Unprecedented Budget Surplus Is Focus of May Revision

To nobody’s surprise, Governor Gavin Newsom on Friday announced another upward revision in the state’s general revenues—a $55 billion bump since January. To the surprise of many, this means that discretionary surpluses for three consecutive fiscal years will top $100 billion. Nobody had this number on their bingo card as the state tumbled into the pandemic recession just two years ago.

This unprecedented and unexpected streak of budget surpluses has been amassed in large part from the strong economic performance by key California economic sectors and entrepreneurs. This creativity and adaptability by employers, along with the commitment of millions of California workers, has seen the state through the tragedy of COVID-19, with extra revenues to bolster the social safety net.

Experience with the California budget teaches that what goes up must come back down, so the Governor prudently sets aside $37 billion into various reserve funds, and calculates that 94% of all spending from surplus funds is dedicated to one-time purposes.

Since the state budget is pushing against the so-called Gann Limit, which caps annual expenditures from the state budget, the Governor targeted several of his initiatives toward spending exempt from the limit, in particular, infrastructure and tax relief.

Noting the toll that inflation has recently taken on individual family budgets (not to mention the already high cost of living endemic to California), the May Revision calls for more than $18 billion in various tax relief or rebate programs, including:

  • A $400 rebate to households based on registered motor vehicles.
  • A temporary reduction to the diesel sales tax.
  • Funding for rental assistance and payments for outstanding utility arrearages built up during the pandemic.
  • Covering all family fees for subsidized child care programs as well as continued health care subsidies for the middle class if federal subsidies expire.
  • Retention bonus payments to approximately 600,000 workers in hospitals and nursing homes.

The Governor is also proposing some targeted tax benefits for businesses, including:

  • Extending the CalCompetes tax credit program for five years at $180 million per year, and extending the CalCompetes grant program for another year at $120 million.
  • Fully conforming California law to the extended federal Paycheck Protection Program (PPP), which prevents these federal grants from being subject to state taxation.
  • Another $500 million for a grant program administered by the Small Business Advocate to provide additional relief to small businesses most affected by the pandemic, focusing on the top ten industries hardest hit by the pandemic.

California will receive $13.9 billion in new federal funds from the Infrastructure Investment and Jobs Act that will support transportation, broadband and other projects over the next five years. On top of that, the May Revision will target another $17 billion (on top of $20 billion from the January budget proposal) for electric vehicle infrastructure and clean energy innovation, transportation projects, broadband build-out, and reducing wildfire risk and supporting drought resiliency.

Schools automatically receive a portion of every new general tax dollar, courtesy of a 1988 ballot measure, Proposition 98. The May Revision includes total funding of $128.3 billion for all K-12 education programs—more than $20,000 per student. This is $20 billion more than the Governor proposed in January, and a stunning $35 billion higher than the current year budget. Some $8 billion of this amount is a one-time allocation that schools can use to address the continuing effects of the pandemic by supporting students’ mental health and learning challenges and to take actions to preserve staffing levels.

The Governor made good on his pledge to give annual budget increases of 5% to the University of California and California State University systems over the next five years. In exchange, the systems will be expected to make progress and report annually on goals including improved graduation rates, growing enrollment, making college more affordable and preparing more students for high-demand careers.

Governor Newsom increased his spending commitment for programs related to climate change and drought mitigation, adding $9.5 billion to a $23.5 billion multi-year commitment made in January. The spending will cover drought relief and water projects, investments in clean energy, and subsidies for electric vehicle purchases and charging infrastructure.

The Governor made no changes to his January proposal to transfer $3 billion to the Unemployment Insurance Fund to offset future employer tax liabilities.

Contact: Loren Kaye

Loren Kaye
Loren Kaye was appointed president of the California Foundation for Commerce and Education in January 2006. He has devoted his career to developing, analyzing and implementing public policy issues in California, with a special emphasis on improving the state's business and economic climate. He also was a gubernatorial appointee to the state's Little Hoover Commission, charged with evaluating the efficiency and effectiveness of state agencies and programs. Kaye served in senior policy positions for Governors Pete Wilson and George Deukmejian, including Cabinet Secretary to the Governor and Undersecretary of the California Trade and Commerce Agency. See full bio.