Governor Newsom Presents May Revision to the California Budget for 2022-23

This morning, Governor Gavin Newsom presented the May Revision of his California Blueprint. Previously, his proposal included a $286.4 billion budget for the 2022-23 fiscal year, of which $213.1 billion would be from the General Fund. However, General Fund revenues are estimated to be nearly $55 billion higher than January, even after the temporary limitation of business tax credits was restored earlier this year. Consequently, this revision proposes a $300.7 billion budget to “provide relief from rising inflation, ensure public safety, address homelessness, transform public education, and combat climate change,” as stated in the Governor’s press release.

These proposed state funds consist of approximately $227.3 billion from the General Fund, $68.9 billion from special funds, and $4.4 billion from bond funds. Additionally, the May Revision reflects $37.1 billion in budgetary reserves and plans to prepay billions of dollars in state debts and make supplemental deposits into the Rainy Day Fund. The May Revision reflects $49.2 billion in discretionary surplus, and the overall budget plan spends 94 percent of the discretionary surplus on one-time projects.

Below are key takeaways from the Governor’s revised proposal.

1.) Broad-Based Relief

Inflation is expected to exceed 7 percent in 2021-22, triggering an increase of the state’s minimum wage on January 1, 2023. Under current law, the state’s minimum wage will go to $15.50 per hour for all employers. To further address rising prices and return tax proceeds to Californians, the May Revision includes additional numerous other proposals to provide broad-based relief to Californians totaling $18.1 billion.

a. Early Broad-Based Relief Proposal

The May Revision reflects the early budget proposal made by the Administration to provide broad-based relief to millions of Californians facing high gas prices and other inflation-induced price increases.

This proposal would provide a one-time refund of $400 to each eligible owner of a registered vehicle. The proposal caps the number of rebates to two per registered vehicle owner for a total of $800, excludes fleets and corporate-owned vehicles, and excludes vehicles over a certain value. This broad-based refund would return an estimated $11.5 billion back to taxpayers.

To provide relief to millions of Californians who ride transit and rail, the broad-based relief package includes $750 million in incentive grants to transit and rail agencies to provide free transit for Californians for three months. This proposal will provide an amount to agencies based on their 2019 fare revenues.

The broad-based relief package also includes a 12-month pause, effective October 1, 2022, on the General Fund (3.9375-percent rate) portion of the sales tax rate on diesel fuel. This pause will provide relief to the commercial sector that utilizes the bulk of diesel fuel in the state. This pause is estimated to reduce revenues by $327 million in 2022-23 and $112 million in 2023-24. Revenue from this portion of the diesel fuel tax is generally dedicated to the Public Transportation Account (PTA).

The May Revision proposes to continue making transfers from the General Fund to the PTA as if the full amount of tax were being collected, thereby having no impact on transportation funding. Complementing these relief efforts, the Administration proposed to accelerate its $10 billion zero-emission vehicle (ZEV) plan to move California toward clean transportation options that reduce overall dependence on gas and fossil fuels and proposed additional investments in active transportation.

2.) Economic Growth, Job Creation, and Expanded Opportunity

The May Revision proposes additional grants to small businesses in hard-hit industries, including farms and related businesses impacted by the drought and additional tax relief to small businesses.

a. Drought Relief Assistance for Small Agricultural Businesses

The May Revision includes $75 million one-time General Fund in 2022-23 for the California Small Agricultural Business Drought Relief Grant Program to provide direct assistance to eligible agriculture-related businesses that have been affected by severe drought conditions. Grant awards range from $30,000 to $50,000, depending on annual gross revenue decline, and will be prioritized first to businesses located in regions hardest hit by drought impacts, including the Sacramento-San Joaquin Valley, and then to additional areas experiencing drought impacts, as determined by the California Department of Food and Agriculture. This program will be administered by CalOSBA, in consultation with the California Department of Food and Agriculture and will be modeled after other CalOSBA programs providing relief to small businesses.

3.) Climate Change

The Governor’s January Budget proposed $22.5 billion over five years to support transformative climate investments in transportation, energy, housing, education, wildfire resilience, drought, and health.

To address these pressing issues, the May Revision includes an additional $9.5 billion from various fund sources over four years for a total $32 billion to continue to advance the state’s Climate and Opportunity Budget, provide equitable climate solutions, protect communities, and support energy reliability.

a. Water Resilience and Drought Response

Given the intensification of drought since January, the May Revision includes an additional $1.3 billion General Fund for drought resilience and response designed to help communities and fish and wildlife avoid immediate negative impacts as a result of extreme drought while continuing to advance projects and programs that prepare the state to be more resilient to future droughts. This funding is proposed for acceleration into the 2021-22 fiscal year given current availability of resources.

Significant investments include:

• $530 million to support water recycling and groundwater cleanup; advance drinking water and clean water projects that leverage significant federal infrastructure funds; and continue aqueduct solar pilots.
• $553 million to provide grants to urban water districts and smaller community water suppliers for drought-relief projects; support data, research, and public education campaigns; support local technical assistance emergency drinking water response, including the purchase and pre-positioning of water storage tanks; enhance water rights enforcement and modernization tools; and support food assistance programs for farmworkers impacted by drought.
• $280 million to address fish and wildlife impacts associated with drought and climate change, and to build aquatic habitat and water resilience projects to support implementation of voluntary agreements with water suppliers.
• $187 million to support agricultural water conservation practices; incentivize farmers to install more efficient irrigation equipment and provide on-farm technical assistance; provide direct relief to small farm operators; and support additional water conservation projects.

Table 1

The May Revision also includes $500 million General Fund in 2025-26, to serve as a multi-year commitment to promote strategic water storage projects in the state that benefit water supply reliability and the environment. California’s variable precipitation makes above and below ground water storage crucial, and aquifers and off-stream reservoirs are among the most feasible places to store additional water as a resilience measure into the future. These resources will build upon the $2.7 billion provided in Proposition 1 under the Water Storage Investment Program to accelerate critical projects as part of a comprehensive and coordinated approach to water resiliency as outlined in the California Water Resilience Portfolio.

b. Nature-Based Solutions

The 2021 Budget Act committed $1.4 billion General Fund over three years for multi-benefit nature-based solutions. This included $768 million General Fund over two years to support implementation of the state’s Natural and Working Lands Climate Smart Strategy to advance climate-focused land management toward an equitable, resilient, and carbon-neutral future, and the Pathways to 30×30 Strategy to accelerate California’s pledge to protect biodiversity, expand access to nature and tackle climate change.

To advance these two initiatives, and reflecting over a year of public input, the Administration’s proposed allocation of the $768 million over two years includes:

• $275 million to fund projects that will deliver climate benefits and protect biodiversity, including voluntary conservation acquisitions and easements.
• $213 million to support regional action through investments in Natural Community Conservation Planning programs and projects funded through state conservancies and local and tribal conservation corps.
• $100 million for the Tribal Nature-Based Solutions Program announced in March at the California Truth & Healing Council.
• $90 million for inland wetlands restoration, which delivers multiple benefits including sequestering greenhouse gas emissions, protecting habitat, and advancing economic opportunity.
• $50 million for wildlife corridors, including the Liberty Canyon Wallis Annenberg Wildlife Crossing Project.
• $30 million to accelerate climate smart land management practices across California’s diverse landscape including farms, forests, and community green spaces.
• $10 million to support a compost permitting pilot program that will help local government entities and facilities locate and permit small and medium-sized compost facilities, diverting more organic waste away from landfills and into the creation of healthy soils and to support additional strategic nature-based solution investments.

c. Wildfire and Forest Resilience

The ongoing impact of climate change on California’s wildlands continue to drive critically dry fuel conditions and longer, more severe fire seasons. The May Revision recognizes these conditions and its impact on firefighting operations and makes further investments to enhance CAL FIRE’s fire protection capacity, which builds upon the Governor’s January proposal to invest an additional $1.2 billion investment over two years in a comprehensive wildfire and forest resilience strategy to continue to reduce the risk of catastrophic wildfires.

d. Cap & Trade Expenditure Plan

The May Revision builds on the Cap and Trade Expenditure Plan in the Governor’s Budget by targeting additional investments to programs that identify and mitigate methane emissions and protect disadvantaged communities. Specifically, the Administration proposes investing an additional $120 million from Cap and Trade auction proceeds to two programs including:

• Methane Satellites—$100 million Greenhouse Gas Reduction Fund on a one-time basis to expand the number of satellites launched for methane observations, which would provide weekly measurement of large methane emissions in the state and enhance enforcement capabilities. This data will allow California to identify the source of these emissions, work with programs to hold emitters accountable for violations, and further reduce the amount of short-lived climate pollutants in the atmosphere.
• AB 617 Community Air Protection Program—$20 million Greenhouse Gas Reduction Fund on a one-time basis for the Community Air Protection Program, which reduces emissions in communities with disproportionate exposure to air pollution through targeted air monitoring and community emissions reduction programs. The Governor’s Budget included $240 million to support AB 617 investments; this additional allocation will bring the total proposed investment to $260 million.

e. Energy

The Governor’s Budget included $2 billion for a Clean Energy Investment Plan to support innovation and deployment of clean energy technologies in the energy system. The May Revision includes an additional $8 billion investment to further increase the state’s energy system’s resilience, increase reliability and affordability, and accelerate the deployment of the resources needed to achieve California’s clean energy transition, and provide debt relief to California households impacted by the COVID-19 Pandemic.

Table 2

The Legislature now has until June 15 to finalize the budget and send back to the Governor for his signature. The summary of the Budget’s May Revise can be found here. View Update