, corporations and other taxpayers are no longer able to carry back their NOLs (with the exception of certain disaster-related farm losses) to offset federal taxable income. Additionally, NOL carryforward deductions are now limited to 80% of taxable income in any given year, but the 20-year limit has been removed so losses can be carried forward indefinitely. California generally conforms to pre-TCJA federal law at present, but in past years has had its own rules concerning NOLs. Prior to 2013, California had not allowed NOL carrybacks, and in certain years had limited or suspended NOL carryforwards.
There is a legitimate rationale for allowing businesses to average income over several years for tax purposes, given that businesses often incur losses in early years and during economic downturns. However, allowing NOL carrybacks can exacerbate state fiscal challenges during a recession, since it requires that the state refund tax revenues that have likely already been spent. Without NOL carrybacks, businesses may still reap the benefits of income averaging by claiming NOL carryforwards. Limiting carryforwards to a percentage of taxable income reflects the concept that even if a business isn’t profitable, it still benefits from public services like education and infrastructure and should thus be expected to pay some level of taxes. The new federal 80% limitation on NOL carryforwards ensures that corporations cannot use NOLs to entirely wipe out their tax liability in a given tax year. If California conforms to the new limits on NOL carrybacks and carryforwards, the state could bring in an additional $650 million annually in revenue.
Limitation on Losses for Non-Corporate Taxpayers
For taxpayers that have interests in so-called “pass-through businesses” such as S corporations, partnerships, limited liability companies, and sole proprietorships, the TCJA limits the federal deduction for business losses that can offset other income, such as salary and investment income. Prior to the TCJA, business losses could be used to reduce or even zero out federal tax liability, even for individuals with significant income from non-business sources. As with any tax deduction for individuals, higher-income taxpayers receive a larger tax benefit per dollar deducted because they are in higher tax brackets. Federal law now only allows taxpayers to deduct up to $250,000 in “excess business losses” (defined as the amount by which business-related deductions exceed business-related income). The threshold amount is $500,000 for married taxpayers filing joint returns. Any excess business losses above the threshold would have to be carried forward to offset income in future tax years as part of the taxpayer’s NOL. This limitation is scheduled to sunset after 2025 for federal tax purposes. FTB estimates that conforming to the excess business loss limitation would generate $850 million for California.
Revenue-Losing Conformity Provisions
The Governor also has indicated that he wants California to conform to two additional TCJA provisions that would result in state revenue losses – losses that would partially offset the increased revenues from the other conformity provisions. Specifically, the Governor is calling for “flexibility for small businesses,” which is likely a reference to the TCJA’s provision allowing more “small” businesses to use simplified accounting methods. Primarily, this provision increases the size threshold for small businesses that may use the cash method of accounting (rather than the accrual method) from $5 million in gross receipts to $25 million. Under the cash method, businesses recognize income when it is received and expenses when they are paid; under the accrual method, income and expenses are recognized when they are incurred. The cash method allows some businesses to defer taxes by recognizing more expenses in the current tax year and postponing income to the next year. As the Joint Committee on Taxation explains, the cash method is “administratively easy and provides the taxpayer flexibility in the timing of income recognition” while accrual methods “generally result in a more accurate measure of economic income.” Conforming to this provision would make filing taxes simpler for California businesses affected by the change in federal law, since it would be administratively burdensome to use different accounting methods for federal and state tax purposes. However, it would also reduce the revenue gains from enacting other conformity items by about $100 million (though this number would likely decrease over the next several years, consistent with the 10-year federal revenue estimates).
The Governor also proposes to conform — at least in part — to the new federal Opportunity Zone tax incentives, which allow individual and corporate investors to defer and reduce their capital gains taxes if they invest in economically distressed communities that meet certain federal criteria and have been designated by states as Opportunity Zones. The tax incentives are very generous to investors and come with few strings attached. Although the incentives may encourage increased investment in some underserved communities, there is also a risk that the subsidies may accelerate gentrification and displacement in some areas or be used for projects that have little benefit for current community residents. Conforming to these tax incentives would cost the state an estimated $37 million in the first year, rising to $70 million in the following year — but the long-term costs would be higher than suggested by the early year estimates since the tax incentives become more generous as Opportunity Zone investments are held longer. The Budget Center will explore these new incentives in more detail in future publications.
Beyond the items highlighted in the Governor’s budget, the TCJA contains some large new unnecessary federal tax breaks for businesses that would cost California significant revenue if the state were to adopt them. For instance, one set of provisions would repeal the federal corporate Alternative Minimum Tax (AMT) and temporarily allow corporations to claim a partially refundable tax credit for AMT paid in previous years. These provisions together would cost the state $300 million or more if adopted by California, according to FTB. Even more concerning is the new federal 20% deduction for pass-through business income, which would reduce state revenues by $2.6 billion per year if adopted. The pass-through deduction is as poorly designed as it is costly; an estimated three-fifths of the federal tax benefits will go to the richest 1%, and this tax break is vulnerable to myriad abuses by higher-income taxpayers. The Governor does not propose conforming to these poorly-conceived federal provisions, and the state should avoid adopting them as they would not enhance state tax fairness.
Looking Forward
Over the next several months, the Newsom Administration and the Legislature will need to carefully consider the various tax conformity options in terms of their effects on the state budget as well as the fairness and efficiency of the tax code. Adopting any provision that increases taxes on any state taxpayer will likely require a two-thirds vote in each house of the Legislature, which could be an uphill battle politically. Conforming to selected portions of the recent federal tax law offers policymakers an opportunity to raise revenues for new investments by limiting inefficient or unnecessary business tax breaks while resisting pressures to adopt new tax breaks that are not needed. Doing so would make California’s tax code fairer, offset some of the harmful and inequitable aspects of the TCJA, and make significant funding available to support state policy goals and invest in the low- and moderate-income Californians who have benefitted less from recent federal tax cuts.
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Executive Summary
On January 10, Governor Gavin Newsom released a proposed 2019-20 budget that calls for a series of bold and smart investments in broadening economic security and opportunity for Californians, while continuing to strengthen the state’s underlying fiscal health.
The Governor forecasts revenues that are $8.1 billion higher (over a three-year “budget window” from 2017-18 to 2019-20) than previously projected in the 2018-19 budget enacted last June, driven largely by continued economic growth.
The Governor’s proposal includes a range of significant expansions in support of low- and middle-income Californians who are struggling to make ends meet and access greater economic opportunity, including doubling the state’s Earned Income Tax Credit, working toward universal preschool for 4-year olds, investing in child care infrastructure, expanding health care to move closer to universal coverage, expanding paid family leave, boosting CalWORKs grants, and increasing investment in state higher education systems. Recognizing that high housing costs contribute to California’s high poverty rate, Governor Newsom also proposes a mix of policies and an expanded state role to address housing needs and homelessness. These policies would make California more affordable and more equitable for millions of Californians.
Many of the Governor’s proposals — such as child care and housing — use one-time investments in 2019-20 to lay a foundation for significant build-out of public supports over the next several years.
Confronted by federal challenges to Californians and their communities, the budget proposal calls for investments to support immigrants, improve state and local emergency preparedness, and ensure that the 2020 census is as accurate as possible.
Recognizing that California is experiencing a period of sustained economic growth and a positive revenue outlook, the budget proposal also calls for paying down debts and building up reserves. These proposals, in combination with one-time and ongoing investments, represent a balanced approach to managing the state’s fiscal health.
The following sections summarize key provisions of the Governor’s proposed 2019-20 budget.
Download full report (PDF) or use the links below to browse individual sections of this report:
Governor Expects Economic Growth to Continue, Albeit at a More Moderate Pace
The Governor’s proposed budget assumes that the current economic expansion continues in the near-term, albeit at a more moderate pace than in recent years. Specifically, the Administration projects that national economic growth, as measured by the change in Gross Domestic Product (GDP), will begin to moderate this year and then gradually slow each subsequent year through 2022, the end of the forecast period. The Administration also expects economic growth to slow in California during this period.
In terms of California’s labor market, the Governor’s forecast assumes steady job growth that continues to increase the state’s labor force participation rate and maintains the state’s unemployment rate at historically low levels. The forecast notes that low unemployment in 2018 failed to translate into significant wage increases thus far, other than for high-income earners, but anticipates that more workers will begin to see real wage increases this year.
The proposed budget summary outlines several risks to the Governor’s projections for California’s economic growth. These include a number of national factors, such as a large drop in the stock market, which has been experiencing significant fluctuations since last year; a national recession, which could come at a time when many people have not yet recovered from the previous downturn and when the federal government is not well-positioned to ramp up spending to mitigate its damage; and the ongoing trade war with China, California’s third-largest trading partner. Additionally, the Governor’s forecast notes that California will need to address the aging population, declining birth rates, and insufficient housing supply in order for the state’s economic growth to continue.
Revenue Forecast Reflects Continued Economic Growth
The proposed budget assumes increases in revenues over the three-year “budget window,” from 2017-18 to 2019-20, while acknowledging that rising risks to the state’s economic outlook could affect the revenue forecast.
The Governor’s proposal projects General Fund revenues for the budget window to exceed the projections in the enacted 2018-19 budget package by $8.1 billion, before accounting for transfers such as deposits into the rainy day fund. This includes higher-than-expected revenues from the personal income tax (PIT) and the corporation tax (CT), partially offset by lower-than-expected revenues from the sales and use tax (SUT). Together, these three taxes are expected to comprise almost 97% of General Fund revenues in the proposed 2019-20 budget.
PIT revenues are projected to be $7.5 billion higher over the three-year budget window than estimated in the 2018-19 budget agreement, reflecting strong growth in wages and capital gains, particularly among high-income taxpayers. SUT revenues are expected to be $1.4 billion lower, primarily because a spike in business investment that was anticipated due to last year’s changes to federal tax law did not occur. Additionally, the lower SUT projection reflects consumer spending restraints due to high housing costs and the continued erosion of the state’s sales tax base. CT revenues are estimated to be $1.3 billion higher over the budget window, though the budget proposal warns this is expected to be a one-time increase largely resulting from shifts in the timing of corporate tax payments.
Governor’s Budget Proposal Continues to Build Up Reserves to Bolster State Fiscal Resilience
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”).
The Governor’s proposed budget includes a transfer of $1.8 billion to the BSA for 2019-20, bringing the reserve’s balance to $15.3 billion by the end of the fiscal year. Prop. 2 requires that when the BSA balance has reached its constitutional maximum of 10% of General Fund tax revenues, any additional dollars that would otherwise go into the BSA must be spent on infrastructure, including spending on deferred maintenance. However, while the BSA has reached this maximum, the Governor’s budget assumes that constitutionally required deposits will continue to be made since the account’s maximum balance was achieved in part through supplemental payments in prior years. This assumption is based on an opinion by the Legislative Counsel, but could be subject to a legal challenge.
The BSA is not California’s only reserve fund. Each year, the state deposits additional funds into a “Special Fund for Economic Uncertainties” (SFEU). The Governor’s proposed budget assumes an SFEU balance of $2.3 billion. Additionally, the 2018-19 budget agreement created the Safety Net Reserve Fund, which holds funds that can be used to maintain benefits and services for CalWORKs and Medi-Cal participants in the event of an economic downturn. The Governor proposes depositing $700 million into the Safety Net Reserve, bringing the fund’s balance to $900 million. Taking into account the BSA, SFEU, and the Safety Net Reserve, the Governor’s proposal would build state reserves to a total of $18.5 billion in 2019-20.
Governor’s Budget Proposal Prioritizes Paying Down Debts
The Governor’s proposed 2019-20 budget prioritizes paying down state and local unfunded pension liabilities and paying off outstanding budgetary debt incurred during the Great Recession and its aftermath.
The budget proposal includes required and supplemental contributions to two state-run retirement systems: the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS). CalPERS and CalSTRS, like many retirement systems, are not funded at levels that will keep up with future benefits, resulting in the state needing to make higher annual contributions in order to pay down unfunded liabilities.
Beyond statutorily required contributions, the Governor’s proposed budget includes a $3 billion supplemental pension payment to CalPERS that would be made in the current fiscal year (2018-19). The budget proposal also devotes an additional $390 million to CalPERS in 2019-20 from Proposition 2 funds (see Reserves section) that are required to be set aside for reducing state liabilities.
In the case of CalSTRS, the budget proposal devotes an additional $1.1 billion, beyond statutory requirements, toward the state’s share of CalSTRS unfunded liabilities. The $1.1 billion comes from Prop. 2 funds (see Reserves section) that are required to be set aside for reducing state liabilities. The Governor’s proposal notes that the $1.1 billion is the “first installment of an estimated $2.9 billion to be paid to CalSTRS through 2022-23” using available Prop. 2 dollars.
In addition, the Governor’s proposal includes a one-time $3 billion non-Proposition 98 payment to CalSTRS to reduce the employers’ (local educational agencies and community colleges) share of unfunded liabilities in response to prior changes in contribution levels and pressures confronting employers. In 2014, the state enacted AB 1469, increasing the share of CalSTRS costs borne by all parties (the state, employers, and teachers), but particularly increasing the contribution rate of employers. Confronting a series of other pressures, including enrollment decline and increases in the costs of local services, some local educational agencies are in danger of not being able to meet their financial obligations. The Governor’s proposal would provide $2.3 billion toward the employers’ share of the unfunded liability for the CalSTRS Defined Benefit Program. The Governor proposes to use the remaining $700 million to reduce the required contributions by employers in 2019-20 and 2020-21. Overall, the proposed $3 billion supplemental payment would free up — in the short term as well as the long term — local dollars for investment in education or to allow employers to pay down retirement obligations.
The Governor’s proposed 2019-20 budget also includes more than $4 billion to pay off outstanding budgetary debts incurred during the Great Recession, including $2.4 billion to eliminate outstanding loans from special funds and transportation accounts and a total of $1.7 billion to eliminate a one-month deferral of payroll from nine years ago and a deferred payment to CalPERS from over a decade ago.
Governor Boosts Funding for Child Care Infrastructure, While Not Providing Additional Access to Subsidized Care
Subsidized child care allows parents with low and moderate incomes to find jobs and remain employed, feeling secure that their children have a safe space to learn and grow. These programs provide a critical service, keeping families across California afloat. Currently, subsidized child care programs serve far fewer children than they did ten years ago. While policymakers have made incremental investments in early care and education in recent years, investments to serve more children have been targeted to the California State Preschool Program, just one component of California’s subsidized child care and development system.
The Governor’s proposed budget signals a commitment to expand access to subsidized child care in future years by funding child care infrastructure in 2019-20. Specifically, the budget proposal:
Provides $245 million one-time General Fund for child care facilities. The state currently operates three programs that provide funding for child care facilities including a loan program for portable facilities, loans for facility repair and renovation, and, most recently, the new Inclusive Early Education Expansion Program funded in the 2018-19 budget agreement with $167 million in one-time Prop. 98 funding. The proposal does not indicate if this funding would augment existing facility funding programs or create a new program.
Provides $245 million one-time General Fund for child care workforce development. The administration’s stated goal is to “improve the quality of care” by investing in the education of the child care providers. Details about how this will be allocated are not available.
Improves and expands child care facilities on university campuses with $247 million in one-time General Fund. The proposed budget boosts resources for the California State University (CSU) in order to add more child care facilities to serve students with children. This is aligned with the administration’s proposal to also increase financial aid for student parents. (See the Student Aid section.) These funds could also be used for deferred maintenance, but it is not clear if this is deferred maintenance on child care facilities or on other CSU facilities.
Provides $10 million General Fund to develop a plan to increase access to subsidized child care. As mentioned in the Early Learning section, the budget proposal also includes $10 million General Fund to pay a contractor to create a plan in the 2019-20 fiscal year to address a wide variety of issues such as universal preschool, facility capacity, workforce training, access to subsidized child care, and potential revenue options for the subsidized child care and development system.
The budget proposal signals a commitment to serve more families in future years, by setting aside hundreds of millions in one-time funding for subsidized child care infrastructure in the 2019-20 fiscal year. Yet, despite this historically large proposed increase, the proposal does not provide more low- and moderate-income families with access to subsidized child care, despite years-long waiting lists.
Administration Proposes Bold Plan to Expand California’s Paid Family Leave Program
Paid family leave has the potential to benefit both children and parents, boosting health and well-being, while also providing savings for both businesses and the state. California leads the nation in paid family leave policy, but the state and the nation lag other wealthy countries in terms of the length of leave and the level of benefits. The California Paid Family Leave (PFL) program is funded entirely by workers’ contributions to the state’s Disability Insurance Program. These contributions are housed in a special fund that provides 60% to 70% of a worker’s weekly earnings based on income when a worker takes family leave. Caregivers can currently take up to six weeks of paid time off to care for a family member or bond with a newborn or adopted child. Birth mothers are generally allowed another 6 weeks to recover from the birth, for a total of 12 weeks.
The Governor’s proposed budget expresses a commitment to expand the PFL program to six months in future years. In the upcoming fiscal year, the proposed budget would adjust the reserve requirement for the special fund that pays PFL claims. As stated in the proposed budget, this would ensure that the fund’s reserves are not depleted when the PFL program is expanded in the future. The administration also plans to convene a task force to study different options for expanding the program, including for caregivers with low-incomes who may not be able to afford to take time off of work to care for their family.
Proposed Budget Expands Home Visiting and Black Infant Health Programs
Last year’s 2018-19 budget package instituted a new home visiting initiative in the California Work Opportunity and Responsibility to Kids (CalWORKs) program, beginning on January 1, 2019. The program will provide up to 24 months of evidence-based home visiting for CalWORKs parents who are either pregnant or parenting a child under age 2, with a priority for first-time parents. A total of $158.4 million in federal TANF and state General Fund dollars was set aside to fund home visiting for three years, after which the initiative will be subject to annual appropriation as an ongoing program. Of this total, $29.2 million was budgeted for the current 2018-19 state fiscal year (which began July 1, 2018). Governor Newsom’s budget proposal allocates $78.9 million of the remaining funds for the 2019-20 budget year, leaving $50.3 million reserved for 2020-21.
In addition, the Governor calls for $23 million General Fund to expand home visiting programs outside of the CalWORKs program. Currently, the Department of Public Health receives federal funding to administer home visiting programs for pregnant and newly parenting families who are at risk for adverse childhood experiences. The proposed $23 million represents the state’s first financial investment in home visiting for non-CalWORKs families.
The budget proposal also includes $7.5 million to increase participation in the Black Infant Health program, which aims to improve African-American infant and maternal health through group support services and case management.
Budget Proposal Includes Investment in Child Savings Accounts for Kindergarteners
A Child Savings Account (CSA) is an account established for children as early as birth that builds assets over time. CSAs are generally seeded with an initial deposit from a government agency or another sponsoring organization, then built with contributions from family, friends, or the child. Once the child reaches adulthood, the savings are typically used for higher education, though they can also support homeownership or other asset-building investments.
In the budget proposal, the Governor provides a one-time investment of $50 million General Fund “to support pilot projects and partnerships with First 5 California, local first 5 Commissions, local government, and philanthropy” to increase access to CSAs among incoming kindergarteners. The proposed budget suggests these accounts could be used for post-secondary education expenses, such as tuition, room and board, books, supplies and equipment, and mandatory fees.
Governor Proposes to Significantly Expand the CalEITC
The California Earned Income Tax Credit (CalEITC) is a refundable state tax credit that helps low-earning workers and their families make ends meet. The credit was established by the 2015-16 budget agreement and was modestly expanded twice in recent years. Currently, the CalEITC provides up to nearly $2,900 as a state tax refund, depending on how much families earn and how many children they support.
The Governor’s proposed budget would strengthen and expand the CalEITC. The Administration proposes extending the credit to a total of 2.4 million tax filers, up from 2.0 million tax filers who are expected to benefit from the credit this year (plus their spouses and dependents). The Governor also proposes to increase the size of the credit available to many families and individuals. These two changes combined are expected to more than double the total amount of credits provided from around $400 million this year to $1 billion next year. As part of this plan, the Administration also proposes renaming the CalEITC the “Working Families Tax Credit.” Specifically, the proposed budget:
Extends the credit to an estimated 400,000 additional tax filers by allowing those with somewhat higher incomes (who are still low-income) to claim the credit. The maximum annual income for filers eligible to claim the credit would be increased to about $30,000 – roughly equal to full-time, year-round earnings for a worker earning $15 per hour, which will be the state’s minimum wage as soon as 2022. Currently, the annual income limit for families with children is about $25,000 and for workers without dependent children it is just under $17,000.
Increases the credit for many families and individuals who currently receive small credits. The Administration proposes to provide “significantly higher” credits to tax filers “earning income at the upper end of the credit structure.” This suggests that tax filers with earnings above about $14,000 if they have multiple children, about $10,000 if they have one child, and about $6,000 if they have no dependent children will see their credit increase. (Workers in these income ranges currently qualify for small credits.)
Provides an additional $500 credit to families with children under age 6. If this amount is provided to all eligible families with children under age 6 on a per-family basis (regardless of how many young children they have), then the maximum credit would increase to nearly $3,400 from nearly $2,900 currently. If instead this additional $500 is provided per child under age 6, the maximum credit available to young families would be much higher. (For example, it would be nearly $4,400 for families with three children under age 6.)
Proposes to explore providing a monthly payment option for workers who qualify for the credit. Specifically, the Administration proposes exploring “how to allow workers to receive a portion of their [credit] in monthly payments,” rather than as an annual lump sum.
These changes are projected to reduce state personal income tax revenue by $600 million, bringing the total cost of the credit to an estimated $1 billion. To offset this revenue loss, the Governor proposes that California conform to “several federal tax law changes mainly impacting business income.” When states conform to federal tax law provisions they adopt those provisions as part of the state tax code. California has the ability to choose which provisions of federal tax law the state will conform to, which gives state policymakers the ability to decide on a case-by-case basis which provisions of federal law they believe are sound tax policy and would benefit California if the state adopted them. The Administration proposes conforming to several provisions “that on either administrative burden or policy grounds are clearly beneficial to California.” These include “flexibility for small businesses; capital gains deferrals and exclusions for Opportunity Zones; and limitations on fringe benefit deductions, like-kind exchanges, and losses for non-corporate taxpayers; among others.” The Administration expects these conformity provisions to raise $1 billion in 2019-20.
The proposed budget also includes $5 million one-time General Fund “to provide matching funds to nonprofits, community-based organizations, or governmental entities that provide increased awareness of the California Earned Income Tax Credit and free tax preparation assistance to eligible families and individuals.” The 2018-19 budget package included $10 million General Fund to support community based efforts to promote the CalEITC and evaluate those efforts as well as to support organizations that provide free tax preparation services.
Governor Proposes Significant Increase to CalWORKs Grants to Raise Them to the Deep-Poverty Threshold
The California Work Opportunity and Responsibility to Kids (CalWORKs) program provides modest cash assistance for over 775,000 low-income children while helping parents overcome barriers to employment and find jobs. The annualized maximum CalWORKs grant for a family of three has been well below the deep-poverty threshold (50% of the federal poverty line) for the past 11 years. In the 2018-19 budget package, the previous administration took the first of three proposed steps to raise the maximum grant to the deep-poverty threshold over three years, beginning with $90 million for a 10% grant increase beginning April 1, 2019. Governor Newsom’s 2019-20 proposal calls for an additional 13.1% increase, which would raise the maximum grant to 50% of the federal poverty line effective October 1, 2019. To fund this increase, the proposed budget allocates $347.6 million General Fund for the 2019-20 fiscal year (which begins July 1, 2019), with $455.4 million General Fund as the annual, full-year cost.
Budget Proposal Addresses Housing Affordability Through One-Time Funding, Tax Credits, and Regulatory Changes
More than half of California renter households pay more than 30% of their income toward rent, making them housing cost-burdened, and high housing costs are a key driver of California’s high poverty rate. The Governor’s budget proposes a multi-pronged state-level approach to address California’s housing affordability crisis, including regulatory changes, one-time planning and incentive funding, and an ongoing expansion of tax credits that finance affordable housing development.
As a key regulatory proposal, the Administration proposes to “revamp” the current system used by the state to set housing production goals for regions and local jurisdictions, the Regional Housing Needs Assessment (RHNA) process. In place of the current process, the Department of Housing and Community Development (HCD) would develop two new sets of housing production goals: short-term goals and “more ambitious” long-term targets. The budget plan allocates funding to support these changes, including:
$250 million one-time General Fund for local jurisdictions to develop plans to reach the new short-term goals, as well as
$500 million one-time General Fund as incentive funds, which would be awarded to local jurisdictions as they meet housing production milestones and available to use “for general purposes.”
HCD would also play a more active role in reviewing local housing plans and enforcing housing goals and production. In addition, the Administration proposes “linking housing production to certain transportation funds and other applicable sources,” suggesting that some types of state funding would become available only to local jurisdictions that are demonstrating progress toward housing production goals.
The Governor’s budget also proposes expanding the state’s Low Income Housing Tax Credit (LIHTC) program. These state tax credits support affordable housing development, pairing with two types of federal housing tax credits to reduce housing developers’ project costs. The budget proposes increasing the state LIHTC program by up to $500 million in 2019-20 and up to $500 million annually ongoing. This total new authority would be allocated as follows:
$300 million would be used for the existing state LIHTC program, targeted to projects that pair with the currently underutilized federal housing tax credit (the 4% federal LIHTC), and
$200 million would be dedicated to a “new program that targets housing development for households with incomes between 60 to 80 percent of Area Median Income.”
The Administration also proposes a “redesign of the existing tax credit programs to promote cost containment and increase the construction of new units.”
The budget also includes $500 million General Fund one-time to support the construction of housing for moderate-income households through the existing Mixed-Income Loan Program, administered by the California Housing Finance Agency. As another strategy to increase housing production, the Administration proposes to make excess state property available for affordable housing demonstration projects, providing developers with low-cost, long-term ground leases for state-owned land on which they would build affordable and mixed-income housing using “creative and streamlined approaches,” such as modular construction.
Finally, the Governor’s budget plan proposes encouraging housing development by incentivizing the use of economic development tools including Enhanced Infrastructure Financing Districts (EIFDs) and Opportunity Zones (OZs). After the dissolution of redevelopment agencies in 2011-12, a newer state law allows cities and counties to create EIFDs to finance infrastructure, including affordable housing, with property tax revenue from consenting local taxing agencies, with the exception of school or community college districts. Under current law, EIFDs can issue bonds to fund projects but must get approval from 55% of voters. The Governor’s budget proposes to eliminate the 55% voter approval requirement to issue bonds to make the creation of EIFDs more attractive. In addition, the Governor proposes aligning EIFDs with OZs, which are primarily economically distressed census tracts that have been selected by the state pursuant to last year’s federal tax law. Taxpayers that make investments in these zones, which may include but are not limited to housing development or rehabilitation, qualify for deferred and reduced federal capital gains taxes. The Governor’s proposal would provide similar deferrals and reductions in state income taxes for investments in affordable housing in OZs.
Budget Proposes New Funding and Regulatory Changes to Address Homelessness
California has nearly 25% of the nation’s population of homeless individuals, with an estimated 134,000 homeless residents as of January 2017. More than two-thirds of California’s homeless residents are unsheltered, sleeping in locations such as in a vehicle, in a park, or on the street. The Administration highlights homelessness as a key challenge facing California, and proposes several responses, focusing on the population of unsheltered homeless individuals and those with significant need for services. The budget proposal emphasizes expanding emergency shelters and homeless navigation centers, developing supportive housing units (or permanent housing coupled with supportive services), and investing in services targeted to homeless individuals who have disabilities or significant health or behavioral health challenges. In terms of funding, the budget proposal includes:
$300 million General Fund one-time funds to support expansion or development of emergency shelters and navigation centers, available to jurisdictions that establish joint regional plans to address homelessness.
$200 million General Fund additional one-time funds available to jurisdictions that demonstrate concrete progress (e.g., permitting or construction) toward developing new emergency shelters, navigation centers, or supportive housing units, to be used “for general purposes.”
$25 million General Fund ongoing to continue support for the Housing and Disability Advocacy Program (HDAP), which assists homeless individuals with physical or mental disabilities in applying for federal Supplemental Security Income (SSI) disability benefits by providing outreach, case management, benefits advocacy, and housing supports. The 2017-18 budget had included one-time funding of $45 million over three years for this program.
$100 million General Fund one-time funds with multi-year spending authority, administered through the Department of Health Care Services, to support Whole Person Care Pilot programs that include housing services. These programs provide coordinated health, behavioral health, and social services and often target individuals who are homeless or at risk of homelessness and have a medical need for housing and/or supportive services.
The Governor also proposes two regulatory changes to support the expansion of shelter and supportive housing capacity throughout the state, specifically:
Allowing a streamlined environmental review process for proposals to construct homeless shelters, navigation centers, and supportive housing units, with accelerated judicial review of challenges brought under the California Environmental Quality Act (CEQA). The Administration plans to propose legislation for this purpose that is similar to “recent bills providing streamlined environmental reviews for sports stadiums.”
Developing a statewide policy to allow emergency shelters to be developed on state land located within the state’s highway right-of-way limits but used for nontransportation purposes (known as Department of Transportation, or CalTrans, “airspace”). This proposal would expand a 2018 policy that allowed for emergency shelters to be sited on CalTrans land in a few cities throughout the state.
Finally, the Governor proposes accelerating awards for housing development projects that qualify for funds from two bond measures approved by voters in November 2018 – the No Place Like Home Act (Proposition 2 of 2018), which provides funds to develop supportive housing for individuals with mental illness who are homeless or at risk of homelessness; and the Veterans and Affordable Housing Bond Act (Proposition 1 of 2018), which provides funds that can be used for development of supportive housing, among other types of housing projects.
Proposed Budget Lacks a State Increase for SSI/SSP Grants, but Makes Permanent a New State-Funded Food Benefit
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, food, and other basic necessities. Grants are funded with both federal (SSI) and state (SSP) dollars. State policymakers made deep cuts to the SSP portion of these grants in order to help close budget shortfalls that emerged following the onset of the Great Recession in 2007. The SSP portions for couples and for individuals were reduced to federal minimums in 2009 and 2011, respectively. Moreover, the annual statutory state cost-of-living adjustment (COLA) for SSI/SSP grants was eliminated beginning in 2010-11. Since then, state policymakers have provided only one discretionary COLA for the state’s SSP portion of the grant — a 2.76% boost that took effect in January 2017, resulting in monthly state SSP grant levels of $160.72 for individuals and $407.14 for couples, which remain in effect today.
The Governor does not propose a state increase for the SSP portion of SSI/SSP grants in 2019-20. However, the Administration does project that the federal government will boost the SSI portion of the grant by 2.5% effective January 1, 2020. As a result of this projected federal increase:
The maximum monthly combined SSI/SSP grant for individuals who live independently would increase from the current level of $931.72 to $950.72 on January 1, 2020. This projected 2020 grant level equals 93.9% of the current federal poverty guideline for an individual ($1,012 per month).
The maximum monthly combined SSI/SSP grant for couples who live independently would increase from the current level of $1,564.14 to $1,593.14 on January 1, 2020. This projected 2020 grant level equals 116.1% of the current federal poverty guideline for a couple ($1,372 per month).
In addition, the Governor proposes to make permanent a state-funded food benefit that will be provided to certain households with SSI/SSP recipients — households that would otherwise be harmed by a recently adopted state policy. Specifically, the budget package for the current fiscal year (2018-19) ended California’s SSI “cash-out” policy, which prohibits people enrolled in SSI/SSP from receiving federal food benefits provided through the Supplemental Nutrition Assistance Program (SNAP), which is called CalFresh in California. Under this new policy, SSI/SSP recipients will become eligible for CalFresh food assistance as soon as June 1, 2019, or no later than August 1, 2019, depending on how rapidly the state can implement this change.
Ending the SSI cash-out will primarily benefit households that consist solely of SSI/SSP recipients — and no one else — by allowing them to newly enroll in CalFresh. Certain other households will be harmed by this change. These households contain a mix of SSI/SSP recipients and other people with low incomes who 1) are not enrolled in SSI/SSP and 2) receive CalFresh benefits. Because of how CalFresh benefits are calculated, once SSI/SSP recipients become eligible for CalFresh, tens of thousands of mixed households will see their CalFresh benefits reduced or eliminated, according to state projections released in 2018. In order to hold these households harmless, the 2018-19 budget included temporary funding for a state-funded food benefit to replace the CalFresh assistance that these households will lose. Governor Newsom proposes to make this new state-funded food benefit permanent.
Governor Proposes Several Measures to Move Toward Universal Coverage and Reduce Health Care Costs
Building on the federal Affordable Care Act (ACA), California has substantially expanded access to health coverage in recent years. For example, more than 13 million Californians with modest incomes receive free or low-cost health care through Medi-Cal (California’s Medicaid program) — several million more than before the ACA took effect. Another 1.2 million Californians with incomes up to 400% of the federal poverty line — $48,560 for an individual in 2019 — receive federal premium subsidies to reduce the cost of coverage purchased through Covered California, our state’s health insurance marketplace. Despite these gains, around 3 million Californians remain uninsured, health care costs continue to rise, and many people face both high monthly premiums and excessive out-of-pocket costs — such as copays and deductibles — when they use health care services.
The Governor’s health policy agenda includes several 2019-20 budget proposals as well as an executive order related to prescription-drug pricing that was signed into law on January 7, 2019. Overall, the Governor’s approach aims to further reduce the number of uninsured Californians, lower the cost of health insurance purchased through the individual market, and curb the growth of prescription drug costs.The Governor’s proposed budget:
Calls for creating state subsidies to reduce the cost of health insurance for Californians with incomes between 250% and 600% of the poverty line. Budget documents do not include details about these proposals, such as the structure of the new state subsidies or their estimated costs. Under current law, households with incomes up to 400% of the poverty line are eligible for federal subsidies to reduce the cost of their premiums if they purchase coverage through a health insurance marketplace, such as Covered California. Households with incomes above 400% of the poverty line are not eligible for federal assistance to help make health insurance more affordable.
Calls for creating a state requirement for Californians to carry health insurance or pay a penalty. The ACA included an “individual mandate” to encourage young and healthy people to buy health insurance. The goal was to create healthier “risk pools” and keep premiums lower than they otherwise would be if only older and sicker people signed up for coverage. With limited exceptions, people who failed to comply with this requirement had to pay a penalty to the federal government. However, Congress and President Trump eliminated the individual mandate penalty effective January 1, 2019. The Governor proposes to establish an individual mandate at the state level, which would require Californians “to obtain comprehensive health care coverage or pay a penalty,” according to the Governor’s budget summary. The Administration indicates that revenues raised by this penalty would fund the new state subsidies described above. On a conference call with stakeholders, Administration officials suggested that the penalty could raise around $500 million per year.
Expands eligibility for comprehensive Medi-Cal coverage to undocumented young adults who otherwise meet the program’s requirements. States are prohibited from using federal dollars to provide comprehensive, or “full-scope,” Medicaid coverage to undocumented immigrants. States, however, may use their own funds to provide such coverage. In 2016, California expanded full-scope Medi-Cal coverage to undocumented children and youth through age 18 who meet all other eligibility requirements, including income limits. The Governor proposes to extend this policy to undocumented Californians who are ages 19 through 25, effective no sooner than July 1, 2019. (This age range may be intended to create parity with other young adults: The ACA requires private insurers that offer dependent coverage to let young adults up to age 26 remain on their parent’s plan.) The Administration estimates that 138,000 undocumented young adults would sign up for full-scope Medi-Cal under this new policy, with a General Fund cost of $194 million in 2019-20.
In addition, with a recently signed executive order, the Governor:
Set in motion a series of steps that are intended to boost the state’s bargaining power in negotiations with prescription drug manufacturers. For example, the order requires the Department of Health Care Services to conduct — by January 2021 — negotiations with drug companies for the entire Medi-Cal program, rather than just for part of the program, as is the current practice. In addition, the Department of General Services (DGS), working with the California Pharmaceutical Collaborative (CPC), is required to “develop and implement bulk purchasing arrangements for high-priority drugs.” The Governor’s order also requires DGS and CPC to create a “framework” to allow small businesses, health plans, and other private purchasers of prescription drugs to negotiate alongside the state with drug companies. The combined market power of public and private purchasers would strengthen their bargaining leverage when negotiating prescription drug prices.
Governor Projects $1.1 Billion in Proposition 56 Funding for Medi-Cal, With Some Funding Going Toward Trauma Screenings
Approved by California voters in 2016, Proposition 56 raised the state’s excise tax on cigarettes by $2 per pack and triggered an equivalent increase in the state excise tax on other tobacco products. These increases took effect on April 1, 2017. Prop. 56 requires most of the revenues raised by the measure to go to Medi-Cal, which provides health care services to more than 13 million Californians with low or moderate incomes.
The Administration projects that Medi-Cal will receive $1.1 billion in Prop. 56 revenues in 2019-20. As in the current fiscal year (2018-19), most of these Prop. 56 dollars will support payment increases for doctors, dentists, and other providers. In addition, the Governor proposes to use Prop. 56 funds to support the following services in the Medi-Cal program in 2019-20:
Early developmental screenings for children ($30 million);
Screenings for trauma (“adverse childhood experiences”) for children and adults ($22.5 million); and
Proposed Budget Includes Targeted Funding Increases for Mental Health Services
Mental health services in California are primarily provided by counties, with funding largely coming from the state and federal governments. The Governor’s proposed budget highlights several “emerging challenges” to the mental health system, including a growing demand for mental health practitioners, rising homelessness (a substantial share of homeless individuals struggle with mental illness), and the need for new approaches to detect and treat mental illness as early as possible.
The proposed budget includes:
$100 million General Fund to provide additional supportive housing services for people who are homeless or at risk of becoming homeless, with a focus on people with mental illness. These funds would be directed to existing Whole Person Care Pilots, which coordinate health, behavioral health, and social services for Medi-Cal enrollees, largely targeting those who are homeless and/or mentally ill.
$50 million General Fund to increase support for mental health workforce programs. This additional funding would be administered by the Office of Statewide Health Planning and Development.
$25 million General Fund to improve efforts to “detect and intervene when young people have had, or are at high risk of experiencing, psychosis,” according to the Governor’s budget summary.
Budget Proposal Prioritizes Early Learning Opportunities, Moves Towards Universal Preschool
State policymakers have taken steps in recent years to expand access to full-day early learning opportunities for preschool-age children. Since 2013-14, the state has funded more than 37,000 full- and part-day California State Preschool Program (CSPP) slots for children in low- and moderate-income families. Nearly three-quarters of these slots were for full-day, full-year services. In addition, after passage of the Kindergarten Readiness Act of 2010 (SB 1381), which moved the kindergarten age cutoff from December to September, the state phased in a new Transitional Kindergarten (TK) program in the fall of 2012. Schools can offer either part-day or full-day programs. This new grade is not an expansion of services, but offers a two-year kindergarten experience for children that otherwise would have been very young for their grade. Eligibility for TK is not related to family income. Finally, in 2017 administrators released the results of an evaluation of kindergarten programs that provided much-needed data on the number of districts offering part-day or full-day classes across the state, revealing that about one in five districts only operate part-day kindergarten programs. Full-day kindergarten programs can benefit low-income working parents by providing care for more hours of the day, while potentially offering more educational opportunities for students.
The Governor’s budget proposal continues to expand early learning opportunities by proposing a one-time $750 million General Fund allocation to build new facilities or modernize existing facilities, specifically for full-day kindergarten programs. School districts reported a lack of facilities as the main constraint in offering full-day programs. The administration notes that these one-time dollars may also be used to “fund other activities that reduce barriers to providing full-day kindergarten.”
The 2019-20 proposal also includes a significant investment in the CSPP. Specifically, the Governor’s proposed budget:
Provides $124.9 million General Fund to increase the number of slots in the CSPP. The proposed budget adds 10,000 full-day, full-year preschool slots for community-based organizations. The budget proposal signals the intent to continue expanding the CSPP over the next two fiscal years with the goal of adding a total of 200,000 slots by 2021-22.
Shifts $297.1 million in Proposition 98 General Fund for the CSPP to the non-Prop. 98 General Fund. Recent expansion of the CSPP has been directed to Local Education Agencies (LEA), but many LEAs have been unable to serve more children in the program. Shifting funds out of the Prop. 98 General Fund frees up funding for non-LEA providers that have the capacity to serve children not served by LEAs. This also has the intention of simplifying contract funding for these state preschool providers.
Eliminates the parental work or school requirement for the full-day CSPP. Currently, the CSPP is a part-day program offered for roughly nine months of the year. Some children receive “wraparound” services that provide subsidized child care for the remainder of the day and throughout the entire year. Eligibility for the part-day program is based solely on family income. To be eligible for the full-day CSPP, families must also demonstrate that they are working or attending school. To make access to a full-day, full-year program easier, the proposed budget eliminates the parental work and school requirement for wraparound child care services.
Provides $10 million General Fund to develop a plan to provide universal access to the CSPP. As mentioned in the Child Care section, the budget proposal also includes $10 million General Fund to pay a contractor to create a plan in the 2019-20 fiscal year to address a wide variety of issues such as facility capacity, workforce training, redundancies with TK, access to subsidized child care, and potential revenue options for the subsidized child care and development system.
Increased Revenues Boost the Minimum Funding Level for Schools and Community Colleges
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 2019-20 Prop. 98 funding level of $80.7 billion for K-14 education, $2.3 billion above the 2018-19 funding level of $78.4 billion estimated in the 2018-19 budget agreement. Based on projections in the Governor’s proposed budget, the 2018-19 Prop. 98 funding level dropped by $525.7 million to $77.9 billion from the estimated level in the 2018-19 budget agreement, and the 2017-18 Prop. 98 funding level dropped by $120.1 million to $75.5 billion.
Because some of the information needed to calculate the Prop. 98 guarantee is not available until after the close of a fiscal year, the state estimates the minimum funding level and reconciles differences between the Prop. 98 funding provided in the annual budget and the final minimum guarantee after the end of the fiscal year. The 2018-19 budget agreement required the Department of Finance (DOF) to certify the Prop. 98 guarantee for 2009-10 through 2016-17 and established a new process for finalizing prior-year Prop. 98 spending that included a so-called “cost allocation schedule,” which requires the state to credit dollars above the guarantee toward this new account in years when the Prop. 98 guarantee ends up lower than estimated. Conversely, in years when the Prop. 98 guarantee ends up higher than estimated, the state must use any dollars credited to the cost allocation schedule to meet the higher guarantee. Last year’s budget agreement also established a new process for how the state certifies the annual funding level guaranteed under Prop. 98 that required the DOF to issue a final certification of the minimum funding obligation and to publish this amount by August 15. (For example, the final certification for fiscal year 2017-18 must be published by August 15, 2019.)
The Governor’s proposal would change statutory language to specify that the state may not adjust Prop. 98 funding levels for any non-certified year outside of the current year or budget year (i.e. for the 2019-20 proposed budget, current year refers to 2018-19 and budget year refers to 2019-20). Moreover, after referencing legal challenges to changes in the certification process, the Governor’s budget summary states that to provide more certainty he proposes prohibiting the state from adjusting Prop. 98 funding levels for a prior fiscal year and eliminating the cost allocation schedule. Under this proposal, when the final Prop. 98 guarantee ends up lower than estimated the state would not be able to adjust the Prop. 98 funding level downward. However, in years when the final Prop. 98 guarantee ends up higher than estimated the state would be required to adjust the Prop. 98 funding level higher to meet the constitutional funding requirement. The overall effect of the Governor’s proposal would shift the risk associated with the uncertainty in the annual Prop. 98 guarantee from K-12 school and community college districts to the state.
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 approximately 6.2 million students in grades kindergarten through 12. The Governor’s proposed budget increases funding for the state’s K-12 education funding formula — the Local Control Funding Formula (LCFF) — to support special education services, and to reduce school districts’ spending obligations for retirement costs (see Paying Down Debts section). Specifically, the Governor’s proposed budget:
Increases LCFF funding by $2.0 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 Governor’s proposed increase reflects a 3.46% cost-of-living adjustment (COLA) and would result in $63 billion in total LCFF funding. The Governor’s budget also provides $9 million to fund a 3.46% COLA for COEs. Last year’s budget agreement included a provision that would appropriate LCFF dollars to K-12 school districts even if the Legislature does not act and, further, automatically adjusts this appropriation for increases in the cost of living and for changes in enrollment. The Governor’s proposed budget would “create a cap on increases to LCFF related to the continuous appropriation of LCFF COLA,” which would reduce the financial risk to the state budget if the COLA for LCFF and other programs exceeded growth in the annual Prop. 98 minimum funding guarantee.
Provides $576 million, including $186 million in one-time dollars, to support expanded special education services. The Governor’s proposal would provide grants to school districts with large shares of students with disabilities and other disadvantaged students — English learners, students from low-income families, and foster youth — to supplement services for students in special education programs and for preventative services.
Provides $187 million to fund COLAs for non-LCFF programs. The Governor’s proposed budget funds a 3.46% COLA for several categorical programs that remain outside of the LCFF, including special education, child nutrition, and American Indian Education Centers.
Increases COE funding by $20.2 million to provide assistance to school districts. The Governor’s proposed budget includes funding for COEs to help address low student achievement in school districts identified by the state’s accountability system as needing support.
Budget Proposal Includes Increased Funding for Community Colleges While Making Adjustments to Funding Formula
A portion of Proposition 98funding provides support for California’s community colleges (CCCs), which help prepare over 2 million students to transfer to four-year institutions as well as obtain training and employment skills. The 2019-20 budget proposal increases support for the community college’s Promise Program, revises the Student Centered Funding Formula implementation plan, and makes other investments. Specifically, the proposed spending plan:
Provides significant funding increases for Promise Program. The California College Promise Program provides state funding to community colleges to improve college readiness, increase completion rates, and close achievement gaps. The Governor’s 2019-20 budget proposal increases funding by $40 million — the amount needed to extend the California College Promise to a second year of tuition-free college for first-time, full-time students. The proposal also allocates $5 million in one-time funding for outreach related to the Promise Program.
Revises implementation of the Student Centered Funding Formula. The 2018-19 budget created a new funding formula for CCC general-purpose apportionments. The Governor’s proposed budget revises the implementation of the formula including maintaining current funding rates for the student success allocation, capping the student success allocation year-over-year increases to 10%, and clarifying how the transfer student outcome measure is defined.
Provides $26 million for enrollment growth.
Provides an increase of $10 million for legal services for undocumented immigrant students, staff, and faculty on CCC campuses.
Does not provide funding to address students’ food and housing needs.
Funding Increases for CSU and UC Included in Budget Proposal
California supports two public four-year higher education institutions: the California State University (CSU) and the University of California (UC). The CSU provides undergraduate and graduate education to roughly 481,000 students on 23 campuses, and the UC provides undergraduate, graduate, and professional education to about 273,000 students on 10 campuses.
The Governor’s proposed 2019-20 budget increases support for the CSU with the expectation that the institution will not raise tuition. Specifically, the proposed spending plan:
Increases ongoing funding for the CSU by $300 million. The budget proposal includes $193 million for operational costs, $62 million for a 2% enrollment growth (7,000 students), and $45 million for the Graduation Initiative, which seeks to improve graduation rates and eliminate opportunity and achievement gaps.
Proposes $15 million one-time funding for the Basic Needs Initiative. The Basic Needs Initiative addresses students’ food and housing needs by providing short-term emergency housing, financial assistance, food pantries, and assistance connecting students with resources.
Allocates $7 million to support legal services for undocumented immigrant students, staff, and faculty at the CSU.
Provides $2 million in one-time funding to undertake a review of a potential CSU campus in San Joaquin County.
Provides $250,000 for Project Rebound, which supports formerly incarcerated individuals.
The Governor’s proposed 2019-20 budget includes funding increases for the UC with the expectation that the institution will not raise tuition. Specifically, the proposed spending plan:
Increases ongoing funding for the UC by $240 million. The Administration’s proposal includes $119.8 million for operational costs, $49.9 million to improve degree attainment and student success, $15 million to address food and housing insecurity, $10 million for enrollment growth of 1,000 additional resident students, $5.3 million for student mental health programs, and $40 million for Graduate Medical Education that was previously supported by Proposition 56 funds.
Provides $15 million one-time funding for UC extension centers. The Administration intends for the extension center to provide outreach and degree completion support to students who have some college credits but no degree.
Allocates $1.3 million to support legal services for undocumented immigrant students and their families, beginning in 2022-23. The Administration notes that the 2018-19 budget allocated sufficient funding to sustain legal services for undocumented students through 2021-22.
Governor Proposes Significant Increase in Cal Grant Program
Cal Grants are the foundation of California’s financial aid program for low- and middle-income students pursuing higher education in the state. Cal Grants provide aid for tuition and living expenses that do not have to be paid back. The Governor’s spending plan includes increased funding for nontraditional students and students with dependent children. Specifically, the plan:
Provides $121.6 million to increase Cal Grants for students with dependent children. The spending plan proposes supporting CSU, UC and CCC students with dependent children by increasing the Cal Grant B Access award from $1,648 to $6,000, awarding new or renewal Cal Grant A students with an access award of up to $6,000, and increasing the Cal Grant C book and supply award from $1,094 to $4,000.
Increases funding for Competitive Cal Grant awards by $9.6 million. Competitive Cal Grants support students who attend college more than a year after high school graduation and meet certain income and GPA requirements – awards are limited to 25,750 students, though more than 340,000 qualified for them in 2017-18. The budget proposal increases the number of awards available to 30,000.
Administration Proposes Developing a Longitudinal Student Data System to Track the Impact of State Education Investments
Education data can be a powerful tool for policymakers, educators, parents, and other stakeholders in measuring outcomes and informing decision making. The Governor’s budget summary notes that California’s education data are currently housed in multiple databases operating under differing legal and regulatory requirements. The budget proposal provides $10 million one-time General Fund for a statewide longitudinal “cradle-to-career” data system for early education, K-12 education, and postsecondary education in California. This funding will support both the planning of the data system and initial implementation. The proposed budget would add California to the list of 16 states that currently have a data system that tracks students from preschool through their college degree.
Proposed Budget Anticipates Ending Use of Out-of-State Correctional Facilities by June 2019
Currently, more than 127,000 adults who have been convicted of a felony offense are serving their sentences at the state level — down from a peak of around 173,600 in 2007. Most of these individuals — about 114,200 — are housed in state prisons designed to hold slightly more than 85,000 people. This level of overcrowding is equal to 134.1% 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. (In other words, the state is in compliance with the court order.) In addition, California houses over 13,100 people in facilities that are not subject to the court-ordered cap, including fire camps, in-state “contract beds,” out-of-state prisons, and community-based facilities that provide rehabilitative services. The sizeable drop in incarceration has resulted largely from a series of policy changes adopted by state policymakers and the voters in the wake of the federal court order.
The proposed budget:
Anticipates that all Californians housed out-of-state will be returned to California by June 2019, rather than January 2019 as assumed in the 2018-19 budget package. Nearly 2,000 Californians are housed in Arizona because there is no room for them in state prisons, given the court-imposed prison population cap.
Provides $12.6 billion for the California Department of Corrections and Rehabilitation (CDCR) in 2019-20, which is roughly equal to 2018-19 spending. Nearly all support for the CDCR comes from the General Fund.
Estimates that Proposition 47 will generate net state savings of $78.5 million in the current fiscal year (2018-19). Approved by California voters in 2014, Prop. 47 reduced penalties for certain nonviolent drug and property crimes from felonies to misdemeanors. Annual state savings from Prop. 47 are allocated as follows: 65% to mental health and drug treatment programs, 25% to K-12 public school programs for at-risk youth, and 10% to trauma recovery services for crime victims.
Projects that the average daily adult population of adults incarcerated at the state level will decline by 1.1%, from 128,334 in 2018-19 to 126,971 in 2019-20.
Highlights several proposals to address California’s aging correctional infrastructure, including:
$71.7 million over two years for roof replacement projects;
$59 million over two years to replace fire alarm systems and repair fire suppression systems; and
$25 million to address “the highest priority deferred maintenance projects.”
Includes a total of $10.7 million over the next two years to expand the Board of Parole Hearings staff. This expansion reflects increased workload related to “parole suitability” hearings for people serving indeterminate life sentences under the state’s “Three Strikes” law. A recent court ruling found that the state had erred in initially excluding these individuals from the parole hearings required by Prop. 57 of 2016.
Provides $5.5 million to help improve literacy rates among incarcerated adults.
Includes $576,000 to initiate a study of California’s complex Penal Code. The California Law Revision Commission would lead an effort “to simplify and rationalize criminal law and criminal procedures included in the Penal Code,” according to the Governor’s budget summary.
Governor Proposes to Shift Responsibility for Justice-Involved Youth to the State Health and Human Services Agency
A small number of justice-involved youth — a projected 759 in 2019-20 — are housed in facilities overseen by the state’s Division of Juvenile Justice, which is part of the California Department of Corrections and Rehabilitation (CDCR). The Governor proposes “to move youth correctional facilities from the CDCR to a new department under the Health and Human Services Agency,” according to the Governor’s budget summary. The Administration suggests that this shift will better enable the state to provide justice-involved youth “with services needed to be successful when they are released.”
Governor’s Budget Proposes New Immigration Rapid Response Funding and Continues Increased Funding for Legal Services
California has the largest share of immigrant residents of any state, and immigrants make up a third of the state’s workforce. The Administration notes that conditions in Central America together with “inadequate federal immigration policies” have caused a “humanitarian crisis” at California’s southern border. To address this challenge, the Governor proposes allocating $25 million (with $5 million available in the current 2018-19 fiscal year, and the remaining $20 million available over the next three fiscal years) for an “immigration rapid response program,” which would support the work of nonprofit and community-based service providers that are responding to immigration-related emergencies.
The Governor’s budget also allocates ongoing annual funding for legal services for immigrants to assist individuals with applications for Deferred Action for Childhood Arrivals (DACA), naturalization, deportation defense, and other immigration remedies. These funds include $58 million for the Department of Social Services, as well as $7 million for the California State University (CSU) and $10 million in Proposition 98 funds for community colleges to support legal services for undocumented immigrant students, staff, and faculty in each of these systems, maintaining the increased funding levels for these items adopted in the 2018-19 budget. The Administration notes that funding provided in the 2018-19 budget for similar services at the University of California (UC) is “sufficient to support the UC’s legal services program through the 2021-22 fiscal year,” and proposes allocating $1.3 million ongoing for these services at UC beginning in 2022-23.
As mentioned above, the Administration also proposes to extend Medi-Cal eligibility to undocumented immigrant young adults ages 19 to 25 (adopting a proposal put forth by the Legislature last year).
Additional Support to Boost Participation in the 2020 Census Included in the Governor’s Budget Proposal
The decennial census is an important tool that provides indispensable social and economic data about the state and the country. The census count also determines how federal dollars are distributed to states and how many seats each state has in the House of Representatives. It is in California’s best interest to ensure that the 2020 Census is as accurate as possible, a goal reflected in the Governor’s proposed funding for census outreach, awareness, and coordination.
There are a number of issues that raise concerns about the 2020 Census. First, federal funding for the 2020 Census has not been adequate to fully prepare for the count. Second, the US Census Bureau has significantly changed the way in which it plans to administer the 2020 survey, and the agency will be hiring far fewer field workers to follow up with households who are late to respond. Third, the Trump Administration has announced that it will be adding a citizenship question to the Census, which could depress response rates given the administration’s virulent attitude toward immigrants.
The Governor’s proposed budget includes an additional $50 million to support statewide efforts to increase participation in the 2020 Census, bringing total state support for this effort to $140.3 million. Last year’s budget provided $90.3 million in state funding to support the California Complete Count Committee, which oversees census outreach, awareness, and coordination efforts — particularly for hard-to-count residents. The committee was created after the undercount of the state’s population in the 1990 decennial federal census. This undercount likely resulted in California losing a seat in the US House of Representatives as well as about $2 billion in federal funding over a 10-year period.
The proposed budget also includes $4 million for the California Housing and Population Sample Enumeration, which is a survey that will identify barriers to a complete census count and outreach strategies that can improve the count. This survey is intended to help inform recommendations for the 2030 Census.
Governor’s Proposed Budget Makes Critical Investments in Disaster Preparedness, Response, and Recovery
After the unprecedented wildfires that devastated California communities in 2018 and other recent years, the Governor’s budget proposes several new investments to improve the ability of the state and local communities to prevent, prepare for, and respond to the natural disasters that are becoming ever more frequent.
The Governor’s proposed budget includes $172.3 million in additional funding for the Office of Emergency Services, including:
$60 million in one-time funding for continued upgrades to the state’s 9-1-1 system. This includes $10 million for the current fiscal year and $50 million for 2019-20;
$1 million to support coordination between the 9-1-1 system and broadband network services;
$16.3 million in one-time funding to complete the California Earthquake Early Warning System;
$25 million in ongoing funding to support the state’s Mutual Aid System in prepositioning state and local resources, such as fire trucks, in areas determined to have high fire risks;
$50 million in one-time funding for a statewide disaster preparedness public education campaign; and
$20 million in one-time funding under the California Disaster Assistance Act to repair or replace public property damaged or destroyed in a disaster and to reimburse local governments for the costs of emergency response activities.
The budget proposal also includes a funding increase of $415.1 million for the Department of Forestry and Fire Protection (CAL FIRE) to improve fire prevention and firefighting capacity. The additional funding includes:
$213.6 million for forest management and other fire prevention activities;
$120.8 million to upgrade the state’s firefighting aircraft fleet;
$64.4 million to expand CAL FIRE’s firefighting surge capacity, including adding new engines and crews;
$6.6 million for medical and psychological services for firefighters; and
$9.7 million for technology improvements.
To offer relief to communities affected by wildfires, the proposed budget includes $31.3 million to compensate cities, counties, and special districts for property tax revenue losses incurred between 2019-20 and 2021-22 as a result of wildfires in 2018 and previous years. Property tax revenue losses to school districts, expected to total $19 million in 2019-20 from 2018 wildfire damage, will be backfilled through Proposition 98. The state would also waive the share of debris removal costs that local governments are generally responsible for and backfill whatever costs are not covered by the federal government; the Governor’s proposal estimates the local cost share for the November 2018 wildfires to be $155.2 million.
Finally, the Governor proposes to permanently authorize the Director of Finance to immediately access funds in the Special Fund for Economic Uncertainties (SFEU) for disaster response and recovery efforts, as the Director’s temporary authorization expired at the end of 2018.
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