We wanted to give you a little detail on the agreement reached last night on the State Budget that will be acted upon very swiftly in the coming days.
The agreement includes the revenue and taxation proposal adopted by the Legislature, which speeds up the suspension of some tax credits and increases general fund revenue by about $5 billion in the budget year compared to the Governor’s May Revision. With overall general fund revenue at about $211 billion in the budget year, there is a corresponding increase to the Proposition 98 Guarantee to $115.3 billion.
As we noted in our budget update of June 11, 2024, while this budget deal significantly modifies and (from our perspective) improves the Prop 98 suspension “deal” between CTA and Governor Newsom, there is virtually no change to programmatic spending in the budget year. Please refer to the prior budget update for details on the Prop 98 Guarantee, suspension amount, and maintenance factor amounts for each year in the three-year budget period. The bottom-line is that the base of Prop. 98 is nearly $5 billion higher in the budget year compared to the CTA/Governor deal, and at the end of the budget year the state is projected to owe schools about $4 billion due to the suspension in current year and resulting maintenance factor repayment obligations. In other words, the deal was a big improvement over May Revision, and this final budget agreement makes it even better by bumping up Prop 98 base funding while retaining the obligation to repay $4 billion.
The final budget maintains ongoing spending for TK-14 programs at the May Revision level, but also reduces the deferral to 2025-26 to less than $300 million (compared to $2.4 billion in the deal). The final budget also allows for a deposit into the Prop 98 Reserve in budget year, which will leave a balance in this reserve of $1.1 billion at the close of 2024-25. Again, these are improvements over the prior deal.
One of the major issues debated over the past several weeks was the difference between the Governor and Legislature over the timing of a three-year suspension of medium and large-sized businesses’ use of net operating loss (NOL) deductions and tax credits. The Legislature prevailed in suspending those business tax breaks a year earlier, in 2024, to accelerate revenues necessary to avoid deeper cuts to social services and housing programs during the current budget cycle. It turns out that the added revenues not only help address some of the previously proposed cuts on the non-Prop 98 side of the budget, but also increase the Prop 98 Guarantee in the budget year.
The general framework for the TK-12 spending plan follows the agreement reached by the Governor and embraced by the Legislature last month for protecting base education funding plus the COLA and importantly, following the constitutional path permitted for suspending the Prop 98 Guarantee to assure restoration of school funding in future years.
Not surprisingly, the agreement also includes the language previously agreed to by the Governor and CTA that sets aside statutory layoff provisions when the enacted LCFF COLA is less than 2 percent.
What’s Next?
Our team is compiling a more detailed analysis of the budget deal, which we will share as soon as possible. We expect this deal to be passed by the Legislature and signed by the Governor, taking effect July 1, 2024.
Budget Perspectives Workshops
You can register for the July Budget Act Workshops here.
If you have any questions, please reach out to any of us here at Capitol Advisors.
-Kevin
Kevin Gordon
President | Capitol Advisors Group