League of California Cities logoFor the past few years, Gov. Gavin Newsom had the luxury of calling his revised state budgets “unprecedented” and “historic.” On Friday, he struck a much different tone, repeatedly emphasizing the value of prudence and restraint as he unveiled a revised, $306.5 billion state budget proposal.

The budget includes a few wins for cities, but on the homelessness and housing front, a few disappointments as well.

The shift in tone is not surprising. The state started with a budget deficit for fiscal year 2023-24, which grew to $31.5 billion since January. The Governor used a combination of funding deferrals, reversions of unused dollars, and shifts from the General Fund to balance the budget. The budget proposal also draws heavily on federal funding and a potential 2024 climate bond to meet environmental goals.

In a win for cities, the May budget proposal does reflect calls from the League of California Cities to avoid redirecting city funds to address the state’s budget shortfalls. It also does not include deep cuts to existing appropriations to cities. The proposed budget even includes some modest, but important increases for local governments, including more money for behavioral health care, adaptive reuse, fentanyl overdose aids, and flood control in the Central Valley.

The May Revision largely maintains commitments made earlier this year for homelessness, adding no new investments. However, it proposes additional reductions and deferments for affordable housing. Cal Cities issued a press release in response, turning up its pressure on the state to find a permanent home in the budget for $3 billion annually to prevent and reduce homelessness and boost the supply of affordable housing.

The budget battle is hardly over, even by the California Legislature’s prolonged standards. The state’s economic future is anything but certain and Californians have until October to finish filing their taxes. More revisions will be on the way.

This is not only the first budget process for nearly a third of the Legislature, but the first budget deficit for most legislators. Only a handful of legislators were around during the 2009 Great Recession. Lawmakers must meet their constitutional deadline and pass a budget by June 15 so they can continue to get paid. More information about the macroeconomic conditions affecting the budget is in the “Revenue and Taxation” section of this story.

Read Cal Cities Executive Director and CEO Carolyn Coleman’s statement in response to the budget proposal, and Cal Cities’ analysis of the budget below.

Revenue and Taxation

The Governor’s May Revision is centered on maintaining a strong fiscal foundation to hedge against continued economic uncertainty. The revised budget proposal seeks to balance a $31.5 billion budget deficit — a $9 billion increase over January’s estimated budget shortfall. The budget deficit increased due to lower-than-expected tax revenues and greater-than-expected usage of social safety net programs, such as the state’s Medicaid program.

Although the state’s deficit increased, the May Revision assumes continued but slowing economic growth. The Governor proposed balancing the budget through a combination of funding delays, shifts, and reductions, with no withdrawals from the state’s reserve accounts. This approach is consistent with the proposed budget put forward in January.

During the pandemic, the state experienced unprecedented General Fund growth, with revenues increasing 30% in 2020-21 and 20% in 2021-22. Despite the weak personal income tax forecast, anticipated overall revenues for 2023-24 — while down from their peak — remain higher than the pre-pandemic level on an inflation-adjusted basis. California’s revenues are largely dependent upon corporate and personal taxed earnings — specifically capital gains — which fluctuate wildly with market conditions.

The May Revision does not forecast an economic recession. Nonetheless, state budget officials did note the economy is at a heightened risk of recession due to simultaneous low employment and high inflation, a key indicator of a likely recession. Although inflation seems to be cooling, it is still higher than the Federal Reserve’s target rate. More interest rate hikes are likely on the way. The Fed’s ongoing effort to lower inflation through rate hikes does cool the economy but also raises the odds of a recession. If the economy enters a recession, there is a possibility of a sharp downward revision to revenue estimates by as much as $40 billion in 2023-2024 alone.

To further complicate matters, the state and the Internal Revenue Service delayed the 2022 tax filing deadline to October. Incomplete tax collection data could contribute to substantially larger fluctuations in the revenue forecast. If the June budget is built on overestimated revenues, the chances of midyear corrective budget adjustments will rise. This could also result in an increased risk for the Legislature to claw back monies previously appropriated for use by cities.

The Governor’s budget proposal does not include redirection of city funds to address the state’s budget shortfalls and does not include deep cuts to ongoing programs that benefit cities.

Below is a breakdown of major allocations, reductions, and policies announced in the May Revision.

  • City of Fresno Public Infrastructure Plan: The Governor’s January budget included $300 million one-time General Fund to be spent over three years for the Local Government Budget Sustainability Fund to provide grants to support revenue stability in counties with high unemployment and high rates of poverty. The May Revision maintains $50 million for this purpose and reallocates $250 million to support the city of Fresno’s Public Infrastructure Plan, which includes new parking structures and green spaces, improved walkability, and water infrastructure.
  • Technical Assistance to Small Businesses: An increase of $23.5 million in Federal Funds, to be spent over 5 years, for the Office of the Small Business Advocate to provide technical assistance to small businesses — including businesses owned by socially and economically disadvantaged individuals — applying for State Small Business Credit Initiative capital programs.
  • California Small Business COVID-19 Relief Grant Program: A decrease of an additional $50 million one-time General Fund from this program due to declining General Fund revenues, bringing the total reduction to $142 million.

The May Revision also maintains funding for proposals highlighted in Cal Cities’ analysis of the Governor’s January budget proposal.

Community Services

The May Revision maintains funding commitments from prior budgets for homelessness. However, the budget falls short in proposing investments that match the scale of this crisis. The budget proposal focuses on accountability measures for local governments and prioritizes spending for specific homelessness programs. It also signals the intent to tie state funding for homelessness to compliance with state housing laws.

The Governor is working with legislative leadership on a 2024 ballot initiative that would modernize the Mental Health Services Act (MHSA) to focus on housing and residential services for people experiencing homelessness and mental health and substance use disorders. Cal Cities supports this initiative in concept, which could provide nearly $1 billion every year for behavioral health housing and care.

Cal Cities is keeping up the pressure to advocate for $3 billion in ongoing funding to prevent and reduce homelessness and boost the supply of affordable housing. Last week, Cal Cities joined a coalition of local governments, homeless service providers, housing advocates, and business leaders to Governor to provide ongoing funding through the Homeless Housing, Assistance, and Prevention (HHAP) Program. Ongoing funding would allow local governments to sustain long-term interventions critical to addressing this crisis.

Below is a breakdown of major allocations, reductions, and policies announced in the Governor’s May Revision.

  • Homelessness Funding: Maintains $3.4 billion in one-time funds to address homelessness as committed in prior budgets. This includes $1 billion for the HHAP program.
  • Homelessness Funding Prioritization: Proposes statutory changes to the HHAP program to prioritize spending on supporting permanent housing, Homekey operating sustainability, Community Assistance, Recovery and Empowerment Act (CARE) housing supports, and other activities.
  • Homelessness Accountability: Reinforces the Governor’s continued effort to work with the Legislature to enhance local accountability around homeless services and regional coordination on homelessness strategies. This includes proposed trailer bill language that signals the intent to link state homelessness funding to having submitted a compliant housing element.
  • CARE Act Funding: Provides an annual increase between $43 million and $54.5 million for county behavioral health departments to implement the CARE Court program. The May Revision also includes an additional one-time $15 million for Los Angeles County. This is due to Los Angeles County’s announcement that it will implement the CARE Act one year early.
  • Behavioral Health: Includes $500 million one-time MHSA in lieu of General Fund for the Behavioral Health Bridge Housing Program, effectively eliminating the Governor’s earlier proposed delay of $250 million General Fund to 2024-25.
  • Parks and Open Space: Shifts $86.6 million in Statewide Parks Program funds to be included in a future climate bond proposal.
  • Children and Youth: Scales back funding for transitional kindergarten in response to smaller-than-expected enrollment. The Governor dedicated $604 million in the January budget but trimmed the investment to about $357 million. Additionally, $337 million for staffing universal transitional kindergarten dropped to $283 million. It also requires local education agencies to begin screening pupils in kindergarten through second grade for risk of reading difficulties, including dyslexia, by 2025-26.
  • Older Adults: Includes $20 million in 2023-24, $20 million in 2024-25, and $10 million in 2025-26 for the California Department of Aging to continue the Older Adult Friendship Line, which offers competitive grants to local jurisdictions to identify and address older adult behavioral health and substance use disorder needs.

Housing, Community, and Economic Development

Instead of providing essential funding to jumpstart affordable housing construction, the May Revision takes the opposite approach and proposes additional reductions and deferments. Combined, the Governor proposed $367.5 million in reductions and $345 million in deferments in much-needed housing funding, for a total of $712.5 million.

Delaying or eliminating nearly three-quarters of a billion dollars will only exacerbate the housing crisis. Cal Cities will continue to call on the Governor and lawmakers to include a $3 billion annual investment in the state budget to help cities prevent and reduce homelessness and spur affordable housing development. Targeted, ongoing funding is the only way cities can find community-based solutions that get residents off the streets and keep them in their homes.

Below is a breakdown of major reductions and deferments announced in the May Revision.

  • Foreclosure Intervention Housing Prevention Program: Provides funds to various nonprofit organizations to acquire foreclosed property and operate as affordable housing. The May Revision proposes deferring $345 million over the next four fiscal years for a revised allocation of $50 million in 2023-24, $100 million in 2024-25, $100 million in 2025-26, and $95 million in 2026-27.
  • Downtown Rebound Program: Provides funding for adaptive reuse of commercial and industrial structures to residential housing. The May Revision proposes reverting the remaining $17.5 million in unexpended funds to the General Fund.

Public Safety

The May Revision includes resources to address the fentanyl crisis plaguing cities throughout the state, primarily through overdose reversal aids. It also includes one-time funds to support the 988 Suicide and Crisis Lifeline. The consortium of 13 crisis centers answers calls, texts, and chats and combines custom local care and resources with national standards and best practices for mental health crisis response.

This increased focus on long-term resources and partnerships will enable the state to make behavioral health resources and opioid overdose reversal tools more accessible statewide. Below is a breakdown of major allocations, reductions, and policies announced in the May Revision.

  • Fentanyl: The May Revision includes an additional $141.3 million in Opioid Settlements Fund over four years for the Department of Health Care Services to support the Naloxone Distribution Project, for a total of $220.3 million over four years. Additionally, the May Revision includes $30 million one-time Opioid Settlements Fund in 2023-24 to support the development of a lower cost, generic version of a naloxone nasal spray product through the CalRx Naloxone Access Initiative at the Department of Health Care Access and Information.
  • 988: Includes $15 million one-time 988 State Suicide and Behavioral Health Crisis Services Fund in 2023-24 to support eligible 988 call center behavioral health crisis services, for a total of $19 million in 2023-24 and $12.5 million in 2024-25 and ongoing.

Transportation, Communications, and Public Works

The revised budget proposal mostly mirrors the Governor’s January budget except for $2.2 billion in General Fund reductions to maintain $12.8 billion of transportation infrastructure investments.

The May Revision proposes statutory changes to expedite infrastructure projects that advance California’s climate, equity, and economic goals and maximize the state’s share of federal infrastructure spending while maintaining appropriate environmental review. California has received about $48.6 billion in federal infrastructure funding so far.

Under the revision, the California Department of Transportation will deliver over $20 billion worth of planned state highway repair and rehabilitation projects in the State Highway Operations and Protection Program over the next five years. Caltrans will also allocate almost $12 billion of local assistance direct funding to local governments.

Below is a breakdown of major allocations, reductions, and policies announced in the Governor’s May Revision.

  • Transit: With federal emergency funds coming to an end and transit agencies’ fare revenue in decline, the Governor committed to working with the Legislature and stakeholders to address a multibillion-dollar deficit in transit funding.
  • Ports and Rail: Proposes $1.2 billion for projects that improve goods movement on rail and roadways at port terminals, including new bridges and zero-emission modernization projects.
  • Active Transportation Program: Maintains the Highways to Boulevards Pilot and bicycle and pedestrian safety projects for a total of $1.4 billion.
  • High-Speed Rail: Proposes $4.2 billion for the High-Speed Rail Authority to continue building the 119-mile Central Valley Segment from Madera to the north of Bakersfield.
  • Grade Separation: Commits $350 million for grade separation projects to support critical safety improvements and expedite the movement of traffic and rail by separating the vehicle roadway from the rail tracks.
  • Regional Transportation Projects: Over $3.5 billion will be available for congested corridors, state and local partnerships, and trade corridor enhancement projects through 2027-28, as well as over $3 billion to support the implementation of regional Sustainable Community Strategies.
  • Hints of Project Development Streamlining Reform: The Governor hinted at yet-to-be-detailed proposals to reduce delay tactics and expand permit streamlining for infrastructure and commercial projects.

Governance, Transparency, and Labor Relations

The Governor continues to focus on improving government operations, paying down long-term pension benefit liabilities, and restoring investments in workforce development. Below is a breakdown of major allocations, reductions, and policies announced in the Governor’s May Revision.

  • State Retirement Contributions: The state continues to make its required pension payments and pay down its unfunded retirement liabilities to protect the long-term security of state employees’ retirement benefits. State contributions to the California Public Employees’ Retirement System (CalPERS) decreased by a net total of $1.7 million in 2023-24 relative to the Governor’s Budget. The decrease is a result of CalPERS’ adjustment to the state’s contribution rates and the application of 2021-22 and 2022-23 supplemental pension payments.
  • Department of Industrial Relations: Proposes restoring $15 million in 2023-24 and $15 million in 2024-25 for the Department of Industrial Relation’s Women in Construction Priority Unit. In January, the Governor proposed pausing this funding for two years as part of the proposed budget solutions.
  • Employee Compensation and Collective Bargaining: Increases state employee compensation by a net total of $22.2 million in 2023-24, relative to the Governor’s January budget proposal, to reflect increased employee compensation costs resulting from updated payroll information, updated health and dental rates, increased enrollment in health and dental plans, and a change in health plan enrollment composition. Collective bargaining negotiations are ongoing with 15 of the state’s 21 bargaining units, whose contracts are expired or will expire in summer 2023.

Environmental Quality

The climate change priorities outlined in the Governor’s May Revision are highly similar to the cut-and-delay plan proposed at the start of the year. However, the probability of the funding being available has become much less certain. The updated budget plan now relies on the potential drawdown of federal funding and the passage of a climate bond in 2024. Together, these assume tens of billions of dollars for environmental priorities. Despite the fiscal constraints, the Governor did provide substantial funding to the significant flood events in the Central Valley, putting up nearly $500 million in new funding for flood control, levee restoration, and small business relief.

Below is a breakdown of major allocations, reductions, and policies announced in the Governor’s May Revision.

  • Climate Budget Very Uncertain: Maintains the total climate budget is $48 billion provided over several years which is unchanged from the January proposal. Several programs are now tied to the prospect of federal funds available in the federal Inflation Reduction Act and the Infrastructure Investment and Jobs Act, as well as future state bond proceeds.
  • Clear Support for 2024 Climate Bond: The Governor affirmed his commitment to getting a climate bond on the 2024 ballot. Several legislative proposals have been put forth. Cal Cities supports these efforts with additional investments for local government priorities.
  • New Flood Protection Investments: Proposes $492 million for levels and additional floodplain investments in response to the severe rain and flood conditions across the state, particularly in the Central Valley. This 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. The May Revision also contains $40 million one-time General Fund for San Joaquin Floodplain Restoration.
  • Coastal Resources Continue to Take Hits: Includes a 47% cut to the Coastal Conservancy from the January budget, which will delay key program funding until the state budget condition improves.
  • Electricity Bill Surcharge Increase: Proposes to raise the statutory cap on the California Energy Commissions’ bill surcharge. This surcharge will apply to metered electricity ratepayers.

Next steps for city leaders

The May Revision is one key step in a series of lengthy budget negotiations. Cal Cities will keep up the fight for city priorities, including the need for ongoing funding to reduce homelessness and increase the supply of affordable housing. Cal Cities is stronger when cities join together as one voice. Be on the lookout for next steps, more in-depth legislative stories, and how you can make your voice heard at the Capitol.