Report

First Look: Governor’s Inaugural Budget Proposal Includes Bold and Smart Investments, While Maintaining Fiscal Health

Executive Summary

On January 10, Governor Gavin Newsom released a proposed 2019-20 budget that calls for a series of bold and smart investments in broadening economic security and opportunity for Californians, while continuing to strengthen the state’s underlying fiscal health.

The Governor forecasts revenues that are $8.1 billion higher (over a three-year “budget window” from 2017-18 to 2019-20) than previously projected in the 2018-19 budget enacted last June, driven largely by continued economic growth.

The Governor’s proposal includes a range of significant expansions in support of low- and middle-income Californians who are struggling to make ends meet and access greater economic opportunity, including doubling the state’s Earned Income Tax Credit, working toward universal preschool for 4-year olds, investing in child care infrastructure, expanding health care to move closer to universal coverage, expanding paid family leave, boosting CalWORKs grants, and increasing investment in state higher education systems. Recognizing that high housing costs contribute to California’s high poverty rate, Governor Newsom also proposes a mix of policies and an expanded state role to address housing needs and homelessness. These policies would make California more affordable and more equitable for millions of Californians.

Many of the Governor’s proposals — such as child care and housing — use one-time investments in 2019-20 to lay a foundation for significant build-out of public supports over the next several years.

Confronted by federal challenges to Californians and their communities, the budget proposal calls for investments to support immigrants, improve state and local emergency preparedness, and ensure that the 2020 census is as accurate as possible.

Recognizing that California is experiencing a period of sustained economic growth and a positive revenue outlook, the budget proposal also calls for paying down debts and building up reserves. These proposals, in combination with one-time and ongoing investments, represent a balanced approach to managing the state’s fiscal health.

The following sections summarize key provisions of the Governor’s proposed 2019-20 budget.

Download full report (PDF) or use the links below to browse individual sections of this report:

Economic and Revenue Conditions

Children and Families

Economic Security

Health

Education

Other Key Priorities in the Proposed Budget

Economic and Revenue Conditions

Governor Expects Economic Growth to Continue, Albeit at a More Moderate Pace

The Governor’s proposed budget assumes that the current economic expansion continues in the near-term, albeit at a more moderate pace than in recent years. Specifically, the Administration projects that national economic growth, as measured by the change in Gross Domestic Product (GDP), will begin to moderate this year and then gradually slow each subsequent year through 2022, the end of the forecast period. The Administration also expects economic growth to slow in California during this period.

In terms of California’s labor market, the Governor’s forecast assumes steady job growth that continues to increase the state’s labor force participation rate and maintains the state’s unemployment rate at historically low levels. The forecast notes that low unemployment in 2018 failed to translate into significant wage increases thus far, other than for high-income earners, but anticipates that more workers will begin to see real wage increases this year.

The proposed budget summary outlines several risks to the Governor’s projections for California’s economic growth. These include a number of national factors, such as a large drop in the stock market, which has been experiencing significant fluctuations since last year; a national recession, which could come at a time when many people have not yet recovered from the previous downturn and when the federal government is not well-positioned to ramp up spending to mitigate its damage; and the ongoing trade war with China, California’s third-largest trading partner. Additionally, the Governor’s forecast notes that California will need to address the aging population, declining birth rates, and insufficient housing supply in order for the state’s economic growth to continue.

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Revenue Forecast Reflects Continued Economic Growth

The proposed budget assumes increases in revenues over the three-year “budget window,” from 2017-18 to 2019-20, while acknowledging that rising risks to the state’s economic outlook could affect the revenue forecast.

The Governor’s proposal projects General Fund revenues for the budget window to exceed the projections in the enacted 2018-19 budget package by $8.1 billion, before accounting for transfers such as deposits into the rainy day fund. This includes higher-than-expected revenues from the personal income tax (PIT) and the corporation tax (CT), partially offset by lower-than-expected revenues from the sales and use tax (SUT). Together, these three taxes are expected to comprise almost 97% of General Fund revenues in the proposed 2019-20 budget.

PIT revenues are projected to be $7.5 billion higher over the three-year budget window than estimated in the 2018-19 budget agreement, reflecting strong growth in wages and capital gains, particularly among high-income taxpayers. SUT revenues are expected to be $1.4 billion lower, primarily because a spike in business investment that was anticipated due to last year’s changes to federal tax law did not occur. Additionally, the lower SUT projection reflects consumer spending restraints due to high housing costs and the continued erosion of the state’s sales tax base. CT revenues are estimated to be $1.3 billion higher over the budget window, though the budget proposal warns this is expected to be a one-time increase largely resulting from shifts in the timing of corporate tax payments.

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Governor’s Budget Proposal Continues to Build Up Reserves to Bolster State Fiscal Resilience

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

The Governor’s proposed budget includes a transfer of $1.8 billion to the BSA for 2019-20, bringing the reserve’s balance to $15.3 billion by the end of the fiscal year. Prop. 2 requires that when the BSA balance has reached its constitutional maximum of 10% of General Fund tax revenues, any additional dollars that would otherwise go into the BSA must be spent on infrastructure, including spending on deferred maintenance. However, while the BSA has reached this maximum, the Governor’s budget assumes that constitutionally required deposits will continue to be made since the account’s maximum balance was achieved in part through supplemental payments in prior years. This assumption is based on an opinion by the Legislative Counsel, but could be subject to a legal challenge.

The BSA is not California’s only reserve fund. Each year, the state deposits additional funds into a “Special Fund for Economic Uncertainties” (SFEU). The Governor’s proposed budget assumes an SFEU balance of $2.3 billion. Additionally, the 2018-19 budget agreement created the Safety Net Reserve Fund, which holds funds that can be used to maintain benefits and services for CalWORKs and Medi-Cal participants in the event of an economic downturn. The Governor proposes depositing $700 million into the Safety Net Reserve, bringing the fund’s balance to $900 million. Taking into account the BSA, SFEU, and the Safety Net Reserve, the Governor’s proposal would build state reserves to a total of $18.5 billion in 2019-20.

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Governor’s Budget Proposal Prioritizes Paying Down Debts

The Governor’s proposed 2019-20 budget prioritizes paying down state and local unfunded pension liabilities and paying off outstanding budgetary debt incurred during the Great Recession and its aftermath.

The budget proposal includes required and supplemental contributions to two state-run retirement systems: the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS). CalPERS and CalSTRS, like many retirement systems, are not funded at levels that will keep up with future benefits, resulting in the state needing to make higher annual contributions in order to pay down unfunded liabilities.

Beyond statutorily required contributions, the Governor’s proposed budget includes a $3 billion supplemental pension payment to CalPERS that would be made in the current fiscal year (2018-19). The budget proposal also devotes an additional $390 million to CalPERS in 2019-20 from Proposition 2 funds (see Reserves section) that are required to be set aside for reducing state liabilities.

In the case of CalSTRS, the budget proposal devotes an additional $1.1 billion, beyond statutory requirements, toward the state’s share of CalSTRS unfunded liabilities. The $1.1 billion comes from Prop. 2 funds (see Reserves section) that are required to be set aside for reducing state liabilities. The Governor’s proposal notes that the $1.1 billion is the “first installment of an estimated $2.9 billion to be paid to CalSTRS through 2022-23” using available Prop. 2 dollars.

In addition, the Governor’s proposal includes a one-time $3 billion non-Proposition 98 payment to CalSTRS to reduce the employers’ (local educational agencies and community colleges) share of unfunded liabilities in response to prior changes in contribution levels and pressures confronting employers. In 2014, the state enacted AB 1469, increasing the share of CalSTRS costs borne by all parties (the state, employers, and teachers), but particularly increasing the contribution rate of employers. Confronting a series of other pressures, including enrollment decline and increases in the costs of local services, some local educational agencies are in danger of not being able to meet their financial obligations. The Governor’s proposal would provide $2.3 billion toward the employers’ share of the unfunded liability for the CalSTRS Defined Benefit Program. The Governor proposes to use the remaining $700 million to reduce the required contributions by employers in 2019-20 and 2020-21. Overall, the proposed $3 billion supplemental payment would free up — in the short term as well as the long term — local dollars for investment in education or to allow employers to pay down retirement obligations.

The Governor’s proposed 2019-20 budget also includes more than $4 billion to pay off outstanding budgetary debts incurred during the Great Recession, including $2.4 billion to eliminate outstanding loans from special funds and transportation accounts and a total of $1.7 billion to eliminate a one-month deferral of payroll from nine years ago and a deferred payment to CalPERS from over a decade ago.

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Children and Families

Governor Boosts Funding for Child Care Infrastructure, While Not Providing Additional Access to Subsidized Care

Subsidized child care allows parents with low and moderate incomes to find jobs and remain employed, feeling secure that their children have a safe space to learn and grow. These programs provide a critical service, keeping families across California afloat. Currently, subsidized child care programs serve far fewer children than they did ten years ago. While policymakers have made incremental investments in early care and education in recent years, investments to serve more children have been targeted to the California State Preschool Program, just one component of California’s subsidized child care and development system.

The Governor’s proposed budget signals a commitment to expand access to subsidized child care in future years by funding child care infrastructure in 2019-20. Specifically, the budget proposal:

  • Provides $245 million one-time General Fund for child care facilities. The state currently operates three programs that provide funding for child care facilities including a loan program for portable facilities, loans for facility repair and renovation, and, most recently, the new Inclusive Early Education Expansion Program funded in the 2018-19 budget agreement with $167 million in one-time Prop. 98 funding. The proposal does not indicate if this funding would augment existing facility funding programs or create a new program.
  • Provides $245 million one-time General Fund for child care workforce development. The administration’s stated goal is to “improve the quality of care” by investing in the education of the child care providers. Details about how this will be allocated are not available.
  • Improves and expands child care facilities on university campuses with $247 million in one-time General Fund. The proposed budget boosts resources for the California State University (CSU) in order to add more child care facilities to serve students with children. This is aligned with the administration’s proposal to also increase financial aid for student parents. (See the Student Aid section.) These funds could also be used for deferred maintenance, but it is not clear if this is deferred maintenance on child care facilities or on other CSU facilities.
  • Provides $10 million General Fund to develop a plan to increase access to subsidized child care. As mentioned in the Early Learning section, the budget proposal also includes $10 million General Fund to pay a contractor to create a plan in the 2019-20 fiscal year to address a wide variety of issues such as universal preschool, facility capacity, workforce training, access to subsidized child care, and potential revenue options for the subsidized child care and development system.

The budget proposal signals a commitment to serve more families in future years, by setting aside hundreds of millions in one-time funding for subsidized child care infrastructure in the 2019-20 fiscal year. Yet, despite this historically large proposed increase, the proposal does not provide more low- and moderate-income families with access to subsidized child care, despite years-long waiting lists.

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