Although we were tipped-off that this May Revision Budget would have less detail than usual, we did not expect virtually no detail on Proposition 98 or K-14 funding. There are probably several reasons for this, including that: the Summary was released early because Governor Newsom plans to be at the Vatican next week to discuss climate change; negotiations are ongoing regarding the January proposal to adjust and reduce the Prop 98 Guarantee by over $8 billion in the prior budget year (2022-23); many difficult compromises with the Legislature remain on the budget as a whole, and the extent to which Prop 98 will be part of the solution to balancing the budget.
Main Take-aways
- Budget Shortfall Increases – The Administration says the shortfall has grown by about $7 billion since release of the January Budget, and including the $17.3 billion of “solutions” contained in the early action budget package, the state has a remaining shortfall of $27.6 billion.
- Funds 1.07% COLA – We do not have details, but the Governor did note that the COLA for K-14 education is 1.07%, a little above the COLA projected in January. We can only assume he mentioned this because he plans to fund the 1.07% COLA, but we do not yet have confirmation.
- Proposition 98 - Without details we cannot say much about Prop 98 spending, but we can note that the Budget Summary charts indicate that General Fund expenditures in support of Prop 98 are almost $3 billion lower in current year and nearly $300 million lower in budget year compared to January. We will not know the significance of these adjustments until we see details.
- Maintains No Cuts to Ongoing K-12 Programs – We cannot be sure, but it appears as if the goal of the Administration is to avoid cuts to all, or virtually all, existing and on-going K-12 education programs.
- Prop 98 Reserve – It looks like the Administration proposes to withdraw more funds from the Prop 98 reserve compared to the January proposal.
Governor Newsom’s Press Conference
The main focus of the Governor was to explain that budget revenues were “super-charged” in 2021 and 2022 (largely due to capital gains revenue) and that the budget deficit is due to revenues returning to the norm. Recognizing that “right-sizing” the budget will be a multi-year problem, Governor Newsom provided top-line budget solutions for both the 2024-25 budget year and the following 2025-26 budget year. While this may be helpful for planning purposes, we expect that the final budget passed by the Legislature will focus on the budget year.
In addition to explaining the huge disparity in general fund revenues collected in fiscal years 2021 and 2022 compared to 2023 and 2024, the Governor noted that the budget deficit became about $7 billion larger since January. Please note that the term budget deficit as used by the Administration refers to the status of the budget after adjustments to Prop 98 are calculated. In other words, increases or cuts to Prop 98 are not dependent on either a budget “surplus” or “deficit” as those terms are used by the Administration.
The remainder of the press conference was to describe adjustments and solutions to reduce spending on the non-Prop 98 side of the budget. We will not go into details on those programs and proposed solutions, except to note that Governor Newsom did his best to reaffirm his commitments to his biggest priorities, including issues such as climate change, health care, housing and homelessness, etc.
Proposition 98 and TK-14
As noted above, we have few details on Proposition 98 funding and the current May Revision Summary does not include a specific section on K-14 education.
Until we get more details next week, for now we are assuming that the Governor intends to maintain the K-14 proposals he made in January, with a few exceptions detailed in the Summary. That means we expect existing, ongoing K-14 education programs will be maintained without cuts, and the Governor proposes to provide the 1.07% COLA, which he specifically referred to during his press conference.
At today’s press conference, Governor Newsom noted the contentious prior-year Prop 98 maneuver has increased from $8 billion to $8.8 billion.
Here are the TK-14 reductions specifically provided in the May Revision Summary:
- School Facilities Aid Program – Eliminate the remaining $375 million in planned one-time funding. Recall that the early action package reduced the planned $875 million investment by $500 million.
- Preschool, TK and Full-day Kindergarten Facilities Grant Program – Eliminate the planned 2025-26 investment of $550 million, and consider rolling funding for this program into education facilities bond proposals being considered by the Legislature.
- Golden State Teacher Grant Program – Reduce by about $60 million one-time support for the program, leaving $50 million in one-time support.
- Learning-Aligned Employment Program – Reduce by $485 one-time, which is equal to unspent resources.
- Middle Class Scholarship Program – Reduce by $510 million, leaving about $100 million for the program.
- Preschool Inclusivity – Eliminate the planned investments of nearly $50 million in 2025-26 and nearly $100 million in 2026-27 to support adjustment factor costs for State Preschool to serve at least 10 percent of students with disabilities by 2026-27. The requirement to serve at least 5 percent of these students will remain in place.
Stay Tuned
More details will be coming, some perhaps later today and more next week. We will provide additional updates as appropriate.
Thanks for your patience! Remember, more details on this May Revision proposal will be provided at our Budget Perspectives Workshops. You can register here.
Thanks.
Abe
Abe Hajela
Partner | Capitol Advisors Group