Budget revise includes wins for cities but lacks adequate funding for homelessness and affordable housing

For 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.

• 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.

• 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.