The Governor’s May Revise tops $213 billion, an increase from the $209 billion in his January proposal. The Governor’s first May Revise presentation was stylistically different from former Gov. Jerry Brown’s, with Newsom opting to use a projector and slides, rather than Brown’s famous budget charts. However, Newsom did echo the fiscal prudence of Gov. Jerry Brown, by repeatedly mentioning the inevitable slower economic growth trends that are forecasted to occur in FY 2022–23, citing the current decade-long expansion and mounting tensions in Washington D.C. as contributing factors. Despite this, the Governor reported that the May Revise predicts short-term revenues of $3.2 billion above the estimates included in the January budget release
The Governor contributed an additional $1.2 billion into the Rainy Day Fund, bringing the total reserve to $16.5 billion. The fund is projected to reach its ten percent constitutional cap in FY 2022-23, two years earlier than predicted in January.
The League expressed
its appreciation for Gov. Newsom’s dedication to addressing California’s housing affordability and homelessness crisis and for expanding the resources local governments have to combat these challenges. Unfortunately, the May Revise maintains the Governor’s commitment to link SB 1 transportation funding to compliance with housing element law, zoning and entitlements to meet the state’s housing goals. The League continues to be a willing partner with the Administration to find a mutually beneficial solution to the housing affordability and supply crisis without withholding any hard fought transportation funding.
The Governor’s housing-related proposals are largely consistent with his January budget, which proposes $1.75 billion for various housing related programs. However, the May Revise does contain some minor increases in funding to assist renters and repurposes housing production incentives grants to provide infill infrastructure funding for housing projects.
During the press conference, the Governor highlighted the fact that California only saw 77,000 net housing units produced in 2018. He said that production rate was “deplorable” and significantly short of the 180,000 units needed each year to keep pace with population growth. Additionally, the Governor stressed his three P’s to addressing the housing crisis: “Production, Preservation and Prevention.”
The May Revise also sheds light on a troubling trend with regard to homeownership. Nationally, over the past decade, homeownership rates have fallen from 67.2 percent to 64.9 percent. California has seen a similar decline with rates falling from 58 percent to 54.8 percent. Among Californians 35–44 years old, homeownership rates have significantly declined from 54.6 percent to 44.6 percent. Slow wage growth, inflation, and student loan debt are indicated as likely contributing factors for the decline in homeownership.
In response to requests for additional funding to address homelessness, the Governor’s May Revise includes an additional $150 million for homelessness services and resources, increasing the state’s support to prevent and mitigate homelessness to $1 billion.
The May Revise also includes additional investments to sustain and improve the state’s emergency readiness, response and recovery capabilities. The additional $39.9 million in funding will allow for further investments and an increase in the state’s ability to protect vulnerable populations and tackle increasingly frequent and challenging natural disasters as they arise.
Details on budget areas of importance to cities are outlined below:
The Governor’s May Revise indicates that net housing production in 2018 was 77,000 when factoring in loses due to natural disasters which destroyed over 15,000 units. This is down from 85,297 produced in 2017, and down from the 89,457 produced in 2016. On a more positive note, it is forecasted that annual residential building permits will likely increase to around 165,000 by 2022. This is a dramatic increase and brings production levels near the state’s identified annual need of 180,000 units to keep pace with population growth.
Short-Term Planning and Performance Incentive Grants
The Governor’s January Budget proposed allocating $750 million in one-time funding for local planning ($250 million) and incentive grants for reaching housing production milestones ($500 million).
The May Revise makes two significant changes:
- School districts and county offices of education will be eligible to compete with cities and counties for a portion of the $250 million in planning and technical assistance support; and
- The $500 million incentive grants for meeting housing production milestones has been repurposed and is now being allocated to the Infill Infrastructure Grant Program administered by the Department of Housing and Community Development (HCD).
The Infill Infrastructure Grant Program provides assistance, available as gap funding to infrastructure improvements required for specific residential or mixed-use infill development. All of the funds are allocated through a competitive process, based on the merits of the individual infill projects and areas.
While there is no specific proposal, the Governor has also indicated that the Administration is considering ways to streamline and improve processes at the state’s Infrastructure and Economic Development Bank (IBank) to help fund infrastructure, including projects in Opportunity Zones.
Long-Term Statewide Housing Production Strategy
The Administration reaffirmed its commitment to meeting long-term housing production goals. As part of this commitment, the May Revise aligns housing production targets with the forthcoming 6th cycle Regional Housing Needs Allocation (RHNA) goals in the short-term. HCD will continue to develop long-term regional housing production targets through a new RHNA process by no later than 2022.
Additionally, as part of this long-term strategy, the May Revise maintains the Governor’s commitment to link SB 1 transportation funding to compliance with housing element law, zoning and entitlements to meeting the State’s housing goals.
Expanded State Housing Tax Credit Program
The January Budget proposed to allocate $500 million to the tax credit program in 2019–2020 and up to $500 million annually thereafter. The May Revise expands eligibility for the tax credit program to include projects that preserve existing affordable housing.
Demonstration Projects for Housing
The May Revise includes $2.5 million for real estate consultants for both HCD and Department of General Services (DGS), and four positions and $780,000 ongoing for HCD to assist with developing request for proposals, conducting site investigations, evaluating housing developments and monitoring projects.
Legal Aid for Renters and Landlord-Tenant Disputes
The May Revise proposes an additional $20 million to provide grants to nonprofit service organizations to assist with landlord-tenant disputes, including legal assistance for counseling, renter education programs and preventing evictions.
Providing additional resources to help address homelessness continues to be a major priority for the Governor. The May Revise increases the state's support to prevent and mitigate homelessness by $1 billion. Specifically, it provides:
Fairview Development Center
- $650 million to local governments for homeless emergency aid;
- The most populous 13 cities receive $275 million;
- Counties receive $275 million; and
- Continuums of Care receive $100 million – all cities and counties have access to these funds.
- $120 million for expanded Whole Person Care Pilots;
- $150 million for strategies to address the shortage of mental health professionals in the public mental health system;
- $25 million for Supplemental Security Income advocacy;
- $40 million for student rapid rehousing and services for University of California and California State University system; and
- $20 million in legal for eviction prevention.
The May Revise includes $2.2 million to complete a site evaluation of disposition options for the Fairview Developmental Center. This property will become available in 2020. The Administration is working with the City of Costa Mesa and Orange County to identify local stakeholder interest in the reuse of the property. Concurrently, DGS will explore options to immediately enter into a long-term lease with a local jurisdiction to provide housing and supportive services for up to 200 individuals with cognitive disabilities who are currently homeless.
Linking Transportation Funding to Housing Objectives
While the Governor’s May Revise includes significant resources to address California’s housing and homelessness crises, it still includes the concept of linking transportation funding to achieve housing objectives. The Governor’s proposal and similar legislative efforts were quickly met with resistance within the Legislature and transportation stakeholders, including the League. The League maintains the position that state and local governments need to ensure that promises made must be promises kept – linking transportation funding to housing objectives would break that promise.
Ensuring that the $26 billion in local transportation funds are not delayed, withheld or diverted for non-transportation purposes is essential in delivering the road improvements promised to voters. Because of SB 1, the unmet funding need for local streets and roads shrinks by approximately $18 billion, while two-thirds of the network moves into a state of good repair.
Absent such investment, shortfalls would have grown by $20 billion and over half of all roads would have fallen into a state of disrepair. SB 1 stabilizes road conditions across the state. Preserving these investments and the commitment made to the voters will continue to be a top priority for the League.
SB 1 provides the following funding for transportation on an annual basis:
- $1.2 billion for local streets and roads, including $600 million for cities (based on population) and $600 million for counties;
- $458 million for local transit operations;
- $386 million for transit, commuter and intercity rail;
- $200 million for the State-Local Partnership Program;
- $100 million for the Active Transportation Program;
- $36 million for Commuter Rail and Intercity Rail; and
- $25 million for Local Planning Grants.
For the latest city transportation funding estimates, including funds from the Highway Users Tax Account and Road Maintenance and Rehabilitation Account, please visit www.californiacityfinance.com
Emergency Preparedness and Response
The Governor made a strong commitment to strengthen the state’s disaster preparedness, response and recovery in the first months of his Administration. As a result, the January Budget proposal allocated $769 million in additional funding to support the state’s emergency preparedness and response. The May Revise adds an additional $39.9 million to enhance the state’s capacity to tackle natural disasters, including devastating wildfires.
The $39.9 million in new funding includes:
Department of Forestry and Fire Protection (CAL FIRE)
- $5.9 million in ongoing funds to increase staffing and response capacity at the Office of Emergency Services (Cal OES);
- $2 million in one-time funds to create a permanent disaster response and recovery unit to tackle local housing issues through HCD;
- $1 million in ongoing funds to the State Water Resources Control Board to increase response capabilities and address engineering and operations issues facing drinking water systems and wastewater utilities;
- $2.8 million in ongoing funds to enhance the Department of Resources Recycling and Recovery’s (CalRecycle) ability to facilitate safe and timely debris removal;
- $979,000 in ongoing funds to Emergency Medical Services Authority to increase disaster medical services capacity;
- $959,000 in ongoing funds to Department of Public Health to support health care facilities and mass care shelters during emergencies as well as disaster preparedness, response and recovery efforts;
- $996,000 in ongoing funds to the Department of State Hospitals to improve emergency coordination and preparedness, and business continuity planning at five state hospitals and the Department of State Hospitals headquarters;
- $2.9 million in ongoing funds to Department of Social Services to support their mandated disaster planning, coordination and training activities; and
- $711,000 to initiate development of a statewide Disaster Reserve Corps.
$15 million in one-time funds are allocated to Cal FIRE to enhance CAL FIRE’s fire protection capabilities and increase the pace and scale of forest health and fire prevention activities.
Support for Affected Communities
The May Revise proposes the following allocation changes for local communities affected by the devastating disasters in recent months:
Related Activities and Executive Orders
- $75 million in one-time funds to improve resiliency of state’s critical infrastructure in response to investor-owned utility-led Public Safety Power Shutdown (PSPS) actions;
- $41 million in one-time funds to the Public Utilities Commission Utilities Reimbursement Account to fund inspections and improve review of both utility wildfire mitigation plans and PSPS reports;
- $518,000 in one-time funds to reimburse cities, counties and special districts in Los Angeles, Mendocino, Napa, Orange, San Diego, Solano, Tuolumne and Ventura counties for 2018–19 property tax losses resulting from the 2018 wildfires. This augments the $31.3 million in the Governor's January Budget proposal, and subsequently added to the 2018 Budget Act by Chapter 1, Statutes of 2019 (AB 72); and
- $10 million in one-time funds to support local communities in their recovery from the unprecedented devastation of the Camp Fire.
The Governor took several actions in the opening weeks of his Administration related to wildfires and disaster preparedness. Below are updates to the actions the Governor took earlier this year:
- Executive Order N-05-19 was signed on Jan. 8 2019, requiring CAL FIRE, in coordination with other state agencies, to report to the Governor within 45 days with recommendations to prevent and mitigate wildfires, including deploying personnel and resources, policy changes for rapid fuels management and a methodology to assess at-risk communities. On March 5, CAL FIRE released the Community Wildfire Prevention and Mitigation Report that, among other things, recommends acceleration of the completion of 35 identified priority fuel reduction projects.
- “Wildfires and Climate Change” California’s Energy Future report was released on April 12, 2019 by the Governor-created Strike Force. This report outlines several concepts to account for utility-caused wildfires and the associated damaged related costs.
The Governor is continuing to make safe drinking water a priority in the May Revise by reiterating his commitment to develop and implement an on-going stable source of funding to provide safe drinking water for all Californians. A funding source has not yet been identified, but will likely come from a tax on water.
The May Revise adds an additional $252 million to the cap-and-trade program’s Green House Gas Reduction Fund expenditure plan, making a total of $1.253 billion in proposed 2019–20 expenditures. Some notable increases to the expenditure plan include:
- $92 million one-time increase to the Transformative Climate Communities program to support integrated, community-scale housing, transit-oriented development, and neighborhood projects that reduce emissions in some of the state's most disadvantaged areas; and
- $130 million one-time increase to the Low Carbon Transportation program, including $50 million to provide incentives for zero-emission trucks, transit buses, and freight equipment.
The League has also requested more cap-and-trade funding
for organic waste infrastructure to address the state’s organic waste diversion goals. The May Revise does not include additional funding in this area; however, continued discussions by the Legislature on this proposal are expected.
Sustainable Pest Management
The Governor indicated in his May Revise press conference that acute exposure to the insecticide Chlorpyrifos can cause severe health risks, including neurological development impairments. As a result, the Governor included $5.7 million in one-time funding to assist in the transfer away from Chlorpyrifos and shift to new alternatives.
The Governor continues his strong support for children and families by creating his “Parents Agenda.” This ambitious agenda builds on aspects of his January Budget, but adds new funding for programs including subsidized childcare, temporary assistance to families and improving childcare overall. Additionally, the May Revise also includes more funding to address a shortage of mental health professionals in local communities and to bolster funding for public libraries.
- $80.5 million in continuously appropriated funds from the Cannabis Fund to subsidize child care for school-age children from income-eligible families;
- $12.8 million federal funds to pilot a program to allow alternative payment agencies to offer emergency child care vouchers to families on the waiting list who are in crisis and in need of temporary assistance; and
- $2.2 million in ongoing federal funds to improve child care quality through Quality Counts California.
- $5 million in one-time funds to support grants for local library jurisdictions with the lowest per capita library spending to develop and implement early learning and after-school library programs; and
- $3 million one-time funds to support grants for local library jurisdictions to purchase bookmobiles and community outreach vehicles that would be used to expand access to books and library materials in under-resourced neighborhoods.
The May Revise also invests $100 million in one-time funding (available over five years) from the Mental Health Services Fund for the new 2020–25 Workforce Education and Training Five-Year Plan. The plan provides a framework of strategies that the state, local governments and other stakeholders can pursue to begin to address the shortage of qualified mental health professionals in the public mental health system.
Department of Corrections and Rehabilitation (CDCR)
The May Revise includes total funding of $12.8 billion, up from $12.6 billion proposed in January. $12.5 billion in General Fund and $305 million in other funds for CDCR in 2019–20. The average daily adult inmate population projection for 2018-19 is now projected to decrease from 127,993 to 126,705, about a 1 percent decrease, which aligns with a projected year-over-year downward trend for 2018–19 and 2019–20.
Proposition 57, the Public Safety and Rehabilitation Act of 2016, is currently estimated to reduce the average daily adult inmate population by approximately 6,500 in 2019–20, growing to an inmate reduction of approximately 10,600 in 2021–22.
The May Revise includes $8.8 million ongoing General Fund to establish two new 60-bed female reentry facilities in Los Angeles and Riverside and expand an existing male facility in Los Angeles by 10 beds. The May Revise also includes 1.5 million ongoing General Fund to provide a five-percent contract rate increase for Male Community Reentry Program providers.
Integrated Substance Use Disorder Treatment Program
The May Revise includes $71.3 million one-time General Fund in 2019–20 and $161.9 million ongoing General Fund beginning in 2020–21 to implement an integrated substance use disorder treatment program throughout all 35 CDCR institutions. Proposal components include:
- Medication-assisted treatment (MAT) for opioid and alcohol use disorders;
- A redesign of the current cognitive behavioral treatment curriculum; and
- The development and management of inmate treatment plans and substance use disorder-specific pre-release transition planning.
The proposal targets three types of inmate populations:
Inmate Health Care & Medical Classification Model Update
- Inmates who were receiving MAT prior to entering prison;
- Those already in CDCR with high substance use disorder risk factors (such as a recent overdose); and
- Inmates scheduled for release within 15–18 months who have been assessed as having a high need for substance use disorder services.
The May Revise includes $3.5 billion in General Fund to health care services programs (an increase of roughly $200 million from the January Budget proposal), which provide access to mental health, medical and dental care for inmates. This increase was driven by unanticipated current year costs totaling $95.6 million General Fund related to contract medical ($61 million), pharmaceuticals ($18.8 million), clinical staffing ($12.7 million) and leased office space ($3.1 million).
The May Revise designates $114.3 million General Fund in 2019–20 to account for these costs on an ongoing basis. Included in these ongoing funds is $27.9 million to pay for increased staffing levels for health care operations throughout California’s prison system. This funding allocation is based on an updated assessment of CDCR’s Medical Classification Model, which concluded that current staffing ratios are insufficient to address the state’s prison population; a population that has grown older, sicker and is experiencing an increase in trauma-related incidents.
In furtherance of the Governor’s January Budget proposal plan to reorganize the Division of Juvenile Justice (DJJ), the May Revise includes statutory changes to move the DJJ from the CDCR to a new department — the Department of Youth and Community Restoration — under the California Health and Human Services Agency (CHHS), effective July 1, 2020.
The May Revise also includes:
- $1.2 million ongoing General Fund for a new independent training institute that will train all staff on best practices to further the new department’s rehabilitative mission; and
- $1.4 million ongoing General Fund to create a partnership between the DJJ and the California Conservation Corps to develop and implement an apprenticeship program to provide skill building and job training opportunities to participating members.
Over the coming year, the Administration will develop a plan to consolidate the Office of Emergency Services and Victim Compensation Board victims programs within a new state department under the Government Operations Agency, and may identify victims programs in other departments that could also be consolidated.
With regard to victim impact programs that are viewed as unique to CDCR and will not be consolidated, the May Revise includes an additional $2 million to the Inmate Welfare Fund for:
California Violence Intervention and Prevention Program (CalVIP)
- The Victim Offender Dialogue program, which employs restorative justice principles to provide opportunities for offenders to understand the impacts their actions have had on victims; and
- The Division of Rehabilitative Programs to establish or expand Innovative Programming Grants targeting victim impact programs.
While the January Budget included $9 million ongoing General Fund for the CalVIP program, the May Revise proposes an additional $18 million in one-time General Fund, totaling $27 million for the program in 2019–20 for grants to eligible cities and community based organizations that provide services such as community education, diversion programs, outreach to at-risk transitional age youth and violence reduction models.
Nonprofit Security Grant Program
The May Revise includes a $15 million one-time General Fund augmentation for the grant program, to assist nonprofit organizations that have historically been targets of hate-motivated violence, such as places of worship.
Local Public Safety
The May Revise includes:
Cannabis Tax Fund Allocations
- An additional $6.2 million ongoing General Fund for the Standards and Training for Corrections Program, which assists local corrections agencies in improving the professional competence of their staff;
- $112.8 million General Fund (decrease of $548,000 from January proposed budget) for the Community Corrections Performance Incentive Grant, which was created to provide incentives for counties to reduce the number of felony probationers sent to state prison; and
- $14.8 million General Fund for county probation departments to supervise the temporary increase in the average daily population of offenders on Post Release Community Supervision; $2.9 million more than proposed in January.
Under the May Revise, the cannabis excise tax is forecast to generate $288 million in 2018–19 and $359 million in 2019–20, a reduction of $67 million and $156 million, respectively, from the Governor’s JanuaryBudget forecast. The forecast assumes continued growth of more than 15 percent annually, as new businesses continue to enter the marketplace and local jurisdictions adjust to the state’s evolving legal framework. The May Revise notes that for the near term, revenue estimates are subject to significant uncertainty because the market has only recently been established.
Prop. 64 specified the allocation of resources in the Cannabis Tax Fund, which are continuously appropriated. Pursuant to Prop. 64, expenditures are prioritized for regulatory and administrative workload necessary to implement, administer and enforce the Cannabis Act, followed by research and activities related to the legalization of cannabis, and the past effects of its criminalization. Only after all of these priorities are addressed, can any remaining funds be allocated to issues such as youth education, environmental restoration; and public-safety related activities.
The May Revise estimates $198.8 million will be available for these purposes for the first time in 2019-20, which include the three funding buckets identified below.
Education, prevention, and treatment of youth substance use disorders and school retention — 60 percent ($119.3 million). This funding is divided as follows:
- $12 million to the Department of Public Health for cannabis surveillance and education activities;
- $80.5 million to the Department of Education to subsidize child care for school-aged children of income-eligible families;
- $21.5 million to the Department of Health Care Services for competitive grants to develop and implement new youth programs in the areas of education, prevention and treatment of substance use disorders; and
- $5.3 million to California Natural Resources Agency to support youth community access grants to natural or cultural resources, with a focus on low-income and disadvantaged communities.
Clean up, remediation, and enforcement of environmental impacts created by illegal cannabis cultivation — 20 percent ($39.8 million). This funding encompasses:
- $23.9 million to the Department of Fish and Wildlife with funding to support clean-up, remediation, and restoration of damage in watersheds affected by illegal cannabis cultivation, as well as enforcement activities aimed at preventing further environmental degradation of public lands; and
- $15.9 million to the Department of Parks and Recreation in order to prioritize resources for effective enforcement of cultivation activities, remediation and restoration of illegal cultivation activities on state park land, and making roads and trails accessible for peace officer patrol and program assessment and development.
Public safety-related activities — 20 percent ($39.8 million), which include:
- $2.6 million to the California Highway Patrol (CHP) for training, research, and policy development related to impaired driving and for administrative support;
- $11.2 million to the CHP’s impaired driving and traffic safety grant program for nonprofits and local governments, as authorized in Prop. 64; and
- $26 million to the Board of State and Community Corrections for a competitive grant program for local governments that have not banned cannabis cultivation or retail activities.
Importantly, the May Revise also includes a $15 million for the Cannabis Tax Fund to provide grants to local governments to assist in the creation and administration of equity programs, and to support equitable access to the regulated market for individuals through financial and technical assistance. The Governor’s Office of Business and Economic Development will administer the grant program on behalf of the Bureau of Cannabis Control.
Statewide Issues and Various Departments
Property Tax Forecast
Preliminary data shows statewide property tax revenues increased 6.1 percent in 2018–19 and is expected to grow 6.5 percent in 2019–20.
Wayfair v. South Dakota
The U.S. Supreme Court’s ruling in Wayfair v. South Dakota
in June 2018 gives states more authority to require out-of-state sellers to collect use tax. AB 147 (Burke), signed this year, clarified the economic nexus thresholds that California will use to determine if out-of-state retailers are required to remit use tax to California, effective April 1, 2019. Marketplace facilitators will now collect and remit sales and use tax on behalf of their marketplace sellers, effective Oct. 1, 2019.
The Wayfair decision and AB 147 are expected to increase sales and use tax revenues by $174 million in 2018-19 and $616 million in 2019-20. The May Revise proposes that CDTFA limit the look-back to 3 years of back taxes, which is consistent with the revenue forecast. This will be codified with statutory amendments.
Menstrual Products and Diapers Sales Tax Exemption
The Governor proposes to exempt menstrual products and children’s diapers from sales taxation beginning Jan. 1, 2020. This exemption reduces General Fund revenues by $17.5 million in 2019–20 and $35 million each year thereafter. Total estimated state and local revenue losses merit further review, given previous estimates on similar legislative proposals in the past have been higher. This tax exemption sunsets on Dec. 31, 2021.
Paid Family Leave
The Administration proposes to expand the maximum duration of a Paid Family Leave (PFL) benefit claim from six weeks to eight weeks for all bonding and care-giving claims, effective July 1, 2020. This expansion adds an additional month of paid leave for two-parent families—allowing up to a combined four months of leave after the birth or adoption of their child. The proposal will also allow claimants to take a full eight weeks to assist a family member for military deployment, pursuant to Chapter 849, Statutes of 2018 (SB 1123), when that bill takes effect on Jan. 1, 2021.
To deliver this expanded benefit, the minimum reserve in the Disability Insurance Fund will be reduced by 15 percent beginning July 1, 2019.
Paid Family Leave Task Force
Additionally, the Administration will convene a task force to consider different options to phase-in and expand PFL to meet the Administration’s goal that all babies can be cared for by a parent or a close relative for up to six months. The task force will also evaluate policy considerations such as alignment of existing worker protections and non-retaliation protections for employees’ use of the program, as well as adjustments to the wage replacement rate. By November, the task force will issue recommendations for consideration in the 2020–21 Governor’s Budget.
County Voting Systems
The May Revise includes a one-time General Fund investment of $87.3 million to replace and upgrade county voting systems.
State Retirement Contributions
The May Revise maintains the Governor’s January proposal to reduce the state’s unfunded pension liabilities by $3 billion, and increases the state’s contributions to CalPERS by a net total of $3.5 million. The May Revise also increases the state’s contributions to CalSTRS by $5.6 million and adds $150 million in one-time funds to reduce employer contributions to 16.7 percent in 2019-20.
While budget committee hearings have been underway in the Capitol, the May Revise will begin the more active budget committee hearing process. June 15 is the constitutional deadline for the Legislature to send the Governor its budget. The League will continue to examine the details of this budget proposal, committee hearings and provide addition information to cities as warranted.