Department of Finance releases proposed 2024–25 Prop 98 budget trailer bill language

The Department of Finance (DOF) released anticipated trailer bill language on Feb. 15 outlining Gov. Gavin Newsom’s January Proposition 98 proposal. The proposal provides greater detail on the nuances of the mechanisms the administration intends to employ relating to the minimum funding guarantee as prescribed by Prop 98, a key item in the Legislature’s review of the proposed state budget and its eventual counterproposals. In addition, the Legislative Analyst’s Office (LAO) released its assessment of the Governor’s budget proposal and highlights important elements where the Legislature may want to apply greater scrutiny.

Delayed income tax filings played a significant role in the difficulties developing the 2023–24 budget

Due to the extreme storms experienced across California during the winter months of 2022–23, the federal Internal Revenue Service, in response to the Governor’s declaration of states of emergency in counties across the state, delayed the 2023 tax filing deadline from April 15 to Oct. 15 and then again until Nov. 15. This led to the Governor, Legislature and the public relying upon revenue projections as opposed to actual revenues in the adoption of the 2023–24 budget. What was not learned until later in 2023 was that income tax collections fell 25 percent, which, according to the LAO, “results in an unprecedented prior‑year reduction to the minimum funding requirement for schools and community colleges.” As a result, the Prop 98 guarantee for the 2022–23 was funded $8 billion above what it should have been, thus creating a substantial shortfall in the prior year.

New Prop 98 funding maneuver proposed for 2024–25 budget to bridge $8 billion shortfall

To address this $8 billion funding shortfall in the 2022–23 fiscal year, the Governor is proposing a new funding maneuver to fully fund Prop 98 in the prior fiscal year by borrowing against future-year state general fund revenues. Essentially, if adopted, the state would fund the $8 billion Prop 98 shortfall in the 2022–23 fiscal year using projected future state general fund revenues. According to the LAO, this would retain all funding previously provided in the 2023 budget but recognize it over a five-year period beginning in 2025–26. In essence, the state is loaning Prop 98 $8 billion with general fund money that would be repaid over a five-year period.

The proposed budget trailer bill establishes this maneuver in statute, thus making it permanent, which would provide the state the ability to use it again should it face similar fiscal challenges in the future.

LAO declares proposed funding maneuver “bad policy”

In response to the Governor’s Prop 98 proposal, the LAO writes that the “proposed maneuver is bad fiscal policy. It sets a problematic precedent for the state and creates a binding obligation that will worsen out‑year deficits and require more difficult decisions in the future.” In developing their recommendation, the LAO cites growing concerns that the administration is relying on more optimistic budget revenue projections that may not materialize, thus leading to greater budget deficits in the coming years. Stating it as setting a “problematic precedent,” the LAO also raises the concern that “there is a good chance that the administration’s revenue projections are too low and the state will face an even larger budget problem in May.”

LAO recommendations that could help reduce budget deficit impacts on public education

Fundamentally, the LAO recommends the state take immediate action to:

  • Develop an alternative budget package prioritizing core programs and budget stability.
  • Reject the Governor’s Prop 98 funding maneuver.
  • Identify reductions and budget solutions now as opposed to waiting until the announcement of the May Revise.

Citing one-time moneys, the LAO estimates there is $4.5 billion available in recently enacted grants that could be used to help the Prop 98 budget deficit. It also recommends dipping into the state’s Prop 98 reserve to address the 2022–23 shortfall, which it cites as fitting within the existing legal framework provided under current law and does not exacerbate future projected budget deficits.

Notably, in realizing the recommendations above, the LAO made the following specific recommendations:

  • Look to ongoing programs developed or expanded during the pandemic, such as the Expanded Learning Opportunities Program, State Preschool expansion moneys, Universal School Meals funding, Home-to-School Transportation funding and moneys provided for current transitional kindergarten teacher–student ratios.
  • Reject one-time spending increases such as the zero-emission school bus grants.
  • Reject the statutory cost-of-living adjustment (COLA) increase, citing the relatively small projected COLA for the coming fiscal year estimated at .76 percent, approximately $628 million in Prop 98 funds.

Maintain investments in implementing universal transitional kindergarten, citing the disruptive impacts cessation of the program would have on local educational agencies, families and students.

What’s next?

Budget hearings have begun in the Legislature as the Senate and Assembly work their way through the Governor’s budget. Hearings will continue throughout the spring before Gov. Newsom releases his May Budget Revision by May 15. Negotiations between the administration and the Legislature will be ongoing until the June 15 deadline for the Legislature to pass the budget bill, at which point the Governor will then have until July 1 to sign the bill.

The budget will be a significant focus of CSBA’s advocacy. If you have not already signed up to participate in CSBA’s Legislative Action Week, please register here.