Governor’s revised $300.7 billion budget includes funding for cities’ top priorities, but misses the opportunity to invest in critical local-state partnerships
California's projected budget surplus has reached an eye-popping $97.5 billion, more than double the estimated surplus in January. It is a stunning amount that, as Gov. Gavin Newsom noted in his revised May budget proposal, is "simply without precedent." Newsom unveiled his latest spending proposal for the coming fiscal year on May 13.
The surplus brings the total proposed budget for 2022-23 to $300.7 billion. Nearly half of the surplus must be directed to public education and state reserves, leaving a $50 billion discretionary surplus for investments back into California’s communities and families.
In general, the May Revision reinforces the Governor’s January budget priorities, which provided billions in funding for COVID-19 response measures, climate change, homelessness, the cost of living, and public safety. The May Revision also includes new investments to help cities transform underutilized commercial space into housing, build safe and reliable infrastructure, deploy high-speed broadband, and address the effects of climate change.
However, the budget does not contain funding for Cal Cities' $1.6 billion budget ask, which would fund programs that achieve shared local and state government goals, as well as reimburse cities for unfunded mandates.
The Governor stressed the volatility of California's revenue system, which depends on capital gains from the state's wealthiest residents. To avoid future budgetary deficits, 94% of his total proposed budget goes to one-time allocations. This includes a new $18.1 billion package aimed at lowering the costs of living, which features gas refund checks to residents, low-income rental and utility assistance programs, and free public transportation grants, with no impact to local governments. The Governor is also proposing a 12-month reduction to the state portion of the diesel sales tax rate.
The Assembly and the Senate must pass a final, balanced budget before June 15 and the Governor must sign the budget by June 30. The League of California Cities will continue to work with the Administration and the Legislature in the coming weeks to ensure that city priorities — including Cal Cities' $1.6 billion budget ask — are included.
Lawmakers will continue to negotiate the finer points of the budget even after the June 15 deadline via trailer bills, measures that implement specific parts of the state budget. Looming large in the background of these conversations is the growing possibility of a recession within the next two years and its impact on the state's financial reserves.
Read Cal Cities Executive Director and CEO Carolyn Coleman’s statement in response to the revised budget proposal and Cal Cities’ analysis of the May Revision below.
Housing, Community, and Economic Development
The Governor's May Revision budget builds off the more than $2 billion of new funding already proposed in the January budget to address the state’s housing crisis. These budget allocations address one of the priorities in Cal Cities’ 2022 State Action Agenda, which seeks to secure additional funding and resources to increase the supply and affordability of housing.
While these investments are significant, cities need additional funding and a partnership with the state for the housing crisis to be meaningfully confronted. That is why Cal Cities is calling on the Governor and lawmakers to allocate $500 million in the budget for a new Housing and Economic Development Program. This program would encourage partnerships between state and local agencies by providing matching funds to cities that adopt local tax increment financing tools to support affordable housing, upgrade essential infrastructure, and stimulate economic development. Below is a breakdown of the major allocations, programs, and policies proposed in the Governor’s May Revision.
- $500 million one-time General Fund over 2023-24 and 2024-25 to build more downtown-oriented and affordable housing through funding adaptive reuse — namely, converting existing infrastructure, underutilized retail space, and commercial buildings into residential uses. When added to the $100 million one-time General Fund included in the Governor’s January budget, adaptive reuse investments total $600 million over three years.
Transportation, Communications, and Public Works
The bulk of transportation investments included in the Governor's January proposal remain largely intact and continue to be reflected in the May Revision. In January, the total package was $9.1 billion; this proposal raises that total to $9.6 billion. Below is a breakdown of the major allocations, programs, and policies proposed in the Governor’s May Revision.
- $1.25 billion amount for active transportation. This includes $1 billion (doubled from January's proposal) for the Active Transportation Program, as well as $150 million for a new “highways to boulevards” program and another $100 million for bike and pedestrian safety in the state highway budget.
- $750 million in grants to local transit and rail agencies to provide free transit for Californians for three months, which was part of the early broad-based relief package. It is unclear if this amount would be enough for all agencies to eliminate fares entirely for three months and how this could be done quickly, as grant programs typically take time to develop, publicize, decide, and allocate.
- The May Revision proposes funding nearly 1,000 new positions annually for Caltrans to administer and implement the state and local transportation funding provided by the Infrastructure Investment and Jobs Act. These positions are intended to provide support in processing applications to existing and new transportation programs for highway, transit, and highway safety, as well as provide engineering and design support associated with the increased project workload.
- The May Revision proposes a 12-month pause, effective Oct. 1, 2022, on the General Fund (3.9375%) portion of the sales tax rate on diesel fuel. This pause is estimated to reduce local revenues by $327 million in 2022-23 and $112 million in 2023-24. The May Revision continues to propose making transfers from the General Fund to the Public Transportation Account to backfill the suspension. Regardless of the much-needed backfill, these allocations continue to fall far short of the amount needed to address the shortcomings in California’s transportation system. Cal Cities is working with legislative leaders to ensure that the final budget will backfill any revenue impacts to local governments.
- $1.1 billion for broadband infrastructure. These proposed investments are in addition to the $6 billion already approved last year and the minimum allocation of $100 million from the federal infrastructure package.
- $600 million one-time General Fund in 2023-24.
- $500 million one-time General Fund in 2024-25 to the California Department of Technology to support the completion of the Broadband Middle-Mile Initiative.
The Governor's May Revision includes significant community service investments that will benefit residents throughout the state, most notably unhoused Californians. The proposal includes $650 million in homelessness funding over two years, increasing the total homelessness resources included in the budget to $9.4 billion in 2022-23. These key budget allocations address one of Cal Cities' top priorities in our 2022 State Action Agenda, which seeks to secure additional funding and resources to prevent homelessness and assist individuals experiencing homelessness. Below is a breakdown of the major allocations, programs, and policies proposed in the Governor’s May Revision.
- $500 million over two years to house unsheltered individuals on state-owned land through grants to local governments for interim housing and site preparation. This interim housing is designed to be built quickly and serve as bridge housing for unsheltered individuals while long-term housing placements created by other programs are constructed.
- $150 million in the current year for the Homekey program, which expands access to housing for persons experiencing homelessness or at risk of homelessness through partnerships with local governments. This allocation increases the total Homekey funding to $2.9 billion over two years.
Community Assistance, Recovery, and Empowerment (CARE) Court
- $64.7 million to fund state department and judicial branch costs associated with the new Community Assistance, Recovery, and Empowerment (CARE) Court. CARE Court is a newly proposed court process that would deliver community-based behavioral health services and support to Californians living with untreated schizophrenia spectrum or other “psychotic disorders.”
Children and Youth Behavioral Health
- $290 million over three years to implement a multipronged approach to address the urgent youth behavioral health crisis. This funding supports grants that deliver well-being and mindfulness programs and parent support education programs. This proposal will also fund grants to support children and youth at increased risk of suicide and a youth suicide crisis response pilot.
- $3 million one-time General Fund to provide transitional housing to youth discharged from California's Department of Corrections and Community Rehabilitation Division of Juvenile Justice by the Board of Juvenile Hearings in 2022-23. Transitional housing will be available to youth who are at risk of homelessness upon their release to support them in successfully reentering their communities.
Childcare and Early Childhood Education
- $6.3 billion ($2.7 billion General Fund) for child care programs, including continued support for the historic multiyear commitment to rate increases and supplemental funding to providers in the first collective bargaining contract ratified last year. The Governor's May Revision largely follows through on existing child care commitments, and continues commitments to expand child care access by 200,000 slots by 2025-26.
- The May Revision also includes a programmatic change that would allow teachers with preschool teaching permits who hold bachelor's degrees, meet basic skills requirements, and are enrolled in coursework to be assigned as the teacher of record in a credential to teach transitional kindergarten. The goal is to temporarily increase the pipeline of qualified transitional kindergarten teachers. This proposed flexibility would sunset on June 30, 2026.
Seniors and Aging
- $36.3 million in 2022-23 and ongoing funding to continue the implementation of the Master Plan for Aging. This includes caregiver resource centers, emergency preparedness and response, supporting independent living, and more.
- $19 billion for the In-Home Supportive Services program, which provides personal care services to eligible low-income individuals with disabilities, including children, and adults aged 65 and older. These services are provided to assist individuals to remain safely in their homes and prevent more costly out-of-home care, such as nursing homes.
- $13.5 million one-time General Fund to expand a pilot program that provides state park passes for checkout at local libraries.
- $1.4 million one-time General Fund to support online job training and workforce development resources targeting older adults and veterans at California's local libraries, building upon the Governor's budget investment of $8.8 million to support two additional years of free online job training and workforce development programs available through public libraries.
The Governor’s May Revision adds billions of dollars in additional one-time funding for a wide range of environmental quality issues, including energy and water resilience and emergency response. Noticeably absent from the May Revision is local assistance grant program funding that would help cities and counties implement the SB 1383 (Lara, 2016) organic waste diversion regulations. Discussions are ongoing to see if this type of funding can be included in the final budget that is signed in July.
While the May Revision is heavy on funding, it is light on details about how the funding would be spent. Below are some highlights of the May Revision:
- $9.5 billion, over four years, in additional funding from the January budget, to advance climate change efforts. A total of $32 billion for climate change is proposed for over five years.
- $1.2 billion to address residential electric utility arrearages through the Department of Community Services. The May Revision also includes $200 million to address residential water and wastewater arrearages.
- $8 billion over five years to increase the state's energy system reliability and provide consumers with relief from rising electricity rates.
- $8.1 million for the California State Warning Center to better analyze, monitor, coordinate, and inform state-level decision-makers about critical emergency incidents and disasters.
- $500 million, in 2025-26, to serve as a multiyear commitment to promote strategic water storage projects in the state that benefit water supply reliability and the environment.
- $10 million to support a compost permitting pilot program that would help local governments and facilities locate and permit small and medium-sized compost facilities. This would divert more organic waste away from landfills and into the creation of healthy soils, as well as support additional strategic nature-based solution investments.
The Governor’s May Revision largely reinforces priorities outlined in January’s proposed budget. The Governor has committed resources toward improving officer wellness and funding local-state partnerships that prevent the flow of drugs, especially fentanyl. With the realignment of the state’s justice-involved youth and efforts to end cycles of recidivism for all populations, funding has also been allocated to programs that improve reentry planning for formerly incarcerated individuals.
Additionally, with the increase in wildland fires and other natural disasters, the Governor expanded his commitment to bolstering mutual aid resources to help ensure cities can respond efficiently to local emergencies.
The May Revision also proposes statutory changes to reform cannabis taxes. These policy changes aim to simplify the tax structure, remove unnecessary administrative burdens and costs, temporarily reduce the tax rate to support shifting consumers to the legal market, and stabilize the legal cannabis market. The Governor has also proposed funds to establish a cannabis local jurisdiction retail access grant program, with the goal of assisting cities and counties in the development and implementation of local retail licensing programs that increase access to California’s legal cannabis marketplace.
Below is a breakdown of several notable new allocations and policy proposals.
- $50 million one-time General Fund to fund grants intended to improve general officer health and well-being, build resiliency, decrease stress and trauma, and improve community trust and relations.
- $7.9 million General Fund in 2022-23, and $6.7 million ongoing, to establish the Fentanyl Enforcement Program.
- $30 million General Fund ($15 million in 2022-23 and $15 million in 2023-24) to bolster the California Military Department’s existing efforts to prevent transnational drug-trafficking operations throughout the state, with a particular focus on assisting federal, state, local, and tribal law enforcement agencies in preventing the distribution of fentanyl.
- $3 million one-time General Fund to provide transitional housing to youth discharged by the Board of Juvenile Hearings in 2022-23, with transitional housing available to youth who are at risk of homelessness upon their release to support them in successfully reentering their communities.
- $6 million one-time General Fund to enhance the California Department of Corrections and Rehabilitation's data collection and evaluation capabilities regarding the outcomes of formerly incarcerated individuals.
- $150.2 million and 465 positions to enhance CAL FIRE’s capabilities to meet the demands of wildland firefighting. This includes staffing for support fire crews, direct mission support, emergency surge capacity, and response enhancements.
- Setting the cultivation tax rate at zero beginning July 1, 2022.
- Shifting the point of collection and remittance for excise tax from distribution to retail on Jan. 1, 2023, maintaining a 15% excise tax rate.
- Setting Allocation 3 funding for youth education, intervention, and treatment, environmental restoration, and state and local law enforcement programs at a baseline of $670 million annually for three years. Up to $150 million one-time General Fund is available as needed through 2025-26 to backfill Allocation 3 funding, along with the authority to increase the excise tax rate through 2024-25 if tax revenues fall below the baseline for Allocation 3.
- Strengthening tax enforcement policies to increase tax compliance and collection and reduce unfair competition.
- $20.5 million one-time General Fund to establish a cannabis local jurisdiction retail access grant program.
Governance, Transparency, and Labor Relations
The Governor’s May Revision focuses on pandemic response and recovery, with an additional $1.1 billion for the continued implementation of the state’s “Shots, Masks, Awareness, Readiness, Testing, Education, and Rx” (SMARTER) Plan, which will indirectly support employer COVID-19 responses. Below is a breakdown of the major allocations and policies announced in the Governor’s May Revision.
State CalPERS Payments
- State contributions to the California Public Employees’ Retirement System (CalPERS) have decreased by a net total of $215.6 million ($180.1 million General Fund) in 2022-23 relative to the Governor’s budget.
- The May Revision estimates $2.9 billion in one-time Proposition 2 debt repayment funding in 2022-23 to further reduce the unfunded liabilities of the CalPERS state plans (CalPERS is 80.7% funded, with a $43.6 billion total shortfall.).
- The May Revision adds $1.1 billion to continue to implement the state’s COVID-19 SMARTER Plan, including additional funding to support school testing, increase vaccination rates, and expand and sustain efforts to protect public health at the border.
- $100 million in total to support upfront staffing costs for facilities that need additional medical surge staff during COVID-19 surges.
- $530 million for COVID-19 testing.
- $93 million in total to prioritize vaccination of youth under five years old, additional boosters for eligible populations over 50 years old, and the continuation of mobile vaccination sites through the end of 2022-23.
- $230 million for the Office of Community Partnerships and Strategic Communications to support COVID-19 vaccine-related public education and outreach campaigns previously implemented by the California Department of Public Health (CDPH).
- Of this amount, $130 million is included for CDPH in the Governor’s budget and will be transferred to the office at the May Revision.
- $16 million to continue activities that allow tracking and monitoring of transmission of COVID-19 through wastewater surveillance, epidemiologic data analysis, modeling of future data trends, and research on the long-term impacts of COVID-19.
- $158 million to implement a Test-to-Treat Program for therapeutic treatment targeted at low-income, uninsured, and underinsured populations.
- $468 million for border operations that will continue the state’s COVID-19 response and humanitarian activities at the southern border in anticipation of increased arrivals.
- $183 million for the COVID-19 call center, contractor support and contract costs, and the Public Health Reserve Corps.
- $250 million to support unanticipated COVID-19 emergency response needs.
Minimum Wage Increase
- Inflation is expected to exceed 7% in 2021-22, which has triggered an accelerated increase of the state's minimum wage for millions of workers to $15.50 per hour regardless of employer size.
Worker Protection from Extreme Heat
- $24.5 million General Fund to the Department of Industrial Relations to protect vulnerable populations through targeted outreach and education in multiple languages for employers and employees, and increase strategic enforcement before and during heat events to protect workers from heat-related illness and wildfire smoke hazards.
Revenue and Taxation
The Governor’s May Revision is centered on creating a stronger fiscal foundation to guard against future economic uncertainty. While the Administration’s revenue forecast has grown significantly compared to January 2022, the Department of Finance included the caveat that the May Revision budget forecast was finalized before recent stock market declines and volatility.
Despite this historic discretionary General Fund windfall, the state and local governments are cognizant of the economic pressures resulting from record rates of inflation, continued global supply chain disruptions, labor force declines, and the war in Ukraine. Cal Cities is monitoring the Federal Reserve’s monetary policy changes to address inflation nationally and assessing the impact on the state’s economic growth.
Consequently, the Governor’s May Revision prioritizes prudent investments, including $37.1 billion in budgetary reserves, and plans to prepay billions of dollars in state debts and supplemental deposits into the Rainy Day Fund to reach the constitutional maximum (10% of General Fund revenues).
Although the Governor’s proposed budget in January exceeded the State Appropriations Limit (“Gann Limit”), the May Revision excludes expenditures related to the revised allocation of Coronavirus State Fiscal Recovery Funds from the State Appropriations Limit expenditure calculation, bringing General Fund expenditures below statutory spending requirements.
Below is a breakdown of the major allocations and policies announced in the Governor’s May Revision.
State-Mandated Program Costs Owed to Local Governments
- The May Revision does not include an allocation of $933.5 million to reimburse local governments for costs incurred to implement state-mandated programs between 2004 and fiscal year 2019-20.
- Of the $933.5 million owed to local governments, $466.6 million is owed to cities (not including estimated accrued interest).
- Cal Cities will continue to work with the Administration and the Legislature to ensure this long-standing state debt is repaid to local governments.
The “Lithium Valley” Vision
- The May Revision proposes to increase the California Alternative Energy Advanced Transportation Financing Authority’s sales tax exemption program by $45 million across three fiscal years to bolster lithium-related activity in the Salton Sea, sometimes referred to as the “Lithium Valley.”
- The Administration has committed to additional backfills to local revenues consistent with the original California Alternative Energy Advanced Transportation Financing Authority’s program. In the coming weeks, Cal Cities will be vigilant in support of these backfills.
The May Revision also proposes a per-ton lithium extraction tax, with intended support for local governments. Further details regarding this proposed tax are not currently available. Cal Cities staff will work with the Administration and the Legislature to determine the structure and fiscal impact of this proposal.