Assembly Standing Committee on Budget

All right. Good afternoon, everybody. I know that many of us have been gathered together in this room this. This year a few times. But believe it or not, this is our first regular session Budget Committee hearing for 2025.

So we welcome today is an informational hearing that will provide the Committee with an overview of the Governor's Budget from the Department of Finance and is also from our friends at the Legislative Analyst Office. We're also going to adopt our Committee rules today.

And today, as those returning Members know, is merely the beginning of a much larger journey as we work to craft our state budget for this year. We have already noticed over 60 hearings for our seven subcommittees where we will dig down into the details and begin building the 2025 budget that we will pass in approximately 120 days. And I have some opening comments as we begin that journey. But before we do that, Madam Secretary, can we call roll to establish a quorum, please?

[Roll Call]

Sorry, Madam Secretary, do we have a quorum?

We have a quorum.

Thank you very much. And while we have a quorum, let's go ahead and take care of our housekeeping items. So, Members, proposed Committee rules are attached to the agenda and they were distributed last week. These rules are largely the same as last year, but were updated to reflect the current Subcommitee structure.

The rules also provide more clarity on Subcommitee informational hearings to conform to current practice, including quorum requirements, hearing length and the process for Non Committee Members to participate in informational hearings. I'm now ready to entertain a motion to adopt the Committee rules. I have a motion from Mr. Flora. Do we have a second from Mr. Fong?

Madam Secretary, can we please take a vote on the Committee rules?

[Roll Call]

Thank you very much, Madam Secretary. Congratulations. We have Committee rules Members. We are going to have an opportunity in just a moment to hear from Erika Li at the Department of Finance who is going to present the governor's proposed budget. Thank you for joining us. We will then have an opportunity to hear from our Legislative Analyst, Gabe Petek.

Mr. Legislative Analyst, thank you for joining us. After the presentation, we will turn to Member questions and comments and then public comments. But just to get us oriented, I thought I would reflect on the fact that, to put it mildly, it has been an uncertain start to the year.

The Governor's Budget is barely a month old, and yet it feels that it was introduced in a different era. Reflecting back on January 62025 when Governor Newsom previewed his budget proposal, that was the day before a deadly firestorm would hit Southern California.

President Joe Biden's Administration had just announced 122 million in new funding for six California projects to build zero emission vehicle infrastructure. And one of California's most valuable companies, Nvidia, had its stock close at nearly $150 per share. And yet here we are, barely one month later, and the world has changed in fundamental ways.

We have devastating fires in Altadena and the Palisades that have destroyed over 12,000 structures and displaced tens of thousands of Californians. The Trump Administration has attempted to freeze critical federal funding and raise questions about whether we here in California can count on federal disaster relief. Nvidia endured historic stock market losses.

Like many other tech companies, the losses for that company alone exceeded the entire listed value of the Mexican Stock Exchange. Given how fast things are changing, we should expect that assumptions around this budget will continue to diverge from the realities of our economy, our relationship with the Federal Government and our potential needs.

And there is no guarantee that when we craft the budget in June, we will have greater certainty about our economic future or the reliability of our federal partners. But Members, we have the power and resources in this budget to provide an example of what government should be safe, predictable and reliable.

We are not big enough to assume all of the roles of the Federal Government, but we can shape this budget to make clear our commitment to Californians and especially to our vulnerable communities. This budget may require tough choices, but we proved last year that we are up to the task.

I do offer want to also add a word about our communication and our relationship with our partners. Confronting these challenges will require us to work closely with our partners in the Senate and in the Administration under these circumstances, it will be important that the Administration communicate with us proactively and frequently to avoid surprises at the May revision.

We expect that sincere partnership, and we will do our best to reciprocate. Californians are depending on us all to work together. I also want to briefly point out two important priorities for this year's budget discussions. Our funding for housing, housing and homelessness programs, and our emphasis on accountability.

The lack of resources for housing and homelessness in this budget is impossible to overlook. It does not reflect our prior commitments, nor does it reflect our the importance of this issue. We can and must do better, regardless of our budget situation.

I look forward to working collaboratively with, with the Senate and with the Administration to craft a thoughtful and balanced approach to these important issues as we move forward. And many of you are well aware of the emphasis that the speaker and this Committee have placed on the issue of accountability.

And we are focusing, we will continue to focus attention on that important issue under the very able leadership of Assemblymember Hart, who is chairing Our Budget Subcommitee 7. We had some great successes last year in this area, and I think we learned some important lessons regarding legislative authority.

This will continue in 2025, but we must double down and do more. And with that, I will turn it over to my. Our Vice Chair for any opening comments.

Thank you, Mr. Chair and colleagues. This is my first full term as Vice Chair of this Budget Committee, and I'm excited about it. I really am. I think we have a lot of opportunities, I think for all of us that are elected here today. We represent 40 million people in the State of California.

We're all brought here by voters. We're all brought here by our voters to protect what is important to our constituents. And I think we have a unique opportunity right now because there's not a single elected Member of the Assembly and or the Senate that does not want to do the right thing. Our issues are different.

Our politics may be different, but. But we're here to protect our constituents. And we're here to have an honest conversation about what is important. And I'm excited. We've been here through extraordinary session.

There was a lot of things that were raised, a lot of issues that were raised that I know every single one on this dais wants to fix. And we have the opportunity to do that. We have the opportunity to work together and show that California is different.

When it comes to legislating, when it comes to governing, we can all work together. We can all build a state that we can be proud of. It doesn't have to be partisan. When you take a step back and understand that my life story is different than somebody from the Bay Area or la. And that's okay.

If we take a step back and just listen what people's priorities are, we have an opportunity in this Budget Committee right now to make changes that will last for generations for our kids, something we can be very, very proud of. So when we talk about vegetation management, we talk about these priorities that we all may have.

Let's look at it from a lens of not just like your own, where you come from, but take a step back, pull the curtain back and let's truly listen to each other. And I'm excited. I look forward to the opportunity. Our chair is great and I appreciate you, my friend.

And I think there is a lot that we can work together on and I'll just, we'll leave it at that. And I cannot wait to get this budget season started and I cannot wait to work with the governor's office, our colleagues and let's make a budget that Californians can be proud of.

Thank you very much, Mr. Vice Chair, and appreciate that beautiful note to kick us off on with that. Let's go ahead and dive in. We have Erika Li from the Department of Finance. Erika, thank you for joining us.

Thank you. Good afternoon, Chair and Vice Chair and Members of the Committee. Erika Li with the Department of Finance to provide an overview of the 25-26 Governor's Budget. After two difficult budget years, this year's Governor's Budget is balanced without the need for further solutions.

We've seen stronger than anticipated performance of the economy, the stock market and cash receipts leading to an upgraded revenue forecast. We now project 16.5 billion higher revenues over the budget window when compared to the 2024 Budget Act.

A lot of credit goes to the agreement made with the Legislature and the Administration in regards to the current budget that solved an over $45 billion problem last year. Budget deficit for this fiscal year as well as and importantly, it took steps to address some of the budget deficit for next year, which would be budget year.

This has never been done before. So I think a lot of credit goes to the 2024 Budget act framework. We did have to make some tough decisions, including reductions, some deferrals, borrowing. However, core programs were largely spared and last year's budget helped position the state onto more fiscal stable, stable fiscal footing going forward.

And yet we are not out of the woods. As chair mentioned, there are a lot of things in motion and as the LAO has noted in its November forecast, sorry November Outlook Our baseline expenditures are outstripping our revenues. We must continue to assess the situation and go forward to ensure that the state is on firm fiscal footing.

And we must absolutely be mindful of the risks that lay ahead. Always. Stock market volatility, reemerging inflation, the latest fires and recent delayed tax filing deadlines will have an impact on our revenue projections.

And perhaps the biggest risk and uncertainty lies around federal policy changes that could lead to significant impacts in funding, decreased funding here in California, as well as potentially shortages and other negative impacts. That said, the Governor's Budget builds off the 2024 Budget act framework and again, it's balanced with no cuts and with very limited new investments.

It includes total spending of 322.3 billion in total, of which 228.9 billion of that is General Fund.

The budget does maintain the 7.1 billion withdrawal from the Budget Stabilization Account or our rainy day account that was planned as part of the 2024 budget agreement and leaves remaining reserves of about 17 billion, of which 4.5 billion is for the State Fund for Economic Uncertainties.

This is about a billion larger than what we have had over the past year.

To account for some of that uncertainty that I mentioned, the budget sustains and protects progress in core programs, including celebrating the full implementation after many years of diligent work of programs such as Universal tk, before, after and summer programs, as well as Universal school meals, just to name a few, in the education realm.

Lastly, I would like to reiterate the Governor's proposal for Proposition 2 reforms. Proposition 2 requires that the state set aside funds during good fiscal times to use during downswings. This is largely to address the volatile nature of our revenue streams. However, there are constraints on how much we can actually store away for a rainy day.

This is because of the interaction with propositions, Proposition 2's cap on mandatory deposits, it's currently 10% of General Fund revenues, as well as Proposition 4, which is our state appropriations limit. Under current law, a deposit into our state savings account is effectively counted against the expenditures and therefore it is not exempt from the state appropriations limit.

Our proposal seeks to raise the mandatory deposit from 10% to 20% as well as exempt deposits into the BSA from the appropriations limit. As the Governor stated during his presentation, which does feel like years ago, not weeks ago, this budget is a starting point.

We look forward to working with the Legislature throughout the spring to finalize a budget plan that ensures California's fiscal footing now and into the future. Thank you.

Thank you very much Ms. Li, we appreciate it. We will now turn to the LAO.

Okay. Good afternoon. Thank you, Mr. Chair, Mr. Vice Chair and Members, thank you for having us here at the Committee. Hopefully you have a copy of this handout that was distributed.

I will walk through this briefly, provide some of the way we describe the budget situation at a high level and offer a few of our analytical comments at the end. The first is just to pick up kind of on what Ms. Li was describing, which is on the first page a brief recap of how we got how the state got to where it is today, which is that the Legislature did indeed take actions to address the current year deficit, but also in a atypical but proactive fashion, took actions to address the anticipated deficit for the upcoming budget year as well.

Since then, though, we've had actually stronger revenue performance or tax collections than what the Budget act assumed. And this did lead the Administration to upgrade its revenue estimates for through, you know, the period through the budget year. And but with the additional revenues comes higher expenditures, particularly for education under the Constitutional Proposition 98.

But our office also estimated that other areas of the budget were also running higher in our November fiscal outlook as well. So where that leaves us, if you turn to page two, is, you know, the actions to balance the budget then with higher revenues and higher expenditures that somewhat offset each other.

We describe the budget as being currently roughly balanced. That is to say, we're not describing there as being a surplus or a deficit.

Though I will note now technically when you look into the details of it, what we have estimated is that under the administration's assumptions, and before you take account of the governor's new proposals, the administration's assumptions would leave the state with a $3 billion positive balance in the SF EU at the end of the year.

This whereas our office back in November when we did our fiscal outlook, estimated that there would be a relatively small $2 billion deficit at the end of the fiscal year. I can briefly crosswalk the difference between the positive three and the negative two just by noting that as Ms. Lee indicated, the Administration upgraded its revenue estimates.

We upgraded ours as well in November, but not by as much. And so the administration's revenue estimates through the budget year are 9 billion higher than our estimates were in November. With those higher revenues, there's higher spending on Proposition 98. That's a constitutional formula that drives that.

And then somewhat offsetting that there were, the Administration has somewhat lower expenditures in other areas of the budget. So you put those together and if sum them up, the net difference is the positive Three and the negative two that we had in our fiscal outlook.

But then when we look ahead to the multi year period, both the Administration and our office do see significant deficits in the future years after the upcoming budget year. The administration's estimate of the deficits is in the range of 13 to 19 billion per year.

Whereas our estimate that we showed in our November fiscal outlook was starting at 20 billion but growing to 30 billion by the end of the period, which is 2028-29. And I'd be happy to describe why there's a difference. I think the most important thing is the General direction.

We both see quite large deficits and I will note, as always, we take the further out we look. There's a lot of uncertainty, but. But I think the direction that we're both pointing to does suggest there will be significant fiscal pressure in those out years.

Okay, moving to page four, I was just briefly going to touch on some of the Governor's discretionary proposals in the budget. And we put them into three categories. There were proposals that would add capacity to the budget, savings proposals and others that will add capacity. There are proposals that would use that capacity on spending and tax expenditures.

And then there's the proposal related to the discretionary budget Reserve that Ms. Li referenced. On the capacity creating policies, they sum to about 2.2 billion. The largest proposal in this category is one which would delay the funding of Proposition 98 in an amount of 1.6 billion.

So 1.6 billion of Proposition 98 funding would be delayed until we know the final revenue estimates for the current fiscal year that we're in now 2024-25. So that creates savings of 1.6 billion for the budget year. But it would create a settle up obligation in the future years if revenues meet or exceed the administration's estimates.

So we do note that the Administration also has a proposal to implement a new single sales factor methodology for taxing the profits of financial institutions, which would raise revenues by about 300 million. And then a proposal to shift some of the planned General Fund spending in the climate area over to the Proposition for bond that was approved by voters in November.

On the spending side of the proposals from the Governor for spending and tax expenditures, There are about 570 million in new spending proposals, although those would settle out, we estimate to about 300 million on an ongoing basis. Examples in this category, there's a wide range of smaller proposals that sum to those figures.

But one of the more notable examples is 60 million for additional Cal Compete's grants. Another proposal from the Governor, to use budget capacity is 150 million in tax expenditures.

Now, this will actually grow to costing about 300 million on an ongoing basis, but it includes the film tax credit proposal, expansion to that, and also excluding some military retirement income from taxation for retired military personnel. Finally, the Governor's discretionary proposal related to the Special Fund for Economic uncertainty is for 4.5 billion, which as Ms.

Lee mentioned, is larger than it has been historically, which is in the range of 3 billion to 4 billion. So it's an increase there and it does provide some additional cushion given the uncertainty. Moving to page five here we just display our depiction of the General Fund condition under the Governor's Budget proposal.

What we show here is that at the end of 2025-26 there would be 15.4 billion in General purpose reserves, as we call them. That's the Budget Stabilization Account or rainy day Fund, plus the Special Fund for Economic Uncertainty. But there also would be 1.5 billion in the Prop 98 Reserve.

We don't include it here because that's really only available for schools and community colleges. So it's not as flexible, but it is there. So then finally on page six is where I was just going to spend a moment on our assessment or our comments on this proposal.

The first is that the revenue estimates, as I noted, the administration's estimates, are higher than ours were. They are reasonable, though, in our opinion because there has been continued strong tax collections even since we did our November forecast.

However, we would say that caution is warranted because a lot of the revenue gains or tax collection improvement that we've seen that outperformed what the budget assumed is related to the stock market appreciation that we've all seen and less so the broader economic situation, which in our characterization remains somewhat lackluster.

When you look at job growth, the unemployment rate and consumer spending, those metrics are not as strong as you would hope to see. And so if a lot of these revenue improvements are being driven by the stock market, as you know, that could be subject to a lot of volatility and could reverse without much warning.

So we think caution is warranted there. In addition, the proposal doesn't incorporate some cost pressures that will be facing the state. It couldn't. Some of them, the fires had occurred after the proposal came out.

But also that proposal to delay the 1.6 billion in Prop 98 funding, as I noted, if revenues do meet or exceed the Administration's own estimates, that would be a cost that the state would incur in the future. And so that would need to also be borne by the state.

The proposal continues with the plan that was adopted back in June to use some of the budget stabilization account, the Reserve that was to address the deficits over a two year period. 5 billion from the Reserve was used for the current year and then a plan to use 7 billion in the upcoming budget year.

And that is maintained in the governor's proposal. We think that's reasonable, is part of a two year approach. But one of the main points I think we would want to convey is that we think the Legislature would be advised to continue the momentum on addressing these deficits.

It is not new for the state to face deficits in future years after the budget year. When we've done, we've done previous multi year outlooks as the Administration has, and it is not a new thing for there to be deficits in those future years.

The difference is this time the revenues for the current year have not even caught up to expenditures even in the current year. Also, as Ms. Lee mentioned, revenues in the future years are not keeping pace with the growth of expenditures. That is somewhat new for us.

And then third, a lot of the solutions that were adopted in the recent budget balancing actions were one time in nature. So a lot of those one time tools were used up, meaning that more of the solutions going forward may have to look to ongoing programs that provide services. So those choices may be more difficult.

And because of that, one of our overarching recommendations for the Legislature is to use this time to conduct overarching oversight and program review. This, you know, makes sense because doing that activity takes time. You want to collect information, hold hearings, ask for reports, ask for data.

And some of that will take time since, you know, as we're saying here, the budget is roughly balanced at this time for this coming year. The bigger challenges will be in those future years.

But this gives the Legislature time to get that information and that data to make its assessment and its decision determination about what its priorities will be if there is reduced budget capacity in those future years. And then finally on the Reserve, the Reserve enhancements that Ms. Lee mentioned, we think this is an idea that is merited.

The ceiling. Increasing the ceiling on the mandatory deposits from 10% to 20% would be prudent. Also excluding deposits from counting against the state, state appropriation limit has some merit as well.

But what we would add to this is that while those would allow for a larger balance in the Reserve, they wouldn't necessarily do anything to provide for it. And so the Legislature may want to also examine the formulas that determine how much of annual revenue goes into the Reserve in order to build up that fiscal cushion.

So that would be the type of added cushion consideration that we would put on the table. So, yeah, with that I will stop and be happy for us to take questions. Thank you.

Thank you very much, Mr. Petek. We are now going to turn to bring it back to the Committee for questions or comments. And I just want to, if Committee Members will indulge me, Mr. Speaker has blessed us with what I believe is a historically large Committee.

We have 33 Members, so just north of a quarter of the Assembly sits on this Committee. So as you think about your questions and comments, I would encourage everybody to be mindful of the colleagues that may be behind you in line wanting to make comments and questions and remind you that we have already scheduled 60 Subcommitee hearings.

So the opportunity to dig into the details, to dig into the meat, to drill down on the issues that I know are important to your districts and to all of us. There will be many, many opportunities in the road ahead to do that. So I know everybody has a lot of wonderful things to add to this hearing. But just a reminder that we are a very, very large Committee and with that we'll go to questions and we'll start over here. Assemblymember

Thank you for the presentation. And just to follow up, if you could, for your last comment, is you said that the governor's proposals to for. The budget to change the reserves is. That it allows for it but doesn't provide for it. Did you have any examples of how. The Legislature should consider providing for it?

Well, at this point we are still doing analysis of the Reserve and what type of Reserve and what level of Reserve would help the state weather different economic cycles. But I think the idea that we were contemplating right now, I think it's one and a half percent of General Fund revenues get set aside annually.

That's a percentage that could be increased. Or there's also a provision that takes a portion of the excess capital gains, the most volatile portion of the personal income tax, and puts that into the Reserve. And so that's also the calculation or the formula for that could be adjusted as well to provide for larger deposits more frequently, for example.

All right, let's go to Dr. Jackson, please.

I didn't think I was so top of the list. Thank you very much, Mr. Chair. You know, one of the things that I am worried about, obviously there's so much uncertainty.

There's so much now new priorities that need to be assessed given the devastation happening in California and other things and there's no doubt in my mind that we will have a balanced budget, fiscally balanced budget. My concern is that we may not have a morally balanced budget, though, after we start dealing with the may revise.

And so is the Administration committed to making sure that we are preserving our social safety net and preserving the commitments that he has made with the Legislature moving forward?

I think I would underline exactly what you said about the uncertainty going ahead. And the Administration is aware of some of the things, some of the policy changes being either proposed or through Executive order have been proposed and looking at what programs those would impact.

So currently we're running drills and looking at programs, doing something similar to, I believe, what the Legislature would do in regards to oversight, looking at the programs to see which programs are most impacted, what are the potential losses of federal funds? There is no situation where the state can backfill for all those lost federal dollars.

So it's a matter of looking at what programs, obviously are priorities for the Legislature, what programs are priorities for the Administration, and what can be done to preserve those programs.

But it is something I think we're going to need the whole spring and probably beyond, as federal policy changes continue to come or continue to be passed, what those impacts to California are and continue having conversations with the Legislature and making potentially some difficult decisions going forward.

And part of the difficult decisions that I think, and certainly there's no doubt we're going to have to make difficult, possibly make difficult decisions. One of the things that we always talk about is can we afford certain programs?

And I think LAO said that we might need to look at making sure that we assess programs, whether they are having the outcomes that we need, are they higher priority than others? But I don't see us doing an equal, equally the same thing when it comes to our tax credits and tax expenditures.

And so a part of having a morally balanced budget, I would certainly like to see the Administration also look at not can we afford programs, but can we afford some of these tax credits and tax expenditures equally?

Will the Administration be looking just as equally at tax credits and expenditures, just as certainly he will be doing in terms of other programs that the state wishes to have?

I think everything will be on the table.

Okay. Also lastly, actually, is that certainly we've made some great strides. And one, although we know we have to make tough decisions, one of the only concerns that I had even in the governor's January budget that I hope you would take a look at is that many times when the Legislature makes agreements with the Administration on certain programs that in the following budget proposal, he proposes to then eliminate them or to not Fund them. What can we do to do a better job in making sure that once we have agreement that we actually will follow through?

I'm not sure specifically what programs you're speaking about, but I think again, having the, the pro. The spring process in regards to subcommittees hearing the priorities of the Legislature, that's all important and part of the conversation.

Looking forward to working with you all. Thank you.

Thank you very much, Dr. Jackson. We'll go now to Assemblymember Lackey.

Yes, thank you. My, my biggest concern in this proposal is the lack of funding for Prop 36. As you know, Prop 36 was very, very popular and the voters spoke very loudly in wanting to deal with criminal offenders and their substance use disorders.

And I guess my biggest question is what's the governor's plan to Fund this drug treatment for these offenders? Because that was one of the main crux points of a Prop 36.

The Governor's Budget does include funding for CDCR in regards to the increased population that we have projected even beginning in the current year. And so I would say that there are investments going to CDCR in pursuant to Proposition 36.

That really doesn't seem to address my question though. I mean, for additional inmates to be funded does not earmark funding specifically for drug treatment, drug disorder treatment. And we feel that that's a very critical component of Prop 36.

And unless those people who are incarcerated are able to get that drug treatment, they're going to have very serious problems adapting to their release. And I think that was the public's perspective as well and why they strongly supported this initiative. And it seems like it's almost an intentional oversight.

And so I would really appreciate having a direct answer to that question on how that program specifically is going to be funded because it's going to cost an incredible amount of funding, not just funding the amount of inmates that doesn't do it.

Good afternoon. Justin Adelman, Department of Finance. So to final up on Ms. Li's comments, there are treatment programs available within CDCR that would be funded as part of that. So individuals sent to state prison.

To your point, I do also want to note that there are from Proposition 47 grants available through the Board of State and Community Corrections that provide mental health substance use disorder treatments kind of existing that may also be eligible for Proposition 36 purposes.

I'll address my questions more in these sub hearings, but that's a very, very critical component that I feel is not satisfactorily addressed in this budget proposal. So I'm hoping that we can get some real concrete answers instead of some blurry allegations. Thank you.

Thank you very much. Let's go to Assemblymember Petrie Norris.

Good afternoon. Thank you all for being here. So as you both provided some context for the budget proposal, I think there's actually quite a few bits of good news. Namely the economy has actually been doing quite well, market performance has been quite strong, our revenues are coming in above expectation. So that's a pretty positive picture.

I think with that context, I was Wes and I'm very confused that we would be withdrawing $7 billion of rainy day funds. Can you help us understand why that is our starting point?

Yes. As I said, we maintain the 2024 Budget act framework that did actually have over two years of withdrawal from the BSA, which was the 12.2 billion. And one of the there were many options.

But going into the development of the Budget act generally in the past we have had taken out the full amount in a single year. What we decided to do was to spread that out over two years. And what that actually did was create actually more budget resilience.

In regards to last year, we had to come up with a variety of solutions that backfilled basically for that 7.1 billion. So we did have again to make tough decisions about certain things to cut and to defer. And so including it again, it's part of that broader budget framework. And so we continued with that.

Yes. So, Ms. Petrie Norris, we generally, as I mentioned in the comments opening the hearing, think that withdrawing the 7 billion this year is reasonable because when you go back and look at it, from 2023 to fiscal year 2023-24 the state has addressed a total of 82 billion in deficit budget problems.

And so we started the time with a little bit more than 20 billion in reserves. And so to close that amount of deficit since then, the idea that we would use some portion but still have about half of our rainy day funds intact seems reasonable to us.

However, you know, I would just add to your first point that you made. We are a little bit concerned about the revenue situation being more precarious because yes, we've had revenue growth, tax collections have come in better than the Budget act assumed.

But as I said in my comments, almost all of that is really coming from a strong stock market. And, and we don't really see the broader economy as being as positive. It's rather flat in our opinion.

And most of the job growth, for example, that we see in the State of California is coming from government and healthcare sectors and the rest of the economy is not really producing the jobs in the state. And so and then we see consumer spending being rather lackluster as well.

And so we would feel better about the revenue outlook remaining more positive and being sustainable if we saw, you know, more regular economic activity being stronger. And so, you know, I think that the idea of taking actions to preserve more of the Reserve than is being proposed is certainly worth consideration and a good topic to discuss.

But just, you know, when you kind of step back and look at the proposal over kind of this couple of year period, the that's why, you know, we thought it was reasonable to, to maintain that part of the plan.

Okay. Thank you. And thank you for that. For that additional context. I think my concern would be that dipping into the rainy day Fund, when by all accounts, you know, it's not even misty out. Right.

I think particularly in light of the potential headwinds we're facing, potential risks of market, potential risks related to a recession, it feels like we got to make sure that we have those funds when, yeah, the rain actually starts coming. So thank you.

Thank you very much. Assembly Member we're now going to go to Assembly Member Quirk Silva.

Thank you, Mr. Chair. Assembly Member Sharon Quirk Silva, Chair of Budget Sub 5 State Administration for first, I'm really glad that we do have the rainy day Fund, because some of you may not know in 2012, when I started, we did not have that.

So I am glad that we have that Fund and it certainly has been days that we've needed to tap into this. But second, I'm going to focus my questions on to the Administration, and these would be related to the housing.

The Governor's Budget includes a proposal to break up the business, Consumer Services and Housing agency to create two new departments. A few questions related to that. First of all, what is the General timeline? I know in the notes it said that there would be a letter to the Little Hoover Commission.

What my question is, will that timeline be on the same timeline as our budget process? Are they going to have hearings and so forth at the same time as our budget process?

And then secondly, we know that the housing and homeless programs are in many departments beyond HCD and Calich, and which housing and homelessness programs does the Governor want to include in the new agency? And then my last is most of our housing programs were zeroed out in this budget. If you could speak to that.

Sure. The Little Hoover process. In terms of timing, the Administration will be submitting its plan in the spring to the Little Hoover process or to the Little Hoover Commission with a time frame of having hearings through that Commission later in the spring. I'll defer to my colleague for the exact timing and how it aligns with the the budget process.

Hi, Good afternoon. Teresa Calvert. As Ms. Li said, there will be the submission to Little Hoover Commission and that starts a clock for the Commission process. And if, depending on when it is in spring, it would line up to budget, probably more likely a May revision timeframe.

And then I think a subsequent question was the programs that are being looked at and the programs that are being looked at are those programs that exist now within the the BCSH agency. And on the last question on the funding for housing, a lot of one time funds are expiring.

So what you're seeing is not a proposal for new funding, but you are seeing kind of the expiration of one time fundings that had been previously provided.

And then a quick follow up. Last year we worked very hard to retain some of the housing programs that many, not only constituents but advocates had talked about in their local cities that really had made a difference. Reap 2.0, the Low income tax, housing tax credits, multifamily housing programs.

Is there going to be an effort to really look at trying to retain those even though we have a zero now, knowing how important these have been to our local jurisdictions?

As Ms. Calvert was saying, a lot of one time dollars fell off this year. And I think that the Administration is open to discussions with the Legislature in regards to a variety of those which I believe I know are priorities for the Legislature.

Thank you very much. We'll now go to Assemblymember Demaio.

Thank you. I don't even know if my questions are going to be relevant or helpful because, frankly, I don't think you have a whole lot of credibility given just basic math.

If people back home are sitting around their kitchen table and they look at their income and then they look at their expenses and they realize, oh, I don't know, they're about $7 billion short for the year. No one in their right mind describes that as a balanced budget.

And I think that it is alarming that we have the top finance officials and our top legislative analysts when it comes to fiscal issues sitting before this Committee testifying for elected officials that we have a balanced budget. And I do appreciate Ms. Petrie Norris's line of questioning because it raises even bigger questions that our economy is not necessarily on the firmest footing. And so we're adopting a budget automatically that's not balanced on day one.

And so I don't even know if I'm going to come to another budget hearing for oversight because I'm not convinced I'm going to get an honest answer. And both of you just described the the budget has, quote, balanced but $7 billion of raids on reserves.

And the fact is we're taking in less money by $7 billion than we're spending. It doesn't jive with reality. And it almost is as though we're getting political talking points rather than actual facts.

For us as a legislative body to do our job to adopt a budget, I would encourage my colleagues not to put a whole lot of faith or even use this document as a starting point. I think we're going to have to roll up our sleeves and start fresh.

And it might mean that we have to get outside counsel to come in and provide us with some honest, blunt answers to some basic questions, because that is what Californians would demand of us. No one can describe this fiscal picture as balanced, and it's offensive to California taxpayers to do so.

How much are we raising the California payroll tax by because of the Unemployment Insurance fraud? Are we talking $2 billion this year in payroll taxes? What's the tax hike on employers in the state? I think it's $23 per employee of added cost, because I believe that that increased revenue is presumed in this budget overall, when you're looking at special funds.

Hi, Theresa Calvert again. I'm looking to see if I have that specific amount we might have to get back to.

I think it's about $2 billion. And yet we're giving Hollywood elites a $750 million tax credit. Big entertainment studios get a tax credit while small business owners are being charged $23 per employee in higher taxes. If we adopt this budget, it doesn't seem to bode well for this shaky economy that everyone seems to be worried about that might burst at any time and leave us holding the bag. There was a mention of federal funding and perhaps disruptions in federal funding.

Has the governor's office done a risk assessment of the potential exposure of this budget to the Trump Administration withholding federal funds? And if so, what is the total tab that we might be short on if the Trump Administration follows through on sequestering federal funds?

Should we have a rainy day Fund for the potential that we get into a fight? Because it looks like we're on a collision course right now with the Trump Administration. A fight with the Federal Government on federal funds. Have we done a risk assessment?

As I mentioned earlier, we are looking at all of the federal funding that we receive as states. And at this point, we don't know what is at jeopardy, but we are looking at that. And as I also said, you're correct, there's no way that the General Fund can backfill the loss of federal funds.

Well, there's certain funds that are discretionary and certain funds that are already on a formula basis. I think if, if you could just at least give us the discretionary list, that's a good starting point because the formulaic funds are probably going to be harder for them to sequester. And then finally, and thank you Mr.

Chairman, for the time it looks like we're dipping into about $7 billion of reserves. If we are to believe your numbers, and I don't believe your numbers, I think we're probably looking at a budget deficit that is northward of 15 to 18 billion dollars.

If you true up actual expenses and you back out the one time monies that I know that you guys are shaking the tree on. How much money are we spending in this year's budget on illegal immigrant services? Let's just start with health care.

The number in the budget said an increase of 6.3 billion, but my numbers suggest that the number is far higher than that that was added coverage from this last budget cycle. Not the total amount just for the health care.

Do we have an actual number of illegal immigrant health care that the state taxpayers are covering in this year's budget?

Well, I. Lupe Manriquez with the California Department of Finance. So in the current year, to cover undocumented individuals In Medi Cal, we're spending $9.5 billion total funds. So.

So it's not the 6 billion that people continue to talk about in the media. It's 9.5 billion.

It was a budget act number. This is a revised number based on the Governor's Budget updated estimates. So of the 9.5 billion, 8.4 billion is General Fund.

8.4 billion in General Fund. So that's. Well, if we cut that, at least using your math, we'd have a $1 billion surplus, my friends. We wouldn't have to go into the rainy day Fund. Gee, I mean, soon we can actually start getting a reserve.

I mean, my colleague from Los Angeles mentions a moral budget, a morally balanced budget. I'd like to start with a balanced budget to get real numbers so we know exactly what we're dealing with. And then we can start asking the question, what are the priorities of California taxpayers? I don't think covering $9.5 billion of illegal immigrant health care in the General Fund would be at the top of their list. Thank you.

Go to Assemblymember Schiavo.

So thank you so much for being here today. I know we are in a situation where it's almost impossible to figure out a budget right now. We know that today unelected Elon Musk and DOGE have taken their sights to Medicare and Medicaid, which is Medi Cal here in California. And that is well over half of our budget.

We are in very uncertain times. And so it's really frustrating to be in a situation where were presented a nearly balanced budget. And you know, there's going to be some disagreement about that. But to, you know, to your comments about how we won't be able to backfill possible oncoming cuts that we expect to come from the Federal Government. And it's, you know, it's really creating an almost impossible situation for us to figure out a budget when we don't.

We have no idea what is coming from a Federal Government right now. And this, you know, this is not only creating chaos and uncertainty here in our process, but obviously the trickle down, or I call it the tidal wave effect that is impacting localities. Right. Because so much of our money goes to cities and counties to do the good work that they need to do to support our communities on the ground.

And so, you know, if we are making multibillion dollar cuts to programs that are essential to address housing that people can afford, senior meals, schools and education, you know, homelessness, then, then that means on the local level those, those cuts are going to be felt very deeply.

And I've started having conversations with localities in my district about how we figure out a plan B and some kind of social safety net which may get to the point of pure desperation and mutual aid from neighbors. I don't even know. I mean, this could be, as I think we all know, a very, very dire situation that we are faced with if this current President and his appointed people have their way.

So, you know, it's almost hard to ask questions in this situation because we have no idea what we have and where we're going and, and when, you know, when a month ago, we thought we were on, you know, pretty okay footing actually California was in a good spot, good enough that we have, you know, I don't know about

Mr Demaio, but my checkbook, we have a savings account that we use when we go over in our checking account to cover for those things. And that's how I see the Rainy Day Fund. We've known this for two years.

We balanced the budget in two years with taking from the rainy day account to be able to cover what we knew were multi year deficits and this helping to ease the pain and make sure that we were especially protecting those who needed protection the most. And so I don't know. So I, I don't.

One of the things I, I just want to note because as the chair of Military, Military and Veteran Affairs, I know we've had a multi year fight to, to ensure that military retiree pensions were not taxed. And I appreciate very much that this was covered in the budget by the Governor. This is something that my colleague Mr. Ramos has been fighting for for a long time and I've been happy to co author with him and a priority for us this year.

And then, you know, but we have a situation in my district, we have a burning landfill, the only fire in LA that's still going, the Chiquita Canyon landfill is going to be burning for 10 years at least and it's making neighbors sick.

And we have an emergency and we have a situation where, you know, the EPA, environmental organizations are threatened and their budgets are threatened to be able to respond and keep our communities sick. And I'm very concerned about us keeping up our capacity to protect my community when it comes to that issue. So I know, you know, I don't have a lot of answers at this moment.

I hope that the national landscape becomes clearer and that there is some real reckoning with the long term impacts of what this means for people on the ground who are trying to put food on the table and keep a roof over their heads and keep their kids in school because right now how it's heading, it looks like it is devastation for everyone.

And so appreciate you grappling with a constantly changing landscape and, and these conversations that we have. I think the one last thing I would just say is that I know it's going to be really important for us as we move forward because I expect there to be a lot of cuts if, if the current President has his way.

And we're going to have to really have a very strong understanding of what programs are the most effective and make the most difference for people. And I know, you know, sometimes there is hesitancy about or difficulty for us to get really clear answers on that.

And we're going to need it this time because we're going to have a lot of difficult decisions in front of us and we're going to have to be able to make those decisions in the best way to protect the most people and bring the least pain to folks in our communities. Thank you.

Thank you very much. Let's go to Assemblymember Alvarez.

Thank you and thank you for being here. Just want to start off by acknowledging the uncertainty and that's obviously something that we'll have to deal with as it comes.

But my questions will be focused on things that are ongoing and one way shape or form would be impacted certainly by the uncertainty, but but not necessarily directly tied to that. So I appreciate your support in answering these questions. The first one, I'm going to start with Higher education, obviously chairing the Subcommitee on Education Finance.

I'll focus on those questions. So I'll start with higher education. One of my concerns is with the nearly 40% of the statewide program operations cut is. Is going to be coming from the UC and CSU systems. And I want to definitely focus in on that.

And I guess the question is it's my understanding that other agencies and departments had a opportunity to meet with Finance to discuss some of their operations and some of them have not received the level of cut that was anticipated. First, could you answer whether that's correct or not?

That is true. Through the fall, we did meet the Administration, met the Department of Finance, met with the different departments to understand their program needs at the time. And so that is looking at health and safety requirements as well as 24-7 facilities. We were able to land on the efficiency numbers that we did.

And I would just say in regards to UC and CSU proposed reductions that we are very open to having further discussion with Legislature in regards to what those actually look like in the final budget.

Okay. So appreciate you. You preempted my question, which is wanted to ask about looking into that deep level of cuts to this, to the, to the two institutions given the cuts that happen in other parts of the state.

So thank you and we'll continue that conversation on the issue of community colleges, which serves a lot of our highest need students and those who are looking to get back into the workforce. Nearly 2 million students actually is the count. I'm concerned about the enrollment increases and decreases.

It's a very interesting and dynamic there that's happening and, and would like to hear from your perspective as to whether there's been any thought given to the differences depending on different parts of the state as to the enrollment growth versus others as opposed to providing a flat increase to the General. To community colleges in General.

Hi, I'm Michelle Nguyen with the Department of Finance. With regard to I believe you're talking about unfunded enrollment.

Correct

Community colleges in the current year. So that is something that we are monitoring closely with the California Community Colleges Chancellor's Office.

We're trying to get a sense of what the scale is of that unfunded growth target and that's something that we're going to definitely be considering at the May revision given the, you know, the resources within the budget.

Thank you for your answer that. Again, I'm aware and cognizant that there's growth, excuse me, that's unfunded in some areas and also declining in enrollment in other community colleges. And that's something that we will be discussing in the Subcommitee work that we do. Same thing is happening at the CSU system.

We see enrollment growth and high demand in some institutions and decline in others. And so I think we want to get into that and in addition to that capital needs as, as it relates to the growth that's needed, particularly in our higher education space and the fact that it's been over nearly 20 years since the last capital bond, General obligation bond was approved. Is there.

I see nothing in the budget towards capital projects. We would like to have a conversation with the Administration on potentially a bond or other ways of addressing capital needs. Is the Administration open to that or what are your thoughts?

I think the Administration is of course open to conversations. Legislature on that.

Thank you. Appreciate that. Moving on to K12 pre K through 12 education. Appreciate the focus on the evidence based approaches as was mentioned by our chair. It's a consistent theme from certainly from all Budget Subcommittees. But our Subcommitee number three, ensuring that the investments that we've made are on evidence based approaches. Learning Recovery Block Grant.

I see that is in this budget. I appreciate that. One thing that is a one time funding that also has some recent evidence based positive results is educated educator workforce.

I don't know if anybody's here who can answer as to why we are approaching educator workforce in the pipeline with only one time resources as opposed to ongoing Prop 98 funding. Can anybody comment on that at the moment?

There we go. Good afternoon. Amber Alexander with the Department of Finance would just note that many of the investments that have been made in the teacher workforce space in recent years have been available over multiple years.

So in terms of new one time investments in the 25-26 Budget act, you do see the additional 100.0 million for the National Board Incentive Grant program as well as the 150 million for the teacher loan repayment program. Recognizing that there are other programs in this space that do continue to be available in that 25-26 year.

But so for the. Well, I'll just say so it appears that for the current budget anyway, we're approaching this from a one time basis. But these are both pretty highly successful and programs that have demonstrated their effectiveness. And so I'm interested in a long term investment in these programs as well.

So we will follow that up at another time. Ethnic studies is not in this year's budget even though it was an agreement between the Legislature and the Governor a few years ago. Why was that left out of this budget?

I would just state that that Bill was the dollars were upon appropriation and given the State of the budget this year was not included in this year.

Do you have any expectation of when that would be included or if you are revisiting that or reviewing that for the may revise again?

I think we can discuss that through spring with Legislature.

Okay, thank you. Last thing, I'll just say I want to thank especially the LAO whose work throughout the last year we've been focusing on the oversight. Today was highlighted by our Legislative Analyst Office.

That needs to be an ongoing process which we definitely expect to have in our Committee to ensure that the funds are actually being utilized in the way that it returns. There's a return on the investment even though there is more spending as a result of Prop 98 in education.

I would say that we're definitely not interested in spending just for the sake of spending. We want to make sure that those investments are having effective returns on that investment. And so we will be reviewing the programs through that lens.

My last General comment would be my perspective on the use of reserves is that reserves should never be used for growth in programming.

And so I think my General question going forward to the Legislative Analyst Office is as, as we look at the $7 billion that gets referred to, how much of that is for growth and programming as opposed to continuous continuing the the current expenditure levels?

Because I think it's responsible to do it when there's a deficit to use those those rainy day funds for that purpose. But not to use them for an ongoing purpose because then that creates future deficits. So I don't know if you have any thoughts initially on that.

Well, my initial response, Mr. Alvarez, is just that when we look at the three categories of the governor's proposal, creating capacity, using capacity and then the discretionary Reserve, the using capacity was 570 million in new spending proposals that would actually decline to about 300 million on an ongoing basis and then the tax expenditures would grow over time to about 300 million in annual costs.

So, you know, to the extent the use of the Reserve is supporting this, it's a combination of the creating the capacity that was created in the first category was 2.2 billion of some of it. A significant portion of it, however, is on a one time basis the 1.6 billion delay in Prop 98 funding.

So it's difficult to answer precisely, but it's the combination of these things. And on balance, the new proposed spending in this budget proposal, you know, is relatively small compared to the overall size of the budget and you know, compared to even the 7 billion Reserve withdrawal.

I don't know which you want to attribute the new spending to, the Reserve withdrawal or the additional capacity that is being created by those other actions, but.

Well, generally I would just say new spending, new program spending. Given all the concerns you're hearing from every Member of the Legislature and the uncertainties that you yourself have expressed, probably we should be more cautious than not in terms of new expenditures and identifying exactly what those are would be helpful for us. Yeah. Thank you very much.

Thank you. Let's go to Assemblymember Rogers.

Thank you, Mr. Chair. So I know when I was out helping to campaign for Prop 4, I did not expect that the funds would be used to supplant and backfill existing programs. I suspect that that's the same for many of my colleagues and I know that that's what voters expected.

Can you give us some form of a sense of how much of this proposed budget backfills with Prop $4 and supplants existing funds from previous budgets?

Yes, we have about 273 million of General Fund obligations that have been moved over to Prop 4.

All right, obviously we'll dig into that in Sub 4. I think you're probably going to hear a lot of pushback from that.

The other area that I'm particularly interested in when we talk about the budget is looking at it not just from a lens of expenditures and cuts, but as an investment and where our cuts actually make it more difficult in the future to Invest I appreciate my colleagues comments about the CSU system.

As one of the three Members of the unofficial Seawolf Caucus very concerned about the cuts proposed at Sonoma State. When you're cutting about 25% of your campus, how do you then prevent a death spiral by cutting your amenities or the reasons that people would want to go there, particularly in rural areas.

We've seen that in other aspects of the state. So I would like for us to dig in a little bit in the future on how to prevent those cuts from having detrimental long term effects. And then I'll mention one more as well. We are looking to make cuts and freezes.

One of those areas is the freezing of the DDS rate study that was done three years ago. It's been frozen now for two years. Particularly for our zero to five providers, it's been frozen for an extra year. Those are some of our lowest paid workers in the state.

And while it might look like budget savings this year if it pushes people onto the social safety net because they can't afford to live here and provide services, that's not a good investment for California. That ends up actually just costing us more in the long term. So I hope we'll dig into that as we move through these subcommittees.

Thank you very much. Let's go to Assemblymember Ramos.

Thank you Mr. Chair. Thank you, Mr. Chair. I want to thank the staff and Leo for working on the budget and bringing all this information to us. I also want to thank the Vice Chair, Mr. Lackey for bringing up the issue of Prop 36, which we will start to dive into when we start to move forward in hearings. But I also want to bring up another topic that ties into all of the funding that's here.

That somehow a variable that we overlook when we start to talk about these things and that's the outflow of money taxes paid to the Federal Government and what we're receiving as a state, as the fifth largest economy in the world, we still pay into the Federal Governmental system.

And there are some articles that are out there that peg the return that we're not getting as much as $80 billion back from our federal taxes and that what we're paying to the Federal Government and ultimately being a donor state, we're subsidizing other states to be able to move forward without basically paying their fair share into the system.

So one, Mr. Chair, is what is that dollar amount and when are we going to start to discuss that and put that variable into the discussion all around what's going on in the State of what we're paying out and what we're receiving back.

And again, some have put that dollar amount as high as $80 billion that we have not received back from the funding that we're sending to the Federal Government.

I think that's a variable that we need to continue to address, continue to bring forward and keep it in the purview as we start to address issues, Prop 36, other things that are being brought up around the dais here today. I just wanted to ask that question if we could add that variable into the discussion moving forward. Mr. Chair.

Yeah. And I would just reiterate your point that California is a donor state. We send more taxes to the Federal Government than we generally receive. I don't know about the 80 billion, but I think recent studies have, have pegged some of those taxes going to the Fed, to D.C.

at over 650 billion and we receive close to 600 billion. I think again, that changes year over year. But generally speaking, California is a donor state. To your point.

Yeah. Thank you very much, Mr. Ramos. I just want to lift up that point. My understanding is California is far and away the largest donor state and that if you look at 2022, the last year for which we have records, it's in excess of $80 billion.

And that is the money of Californians and California taxpayers that is going to Washington, D.C. and not being returned to California. And so as we consider federal funding that may be withheld from California, federal funding that may not come to California, we should remember that ultimately this is the money that California taxpayers have sent.

And I hope that all of us, irrespective of the part of the state we represent, irrespective of our political party, would be advocates to make sure that our constituents, the people that we represent, are getting their fair share of federal resources. So I just want to thank you for bringing up that point. Not only we are donor state, we are by far and away the largest donor state.

Thank you, Mr. Chair.

And I think that's a variable that we need to be adding into the discussion of what's coming forward to our hearings to ensure that when our constituents here, those in the State of California that we all represent, when they start to hear of programs being cut off, that they truly understand that we're paying far more money to the Federal Government than we're actually receiving. So I think that needs to resonate. Thank you, Mr. Chair.

Thank you very much, Chairman Ramos. We are now going to go to Assemblymember Schultz.

Thank you very much, Mr. Chair. I'll be brief, two quick comments, and then two questions for DOF and for LAO. First of all, I just want to thank all the presenters today and the folks that are in the audience because you are dedicated public servants.

And in the weeks and months ahead, we're going to have some really tough questions for you and I'm not going to like asking them and you may not like answering them, but we're going to need you to help solve what I think is a really significant budget crisis, which I'll touch on in just a moment.

The second thing is I want to uplift the comments from Assembly Members Jackson and Schiavo, who I think put it in their own words, but both were talking about something that I think is really critical. Passing a budget isn't just about numbers.

On paper, a budget is a reflection of our values as a state and the communities that we represent. And so I look forward to working with everybody to pass a budget that reflects the resilience and the compassion and the creativity of the California that I know. So with all that said, I don't want to relitigate the past, but I do have a question for both representatives here.

Now, the part of the write up that I read in preparation for today that caught my attention was page three of the LAO report, which forecasts although the numbers are a little different, they both have an alarming Trend. In the three projected out years of budget years 26-27, 27-28 and 28-29 we see ever increasing budget deficits where expenditures are outpacing revenue collection.

So my first question is not that long ago, I would argue that there was at minimum a miscalculation where we were projecting a nearly $98 billion surplus and it turned out to be a significant hole.

So the question is just procedurally, what have each of you done to ensure that the numbers that are represented here, or in other words, prepared and presented to this Committee and to the Assembly are accurate and reliable numbers that we can use? What did you learn from that prior experience and how have you adjusted accordingly?

Yes, thanks for the question. So I would say that your reference to the almost 100 billion in surplus was based on a the 2021-22 fiscal year, which saw a huge spike in capital gains, a huge spike in the revenues that the state was receiving.

And following that, we had the federal tax IRS delayed our tax receipts from April through December. And so the projection at that point was based off of this very high year of revenues. And we anticipated, as always, when revenues go up, they're going to come down. We looked at the past to see what that could teach us.

And in the past, that spike is followed by a trend down. And generally it takes a couple years. We actually saw that spike go up and come down dramatically in the following year.

So the projection was based on what we had seen in the past, but it was a little bit muddied by the fact that we were coming off a very high revenue year. And also we didn't have any tax receipts in hand to tell us, well, how are things actually trending?

And so I would say that that was a very unusual circumstance. We currently have the IRS, which has delayed the tax receipts until October for LA LA accounts for about 20% of our PIT.

And so we, I would say in terms of how we will be projecting revenues going forward, we are in a better position because we aren't coming off of a huge spike. Revenues have normalized a bit.

And so we also have the past few years in terms of, again, knowing what percent of our revenue income comes actually from that area. So I would say taking all the things that we have learned from the past, as well as the unusual past, the. The high spike in the revenues, we have learned from those.

We have normalized revenues now. We are tracking very small growth in revenues going forward. And that is all from the past five years. And I'll turn it over to.

All right. Thank you. I think it's actually a really great question, and I think it's helpful to almost step back and think about the way budgeting works in the sense that back when we were estimating that there was a $97 billion surplus, the Legislature then went about making decisions and allocating that 97 billion.

It went to one time spending a small share to ongoing spending, a chunk to building up budget reserves in the rainy day Fund, these types of things. And then that was all put into the budget agreement with the Governor and signed into law. And then it's kind of as if the clock resets to zero at that point.

The same, by the way, is when there's a deficit, the Legislature and the Governor work together to come up with a package of solutions. They reach an agreement on those, they adopt them, and once the budget is signed, we're kind of at 0.0 again, and we go forward into the next fiscal year.

And so the 97 billion that we're thinking of from several years ago really doesn't have a lot of meaning for where we are today, because all of those resources were allocated through the budget process. Now, as we sit here today though, the tough issue that the state does face are these large and even growing deficits, operating deficits, according to our forecast.

And it has to do really with the difference between the growth rate of our revenues, which we estimate over the coming years to be in the 3 to 3.5% range, and the growth rate of our expenditures, which we estimate to be close to 6% in the coming years. Now the that's higher than normal.

That's higher than historically has been the norm. Revenue expenditures have typically grown at a slower rate. And are revenues actually tended to grow at a faster rate?

Part of the reason the revenues are growing at a slow rate in the coming three years is that we currently have in place some suspensions on the ability of corporations to utilize net operating loss provisions and tax credits to reduce their tax liability. But those provisions will drop off here at the end of 2026 calendar year.

And after that those corporations will begin to utilize those net operating loss provisions and take those tax credits. And so that will weigh on our reven growth. So our revenue growth, which normally might be a little bit higher, will be weighed on by that.

And that's why we're seeing in our estimates three to three and a half percent growth in those out years. And so the Delta between that 3% or 3 and a half percent and the 6% expenditures is contributing to this widening gap. And so hopefully that's helpful. But we're happy to continue this dialogue with you.

Absolutely. For the sake of time I will. But I'll just say that it is really essential that we have reliable numbers in this process. So I appreciate the explanation and any other questions I'll take offline. The last question I have is more of an open ended one, but I think the LAO just hit it right on the nose. This is a problem that's going to get worse.

And we although the focus of this year's Budget Committee is going to be looking at this year's budget, we have to start laying the foundation for how we eliminate this structural recurring deficit that could jeopardize a lot of critical programming.

So will this Administration through DoF and I guess for that matter, will Lao commit in the next 60 plus hearings that we're going to have to bring forward some of these creative solutions for how we can save cost or maybe generate new revenue?

Yeah, I would note that we see the cost of certain programs, the expenditure side outstripping revenues, as I mentioned earlier at the top of the hearing and we are looking at ways to address that and we will have some information to provide to the Legislature in the May revision, but of course, through the spring process as well. Those. That is an important topic for discussion.

We will also. That's a big part of our analysis of the budget proposal is to present an assessment and sometimes alternatives and recommendations. And I'll just add a brief comment that we have long had an interest in having the Legislature review the various tax expenditures that are out there.

So we are not just focusing on the expenditure side, but also the revenue side, because some of those. I think it's very important to go back and look at what was the goal of those tax expenditures when they were put into place and are they helping achieve that intended goal that the Legislature had? And if they're not, maybe they should be revisited.

Thank you very much. And I know we would welcome that conversation with both of you in advance of the May revise as well. With that, we'll go to Assemblymember Hadwick.

Thank you for coming and answering all of our questions. I have a question about SB 520. Is it not. Is it working? Sorry. Thank you. It's been really weird. Sorry. My question is about SB 525, the healthcare minimum wage. I did not see that in the budget. And we asked in January.

On January 10, Finance was unable to tell us, like, the actual impact on the budget. Can you give us those numbers now? How much the policy costs?

I'll start and if I've missed anything, turn to my colleague. But yes. So the last time we were discussing 525 with Legislature, we did not. Sorry, can you hear me? Is that better? Okay. I'm having MIC issues as well.

We did not contemplate the hospital payments that we'd be receiving from the Federal Government, of which since that time is about $9 billion. And so $9 billion now has been infused into hospital payment plans.

That has been considered as part of a lot of the calculation that actuaries who are part of the rate setting process have been able to now use. So the costs that were potentially going to be borne by the state are no longer there in terms of the pass through.

So the hospitals are receiving that additional $9 billion to offset their costs for implementation of the $25 minimum wage for healthcare workers. So that is sort of the broader story. Do you want, and I will turn to my colleague for some reason is.

That the hospital quality assurance fee, and to clarify, the hospital quality assurance fee alone is $6 billion, but there are other types of directed payment programs that add up to the 9.1 billion.

The only other thing that I would add to what my colleague said is that the, as part of the managed care rate setting process, the total impact of the healthcare worker minimum wage is kind of baked in to the overall medi Cal estimate and it's just impossible for it to be broken out just because there are lots of complicated factors that feed into to how that's calculated.

Okay. And if the hospital quality assurance fee isn't approved by the Federal Government or is it, I don't know if it's already approved, who's on the hook for that money?

So I think we would have to have further conversations about that.

That and are you talking to the smaller hospitals to see what the impact is on them? Because I know my little eight bed hospital, it cost them over $1.0 million the first year.

Yeah, I would have to defer to the Department of Healthcare Services and we can certainly connect with them, but they would be the ones engaging with hospitals.

And then I have one other off it's on wildfires, there was a tax exemption that the Governor signed and bills in 22 and 23 to provide exclusions for victims on their settlements.

And this year he, he said again that from 25 to 29, regardless of when the fire occurred, that there would, there would not be a state taxation for them on for their settlements. Lackey and Dahle submitted AB 1973 and SB 542 last year. They were vetoed for the Bobcat, Dixie and Mill fires.

He said it would be included in this budget process and it's not. Do you know why that was excluded?

Colby White, Department of Finance so as you mentioned, the, the proposal in the Governor's Budget exempts all payments that are made beginning in 2025 and ending through 2029.

So it would cover payments for past fires to the extent that the settlements were paid in 2025 or later with regard to providing more retroactive relief to fires in addition to other fires that have already been exempt from taxation.

We look forward to working with the Legislature in the coming months and coming to a final agreement in the budget.

Okay. Because the Dixie fire was almost a million acres in my district and those victims have not been made whole. And I want to make sure that we're not just giving our friends in La, we're not making just them whole. Our, the northern, northern fire victims deserve to be made whole as well.

Thank you.

Let's go to assemblymember Ward.

Great. Thank you for all the preparation in these two helpful starting documents. We have a long way to go with A lot of uncertainties. Acknowledge that sitting on sub five with our chair, Ms.

Kursila, I just wanted to maybe underscore some of her questions as well with the, you know, I'm cautiously optimistic about this interest in reorganizing and centralizing some of the work that we're doing in housing, community development, homelessness services as well.

But back to I think your answer with the, you know, upcoming reorg plans that are out there, I just wanted to see if I could get a little bit more specific because my understanding is that the Little Hoover Commission would have up to 90 days to be able to review any proposal that's coming forward and thereafter.

We would want maybe upwards of 30 days to be able to review that and hopefully align all this within the budget process as well. If that dropped today and that was sent over, we would be at June 10th for all that to I think fully complete.

So when can we expect to be able to see a draft plan of this reorganization to be able to start to review alongside of the Little Hoover Commission?

I can't give you a date at this point, but I think the, the idea is to go through the Little Hoover process to allow for the hearings and the questions. But the intent is also to provide something at the May revision for this, for this body.

I support that very much as well. I'm just worried that we might miss deadlines. That would be helpful to be able to get all this done constructively within our budget process.

And we'll get back to you on the specific dates.

Okay, thank you for that. You know, related to that as well.

You know, you talked a little bit about, I would say generally as a statement, you know, I'm, I'm more frustrated this year with the zeroing out of a lot of important ongoing, what I see as ongoing state support for affordable housing, tax credits for the multifamily housing program for a lot of our other sort of, we've established a baseline here really since, you Know20172018 of a level of state funding, especially when years were better, that we were able to be able to do our part to help localities be able to somewhat meet their affordable housing needs.

And of course, housing doesn't get built literally overnight or with even a year. Sometimes it takes multi years in nature to be able for all that funding streams to align, to be able to ultimately get successful applicants to the local government and really to get some of these housing projects started up.

So that said to come back and to be able to respond and say that, you know, these are all One time funding in nature. We've talked about this before, that we need to come to some kind of agreement about ongoing commitments.

Some of those were multi year in nature and yes, maybe they are now in this fiscal year, coming up to the end of that.

And what's frustrating is that last year we all understood we were walking into a very dire situation with a large structural budget deficit that we had to solve and we knew that a lot of discretionary funding would be on the table. This year we're walking into a situation that's less dire.

Yet a solution initially is basically exactly the same, that we want to completely zero out. Some of these really needed an ongoing funding. So I'm wondering what the administration's position is.

Why, why go so hard on zeroing out, say the affordable housing tax credit when we know that that is something that has been successfully used, over subscribed and is doing the good work that we would argue is I think our Californians number one priority to build more affordable housing.

I think that what the Administration would say is that after two pretty difficult budgets where we did have to BRIDGE an over $80 billion deficit, coming into this budget and not making further cuts was a win in regards to certain programs.

And so I hear what you're saying and I think that as I stated earlier, the Administration is completely open to having these discussions, understand what your priorities are.

I would also just note that over the past five years, an additional billions and billions of dollars have been spent in both the affordable housing space as well as homelessness space. So dollars that were prior, never there because we took advantage of some of the increased revenues that we were seeing.

So again, I would just, I would, I would just say that the fact that there were no cuts, I think again, we took that as a positive step going forward. Understand that there are programs that are falling off or programs that you're not seeing additional funding for this, this moment.

But we have heard what some of those priorities are of the Legislature and we, we look forward to having discussions with you at Subcommitee and coming out with a budget act that we can all agree with.

Thank you. And as we're having those discussions, the Subcommitee is something that we've argued for many years as well. In fact, we really had to draw it out of some of the presenters last year too. Is the impact, right? If we're not going to be able to spend this $200 million, how many housing units are we talking about?

How many, how many families served historically, are we not able to now support that return on investment or Sort of those outcomes and understanding, you know, the dollars to the people sort of translation, I think it's critical for us to be able to make more responsible decisions.

When we're thinking about the affordable housing tax credit versus the film tax credit versus the R&D tax credit, you know, what are, you know, what does $500 million get you in some sort of tangible public benefit or public outcome. That is what I'm going to really drill down on as we get into Subcommitee conversations as well.

And the sooner we are able to kind of come to that conversation, I also welcome the LAO as well to sort of, you know, give us some of that back of the envelope that gives us some real world knowledge to be able to start to be able to Decide what does 10 million here versus 10 million there get you?

Because we are going to have to make some critical decisions in the May June timeframe. And I want to make decisions that are really guided on delivering the best impact for Californians on some of these very core needs.

Yeah. And I would also add that the Governor is very interested in accountability measures and understanding, you know, understanding. I think the same thing that you're asking for is from locals who have been availed these additional billions of dollars. What are those impacts and how do we now link that accountability to any future dollars?

Right. And I would bring it full circle and to say, I think by potentially this reorganization that I'm very excited about, that can be, I think really the forum to be able to understand how these ongoing funds or these multi year funds are best producing 1,000 units or helping 1,000 families.

But we'd like to be able to see what that plan looks like because I think on an ongoing basis we might not need to have this conversation year over year here through the Budget Subcommittees that, you know, we can rely on more real time dashboard related data to be able to monitor the progress on these outcomes. Thank you.

Thank you very much, Assemblymember Ward. Appreciate that. We are now going to go to Assemblymember Macedo.

Thank you, Mr. Chair. We've been talking a lot about the Federal Government today and one of the hot button topics with the Federal Government right now is the high speed rail. It's also a hot button topic here in California given the Inspector General report that recently came out. And so my question is how much money has the high speed Rail Authority received in taxpayer dollars so far?

Waiting for a colleague to come up with those numbers. Thank you.

Thank you. Randall Katz, Department of Finance. Just a second while I pull it up.

Thank you. While you're looking for that, can you also tell me how much the state is giving as well to the High-Speed Rail Authority in this year's budget as well as how much the private sector has invested since the project began?

So what I can do, right now, the cash received for High-Speed Rail, to date it's about $19 billion. That consists of 9 billion from Proposition 1A General GO Bonds, about 7.5 billion from the Greenhouse Gas Reduction Fund, and about 2.6 million from the Federal ARRA Grant.

How much is it getting this year from their budget?

So this budget, they get a 25 percent share of cap and trade proceeds. That's estimated around a billion dollars. And then they were also recently awarded a federal grant of 89 million and previous grants of I think 3.3 million from the Federal State Partnership and 260 from the Christie program.

Those were budgeted in past years.

I'm not talking about federal money. It's not looking likely we'll get federal money. I'm talking about from this state's budget. How much money will High-Speed Rail get?

So from GGRF, it's estimated at around $1 billion.

So just cap and trade funding, there's no other funding coming for High-Speed Rail?

Correct.

Okay. The project was promised to be completed by 2020 with a price tag of $30 billion. That's now over 128 billion. Is there any idea when the San Francisco to LA Segment Project is going to be completed?

So the High-Speed Rail puts out their five-year plan on, sorry, their business plan on even years. And then in odd years, they put out their project update report and that information will discuss the timelines.

What is the most recent timeline we've been given for that segment?

So right now, the timeline, what they show on their business plan is 2033 to get from Merced to Bakersfield.

What about San Francisco to Los Angeles as originally was passed on the ballot?

So for that something, we'd have to go back to the department.

Okay. Of the 7.3 billion in cap and trade funding that the High-Speed Rail Authority has received since 2018, how much greenhouse gas reductions has this project actually achieved?

So again, that's something you'll need to reach out to the Department.

Okay, so this project was about greenhouse gas emissions. That's why it's getting money from High-Speed Rail. When are we expected to meet those greenhouse gas reduction emissions that were promised.

And again, that's something you'll need to reach out to the Department.

Okay, well, the purpose of cap and trade funding is to reduce greenhouse gas. That goes into our atmosphere. I guess my question is, is when we're talking about this, I'm curious how much greenhouse gas was emitted into the atmosphere because of the wildfire.

So I'd argue that maybe funding from cap and trade be better spent on wildfire prevention and water infrastructure. But I'm going to move on from High-Speed Rail over to the water world. I've not been shy that we're very tardy in our investments in the water world. We're paying the price for that now.

So my first question in regards to water is how much money is being dedicated to conveyance that is accessible by water districts?

Good afternoon. Andrew Hull with Department of Finance. There's no new specific money that I'm aware of for conveyance. I'd have to work with the department to see if there was anything that's proposed in some of their baseline funding. But there's nothing new in the budget.

Okay, well, under Prop 4, how is the Administration planning to expedite funding for groundwater recharge? Will it be block grants to groundwater sub basins? Will there be priority given based on need?

Is there a specific codes? Or a specific pot of funding in there? Because the bond itself did spell out certain areas that are competitive grants, others that weren't. So I might be able to.

Specifically for groundwater funding. Groundwater recharge funding.

Okay. Just a moment. I think that's with a different department. So I can say that for Department of Water Resources for the groundwater recharge and banking. There is a proposed $10 million appropriation for budget year. I'd probably have to work with the department on their exact criteria and timing.

Okay, we'll follow up in Subcommitee on that. Prop 1 was approved by the voters in 2014 to fund critical water projects. Yet much of that money remains unspent. How much of that funding has gone to surface water storage and infrastructure as it was passed back in 2014?

I think for that one. I don't have current data on Prop 4 for that, but we could certainly get back to your office once we were able to gather the data.

Off the top of your head, you don't know the most recent numbers you can recall?

No.

Okay. What is the status of surface water projects slated for this funding that Prop 1 was passed for? And then if they're not happening, what barriers are stopping those projects from happening.

That one I'd be happy to work with the departments on to get answer back to your office. I know that we've appropriated a lot of the funding for Prop 1. I'm not sure of the specific areas in which it might be slow to get out the door.

Okay, well, I look forward to working with you on that. I'm going to move on to the gas tax. Millions of Californians have to drive to work each day. Cost of filling up their car is a necessary expense and they pay an average of $4.60 a gallon while the national average is $3.16. Californians are struggling with affordability.

The Governor promised to address the high cost of living in California. Is there any proposal to freeze the gas tax?

There is no proposal in this Governor's Budget.

Okay. I'm going to move on to another area that has been impacting our state and especially in the agricultural front. Bird flu is a widespread disease in wild birds and is causing the cost of eggs to skyrocket due to scarcity. California families are already struggling with affordability. We talk about affordability a lot.

Is there funding in the state budget to address the outbreaks?

Matt Almy, Department of Finance. I believe the state of emergency was called right before the budget was released. So I don't believe there's any money specifically for bird flu, but I'm going to have to get back to you on that.

Well, do you know if there's going to be any additional funding for the agriculture inspection checkpoints or anything like that to prevent this from spreading or growing?

Correct, that would be part of the May revision process for sure.

Okay. Thank you, I look forward to getting more clarity in the future. Thank you, Mr. Chair.

Thank you very much. And I just, I want to make sure everybody has an opportunity to ask their question. We still have quite a few Assemblymembers on the list and remind everybody that we have more than 60 Subcommittee hearings that are scheduled so there will be an opportunity to dive deep again.

I appreciate everyone's questions, everyone's thoroughness, but just out of respect for our colleagues, hoping we can move it along a little bit here. Let's go to Assemblymember Bennett.

Thank you, Mr. Chair. I'll keep my questions at the higher level that I think is appropriate here at this very first budget hearing. And the first one is, just want to highlight the role of the LAO's office.

And it took me a while as a new member here to really appreciate how valuable it is to have the LAO sitting alongside Department of Finance so that we get an independent analysis from an organization that works for the Assembly and it has been, I think tremendously helpful.

They have long-term credibility and they can analyze anything about the budget. So all of us can go and say, hey, do some analysis of this or that. And they can also come up with recommendations for us. Without the LAO, we would really be shooting blanks here, I think as the Assembly.

So I just want to just overall for the next 60 hearings and as everybody interacts, compliment LAO, but make sure that we all take advantage of LAO and the great resource they are for us. Second thing is my colleague from Irvine and I have had a concern about how much of the Rainy Day Fund to use in the past.

You know, wanting to make sure we save it, that we don't hit it too soon, etc.

But I recognize that, that $7 billion that was decided upon was decided upon before, you know, before we had the fires in Los Angeles, before even we knew what was happening in terms of who was going to be in charge of the federal administration.

Those are all decisions that were sort of baked in as we were doing our two year budget.

So now with all of the uncertainty out there, I'm not that focused on how much the Rainy Day Fund are we going to use now because I don't think we know where we're going to be when we get to June as we go forward.

But what I do think I would like to raise is that it's not the focus on the Rainy Day Fund, it's the focus on the statement being made that we have an historic change in front of us right now.

We have not been having in the past expenses growing faster than revenues, but now we are projected to have expenses growing faster than revenues. That is a sea change difference for us here in California and a real challenge for this legislature. Where the Rainy Day Fund in my mind was for smoothing out things. Smoothing it out while you had the most variable revenue stream of any state government in the United States, this is a much bigger problem that we have to address.

And it will be the test of our leadership and our political courage whether we can actually prioritize our budget and get our expenditure growth to be less than our revenue growth or at least to match our revenue growth as we go forward.

And that challenge will be even greater with, for the next four years anticipated, less support from the federal government. Make it even more important for us to be able to do that. I want to do a quick aside when it comes to housing.

I have said this over and over again, but in every other first-world country in the world, housing is paid for.

The construction of public housing is paid for by the national government and all the states in the United States, all the cities in the United States, we will be chasing our tail in terms of trying to come up with the housing we need for our residents until the federal government bites the bullet and starts to fund public housing.

Funding Section 8, saying 'here's a voucher, good luck finding the housing,' is the opposite way to try to address this problem. So that's one of the things we have to consider as we are trying to match our revenue streams

And the final thing I would offer is my colleague from Santa Rosa raised the issue and that is the citizens voted for Prop 4, the Climate Bond, as supplemental funding to the budget. And so it is a concern for me that we are considering backfilling the General Fund with Prop 4 money.

And it's a concern for two reasons. One, it erodes public's trust and confidence that when we put something on the ballot we're really going to follow through. And two, there are significant needs in the whole field that is covered under Prop 4, which I might add is not just climate change, but it is wildfire prevention.

Lots of other things that are out there. So thank you very much for letting me present these overview comments.

Thank you very much Assemblymember. Now I'm going to go to Assemblymember Patel.

Thank you very much Mr. Chair, and thank you for the presenters here today. It will be clearly a long year of conversations as we look at balancing our budget and bringing it kind of into balance with what our revenues are showing.

In light of the economic and general revenue uncertainty and a focus on accountability that our Chair referenced, I anticipate that many of us will be seeking additional information hopefully in advance of these hearings so that we can have an informed conversation and show our public actually what we know.

It's going to lead me to ask for some reports and audits, right? Because I like to be informed when I enter into a hearing room and hearing my colleague from San Diego speak about 90 days for a Little Hoover Commission Report, I am concerned that we won't get that information from those requests soon enough to help inform decisions in this budget cycle.

Can I ask you what is your confidence level in your ability to have staff bring us information in a timely way so that we can have more in depth robust conversations in the solutions space?

And also going forward in out years where we know we're going to have to continue to make cuts. Just to put it in context, I'm on all three education committees as well as the Health Committee.

These are areas that we definitely spend a lot of money of our state budget, and I am going to be looking for ways that we can maximize efficiency, efficacy, and make sure those programs are reaching their targeted goals.

Yes, our staff are always available. Obviously, we attend the Subcommittee hearings, and when there are details or data that we don't have available at that point, we will always follow up with your staff.

So having that data is important for the Legislature to make decisions, just as it is important for us when we propose the Governor's Budget.

At our office, at the Legislative Analyst Office. I would just say, you know, we're in the midst right now of analyzing the proposal, the Governor's Budget proposal, and we'll be coming forth at the Subcommittee hearings and making assessments and presenting options and sometimes making recommendations to the Legislature.

But, you know, your question also sounded like you're asking about more fundamental types of review efforts. We have limited capacity; frankly, we're an office of around 40 analysts and some other staff in the office, bringing the total to about 50.

So we have to be strategic about how we allocate those resources, and we are happy to assist the Legislature, respond to questions that you may have about specific policy issues.

And that is one of the reasons that my earlier comment was to consider using this time right now to begin the process of program review and oversight, because it could take some time. So if we wanted to assist you in a deeper dive analysis, it would take a little bit of time.

And given that the budget right now is balanced in the sense that we've lined up resources to fund our commitments, the main challenges that we see are those out years where the deficits are quite large. But you have time right now because we're a year before that starts to hit.

So that's why we recommend using this time to ask those kind of specific questions. And we can help. We can enter a dialogue, too, with you about which is the best way to prioritize and which is the best way to focus our efforts.

Well, I certainly appreciate that commitment because I've read many of your reports in the special education and education in general spaces, and I've appreciated them. And I look forward to engaging with you in advance of a lot of these Committee hearings to make sure I have the information I need. Thank you.

Thank you so much Assemblymember. We go to Assemblymember Tangipa.

Thank you, Mr. Chair. I may be new to the Legislature, but I'm not new to business. And a lot of what I've heard today is actually terrifying. I have my own emergency and rainy day fund that if something was to happen, all of my expenses could actually last about a year.

When I look at our Rainy Day Fund, we wouldn't be able to last a day. Is that an accurate assessment?

I don't know if that's true for a day, but I understand your point.

You know, and when again, looking at the budget, has this budget been updated with the LA wildfires factored into it?

No. The Governor's Budget was released to the Legislature prior to the fires and admittedly many other things have happened since January 10th when this became public.

And so I think again, this is the opportunity throughout the spring to look at the things that have happened to make the changes that are necessary so that we have a final budget act that Legislature and the Administration agree on and that does put us on more stable fiscal footing.

Again, admittedly, there are concerns for the out years that we are looking at and we do want to work with the Legislature on what that looks like so that we can align our expenditures with our revenues.

And again, the part that worries me is that we're talking about this budget, but the largest or one of the largest economic disasters in California's history isn't even factored into it and the cost associated.

And you know, on again, the topic of wildfires and something that I find very personal as other colleagues have talked about, especially with fires in the past.

You know, if we're looking at the amounts appropriated in the past and current year for the Forest Health Program, how much has been spent, and how much is still available for CAL FIRE to distribute?

As one of my colleagues comes up, I just want to also point out that there is an additional over $2.5 billion that this body approved in regards to the response and recovery for the LA wildfires through special sessions.

So I think that's just important to note and that's a first step likely in a longer recovery and response time. But something of note, and I'll turn my.

Which would add to the deficit portion, is that we'd have to then push on.

That 2.5 billion would be coming from the General Fund. While it's not factored into this Governor's Budget, I wanted to highlight the fact that it is available and important to note that it is something that we will end up spending the spring and probably beyond that addressing.

But I will turn to my colleague for responses to your question.

Yeah, so as Ms. Li noted, the 2.5 billion was an appropriation from the General Fund. However, a lot of the expenses associated with that are potentially eligible for federal reimbursement as well. And the former President Biden did authorize 100% federal reimbursement for the first 180 days. And we're actively pursuing federal reimbursements as part of that.

So, I think that's part of what Ms. Li's point is, is that due to the extraordinary circumstances, we want to get that money out the door as quickly as possible to the people who were affected by the wildfire.

But over the course of the next couple months, we're going to make sure that we maximize the amount of federal reimbursements that minimizes the ultimate hit to the state's reserves.

I was just going to say, if I may, our office has been exploring what the state has done in response to prior fire histories just to give sort of a framework for how to think about this. So in 2018, there was the Camp Woolsey and Hill fires.

And the car fire

Okay, yes. Those first three that I mentioned, we went back and looked at it and the estimated response and recovery costs related to that were about 3 billion with a net, after the federal reimbursement came in, a net General Fund impact of $334 million. So it kind of gives a sense of the ratio.

And I don't want to say it will necessarily be the same or that the initial cost will be the same, but just as a frame of reference.

Well, and I remember when we had met just to go over some of the General, the budget had, we had talked about some of the emergency funding that was unaccounted for that we didn't see.

Are we prepared for more fires in the future when we're looking at, with this budget, something that could be similar to the 2020-2021. When we look at the Trinity, the August, the Dixie, the Lightning, the Complex, and the Creek fire.

One thing that hasn't been mentioned yet, but the budget stabilization account is actually also available for emergency response upon a natural disaster emergency declaration. We currently, as you know, as shown in the figures here, we would have about $11 billion still in the budget stabilization account. Of course, they're also to provide budget stability.

I would also add. So there's kind of maybe two buckets to think about. One is CAL FIRE's Emergency Fund. So the way CAL FIRE is budgeted, they have baseline budgeting, but we also have what's called the E Fund, which CAL FIRE uses for those extraordinary catastrophic wildfires.

And we build in, this budget builds in about $600 million in next year in anticipation of what we consider to be potential catastrophic wildfire costs.

And we have a methodology that's based on a five year average where we look at the past five years of emergency wildfire costs and we essentially budget that amount really to recognize that every year is going to have some wildfires.

And we, for budget, kind of resiliency purposes want to account for at least a certain assumption of what those costs might be. I think in Ms. Li's opening statements mentioned a higher reserve than usual of $4.5 billion. That's by design, as alluded to.

What that does, there's of course the federal uncertainty, but there's also uncertainty associated with these emergencies. And so that provides much more resiliency. So as I mentioned, to address potential risks.

And I apologize, I think your initial question was about funding for the Forest Health Program.

Yes

And so, I want to make sure I answer that question. So there's kind of two layers. One is cap and trade was mentioned originally. There's 200 million annually out of the cap and trade program that goes to forest health programs. That's proposed to continue in ongoing funding and that's built into the budget. 200 million. And then the Climate Bond had a total of 1.5 billion.

In the Climate Bond for wildfire-related activities, the budget proposes 325 million out of that bucket of which 82 million of that is for that Forest Health Program that you alluded to.

On the 200 million portion, has that been spent?

No, that's being proposed, but it's an annual amount of cap and trade that gets funded every year. So in terms of what's built into the budget, we would maintain the existing baseline of 200 million.

But on the prior years, has that money gone out the door?

Yes.

I'm really just trying to figure out, where is it going. And I know we've stated at least on the Forest Health Program, you know, has that money again, previously has already been appropriated, spent out the door. What have we seen from that?

Yeah, so we have annual reports for the and we're happy to send you the annual report it provides and I believe there's a website as well that shows all of the different projects that get funded out of the Cap-and-Trade Program, including Forest Health. And I'm happy to send that for your information.

Well, and then I want to again shift back to a little bit more on. Again, the same worries that I think a lot of my colleagues have stated as well is that we do see revenues increase, but we're continuing to use our reserves to balance the budget.

Even in this budget, since it was presented the day after a lot of the LA wildfires had occurred, you know, it really just terrifies me into how sustainable, I mean, this is. And I think that sentiment was actually echoed. That if, if there's or what are we doing to prepare if we see whether it's a black swan event.

More economic disaster. If I use the dot-com bubble as an example, we saw a 78 percent drop in the NASDAQ. How prepared are we to see if there was a 50 percent drop in the stock market?

And again, from the information that we had talked about previously, you know, we knew that 42 percent, about 42 percent of the budget in California is based off of the taxable income. Majority of it comes from capital gains.

What was also stated in that meeting was 0.01 percent makes up a majority of that 42 percent revenue portion that if we have a downturn in the stock market, we have just had one of the largest economic disasters in an area where probably a large portion of those same individuals lived in.

And I had asked the question that that would have based the California budget off of. To me, the question I had asked was about 39,000 people to which the response that I received was that it's more accurate to say dozens of people really float and carry that.

I just don't see where we're prepared for a lot of this. And if something was to happen like the dot-com bubble, which I think is a lot more accurate of an assessment than the housing bubble, how prepared are we to handle something like that?

California's revenue stream is quite volatile and I think that's why you see that we have this Rainy Day Fund that does try to capture some of the capital gains that you mentioned in good times so that we can use it during bad fiscal times.

I would say if there are the types of events that you mentioned occurring, then we would have to make some difficult decisions in regards to cutting some of the expenditures if the revenue isn't coming in. That's the reality. Constitutionally, we must provide a balanced budget with a positive SFEU State Fund for economic uncertainty every year.

And so what you're saying is if we have a huge drop in our revenues, and we've seen that in the past and we've had to cut programs. We've had to cut core programs prior to having a reserve, a Rainy Day Fund.

And so to your point, the Administration Legislature would have to get together and we would have to make decisions based on the revenues that are coming in.

Yeah, I think what I would just say, I think Ms. Li is correct in her characterization and that when you look at our revenue estimates and the narrative that we put around them, we are reflecting that we think there's considerable risk associated with them, and that the gains we've seen are benefiting a lot from stock market appreciation, which is susceptible to great volatility.

And so I don't envy the task of the Legislature to have to make these decisions as the policymakers. What we can do is help point out the risks for you and help you keep them in mind as you make these decisions.

You know, I want to also point out, though, that we are careful to not only think about the downside because just like there is a downside risk, if you prepare for the worst-case scenario, the black swan event, and you slash programs to prepare for that, for example, and then the revenues don't go down, there's a cost to doing that as well because you may have cut into vital services and safety net programs that people in California need and that the Legislature have previously decided are very important.

And so we try to take a measured approach to this. And as much as there is downside risk, there's also upside risk. I mean, this AI revolution that we're all witnessing right now may prove to be warranted and that the gains will materialize in a way that the high valuations that we see right now are completely warranted.

We just don't know at this time. And that's the risk that we face. That is why we agree with the Governor's concept of strengthening our reserve policy and making the state even in a better position to weather the ups and downs that come with our revenue system that we have.

But we also would point out that the Legislature may well want to reevaluate the revenue system that we have. It is very volatile. There's good aspects to that that I'm just alluding to, that we have strong growth in good times, but there is a downside risk.

And if the Legislature feels like that downside risk is more than it can be find acceptable, there could be adjustments made to that.

And so, you know, in a time like this where I talk about program review and oversight and that there is a little bit of time for the Legislature to do these activities, I really do think that a lot should be on the table both sides of the ledger, expenditures and revenues.

So even though I can't give you the answer to what we should do at this time, these are some of the things I've been thinking about.

And it's just what I see and it terrifies me personally because I benefited from the social safety net. I was caught in it and it just seems at times we've created social safety hammock that is unsustainable.

When I hear about $9.5 billion towards illegal health care when the appropriated and allocated number was $500 million that is 1000 percent plus more than what we thought we were going to spend.

How many more programs are out there in it to where it's totally unsustainable from whether a business model or even just operating in your own daily budget. And when the reserves that we have feels more like $100 in our back pocket when our card wasn't working on the reader.

It's terrifying for somebody that my family still lives somewhat in the same conditions. I take care of them after losing my father. That there is more than likely because the sentiment that was pushed out by the LAO stated to us that there are more red flags now than they've seen in a long time. Is that still a true statement?

The one I'm thinking of is that we were comparing the earnings to the price. The PE ratios of some of these stocks are comparable to what we saw back at the dot-com bubble time. So that's a red flag. I mean, it always would be. But that's also what I said.

If some of these technologies pan out the way some the investors are showing with their investment, then maybe the PE ratios are warranted. But again, I mean, these are comparisons that we've pointed out. Yes.

Well, and I'm grateful for the information. I look forward to more dialogue because it just, I don't think I'd be doing my job if I wasn't warning my family and those people who grew up in the same conditions that this truly is unsustainable. So thank you and I look forward to more conversations.

Let's go Assemblymember Addis, and then Assemblymember Lee, and then Assemblymember Bonta.

Well, thank you so much. I'm going to keep brief because we have a number of hearings coming up as the Health Budget Sub-Chair and I trust that you're going to come prepared and with lots of information. But just in case you're wondering what's coming up or my colleagues are wondering or the public is wondering.

We're going to be covering affordability and the rising cost of health care, adequate rates for Medi-Cal providers, expanding the availability of physicians and allied healthcare professionals, defending the progress that we have made in reproductive and LGBT-focused care, healthcare workforce development, assisting distressed California hospitals, oversight of the state's investments on behavioral health.

And that includes obviously Prop 1 and then looking at the development of Prop 35, sort of your plans around the MCO tax that the voters just passed.

And I say those topics to you because we've gone through quite a few exercises on the Assembly side to gather information from the Legislature in terms of what's of interest and also what's of interest to constituents across California as well as what the budget sub oversees.

And that's where all of these questions start to come and bubble up from. Is one, what's the purview of the Sub Chair? Two, what does the Legislature need to know? And three, what are our constituents telling us? And so I hope through the process of that that you'll, you know, come ready and your teams will come ready with information.

And I will mention I know one of our colleagues brought up the Avian Flu. So we will be covering that on February 24th in a hearing. And I understand that there is some funding aligned to Avian Flu and so hope that that information will be forthcoming.

And so I'll keep it brief there because I know folks are getting tired, but want to say thank you and very much look forward to working with you.

Thank you very much, Madam Chair. Let's now go, Assemblymember Lee.

Thank you, Mr. Chair. I'm also going to keep my comments brief, but I wanted to just reiterate that of course, our immigrant communities are taxpayers. They contribute not just to our General Fund but to our larger economy. And so they are our constituents that we swore duty to protect and to serve.

But I just wanted to for LAO and DOF to say I had some questions about tax expenditures but I will save the exact line of questioning for the budget subs.

But if I could ask, especially for DOF, to come prepared with this information with some questions I have so that we can discuss them in the budget subs because I just don't want, must be held up because technicalities.

In the big three of our taxation system. The corporate tax is one of the largest, even though it has not been raised since the Reagan Era in 1980.

The corporations have seen record profits, especially even those in my own area in the Silicon Valley and even though during the Trump first Administration there was a huge amount of tax cuts, there has not been any serious talk about raising the corporate tax rates and compensation to how now again the Federal Government is talking about cutting corporate taxes again.

So I wanted to when in the Budget Committee and the budget subs, when we get there, if we could talk about what is the contribution historically of the corporate tax rate to the General Fund and then also what is the size of the corporate tax expenditures.

In other words, what are the tax breaks that we give to corporations, because using the tax credit system they are able to subtract their own tax liability and thus subtract their obligation to the general taxpayers of California.

So wanted to see what the size of the tax breaks are historically and then also what is in this new proposed one. And then something that has been more recent, a new trend is we built into tax refundability in our tax credits.

So before with our corporate tax credits, until the last time we renewed the film tax credit, it was just basically subtracting how much tax bill they owed. But now building into the new tax refundability which now is also part aspect of the net operating loss and some of the other tax deals that we worked out last year.

I wanted to get an understanding of what is the future out years liability that we, the California budget and the taxpayers, are now obligated to pay. Because under the refundability rules, corporations can also get a tax refund just like individuals can now from the state, from the state treasury.

So I think it's important to understand what the tax liability of the refund is and then the last thing and I'm sure this will be more of a conversation, but I was here and last time we negotiated the Film Tax Credit, and this time the Administration proposing more than a 2x increase.

So I like to see what is the economic plus fiscal rationale, especially when we have budget uncertainty, why we're going to go double a tax credit, which historically tax credits have not had a lot of accountability, transparency.

But I was still around when we were negotiating and talking about why we need to do it the first time and now suddenly you come, you know, the industry comes back a second time with even more money.

So I think it's very important for the Legislature to understand what the gravity of those fiscal implications is, but also what is the economic rationale. So I'm not going to go through a series of questioning Mr. Chair, but I just want those questions and discussion to be in the future Sub Chairs that Subcommittees that I'll be partaking in. Thank you.

Thank you very much, Assemblymember. Appreciate that. And we will go to Assemblymember Bonta, please.

Thank you Chair, thank you so much for this kind of overview hearing which I think is incredibly helpful. I first want to just thank the Governor's Administration for putting forward, I think a very positive and robust education package in terms of funding.

I think the preservation of a lot of the early education and child care initiatives, including keeping prior year commitments around child care slots, keeping and maintaining the existing reimbursement rates for child care programs, and ensuring that our state-subsidized child care programs will have ongoing funding are incredibly important.

I'm sure we will have more discussions about the shape of those over time, but I think from my perspective we have had a decent start to our conversations in that as well as ensuring that in our TK-12 system, we are maximizing the deferrals and Prop 90, which I think are quite beneficial to us overall.

I did want to just move on to some, a question that was raised regarding Prop 36 and Prop 47 and so there is a question here.

My understanding is that the way that Prop 36 was structured was that it would actually see an impact on the costs associated with whatever those proponents of Prop 36 thought might happen.

Your response was that one of the ways that Prop 36 is funded is that you've maintained funds for CDCR, so wanted to have you address that.

And then also more specifically, my understanding is that Prop 36 actually cuts into the funding that we were able to allocate for Prop 47 in the front liners and first liners rehabilitation programs, and reentry programs that are now not going to be able to be funded in the way that they had been.

I don't think that many people focused on that when they were voting on Prop 36, but I do think that we are going to have to deal with the impacts of that over time.

So wanted this just to make it very clear as we're going through these 60 sub hearings on the impact of Prop 36 on our overall funding of reducing recidivism.