RESPONSE TO COUNCIL QUESTIONS RE: 12/12/23 AGENDA
Agenda Item 3.E RTC 23-1216: Action on an Agreement with BKF Engineers for Design Professional Services for the Lafayette Street Class IV Bikeway and Pavement Rehabilitation Project and Related Budget Amendment
Council Question:
1. Will there be a comparison of the number of bikes and scooters before the bike lanes are added and afterwards?
Staff Response:
Yes, since a portion of the project is a pilot, bike and scooter count data will be collected before/after the bike lane installation.
Council Question:
2. How long will it take for the new bike lanes to be recorded on google maps and VTA’s maps?
Staff Response:
Staff does not have the timeframes for how long it will take to show up on those maps. However, staff will inform VTA for inclusion in VTA maps once the project is completed.
Council Question:
3. Will there be a comparison of bicycle and car-car and car-bike accidents before and after?
Staff Response:
Yes, since a portion of this project is a pilot, collision data will be analyzed before/after the installation of bike lanes.
Council Question:
4. Will there be a comparison of car speeds before and after?
Staff Response:
Yes, since a portion of the project is a pilot speed data will be collected and analyzed before/after the installation of bike lanes.
Agenda Item 3.H RTC 23-1425: Action on Amendment No. 1 to the J. Powers Recruiting Inc. Agreement For Citywide Recruiting Services
Council Question:
Was the original approval for 7 x $250,000 that is $1,850,000? How much have we already paid to all these firms as of date?
Staff Response:
We have not executed an agreement with all seven vendors that were selected. Each initial agreement will have a total compensation amount not to exceed $250,000. Since we conducted the RFP and the firms were selected, we have only executed agreements with J. Powers Recruiting and Peckham & McKenney.
2 Recruiting Firm Total Spent Under Current
Agreement
Recruitments
Peckham & McKenney $29,000 Director of Parks & Recreation J. Powers Recruiting $207,089.98 Assistant Director of Electric Utility Senior Electric Division Manager
Electric Division Manager –
Transmission & Distribution
Council Question:
What happens if the employee leaves before completing one year service are we still liable to pay 27% to 20% of annual salary to the recruiter?
Staff Response:
Under the J. Powers Recruiting Agreement, we have the following Guarantee provision:
If the employee resigns or is terminated within 6 mos. of employment:
# of days candidate employment What Consultant will do
1 to 30 60 days to find a replacement; if no replacement is found, 100% of the fee is credited to the City
31 to 90 60 days to find a replacement; if no replacement is found, 50% of the fee is credited to the City
91 – 180 60 days to find a replacement, in no replacement is found, 25% of the fee is credited to the City
If the employee resigns, is terminated, or is promoted after 180 days and up to 5 years, a new search will be conducted and the City is charged 90% of the original invoice.
Agenda Item 3.N RTC 23-1062: Action on Legislative Advocacy Positions
Council Question:
I would like to know from our Lobbyist Townsend how they think the State’s $70B deficit will affect us as we’ll be discussing budget at the council meeting.
Staff Response:
Townsend Public Affairs has prepared an update on the State’s Legislative Analyst’s Office’s (LAO) projected State budget deficit (Attachment 1). They have shared that it is unclear how the deficit will impact local governments at this time as the LAO report is their fiscal forecast, which serves as insight, but doesn’t contain specific proposals that the Legislature or Administration are bound to. The Governor will release his January Budget by January 10th and that document will contain the Department of Finance’s revenue estimates and specific proposals for consideration by the Legislature. At that time, Townsend will have a better idea of how the budget deficit may be addressed and how those proposals would impact the City
Agenda Item 3.Q RTC 23-1461: Note and File the List of Designated City Employees who are Subject to Post- Employment Restrictions Pursuant to City Code Chapter 2.145
Council Question:
Why City Clerk, Chief of Police, Director of Public works are not included in the designated list?
3 Staff Response:
The Director of Public Works Is listed in the first column of the RTC report.
The City Clerk and Police Chief were not included on the City Manager’s list of employees, as they are not within the City Manager’s appointing authority. Similarly, at the time of code adoption, the City Council may have been hesitant to extend the City Code restrictions to the City Clerk and Police Chief, since both are elected officials outside the appointing authority of the City Council. While the elected City Clerk and Police Chief are not covered under our City Code, they are subject to state law restrictions on post-employment activities. Gov’t Code section 87406.3 prohibits certain local officials, including the elected City Clerk and Police Chief, for a period of one year after leaving local government office or employment, from representing any other person, for compensation, by appearing before or communicating with their former agency in an attempt to influence the agency’s decisions in an administrative or legislative action, whether quasi-legislative or quasi-judicial, or any action involving a permit, license, contract, or transaction involving the sale or purchase of property or goods.
From: Casey Elliott
To: Christine Jung
Subject: LAO Releases Fiscal Outlook for State Budget
Date: Monday, December 11, 2023 11:29:01 AM
Attachments: 2024-25-Fiscal-Outlook.pdf
Christine—
Last week, the Legislative Analyst’s Office (LAO) released its Fiscal Outlook Report for the
State’s 2024-25 upcoming budget cycle. The LAO’s annual Fiscal Outlook publication provides an independent assessment of the California state budget condition for the upcoming fiscal year, along with a forecast of the state’s longer-term fiscal condition. The key takeaway from the outlook report is a projected $68 billion budget shortfall that will
need to be addressed in the 2024-25 fiscal year, due mostly to the net effect of unexpected revenue changes in the 2022-23 and 2023-24 fiscal years.
On December 1
st, the LAO announced that it was lowering its revenue estimates by $58 billion over the 2024 Budget window – inclusive of fiscal years 2022-23 through 2024-25 – however, the comprehensive Fiscal Outlook report released yesterday takes a new revenue estimate, which now includes estimates of lowered 2021-22 revenues.
The conditions surrounding the 2024-25 fiscal year outlook are atypical compared to recent years, which can largely be attributed to the unprecedented delay in tax return filings generated by the severe winter storms in early January. The delay caused most high- earners – who contribute close to half of California’s personal tax income revenue - to delay tax return filings until the last minute. This meant that the Administration and the Legislature had an incomplete picture of 2023-24 revenues when they passed the budget in June. The LAO approximates that the state overallocated close to $26 billion in the enacted 2023-24 budget.
Recently, California's economy has been tempered by several factors, including that total income tax returns fell by 25% in 2022-23, and, due in part to the Federal Reserve’s increases in interest rates to temper inflation, home sales declined by half, and the state’s unemployment rates rose from 3.8% to 4.8% in 2022. In particular, Silicon Valley has seen an 80% drop in new California companies going public in 2022 and 2023 compared to 2021, which results in a significant decline in revenue coming to the state through capital gains taxes.
While the budget outlook recommends fiscal prudence over the next few years, the LAO reports that the Legislature has a number of tools at its disposal to address the scope of the deficit, including $24 billion in reserves, cost shifts, reductions in one- time spending, and reducing spending on schools and community colleges. The State’s Legislative Analyst, Gabe Petek, recommended Governor Newsom declare a fiscal emergency, a procedure that would allow the state to tap into some of its rainy day funds, though he advised lawmakers to preserve up to half of the $24 billion available in budget reserves for future downturns.
Looking ahead, the Governor and the Department of Finance will continue to make their own assessments of the state’s fiscal condition in preparation for the release of the January budget framework proposal. As is the case with most years, the status of the state’s spending plan is subject to fluctuations and could change throughout 2024 as the State gets a better picture of the actual revenues received throughout the current budget year.
I will continue to keep you updated as the Governor prepares to release his initial budget proposal in January. In the meantime, please let me know if you have any questions or need additional information.
casey
Casey Elliott
Vice President
Townsend Public Affairs, Inc.
925 L Street, Suite 1404, Sacramento, CA 95814
o: 916-447-4086 m: 530-400-9927
[email protected]
www.TownsendPA.com
www.lao.ca.gov
2024-25 BUDGET
1 GABRIEL PETEK
LEGISLATIVE ANALYST
DECEMBER 2023
The 2024-25 Budget:
California’s
Fiscal Outlook
LEGISLATIVE ANALYST’S OFFICE
2024-25 BUDGET
2 www.lao.ca.gov
2024-25 BUDGET
3 Executive Summary
California Faces a $68 Billion Deficit. Largely as a result of a severe revenue decline in 2022-23, the state faces a serious budget deficit. Specifically, under the state’s current law and policy, we estimate the Legislature will need to solve a budget problem of $68 billion in the upcoming budget process.
Unprecedented Prior-Year Revenue Shortfall Creates Unique Challenges. Typically, the budget process does not involve large changes in revenue in the prior year (in this case, 2022-23).
This is because prior-year taxes usually have been filed and associated revenues collected.
Due to the state conforming to federal tax filing extensions, however, the Legislature is gaining a complete picture of 2022-23 tax collections after the fiscal year has already ended. Specifically, we estimate that 2022-23 revenue will be $26 billion below budget act estimates. This creates unique and difficult challenges—including limiting the Legislature’s options for addressing the budget problem.
Legislature Has Multiple Tools Available to Address Budget Problem. While addressing a deficit of this scope will be challenging, the Legislature has a number of options available to do so. In particular, the state has nearly $24 billion in reserves to address the budget problem.
In addition, there are options to reduce spending on schools and community colleges that could address nearly $17 billion of the budget problem. Further adjustments to other areas of the budget, such as reductions to one-time spending, could address at least an additional $10 billion or so. These options and some others, like cost shifts, would allow the Legislature to solve most of the deficit largely without impacting the state’s core ongoing service level.
Legislature Will Have Fewer Options to Address Multiyear Deficits in the Coming Years.
Given the state faces a serious budget problem, using general purpose reserves this year is merited. That said, we suggest the Legislature exercise some caution when deploying tools like reserves and cost shifts. The state’s reserves are unlikely to be sufficient to cover the state’s multiyear deficits—which average $30 billion per year under our estimates. These deficits likely necessitate ongoing spending reductions, revenue increases, or both. As a result, preserving a substantial portion—potentially up to half—of reserves would provide a helpful cushion in light of the anticipated shortfalls that lie ahead.
LEGISLATIVE ANALYST’S OFFICE
2024-25 BUDGET
4 www.lao.ca.gov
2024-25 BUDGET
5 INTRODUCTION
Each year, our office publishes the Fiscal Outlook
in anticipation of the upcoming budget season.
The goal of this report is to give the Legislature our
independent estimates and analysis of the state’s
budget condition as lawmakers begin planning the
2024-25 budget. This year, this report has three
key takeaways:
• California Faces a Serious Deficit.
Largely as a result of a severe revenue decline
in 2022-23, the state faces a serious budget
deficit. Specifically, under the state’s current
law and policy, we estimate the Legislature will
need to solve a budget problem of $68 billion
in the coming budget process.
• Unprecedented Prior-Year Revenue
Shortfall. Typically, the budget process
does not involve large changes in revenue in
the prior year (in this case, 2022-23). This is
because prior-year taxes usually have been
filed and associated revenues collected.
Due to the state conforming to federal tax
filing extensions, however, the Legislature is
only gaining a complete picture of 2022-23
tax collections after the fiscal year has already
ended. Specifically, we estimate that 2022-23
revenue will be $26 billion below budget
act estimates.
• Legislature Has Multiple Tools Available to
Address Budget Problem. While addressing
a deficit of this scope will be challenging, the
Legislature has a number of options available
to do so. In particular, the Legislature has
reserves to withdraw, one-time spending to
pull back, and alternative approaches for
school funding to consider. These options,
along with some others, would allow the
Legislature to solve most of the deficit largely
without impacting the state’s core ongoing
service level.
CALIFORNIA ENTERED A DOWNTURN LAST YEAR
Higher Borrowing Costs and Reduced
Investment Have Cooled California’s Economy.
In an effort to cool an overheated U.S. economy,
the Federal Reserve has taken actions over the
last two years to make borrowing more expensive
and reduce the amount of money available for
investment. This has slowed economic activity in
a number of ways. For example, home sales are
down by about half, largely because the monthly
mortgage to purchase a typical California home
has gone from $3,500 to $5,400. Some effects of
the Federal Reserve’s actions have hit segments
of the economy that have an outsized importance
to California. In particular, investment in California
startups and technology companies is especially
sensitive to financial conditions and, as a result,
has dropped significantly. For example, the number
of California companies that went public (sold
stock to public investors for the first time) in 2022
and 2023 is down over 80 percent from 2021.
As a result, California businesses have had much
less funding available to expand operations or hire
new workers.
State’s Economy Entered a Downturn in 2022.
These mounting economic headwinds have pushed
the state’s economy into a downturn. The number
of unemployed workers in California has risen
nearly 200,000 since the summer of 2022. This has
resulted in a jump in the state’s unemployment rate
from 3.8 percent to 4.8 percent, as Figure 1 on
the next page shows. Similarly, inflation-adjusted
incomes posted five straight quarters of
year-over-year declines from the first quarter of
2022 to the first quarter 2023.
Recent Revenue Collections Show Impact of
Economic Downturn. With the state’s conformity
to federal actions postponing deadlines for tax
payments on investment and business income
for much of the past year, the state adopted the
2023-24 budget without a clear picture of the impact
LEGISLATIVE ANALYST’S OFFICE
2024-25 BUDGET
6 of recent economic weakness on state revenues.
Regardless, there have been signs of revenue
weakness over the past year. The portion of
income taxes collected directly from workers’
paychecks was down 2 percent over the last twelve
months compared to the preceding year. Sales
tax collections have been essentially flat, despite
above-average growth in consumer prices. The full
extent of revenue weakness, however, came into full
focus recently with the arrival of the postponed tax
payments. With the deadline passed, collections
data now show a severe revenue decline, with
total income tax collections down 25 percent in
2022-23. This decline is similar to those seen during
the Great Recession and dot-com bust. While the
slowdown of investment in California companies
and corresponding broader economic weakness
likely were primary drivers of this decline, another
important factor was financial market distress
in 2022. Overall, the experience of the last few years
suggests California’s economy and revenues are
uniquely sensitive to Federal Reserve actions.
Significant Risk That Weakness Could
Persist Into Next Year. Whether the recent
weakness will continue is difficult to say. However,
the odds do not appear to be in the state’s favor.
Past downturns similar to this recent episode have
tended to be followed by additional weakness.
For instance, as Figure 1 shows, an increase in the
unemployment rate similar to the recent period has
consistently been followed by an extended period of
elevated unemployment. Similarly, in the past, years
with large revenue declines typically have been
followed by an additional year of lackluster revenue
performance. History does not always repeat itself
and might not this time. Nonetheless, there is a
significant risk the current weakness could continue
into next year.
Sahm Rule Triggered On
Sahm Recession Indicator signals the start of a recession when the three-month moving average of the unemployment rate rises by 0.5 percentage points or more relative to its low during the previous 12 months.
Figure 1
Uptick in Unemployment Rate Triggered a Recession Indicator Federal policymakers use the Sahm Rule to track the start of recessions in real time.
The Sahm Rule has accurately indicated—with no false positives—the prior six U.S. recessions as well as California downturns.
2 4
6 8
10 12
14 16%
1980 1985 1990 1995 2000 2005 2010 2015 2020
www.lao.ca.gov
2024-25 BUDGET
7 Revenue Outlook Reflects Risk
of Continued Weakness. Reflecting
the risk of continued weakness,
our revenue outlook—shown in
Figure 2 —anticipates collections
will be nearly flat in 2023-24, after
falling 20 percent in 2022-23.
Our outlook then has revenue growth
returning in 2024-25 and beyond.
Based on this trajectory, our revenue
outlook expects collections to come
in $58 billion below budget act
assumptions across 2022-23 through
2024-25, with about half of this
difference ($26 billion) attributable to
2022-23. As always, this forecast is
highly uncertain. It is entirely possible
that revenues could end up $15 billion
higher or lower than our forecast for
2023-24 and $30 billion higher or
lower for 2024-25.
THE BUDGET PROBLEM
Budget Year
In this section, we describe our estimates of
California’s budget condition for the upcoming
fiscal year: 2024-25. We expect the state will face
a serious deficit, also known as a budget problem.
A budget problem occurs when resources for the
upcoming budget are insufficient
to cover the costs of currently
authorized services.
State Faces a $68 Billion
Deficit. Under current law and
policy, we estimate the state
faces a budget problem of
$68 billion. Figure 3 reflects the
budget problem in the 2024-25
ending balance in the Special
Fund for Economic Uncertainties.
The budget problem is the net
effect of the following factors:
• State Anticipated a Deficit
of Around $14 Billion.
The 2023-24 Budget Act
planned for a spending level
in 2024-25 that was higher than expected
revenue collections. Put another way, last
year’s budget planned for a deficit in 2024-25.
That anticipated deficit of $14 billion is the
starting place for the upcoming budget
process and therefore adds to the calculation
of the budget problem.
Figure 2
LAO Revenue Outlook
Total Revenue Excluding Federal Cost Recovery (In Billions) 160
180
200
220
240
260
$280
2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 The shaded area shows how far revenues could deviate from our main forecast. Outcomes beyond the shaded area are possible, but revenues most likely will fall in the shaded area.
Figure 3
General Fund Condition Under Fiscal Outlook
(In Millions)
2022-23 2023-24 2024-25
Prior-year fund balance $52,561 $167 -$32,792
Revenues and transfers 179,961 189,062 193,255
Expenditures 232,355 222,021 222,782
Ending Fund Balance $167 -$32,792 -$62,318
Encumbrances $5,272 $5,272 $5,272
SFEU balance -$5,105 -$38,064 -$67,590
Reserves
BSA balance $21,515 $22,074 $22,809
Safety Net Reserve 900 900 900
SFEU = Special Fund for Economic Uncertainties and BSA = Budget Stabilization Account.
LEGISLATIVE ANALYST’S OFFICE
2024-25 BUDGET
8 • Revenues Are Lower Than Budget Act
Projections by $58 Billion. As described
earlier, collections data to date show a
severe revenue decline, with total income
tax collections down 25 percent in 2022-23.
Reflecting the risk of continued economic
weakness, our forecast anticipates flat
revenue growth for 2023-24, with positive
growth returning in 2024-25 and beyond.
Based on this trajectory, our revenue outlook
expects collections to come in $58 billion
below budget act assumptions across the
budget window. This is the major driver of the
budget problem.
• School and Community College Spending
Is Lower by More Than $4 Billion.
Proposition 98 (1988) establishes a minimum
annual funding requirement for schools and
community colleges, met with state General
Fund and local property tax revenue. When
General Fund revenue declines, the minimum
requirement usually declines in tandem.
Most school spending, however, does not
automatically decrease when the minimum
requirement drops in the current or prior
year. As described in the nearby box, the
state could decide to reduce Proposition 98
General Fund spending by nearly $21 billion
under our outlook, but the automatic reduction
is about $4 billion. The budget problem is
therefore lower by about $4 billion in our
deficit calculation.
• Other Spending Is Lower by $4 Billion.
We estimate spending across the rest of the
budget will be lower than the administration’s
June projections by about $4 billion over
the budget window. The major driver of this
difference is spending on health and human
services (HHS) programs, where our estimates
are lower by about $3 billion. We do not have
department- or program-level detail on the
administration’s HHS spending forecast, so
we cannot give more detail about the nature
of this difference. This lowers the budget
problem by a like amount.
• Entering Fund Balance Is Lower by
$3 Billion. Budgetary changes to years
before the budget window are reflected in
the 2022-23 entering fund balance. (These
changes occur due to accounting rules,
which sometimes result in the state “accruing”
or attributing revenues or spending to
earlier years, based on when the underlying
economic activity is estimated to have
occurred.) Our estimate of the budget problem
reflects a $3 billion downward adjustment in
the entering fund balance as a result of lower
revenues. This adds to the budget problem.
• Reserve Deposits Are Higher by
$400 Million. Proposition 2 (2014) requires
the state to set aside minimum amounts to
deposit into its reserve, pay down debts,
and (under certain conditions) spend money
on infrastructure. These requirements are
determined by a set of relatively complex
formulas. Ordinarily, the required set asides
increase when revenues increase and drop
when revenues decrease. This year, however,
due to a variety of idiosyncratic issues, under
current law and policy, the state’s reserve
requirements would increase in response
to our revenue forecast. The nearby box
describes the reasons why. As we discuss
later, in response to a budget emergency,
the Legislature and Governor can decide to
suspend these deposits and/or withdraw
funds from the reserve.
Multiyear
In this section, we describe our estimates of
California’s budget condition for the multiyear
period through 2027-28. This projection is based
on our main revenue forecast, as shown in Figure 2,
and spending forecast, as shown in Appendix 2.
State Faces Significant Operating Deficits.
Figure 4 on page 10, shows our projections of
the multiyear condition of the budget under our
main revenue forecast. As the figure shows, in
addition to the $68 billion budget problem we
have identified for 2024-25, the state faces annual
operating deficits of around $30 billion per year.
www.lao.ca.gov
2024-25 BUDGET
9 ONLY MODEST AUTOMATIC SPENDING CHANGES
IN RESPONSE TO LOWER REVENUES
State Has Two Constitutional Reserves with Formula-Driven Requirements. Proposition 2 (2014) governs deposits into (and withdrawals from) the state’s two constitutional reserves: the Budget Stabilization Account (BSA), a general purpose reserve, and the Proposition 98 Reserve, which is dedicated to schools and community colleges. In both cases, reserve requirements tend to go up when revenues increase, particularly when capital gains taxes rise, and vice versa. These requirements are automatically adjusted in response to changes in revenue estimates and both reserves have maximum thresholds. In the case of the BSA, requirements above the maximum threshold must be spent on infrastructure instead. In the case of the Proposition 98 Reserve, reserve withdrawals are sometimes required, especially in tighter fiscal times.
Proposition 2
This Year, Most Declines in BSA-Related Requirements Do Not Impact Budget’s Bottom Line. Typically, drops in revenue would result in lower BSA and infrastructure requirements. Under our estimates, the state’s required payments on infrastructure decline by billions of dollars, but because of the way these payments are scored, these changes have no impact on the budget’s bottom line.
In addition, BSA deposits increase largely because of the significant downward revenue adjustment to 2022-23. The large downward revenue adjustment means the state must continue to make reserve deposits to reach the 10 percent threshold (under our understanding of the administration’s interpretation of Proposition 2) after 2022-23.
Proposition 98
Proposition 98 Sets Minimum Level of School Funding. Proposition 98 (1988) amended the California Constitution to establish a minimum annual funding requirement for schools and community colleges. The state calculates the minimum requirement using formulas that account for various inputs, including General Fund revenue. The state meets the requirement through a combination of General Fund spending and local property tax revenue. The state recalculates the minimum requirement at the end of the year based on revised estimates of these inputs, followed by a second recalculation at the end of the following year. When the minimum requirement decreases, the state can leave school spending at the level it initially approved in the budget or reduce spending to the lower requirement.
Estimate of Minimum General Fund Spending Requirement Under Proposition 98 Is Down $21 Billion… Under our outlook, the decline in General Fund revenue reduces the minimum required General Fund spending under Proposition 98 by $21 billion from 2022-23 through 2024-25, which represents a reduction of nearly 38 cents for each dollar of lower revenue. This reduction includes $9.6 billion in 2022-23, $7 billion in 2023-24, and $4.4 billion in 2024-25. The magnitude of the downward revision in 2022-23 is unprecedented for a fiscal year that is already over. Although the state has experienced large swings in the minimum requirement for fiscal years that are currently in progress, revisions to prior fiscal years are typically minor and rarely exceed a few hundreds of millions of dollars.
… But Automatic Reduction in School Spending Is Only $4.3 Billion. Although the constitutional minimum funding requirement is down $21 billion, the automatic reduction in school spending over the period is only $4.3 billion. Most of this reduction relates to the automatic elimination of required deposits into the Proposition 98 Reserve in 2022-23 and 2023-24. After accounting for the effects of lower reserve deposits—along with several smaller adjustments—General Fund spending over the three years is down $4.3 billion compared with the June 2023 estimates. This reduction leaves school spending nearly $16.7 billion above the levels that would exist if the state only funded at the constitutional minimum each year of the period.
LEGISLATIVE ANALYST’S OFFICE
2024-25 BUDGET
10 These operating deficits represent
additional budget problems
the Legislature would need to
address in the coming years,
either by reducing spending,
increasing revenues, shifting
costs, or using reserves. Although
highly uncertain, our projection
of the state’s deficits would
accumulate to $155 billion across
the forecast window, which is
significantly more than the amount
of reserves the state has available
(about $24 billion).
Extent of Future Deficits
Depends on Legislative
Decisions This Year. The multiyear
deficits shown in Figure 4 are
subject to substantial uncertainty.
First, revenue estimates can easily
differ from our estimates by tens of billions of
dollars in either direction. Second, these deficits
are based on our assessment of the costs of the
state’s programs under current law and policy.
The state’s actual costs will be higher or lower
depending on decisions made by the Legislature,
including, for example, about how to fund schools
and community colleges in 2022-23.
SOLVING THE BUDGET PROBLEM
State Has Various Options to Address the
Budget Problem. While addressing a deficit of
$68 billion will be challenging, the Legislature has a
number of options available to do so. In this section,
we describe some of the key ones. (Some of the
solutions here assume a budget emergency is
declared.) These solutions include:
• Withdraw Reserves. Under our estimates, the
state would have about $24 billion in reserves
to help address the budget problem (assuming
a budget emergency is declared).
• Reduce Proposition 98 Spending. Over
the three-year period, the state could reduce
General Fund costs by $16.7 billion if it were
to lower school spending to the constitutional
minimum allowed under Proposition 98.
One option for implementing some of this
reduction would be to use the Proposition 98
Reserve to cover school-related costs
that exceed the Proposition 98 minimum
requirement in 2022-23.
• Reduce Other One-Time Spending.
We estimate the state has at least $8 billion in
one-time and temporary spending in 2024-25
that could be pulled back to help address
the budget problem. In addition, there are
potentially billions of dollars more in spending
from prior years that has been committed but
not yet distributed, and therefore also could be
reduced to help address the budget problem.
• Identify Other Solutions. Even after using
most or all of these solutions, the Legislature
still would need to find more solutions
to address the remainder of the budget
problem. Other options include additional
cost shifts (such as more loans from special
funds), revenue solutions, and ongoing
spending reductions.
Figure 4
State Faces Serious Budget Problem in 2024-25,
and Significant Operating Deficits in Future Years
(In Billions)
- 7 0
- 6 0
- 5 0
- 4 0
- 3 0
- 2 0
-$10
2 0 2 4 - 2 5 2 0 2 5 - 2 6 2 0 2 6 - 2 7 2 0 2 7 - 2 8 Bu d g e t P ro b l e m Op e r at i n g D e fic i t s
www.lao.ca.gov
2024-25 BUDGET
11 Withdraw Reserves
State Could Withdraw Up to $24 Billion
in General Purpose Reserves. As shown in
Figure 3, the state has $23 billion in the BSA under
our estimates, plus about $1 billion in the Safety
Net Reserve, to address the budget problem.
The Safety Net Reserve is available to fund program
costs in HHS programs, like Medi-Cal, while the
BSA can only be accessed in a budget emergency,
as described below.
Budget Emergency Available Under Our
Estimates. The Legislature can only suspend
mandatory deposits or make withdrawals from
either of its two constitutional reserves—the BSA
and the Proposition 98 Reserve—if the Governor
declares a budget emergency. The Governor
may declare a budget emergency in two cases:
(1) if estimated resources in the current or upcoming
fiscal year are insufficient to keep spending at
the level of the highest of the prior three budgets,
adjusted for inflation and population (a “fiscal
budget emergency”), or (2) in response to a natural
or man-made disaster. Under our forecast, a fiscal
emergency would be available both in 2023-24 and
2024-25. In the case of a fiscal budget emergency,
the Legislature only can withdraw the lesser
of: (1) the amount of the budget emergency, or
(2) 50 percent of the BSA balance (in each year).
As of this writing, the Governor has not called a
fiscal budget emergency for 2023-24 or 2024-25.
Reduce Proposition 98 Spending
Spending Reductions Would Help Balance
the Budget but Involve Trade-Offs. If the
Legislature reduced school spending to the
constitutional minimum allowed by Proposition 98,
it would address up to $16.7 billion of the budget
problem. To obtain these savings, the state would
have to reduce spending it previously approved in
2022-23 and 2023-24. In previous downturns, the
state relied heavily on two main approaches for
implementing such reductions: (1) across-the-board
reductions to per-pupil allocations and (2) payment
deferrals. These options, however, tend to be
disruptive for school operations, particularly
when the state announces them on short notice.
In addition, the state’s options for reductions in
2022-23 are relatively limited because the state
has allocated most of the funding attributable to
the prior year already. Before resorting to cuts or
deferrals, however, the state could reduce spending
in other ways that would be less disruptive
for schools.
Proposition 98 Reserve Could Cover
Spending Above the Minimum Requirement
in 2022-23. Based on deposits the state made
in 2020-21 and 2021-22, the Proposition 98
Reserve currently holds a balance of $8.1 billion.
(This amount excludes the additional deposits
the state had anticipated making in 2022-23 and
2023-24 prior to our lower revenue estimates.)
The state could use up to $7.7 billion of this
balance to cover school spending that exceeds
the Proposition 98 minimum requirement in
2022-23. Using the Proposition 98 Reserve in
this way would allow the state to lower General
Fund spending to the constitutional minimum
level in the prior year without reducing the funding
allocations it previously approved. From an
accounting perspective, Proposition 98 Reserve
withdrawals also do not count as spending for
the purpose of determining the minimum funding
requirement in future years. This means using the
Proposition 98 Reserve for 2022-23 also would
reduce the constitutional minimum requirements
in 2023-24 and 2024-25. (The formulas governing
the Proposition 98 Reserve would require the state
to withdraw the remaining amount in the reserve—
about $450 million—in 2023-24.)
State Could Make Reductions to Programs
With Unallocated Funds. Although the
Proposition 98 Reserve could allow the state
to reduce General Fund spending with minimal
disruption to school programs, the reserve balance
is not large enough to obtain $16.7 billion in
savings by itself. If the state wanted to obtain the
maximum possible savings, it would need to make
additional reductions. One option is to reduce
program funding that has not yet been allocated
to schools. For example, the state previously
approved $1.1 billion for grants to community
schools that count as spending in 2022-23 but have
not yet been awarded. (This funding is in addition
to the roughly $3 billion in funding for community
schools that the state approved prior to 2022-23.)
LEGISLATIVE ANALYST’S OFFICE
2024-25 BUDGET
12 In addition, several hundreds of millions of dollars in State Preschool funding provided in 2022-23
and 2023-24 is currently not obligated for any
specific purpose. Over the coming months, the
state likely will be able to identify additional grants and programs with unspent funds. Reducing grants
that have not yet been allocated to schools could
allow the state to reduce General Fund spending
while minimizing reductions to funding that schools
were already planning to receive. As we explain in
the Appendix, if the Legislature took these actions,
Proposition 98 funding would be sufficient to
cover all but $1 billion of ongoing program costs
in 2024-25.
Reduce One-Time Spending
Pulling Back One-Time and Temporary
Spending Could Provide More Than $10 Billion
in Solutions. We estimate the state has $8.6 billion
in one-time and temporary spending slated for
2024-25 that can be reduced entirely in order to
address the serious budget problem. This includes
spending of: $2.2 billion in transportation,
$1.9 billion in natural resources and environment,
and $1.8 billion in various education programs.
In addition, the Legislature has committed tens of
billions of dollars in previous years to one-time and
temporary purposes, including billions of dollars
in the current year. Some of these funds could be
withdrawn to address the deficit, but the Legislature
would need to request more information from the
administration to know the precise amounts that
could be feasibly reduced. To maximize flexibility
and mitigate disruption, some of these pullbacks
could merit early action in 2024.
Identify Other Solutions
State Might Have Some Cost Shift Options
Remaining. Cost shifts occur when the state
moves costs between fund sources or entities—
for example, shifting spending from the General
Fund to special funds or, as has been done in
prior budgets, shifting costs from the state to local
governments. The state used about $10 billion in
cost shifts to address last year’s budget problem
and could have some additional capacity to shift
additional costs again this year. For example, we
think the state would have more capacity to make
loans from special funds if those loans were made
on a pooled basis, rather than on an individual
fund basis.
State Has Used Revenue Increases to
Address Past Budget Problems. For example,
in 2020-21, the state temporarily suspended
net operating loss (NOL) deductions, preventing
corporations with net income over $1 million from
using NOLs. The state also limited businesses
from claiming more than $5 million in tax credits.
The state also has increased broad-based taxes
on a temporary and permanent basis in similar
revenue downturns.
Other Spending Reductions. Given the extent
of the deficit, the state might also have to reduce
other spending—including cuts into its core service
level—in order to balance the budget. In facing
budget problems of similar magnitudes, the state
in the past has made reductions to employee
compensation and lowered spending on higher
education and the judicial branch. The Legislature
also could explore using more of the state’s recently
reauthorized tax on managed care organization
to offset the General Fund costs of Medi-Cal,
rather than for other costs, such as increasing
provider rates.
www.lao.ca.gov
2024-25 BUDGET
13 COMMENTS
Unprecedented Prior-Year Revenue Revision
Creates Unique Challenges. Typically, the budget
process does not involve large changes in revenue
in the prior year (in this case, 2022-23). This is
because usually prior-year taxes already have been
filed and associated revenues collected. Due to
the federal tax filing extensions, however, the
Legislature is gaining a complete picture of 2022-23
tax collections after the fiscal year has already
ended. This creates unique and difficult challenges.
Had the Legislature had complete information
about 2022-23 tax collections in May, as would be
typical, it would have solved much of this deficit in
June 2023. At that time, the Legislature would have
had more options available to reduce spending.
Now that the fiscal year has ended, adjusting
spending for 2022-23 across a broad range of
programs will be more challenging, including for
schools and community colleges and much of the
rest of the budget.
Early Action Could Increase Flexibility. Given
the scale of the budget problem, we suggest
the Legislature immediately begin evaluating
past spending to find monies that have been
committed but not yet distributed. These could be
pulled back to help address the budget problem.
Taking early action on these reductions could
increase the choices available to the Legislature.
Once more money has been distributed, fewer
options will be available by May.
Legislature Will Have Fewer Options to
Address Multiyear Deficits in the Coming Years.
Given the state faces a serious budget problem,
using general purpose reserves this year is merited.
That said, we suggest the Legislature exercise
some caution when deploying tools like reserves
and cost shifts. The state’s reserves—which total
$24 billion—are unlikely to be sufficient to cover the
state’s multiyear deficits—which average $30 billion
per year under our estimates. These deficits
likely necessitate ongoing spending reductions,
revenue increases, or both. As a result, preserving
a substantial portion—potentially up to half—of
reserves would provide a helpful cushion in light of
the anticipated shortfalls that lie ahead.
LEGISLATIVE ANALYST’S OFFICE
2024-25 BUDGET
14 APPENDIX 1: OUTLOOK FOR SCHOOL AND
COMMUNITY COLLEGE FUNDING
Total Proposition 98 Funding Requirement
Down $18.8 Billion Compared With June
Estimates. Under our outlook, the minimum
funding requirement for schools across 2022-23,
2023-24, and 2024-25 is $18.8 billion lower than
the estimates from June 2023. This reduction
reflects two main adjustments: (1) a $21 billion
decrease in required General Fund spending and
(2) a $2.2 billion increase in local property tax
revenue. The reduction in required General Fund
spending reflects our significantly lower estimates
of General Fund revenue, with the minimum
funding requirement decreasing nearly 38 cents
for each dollar of lower revenue. The increase in
local property tax revenue reflects preliminary data
showing growth in 2022-23 and 2023-24. Appendix
Figure 1 and Figure 2 on the following pages
provide more detail on these changes by year.
As the bottom of Appendix Figure 2 shows, the total
reduction in the minimum funding requirement is
$9 billion in 2022-23, $6.3 billion in 2023-24, and
$3.5 billion in 2024-25. These amounts represent
the maximum reductions in school funding—relative
to June 2023 estimates—the state could make
while still meeting the Proposition 98 minimum
funding requirement.
Under Baseline Assumptions, State Would
Provide $11.9 Billion More Than the Revised
Minimum Requirement in 2022-23 and 2023-24.
Although the Proposition 98 funding requirement
changes automatically based on updated revenue
estimates, the law does not automatically adjust
most school spending in the current or prior
year. For 2022-23, we estimate that automatic
adjustments only reduce Proposition 98 spending
by $1.3 billion compared with the level anticipated
in June 2023. This reduction mainly reflects
the elimination of the required deposit into the
Proposition 98 Reserve (the deposit is no longer
required due to our lower estimates of capital gains
revenue). It also reflects a small increase in costs
for the Local Control Funding Formula and various
smaller adjustments. Accounting for the $9 billion
decrease in the Proposition 98 funding requirement
and the $1.3 billion decrease in costs, overall
spending in the prior year is $7.7 billion above the
minimum requirement. This funding above the
minimum level also becomes part of the base for
calculating the minimum requirement in 2023-24.
Specifically, it increases the 2023-24 requirement
by $4.2 billion relative to the amount the state
otherwise would have to provide. Across both years
combined, funding under our baseline assumptions
is $11.9 billion higher than the amount the state
would provide if it were to fund at the minimum
level only.
Decision About Spending in 2022-23 and
2023-24 Affects Calculation of the Funding
Requirement in 2024-25. The Legislature’s
decision about whether to reduce funding to the
lower minimum requirement in the current and prior
year has significant implications for the calculation
of the funding requirement in 2024-25. We estimate
that if the state leaves funding $11.9 billion above
the Proposition 98 minimum requirement across
2022-23 and 2023-24 (consistent with our baseline
assumptions), the funding requirement in 2024-25
would be $113 billion. This level of funding would
be slightly higher than the estimate the state made
in June 2023. Conversely, if the state were to lower
funding in 2022-23 and 2023-24 to the minimum
levels allowed under Proposition 98, the funding
requirement in 2024-25 would be $108.2 billion.
This level of funding would be about $3.5 billion
less than the estimate the state made in June 2023.
If the state were to lower spending somewhat but
not to the minimum levels in 2022-23 and 2023-24,
the funding requirement in 2024-25 would fall
somewhere between $108.2 billion and $113 billion.
Total Costs for Existing Programs and
Statutory Cost-of-Living Adjustment (COLA)
Estimated at $109.3 Billion. Separate from
our calculations of the Proposition 98 funding
requirement, we also estimated the cost of
maintaining existing school and community college
programs in 2024-25. In making this estimate,
we accounted for cost increases and decreases
related to (1) changes in student attendance and
community college enrollment, (2) an estimated
statutory COLA of 1.27 percent, and (3) the
www.lao.ca.gov
2024-25 BUDGET
15 expiration of various one-time costs and savings
included in the June 2023 budget plan. Under
our estimates, the total cost for existing programs
in 2024-25 is $109.3 billion. Of this amount,
$1.3 billion is the cost specifically associated
with the 1.27 percent statutory COLA. Under our
baseline assumption (in which the state does
not reduce funding to the minimum level in the
current or prior year), the Proposition 98 funding
requirement in 2024-25 would be more than enough
to cover the statutory COLA. If the state were to
reduce spending to the minimum level, however,
the 2024-25 funding requirement would be about
$1 billion less than the cost of existing programs
adjusted for COLA.
State Estimated to Withdraw Entire
Proposition 98 Reserve Balance. Under our
outlook, the reductions in Proposition 98 funding
require the state to withdraw the entire $8.1 billion
balance in the Proposition 98 Reserve. Under our
baseline assumption—that is, absent any special
action by the Legislature—the constitutional
formulas would require withdrawals of nearly
$5.5 billion in 2023-24 and nearly $2.7 billion in
2024-25. Alternatively, the state could decide
to withdraw funds preemptively and use them
to cover costs that exceed the Proposition 98
requirement in the prior year. Under this approach,
the state would withdraw $7.7 billion from the
reserve for use in 2022-23 (it would be required to
withdraw the remaining $450 million in 2023-24).
This approach would allow the state to reduce
General Fund spending on schools in the prior year
without cutting school programs below previously
approved levels. (This approach also assumes
a budget emergency is declared.) Under the
Constitution, the Legislature may use withdrawals
from the Proposition 98 Reserve for any school or
community college purpose.
Appendix 1, Figure 1
Comparing Proposition 98 Funding Levels in the Budget Windowª (In Billions)
$107.4
$108.3
$111.6
$106.0 $106.2
$113.0
$98.3
$102.0
$108.2
E n ac t e d B u d g e t L e v e l B as e l i n e F u n d i n g A s s u m p t i o n b M i n i m u m F u n d i n g L e v e l c a Reflects total General Fund and local property tax revenue for schools and community colleges. b For 2022-23 and 2023-24, reflects June funding level with automatic adjustments, including elimination of required reserve deposits and baseline adjustments to Local Control Funding Formula. For 2024-25, reflects estimate of the Proposition 98 minimum requirement building upon the baseline spending assumptions in 2022-23 and 2023-24. c Reflects funding level if state funds at the Proposition 98 minimum requirement each year of the period. 90 95
100
105
110
115
$120
2022-23 2023-24 2024-25
$8.1 Billion Reserve Withdrawal
Available During the Budget Window
-$4.8
5 $10
-$4.2
-$7.7
LEGISLATIVE ANALYST’S OFFICE
2024-25 BUDGET
16 Appendix 1, Figure 2
Comparing Proposition 98 Funding Estimates
(Dollars in Millions)
2022-23 2023-24 2024-25 Three-Year Totals
Proposition 98 Estimates
June 2023 Enacted Budget
Proposition 98 Funding:
General Fund $78,117 $77,457 $79,739 $235,314
Local property tax 29,241 30,854 31,881 $91,977
Totals $107,359 $108,312 $111,621 $327,291
General Fund tax revenueª $204,533 $201,213 $203,116 $608,862 K-12 average daily attendance 0.1% 0.3% -0.2% —
Per capita personal income 7.6 4.4 3.1 —
Per capital General Fund b -6.2 -0.8 1.4 —
Operative test 1 1 1 —
LAO December Outlook With Baseline Adjustments Only
Proposition 98 Funding:
General Fund $76,244 $74,651 $80,111 $231,007
Local property tax 29,778 31,543 32,867 94,189
Totals $106,022 $106,195 $112,979 $325,195
General Fund tax revenueª $179,091 $182,747 $190,099 $551,938 K-12 average daily attendance 0.9% 0.7% 0.7% —
Per capita personal income 7.6 4.4 4.3 —
Per capital General Fund b -17.8 2.9 5.3 —
Operative test 1 3 2 —
LAO December Outlook With Funding Reduced to Minimum Level Proposition 98 Funding:
General Fund $68,553 $70,491 $75,295 $214,338
Local property tax 29,778 31,543 32,867 94,189
Totals $98,330 $102,035 $108,162 $308,527
General Fund tax revenueª $179,091 $182,747 $190,099 $551,938 K-12 average daily attendance 0.9% 0.7% 0.7% —
Per capita personal income (Test 2) 7.6 4.4 4.3 —
Per capital General Fund (Test 3) b -17.8 2.9 5.3 —
Operative test 1 1 2 —
Funding Comparisons
Difference From Enacted Budget to LAO Baseline
General Fund -$1,873 -$2,806 $372 -$4,307
Local property tax 536 689 986 2,211
Totals -$1,336 -$2,117 $1,358 -$2,096
Difference From LAO Baseline to Proposition 98 Minimum Level General Fund -$7,6 92 -$4,160 -$4,816 -$16,668
Local property tax — — — —
Totals -$7,692 -$4,160 -$4,816 -$16,668
Difference From Enacted Budget to Proposition 98 Minimum Level General Fund -$9,565 -$6,966 -$4,445 -$20,975
Local property tax 536 689 986 2,211
Totals -$9,028 -$6,277 -$3,459 -$18,764
a Excludes non-tax revenues and transfers, which do not affect the Proposition 98 calculations. b As set forth in the State Constitution, reflects change in per capita General Fund plus 0.5 percent. www.lao.ca.gov
2024-25 BUDGET
17 LEGISLATIVE ANALYST’S OFFICE
2024-25 BUDGET
18 APPENDIX 2
Appendix 2, Figure 1
General Fund Spending Through 2024-25
(In Billions)
2023-24
Outlook
2024-25
Change From
2022-23
Legislative, Executive $6.1 $5.2 -15%
Courts 3.5 3.7 6
Business, Consumer Services, and Housing 2.6 0.5 -79 Transportation 0.9 0.1 -94
Natural Resources 5.7 4.6 -20
Environmental Protection 0.6 0.4 -33
Health and Human Services 73.4 75.4 3
Corrections and Rehabilitation 14.2 13.5 -4
Education 21.2 21.4 1
Labor and Workforce Development 0.9 1.2 43
Government Operations 4.0 2.3 -42
General Government
Non-Agency Departments 1.8 1.7 -3
Tax Relief/Local Government 0.6 0.6 6
Statewide Expenditures 4.8 5.7 18
Capital Outlay 0.5 0.3 -37
Debt Service 5.8 5.9 2
Non-98 Spending Totals $146.4 $142.7 -3%
Proposition 98 a $75.6 $80.1 6%
Totals 222.0 222.8 0%
a Reflects General Fund component of the Proposition 98 minimum guarantee. www.lao.ca.gov
2024-25 BUDGET
19 Appendix 2, Figure 2
General Fund Spending by Agency Through 2027-28
(In Billions)
Agency 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28
Average
Annual
Growth
Legislative, Executive $14.1 $6.1 $5.2 $3.1 $2.5 $2.5 -22.0% Courts 3.5 3.5 3.7 3.8 3.9 4.1 3.5
Business, Consumer Services, and
Housing
3.9 2.6 0.5 0.3 0.3 0.2 -28.8
Transportation 1.5 0.9 0.1 0.3 0.0 0.0 -17.7
Natural Resources 13.7 5.7 4.6 4.9 3.5 3.3 -10.9
Environmental Protection 3.9 0.6 0.4 0.1 0.1 0.1 -28.0 Health and Human Services 61.2 73.4 75.4 79.4 84.3 89.9 6.0 Corrections and Rehabilitation 14.8 14.2 13.5 13.1 13.1 13.0 -1.2 Education 20.0 21.2 21.4 20.3 21.3 22.2 1.2
Labor and Workforce Development 1.3 0.9 1.2 1.0 1.0 1.0 -5.5 Government Operations 5.5 4.0 2.3 3.4 7.0 8.1 52.0 General Government
Non-Agency Departments 2.3 1.8 1.7 1.8 1.3 1.1 -13.9
Tax Relief/Local Government 0.7 0.6 0.6 0.6 0.6 0.7 3.9 Statewide Expenditures 1.3 4.8 5.7 6.9 8.2 9.1 16.9
Capital Outlay 3.3 0.5 0.3 0.1 0.1 0.0 -48.3
Debt Service 5.2 5.8 5.9 5.9 5.9 6.0 0.6
Non-98 Spending Totals $156.1 $146.4 $142.7 $145.1 $152.9 $161.5 4.2% Proposition 98 a $76.2 $75.6 $80.1 $84.5 $87.3 $89.7 3.8% Proposition 2 Infrastructure b $0.0 $0.2 $0.7 $1.7 $4.8 $5.4 95.7% Total Forecasted Spending 232.4 222.0 222.8 229.6 240.3 251.2 4.1% a Reflects General Fund component of the Proposition 98 minimum guarantee. b In 2022-23 and 2023-24, amounts are distributed across agencies. In 2024-25 and after, Proposition 2 infrastructure requirements are assumed to offset existing costs, for example for bond debt service, and so do not result in higher total state costs.
LEGISLATIVE ANALYST’S OFFICE
2024-25 BUDGET
20 LAO PUBLICATIONS
This report was prepared by Ann Hollingshead, with contributions from Ken Kapphahn and Brian Uhler, as well as others across the office, and reviewed by Edgar Cabral and Carolyn Chu. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature.
To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, California 95814.