On Friday, May 12, Governor Newsom released the 2023-24 May Revision to his state budget proposal. When the Governor released his budget proposal in January there was a projected $22.5 billion deficit to the state budget. The May Revision also recorded an additional $9.3 billion revenue shortfall, bringing the total anticipated deficit to $31.5 billion.
Revenue collected by the state has fallen short of initial projections due in some part to the late collection of state income tax revenue as a result of the October tax filing deadline extension by the IRS and Franchise Tax Board for certain areas impacted by severe winter weather. The Governor noted that the federal debt ceiling impasse and roughly $42 billion in forecasted delayed tax receipts have impacted the revision of the budget. Funding to high priority areas including education, homelessness, health care, and climate remain at their proposed January funding levels.
Despite healthy state fiscal reserves, the Governor has declined to tap into these funds. Democrats in the Legislature have drafted a plan which would raise funding through a corporate tax increase which Newsom has stated that he does not support. To address the funding shortfall, the administration has proposed a series of cuts, delays, and reductions to funding. While the May Revise does not contain trigger cuts, it does maintain most of the $3.9 billion in trigger reductions included in the Governor’s January budget proposal.
Climate Change
In the May Revision, there is a continuation of a multi-year wildfire and forest resilience package worth $2.7 billion. Additionally, the revision contains an allocation of $290 million for a flood-related funding package that targets the reduction of flood risk and enhances flood system resilience. The Governor’s office will continue to work with the Legislature to pursue a climate bond in the upcoming months. Due to decreased revenue projections and increased budgetary pressures, the May Revision includes an extra $1.1 billion General Fund realignment across climate resilience programs which are bond eligible. Specific funding sources transitioning to the climate bond include: $270 million for water recycling, $100 million for the Regional Resilience Program, $100 million for urban greening, $60 million towards the Sustainable Groundwater Management Act (SGMA) implementation, $50 million for dam safety and flood management, and $20 million for multi-benefit land repurposing.
Zero-Emission Vehicles (ZEV) Acceleration
The Governor’s office has touted that recent data indicates the state has achieved putting 1.5 million Zero Emission Vehicles (ZEVs) on the road two years before the projected timeline. The Administration has committed to maintaining 89 percent or $8.9 billion in investments to expand ZEV deployment. Some of the initiatives related to ZEV deployment have also had their funding sources replaced; $635 million will be sourced from the Greenhouse Gas Reduction Fund (instead of the General Fund) to underwrite certain ZEV programs. The Administration’s ZEV investments include a wide range of initiatives such as the improvement of short-haul trucks, school buses, and passenger vehicles. Investments will also include provisions for infrastructure development and incentives to support in-state manufacturing.
Public Transit
Though the May Revision provided funding for state ZEV initiatives, the Governor declined to provide funding to assist public transit agencies anticipating significant financial shortfalls. This comes at a time that the state is also reducing its spending on transportation projects— over $2 billion in spending was cut from the original $13.8 billion planned, with 84 percent of the remaining spending ($11.6 billion) preserved following the May Revision.
Wildfire and Forest Resilience
Persistent climate change has led to more extensive and severe fire seasons. The Governor’s May Revision proposes to continue investments of $2.7 billion over four years to mitigate the risk of catastrophic wildfires and extreme climate conditions by restoring forest and wildland health. $25 million from the General Fund will partially restore funding for the Climate Catalyst Fund. While the current plan is to maintain $2.7 billion in funding for forest health and fire prevention investments, there is still the possibility of a reduction in funding which can be offset if the state receives sufficient General Funds by January 2024.
Drought Response and Water Resilience
The Governor has allocated $8.5 billion towards Drought Response and Water Resilience and proposes a reduction of $125 million from drought funding, shifted to flood funding. The aim is to sustain the state’s drought response, implement the current water supply strategy, and enhance flood preparedness and response. The May Revise also includes $75 million one-time General Fund to support local flood control projects, including in communities impacted by recent storms, such as the Pajaro River Flood Risk Management Project. Other significant changes include:
· Delta Salinity Barriers—A reduction of $24.5 million one-time General Fund. The Department of Water Resources no longer anticipates needing to install the salinity barriers as a result of improved statewide water conditions.
· Agriculture and Delta Drought Response Program (LandFlex)—A reduction of $25 million one-time General Fund because water conditions have improved.
As there has been an improvement in the statewide water conditions due to recent winter and spring storms, a reduction in the need for immediate drought relief arose and funds have been diverted to flood contingency programs as the state faces potential flood conditions.
Flood Mitigation
The revised budget aims to allocate $492 million towards safeguarding the state from the adverse impacts of flooding, both in the Central Valley and across the state. One-time funding will primarily focus on aiding communities at risk, particularly the Tulare Basin, which continues to contend with the consequences of the winter storms, and to enhance their resilience to future floods.
The Governor’s budget plan proposes investing an additional $290 million in novel flood initiatives. In total, the state plans to invest nearly $500 million in flood protection.
Additional provisions aim to facilitate the safe diversion of floodwater for the purpose of recharging groundwater. By establishing clear criteria for diverting flood water without permits or impinging on water rights, the proposal aims to simplify measures to harness floodwater for groundwater recharge.
Extreme Heat and Community Resilience
Forecasts predict that all of California will face decades of higher-than-average temperatures and the increased frequency of life-threatening heat waves, both of which will impact vulnerable communities in the state. Pursuant to the 2022 Extreme Heat Action Plan, the May Revision will maintain $444 million in funding over multiple years to support programs and projects; $1.6 billion will be provided for community resilience funding over the next several years.
Energy Reliability, Relief, and Clean Energy Investments
As California transitions to a clean energy future, new and compounding challenges have arisen to electric service reliability and affordability. The Governor has kept in place $7 billion of last year’s $7.9 billion in proposed investments in clean energy - investments that include building decarbonization, transmission development and long duration energy storage. The May Revision continues to support building the clean, reliable, affordable, and safe electric grid of the future by providing details on the one-time $1 billion investment in programs and projects as proposed by the Clean Energy Reliability Investment Plan (over multiple years).
Housing and Homelessness
Housing
As the housing crisis continues, California has imposed requirements on local governments to plan and develop housing. The state is providing support to communities by providing technical assistance and looking to streamline the housing development process. Further steps are being taken to provide funding and enforce current housing laws. To address the budget deficit, the May Revision includes a reduction of $17.5 million in the General Fund and $345 million in deferred funds for housing programs. In addition to the $350 million in the Governor’s Budget, the total amount of proposed reductions in housing programs is $367.5 million with $345 million in deferrals. Funding for housing programs is approximately 88 percent of the allocations made for 2022-23 and proposed for 2023-2024, which is $2.85 billion. According to the Governor’s office, if there are sufficient General Funds in January 2024, $350 million of these reductions will be restored.
Homelessness
Despite the allocation of $7.3 billion of funds in 2021 and $10.2 billion designated in the 2022 Budget, the state continues to confront a surge in homelessness. To address this issue, the California Interagency Council on Homelessness (Cal ICH) has been tasked with advancing a cohesive response. The Governor has provided nearly $3 billion to local governments through four rounds of the Homeless Housing, Assistance and Prevention (HHAP) Program, with an additional $1 billion proposed for a fifth round of HHAP grants, and $400 million for a third round of the Encampment Resolution Funding (ERF) Program to resolve encampments.
General Government
Paying Down Unfunded Pension Liabilities
The May Revision predicts that there will be $1.7 billion allocated towards the repayment of Proposition 2 debt in 2023-24, with the intent of reducing the state’s unfunded liabilities with the California Public Employees’ Retirement System (CalPERS).. If additional payments are made toward this unfunded liability, it is anticipated to result in a minimum long-term gross savings ratio of two-to-one. This is anticipated to reduce the state’s costs over time and the impact of these payments on special districts is unknown. In the May Revision, state contributions to CalPERS will decrease by a net total of $1.7 million in 2023-24 in comparison to the Governor’s January Budget. This is due to CalPERS adjusting the state’s contribution rates, adjustments primarily influenced by the normal progression of paying off the debt over time and the application of 2021-22 and 2022-23 supplemental pension payments.
Property Taxes
Preliminary data suggest statewide property tax revenues increased around 7.4 percent in 2022-23, which is 1.4 percentage points higher than the 6 percent growth rate anticipated in the Governor’s budget forecast. Property tax revenues are expected to grow 4.5 percent in 2023-24, which is 0.5 percentage point lower than the 5 percent growth expected in the Governor’s budget. Strong growth in 2022-23 is likely due to home price increases that took place in 2021. More moderate growth is expected in 2023-24 due to higher interest rates that led to lower property transfers and price declines in 2022.
CSDA will continue its advocacy efforts as the Legislature continues its various budget committee and budget subcommittee meetings to pass a finalized budget by the June 15 deadline. CSDA’s Legislative Committee recently adopted a set of Budget Priorities, which will help guide CSDA’s budget advocacy efforts. Should you have any questions regarding the May Revision, feel free to reach out to Ophelia Szigeti at ophelias@csda.net.
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