Report

First Look: State Budget Manages COVID-19 Challenges But Fails to Use All Options to Invest Now in Californians

A Budget Center Analysis of California's 2020-21 State Budget

On June 29, Governor Gavin Newsom signed the 2020-21 state budget into law, enacting a $134 billion General Fund spending plan that outlines how the state responds to the ongoing COVID-19 pandemic and manages a significant budget shortfall. The budget deal reached by state leaders uses a combination of reserves, available federal funds, temporary revenues, internal borrowing, and deferred payments to help resolve a budget shortfall resulting from the COVID-19 recession. The enacted budget also includes a few targeted expansions to help support Californians with low incomes. Notably, the budget includes $11 billion in spending cuts and delayed payments that would be rolled back if the state receives substantial new federal fiscal relief.    

While the enacted budget put forward by state leaders recognizes the challenges the state faces and meets state leaders’ Constitutional obligation to enact a balanced budget, the spending plan fails to meet many of the most urgent and basic needs of Californians: ensuring they can safely earn a living in healthy environments and provide food, housing, and health care for their families. Without bolder action, including raising additional revenues and pursuing appropriate borrowing, the enacted 2020-21 budget will exacerbate income and wealth inequality and systemic inequities that permanently leave Californians of color, undocumented residents, and households with low incomes locked out of our state’s prosperity. 

State policymakers must do more for Californians now to show they can protect and care for the millions of people, especially Black, Latinx, and undocumented Californians, whose lives have been especially impacted by the health and economic crisis that rages on. Policymakers missed a critical opportunity to put a budget plan in place that, with additional and substantial revenue, could invest in the economic security of Californians, make the state’s tax system more equitable, and, in so doing, position our state to more quickly emerge from the recession. 

As state leaders consider revising the state budget later this summer, there is still time for them to act. State leaders should raise additional revenue and explore appropriate borrowing options to avoid additional fiscal austerity measures, such as cutting vital programs and services that will only cripple their ability to respond to ongoing public health and economic implications of COVID-19. 

While additional federal resources are crucial to help support Californians, our state leaders must take action to provide greater state support and produce the revenues needed to make significant public investment in California’s future.

This report outlines key pieces of the 2020-21 budget, with consideration for how the plan supports — or comes up short for — Californians with low incomes, as well as for women, Black, Latinx, immigrant, and undocumented Californians, and students. 

Contents

Budget Overview

Health & Economic Security

K-12 & Higher Education

Federal Aid & Trigger Cuts

What’s Next 


Budget Overview

Budget Agreement Uses Reserves, Available Federal Funds, and Other Budgetary Maneuvers

The 2020-21 budget agreement uses state reserves, funding made available through federal relief provided earlier this year, and other budgetary maneuvers to balance the state’s 2020-21 General Fund budget. 

The enacted budget draws down $8.8 billion in reserves, including $7.8 billion from the state’s Budget Stabilization Account (BSA), $450 million from the Safety Net Reserve, and all of the funds from a separate, smaller reserve for public schools. The state Constitution under Proposition 2 (2014) allows state leaders to withdraw up to one-half of the BSA in the first year of a fiscal emergency. For the current fiscal year (2019-20), the BSA balance is $16.1 billion, meaning state leaders will draw down almost half of the total available funds, leaving $8.3 billion for future use. State leaders also used half of the $900 million in the Safety Net Reserve, leaving $450 million for use in future years. The budget agreement also set aside $2.6 billion in a separate reserve, the Special Fund for Economic Uncertainties (SFEU), for potential use in 2020-21. 

Earlier this year, federal leaders enacted a series of fiscal relief packages in response to COVID-19. The 2020-21 budget agreement uses $10.1 billion provided through Medicaid’s enhanced Federal Medical Assistance Percentage (FMAP), the Coronavirus Relief Fund, and additional child care funding.

Other budgetary measures used to help balance the state’s General Fund budget include borrowing from special funds and delaying payments to K-12 schools and community colleges (see more below). 

While state leaders used a range of measures to enact a balanced budget, they missed an opportunity to pursue appropriate forms of borrowing that would have provided significant additional help in covering the state’s budget shortfall — in 2020-21 and in future years — and avoided making cuts to and deferring payments for vital services that Californians need now more than ever.

Budget Agreement Includes Additional Temporary Tax Revenue

In addition to drawing down on the state’s reserves, another strategy the budget agreement uses to address the budget problem is a temporary tax revenue increase. The revenue increase is primarily achieved by: 

  • Suspending Net Operating Loss (NOL) deductions for some businesses for tax years 2020 through 2022. Businesses generate NOLs when their expenses exceed their revenues for a given year, and this difference can be “carried forward” to reduce the business’ taxable income, and thus its tax bill, in future years. This suspension would only apply to businesses with at least $1 million in net business income. In 2018, only about 2% of corporations met this criteria, according to the Legislative Analyst’s Office, so this limitation would affect a small number of profitable businesses.
  • Limiting business tax credits to $5 million per business for tax years 2020 through 2022. This means that the total of all tax credits a business can claim to reduce their state income taxes in these years is limited to $5 million. The Low-Income Housing Tax Credit is exempt from this limit.

The state has enacted similar limits on business tax deductions and credits in past recessions, and this is a reasonable approach to help fill the budget gap since these provisions only affect profitable businesses and include exemptions for smaller businesses. However, the revenue increases are a relatively small portion of the solutions to close the budget gap. The Administration estimates that the tax changes will raise about $4.4 billion in 2020-21. Given the scale of the economic crisis confronting California, state policymakers missed a critical opportunity to boost revenues more substantially on an ongoing basis to help Californians weather the current health and economic crises and to help the state rebuild its economy into one that is more inclusive of all Californians particularly those who are Black, Latinx, undocumented, and who have low and middle incomes.

Health & Economic Security

Some Immigrant Families Will Now Benefit From the CalEITC, While Many Other Californians Remain Excluded From Tax Credits

After years of exclusion, immigrant families with children age 5 or younger will be able to access the California Earned Income Tax Credit (CalEITC) and Young Child Tax Credit for the first time beginning in tax year 2020. This will help these families, who earn little from their jobs and were shut out of federal COVID-19 economic recovery efforts, to buy groceries, diapers, and other necessities. However, hundreds of thousands of Californians remain excluded from the CalEITC simply because they or a family member files taxes with an Individual Taxpayer Identification Number (ITIN). In fact, an estimated 7 in 10 Californians in households where someone could qualify for the CalEITC if not for the fact that they file taxes with an ITIN will continue to be excluded from the credit, including many children. This exclusion, together with exclusions from federal tax credits, the federal recovery rebates, unemployment benefits, and other public supports, means that many Californians living in immigrant families have far fewer resources to meet basic needs, denying them a fair chance to thrive and build a better life. This exclusion also contributes to racial and ethnic discrimination in California’s tax code. The same tax system that excludes Californians who are mostly Latinx and Asian/Pacific Islander from the CalEITC, provides enormous benefits to wealthy Californians, most of whom are white. Ending the CalEITC exclusion would cost only about $35 million to $51 million, according to Budget Center estimates. That is just a fraction of the tens of billions of dollars California spends each year on all personal and corporate income tax breaks — and it would take a critical step toward dismantling policies that create vastly different opportunities and outcomes for Californians based on their race or ethnicity. 

Seniors Who Are Undocumented Won’t Receive Comprehensive Medi-Cal Coverage, Perpetuating Racial Health Disparities

Income-eligible California seniors (age 65+) who are undocumented will not receive full-scope Medi-Cal health care coverage under the 2020-21 budget. Policymakers’ failure to adopt this critical expansion for older Californians regardless of immigration status comes at a time when preventive health services and treatment for chronic health conditions are needed most. While seniors and people with chronic health conditions are at a higher risk of developing life-threatening complications from COVID-19, undocumented seniors with low incomes are particularly at risk because they have been historically excluded from health programs and services and face additional barriers to accessing routine care and treatment for chronic health conditions. Although extending full-scope Medi-Cal to this group would have required the state to commit new funding during a period of economic and fiscal uncertainty $80.5 million ($64.2 million General Fund) in 2020-21, rising to an estimated $350 million ($320 million General Fund) in 2022-23 this investment is critical from a long-term public health perspective and could be paid for by closing tax loopholes that primarily benefit the wealthy and corporations. Continuing to exclude Californians who are undocumented from vital health coverage is harmful to the state’s collective health and perpetuates racial health disparities. 

Federal and State Funds Will Help Address Some of the Needs of Californians Experiencing Homelessness

On any given night, more than 150,000 Californians are homeless  — a crisis affecting people and communities well before the COVID-19 pandemic. Now the urgency to help Californians who are without a permanent home has dramatically increased, because individuals experiencing homelessness face significant barriers to protecting themselves from exposure to the virus, while many are at high risk of serious complications and even death if infected because they are older adults and/or have chronic health conditions. Black Californians bear a disproportionate burden of both homelessness and COVID-19 deaths, and addressing the needs of homeless Californians now is important to avoid perpetuating and increasing these racial inequities. The budget agreement includes $550 million in federal CARES Act funds  and $50 million General Fund for acquisition and rehabilitation of hotels, motels, and other sites and related expenses to continue Project Roomkey on a more permanent basis. This initiative was launched in response to the COVID-19 pandemic to provide safe housing for especially at-risk homeless individuals in motel or hotel rooms. Additional CARES Act funds are provided to cities and counties to address COVID-19 needs related to homelessness, public health, public safety, or other services. In addition to these federal dollars that specifically address COVID-19, the budget agreement also allocates $300 million General Fund for local jurisdictions (Continuums of Care, cities, and counties) to address homelessness more broadly. This investment of state dollars recognizes that homelessness was one of the state’s most serious challenges even before the pandemic and requires action beyond the needs related to the pandemic. At the same time, $300 million in state funds is far less than the amount needed on an ongoing basis to fully meet the housing and support needs of all Californians experiencing homelessness.

Parents Will Gain More Access to Support Through CalWORKs to Meet Basic Needs While Facing an Exceptionally Challenging Job Market

Parents participating in CalWORKs, California’s welfare-to-work program, will have 12 more months of access to cash support and fewer confusing and restrictive work and education activity requirements under the 2020-21 budget. The budget agreement restores parents’ lifetime limit for receiving CalWORKs cash support to 60 months, the maximum allowed for federally funded support and an increase over the current 48-month time limit, which was adopted in 2011 to address a state budget shortfall in the wake of the Great Recession. The budget agreement also eliminates confusing CalWORKs “time clock” requirements, which limited parents to only 24 months to focus on addressing serious barriers to finding work or completing an education. Due to the time required to incorporate these changes into CalWORKs data systems, the changes will take effect in May 2022 or as soon after that date as the data system update can be completed.

These changes in CalWORKs for parents and families are especially important in the face of massive job losses due to the COVID-19 pandemic and the public health measures put in place to address it. With the loss of millions of jobs in California in just the past three months, it will be harder and will take longer for parents with work barriers to secure jobs that can cover the costs of living while also keeping their families safe and healthy. More parents will need to turn to CalWORKs for support, including some parents who turned to CalWORKs for support previously during the difficult job market and loss of housing stability in the Great Recession. CalWORKs primarily serves families of color, and workers of color — especially Black and Latinx women — have experienced the largest drops in employment due to the COVID-19 recession. Bolstering CalWORKs support for California families in their time of need by eliminating unnecessary time limit restrictions is an important step to make sure state policies do not further exacerbate racial disparities that cause Californians of color to bear the burden of the economic effects of the pandemic.

K-12 & Higher Education

Delaying Payments to K-12 Schools and Community Colleges Avoids Cuts Now but Creates Cost Pressures on the State and K-14 Schools

The budget agreement defers a large amount of K-12 school and community college payments but will reduce the amount of these deferrals if the state receives additional federal funding. Specifically, the budget package defers a total of $12.5 billion in K-14 education payments until 2021-22 — $11.0 billion in late payments for K-12 schools and $1.5 billion for community colleges. If $14.0 billion in federal funding becomes available by October 15, 2020, the payment deferrals to K-12 school and community college districts will be reduced by $6.6 billion — $5.8 billion to reduce deferrals for K-12 schools and $791.1 million to reduce deferrals for community colleges. The budget agreement also eliminates the 2020-21 cost-of-living adjustment to the Local Control Funding Formula (LCFF), a reduction of approximately $1.1 billion.

The payment deferrals included in the budget agreement allow the state to authorize a level of spending by K-12 schools and community colleges that the state cannot afford in 2020-21. Deferrals provide the state with one year of savings, which occurs in the initial year of a deferral, without requiring K-12 school and community college districts to reduce their spending. However, without the state payments, school districts and community colleges must front the cash in order to maintain spending levels. In the short-term, deferrals avoid state cuts to K-14 education but the amount of the deferral must eventually be repaid and creates future cost pressures on the state, and current and future cost pressures on K-14 schools. State leaders could better position the state to maintain funding for schools and community colleges — now and in future years — by raising additional revenues and pursuing alternative borrowing options.

The California State University and the University of California Face Steep Cuts Unless the State Receives Federal Funding

Under the 2020-21 budget, the CSU and the UC face significant cuts — $400 million and $370 million General Fund, respectively — unless the federal government steps in. These cuts could be fully restored if the state receives $14 billion in federal funds by September 1, or potentially simply reduced if federal funds are less than the $14 billion requested. While the Legislature has indicated its intent to avoid any “disproportionate impact on low-income students, students from underrepresented minority groups, and other disadvantaged students,” these cuts could result in the CSU and the UC raising tuition and increasing fees, as in previous recessions. These actions would raise the cost of attending college for students with low and moderate incomes, many of whom already struggle with tuition and living costs.

However, the 2020-21 budget also provides one-time General Fund dollars for summer-term financial aid ($6 million to the CSU and $4 million to the UC). This support will help low-income students graduate on time and could ease capacity limitations. The budget agreement also provides local assistance funds from the California Dreamer Service Incentive Grant program for emergency financial aid to undocumented students, with $3 million allocated to the CSU and $1 million to the UC. This funding is particularly important for undocumented students, whom the federal government barred from receiving COVID-19 assistance. Here again, instead of cutting funding for CSU and UC, state leaders could better position the state to support those systems and the students that they serve by raising additional revenues and pursuing appropriate borrowing options.

Federal Aid & Trigger Cuts

Some Spending Cuts and Payment Delays Would Be Rolled Back if California Receives $14 Billion in Additional Federal Funding

A variety of state budget actions totaling $11.1 billion would take effect if Congress provides California with an additional $14 billion in federal funding by October 15, 2020. Under this “trigger” mechanism, the state would:

  • Eliminate $6.6 billion in payment delays, or “deferrals,” to K-14 education ($5.8 billion for K-12 schools and $791.1 million for community colleges).
  • Deposit $1.9 billion into a new state fund to offset cuts to state employee compensation.
  • Repay up to $936 million in special fund loans to the General Fund.
  • Restore $498.1 million for the CSU.
  • Restore $471.6 million for the UC.
  • Provide counties with an additional $250 million, on top of the $750 million already included in the budget, to make up for reduced sales tax revenue collections — dollars that the counties use to operate a range of programs, including health-related services.
  • Restore $203 million for the infrastructure grant program operated by the Department of Housing and Community Development.
  • Restore $150 million for the judicial branch.
  • Restore $88.4 million for the Golden State Teacher Grant Program operated by the California Student Aid Commission.
  • Restore $46.4 million for the operation of the child support program.
  • Restore $45 million for moderate-income housing production.
  • Restore $1.9 million to the Hastings College of the Law.

If the state receives less than $14 billion in federal funds, but at least $2 billion, the amount above $2 billion would be allocated proportionally among the purposes listed above. If the state receives less than $2 billion in additional federal funds, or no funding at all, the spending cuts and K-14 deferrals would remain in effect, and the counties would not receive the additional $250 million.

While additional federal fiscal relief is clearly needed, enacting a 2020-21 budget that relies upon unknown support from the federal government in order to roll back significant cuts to vital services creates tremendous uncertainty and instability and only delays addressing California’s fiscal challenges using the full array of options available to the state.

What’s Next

Moving California Forward Requires Significant Investment

We can’t ignore how quickly COVID-19 has changed California’s fiscal outlook. Nor can we look away from the high price Californians are paying as they shoulder the economic impact of this crisis. The sudden and widespread job and income losses due to the necessary stay-at-home orders have left millions of Californians — especially Black, Latinx and undocumented Californians, as well as low-income households — struggling to pay rent and buy groceries.

Austerity measures won’t move California forward. The clearest path requires the state to help the people, families, and organizations that have been economically harmed by the crisis not just survive but recover and thrive. This requires significant public investment. 

And while state leaders are required by law to balance the budget, policymakers have options to avoid cutting vital public supports and deferring payments that will cause further harm at a time when so many Californians are struggling with the health and economic implications of COVID-19. In addition to urgently requesting additional federal fiscal relief, policymakers should borrow appropriately and raise taxes in ways that produce significant additional revenue and make the state’s tax system more equitable for Californians. 

We are living in unusual times that demand extraordinary responses. Doing what Californians need now will mean making some difficult choices so that the state can provide and maintain targeted assistance to the individuals, families, and organizations most affected by the crisis. These decisions may be big and daunting for state leaders, but they are our best shot at bending the curve of this pandemic and economic downturn in a direction that will benefit all Californians as quickly as possible and improve the state’s economic and fiscal outlook.