The state’s fiscal health presents state leaders with an opportunity in the 2022-23 state budget to address California’s great paradox: How can a state with such wealth also be home to immense poverty where so many Californians are blocked from comprehensive health care, affordable housing, stable jobs, paid sick leave, reliable child care, and quality higher education? 

The governor’s budget proposal would make progress by providing comprehensive Medi-Cal for Californians who are undocumented and ages 26-49, providing cash assistance for low-income Californians through state tax credits, investing in homelessness prevention and housing, investing in behavioral health, and committing additional funding across education systems, from early learning to K-12 to higher education.

The governor’s proposals leave open the possibility of additional urgent and ongoing investments. As state leaders deliberate on the 2022-23 state budget, other priority investments that should move forward include but are not limited to:

• Extending temporary economic support to families, including a larger amount of aid for Californians who are undocumented and excluded from federal support;
• Expanding cash support for Californians without children;
• Significantly increasing investments in rebuilding the child care system, particularly supporting providers who have struggled to stay open and parents who can’t find affordable care for their kids so they can go to work;
• Providing additional paid sick leave so workers can follow public health guidelines during the pandemic and increasing paid family leave benefits;
• Fast-tracking planned investments in the social safety net, such as Medi-Cal expansion and increases in SSI-SSP grants, currently not scheduled to begin until 2024 and within the means of the state to start earlier;
• Expanding CalWORKs to include children in all eligible households;
• Monitoring K-12 funding and enrollment formulas to ensure students and schools are not harmed by attendance shifts as a result of the pandemic; 
• Providing ongoing funding for people experiencing homelessness; and 
• Boosting ongoing investments in public health. 

The governor’s proposal also includes a number of proposals for tax breaks for businesses that are unnecessary or deserve further scrutiny. Most notably, the administration proposes to spend $3 billion over the next two years to unnecessarily pay a federal unemployment insurance loan, which amounts to a tax break that primarily benefits larger businesses and corporations. 

State leaders must also figure out how to manage the state’s constitutional spending limit — or Gann Limit — that holds the state back from building a better future that is especially critical for Californians with low incomes, people of color, immigrant Californians, and women. The administration is leaving details of how the state will manage the spending limit to the May Revision.

With the 2022-23 state budget proposals, state leaders can ensure corporations and the wealthy are not the only ones who reap the benefits of the state’s strong economy. This First Look report outlines key pieces of the 2022-23 budget proposal, and examines how the governor and the Legislature can expand upon the governor’s proposals to invest in the people who have put their own health and well-being at risk to keep our communities running and move California forward.

Contents

Budget Overview

• Economic Outlook: Governor’s Budget Assumes Continued Economic Recovery, but Significant Risks
• Revenue: Governor’s Proposal Reflects Strong Revenue Growth and Includes Tax Changes
• Reserves: Stronger-Than-Expected Revenues Allow State to Build Reserves to $35 Billion
• Gann Limit: Gann Limit Impact on Spending Priorities Is Uncertain — Clarity Expected in May

Health

• COVID-19 Emergency Response: Proposed Budget Bolsters COVID-19 Response Efforts
• Public Health: Governor Proposes Much-Needed Public Health Investments
• Health Coverage: Governor Calls for Expanding Medi-Cal to All Undocumented Immigrants
• CalAIM: Proposed Budget Sets in Motion Robust Medi-Cal Reform Initiatives
• Behavioral Health: Proposed Budget Includes Funding to Launch Behavioral Health Initiatives

Homelessness & Housing

• Homelessness: Governor’s Proposals Focus on Encampments and Behavioral Health Needs
• Housing: Governor Proposes $2 Billion in New One-Time Resources to Increase Affordable Housing

Economic Security

• Young Child Tax Credit: Administration Proposes Ending Work Requirement for Young Child Tax Credit
• Immigration: Governor’s Proposals Expand Support for Immigrants 
• CalWORKs: Proposed Budget Continues CalWORKs Investments But Falls Short on Grants
• Child Savings Accounts and Other Supports: Budget Proposal Implements Child Savings Accounts and Boosts Child Support Pass-Through
• Food Assistance: Budget Proposal Pares Back Plan to Provide Food Assistance to Immigrants
• SSI/SSP: Governor Assumes a 24% Increase to State SSP Grants in 2024
• Child Care: Proposal Funds New Child Care Spaces With Federal COVID-19 Relief Dollars

Education

• Early Learning & Pre-K: Proposed Early Learning Plan Continues Implementation of Transitional Kindergarten
• Proposition 98: Increased Revenues Boost the Minimum Funding Level for K-14 Education
• K-12 Education: Significant Funding Boost Proposed to Expand Learning Opportunities for Students
• California Community Colleges: Proposal Misses Opportunity to Provide More Direct Support to CCC Students
• CSU/UC: Proposed Budget Provides Multi-Year Investments in the CSU and the UC
• Student Financial Aid: Proposed Budget Invests in Cal Grants and Middle Class Scholarship

Justice System

• State Corrections: Governor Does Not Propose to Close Additional State Prisons
• Local Corrections & Court System: Proposed Infrastructure Increases to Courts and Juvenile Facilities
• Public Safety: Governor’s Proposed Crime Reduction Plan Lacks Equity Considerations

Workforce & Small Business

• Small Business: Proposed Budget Includes Several Investments Targeted to Small Businesses
• Workforce Development: Workforce Proposals Primarily Target Climate Change and the Care Economy
• UI Debt Repayment: Administration Proposes Unnecessary Payment on Federal Unemployment Insurance Loan

Budget Overview

Governor’s Budget Assumes Continued Economic Recovery, but Significant Risks

Nearly two years into the COVID-19 pandemic, the state is experiencing a continued, but uneven, economic recovery. The budget proposal notes that as of November 2021, California had added back about 70% of jobs that were lost in March and April of 2020. Low-paying industries that were hardest hit in the early days of the pandemic — such as leisure and hospitality — have been recovering more slowly than high-paying industries. The governor’s economic outlook projects that the state will regain all of the jobs lost by the end of 2022, while the hardest hit low-paying industries will not fully recover until early 2023. 

The state saw strong growth in average wages in 2021 despite the return of many low-paying jobs. The administration notes that employers have had to raise wages to attract workers in the face of lower labor force participation due to workers’ pandemic fears, child and dependent care obligations, and searches for better jobs. Wage gains are expected to continue, even after accounting for inflation, but at a lower rate as labor force participation improves and inflation slows down.

The outlook assumes that the federal infrastructure package enacted in late 2021 will provide a modest boost to jobs in the state beginning this year, but does not assume the enactment of the federal “Build Back Better” plan. Additionally, the economic outlook was finalized prior to the emergence of the COVID-19 Omicron variant so it does not account for potential economic disruptions related to Omicron or future variants, such as ongoing weak labor force participation and supply-chain delays. 

The administration also highlights other ongoing risks to the economic outlook, including the potential for a stock market drop, the effects of climate change, unaffordable living costs and increasing inequality, and changing demographics such as the aging of the population and lower fertility and migration rates.

Governor’s Proposal Reflects Strong Revenue Growth and Includes Tax Changes

Although the COVID-19 pandemic has been devastating to many Californians, the state has recently experienced unprecedented revenue growth due to factors including surging incomes among the wealthy, the booming stock market, steep growth in corporate profits, and strong retail sales. Accordingly, the administration estimates that General Fund revenues across the three-year budget window spanning 2020-21 through 2022-23 will be $28.7 billion higher than estimated in the enacted 2021-22 budget, before accounting for transfers such as to the state’s rainy day fund. 

The administration projects that total General Fund revenues before transfers will be $197.6 billion in the upcoming budget year. For the state’s three largest revenue sources, the proposal projects 2022-23 General Fund revenues of:

• $130.3 billion in personal income taxes,
• $32.2 billion in sales and use taxes, and
• $23.7 billion in corporation taxes.

Additionally, the proposed budget assumes that General Fund revenues for the current 2021-22 fiscal year will total $193.8 billion — $12.2 billion higher than projected in the June budget.

The governor cautions that these revenue projections assume continued economic growth and that risk factors discussed in the Economic Outlook section could threaten the expectation of continued revenue growth.

The governor’s budget includes several proposed tax policy changes that would affect some individuals and businesses, most of which are reflected in the governor’s revenue projections.

Proposed tax changes for individuals include:

• Improvements to the Young Child Tax Credit, as outlined in the Economic Security section, estimated to cost $74 million for the 2022 tax year.
• Creation of a $1,000 tax credit for certain former foster youth with low incomes, as described in the Economic Security section, estimated to cost about $20 million annually. 
• Extended income tax payment plans for low- and middle-income households, which would allow participating tax filers to make installment payments on their 2019, 2020, and 2021 taxes until the end of September 2023 without incurring penalties or interest. Eligible filers must have incomes below $75,000 for single filers or $150,000 for couples filing jointly.

Proposed tax changes for businesses include:

• Elimination of the temporary limitation on business tax credits and net operating losses — enacted in the 2020-21 budget package — one year earlier than planned, estimated to decrease General Fund revenues by $5.5 billion in 2022-23.
• Creation of a new temporary tax credit for companies investing in climate change mitigation technologies that are headquartered in California, costing approximately $250 million annually for three years.
• Creation of a new temporary tax credit for companies developing green energy technologies and agreeing to share profits with the state, costing $100 million annually for three years.
• Exemption from taxable income of federal COVID-relief grants for restaurants and venue operators provided through the American Rescue Plan. The proposal would also allow these businesses to deduct expenses related to these grants for tax purposes, Total estimated cost: Nearly $500 million over several years, including $130 million in 2021-22 and $144 million in 2022-23.

Additionally, the governor proposes pausing the inflation adjustment for gas and diesel excise taxes scheduled to go into effect in July 2022, meaning these tax rates would not change for 2022-23. This pause is estimated to reduce special fund revenues that support state and local transportation projects by $523 million in 2022-23. The governor has indicated an intention to backfill the loss of local revenues with other funds.

While some of the governor’s tax proposals would improve equity in the state by increasing support for Californians with low and middle incomes, more detail will be needed on the business tax proposals to determine whether they are appropriately structured and targeted to help struggling businesses and employees and to incentivize new investments in combating climate change rather than providing a windfall to businesses that would have made these investments anyway. These are critical questions because revenues forgone to tax breaks represent dollars that could otherwise have supported investments to improve the health, economic, and social well-being of Californians who have been hit hard by the pandemic and who were blocked from prosperity long before the pandemic — including Californians with low incomes, many Californians of color, immigrants, and LGBTQ+ Californians.

Stronger-Than-Expected Revenues Allow State to Build Reserves to $35 Billion

California has a number of state reserve accounts, some of which are established in the state’s Constitution to require deposits and restrict withdrawals, and some of which are at the discretion of state policymakers.  

California voters approved Proposition 2 in November 2014, amending the California Constitution to revise the rules for the state’s Budget Stabilization Account (BSA), commonly referred to as the rainy day fund. Prop. 2 requires an annual set-aside equal to 1.5% of estimated General Fund revenues. An additional set-aside is required when capital gains revenues in a given year exceed 8% of General Fund tax revenues. For 15 years — from 2015-16 to 2029-30 — half of these funds must be deposited into the rainy day fund and the other half is to be used to reduce certain state liabilities (also known as “budgetary debt”).

Prop. 2 sets the maximum size of the BSA at 10% of General Fund Revenues and, if the limit is reached, any dollars that otherwise would have gone into the BSA would have to be spent on infrastructure, including spending related to deferred maintenance. 

Prop. 2 also established a new state budget reserve for K-12 schools and community colleges called the Public School System Stabilization Account (PSSSA). The PSSSA requires that when certain conditions are met, the state must deposit a portion of General Fund revenues into this reserve as part of California’s Prop. 98 funding guarantee (see section on Prop. 98). 

The BSA is not California’s only reserve fund. Each year, the state deposits additional funds into a “Special Fund for Economic Uncertainties” (SFEU). 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. 

Stronger-than-expected revenue collections result in changes to the BSA, PSSSA, and SFEU balances for the current fiscal year (2021-22) and also affect projections for 2022-23. The administration projects:

• A total BSA balance of $19.3 billion in 2021-22, growing to $20.9 billion in 2022-23;
• A PSSSA balance of $6.7 billion 2021-22, growing to $9.7 billion in 2022-23; and
• An SFEU balance of $20.5 billion in 2021-22, which partly reflects the state’s receipt of unanticipated revenues amid the pandemic, dropping to $3.1 billion for 2022-23.

The administration’s proposal for 2022-23 leaves the Safety Net Reserve at its 2021-22 level of $900 million.

The governor’s proposal estimates that the BSA “is now at its constitutional maximum (10% of General Fund revenue), resulting in a required $2.4 billion in infrastructure investments in 2022-23.”

Taking into account the BSA, PSSSA, Safety Net Reserve, and SFEU, the governor’s proposal would build state reserves to a total of $34.6 billion in 2022-23.

Gann Limit Impact on Spending Priorities Is Uncertain — Clarity Expected in May

One of the biggest unknowns in the governor’s proposed budget is how the Gann Limit will affect budget and policy choices during the 2022-23 budget cycle. The Gann Limit, also known as the State Appropriations Limit, is a constitutional spending cap approved by voters via Proposition 4 in a 1979 special election. The cap is tied to California’s 1978-79 spending level and is adjusted each year for changes in population and per capita personal income, as explained in the Budget Center’s new Gann Limit Q&A.

If the state exceeds the Gann Limit over a two-year period, the Legislature must spend the revenue over the limit in specific ways — providing half to taxpayers and the other half to K-12 schools and community colleges. State policymakers have limited options to structure budgets to avoid exceeding the limit. For example, they can spend more on things that are excluded from the limit, such as emergency response and infrastructure projects, which can include housing.

According to current estimates, the state exceeded the Gann Limit by $19 billion in 2020-21 and is expected to be under the limit by $16.4 billion in 2021-22. The difference — $2.6 billion — is the amount by which the state is currently projected to surpass the Gann Limit over these two fiscal years combined. In contrast, current estimates suggest the state will not exceed the Gann Limit across the next two-year period: 2021-22 and 2022-23. However, all of these estimates will change as new revenue, personal income, and other numbers become available.

The governor does not outline a plan for addressing the Gann Limit as part of his proposed budget. Instead, the administration plans to release “an updated calculation” of the Gann Limit as well as “proposals to address it” as part of the governor’s May Revision. It is very likely that the next set of Gann Limit estimates will show the state substantially outstripping the limit across multiple years, especially if state revenues continue to exceed projections. Under this scenario, the governor and legislative leaders would need to decide how to address the “excess” revenues in ways that are consistent with the Gann Limit’s constitutional limitations.

In addressing the Gann Limit, state leaders should prioritize investments to improve the health, economic, and social well-being of Californians who have been hit hard by the COVID-19 pandemic and who were blocked from prosperity long before the pandemic — including people with low incomes, many people of color, immigrants, and LGBTQ+ Californians. For example:

• If policymakers choose to boost spending on infrastructure — the governor and legislative leaders have already advanced proposals — they should include significant investments in housing, which (as noted above) can be counted as infrastructure for the purpose of the Gann Limit. Our state’s inadequate supply of affordable housing is perhaps the greatest challenge facing Californians with low incomes and Black and Latinx Californians.
• If policymakers choose to provide tax refunds, these payments should be targeted to Californians with low incomes, who struggle with our state’s high cost of living, as well as to Californians who are undocumented, who are blocked from many public supports that other residents can access to meet basic needs.

Even if state policymakers are able to manage within the spending cap over the next year or two, the Gann Limit’s restrictive rules mean that many kinds of ongoing expenditures would be off the table or much harder to sustain, such as big new investments in affordable child care and health care. The Gann Limit also challenges state leaders’ ability to simply maintain current service levels, as the Budget Center explains in this Q&A. Since the spending cap is in the California Constitution, state leaders would need to ask voters to approve any changes to it. Substantially reforming or — better yet — repealing the Gann Limit would allow the state to make the bold investments needed for all Californians to share in the state’s wealth.

Health

Proposed Budget Bolsters COVID-19 Response Efforts

As the state approaches two years into the COVID-19 pandemic, a contagious variant of the virus (Omicron) continues to spread across California communities. The recent surge in cases and hospitalizations are a stark reminder that the pandemic is not yet over. Recognizing this ongoing health threat, the administration proposes additional funding to bolster vaccination and booster efforts, expand testing capacity, and support health care workers. The administration proposes a total of $2.7 billion to mitigate the spread of the virus and protect the health of Californians. Of this amount, the administration requests the legislature to include $1.4 billion in an early action package before the June budget. 

Overall, the proposed $2.7 billion COVID-19 response package includes: 

• $1.2 billion to improve the state’s testing capacity. This funding would allow testing sites across the state to expand their hours of operation as well as their capacity. The funding would also be used to distribute antigen tests to local health departments, community clinics, and county offices of education and schools. 
• $583 million to increase vaccination uptake among Californians. Working in partnership with ethnic media outlets and community-based organizations, the administration aims to provide information about COVID-19 vaccines and boosters. This funding would also support in-home vaccination and testing programs as well as provide free transportation to vaccination appointments. 
• $614 million to support health care systems and frontline workers.
• $200 million to enhance the state’s emergency response and public health capacities, including staffing and information technology for state-level operations.
• $74 million to support services for newly arrived migrants and border communities, such as vaccinations, testing, and isolation and quarantine services.
• $36 million to expand statewide contact tracing, which is a practice that public health workers use to identify and notify people who have been exposed to someone who has tested positive for COVID-19.

Governor Proposes Much-Needed Public Health Investments

The California Department of Public Health protects and promotes the health of all Californians through infectious disease control, chronic disease prevention, and more. Yet despite its important responsibilities, funding for this department has not kept pace with the cost of responding to ongoing and emerging health threats. Due to chronic underfunding in public health, counties and cities across the state were not adequately prepared to respond to COVID-19 and many communities suffered as a result. Most notably, communities of color experienced higher rates of illness and death due to historic and ongoing structural racism that deny many communities the opportunity to be healthy and thrive. The intersection of the pandemic and structural racism has underscored the need to address the root cause of health disparities. 

The governor’s proposed budget includes the following public health investments:

• $235.2 million for disease surveillance readiness and maintenance of IT operations at the state level. Specifically, this funding is for the Department of Public Health to maintain and operate technology and data platforms and applications in 2022-23, both for the ongoing COVID-19 response and for future disease outbreaks.
• $200 million ongoing General Fund for public health infrastructure at the local level. Under this proposal, local health jurisdictions would receive a minimum base allocation of $350,000 to support workforce expansion, data collection and integration, and partnerships with health care delivery systems and community-based organizations.
• $100 million General Fund annually for public health infrastructure at the state level. This funding would establish a new Office of Policy and Planning to assess current and emerging public health threats. It would also support other core functions, such as emergency preparedness, the public health workforce, and public health communications. 
• $55 million for opioid overdose prevention and surveillance. This funding would also improve the Department of Public Health’s ability to collect and analyze data on drug overdoses. 
• $50 million ongoing General Fund to expand home visiting services and the California Black Infant Health Program, both of which aim to improve maternal and child health outcomes.

This funding would provide much-needed support for public health infrastructure and health promotion programs. Ensuring that counties and cities have the resources needed to overcome COVID-19 and other health threats is vital to address this pandemic and future public health needs. 

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

Governor Calls for Expanding Medi-Cal to All Undocumented Immigrants

Building on the federal Affordable Care Act (ACA), California has substantially expanded access to health coverage in recent years. For example, more than 14 million Californians with modest incomes — nearly half of whom are Latinx — receive free or low-cost health care through Medi-Cal (California’s Medicaid program), several million more than before the ACA took effect. Another 1.4 million Californians receive federal subsidies to reduce the cost of coverage purchased through Covered California, our state’s health insurance marketplace. Nonetheless, many Californians — including immigrants who are undocumented — remain uninsured, while those with health coverage often face high monthly premiums and excessive out-of-pocket costs, such as copays and deductibles, when they seek health care services.

The governor’s proposed budget:

• Expands — no sooner than January 2024 — Medi-Cal eligibility to undocumented immigrants ages 26 to 49, the last group excluded from coverage. In recent years, California has expanded eligibility for comprehensive Medi-Cal coverage to certain immigrants who qualify for the program except for their immigration status. This includes children and young adults up to age 25 as well as adults age 50 and older. However, undocumented adults ages 26 to 49 continue to be excluded from Medi-Cal coverage even though they otherwise qualify. The governor proposes to close this eligibility gap by extending full-scope coverage to these adults no sooner than January 1, 2024. This expansion is estimated to cost $819.3 million ($613.5 million General Fund) in 2023-24, rising to $2.7 billion ($2.2 billion General Fund) at full implementation. These figures include the cost of providing In-Home Supportive Services to newly eligible adults who are anticipated to enroll in the program.
• Reduces the premiums that many Californians pay for Medi-Cal coverage. These are Medi-Cal enrollees whose incomes are “marginally above” the cut-off for no-cost Medi-Cal and who therefore must pay a monthly premium to access Medi-Cal services. The governor proposes to reduce these premiums for around 500,000 Medi-Cal enrollees, a group that includes pregnant women, children, and working people with disabilities. The proposed budget includes $53.2 million ($18.9 million General Fund) to implement this proposal in 2022-23, rising to $89 million ($31 million General Fund) annually thereafter.
• Calls for creating “equity payments” for Medi-Cal providers. The governor includes one-time funding of $400 million ($200 million General Fund) for equity payments in the Medi-Cal program. These payments are intended to promote patient-centered models of care, advance equity, and improve quality in children’s preventive care, maternity care, and integrated behavioral health care, according to the governor’s budget summary.
• Includes several proposals to maintain and improve availability of reproductive health care services. These proposals include reducing administrative barriers to medication abortion services; adding the human papillomavirus vaccine as a covered benefit under the Family PACT program, effective July 1, 2022; providing one-time funding of $20 million General Fund for scholarships and loan repayments to help boost the number of reproductive health care services providers; and providing one-time funding of $20 million to help reproductive health care facilities improve their security.
• Rescinds the decade-old 10% Medi-Cal payment reductions for eight categories of providers. These eight categories are: nurses of all types, alternative birthing centers, audiologists and hearing aid dispensers, respiratory care providers, select durable medical equipment providers, chronic dialysis clinics, non-emergency medical transportation providers, and emergency medical air transportation providers. The proposed budget includes $20.2 million ($9 million General Fund) in 2022-23 and $24 million ($10.7 million General Fund) annually thereafter to eliminate the 10% rate cut for these providers. The state rescinded this reduction for other categories of providers in prior years.
• Continues to envision the establishment of an Office of Health Care Affordability. The 2021-22 budget included funding for this new office, but legislation to establish it did not pass last year. This office would be charged with addressing health care cost drivers and improving affordability of health coverage.

Proposed Budget Sets in Motion Robust Medi-Cal Reform Initiatives

This year the administration is moving forward with implementing the ambitious Medi-Cal reform effort known as CalAIM (California Advancing and Innovating Medi-Cal) that was originally introduced in 2019. In late 2021, California received the federal authority needed to implement these reforms through the approval of the CalAIM Section 1115 demonstration and CalAIM Section 1915(b) waivers. The initiatives outlined build on previous pilot programs targeted to coordinate physical health, behavioral health, and social services in a patient-centered manner with the goal of improving health and well-being through Medi-Cal. CalAIM also aims to improve quality outcomes, reduce health disparities, reduce complexity across all delivery systems, and implement value-based initiatives and payment reform. 

The main goal of these changes is to better support millions of Californians enrolled in Medi-Cal — particularly those experiencing or at-risk of homelessness, children with complex medical conditions, children and youth in foster care, Californians involved with the justice system, and older adults — who often have to navigate multiple complex delivery systems to receive health-related services. 

The proposed budget allocates $1.2 billion ($435.5 million General Fund) in 2021-22, $2.8 billion ($982.6 million General Fund) in 2022-23, $2.4 billion ($876.4 million General Fund) in 2023-24, and $1.6 billion ($500 million General Fund) in 2024-25 for CalAIM reforms. Key initiatives added this year focus on justice-involved Californians, including:

• $50 million total funds ($16 million General Fund) in 2022-23 to implement CalAIM justice-related initiatives, and an additional $561 million over five years for related capacity building efforts. This funding supports resources and capacity efforts that will help implement mandated pre-release Medi-Cal application processes in county jails and youth correctional facilities. It also supports the coordination of targeted medical, behavioral health, social service, and reentry services for qualifying people who are incarcerated prior to their release. 
• $1.3 billion total funds over five years for the development of Enhanced Care Management (ECM) and Community Supports in CalAIM through the Providing Access and Transforming Health (PATH) initiative. PATH provides funding for capacity building to community-based organizations, counties, and other local providers as the implementation of Enhanced Care Management and Community Supports begins. These efforts also support effective pre-release care for justice-involved populations, particularly through the expansion of ECM, to close the gap for Whole Person Care pilot programs that are currently serving previously incarcerated Californians with complex needs.

Other CalAIM initiatives that are set to begin in 2022-23 include:

• The development of a Foster Care Model of Care to support the complex medical and behavioral health needs of foster youth. 
• Mandatory managed care enrollment for eligible beneficiaries that qualify for both Medi-Cal and Medicare.
• Required long-term care coverage by all managed care plans.

Proposed Budget Includes Funding to Launch Behavioral Health Initiatives

Behavioral health services — mental health care and/or treatment for substance use — are primarily provided by California’s 58 counties, with funding from the state and federal governments. Even before the pandemic, millions of Californians were coping with mental health conditions or substance use disorders and too many also confronted challenges in accessing care. As a result of the pandemic and economic recession, many Californians experienced stress, grief, isolation, depression, and other hardships. Long after businesses and schools reopen and economic recovery progresses, the work to support Californians’ mental health and well-being will be far from over.

The administration recognizes the toll on health and well-being that COVID-19 has taken, particularly on children and youth. This year, the administration proposes funding for the Children and Youth Behavioral Health Initiative, which aims to transform California’s behavioral health system for all children and youth in California. The administration’s budget proposal includes the following in 2022-23 as part of the Children and Youth Behavioral Health Initiative: 

• $450 million General Fund for school behavioral health partnerships and capacity to increase the number of students receiving behavioral health services in school settings.
• $429 million General Fund for evidence-based behavioral health practices. 
• $230 million General Fund for the Behavioral Health Services and Supports Platform and related e-Consult service and provider training.
• $87 million ($41 million General Fund) to implement dyadic services effective January 1, 2023. Dyadic behavioral health visits are provided for the child and caregiver or parent at medical visits and are intended to provide screening for behavioral health conditions and referrals for appropriate follow-up care.
  

The proposed budget also includes:

• $1.5 billion General Fund ($1 billion in 2022-23 and $500 million in 2023-24) for behavioral health bridge housing to support people experiencing homelessness and serious behavioral health conditions. The funding would be used to purchase and install tiny homes and provide operational supports in bridge housing settings. See the Homelessness and Housing section for more information. 
• $135.1 million ($67.6 million Mental Health Services Fund and $67.5 million federal funds) to extend Medi-Cal provider training to treat and prevent Adverse Childhood Experiences, which are defined as traumatic events that occur before age 18. This funding would be available over a three-year period.
• $108 million ($16 million General Fund) to increase access to community-based mobile crisis intervention services through a new mandatory Medi-Cal benefit as soon as January 1, 2023. The benefit would be implemented through county behavioral health delivery systems by mobile crisis teams in the community. Under the American Rescue Plan Act of 2021, this benefit qualifies for 85 percent federal funding.
• $96 million General Fund to expand the medication assistance treatment program. Medication-assisted treatment is the use of medications as well as counseling and behavioral therapies to provide a “whole-patient” approach to treating substance use disorders.
• $93 million General Fund in 2021-22 and $571 million General Fund ongoing to support early stabilization and community care coordination as well as the expansion of diversion and community-based restoration capacity for individuals who have been determined by a court to be incompetent to stand trial.
• $86 million one-time opioid settlement funds for opioid prevention and treatment. Of this amount, $50 million would be used for a public awareness campaign targeted towards youth on opioids and fentanyl risk, $26 million would be used for provider training on opioid treatment, $5 million would be dedicated to opioid surveillance, and $5 million would be used to distribute naloxone to homeless service providers. 
• $7.5 million General Fund ($6 million ongoing) to improve emergency response for individuals experiencing a mental health crisis. This funding would be used to implement the national suicide and mental health crisis phone number (988) and system.

These investments in our behavioral health system are critical, especially now. The governor’s proposal to transform the behavioral health system for children and youth would increase access to prevention and early intervention services. Expanding access to behavioral health services helps Californians thrive and it can also reduce hospitalization or even incarceration due to behavioral health conditions.

Homelessness & Housing

Governor’s Proposals Focus on Encampments and Behavioral Health Needs

Everyone needs a safe place to live as the most basic foundation for health and well-being. Yet more than 161,000 Californians were experiencing homelessness at the last point-in-time count. Homelessness has devastating effects on individuals’ physical health and mental health and creates serious barriers to maintaining a job or participating in other aspects of community. There are also deep inequities in who experiences homelessness in California, with Black, American Indian, and Pacific Islander Californians disproportionately affected, as well as LGBTQ+ individuals.

The 2021-22 state budget included approximately $12 billion to address homelessness over the 2021-22 and 2022-23 fiscal years. The governor’s current budget proposal adds another $2 billion over two years. New proposals focus on two areas:

• $500 million one-time General Fund to address homeless encampments, specifically “for jurisdictions to invest in short- and long-term rehousing strategies for people experiencing homelessness in encampments.” More details about allowed uses of these funds will be important for understanding whether these efforts would effectively and respectfully address the housing and support service needs of Californians living in encampments.
• $1.5 billion General Fund over two years for immediate housing and treatment services for unhoused individuals with serious behavioral health issues. These funds would be administered through the Department of Health Care Services’ Behavioral Health Continuum Infrastructure Program, and would address immediate needs through interim housing such as tiny homes or other bridge housing settings such as assisted living facilities (see the Behavioral Health section). While some interim housing is needed within the homeless services system to meet urgent housing needs, the most effective approach to addressing homelessness among individuals with serious mental health needs combines supportive services with permanent housing, which can include leased units as well as deed-restricted units.

Homelessness intersects with many other issues and systems, and the governor’s budget proposal includes items in various other areas that aim to prevent homelessness or address the needs of specific subpopulations of unhoused individuals, particularly individuals with serious behavioral health issues and individuals exiting incarceration. These proposals include:

• Adding mobile mental health and substance use crisis services as a new Medi-Cal benefit (see the Behavioral Health section).
• Providing transitional reentry housing for adults leaving state prisons who are at risk of being unhoused, by continuing the Returning Home Well Program (see the State Corrections section).
• Connecting adults leaving incarceration with Medi-Cal health coverage and encouraging “warm hand-offs” to behavioral health services, to reduce the risk of poor outcomes including homelessness, as part of CalAIM (see the CalAIM section).
• Coordinating health care with behavioral health and social services for Medi-Cal participants, through the Enhanced Care Management and Community Supports components of CalAIM (see the CalAIM section).
• Increasing state capacity to serve individuals with serious mental health issues determined incompetent to stand trial (IST) (see the Behavioral Health section).

Governor Proposes $2 Billion in New One-Time Resources to Increase Affordable Housing

Safe and stable housing is a fundamental basic need, but many Californians struggle to maintain stable housing because of unaffordable housing costs. Renters, people with low incomes, Black and Latinx Californians, and Californians who are undocumented are especially likely to pay an unaffordable amount for housing. As of December 2021, about 1 in 5 California adult renters with household incomes below $50,000 reported being behind on rent payments.

The governor’s budget proposal includes $1.5 billion one-time General Fund to boost funding in several programs that support affordable housing development and preservation, with a focus on infill locations near jobs, schools, and other amenities in order to also address climate and equity goals. These investments include:

• $500 million for the Infill Infrastructure Grant program ($225 million in 2022-23 and $275 million in 2023-24) administered by the Department of Housing and Community Development (HCD).
• $300 million for the Affordable Housing and Sustainable Communities program ($75 million in 2022-23 and $225 million in 2023-24) for infill and compact development that reduces greenhouse gas emissions. These funds are proposed in addition to the annual cap and trade auction funds that support this program, projected at $314 million for 2022-23.
• $100 million for affordable housing development and adaptive reuse on excess state land ($25 million in 2022-23 and $75 million in 2023-24).
• $100 million for per-unit adaptive reuse incentive grants ($50 million in 2022-23 and $50 million in 2023-24) to be paired with other state housing funds to remove barriers to converting sites to residential use, prioritizing sites in downtown locations.
• $200 million for loans to develop mixed-income rental housing ($50 million in 2022-23 and $150 million in 2023-24), through the California Housing Finance Agency (CalHFA). 
• $200 million for the Portfolio Reinvestment Program to preserve at-risk affordable housing in downtown areas ($50 million in 2022-23 and $150 million in 2023-24), administered by HCD.
• $100 million for the Mobilehome Park Rehabilitation and Resident Ownership Program ($25 million in 2022-23 and $75 million in 2023-24), administered by HCD, to preserve and develop affordable mobilehome parks.

The proposed budget also allocates an additional $500 million for Low-Income Housing Tax Credits (LIHTC), continuing the annual boost to the LIHTC allocation for the fourth year running. Following through on a commitment from 2021-22, the budget also includes $750 million one-time General Fund for public colleges and universities to develop or acquire housing for low-income students, as the second installment of a total proposed $2 billion over three years.

In addition to these funding proposals, the governor proposes to help local governments meet state mandated housing and climate goals by working “in partnership with local governments… to identify land across California that is well situated for diverse, new downtown-oriented housing types.” This process is expected to identify sites that would be eligible for state infill development funding and streamlining opportunities.

Not included in the governor’s proposal is any funding for emergency rental assistance for struggling renters, despite the fact that requests for help from California’s COVID-19 Emergency Rental Assistance Program now total more than the $5.2 billion in federal funds initially provided to the state. California may receive some additional federal funding for this purpose, but if federal funds do not close the gap, many renters with low incomes will risk losing their housing.

Economic Security

Administration Proposes Ending Work Requirement for Young Child Tax Credit

California’s Young Child Tax Credit provides up to $1,000 annually to help families with low incomes and young children pay for basic needs, such as food and diapers. More than 8 in 10 people who are eligible to benefit from this tax credit are people of color, and nearly 6 in 10 are women. Last year, this credit provided an average of $931 to over 420,000 families. To qualify for the credit, families must have annual earnings between $1 and $30,000 and at least one child age 5 or younger. Families who do not have work earnings are excluded from the credit.

The administration proposes ending the work requirement for the Young Child Tax Credit, allowing families with no annual work earnings to qualify for a $1,000 credit as long as they meet other eligibility rules. Budget documents state that “young children living in households with no earned income are just as deserving of being protected from poverty as are children living in households with low income.” This proposal is projected to cost $55 million annually, implying that they expect 55,000 families to newly qualify for the credit.

Work requirements have a long racist and sexist history in the United States and contribute to racial and gender inequities in who lives in poverty. By removing a racist and sexist barrier to the Young Child Tax Credit, this proposal will increase equitable access to one of California’s most critical cash supports for families with children.

This proposal would likely make California the first state to end the work requirement for a state child tax credit. Federal policymakers temporarily ended the work requirement for the federal Child Tax Credit last year, but the Senate has been unable to secure enough votes to approve legislation that the House passed last fall that would end the work requirement permanently.

Governor Newsom also proposes annually adjusting the Young Child Tax Credit for inflation so that it keeps up with rising prices starting in the 2022 tax year. The credit has not been adjusted for inflation since it was created in 2019, and without annual inflation adjustments, it will lose value over time, helping families less each year. California’s other refundable tax credit, the California’s Earned Income Tax Credit (CalEITC), has been adjusted for inflation each year since it was created in 2015. The administration estimates that this proposal will cost $19 million for the 2022 tax year. 

Administration Proposes Creating Tax Credit for Former Foster Youth

The proposed budget includes a new refundable tax credit for former foster youth modeled after the Young Child Tax Credit. Specifically, this credit would provide a $1,000 credit to young adults ages 18 to 25 who were in the foster care system at some point at age 13 or older and would otherwise qualify for California’s Earned Income Tax Credit (CalEITC). The administration estimates that this new credit will cost $20 million annually, implying that they expect it to benefit 20,000 young adults each year.

This proposal would reduce poverty among current and former foster youth, increasing their long-term financial health, according to John Burton Advocates for Youth. Transition-age foster youth experience high rates of poverty due to high unemployment and low annual earnings. A Santa Clara County pilot program that provided free tax assistance to current and former foster youth showed how refundable tax credits, like the CalEITC, are important tools for boosting the incomes of transition-age youth, helping them to maintain housing, stay in school, and pay for basic needs like food. 

The Proposed Budget Makes No Improvements to the CalEITC

California’s Earned Income Tax Credit (CalEITC) is a refundable state tax credit that helps millions of families and individuals with low earnings from work pay for basic needs, such as food. The administration does not include any proposals to strengthen or expand the CalEITC.

Advocates for the CalEITC would like California to increase the size of the credit for workers without dependents in their home, who comprise more than 7 in 10 CalEITC recipients. Nearly half of these individuals receive less than $100 from the CalEITC and many do not qualify for the federal EITC despite their low earnings.

Governor’s Proposals Expand Support for Immigrants

California has the largest share of immigrant residents of any state and is home to an estimated 2 million to 3.1 million individuals who are undocumented. Half of all California workers are immigrants or children of immigrants. About 1 in 4 of these immigrant workers are employed in an industry highly affected by the COVID-19 economic shutdown. Among California’s undocumented workers, approximately 1 in 3 are employed in an industry highly affected by the COVID-19 economic shutdown, according to Budget Center estimates.

The governor’s proposal builds on important supports provided to immigrants in the 2021-22 budget. Specifically the 2022-23 proposed budget:

• Expands comprehensive Medi-Cal coverage to all undocumented Californians starting no sooner than January 2024. In recent years, California has expanded eligibility for comprehensive Medi-Cal coverage to undocumented immigrants up to age 25 who otherwise qualify for the program. The 2021 budget made adults age 50 and older eligible for Medi-Cal coverage starting May 2022. The governor’s budget proposes to expand comprehensive Medi-Cal coverage to undocumented adults ages 26 to 49 starting no sooner than January 1, 2024. The expansion in the proposed budget is estimated to cost $819.3 million ($613.5 million General Fund) in 2023-24, rising to $2.7 billion ($2.2 billion General Fund) at full implementation, including In-Home Supportive Services (IHSS) costs. (See Coverage, Affordability, and Access section.)
• Ends the exclusion of undocumented adults, age 55 and older, from food assistance program. Administrative estimates show an additional $40 million General Fund in 2022-23 to continue the expansion of the state-funded basic nutrition assistance through the California Food Assistance Program (CFAP) to undocumented adults over the age of 55. CFAP provides state-funded food assistance to “qualified” immigrants who are not eligible for CalFresh, California’s Supplemental Nutrition Assistance Program (SNAP). While the proposal extends CFAP to adults over the age of 55, it pares back the framework for broader CFAP expansion in the current year (2021-22) budget. (see Food Assistance section.) 
• Provides funding to support newly arrived migrants and communities near the California and Mexico border. $74 million one-time General Fund is set aside for the California Department of Public Health for “humanitarian efforts,” including sheltering, testing, vaccines, and support services for newly arrived migrants.
• Invests in immigrant workforce development programs. The proposal includes $30 million to expand the English Language Learner pilots in the Integrated Education and Training Programs, $20 million for the Employment Training Panel to expand workplace literacy training, and $10 million to expand earn-and-learn community change career pathways for community college students, including immigrant students.
• Supports undocumented students at California Community Colleges. The governor’s proposal allocates $20 million one-time Proposition 98 for emergency financial assistance to eligible AB 540 students.

The governor’s budget proposal misses an opportunity to extend temporary economic support through additional stimulus payments to Californians who are undocumented and have been excluded from most support programs, including standard unemployment insurance as well as expanded COVID-19 federal relief. In the 2021-22 budget, the governor included initial resources and committed to expanding CFAP to “individuals regardless of immigration status”. The administration’s proposal to expand this support to adults age 55 and older is an important step, but falls short of ensuring all Californians have access to food assistance. More than half of children in undocumented immigrant families live in poverty. Policymakers can end this xenophobic and racist exclusion of immigrants from a crucial support they need to avoid hunger. Prioritizing the urgent needs of undocumented immigrants and their families is an important opportunity for California’s policymakers to make our support systems more equitably inclusive, to make our state’s economy more resilient, and to lead in this time where the state has the resources.

Proposed Budget Continues CalWORKs Investments But Falls Short on Grants

The California Work Opportunity and Responsibility to Kids (CalWORKs) program provides modest cash assistance for children from low-income households while helping parents overcome barriers to employment and find jobs. Even before the COVID-19 crisis, CalWORKs primarily served children of color, who faced higher rates of economic insecurity than did white children. As millions of California workers – especially workers of color – lost their jobs or saw reduced wages due to a long-term public health emergency and recession, CalWORKs is a particularly critical source of support.

The governor’s proposed budget:

• Increases the maximum CalWORKs grant but does not lift all CalWORKs children out of deep poverty. Monthly CalWORKs grants are adjusted according to the number of people in the household who are eligible for CalWORKs. At least one family member is ineligible for cash assistance in about 55% of CalWORKs cases because they have exceeded the 48-month time limit (extended to 60 months in 2020-21), have not met work requirements, or due to their immigration status. After over a decade of inadequate grants, state policymakers in recent years have raised the maximum CalWORKs grant above the deep poverty threshold (50% of the federal poverty line) for many children in CalWORKs. However, these prior increases left children who share resources with ineligible family members living in deep poverty. Even as the administration proposes a 7.1% increase to the maximum grant (with an estimated cost of $200.7 million in 2022-23), the proposed budget continues to keep these children well below the deep poverty threshold.

The proposed budget also makes changes to child support collections for former CalWORKs families (see Child Savings Accounts and Child Support section).

Budget Proposal Implements Child Savings Accounts and Boosts Child Support Pass-Through

The 2021-22 budget included nearly $2 billion in one-time funds to establish college savings accounts for public school students in grades 1-12 who are defined as low-income under the state’s K-12 Local Control Funding Formula, with larger investments for foster youth and students experiencing homelessness. This CalKIDS program (California Kids Investment and Development Savings Program) is administered through the ScholarShare Investment Board. The governor’s proposed budget begins the ongoing implementation of this plan, allocating $170 million ongoing General Fund to add savings accounts for incoming first-grade cohorts of students, while adding $5 million one-time and $5.2 million ongoing General Fund to support outreach and implementation costs. The existing CalKIDS program also establishes college savings accounts for all California newborns.

The proposed budget also redirects more collected child support to former CalWORKs parents. When one CalWORKs parent has primary custody of a child, the non-custodial parent must provide child support payments. For formerly assisted families, outstanding child support debt that is collected does not go to the families but rather goes to the state, county, and federal governments as “reimbursement” for the costs associated with the CalWORKs program. The administration now proposes to allow former CalWORKs families to receive the money themselves. Under this change, these families will receive an estimated annual total pass through of $187 million. State leaders should build on this change to end racist policies that block Black, Latinx, and other families from economic security by also passing through 100% of child support payments to current CalWORKs and Medi-Cal recipients and ending the state’s collection of interest on child support debt.

Budget Proposal Pares Back Plan to Provide Food Assistance to Immigrants

The governor’s budget proposal includes a number of provisions to combat food insecurity in California. This includes $50 million one-time General Fund for the CalFood program, which provides emergency resources for food banks. Food banks have been a critical resource to curb food hardship during the pandemic. 

Additionally, administrative estimates show $40 million General Fund in 2022-23 to continue the expansion of the state-funded basic nutrition assistance through the California Food Assistance Program (CFAP). The 2021-22 budget agreement included initial resources to expand CFAP to undocumented Californians who are excluded from the federal Supplemental Nutrition Assistance Program, known as CalFresh in California. However, the budget proposal would limit this expansion to just undocumented Californians who are age 55 or older. More than half of children in undocumented immigrant families live in poverty. Completing this expansion to include Californians of all ages who face food insecurity, regardless of immigration status, is necessary to truly dismantle racist and xenophobic barriers and to address gaps in federal aid. 

Finally, in order to maintain the governor’s pledge to support the caregiving economy, the final budget agreement should boost state support for child care providers offering free meals to children and families through the federal Child and Adult Care Food Program. Currently, state law includes racist and sexist pay penalties that offer less state support per meal to child care providers — overwhelming women and disproportionately women of color — than to public schools.

Governor Assumes a 24% Increase to State SSP Grants in 2024

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

State leaders changed course last year and adopted a substantial (24%) increase to SSP grants that took effect on January 1, 2022. The maximum monthly SSP grant for individuals jumped from $160.72 to $199.21. For couples, the maximum monthly SSP grant rose from $407.14 to $504.64. Also as part of the 2021-22 budget package, state leaders committed to providing an additional increase to SSP grants in January 2024, subject to funding being provided in the 2023-24 state budget.

The governor:

• Does not call for an increase to the state’s portion of SSI/SSP grants in 2022-23. Even with the 24% increase to SSP grants that took effect on January 1, the maximum SSP payment for individuals — $199.21 — falls far short of the level it would have reached — more than $360 — if state leaders had consistently adjusted this grant for annual changes in the cost of living since 2008, according to Budget Center calculations. In other words, grants have not kept pace with the cost of living in California due to state policy choices. Nonetheless, under the governor’s proposed budget, the state’s SSP portion of SSI/SSP grants would remain frozen throughout the upcoming 2022-23 fiscal year.
• Assumes the state’s SSP portion of SSI/SSP grants will increase by an additional 24% in 2023-24, as envisioned in the 2021-22 budget package. As noted above, state leaders committed — as part of the 2021-22 budget package — to providing an additional SSP grant increase during the 2023-24 fiscal year. Under the governor’s assumption of a 24% increase, the maximum SSP grant for individuals would rise from $199.21 to about $247 on January 1, 2024. For couples, the maximum monthly SSP grant would increase from $504.64 to nearly $626. The administration estimates a half-year cost of $296 million General Fund in 2023-24, rising to a full-year cost of $593 million in 2024-25.

Proposal Funds New Child Care Spaces With Federal COVID-19 Relief Dollars

The governor’s proposed budget uses federal COVID-relief dollars to increase the number of subsidized child care spaces across the state. Since the beginning of the pandemic, California has received more than $5 billion in one-time federal COVID-relief dollars specifically for child care meant to stabilize children, working parents, and providers during pandemic. The administration proposes to use $823.7 million dollars — roughly one-third of the remaining relief funds — for 36,000 additional child care spaces. 

Other child care investments in the proposed budget include:

• $35.6 million for support programs. This includes $25 million for the California Child Care Initiative Project to increase licensed family child care capacity for infants and toddlers in areas without providers and $10.6 million for the California Infant and Early Childhood Mental Health Consultation program.
• $7.9 million for early care and education data systems. This includes $4.8 million General Fund for the initial design of a child care data system, as well as $3.1 million federal funds to support early childhood data initiatives.

COVID-19 and its consequences are far from over, yet the budget proposal fails to maintain policy changes implemented in the past year to support families and providers during the pandemic, such as waiving family fees for working parents and supporting providers when the virus impacts attendance or forces sites to temporarily close. 

Finally, state and federal leaders have never provided enough funding to provide subsidized child care for all children in eligible families or to pay providers offering subsidized care fair and just rates for this critical work. President Biden’s Build Back Better plan proposes significant new investments to expand subsidized child care, but the ability of Congress to pass this piece of legislation is uncertain. In order to stabilize the subsidized child care system during the current crisis, ensure continuity of care for families, and support the caregiving economy, state leaders will need to commit to additional, ongoing funding in the 2022-23 fiscal year and beyond.

Education

Proposed Early Learning Plan Continues Implementation of Transitional Kindergarten

The 2021-22 budget agreement included a multi-year plan to expand the state’s existing transitional kindergarten program (TK) to all four-year-olds in the state. TK is a two-year kindergarten program offered at local educational agencies (LEA) to children turning five between September 2 and December 2 of each year. The proposed budget includes more than $1 billion for the second year of the multi-year plan, including:

• $639.2 million General Fund to expand TK to younger children. Specifically, the eligibility window would extend to all children turning five between September 2 and February 2 — instead of December 2 — a two-month extension. The General Fund dollars would be shifted to the Proposition 98 guarantee, permanently increasing funding for TK-12 schools and community colleges, while restricting General Fund spending by the same amount for other priorities.
• $383 million Prop. 98 to add additional staff to TK classrooms. Current student-to-teacher staffing ratios in the TK program do not reflect research-based ratios for high-quality preschool programs. Hiring additional staff will more closely align staffing ratios with the California State Preschool Program (CSPP) — offered at LEAs and community-based organizations for children from families with low and moderate incomes — but still does not align with high-quality benchmarks. 

The governor’s budget proposal also makes significant changes to the CSPP. First, the budget proposal would require state preschool providers to ensure that at least 10% of children in their care have a disability. Second, providers would be required to offer additional supportive services for children who are dual language learners. To offset these costs, the proposal provides an additional $308.4 million ($197.8 million Prop. 98 and $110.6 million General Fund) to increase payment rates for providers providing care to children with disabilities and children who are dual language learners. The budget also includes $500 million one-time Prop. 98 for the Inclusive Early Educational Expansion Program, which provides funds to local education agencies to build or modify facilities. Finally, the proposed budget would change eligibility rules, so that providers could enroll two-year-olds, if all older children are served. In addition, once a family is determined to be eligible, the 12-month eligibility period would be extended to 24 months. Children with disabilities will be categorically eligible for the CSPP.

Increased Revenues Boost the Minimum Funding Level for K-14 Education

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 2022-23 Prop. 98 funding level of $102 billion for K-14 education, $8.2 billion above the 2021-22 funding level of $93.7 billion estimated in the 2021-22 budget agreement. The Prop. 98 guarantee tends to reflect changes in state General Fund revenues and estimates of 2020-21 and 2021-22 General Fund revenue in the proposed budget are higher than those in the 2021-22 budget agreement. The governor’s budget proposal assumes a 2021-22 Prop. 98 funding level of $99.1 billion, $5.3 billion above the level assumed in the 2021-22 budget agreement, and a $95.9 billion 2020-21 Prop. 98 funding level, $2.5 billion above the level assumed in the 2021-22 budget package. Following an agreement in the 2021-22 budget package, the 2022-23 budget proposal would increase the percentage of General Fund revenues guaranteed for the Prop. 98 guarantee in so-called “Test 1” years from 38.02% to approximately 38.4% to accommodate enrollment increases due to the expansion of transitional kindergarten. This “rebenching” of the Prop. 98 guarantee would increase the Prop. 98 minimum funding level by $639.2 million in 2022-23, reflecting the addition of an estimated 56,000 transitional kindergarten students. 

Based on projections in the governor’s budget, the state is required to deposit $9.7 billion into the Public School System Stabilization Account (PSSSA) – the state budget reserve for K-12 schools and community colleges – $3.1 billion in 2020-21, $3.6 billion in 2021-22, and $3.1 billion in 2022-23 (see Reserves section). Because the PSSSA balance is projected to exceed 3% of the total K-12 share of the Prop. 98 minimum funding level in 2021-22, current law would prevent K-12 school districts from maintaining more than 10% of their budgets in local reserves beginning in 2022-23.

Significant Funding Boost Proposed to Expand Learning Opportunities for Students

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 roughly 6 million students in grades kindergarten through 12. The governor’s proposed budget significantly increases ongoing funding for the Expanded Learning Opportunities Program and the state’s K-12 education funding formula – the Local Control Funding Formula (LCFF) – and one-time funding for several programs such as school transportation. Specifically, the governor’s proposed budget:

• Increases ongoing funding for the Expanded Learning Opportunities Program (ELOP) by $3.4 billion. The 2021-22 budget agreement provided $1.8 billion in initial funding for the ELOP to provide additional learning time for students before or after school, as well as outside of the traditional school year, and allocated higher per pupil amounts for school districts, charter schools, and COEs with concentrated poverty above 80%. In addition to increasing ongoing funding for the ELOP, the governor’s budget proposes $937.4 million in one-time funding to integrate arts and music enrichment opportunities into the ELOP as well as to support the acquisition of infrastructure and equipment. 
• Increases LCFF funding by approximately $3.3 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 proposal provides $2.1 billion to fund a 5.33% cost-of-living adjustment (COLA) for the LCFF. Because many school districts are experiencing reductions in average daily attendance (ADA) and LCFF base grants are calculated based on ADA, the governor also proposes to change “the LCFF calculation to consider the greater of a school district’s current year, prior year, or the average of three prior years’ ADA.” The administration estimates $1.2 billion in ongoing costs to make this change. According to the Assembly Budget Committee, total LCFF funding would reach $70.5 billion in 2022-23.
• Provides $1.5 billion in one-time funding to support career pathway programs. The governor’s proposal would provide these dollars over four years to support programs focused on technology, health care, education, and climate-related fields. The governor’s proposal notes that “these programs are predicated on developing local partnerships” that include school systems, higher education institutions, and employers.
• Provides $1.5 billion in one-time funding for school transportation. The governor’s proposal would provide these dollars over three years to mitigate the environmental impact of school bus fleets. The governor’s proposal would prioritize funding for small and rural school districts, charter schools, and COEs and those with high-concentrations of English learners, foster youth, and students from low-income families. 
• Provides $1.3 billion in one-time non-Prop. 98 General Fund for K-12 school facilities. Because the administration expects Prop. 51 bond funding will be exhausted in 2022-23, the proposed spending plan provides this funding in 2022-23 and also proposes $925 million in one-time General Fund spending in 2023-24 to support new construction and modernization projects through the School Facilities Program. 
• Provides more than $1 billion to expand school nutrition programs. The governor’s proposal provides $596 million to fund a requirement included in the 2021 budget agreement that all public schools provide two free meals per day to any student regardless of income eligibility in 2022-23. The governor’s proposal requires all schools eligible for a federal provision to fund universal free meals – the “Community Eligibility Provision” – to apply for that funding in order to maximize reimbursement by the federal government and then commits the state to pay for any unreimbursed costs. The governor also proposes $450 million in one-time funding over three years for kitchen infrastructure and equipment and $30 million in one-time non-Prop. 98 General Fund dollars over two years to expand farm to school demonstration projects.
• Provides $700 million in one-time funding to create an early literacy initiative. The governor’s proposals would provide $500 million over five years in grants for literacy coaches and reading specialists in “high-needs schools” to assist struggling readers and $200 million to establish a grant program to create or expand multi-lingual libraries. 
• Increases ongoing funding for special education by $500 million. The governor’s proposal includes several changes to the special education funding formula such as calculating base funding allocations at the local educational agency (LEA) level rather than the special education local plan area (SELPA) level and allocating mental health funds to LEAs rather than SELPAs. 
• Provides $500 million in one-time funding to expand “dual enrollment.” Dual enrollment allows high school students to take college-level courses that count for high school graduation and college credit. The governor’s proposal would provide these dollars over four years to increase student access to “dual enrollment opportunities that are also coupled with student advising and support services.”
• Provides $295 million to fund COLAs for non-LCFF programs. The governor’s proposed budget funds a 5.33% COLA for several categorical programs that remain outside of the LCFF, including special education, child nutrition, and American Indian Education Centers.

Proposal Misses Opportunity to Provide More Direct Support to CCC Students

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

The proposed budget includes $325 million Proposition 98 to support the CCC’s goals of expanding opportunities for students to transfer to four-year institutions, complete a degree in a timely manner, and to better align the system with the state’s workforce needs as part of their “multi-year roadmap.” Notable investments include:  

• $105 million one-time to support the implementation of a common course numbering system across all community colleges. 
• $100 million ongoing for students that are now eligible for the Student Success Completion Grant as part of the Cal Grant expansion (see Student Aid section for further details). 
• $65 million one-time for colleges to implement legislation that ensures that students are placed on a transfer pathway for their intended major. 

Moreover, the budget proposes to continue supporting CCC’s efforts to increase enrollment and retention rates (CCCs have seen a significant decrease in enrollment from pre-pandemic levels), provide emergency financial assistance to some students who are undocumented, and provide funding for deferred facility maintenance. 

Specifically, the proposed spending plan: 

• Provides $409.4 million ongoing for a cost-of-living adjustment (COLA) for apportionments. The proposal represents a 5.33% cost-of-living adjustment (COLA). 
• Includes $387.6 one-time for deferred maintenance. These funds are intended to make progress in clearing a backlog of more than $600 million in deferred maintenance and also support energy efficiency projects. 
• Provides $200 million ongoing to expand healthcare coverage for part-time faculty. This proposal expands the Part-Time Faculty Health Insurance Program to allow community college districts to expand coverage. 
• Allocates $150 million in one-time funds to support student retention and enrollment efforts. This investment is intended to continue to fund strategies to increase retention and enrollment rates — the 2021-22 enacted budget provided $120 million one-time for the same purposes. 
• Includes $130 million one-time over three years to support vocational pathways in healthcare for English language learners. $30 million is for 2022-23, $50 million is for 2023-24, and $50 million is for 2024-25. 
• Allocates $20 million one-time for emergency financial assistance grants for AB 540 students. Under California law AB 540, certain students classified as nonresident (including students who are undocumented) are exempt from paying nonresident tuition. This proposal includes eligibility requirements that are still unclear. 

The proposed budget misses an opportunity to provide additional direct support to students at the community colleges. The pandemic has had severe impacts on community college students — particularly for students with low-incomes and students of color — which is evidenced in the large declines in enrollment from pre-pandemic levels. Additionally, the administration’s failure to enact Cal Grant reform (see Student Aid section) means that additional investments are necessary to support student needs at the community colleges.

Proposed Budget Provides Multi-Year Investments in the CSU and the UC

California supports two public four-year higher education institutions: the California State University (CSU) and the University of California (UC). The CSU provides undergraduate and graduate education to roughly 477,000 students on 23 campuses, and the UC provides undergraduate, graduate, and professional education to about 290,000 students on 10 campuses.

For the CSU, the administration proposes a multi-year budget through 2026-27 focused on increasing enrollment, raising graduation rates and closing graduation gaps, increasing affordability of on-campus housing, and halving the cost of instructional materials by 2025. These investments include:

• $304.1 million ongoing General Fund, including $211.1 million for a 5% increase in operating costs, $81 million to increase undergraduate enrollment for California residents, and $12 million to support foster youth.

For the UC, the administration also proposes a multi-year budget through 2026-27 focused on increasing enrollment, raising graduation rates and closing graduation gaps, reducing the cost of instructional materials, and achieving debt-free education by 2030. These investments include:

• $304.1 million ongoing General Fund, including $200.5 million for a 5% increase in operating costs, $98.8 million to increase undergraduate enrollment for California residents and to offset revenue losses from replacing out-of-state students with in-state students, and $6 million to support foster youth.

Proposed Budget Invests in Cal Grants and Middle Class Scholarship

Cal Grants are the foundation of California’s financial aid program for students with low and middle incomes pursuing higher education in the state. Cal Grants provide aid for tuition and living expenses that do not have to be paid back. The budget summary estimates that over 500,000 financial aid grants will be awarded to students in the 2022-23 academic year. 

In order to support California’s higher education students and increase college affordability, the proposed budget includes:

• $515 million additional ongoing General Fund for the Middle Class Scholarship. This program supports students at the University of California (UC) and at California State University (CSU), including students who are pursuing a teaching credential. Additional funding targets reducing students’ total cost of attendance.
• $300 million one-time General Fund for the Learning-Aligned Employment program. This program, established in the 2021-22 budget, funds UC, CSU, and California Community College (CCC) students to partner with external employers to promote career development and professional networking opportunities for students, prioritizing students from underrepresented communities, with a particular focus for STEM fields.
• $100 million additional ongoing Proposition 98 for the Cal Grant entitlement program. The 2021 Budget Act eliminated the age and time out of high school requirements from the Cal Grant entitlement program that have barred many CCC students from receiving an award. This funding is expected to support an estimated 170,000 awards to newly eligible CCC students in the 2022-2023 academic year.
• $20 million one-time Proposition 98 for emergency financial assistance to support eligible AB 540 students, including undocumented students at CCCs.

The governor can continue to support students with low and middle incomes by pursuing reforms to Cal Grant that streamline and eliminate remaining barriers that prevent more students from accessing state financial aid. In addition, more investments are needed to adequately address non-tuition costs. Ensuring Californians have access and resources to attend and thrive in the state’s higher education institutions broadens opportunities for individuals and families and strengthens our state’s workforce to drive long-term economic growth.

Justice System

Governor Does Not Propose to Close Additional State Prisons

More than 99,500 adults who have been convicted of a felony offense are serving their sentences at the state level, down from a peak of 173,600 in 2007. American Indian, Black, and Latinx Californians are disproportionately represented in state prisons — a racial disparity that reflects implicit bias in the justice system, structural disadvantages faced by these communities, and other factors. Among all incarcerated adults, most — 94,674 — are housed in state prisons designed to hold fewer than 82,000 people. This level of overcrowding is equal to 116% of the prison system’s “design capacity,” which is below the prison population cap — 137.5% of design capacity — established by a 2009 federal court order. California also houses over 4,800 people in facilities that are not subject to the cap, including fire camps, in-state “contract beds,” and community-based facilities that provide rehabilitative services. The sizable drop in incarceration has resulted both from 1) a series of justice system reforms enacted by voters and state leaders and 2) changes adopted in 2020 to further reduce prison overcrowding in response to the COVID-19 pandemic, such as suspending intakes from county jails and implementing early releases.

The proposed budget:

• Does not call for the closure of additional state prisons. California recently closed the state prison in Tracy and was on track to shut down the Susanville prison by the end of June 2022 until litigation filed by the city of Susanville halted the process. In the meantime, the governor does not propose to target more prisons for closure even though the Legislative Analyst’s Office estimates that California could close as many as five prisons over the next several years. Closing additional prisons, particularly those with costly, decaying infrastructure, would not only generate substantial state savings but also continue to reduce our state’s overreliance on incarceration, which is not necessary to make neighborhoods and communities safer.
• Anticipates that the prison population will temporarily rise before resuming its long-term decline by 2024-25. The prison population is estimated to increase by about 8,300 by 2022-23, primarily because the state has been transferring people to prison who were temporarily being held in county jails in order to reduce the risk of COVID-19 transmissions in the state prison system. However, current estimates also suggest that the prison population will soon resume its long-term decline, falling to roughly 100,400 by 2024-25.
• Expands access to substance use treatment in prisons. The governor proposes to expand the Integrated Substance Use Disorder Treatment Program, which was implemented in 2020 to deliver treatment and interventions to incarcerated adults with substance use disorders. This expansion would be funded with $126.6 million General Fund in 2022-23, rising to $162.5 million ongoing.
• Proposes to continue providing emergency housing services to adults who are at risk of being unhoused when they leave prison. The Returning Home Well Program, which was created in response to the COVID-19 pandemic, would continue for another three years at a cost of $10.6 million General Fund annually. These resources would “support continuation of the program while also providing the opportunity to assess the ongoing needs of the release population,” according to the governor’s budget summary.
• Increases incarcerated adults’ access to higher education through a partnership with the California State University. Bachelor’s Degree Programs would be created at seven prisons for an initial cost of $5 million General Fund and an ongoing cost of $4.7 million. These programs would be available to incarcerated adults who successfully complete their prison-based community college program.

Proposed Infrastructure Increases to Courts and Juvenile Facilities

All California counties play a key role in the state’s local correctional system by operating jails and supervising adults and juveniles on probation. While many counties have continued to follow COVID-19 emergency guidelines, including through temporarily lowering bail schedules and reducing the number of people held in custody, county jails still house roughly 59,000 adults on a given day. Since 2011, state-to-county “realignment” made counties responsible for managing certain adults who had traditionally been housed in state prisons and supervised by state parole officers upon their release. Recently, juvenile justice realignment also transferred responsibility for youth who are wards of the state to counties. The California Department of Corrections and Rehabilitation Division of Juvenile Justice (DJJ) will no longer house juveniles, with limited exceptions, and is scheduled to close on June 30, 2023. The local correctional system is also accompanied by California’s 58 county-based trial courts that supplement the foundation of the state’s judicial branch – ruling on both civil and criminal cases. 

This year the administration proposed focusing on continuing efforts to support current programs and funding additional infrastructure projects, including:

• $263 million ($135.8 million General Fund and $127.2 million Public Buildings Construction Fund) for the acquisition or building of five courthouses. These will be located in the counties of Fresno, Solano, Los Angeles, Plumas, and San Luis Obispo. 
• $100 million one-time General Fund for the Board of State and Community Corrections to improve county-operated juvenile facilities. These funds are intended for facilities to build their capacity to support youth with a variety of needs, focusing on trauma-informed care, restorative justice, and rehabilitative programming. 
• $50 million ongoing General Fund to backfill an estimated loss of revenue to trial courts from expanding the ongoing fines and fees reduction pilot program. Newly proposed statutory budget language would qualify court-imposed civil assessments for this program and reduce them from a maximum of $300 to $150. Civil assessment fees are placed on individuals charged with traffic, misdemeanor, or felony charges who fail to appear in court or pay a fine. 
• $42.6 million General Fund in 2022-23 and $42.3 million ongoing for 23 superior court judgeships, which fill all remaining judgeship vacancies allowed under current law.
• $34.7 million General Fund in 2022-23 and $40.3 million in 2025-26 ongoing to continue the modernization of court operations through various technological initiatives sparked by the pandemic.

Governor’s Proposed Crime Reduction Plan Lacks Equity Considerations

Over the years, California has adopted various justice system-related reforms that moved away from “tough on crime” sentencing laws while still ensuring public safety. These reforms, passed through legislative action and voter approval, have led to sustained decreases in overall crime and prison population rates. Yet despite the relatively low and stable crime rates California has experienced, the administration introduced “cracking down on crime” proposals this year targeted at retail theft and other crimes that do not explicitly account for the potential enforcement disparities that may arise. Structural racism and its compounding factors still lead to the overpolicing of communities of color, racial profiling, sentencing disparities, and racial disparties in the state’s prison population which the proposed funding allocations fail to recognize.

The governor’s proposed budget allocates $356 million General Fund over three years, including $132 million in 2022-23, for various law enforcement efforts to address retail theft and provide some relief to small businesses. The proposal for this funding does not state how equity implications and implicit biases will be taken into consideration during enforcement and training. The major funding allocations include: 

• $85 million annually through 2024-25 in competitive grants for local law enforcement to increase enforcement, task force participation, staffing presence at retail locations, diversion and supervision of people accused of committing retail theft, and retail theft training. 
• $20 million one-time General Fund for grants to small businesses affected by retail theft. 
• $10 million annually through 2024-25 for competitive grants to local District Attorneys to establish retail theft prosecution teams.
• $6 million in 2022-23 to provide a total of $15 million annually for the California Highway Patrol to permanently expand their Organized Retail Theft Task Force.

The governor also proposed additional public safety-related funding, such as:

• $25 million one-time General Fund to create a competitive grant program to boost local gun buyback programs and provide awareness about gun and youth violence.
• $20 million one-time General Fund to expand the California Military Department’s existing drug interdiction support efforts in federally designated High Intensity Drug Trafficking Areas.  

Workforce & Small Business

Proposed Budget Includes Several Investments Targeted to Small Businesses

In addition to the business tax proposals outlined in the Revenues section — which do not appear to be exclusively targeted to small businesses — the governor proposes investments of additional state dollars and the allocation of federal funds to help small businesses recover from the pandemic and to support entrepreneurs and startups.

The proposed budget includes:

• $130 million in additional one-time General Fund dollars for the Small Business COVID-19 Relief Grant Program. This program was launched in December 2020 and demand continues to exceed capacity. These new funds would be added to $20 million in unallocated funds from the set-aside for nonprofit cultural institutions, so a total of $150 million would be available to businesses that have applied for but not yet received grants.
• $40 million in one-time General Fund dollars to waive filing fees for new businesses registering between July 2022 and June 2023.
• $20 million in General Fund dollars over four years to expand the Innovation Hub (iHub) program with a focus on inclusive economic growth. The iHub program was relaunched as part of the 2021 budget package, which included $2.5 million one-time General Fund to provide grants for the establishment of 10 regional iHubs — partnerships between research institutions, economic development organizations, business or workforce organizations, venture capital networks, and local governments — to support entrepreneurs and startups in the science and technology sectors. The additional funding would expand the number of iHubs to 13 and provide grants of up to $100,000 for five new businesses incubated at each iHub. The administration states that these grants would encourage science and technology business creation in underserved areas.
• $20 million in one-time General Fund dollars for grants to small businesses that have experienced retail theft to assist them in repairing or replacing infrastructure.
• $6 million in General Fund dollars in 2022-23 and $23 million ongoing for the Technical Assistance Expansion Program. This program was established in the 2018 budget agreement to provide grants to small business technical assistance centers to expand consulting and training services to more underserved business groups, including businesses owned by women, people of color, and veterans and those serving low-wealth, rural, and disaster-impacted communities. The initial funding commitment of $17 million annually over five years will expire in 2022-23, and the governor proposes to increase the funding level to $23 million in 2022-23 and to permanently support the program at that level.

The budget proposal also indicates that of the $1.2 billion in federal State Small Business Credit Initiative funds the state is expected to receive through the American Rescue Plan, it plans to allocate $1 billion to existing programs administered by the California Infrastructure and Economic Development Bank (IBank) and the State Treasurer’s office to increase small businesses’ access to financing. The governor proposes allocating the remaining $200 million to establish a Venture Capital program at IBank to focus on underrepresented venture capital managers and business owners, socioeconomically disadvantaged areas of the state, and climate equity.

Many of the administration’s small business proposals indicate a focus on underrepresented business groups and underserved communities, which could contribute to a more equitable state economy if these businesses and communities are prioritized and the programs help to break down structural barriers faced by entrepreneurs and small business owners who are people of color, women, people from disadvantaged communities and other “historically underserved” groups.

Workforce Proposals Primarily Target Climate Change and the Care Economy

To help workers struggling to secure jobs or shift industries, and to create pathways to jobs in various sectors, the governor’s proposed budget includes a number of investments focused on workforce development. 

Several of these investments are also aimed at supporting the state’s efforts to combat the climate crisis and the ongoing transition to clean energies, including: 

• $265 million to support the transition from oil and gas to other industries. The proposal includes $200 million over two years for the Department of Conservation to seal oil and gas wells, $50 million for a pilot fund intended to support displaced oil and gas workers, and $15 million for a well-capping workforce pilot to train displaced oil and gas workers.
• $235 million for training programs and grants across various climate-related industries. The budget proposes $110 million over three years for a Goods Movements Training Center,  $60 million over three years for the Low Carbon Economy Workforce grant program, $35 million one-time for the University of California to establish climate-focused regional training hubs, and $30 million one-time over two years for community colleges to support workforce development in wildfire and forest resilience. 

Other investments task state agencies — the Labor and Workforce Development Agency and the California Health and Human Services Agency — with coordinating workforce development investments in the care economy and health-related fields. Major proposals include: 

• $350 million for new community health workers. These funds are intended to support recruitment, training, and certification for 25,000 community health workers by 2025. 
• $340 million for high road training partnerships in “family-sustaining” health care jobs. This proposal focuses on training and career development for people with “barriers to employment” through collaboration among various entities. 
• $270 million to increase the number of nurses and other health professions. 
• $210 million to support social worker pipelines. The funds are intended to support training programs and provide financial assistance in the form of scholarships and stipends. 
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The budget proposal also includes several investments to support the educator workforce, including: 

• $46 million one-time General Fund to increase the number of teachers. $36 million are intended for waiving certain teacher examination and credentialing fees and $10 million to provide grants to higher education institutions to implement teacher preparation programs that integrate a bachelor’s degree and a teacher credential in one pathway. 

Additional workforce development proposals include $50 million one-time to support English learners with language literacy and other skills used in the workplace.

Administration Proposes Unnecessary Payment on Federal Unemployment Insurance Loan

Millions of California workers turned to unemployment insurance benefits in 2020 and 2021, after suddenly losing their jobs as COVID-19 moved through homes and communities. These benefits helped Californians pay for basic needs, such as food and rent, while they could not work. 

California had to borrow billions of dollars from the federal government to pay for the unemployment benefits workers needed in 2020 and 2021. This was largely because, for decades, California had not required businesses – particularly large, profitable corporations – to cover the true cost of state unemployment benefits for their workers.

California businesses finance unemployment benefits for their workers by paying annual payroll taxes. These taxes generate revenues that are deposited into the state’s unemployment insurance fund and are available to pay benefits whenever workers lose their jobs through no fault of their own. In California, employer payroll taxes are based on only the first $7,000 of each employee’s annual pay. This is the lowest “taxable wage base” allowed under federal law, and just four states have bases this low.

California’s base has been frozen at just $7,000 since 1983 even though wages have increased substantially since then. As a result, businesses currently pay payroll taxes on just 12% of the average California worker’s earnings – the smallest share in the nation. This severely limits the amount of revenue California can generate for unemployment benefits and is a key reason the state had to borrow money from the federal government to pay for these benefits over the past two years. The taxable wage bases in 16 states are at least half of average annual earnings, and most of these states paid for unemployment benefits during the pandemic without federal loans.

The administration proposes using $3 billion General Fund over two years ($1 billion in 2022-23 and $2 billion in 2023-24) to pay down a portion of the state’s outstanding federal loans for unemployment benefits.

This proposal amounts to an unnecessary business tax break that would take $3 billion away from addressing Californians’ urgent needs at a time when families and communities are still reeling from a nearly two-year-long pandemic and are now grappling with the economic and health impacts of another COVID-19 surge. Specifically, this proposal:

• Would essentially provide an across-the-board tax break for businesses that haven’t been paying enough in taxes to cover the true cost of unemployment benefits for their workers for decades. It would especially benefit large businesses, including profitable corporations, which are paying less than half the amount in state taxes, as a share of their income, than they did a generation ago largely due state policymakers’ decision to provide tax cuts and other breaks.
• Is unnecessary because there is already a sensible process in place for paying off the state’s unemployment debt. Under federal law, California businesses will pay off this debt very gradually through small increases in the federal payroll tax rate. It makes sense that businesses are responsible for paying off this debt since it largely resulted from decades of employers not paying enough in taxes to support the unemployment benefits their workers need. Businesses’ first payment toward the debt will be due in 2023 and will amount to just $21 per employee for the entire year, the equivalent of a 0.07% of a full-time minimum wage worker’s annual earnings. The federal payroll tax will increase in each subsequent year, resulting in businesses paying an additional $21 per employee per year until the debt is paid off.
• Will not benefit any California business for many years. The Legislative Analyst’s Office analyzed a similar proposal included in the governor’s revised budget last May and estimated that the earliest businesses would have benefited was in 2030, well after the economic effects of the pandemic on businesses are likely to have subsided.

The governor indicated that one rationale for this proposal is to reduce how much small businesses will pay in increased federal payroll taxes in future years. But the benefits of the proposal would primarily benefit larger businesses and corporations years from now. If the administration wants to provide short-term assistance to small businesses – particularly those struggling to stay afloat amid the pandemic – there are better alternatives that could provide aid directly to those businesses this year.

The administration also includes $470.1 million one-time General Fund to pay the forecasted interest payment on the federal loans the state took out to pay for unemployment benefits that are due in September 2022. Interest payments on these loans are traditionally paid for out of the state’s General Fund.