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Home > News > News Articles > 2020 > May > Gov. Newsom Submits Austere May Revise Budget Proposal
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Gov. Newsom Submits Austere May Revise Budget Proposal

May 14, 2020
In response to the devastating economic impacts of COVID-19 on the state’s budget, to the tune of a projected $54 billion shortfall, Gov. Gavin Newsom is proposing a multiyear recovery approach that significantly draws down nearly all available reserves while delivering a balanced budget.
 
The May Revision budget proposal is scaled down to $203 billion from the $222.2 billion proposed in January, as the state faces its first deficit in eight years. The Governor’s focus is on the protection of California’s core values: public education, public health, public safety, and people hit hardest by COVID-19. These core values have been at the heart of local leaders’ efforts on the front lines, protecting communities and delivering services throughout the pandemic.
 
The May Revision includes details on the state’s fiscal outlook in context of present and future risks to the state, national, and global economy, including prolonged disruption from the pandemic and public health response. As the state plans through a multiyear or decade-long recovery, the budget plan highlights climate change, housing affordability, aging population, lower fertility rates, and slowing migration as key risks to the California economy.
 
The May Revision proposes to use $16.2 billion in the Budget Stabilization Account (Rainy Day Fund) over three years, cancel planned or previously proposed program expansions, spend available federal funds, and build automatic budget controls in the event that new federal stimulus dollars are approved.
 
From the League’s preliminary analysis, there does not appear to be any state taking or borrowing of city revenues. The League will provide additional updates and analysis as we continue to work through the details. Read League Executive Director Carolyn Coleman's response to the May Revision here, and read the League's preliminary analysis below.
 
Housing
 
State Support for Renters and Homeowners
The May Revision proposes to expend $331 million in National Mortgage Settlement funds for housing counseling, mortgage assistance, and renter legal aid services as follows: the California Housing Financing Agency will administer $300 million for housing counseling and mortgage assistance, and the remaining $31 million to the Judicial Council to provide grants to legal aid services organizations.
 
Funding for Affordable Housing and Infrastructure
The May Revision makes the following key investments:
  • Maintains the $500 million in low-income housing state tax credits in the Governor's proposed January Budget.
  • Maintains the SB 2 real estate transaction fee, estimated at $277 million for 2020-21, for affordable housing.
  • Allocates $452 million from Cap-and-Trade auction proceeds for infill development that also reduces vehicle miles traveled and greenhouse gas emissions.
  • Seeks to expedite the allocation of the $4 billion in Proposition 1 bonds for veterans and affordable housing programs.
 The May Revision redirects significant funding away from key housing programs. These include:
  • $250 million in mixed-income development funds over the next three years.
  • $200 million in infill infrastructure grant funds.
  • $115 million in other housing program funds.
It is important to note that these funds have not been allocated or dedicated to specific projects. It is unclear when these funds will be returned to their individual programs.
 
Streamlining Housing Processes and Procedures 
The May Revision continues the Administration’s commitment to implement and identify process improvements to streamline housing programs to remove barriers to increase housing production. These include:
  • Creating a joint application for tax credits between the Tax Credit Allocation Committee and California Debt Limit Allocation Committee.
  • Realigning the Housing and Community Development Department’s (HCD) program award schedules to expedite funding awards.
  • Working on improvements to revamp the state’s housing planning process with input from key stakeholders and local governments.
The May Revision seeks to leverage federal funds and existing state programs and properties to implement a comprehensive strategy to increase housing supply and to support preservation, protection, and production of housing. These include:
  • Preserving existing subsidized affordable housing stock by stabilizing existing deed-restricted affordable housing and guarding against private sector actors buying up distressed assets.
  • Seeking strategies to stabilize tenants in existing units.
  • Significantly streamlining, upzoning, and producing new housing units, especially on excess and surplus lands, in transit-oriented infill areas, and on public land.
  • Building a workforce development strategy to support a skilled and trained housing workforce pipeline with high-road wage rates, and promoting innovative alternative construction methods.
Homelessness
 
The May Revision proposes $750 million in federal funding to purchase hotels and motels secured through Project Roomkey, to be owned and operated by local governments or non-profit providers. The state will also use these funds to provide significant technical assistance to local jurisdictions or other parties seeking to purchase and operate former Project Roomkey hotels and motels to address homelessness in their localities.
 
The May Revision allocates $1.5 million ongoing to the Homeless Coordinating and Financing Council Administrative Resources and 10 permanent Homeless Coordinating and Financing Council positions to effectively carry out statutory mandates and strengthen its strategic coordination of the state’s efforts to address homelessness.
 
The May Revision allocates $450 million of the state’s CARES Act funding to cities and $1.3 billion to counties to be used toward homelessness, public health, public safety, and other services to address the COVID-19 pandemic.
  • The May Revision allocates $450 million to all cities that did not receive a direct allocation under the CARES Act. Of these recipients, cities with populations above 300,000 will receive a direct state allocation while all other cities will be provided funding through their counties. Jurisdictions must spend these funds consistent with federal law and are advised to prioritize these dollars to supplement existing efforts by counties and Continuums of Care to address the impacts of COVID-19 on people experiencing homelessness, including but not limited to outreach and hygiene efforts, shelter and housing supports, public safety, and rental subsidies.
  • The May Revision allocates $1.3 billion of its CARES Act funding directly to counties based on population size to address the public health, behavioral health, and other health and human services needs that have arisen as a result of the COVID-19 pandemic.
It is important to note that funding is contingent on adherence to federal guidance and the state's stay-at-home orders and will be released upon jurisdictions' certification of both.
 
Environmental Quality
 
The May Revision maintains relatively the same funding levels for both the Environmental Protection Agency and the Natural Resources Agency from the Governor’s proposed January Budget. The Environmental Protection Agency’s total proposed budget is $3.911 billion, an approximately 15 percent decrease from the 2019-20 adopted budget. The Natural Resources Agency total budget is $6.748 billion, an approximately 3 percent increase from the 2019-20 adopted budget.
 
The Governor’s May Revision differed significantly from the January budget proposal, with the elimination of the climate catalyst fund proposal and the absence of the $4.75 billion climate adaptation bond proposal. With the onset of a COVID-19 recession, the ambitious “climate budget” the Governor proposed is all but gone.
 
Emergency Preparedness and Response

The May Revision reflects $127 million in funding for the Office of Emergency Services (Cal OES) to enhance the state’s emergency preparedness and response capabilities. This funding includes:
  • Increases funding from the January budget proposal for the California Disaster Assistance Act (CDAA) by $21.5 million, to total $38.2 million in one-time General Fund funding. These funds can be used to repair, restore, or replace public real property damaged or destroyed by a disaster or to reimburse local governments for eligible costs associated with emergency activities undertaken in response to a state of emergency proclaimed by the Governor. This augmentation increases total CDAA funding available in the Budget to $100.8 million.
  • Reduces funding for the Wildfire Forecast and Threat Intelligence Integration Center from the January budget proposal by $6.8 million, to $2 million in General Fund funding. These dollars will go to enhance the state’s emergency response capabilities through improved forecasts for tracking and predicting critical fire weather systems, which improves situational awareness of fire threat conditions in real-time, consistent with Chapter 405, Statutes of 2019 (SB 209).
  • Eliminates $101.8 million funding proposal to implement AB 38 (Wood, Chapter 391, Statutes of 2019), which directs Cal OES and the Department of Forestry and Fire Protection (CAL FIRE) to develop a joint powers authority to administer a $100 million home hardening pilot program.  The May Revision, however, does include $8.3 million in Cap-and-Trade funding to go towards AB 38 implementation.
  • Maintains $9.4 million ($9.2 million in General Fund) and 50 positions to enhance Cal OES’ ability to prepare for, respond to, and assist the state in recovering from disasters while maximizing eligible federal reimbursements.
  • Maintains $50 million one‑time General Fund to support additional preparedness measures that bolster community resiliency. Building on the state’s 2019-20 power resiliency investments, these measures will support critical services still vulnerable to power outage events, including schools, county election offices, and food storage reserves. This proposal will support a matching grant program to help local governments prepare for, respond to, and mitigate the impacts of power outages.
  • Maintains $17.3 million to operate the California Earthquake Early Warning. This new innovative program that uses science, monitoring, and technology to alert people, businesses, and transit agencies via devices before the anticipated strongest seismic activity arrives. The May Revision proposes to switch the fund source for the loan from the General Fund to the School Land Bank Fund.
The May Revision includes several pots of funding to the California Public Utilities Commission (CPUC) to reduce the risk of utility-initiated wildfires. The CPUC would receive $50.1 million in 2020-21 for the Commission to review and enforce utility wildfire mitigation plans and implement AB 1054 (Holden, 2019) and AB 111 (Budget, 2019). The bills established a new Wildfire Safety Division, created procedures and standards applicable to catastrophic wildfire proceedings, codified the prudent manager standard for wildfire liability, and established a Wildfire Fund and mechanisms to capitalize the fund to protect ratepayers.
 
The May Revision continues to build on the CPUC’s emergency response and preparedness efforts and includes an additional 11 positions for the CPUC to further improve its Wildfire Mitigation Plan guidelines and performance metrics. Overall, the Governor’s proposed January Budget and May Revision together contain 106 new positions and $30 million for the CPUC to address issues related to utility-caused wildfires.
 
The May Revision also includes $1.1 billion in available federal funds through the Community Development Block Grant Program (CDBG) for critical infrastructure and disaster relief related to the 2017 and 2018 wildfires.
 
Climate Resiliency

The May Revision dramatically changes the Governor’s climate resiliency budget proposal. Chief among these changes are the elimination of the $1 billion “climate catalyst fund” and no mention of the Governor’s ambitious $4.75 billion climate resiliency bond measure. The Governor cites “unforeseen budgetary pressures” as the impetus behind the elimination of the climate catalyst fund. However, it is unclear if the Governor is continuing to promote a climate resiliency bond proposal in the Legislature and to the voters given the new fiscal condition of the state.
 
Additionally, the May Revision maintains the $965 million Cap-and-Trade expenditure plan outlined in January, but with the caveat that auction proceeds could come in lower than anticipated. The May Revision establishes a “pay-as-you-go” provision that will allow Cap-and-Trade expenditures to be made quarterly to match the auction proceeds. The following types of projects will be prioritized first if auction revenues are lower than anticipated:
  • Air Quality in Disadvantaged Communities: AB 617 Community Air Protection Program and agricultural diesel emission reduction.
  • Forest Health and Fire Prevention, including implementation of the requirements of Chapter 391, Statutes 2019 (AB 38).
  • Safe and Affordable Drinking Water.
 
Public Safety
 
Proposition 47 Savings
Voters passed Proposition 47 in November 2014, which requires misdemeanor rather than felony sentencing for certain property and drug crimes and permits inmates previously sentenced for these reclassified crimes to petition for resentencing. The Department of Finance currently estimates net savings of $102.9 million General Fund for Proposition 47 when comparing 2019-20 to 2013-14, a decrease of $19.6 million from the Governor's Budget estimate for 2019-20. These funds will be allocated according to the formula outlined in the initiative.
 
The Commission on Peace Officer Standards and Training (POST)
The May Revision proposes to use $10 million General Fund previously appropriated to:
  • Create a Distance Learning Grant Program.
  • Increase the functionality of POST’s Learning Portal.
  • Upgrade previously produced and developed distance learning courses and videos.
Cannabis
  • Cannabis Regulatory Consolidation – The Governor’s proposed January Budget announced the Administration’s intent to consolidate the cannabis-regulatory functions in the Departments of Consumer Affairs, Food and Agriculture, and Public Health into a single Department of Cannabis Control, and stated more details would be submitted to the Legislature in the spring. The Administration will now release details of a proposed consolidation in the 2021-22 Governor’s Budget.
  • Updated Allocation of Cannabis Tax Fund – Proposition 64 specified the allocation of resources in the Cannabis Tax Fund, which are continuously appropriated. Reflecting a total reduction of $35.9 million compared to the Governor’s proposed January Budget estimate (due to lower than expected tax receipts as result of the COVID-19 pandemic), the Budget estimates $296.9 million will be available for these purposes in 2020‑21, and the structure of these allocations is unchanged from 2019‑20:
    • Youth education, prevention, and early intervention and treatment and school retention—60 percent ($178.1 million)
    • Environmental protection—20 percent ($59.4 million)
    • Public safety-related activities—20 percent ($59.4 million)
  • Cannabis Tax Reform – The Governor’s January Budget proposed to simplify tax administration for cannabis by changing the point of collection of cannabis taxes. The changes would have moved the responsibility for the cultivation excise tax from the final distributor to the first, and for the retail excise tax from the distributor to the retailer. This will now be addressed in next year’s budget.
  • Cannabis Excise Tax – Proposition 64 levies excise taxes on the cultivation and retail sale of both recreational and medical cannabis. The cultivation tax is paid on all recreational and medicinal cultivation of cannabis, and was increased to adjust for inflation to $9.65 per ounce of flower, $2.89 per ounce of trim, and $1.35 per ounce of fresh cannabis plant on January 1, 2020. In addition, there is a 15 percent tax on the retail price of cannabis. Both cannabis excise taxes together generated $299 million in 2018-19. The revenue from excise taxes was revised down from $479 million to $443 million in 2019-20 and $590 million to $435 million in 2020-21.
    • While similar products like alcohol and tobacco tend to be recession-resistant, the May Revision assumes that cannabis businesses will be more negatively impacted by the COVID-19 pandemic. Cannabis businesses have less access to banking services that could provide liquidity, have a younger consumer base likely to be disproportionately affected by the COVID-19 recession, and still must contend with competition from the illicit market.
Revenue and Taxation
 
In an effort to find new revenues, the May revision proposes the following:
  • A new tax on e-cigarettes based on nicotine content to be deposited in a new special fund.
  • Suspend Net Operating Losses for 2020, 2021, and 2022 for medium and large businesses.
  • Limit business incentive tax credits from offsetting more than $5 million of tax liability for 2020, 2021, and 2022.
  • Require used car dealers to remit sales tax to the Department of Motor Vehicles with the registration fees.
  • Require the use of market value for determining price for private auto sales (potentially increasing local shares that are distributed through county sales tax pools).
 
Transportation and Infrastructure
 
The transportation budget as a whole remains about the same as the Governor’s January proposal. SB 1 (Chapter 5, Statutes of 2017) funds are protected and continue to be collected. No SB 1 funds are being used to address General Fund shortfalls. In addition to the details below, the May Revision addresses how the Department of Motor Vehicles (DMV) has responded to COVID-19, including alternative service channels such as virtual field offices. The deadline for REAL ID has also been extended by one year until October 2021.  
 
Enhancing Emergency Response and Preparedness
The May Revision reflects $127 million for the Cal OES. Of that, the May Revision makes the following key investments related to Transportation, Communications, and Public Works:
  • Maintains $17.3 million to the California Earthquake Early Warning Program to alert people, businesses, and transit agencies of strong seismic activity before it occurs.
  • Maintains $2.5 million to transfer the Seismic Safety Commission to Cal OES, which will increased coordination, earthquake preparedness, and seismic safety benefits. 
 
Transportation Projects
Fuel tax revenues used to fund transportation projects are expected to drop by a total of $1.8 billion through 2024-25.
 
Caltrans will accelerate projects to achieve cost savings, support the creation of new jobs in the transportation sector, and improve roads. The May Revision maintains current planning and engineering staffing levels to continue developing and designing programmed projects for if and when potential stimulus package funding becomes available. 
 
Broadband Expansion
In response to COVID-19, the CPUC made a series of investments to support bridging the digital divide. This included $25 million for hotspots and Internet service for student households, and $5 million available to help cover the cost of computing and hotspot devices. The May Revision builds upon this work by investing $2.8 million and adding three positions to the CPUC to enhance its broadband mapping activities to better inform the state’s broadband infrastructure grant program, improve safety by providing broadband speed data at emergency response locations such as fairgrounds, and enhance the state’s ability to compete for federal broadband funding.
 
The May Revision proposes statute intended to increase the ability of the state to compete for federal funding to improve access to broadband Internet in California.
 
Community Services
 
The May Revision made numerous eliminations or reductions to almost every part of the budget related to Community Services. As the state is looking for places to “tighten the belt,” they often look to the parks, arts, and humanities programs first. This lean budget proposal is no different. 
 
Parks and Recreation
As we saw in the Great Recession of 2009, community services and parks are among those areas that receive less state funding in times of economic downturn. In the May Revision, the Department of Parks and Recreation, beginning in fiscal year 2021-22 and ongoing afterwards, is proposed to have its budget cut by $30 million. These cuts will be developed through a planning process to ensure Californians still have access to parks and open spaces in an equitable way.
 
The May Revision also eliminates or reduces many of the components of the “Parks for All Initiative,” which seeks to expand access to parks, open spaces, and natural lands for all Californians. The funding for this initiative was reduced from $65.1 million overall in January to $24.5 million. The new allocations are as follows:
  • Reduces funds for establishing a new state park from $20 million to $5 million.
  • Maintains funds of $4.6 million for acquiring lands to expand existing parks.
  • Reduces allocations of Proposition 68 funds for improving park facilities in urban areas from $8.7 million to $6.1 million.
  • Eliminates $20 million for improving outdoor access for underserved populations.
  • Reduces enhancing park access programing from $11.8 million to $8.8 million.
 
California Volunteers
As the State Service Commission for California, California Volunteers manages programs and initiatives aimed at increasing the number of Californians engaged in service and volunteering. The May Revision provides $2.9 million in ongoing General Fund funds for administrative and strategic planning staff, including emergency volunteer coordinators located in the three most populated regions of the state. The May Revision also provides $10.1 million ongoing General Fund to sustain nearly 500 AmeriCorps volunteer positions that were established with funding from the 2019-20 Budget Act.
 
Electronic Cigarette Tax
In order to address the rapidly increasing youth use of potent nicotine-based vaping products, the May Revision maintains the new vaping tax based on nicotine content proposed in the Governor’s January Budget. The new tax will begin on January 1, 2021, and will be $2 for every 40 milligrams of nicotine in the product, equivalent to the tax on a pack of cigarettes. The new tax will be in addition to all existing taxes on e-cigarettes, which are presently taxed as tobacco products under state law.
 
Revenues from the new tax are expected to be $33 million in 2020-21, will be deposited into a new special fund, and will be used to increase enforcement and to offset Medi-Cal costs. The May Revision includes $13.9 million and 10.5 positions for the Department of Tax and Fee Administration to administer the proposed tax and $7 million for the California Highway Patrol to establish a task force in collaboration with the Department of Justice dedicated to combating the underground market for vaping products. In addition to the tax, the Administration will support a statewide ban on all flavored nicotine products as of January 1, 2021.
 
California Arts Council  
The California Arts Council proposal of a one-time increase of $10.5 million General Fund in 2020-21 is eliminated.
 
Animal Shelters
The May Revision reduces from $50 million to $5 million in one-time spending for an animal shelter grant demonstration project.
 
Governance, Transparency, and Labor Relations
While the Governor in his January Budget proposal press conference recognized the challenges cities face with their pension obligations, he did not then, nor now propose new funding to help cities manage their costs or backfill their lost revenue.
 
Unemployment Insurance
As of May 9, the Employment Development Department has processed and approved approximately 4.4 million Unemployment claims that will provide $12.2 billion in Unemployment insurance (UI) benefits. Due to the overwhelming need for these benefit payments, states are able to borrow from the federal government without interest through 2020 to support their UI programs. Similar to the state’s circumstances during the Great Recession, California will need to borrow tens of billions of dollars to support UI benefits as a result of the COVID-19 induced recession.
 
CalPERS
SB 90 (Chapter 33, Statutes of 2019) included a supplemental pension payment of $3 billion toward the state’s share of its unfunded liabilities with the hopes of maximizing savings over 30 years. Of this amount $2.5 billion was paid to CalPERS in 2019 and instead of being applied over several years will instead be applied to the next two budget years to produce more immediate savings and a reduction in the state’s retirement contribution. The remaining unspent $500 million will be directed to support core programs due to the ongoing fiscal challenges the state faces.
 
Paid Family Leave
The May Revision continues to fund the expansion of paid family leave benefits that was included in the January proposal.
 
AB 5 enforcement
The May Revision continues to fund the January proposals to enforce compliance with AB 5 (Chapter 296, Statutes of 2019). The Governor’s proposal provides $22 million for this purpose:
  • The Department of Industrial Relations would receive $17.5 million to increase access to workers’ compensation and to adjudicate labor law violations,
  • $3.4 million to the Employment Development Department for staff training and increased hearings and investigations.
  • The Department of Justice would receive $780,000 for investigations.
 


 
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