Details of Newsom’s May Revision Budget Proposal, May 16, 2021

Proposition 98 Guarantee for 2021-22 is $93.7 billion, and over the three-year budget period the Prop 98 Guarantee is $17.7 billion higher than the level included in the January budget proposal.
A 5.07% “super-COLA” for the LCFF.
Billions of dollars of one-time funds for reopening schools in the Fall, and for new or expanded programs related to additional learning time, universal Transitional Kindergarten (TK), comprehensive student supports, educator retention and training, access to meals and access to the internet and computer technology.
A total of $4.6 billion will be transferred into the Prop. 98 reserve account for 2020-21 and 2021-22.
The remaining K-12 principal apportionment deferrals will be reduced to a $2.6 billion shift from fiscal year 2021-22 to 2022-23 (June 2022 to July 2022).
No direct relief either for rising school employer CalSTRS and CalPERS costs or increased unemployment insurance costs.
Supplemental payment to Prop 98 is eliminated.
Proposal to change Independent Study requirements for next school year

Overview

The recall election, California’s accelerating transition out of the COVID pandemic and a huge budget surplus set the stage for this budget proposal. While recent polls confirm that Governor Newsom has some significant advantages going into the recall campaign, his weeklong California Roars Back tour indicates that he isn’t taking any chances. The relative success of California’s vaccination efforts, low rates of new infections, and recent more relaxed guidance from the Centers for Disease Control (CDC) regarding transmission of the virus and wearing face masks are accelerating the reopening of the California economy, including businesses, workplaces and schools.

With regard to the surplus, the state has a truly unprecedented amount of money available in this budget cycle. Compared to resources available in the 2020 Budget Act last June, the state has both a $75.7 billion surplus and an additional $25 billion available from federal relief, which together fuels Newsom’s $100 billion California Comeback Plan.

Together, the interplay among the recall campaign, addressing the transition from pandemic to recovery, and the unprecedented budget surplus helps explain many of the key provisions of this May Revision proposal, including:

$20 billion in investments to “reimagine K-12 schools” and assist with reopening full-time in-person schooling.
$12 billion to (1) expand the $600 Golden State Stimulus tax refunds/credits to cover two-thirds of all Californians, (2) provide rent and utility bill relief to many Californians, and (3) provide additional grants and relief to small businesses to assist them in staying open and keeping people employed.
$12 billion to address homelessness and the housing affordability crisis, including investments in homeless prevention, rental support, new homeless housing units, programs and grants to move people out of encampments cleaning-up streets and neighborhoods, and more funding for affordable housing.
$11 billion to modernize California’s transportation system, including roads, bridges, rail, public transport and projects related to the 2028 Olympics.
$7 billion to expand broadband infrastructure, increase access and improve affordability.
$5.1 billion to provide drought support, including investments in water supply and natural landscape projects.
$2 billion to prepare to combat wildfires.
Investments to address climate change, including $3.2 billion to accelerate California’s zero emission vehicle goals and $1.3 billion to mitigate the impacts of extreme heat, sea level rise and pollution.

General Fund (GF) Revenues, Expenditures and Reserves

After the sharp decline in economic activity in the second quarter of 2020, the state began a period of uneven recovery for the rest of that year. Since then, however, the California economy has rapidly recovered and expanded, partially due to federal relief and the relative success of our vaccination program. With regard to state general fund revenues, the continued strong performance by high-income wage earners coupled with ongoing stock market growth has led to significant increases in resources compared to the Governor’s January budget.

After accounting for transfers, general fund revenues for 2021-22 are nearly $176 billion. Over the three-year budget period, revenues exceed the Governor’s January budget by $41.6 billion. These additional revenues support a significant increase in expenditures, but the Governor proposes a fairly cautious split among new spending of about 90% one-time expenditures versus about 10% in ongoing expenditures. With a large prior year balance available, total general fund expenditures for 2021-22 are nearly $197 billion.

The Governor proposes to provide significant resources to continue to pay down the state’s long-term retirement liabilities, but does not make a similar investment to pay down school employer’s CalSTRS and CalPERS liabilities.

The May Revision includes $24.4 billion in total reserves, including $15.9 billion in the Proposition 2 Budget Stabilization Account (“Rainy Day Fund”), $4.6 billion in the Prop 98 reserve account, $3.4 billion in the state’s discretionary operating reserve, and $450 million in the Safety Net Reserve.

Finally, while little detail is provided in the May Revision, the Administration notes that the State Appropriations Limit (or “Gann Limit”), which constrains state spending when certain conditions are met, will apply to the 2020-21 and 2021-22 fiscal years. The Administration calculates that revenues will exceed the Gann Limit by $16.2 billion over those two years. When the Gann Limit cap is surpassed, the excess must be allocated evenly between schools and taxpayer refunds. The Governor proposes to account for $8.1 billion of taxpayer refunds as part of the Golden State Stimulus in the budget year, and allocate another $8.1 billion to K-14 schools in 2022-23. Both this approach and the calculations are likely to be controversial, but further assessment is not possible until we are provided additional details.

Proposition 98

The Prop 98 guarantee for 2021-22 is estimated to be a record $93.7 billion, a dramatic increase compared to the 2020 Budget Act guarantee of $70.9 billion. Compared to the Governor’s January proposal, the Prop 98 guarantee is $17.7 billion more over the three-year budget period.

We remain in Test 1 of Prop 98 throughout the three-year budget period, which means the guarantee is equal to about 38% of general fund revenues plus local property tax revenues. While the 2020 Budget Act promised supplemental payments to increase Prop 98 funding by about $12.5 billion, in January the Governor proposed reducing that amount to a single payment of $2.3 billion in 2021-22. Now, with further increases to the Prop 98 guarantee reflected in the May Revision, the Governor proposes entirely eliminating the obligation to make supplemental payments to Prop 98. This issue is sure to raise some controversy among advocates for increased per-pupil investments for California students.

High capital gains revenue along with meeting certain other criteria requires deposits into the Prop 98 reserve, technically the Public School System Stabilization Account. In January the Administration estimated the total deposits for 2020-21 and 2021-22 would equal about $3 billion. The May Revision now estimates the total required deposits will equal about $4.6 billion. These deposits will trigger the state’s school district reserve cap (generally, 10%) starting in 2022-23. This too will be a thorny issue, although LEAs have a number of options to mitigate the impact of this cap.

The Administration asserts that the Constitutional obligation to make payments to schools under the Gann Limit is not finalized until the adoption of the 2023-24 budget, but that it intends to make a one-time payment of approximately $8.1 billion in the 2022-23 fiscal year. As noted above, we will need additional details to assess this portion of the budget.

2021-22 LCFF, Super-COLA and Deferrals

The Governor’s January budget included a combined and compounded COLA of 3.84% for the LCFF in 2021-22, accounting for a 2.31% COLA in 2020-21 and a 2021-22 adjustment of 1.5%. The May Revision proposal updates the 2021-22 COLA adjustment, making the new combined and compounded COLA 4.05%. The Governor then proposes to increase LCFF base funding by an additional 1% to assist LEAs (school districts, charter schools and county offices of education) in addressing ongoing fiscal pressures, and calculates the total growth in the LCFF from this “super-COLA” to be 5.07% over 2020-21 levels. School officials will greatly appreciate this increase to base funding, but are likely to note that fiscal pressure from CalSTRS/CalPERS and unemployment insurance contributions far exceed the 1% proposed by the Governor.

Most categorical programs other than special education (see below) will receive only the 1.7% COLA adjustment for 2021-22.

On deferrals, the January budget proposed paying off most of the principal apportionment deferrals and leaving a balance of $3.7 billion in 2021-22. The May Revision reduces the remaining balance to $2.6 billion, which will mean a deferral of most of the June 2022 principal apportionment to July 2022. While many school advocates would like the deferrals to be completely eliminated, Governor Newsom noted that $4.6 billion in Prop 98 funding is being diverted to the Prop 98 reserve and therefore it makes sense to use the deferral mechanism to allow $2.6 billion in spending in 2021-22.

Other Major K-12 Proposals and Adjustments

Reopening Schools for the 2021-22 School Year

In his press conference, Governor Newsom made a very strong commitment to returning to full-time, in-person instruction for the 2021-22 school year. As part of the commitment, he proposes $2 billion of one-time Prop 98 funds to ensure safety and build trust, including for activities such as testing and vaccine initiatives, personal protective equipment, enhanced cleaning and improved ventilation.

Changes to Independent Study

Noting that despite all of the progress toward reopening schools safely, some parents may still be hesitant to send their children back to school, the Governor proposes some changes to current independent study statutes. These proposed changes are also in response to concerns over how Distance Learning worked in some places over the past year. Unfortunately, these proposed changes are coming very late given the rapidly approaching school year, and will disrupt already-locally negotiated master schedules across the state.

Specifically, LEAs offering independent study would have to:

Provide access to technology, internet connectivity, and a dedicated and rigorous curriculum
Develop and implement a framework of tiered re-engagement strategies for students not meaningfully participating in instruction
Track and record daily student participation and interaction with teachers

While well-intentioned, these proposed new requirements are focused on the experience of distance learning as a substitute for in-person instruction, and do not take into account the purpose and operation of independent study programs prior to the pandemic. The requirement to track and record daily participation for independent study is essentially an audit tool and unrelated to the education model. Many school agencies have already negotiated, implemented, and communicated with families about independent study options for next school year based upon current law. This proposal upends those assumptions and creates significant uncertainty for students and families. We expect pushback from education stakeholders as the Legislature considers the proposal.

Expanded Learning Time

To ramp up learning and enrichment time for high-needs students, the May Revision contains a significant investment for expanded learning time, beginning with a $1 billion Prop 98 expenditure in 2021-22, and growing to $5 billion in 2025-26. Upon full implementation, these funds would be “incorporated” into the LCFF concentration grant calculation.

The ultimate goal of this expansion is to provide 9 hours, year-round, of instructional and enrichment time for approximately 2.1 million students from LEAs with the highest concentrations of unduplicated pupils.

Borrowing from the requirements of the After School Education and Safety (ASES) program, these expanded learning programs would include an educational element and an “supplemental element,” such as art, physical education, or CTE programming.

Universal Transitional Kindergarten (TK)

The May Revision includes a proposal to expand TK, over a four-year period, to all four-year-olds. Specifically:

2021-22 will be used for planning and infrastructure development.
The proposal would add three months of birth date eligibility per-year for three years, beginning in 2022-23, and finishing in 2024-25 when all four-year-olds would be eligible for TK.
Costs are estimated to begin at $900 million General Fund in 2022-23, growing to $2.7 billion at full implementation in 2024-25.
The Prop 98 guarantee would be “re-benched” to draw down state General Fund for the costs of new enrollment in each year of increased investment.
$250 million that was proposed in the January Budget to incentivize TK expansion would be repurposed and used for planning and implementation grants for all LEAs.
The May Revision also proposes $380 million Prop 98 in 2022-23, growing to $740 million in 2024-25 for one additional certificated or classified staff person in each TK classroom.
The proposal maintains the current level of funding for the State Preschool Program (CSPP), with the intention of developing a plan for implementation in 2022-23 to support existing CSPP providers to maintain contracts while transitioning to serve younger children.

Comprehensive Student Supports

To address the negative impact of the Pandemic on our students, the Governor’s May Revision includes a $6.1 billion package aimed at increasing student supports and strengthening student-staff connections.

Community Schools

The Governor proposes to provide $3 billion one-time Prop 98, available over multiple years, to expand the implementation and use of the community school model to provide integrated student supports. This is a significant increase over the $264.9 million that the Governor had originally included for this purpose in his January Budget. According to the Administration, this level of investment in community schools in the May Revision could support grants for up to 1,400 LEAs to convert their school campuses to “full-service community schools."

Student-Staff Ratios

The Governor is proposing an additional $1.1 billion in ongoing Prop 98 funding for the LCFF concentration grant to address student-to-staff ratios. LEAs that receive this funding will be required to demonstrate in their local control accountability plans (LCAP) how the funding was used to increase the number of certificated and classified staff providing direct services to students on campus. Eligible staff include school counselors, nurses, teachers, and paraprofessionals.

The May Revision also provides an additional $30 million one-time Prop 98 for county offices of education (COEs) to work with their local partners to coordinate and provide direct services to students in foster care.

Intensive Tutoring

Acknowledging that the Pandemic not only exacerbated existing learning gaps but also created new ones, the May Revision includes $2.6 billion ($2 billion one-time federal funds and $623 million one-time Prop 98) for schools to provide “research-tested interventions” for students, like intensive tutoring.

Mental and Behavioral Health

Woven throughout the proposals in the May Revision is a focus on the mental health of students and school communities, and the Governor draws a direct line from mental health to academic attainment and positive academic gains. The May Revision proposes to invest in community schools that will provide mental health services, increase LCFF Concentration Grant funding to support the hiring of (among other professionals) school counselors and student support providers, and more than double the proposed investment in the Children and Youth Behavioral Health Initiative.

The $2.3 billion Children and Youth Behavioral Initiative proposes to use a mix of federal and state general fund dollars to provide a broad range of prevention and treatment options for youth 25 and younger suffering from substance abuse disorders, trauma, stress, anxiety and other mental health issues. Through partnerships with schools, clinics, and state agencies, the Initiative is designed to provide rapid and constant access to services for those in need. Also included in the Initiative are resources for the behavioral health and educator workforces, and for the Department of Public Health to “raise the behavioral health literacy of all Californians.”

Other proposed investments in this area include:

$23.8 million ongoing GF to provide children aging out of Early Start provisional Lanterman service eligibility up to age five.
$30 million one-time Mental Health Services Fund for the Mental Health Student Services Act partnership grants.
$39.2 million GF to assist counties serving foster youth with mental health needs.
$12.4 million one-time GF for research, identification and treatment of Adverse Childhood Experiences (ACEs).
$10.6 million one-time Coronavirus Response and Relief Supplemental Appropriation (CRRSA) funds for early childhood mental health consultations for child care programs and providers.

Nutrition

With increasing discussion around expanding access to school meals on both the state and federal level, the Governor is proposing to provide $150 million in ongoing Prop 98 funding to encourage LEAs to participate in one of the current federal universal feeding provisions (i.e. Community Eligibility (CEP), Provision 2, Provision 3).

The Governor is also proposing $100 million in one-time Prop 98 funding for grants to improve school kitchen infrastructure and train school cafeteria staff, as well as $30 million GF, up from $10 million in his January Budget, to support the California Department of Food and Agriculture’s Farm to School Initiative.

Special Education

The Governor’s January Budget proposed to provide LCFF with a 3.84% COLA (reflecting the COLA for 2021-22 and the COLA it should have received in 2020-21) but only proposed to provide special education with a single 1.5% COLA for 2021-22. In his May Revision budget, the Governor is now proposing to provide an additional $117.7 million Prop 98 funding to increase the COLA for special education to the full 4.05% compounded COLA being provided for LCFF.

The Governor’s May Revision also includes the following additional special education-related investments:

$277.7 million one-time federal Individuals with Disabilities Education Act (IDEA) funds to LEAs to increase general statewide special education resources.
$15 million one-time federal IDEA funds to provide technical assistance and support to LEAs in developing and administering comprehensive IEPs and to develop tools and resources to assess and address academic impacts of the Pandemic on students with disabilities.
$2.3 million federal IDEA funds ($965,000 one-time) and six positions for CDE to address special education complaints, perform court-ordered special education monitoring of LEAs, and to purchase special education monitoring software.
$1.2 million federal IDEA funds ($1.1 million one-time) and one position to improve coordination between CDE, the California Department of Developmental Services, and LEAs.

Building and Maintaining the Educator Workforce

The major proposals contained in the May Revision are going to be staff-intensive, and to respond to some of those concerns the Governor proposes several workforce investments, totaling roughly $3.3 billion. Those investments include:

Preparation:

$450 million one-time over five years ($550 million total) for teacher residency and other “grow your own” programs
$400 million one-time over five years ($500 million total) for the Golden State Teacher grants
$100 million one-time over five years ($125 million total) for the Classified Employee Teacher Credentialing Program
$65.5 million one-time Prop 98 plus $45.6 million one-time General Fund to establish the Roadmap to Pre-K through 12 Educational Employment Program to attract newcomers to the teaching profession
$20 million one-time to provide a credential fee waiver in 2021-22
$15 million one-time over three years to support computer science teacher training

Retention and Training:

$1.3 billion one-time over three years for the Educator Effectiveness Block Grant
$250 million one-time over five years for a teacher mentorship program
$60 million one-time for the Classified School Employee Summer Assistance program
$25 million one-time over five years for the 21^stCentury School Leadership Academy

The May Revision also contains proposals for educator training and resources for early math, reading, science, computer science, dyslexia, and LGBTQ+ cultural competency.

Broadband

The May Revision proposes a 3-year, $7 billion investment (a combination of federal ARPA funds and state funds) in broadband infrastructure and affordability.

Intended to build out a statewide “middle-mile” network to expand access to unserved and underserved areas by reducing up-front infrastructure costs.
Proposes creating a new $500 million Loan Loss Reserve Account to assist local governments, tribes, and non-profits secure private financing for new municipal fiber networks.
Proposes $500 million one-time federal ARPA for entities already offering affordable telephone services in rural areas to expand those services to include broadband.
Proposes to utilize one-time federal ARPA funds within the California Advanced Services Fund to incentivize existing and new providers to fund “last-mile” infrastructure to remaining unserved households.

Higher Education

The May Revision includes a proposed $48.7 billion for the higher education segment to address affordability, access and efficiency in California and proposes to fund not just the public institutions but looks to improve equity and barriers to student success. In what Governor Newsom called “catalytic investments to make generational change” he proposes several short-term and long-term investments and gets the segments more than back to pre-pandemic levels of funding.

Increased Resources

The Governor proposed increases to the University of California (UC), the California State University (CSU) and California Community Colleges (CCC’s) with differing caveats that include keeping undergraduate tuition fees at current levels, reducing equity gaps, expanding educational opportunities online, meeting workforce needs and creating dual admissions pathways. The May Revise also includes the following proposed increases:

Increases to the UC that includes a five-percent base increase by proposing to augment UC’s $103 million general fund resources with an additional $69.3 million and $304 million to support operational and programmatic needs.
An increase to the CSU that includes a five-percent ongoing base increase by proposing to augment CSU’s $111.5 million general fund resources with an additional $74.4 million and approximately $299 million to support operational and programmatic needs. The May Revise also includes funding to transition Humboldt State into a Polytechnic University.
An increase of $185.4 million for CCC’s under Prop 98 and $326.5 million one-time funding to retire existing deferrals.

Some of the additional proposed investments in higher education include:

The May Revision also includes an additional $100 million on top of the $15 million proposed in January to reduce textbook cost by expanding the Zero Textbook Cost Degree Program (ZTC) to develop and implement ZTC degrees and open educational resources.
$250 million one-time for regional K-16 collaboratives focused on streamlining occupational pathways and aligning higher education with state workforce needs.
$75 million to expand new and existing College and Career Pathways.
$150 million to support and implement Guided Pathways.
$30 million to establish basic needs centers for students.

Saving for College Early

One of the Governor’s long-term investments for low-income students includes a proposed investment of $2 billion to establish the California College Savings Program. This proposal is modeled after a similar program Newsom began when he was Mayor of San Francisco. Under the proposal, the Scholarshare Investment Board would create college savings accounts in the amount of $500 for low-income and underrepresented students to incentivize their educational goals regardless of income. Foster youth and homeless students would be able to receive an additional $500 “seed” deposit.

Student Housing

The Governor also wants to address student housing costs and proposed $4 billion (split evenly between 2021-22 and 2022-23) to expand affordable housing for students. Student housing is often the largest expenditure for students and a barrier to student success and degree completion. This proposal would authorize the California School Finance Authority to award grants to UC, CSU and CCC’s to build new student housing or to buy commercial properties that can be transformed into student housing for low-income and underrepresented students. Student tenants would need to take an average of 15 degree-applicable units per semester to participate which speeds up degree completion and overall cost.

Other Significant Programs

Creative Youth Development Grant Programs

The Governor's May Revision proposes $40 million one-time General Fund in 2021-22, to be spent over three years, to support the Arts Council’s existing Creative Youth Development programs. The Arts Council will use partnerships between community-based organizations, educators, and local artists to expand participation in these programs statewide.

Youth Workforce Development

The May Revision proposes $200 million federal ARPA funds for grants to cities and counties to create or expand youth employment opportunities. The funding, administered by California Volunteers, would be provided both directly to large cities on a per capita basis, and to other cities and counties through a competitive grant process. This funding would be to help youth gain valuable work experience by increasing employment opportunities, such as part-time work or summer jobs. Specifically, the May Revision proposes the following adjustments:

Student Success Coach Grant Program—$15 million one-time General Fund to create a grant program that will establish student success coaches in communities to nurture relationships with K-12 students and collaborate with teachers to help prepare students with skills and mindsets to achieve their goals.
California Climate Action Corps Program—$4.7 million General Fund annually in 2021-22, 2022-23, and 2023-24, and $823,000 ongoing thereafter, to create service opportunities to take on climate action such as urban greening, food waste recovery, and wildfire prevention.
STEM Teacher Recruitment Grants—$3 million one-time General Fund to provide grants to help recruit STEM professionals into the teaching profession by connecting them with teaching, tutoring and speaking opportunities in K-12 schools. These grants are intended to address the shortage of STEM teachers in California by providing learning and training opportunities for potential future teachers, especially in under-resourced communities.
Statewide Emergency Response Framework—$1.3 million ongoing General Fund to maintain an emergency response framework to prepare and train for future disaster response.

What’s Next?

We’ll continue to analyze and assess this massive May Revision proposal, and provide additional details as we get them. We will provide a comprehensive review of the all the May Revision dynamics at our budget workshops, and you can register here.

In the coming weeks the May Revision will be reviewed by the budget committees in both houses of the Legislature, and a final budget will be sent to the Governor in June.

Please let us know if you have any questions or comments.

Thanks.

Abe and the Capitol Advisors Team

Abe Hajela

Partner | Capitol Advisors Group