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Legislative Analyst’s Office releases The 2022-23 Budget: Overview of the Governor’s Budget

The Legislative Analyst’s Office has just published the following report:

The 2022-23 Budget: Overview of the Governor’s Budget

On January 10, 2022, Governor Newsom presented his proposed state budget to the Legislature. In this report, we provide a brief summary of the proposed budget based on our initial review. In the coming weeks, we will analyze the plan in more detail and release several additional budget analyses.

This report is available using the following link: https://lao.ca.gov/Publications/Report/4492

Executive Summary

Budget Structure

How Much in Discretionary Resources Does the Governor Allocate? We estimate the Governor had a $29 billion surplus to allocate in the 2022‑23 budget process. The Governor proposes spending about 60 percent of discretionary resources, or $17.3 billion, on a one‑time or temporary basis for a variety of programmatic expansions. The Governor also proposes using $6.2 billion to reduce revenues and $2 billion for ongoing spending increases. (These ongoing proposals would increase to $5.2 billion by 2025‑26.) In addition, the Governor’s budget allocates nearly $13 billion in discretionary spending for schools and community colleges (which we exclude from the surplus because these amounts are constitutionally required). The figure below displays the major budgetary decisions that the Governor made in allocating state discretionary funds.

Discretionary spending in the 2022-2023 California State budget. Graphic courtesy of the Legislative Analyst's Office.
Discretionary spending in the 2022-2023 California State budget. Graphic courtesy of the Legislative Analyst’s Office.

How Does the Governor Address the State Appropriations Limit (SAL) Requirement? The SAL limits how the Legislature can use revenues that exceed a specific threshold. The Governor’s budget shows excess revenues of $2.6 billion across 2020‑21 and 2021‑22. The Governor’s budget does not include a proposal to address these excess revenues, but the administration states it plans to put forward a plan to address these requirements at the May Revision. In 2022‑23, the Governor’s budget reflects $5.7 billion in room—meaning appropriations subject to the limit are under the limit by this amount in this year. This room in part reflects $12 billion in proposals for revenue reductions and SAL exclusions.

Overall Comments

Multiyear Revenue Projections Are Reasonable, but New Spending Proposals Exceed Administration’s Estimates of the Budget’s Capacity. Whereas we often noted previously that the administration’s multiyear revenue estimates appear to be fairly cautious, we characterize this year’s estimates as a middle of the road among potential outcomes. Despite these improved revenues, the administration’s multiyear estimates reflect negative balances in the Special Fund for Economic Uncertainties (SFEU) in 2023‑24 (and throughout the rest of their forecast) due to proposed spending exceeding estimated resources. By planning to have a negative balance in the SFEU, the administration assumes that next year revenues will be higher than anticipated, costs will be lower than anticipated, taxes will be increased, or reductions will be required. While multiyear revenue and expenditure forecasts are imprecise, committing to spending above anticipated resources carries considerable risk.

Strongly Consider Building More Reserves. The reserve for schools and community colleges has increased from zero in 2019‑20 to nearly $10 billion—or nearly 10 percent of their funding—under the Governor’s estimates in 2022‑23. The state’s other budget reserves, however, have not increased as a share of other General Fund spending and, in fact, are significantly below the pre‑pandemic share. Given this, we recommend the Legislature consider building general purpose reserves above the level currently proposed by the Governor.

SAL Remains Important Consideration. The SAL will continue to constrain the Legislature’s choices in the upcoming budget process. Deferring plans to meet the SAL’s requirement further decreases the Legislature’s flexibility. We encourage the Legislature to develop a plan for how it wishes to meet the requirement across 2020‑21 and 2021‑22. For the budget year, as the Legislature considers the Governor’s budget proposals, those proposals that currently count as excludable expenditures—such as spending on capital outlay—for the most part can only be reallocated to other SAL‑related purposes, such as tax reductions or an alternative excluded expenditure.

Focus on Ensuring Success of Recent Initiatives. We recommend the Legislature dedicate the early part of the budget process to overseeing the implementation of last year’s significant augmentations. This information could inform the Legislature’s approach to allocating this year’s surplus. For instance, if departments face challenges with administrative capacity, the Legislature could consider whether additional staffing is warranted. Moreover, given the scale of last year’s commitments, we suggest the Legislature be cautious in creating additional new programs as well as expanding the scope of existing programs.

Consider Longer‑Term COVID‑19 Planning. The Governor’s budget includes additional spending for COVID‑19‑related expenditures like testing and vaccination and an intent to modify the state’s COVID‑19 sick leave policies. It largely does not include, however, the extension of program flexibilities and temporary supports provided in last year’s budget. In part, this likely reflects that the Governor’s budget was developed before Omicron became the prevailing COVID‑19 variant in California. As the Legislature starts its deliberations on the budget, we recommend considering whether any program flexibilities—like remote assessments for human services programs—or temporary supports—like targeted cash assistance—are warranted. Moreover, as COVID‑19 likely will remain a public health and economic challenge in future years, we recommend the Legislature closely consider the extent to which the Governor’s proposals properly prepare the state for this reality.

This article was released by the Legislative Analyst’s Office.