Assembly Standing Committee on Budget

Good morning, everyone. Welcome to the Assembly Budget Committee. Today is our 72nd hearing of the year, continuing our commitment to a thorough and thoughtful budget process. Today's hearing will focus on two bills that are fundamental to our ability to deliver an on time balanced budget as required by law. We will vote on these two bills along with the budget Bill on Thursday morning on the Assembly floor. The two bills before us today are SB 154 on Education Finance and SB 167 on Revenue.

Since these bills are part of a two party agreement and do not yet reflect an agreement with the Administration, I will ask Assembly Budget Committee staff to briefly introduce each Bill. We will then take comments from the Department of Finance and the LAO before turning back to Members of the Committee for questions and comments.

Today's hearing is informational and there will not be any votes. At the end of this hearing, we will have an opportunity for public comment on these two bills, and I want to emphasize that we are not considering the main budget Bill Today, so we would respectfully request that you limit any comments to the two bills before us.

But first, I'd like to invite our Vice Chair, Assemblymember Flora, to share any opening remarks.

Thank you, Mister chair. This is not my 72nd hearing. This is my second. But it is again, a privilege to be here and learning about the budget in the last few months that I've been kind of looking into this. It just puts me in awe of, honestly, the staff that do the work for this budget.

And though we may not always agree on what's in the budget, the amount of work and time that goes into this is remarkable to me. So I just want to say thank you for your diligence and look forward to working with you.

Thank you very much. Assemblymember and I will echo and share that. Thanks for our incredible staff, their hard work to bring us to this point. And also thank you, as always, to the Department of Finance and the Legislative Analyst Office for joining us today with that, I think what we're going to do this morning is have presentations on both of the bills.

We'll have opportunities for LA owned finance to comment on both the bills, and then we will turn back to questions and comments for Members of the Committee. So you can have, if you want to ask questions on one or both, or make comments on one or both, we will do that at that time.

So let's begin with SB 154, our school funding trailer Bill. I'm going to ask Erin Gabel to discuss that Bill. Thank you, Erin.

Thank you. Erin Gabel with the Assembly Budget Committee. SB 154 is a cornerstone in the balanced legislative budget. It protects schools from reductions in one time and ongoing appropriations and funding. The Bill does suspend the Proposition 98 guarantee in the current year. 2223 excuse Me202324.

Budget year pursuant to the Constitution to a level of $98.5 billion. This approach is consistent with the recent agreement that we discussed last week in our budget hearing, the agreement between school leaders and Governor Newsom, and it would protect school funding. Thank you.

Thank you very much. And we will now turn over to Genevieve Morelos. And, Genevieve, we're delighted to have you with us today. Can you please share a little bit about SB 167, the revenue trailer Bill?

Good morning. Genevieve Morelos, Assembly Budget Committee. I'm here to present SB 167, which is the Revenue and Taxation Trailer Bill. This Bill reflects the legislative's plan to adopt Trailer bills consistent with tax policies, consistent with the governor's proposed January's budget and may revision proposal.

The Legislature's plan differs in two ways on the Net Operating Loss or the NOL and the business tax credits. First, it starts a suspension a year earlier. So the suspension begins in 2024 in the Legislature's plan. And second, the legislative plan includes intent language to enact additional trailer build language this session to address refundability for business tax credits. Thank you.

Thank you very much, Genevieve. And now we will turn it over to the Department of Finance. Thank you for joining us.

Thank you. Good morning. Chair Gabriel, Vice Chair Flora, Members of the Committee, Erika Li with the Department of Finance. And I'll just say largely that these bills are consistent, largely consistent with the administration's proposal, as mentioned by both staffers. And at this time, we continue to work with the Legislature towards a three party plan. Thank you.

Thank you very much. And now to the Legislative Analyst Office.

Good morning. Thank you, Mister chair. Mister Vice Chair. And Members, Gabe Pettic, Legislative Analyst Office and I'm here with a couple of our experts that cover this area, and so we're happy to respond to questions if they, they come up.

Excellent. Thank you very much. At this point, we will bring it back to the Committee. Do we have any questions or comments from Members of the Committee? Mister Vice Chair.

Thank you, Mister chair. Again, like I stated before, like there's been a lot of time and just trying to understand this. So I do have a few questions, if you just indulge me for just a second. But I would just start out by, first, SB 154 suspends the Prop 98 guarantee and thereby reducing spending on education.

But we also create a maintenance factor that has to be repaid in the future. Then SB 167 increases taxes temporarily retroactively until January of 2024. This tax increase drives up the General Fund revenues and correspondingly, the minimum guarantee in 24 and 25. I guess. What happens when the tax increase go away and the revenues come back down? What does our budget year look like after that? So, I guess, for Department of Finance, how are we not creating insecurity in future education funding?

Sure. I'm going to be joined by one of my colleagues to respond to that.

Okay, thank you.

And I could start to answer that. So the Proposition 98 guarantee is just that. It's a guarantee in the constitution that establishes the formula by which we Fund public education. The guarantee is boosted in the budget year to $115 billion because of the new revenues. And we see that as an ongoing commitment to public education via the constitution.

Chris Ferguson with the Department of Finance. So, on a more technical basis, it creates maintenance factor. That maintenance factor is repaid in times in which revenues for the General Fund are generally tracking better than the overall economy. But at its core, test one, test two, test three.

The three tests under the Proposition 98 guarantee are really designed to keep education funding stable over time. So, as you may see, revenue fluctuations. The formulas themselves are really designed to try and keep stable or predictable funding over time.

So what does happen, though, if we're unable to repay that maintenance factor?

So the maintenance factor balance would remain, and then in future years, even beyond the next 2, 3, 4 years, that balance would be repaid again when General Fund revenues are doing better than the overall economy. That can be 1, 2, 3 years, or that could be 10 or 15 years. It just depends on the specific constitutional formula. But what it does do is it provides schools with the certainty that that funding will inevitably return to the guarantee.

And then what would you say, like, I mean, what would be the unforeseen future risk to this plan if you had any, like, what is the biggest concern that you would have to the plan that we have in place here?

I don't know that I would say there are any systemic risks that I would note in the plan. The constitutional formula is such that maintenance factor can increase, say, if we get to a test three year, which is designed to allow for the greater good, greater bad type scenario in revenue. So you may see fluctuations in the balance where it increases in future years, but I don't see a lot of systemic risk to the budget.

Thank you very much. And to the LAO. Do you feel that we are in a position right now that requires us to suspend Prop 98?

Yeah, Mister Vice Chair we think of the suspension proposal as sort of part of the overall package. So when the first, you know, in 22-23 we are adopting this, what we've been calling this Proposition 98 maneuver, which lowers what we recognize in that year for Prop 98. But we're gonna. But then going.

But we're gonna set going forward the Proposition 98 guarantee at the higher level. As if we didn't do that. The suspension therefore provides us some budgetary relief in the budget year to kind of offset the effect of that. I don't know. My colleague Ken is here, covers this area.

Yeah. Thank you. Ken Kapphahn with the analyst's office. So as the Lege Analyst said, the plan before you is a two part plan. If you adopt the first part, which is agreeing to a base that's $6.2 billion higher, then suspension becomes something the state probably needs to do to balance the budget this year.

I guess the alternative is if you reject both parts of the plan, both the suspension and the prior year base adjustment, then you end up with something that's much more similar to the May revision as introduced on May 14.

Thank you very much. Thank you, Mister chair. Thank you, Mister Alvarez.

Yeah, thank you. I just want to spend a little bit more time on 98 because I think it's, there's some important things to mention, you know, in the 14 hearings that we had in the education finance Subcommitee, which I want to thank those Members who served and obviously the staff. Excuse me.

One of the things that we heard the most concerns about from stakeholders is the impacts to the classroom. And I think there's some things that are important to note with this proposal today. One, there is no impacts to the classroom based on what we are doing with the suspension of Proposition 98.

And in fact, I want to ask our Committee consultant to share how we achieved to maintain the impacts away from the classroom with this proposal.

Absolutely. So with the suspension, Proposition 98 in the current year, we then are able to backfill the prior year, enacted funding levels for school districts with our school rainy day in account.

So we're going to be utilizing in a different Bill, in the education omnibus trailer Bill, the $8.4 billion in school rainy day Fund, that will ensure there are no reductions to school funding in the current year despite the suspension.

Thank you for sharing that. And as the Vice Chair stated, there is a maintenance factor. But as I think finance appropriately described, the payback of that, of the maintenance factor. We are anticipating that for the budget year that we will be adopting, $4 billion will be paid back out of the roughly, I think it's $8 billion. Don't want to give the wrong number. Can you confirm that you are correct.

So there's approximately $4 billion in maintenance factor that would be owed under the constitutional formula for the budget year, which brings the total guarantee in the budget year up to $115 billion.

So education will be receiving $115 billion in this budget as proposed by. And that will be the minimum guarantee going forward. And then, excuse me, as was explained earlier, as the revenue picture changes and there's more revenue to work with, the remaining $4 billion, a little over $4 billion. And I assume there's also some added additional costs that will get paid out as the budget picture improves and there are more resources to do that.

Correct. And so, to Assembly Member Flora's question, part of the importance of suspending the guarantee in the current year is it does create that constitutional maintenance factor, guarantee of repayment over time. So rather than having it be owed in a different way that was not concrete and driven by the Constitution, this protects that right.

And just so that last question on this, so that we're all clear on expectations in future years for beyond the 4 billion in the 24-25 budget, if this takes longer to pay off versus the next four to five years, does that number grow significantly or is it grow? What is the sort of ballpark figure, if you will, of what that could look like over the next four to five years versus 10 to 15 years?

Yeah, we, to your point, we can only predict, based off of forecasting of the current economic conditions, how we think the maintenance factor would grow and the guarantee would grow over time. But we're estimating that it'll grow approximately over. Approximately, approximately $5 billion over the multi year. But we are hoping to be able to start paying that off within the next three years.

We'll grow to $5 billion.

Grow to 5 billion after we've paid off the 4 billion in the budget year.

Appreciate that. The LAO, want to add anything to that? I thought I saw you reach forward. No. Okay. Thank you. Thank you again. I want to thank certainly the public who was at all of the hearings on this particular issue of 98 and the significance impact that the input had on this proposal.

Again, to make sure that we kept the cuts away from classroom and from students, really, and focused on continuing to increase in the future our funding and commitment towards education. So thank you for the work for all at the table. Thank you, Mister chair.

Thank you Mister Alvarez. And let me just also add my thanks to you for your very able leadership of all these issues. Other Members of the Committee, questions, comments? Okay.

With that, I would just want to echo my thanks to the staff for all of your hard work in working together, working on these issues, for being here with us to testify today. Appreciate this. These are obviously important and as I mentioned, fundamental to the architecture of the legislative budget.

And I think that we, hopefully this conversation has illuminated for the public the fact that the approach that we're taking here, consistent with the administration's approach, is one that is supported by education stakeholders, by teachers and others who care about classroom funding, that it will lock in a constitutional guarantee that preserves important classroom funding both now and in the future.

And I think that's the high level bullet point for folks to take away, is the commitment by the State of California, shared by the Governor and the Legislature, to protect funding for schools and to protect funding for classrooms. So with that, let me thank you for all of your hard work.

We look forward to discussing and voting on these bills on the Assembly floor on Thursday, and look forward to continued conversations with our partners in the Administration. Thank you. And we will now turn to public comment. Yeah, did you want to say something? Oh, excuse me. With apologies. We'll turn to. We'll turn to. Mister Lee. My apologies.

Thought we were just talking about the Prop 98 Language Right Now. I had questions about the tax and revenue measure. Please, Mister Lee. So I understand that we are going to be capping the business credit caps and net operating loss, but allowing for carryover for after 2027.

Is there an estimate of how much that could cost us in the future years if we're going to allow for so much tax credit rollover in the future years?

Hi, Erika Li with the Department of Finance, and I'm going to turn to one of my colleagues for that.

Hi, Colby White, Department of Finance. So, as you noted, the refundability would lead to businesses taking refundable credits at a certain juncture after the suspension ends. And so roughly, the estimate that we're currently thinking is about a minus a billion in 27-28 and then there would be ongoing revenue losses after that.

So you believe it carried over into the 27-28 budget would be $1.0 billion. Right. So. Okay. Okay. And that's the business credit cap and the net operating loss together would be a billion, you think? Yeah, it's.

That's the, that's the piece for refundability by itself. So the estimate would be 1.25 billion minus for everything. And that's the last year of the multi year. Yeah.

Okay. Very good. And then I had just one more question. Then I apologize again for misunderstanding the order. But on when we have eliminated the oil and gas subsidies, how much money are we saving annually about for that?

It's relatively small. So these subsidies are not, not large as far. So it's about 10-11 million per year.

10 to $11 million a year. Okay. Still a significant amount. Okay. That is all my questions. I apologize again Mr Chair.

Thank you. Thank you very much, Mister Lee. Final call for questions or comments. Okay, thank you very much everybody. With that, we will turn to public comment. Thank you.

Good afternoon, Mister Chair and Members. Chris Reefe, on behalf of the California School Board Association, first we just want to say thank you to the Legislature for maintaining the guarantee and rejecting the reclassification of Prop 98. That was a big step forward.

And we also want to commend staff and also the Department of Finance in their ingenuity in creating this approach. However, we do just want to be mindful of. This is the largest suspension of Prop 98 in history, recognizing. We have, of course, suspended 98 in the past.

But the use of, I would say, optimistic revenues and out years does raise concerns for CSBA in terms of the how quickly and how able the Legislature in the budget and the Governor will be able to pay down the maintenance factor in future years. So we just wanted to flag that.

But again, we appreciate the efforts of the Legislature to maintain the guarantee. Want to also point out for those folks who kind of. We refer to the guarantee, right. The guarantee is the guarantee because of maintenance factor. If we don't have maintenance factor, the guarantee no longer becomes a guarantee.

And if we didn't have that, we would be creating trap doors through which the Legislature in the state would be following through for years to come if we didn't maintain that loyalty, if you will, to the constitution. So again, thank you.

Thank you.

Good morning. Michelle Underwood, on behalf of the Coalition for Adequate Funding for Special Education and approximately 40 grantees of 60 that were just recently awarded the inclusive early education expansion program. So this is a little bit less than $200 million in the current year budget that was recently awarded out.

These are for funds to have preschoolers with disabilities be able to be in the General education classroom setting. So this is to build inclusive classrooms, playgrounds, bathroom settings at the school districts and county offices of education, so we can have preschoolers both with and without disabilities, learning, growing and playing together.

In the legislative package, these dollars were proposed to be used instead to backfill the Proposition 98 rainy day Fund. So we're concerned that as the Proposition 98 minimum guarantee is suspended, that these dollars don't get put away for a rainy day Fund instead of supporting the inclusive settings for for preschoolers with disabilities today. Thank you.

Thank you very much.

Good morning, Mister chair. Chris Micheli, on behalf of the Los Angeles area, Los Angeles Area Chamber of Commerce in respectful opposition to SB 167, we're home to tech and biotech, among many other industries. The NOL suspension and credit limitation adversely impact those industries in particular.

To make matters worse, we did a suspension and credit cap in 20 and 21, and now that those are available, they are being swiped a second time. To make matters even worse, these provisions are retroactive to January 1 of this year, almost halfway through the tax year.

The other issue I wanted to raise is the apportionment formula item. Many claim that as a clarification, we think that the business community would respectfully disagree that it is a significant change in law and has a potential $1.3 billion impact.

As you know, in California we have a pay to play system, meaning taxpayers must pay tax that's under dispute and file a claim for refund. And unfortunately, by reversing the OTA decision, really one of the first significant ones to benefit the taxpayer, the state is proposing to take that away.

We also advocate for this particular provision to be heard in the two policy committees. Thank you, Mister Chairman.

Good morning, Mister chair Members. Pamela Gibbs, representing the Los Angeles County Office of Education. I'd like to align myself with the advocate from the California Association for Special Education. Adequate Funding for Special Education CAFC.

We are the largest regional education agency in the nation, as you know, and have a large number of early learning and education programs that this program would serve. So we'd like to align ourselves with that.

We also appreciate the suspension in SB/AB 154 to the extent that it would help provide continued efforts for teacher recruitment efforts and Golden State teacher program. We know there's still some work to be done there.

But to the extent that this will help us to continue to build upon the successes that you have made in education overall, we look forward to continue to work with you. We know this is a difficult budget and we would just refer you to the letter that we previously sent and we'll follow up with the final letter. Thank you very much for your time and again, your support for the priorities that we've laid out.

Thank you.

Good morning, chair Members. My name is Danielle Bautista with United Ways of California and also here on behalf of the Cal EITC Coalition and we just want to extend our deep gratitude to the Legislature, Department of Finance and Partnership with Budget Committee consultants for the inclusion of trailer Bill language to adjust the income threshold between the Cali ITC Young Child tax credit and foster U tax credit and ABSb 167.

This adjustment is critical to ensure that California families and households get the tax credit credits that they're eligible for during tax season. These tax credits go towards things such as housing, childcare, groceries, gas. So thank you so much. We really appreciate it.

Thank you.

Good morning. Katie Hardeman with the California Teachers Association just want to appreciate the Committee for listening to the concerns around Prop 98. We support an approach that protects the integrity of Prop 98, protects classroom funding and long term funding for Prop 98. Thank you.

Thank you.

Good morning. Chair and Members Derick Lennox, on behalf of the California County Superintendents representing the 58 county superintendents of schools, ordinarily I might use my minute with my list of asks around the budget, but today I just want to express gratitude to the Committee Members and the staff for the work around Proposition 98.

This is the baseline funding that helps to support all of our schools and students and the programs that the Legislature has created over the past few years, in particular, becoming truly transformational for our students. So the fact that you've modified your budget proposal to match with what the governor's proposing and what the interest holders have been advocating for is incredibly important to us, and I want to thank you all for that.

Thank you very much. Seeing no additional public comment, I just want to thank the sergeants, as always, thank the Department of Finance, Legislative Analyst office, our very able staff for their hard work in testifying today. We look forward to continuing this conversation and voting on the Assembly floor on Thursday morning and then continued conversations with our partners Administration. So thank you everybody. This hearing is adjourned.