This week, California’s newly inaugurated 40th governor, Gavin Newsom, unveiled his first state budget proposal, which projects nearly $6.1 billion in new revenues, would authorize $144.2 billion in state General Fund spending in 2019–20, a 4 percent increase over the $138.7 billion authorized last June for current year spending. However, the new budget uses a more than $21 billion surplus—including carryover revenues and big savings from greatly reduced growth estimates for the Medi-Cal caseload—to pay down significant state pension debt and retiree healthcare obligations and add to the state’s Rainy Day Reserve. The Newsom budget also uses one-time spending and program savings for new signature investments in early childhood development, healthcare, affordable housing, combating homelessness and state emergency preparedness, while providing more funding for K–12 and higher education.

Most of the projected new revenues come from personal income taxes (up 2.9 percent) and sales taxes (up 4.5 percent), a fairly conservative estimate compared with recent budgets. Notably, in response to the release of Governor Newsom’s budget, State Controller Betty Yee reported that California’s revenues in December fell $4.82 billion short of assumptions in the 2018–19 budget. However, January receipts are expected to catch up to the fiscal year 2018–19 budget forecast.

The budget also proposes a $1.8 billion new contribution to the state’s Rainy Day Fund, which would increase from the current $13.5 billion to $15.3 billion, an all-time high.

Here are other significant highlights:

Early Childhood Development

This is an area of specific focus in Governor Newsom’s first budget, with investments to lay a foundation for the eventual goal of providing universal preschool and supporting working families through the expansion of paid leave and child care subsidies. These investments include:

  • $750 million to construct new or retrofit existing facilities for full-day kindergarten programs
  • $125 million this year to add 200,000 new full-day preschool slots by 2021–22
  • New funding for home visiting services for children aged 0–3 for preventive health and wellness care
  • Adjustment to the reserve requirement for the fund that supports the Paid Family Leave program to enable the state to make a down payment in expanding Paid Family Leave in the upcoming budget year
  • $500 million one-time General Fund to both expand subsidized child care facilities in the state and make a significant investment in the education of the child care workforce

K–12 Education

  • Provides a total General Fund spending level of $80.7 billion in 2019–20—up from $77.9 billion this year and an all-time high.
  • Projects ongoing per-pupil spending from all sources to be $17,160 in 2019–20—up from $16,085 in 2018–19, and up 71 percent since the mid-recession low point in 2011–12.
  • Proposes $3 billion in a one-time payment to buy down unfunded pension liabilities in the State Teachers’ Retirement Fund, which will result in a significant reduction in mandated payroll costs for school districts, freeing up money for other needs.

Higher Education

As a former University of California regent through his service as Lieutenant Governor, Governor Newsom used this budget to reconfirm his commitment to California higher education with proposed investments in state colleges and universities.

  • University of California: Provides $240 million in ongoing funding for operations costs and $138 million for statewide deferred maintenance needs. Proposes no increase in student tuition.
  • California State University: Provides a $300 million General Fund increase to CSU for operations and enrollment growth and $247 million for deferred maintenance. The administration states that it expects CSU to keep tuition and fees at current levels and improve both student access and time-to-degree.
  • California Community Colleges: Adds $40 million General Fund to support the California College Promise, which currently waives first-year fees for all first-time, full-time community college students, adding a second free year.

Healthcare

Governor Newsom made a clear statement on the priority of healthcare for his administration through proposed budget investments in this space and early executive action on drug pricing. The budget includes $158.6 billion ($40.3 billion General Fund and $118.3 billion other funds) for all health and human services programs.

Medi-Cal

The Medi-Cal budget is $100.7 billion ($22.9 billion General Fund) in 2019–20—up from $98.5 billion ($20.7 billion General Fund) in 2018–19. The budget assumes that caseload will decrease approximately 1.19 percent from 2017–18 to 2018–19 and increase 0.39 percent from 2018–19 to 2019–20.

Medi-Cal is projected to cover approximately 13.2 million Californians in 2019–20, including 3.8 million in the optional Affordable Care Act expansion population. The budget assumes that the Managed Care Organization Tax, currently set to expire on June 30, 2019, is not renewed.

Negotiating Lower Prescription Drug Prices

Following up on the executive order issued as the first official act by Governor Newsom, the budget proposes steps to use the state’s purchasing power to achieve a single-payer system for prescription drugs in California. Absent federal action to address these rising costs, the state must do what is in its power to get better prices from pharmaceutical manufacturers for taxpayers, employers and consumers.

The budget proposes to transition all pharmacy services for Medi-Cal managed care to a fee-for-service benefit. A fee-for-service pharmacy program will increase drug rebate savings and help the state secure better prices by allowing California to negotiate with pharmaceutical manufacturers on behalf of a much larger population of Medi-Cal beneficiaries. “Such a standardized drug benefit will reduce confusion among beneficiaries without sacrificing quality or outcomes.” This proposal is estimated to result in hundreds of millions of dollars in annual savings starting in fiscal year 2021–22.

California Individual Mandate and Increase Covered California Subsidies

The budget proposes to establish a state individual mandate to obtain comprehensive healthcare coverage or pay a penalty, modeled on the federal requirement enacted as part of the ACA. The administration believes the state’s individual mandate can be enacted by a majority vote. If pursued and passed in this manner, it will be the first time a “tax”-style mandate would be imposed by a simple majority vote.

The additional revenues generated as a result will be used to:

  • Provide increased subsidies through Covered California for individuals with incomes between 250 and 400 percent of the federal poverty level.
  • Expand subsidies to individuals with incomes between 400 and 600 percent of the federal poverty level to increase coverage and promote affordability.

Proposition 56 (2016 Voter-Enacted Tobacco Tax) Spending

Continuing efforts established in the 2018 Budget Act, the budget includes $3.2 billion ($1.05 billion Proposition 56 funds) for supplemental payments and rate increases for physicians, dentists, family planning services, Intermediate Care Facilities for the developmentally disabled, HIV/AIDS waiver services, home health, pediatric day health services and new investments.

For the first time since the proposition’s enactment, Governor Newsom proposed that the state should commit to make these rate increases ongoing. If the legislature agrees, providers will be able to rely on continued support to fund more access to care for Medi-Cal patients.

In addition, the budget includes an additional $50 million Proposition 56 funds for family planning services in the Medi-Cal program. Given that certain family planning services are eligible for enhanced federal funding, this additional funding could result in up to $500 million in additional payments for family planning.

Full-Scope Medi-Cal Expansion for Undocumented Adults

The budget expands full-scope Medi-Cal coverage to undocumented adults aged 19 through 25 at a net state cost of $133.5 million in 2019–20.

Judges and the Courts

The budget includes total funding of $4.1 billion ($2.1 billion General Fund and $2.0 billion other funds) in 2019–20 for the judicial branch, of which $2.4 billion is provided to support trial court operations.

  • The budget also includes $41.9 million General Fund spending for the Judicial Council to improve access to justice and modernize court operations, including money for improving and expanding the case management system and a pilot program to digitize paper and film case files at six courts.
  • The budget includes $20 million for court-appointed dependency counsel who represent children and parent clients at every stage of the dependency proceeding. The additional funding is intended to help reduce attorney caseloads statewide.

Emergency Readiness for Natural Disasters

Governor Newsom proposes a number of investments to the state’s emergency preparedness for fire and earthquake, including the following:

  • $50 million General Fund one-time spending for local grants and an education campaign on disaster preparedness and safety
  • $60 million General Fund one-time spending to upgrade the 911 system
  • $1.63 million General Fund spending to finish the California Earthquake Early Warning System
  • $200 million General Fund spending for Cal Fire to expand firefighting capabilities
  • $25 million General Fund spending for local government fire engines to support the state’s mutual aid system
  • $214 million in forest management to increase fire prevention

‘Working Families Tax Credit’

The budget includes $1 billion to more than double the size of the state’s Earned Income Tax Credit and would change the name of program to the Working Families Tax Credit.

  • This tax break is intended to support low-income families with young children by providing a $500 credit for families with children under the age of 6.
  • This subsidy would be funded through additional revenues resulting from federal tax conformity.

Housing

Governor Newsom’s budget makes significant investments to address the state’s housing crisis. While noting the role of local governments in ensuring adequate housing supply, the budget seeks to increase housing production through a combination of planning incentives and policy changes.

The budget proposes investments totaling $1.3 billion in General Fund spending plus expanded tax credits. This includes the following:

  • $750 million General Fund one-time spending to partner with and incentivize local governments to jump-start housing production
  • $500 million General Fund one-time funding to expand the Mixed-Income Loan Program for developers building developments that include housing for moderate-income households at a lower subsidy level than that of traditional state programs
  • Up to $500 million to expand the state housing tax credit program in 2019–20 to encourage private investment in affordable housing

The Governor also proposes significant housing policy changes. Specifically, he proposes linking whether local jurisdictions meet increased housing production targets to receipt of SB 1 transportation funding. This represents a significant “stick” in moving locals toward permitting more housing production.

Similarly, he would give the Department of Housing and Community Development a greater role in overseeing and enforcing regional housing goals and production, including revamping the current Regional Housing Needs Assessment process to create more ambitious production targets.

Finally, Governor Newsom plans to further incentivize the creation of Enhanced Infrastructure Financing Districts to support longer-term infrastructure commitments.

Homelessness

The proposed budget includes $500 million General Fund one-time spending for jurisdictions that site and build emergency shelters, navigation centers or supportive housing.

  • This includes $300 million to support jurisdictions that establish joint regional plans to address homelessness.
  • An additional $200 million will be available for jurisdictions that show progress toward developing housing and shelters, including permitting new supportive housing units or constructing emergency shelters and navigation centers. Those jurisdictions will be eligible to receive additional funds for general purposes.

Notably, the administration will also propose legislation to accelerate the construction of homeless shelters, navigation centers and new supportive housing units by streamlining the California Environmental Quality Act process.

The budget also invests $100 million from the General Fund (one-time with multiyear spending authority) for Whole Person Care pilot programs that provide housing services. The funds will be used to match local county investments in health and housing services.

Public Safety

  • The budget proposes total funding of $12.6 billion ($12.3 billion General Fund and $303 million other funds) for the Department of Corrections and Rehabilitation.
  • The budget includes $475.3 million General Fund spending specifically for the Division of Rehabilitative Programs.
  • The budget includes $5.5 million General Fund spending for program funding dedicated to improving literacy rates among the prison population.
  • The budget includes $2.5 million General Fund spending for an expanded tattoo removal program for adult offenders.

Resources

The budget proposes combined expenditures of Special Funds, Cap-and-Trade funds and bond funds of $6.2 billion for Natural Resources and $4.225 billion for Environmental Protection.

Exide Battery Facility Cleanup

The Governor has prioritized cleanup of the Exide lead acid battery recycling facility by including $50 million General Fund spending on a one-time basis to accelerate the cleanup of additional properties within a 1.7-mile radius of the facility over the next two years. This funding will allow the Department of Toxic Substances Control to clean up approximately 700 additional high-risk properties in which lead contamination exceeds the state standard of 80 parts per million.

Climate Change

Governor Newsom continues California’s commitment to reduction of greenhouse gas emissions (AB 32, 2006). The Governor has proposed expenditures of over $1 billion from Cap and Trade funds, including:

  • $407 million to provide incentives for zero-emission vehicles and fleet modernization, including $200 million for consumer rebates through the Clean Vehicle Rebate Program
  • $200 million to support forest improvement, fire prevention, fuel reduction and prescribed burn projects
  • $230 million to support environmental justice considerations to improve air quality in disadvantaged communities through AB 617
  • $27 million toward workforce development for apprentices for a green economy

Water

The budget continues to prioritize funding for water issues, including:

  • $168.5 million in Proposition 68 funds for safe water drinking projects
  • $18 million to expand the Healthy Soils Program (a program that Governor Newsom specifically called out during his public presentation on the budget)
  • The establishment of a new special fund to enable the State Water Resources Control Board to assist communities, particularly disadvantaged communities, in paying for access to safe and affordable drinking water
    • This proposal includes $4.9 million General Fund spending on a one-time basis for the State Water Resources Control Board and the Department of Food and Agriculture to take initial steps toward a new Safe and Affordable Drinking Water Program, including (1) implementation of fee collection systems, (2) adoption of an annual implementation plan and (3) development of a map of high-risk aquifers used as drinking water sources.

Technology

Over the course of his career, Governor Newsom has been a supporter of technology and the advantages it can bring to government. The Governor affirmed his commitment to increasing technology and making it a central component of California state government by supporting new policy programs and funding initiatives.

Office of Digital Innovation

The Governor has proposed establishing an Office of Digital Innovation with the primary goal of making government more efficient in the delivery of government services. The budget includes:

  • Initial startup costs of $36.2 million ($33.7 million General Fund)
  • $14.6 million ($9.6 million General Fund) ongoing
  • 50 positions to establish the Office of Digital Innovation (Office) within the Government Operations Agency.

The Governor has proposed that this Office will develop and enforce requirements for departments to assess their service delivery models and underlying business processes from an end-user perspective.

Innovation Academy

The Governor is also proposing a new mandate on state leadership through the establishment of an Innovation Academy focused on continuous process improvement, human change management, executive sponsorship and a customer-centric mindset. The academy will be mandatory for state supervisors, managers and executives, with the curriculum aligned to the audience.

Building on further budget investments in technology, Governor Newsom proposes the establishment of an Innovation Fund with one-time funding of $20 million.

DMV

Recognizing the frustration Californians have experienced with the Department of Motor Vehicles (DMV), on January 9, Governor Newson named Secretary Marybel Batjer of the Government Operations Agency to lead a strike force to reform DMV. Backing up that announcement, the Governor has proposed additional resources for DMV:

The state is currently conducting an audit of the DMV to identify potential opportunities to improve its business processes and overall program management as well as an information technology assessment of its Motor Voter system. Both the audit and assessment will report findings and recommendations in early spring, and the administration anticipates submission of a formal spring budget proposal.

As a part of efforts to improve efficiency at the DMV, the Governor announced through the budget that DMV will be the first state department to pilot the digital services and innovation academy by working with the Office of Digital Innovation in the budget year.

The budget continues current efforts to address DMV’s increased workload resulting from the federal Real ID mandate by providing $63 million and 780 positions, consistent with current-year funding levels.

Conclusion

A Governor’s proposed budget is often viewed as a statement of values and snapshot in time on expenditures and revenues. Governor Newsom’s budget overview lasted over two hours. He showed his knowledge of budget and policy issues as well as past actions taken by the legislature and specific members on prior funding issues, and gave credit to other elected officials for policy ideas and programs.

The Governor recently named Brown Department of Finance Director Keely Bosler as his finance director. Working in conjunction with Legislative Affairs Secretary Anthony Williams and Chief Deputy Legislative Affairs Secretary Che Salinas, former Manatt government relations counsel, the Governor will introduce his budget in bill form along with his policy priorities in legislative bills, more commonly known as Budget Trailer Bills. Over the next few weeks, the budget proposals will be reviewed by the legislature. The Assembly and Senate Budget Committees will begin to hold hearings and hear stakeholder input on specific budget proposals.

Governor Newsom will issue a “May Revise” in the spring, based on updated revenue totals, and the legislature will have until June 15 to pass a budget for the Governor to act on.