Senate Standing Committee on Budget and Fiscal Review

The Senate Committee on Budget and Fiscal Review will come to order. We're holding our Committee hearing in 1021 O Street, room 1200. I ask all Members of the Committee who aren't here yet to rush here. And when we get to 10, I will call for the quorum. Public comment will be heard after the other deliberations.

But let me just sort of briefly do the run of show because today we have to be out of here by 11:45. And so our strategy is to have opening comments from myself and the vice chair to go to our witnesses and have the presentations to come back to the full Committee.

And I know the Subcommitee Chairs will probably lead off with questions. And then for Members, if you signal me, I will make sure you get on the list. We should probably try to limit ourselves.

Senator McNerney wants everybody to only have two minutes on this Committee, but I think we will do two questions at least, or three questions and try to move it because we do want to have time for public comment.

And I will decide based on how many people want to comment and how much time we have whether or not we will limit in any way public comment. But the odds are it will be about a minute if we're lucky.

So if any of you are thinking of making public comments, start that process of how you're going to be succinct and to the point and then we'll do that and just we always accept public comment.

If you want to add or you don't get to speak, or you're listening to this and you want to submit comments to the Budget Committee, go to the website and you can either mail in the comments or you can do it by email. And we would really welcome the comments.

Subsequent to today's hearing, there will be numerous Subcommitee hearings. Last year There were over 50 in February and March and into April. And we heard from hundreds and hundreds, if not thousands of people in that process. We anticipate the same thing this year. So look forward to that.

And the in depth discussions of the governor's proposal will happen in this Committee today, in the subcommittees and going forward. And we look forward to that process. So let me just begin by saying the governor's proposal for 2026 and 2027 is roughly balanced with few new spending commitments. It includes General Fund reserves of $23 billion.

I appreciate the approach the Governor has taken to responsible budgeting for 2026 and 2027. However, this is made possible by an increase in revenue estimates of $42 billion. And it's in what we call the budget window and the budget window is actually closing last fiscal year, the current year and the next year which budget we are considering.

I would also note, and it's going to, I'm confident, come up in the hearing that the administration's revenue picture is $30 billion over what was estimate. The legislative Analyst. We know that the updated forecasts in May will play a real role in our decision making in the final budget.

But the estimates we ultimately use to craft our final budget will have a significant impact if we can adopt a plan like the governor's January proposal or whether the much more difficult decisions need to be made after the May revise. We look forward to those discussions today and through the spring.

Turning to what both forecasts agree on, it is that there's significant work to be done to ensure fiscal stability in the coming years. Both projections show structural deficits of over $20 billion starting in the year after the budget year where we're considering the budget now.

Despite the possibility of revenues continuing to outperform estimates, the Administration and the Legislature must work together to address this challenge. As always, the charge before us to be responsible stewards of the state's funds continue work in upholding California values.

I look forward to the deep discussions in the many meetings of our five budget subcommittees in the areas of Healthcare, social services, education, housing and many others in the weeks ahead. And I look forward to the public participation in the process.

We are ready to work together with our partners in the Assembly and the Administration to craft this state's budget. And before we move to our witnesses, I would recognize the Vice Chair. And if those of you didn't read the news accounts, when I was budget Chair in the Assembly, my Vice Chair was Assemblymember Roger Niello.

So this is back to the future, and I have teased him mercilessly about whenever he accepts the job, the budget tanks. So Senator Niello, over to you.

Thank you, Senator Laird.

It is a reunion of sorts, and John and I have been good friends ever since we were in the Assembly, so I know that we will work together well, although I do not surprisingly take exception to a few things that he said, and certainly with regard to the governor's budget, with regard to those revenue estimates, I've labeled those as dangerously optimistic.

The LAO is, I think, wisely taking into account the risks to the economy and therefore not quite so optimistic on revenues. And what we have with this budget, in my opinion, is an alarming nature. The structural deficit exists now and it's been developing over the last few years with rising revenues and increasing deficits.

I'll pose this question to the LAO and Department of Finance when they present, but I don't think that's ever happened before. Maybe it has, but it is certainly rare. And I believe that is truly alarming.

And I've been calling and the LAO has suggested in the last few years that in order to truly balance this structural deficit, we have to take time to analyze programs, particularly those either established or enhanced in the last few years, as to whether or not they are achieving what they were expected to achieve.

But even if they are, are they sustainable? And that will provide a roadmap to us to close that structural gap. The internal borrowing and delays and deferrals and other maneuvers, if you will, are pretty much exhausted. So I call on the Department of Finance to do this difficult but I think very essential work.

That's the only way that we're going to cure this structural deficit. With regard to the subcommittees, I'm really troubled by another unique nature of this budget proposal, and that is that we're not going to see some of the major aspects until the May revise.

It has been specifically stated that there are areas in this budget that are not addressed in the January proposal, but will be addressed in the May revise. And those of us in these hundreds of Subcommitee meetings have to wonder why are we analyzing a budget that isn't complete? So that's, I have to say, a little bit frustrating.

And here's hoping that in 2026 we do not use liberally use trailer bills to affect non budget related policy. That is a hope against hope. But I really do hope that that'll be the case. A couple of detailed issues.

One is a glaring absence in this budget proposal, again to fund Proposition 36, about which I'm sure questions will be posed. And I'll leave it to that. But I have to point out what I believe is a highly irresponsible aspect of this budget proposal and several for going back four or five years.

And that is the absolute absence to address a $20 billion debt to the Federal Government for unemployment insurance. During the pandemic, the economy shut down and probably half the states in the country like California didn't have the resources to pay those huge, that huge draw on unemployment insurance. So we borrowed from the Federal Government.

That's a routine thing when states don't have the resources to do that. So since then, of those 20 some states that were in the same circumstance, there is now only one. California is the only state in the country that has not paid back that unemployment insurance debt. It's $20 billion.

That is truly a daunting task for us and it is. Now I'm going to use a term that comes from auto mechanics. A device on an engine to limit its output is called a governor, small 'G', governor. This.

The unemployment insurance debt will be paid by employers, that is the entities in our economy that employ people, an additional and increasing burden for each and every employee that they have working for them.

So what we have is a policy, maybe unintentional, that acts as a governor on employment in the state when California has the highest unemployment rate in the country. So I look forward to the presentations and the deliberations and this year working with my good friend John Laird.

Thank you. And I look forward to many more car analogies in your talks. Before we move to Ms. Lee, we have achieved a corum. Would you please call the roll?

[Roll Call]

We have a quorum. Thank you very much, Members. Okay, now we're going to go to our presentations. We're going to begin with Erica Lee, the chief Deputy Director at budget at the Department of Finance. And then after that we will go to Gabe Petek, the legislative analyst.

And then following that, we will have questions and comments from Members. So Ms. Lee, welcome to the Committee.

Thank you. Good morning. Chair Laird, Vice Chair Niello and Members of the Committee, Erica Lee with the Department of Finance. And I'm here today to present on the governor's 26-27 budget. And before getting into the numbers, I just want to highlight the overall approach and the framework that we use as we approach this governor's budget.

First, as was mentioned by Chair Laird, it is balanced in the budget year. However, it does recognize that there are out year long term structural imbalances, as has also been noted by Vice Chair Niello. And starting in 27-28, that's over 20 billion and continuing beyond that.

So while the governor's budget does address the budget year, the Administration is proposing to partner with the Legislature to also address the structural imbalance in the budget year one or 27-28 with additional proposals at the May revision when we will have more updated data, including both revenue and expenditures.

Solving for two budget years as we have done in the past is difficult. It's challenging. And we acknowledge that we, the Administration must work as soon as we can with the Legislature in order to come up with solutions. And we also look forward to the Legislative Analyst Office as they provide meaningful solutions to the Legislature as well.

With that, I will begin with our top line budget numbers. The budget this year includes about 350 billion in expenditures, of which about 2,250 billion is General Fund. That is roughly 19.9 billion over what was in the budget act. The revenues, as was also mentioned, have been upgraded since the budget act to over 42 billion.

This is as a result of strong performance in the stock market which impacts our revenue forecast. The strength in revenues is due largely to capital gains, our personal income tax withholding and strong cash receipts.

Significant portions of that pit withholding we are seeing come from a small sector, the tech sector, and specifically a few California based tech companies. Despite the increase in revenues, we are forecasting a budget year deficit of about 2.9 billion.

And I just want to walk you through that to understand how having $42 billion extra still leads to a deficit in the budget year. First, as in any year, there are constitutional obligations on revenue. Proposition 98, we have Proposition 2. Proposition 98 is for funding our K12 K through 14 education. Prop 2 is for the rainy day Fund.

And so together the two are about 20 billion of that excess revenue that's coming in. We also started this year with a shortfall of about 12.6 billion. So we had to address that issue. So you have the 20 billion from Prop 98, Prop 2, you have the 12.6 billion from a negative starting point.

We also have increased expenditures as we have mentioned over the past. And lastly, we wanted to build a strong SFEU or a State Fund for economic uncertainty because we are certainly surrounded by a lot of uncertainty these days. And so having that reserve is going to be important going forward.

And so that is what gets us to our 2.9 billion budget deficit. As I mentioned, the out years, we are looking at about 22 billion in negative in a deficit in budget year plus one, which is 2728 and over 20 billion. Beyond that.

Again, we acknowledge this budget needs to address not just budget year, but really needs to eat into the negative numbers that we're seeing in out years. And that is what we look forward to partnering with Legislature on as we work through the spring and into May in our reserves. As was mentioned, we have 23 billion.

And of that, that's 14.4 billion in our rainy day Fund, about 4.1 billion set aside for our education rainy day Fund. And then Again, as I mentioned, the SFEU is 4.5 billion. So together that makes about 23 billion in reserves for the state.

The one thing I would like to mention as we talk about reserves is we are proposing suspending the current year, what we call true up into the rainy day fund because we have more revenues. The Proposition two requires that we would put away some of those revenues.

We are suspending the current year revenue of about 2.8 billion, which we believe is in line with the solution that we took in 2024-25 when we had a budget emergency. And we're withdrawing from the rainy day fund. So we are maintaining that alignment and not truing up the current year BSA amount 2.8.

That pretty much addresses that $2.9 billion shortfall. And so given all of these numbers, this is really a workload budget. You will not see a lot of new expenditures, you will not see a lot of cuts. And so that's what we mean by workload. Given the fact that we are trying to solve for a deficit.

That's sort of big picture, big numbers. So I'm just going to go into some of the policy areas and then pass it over to my colleague. The budget within the budget, as I like to call Proposition 98 has been upgraded as a result of upgraded revenues.

And so, so we're looking at 21.7 billion more over the budget window. So that's the prior year, the current year and the budget year. And that is 21.7 billion more than what we were expecting at the 2025 Budget Act. We had a settle up at the end of 2025, meaning we owed Proposition 98 about $1.9 billion.

We are proposing to pay that for the 2425 year. However, we are proposing a new settle up for this current year of 25-26 of $5.6 billion. And that is going to be trued up when we are certified. I think this is just an indication of the uncertainty of where revenues will land.

And so as we did with last year's true up 1.9 billion, we will have to pay whatever the final calculation is for Prop 98 when it is certified next spring. Despite that, we are looking at the highest per pupil funding ever in the states of over 20,000 per pupil funding. And that's just Prop 98.

If you add in all other funds, that's over 27,000 per pupil. On the higher ED front, we are proposing about 716 million ongoing General Fund for both UC and the CSU. And that is to pay the fifth and final 5% base increase for both the UC and the CSU systems.

We are also extending a deferral of the 3% base decrease that was in 25-26. This should not impact the schools though because we are also extending the short term loan that was provided to UC and CSU last year as well.

On the climate front, in regards to the climate bond, we are proposing allocating the second year of that multi year plan which is about 2.1 billion of that total $10 million. And I just want to point out that 314 million of that is for wildfire and landscape resilience to really mitigate the impacts and the risks of wildfires.

And lastly for climate we are introducing a new ZEV incentive about 200 million one time. And these are special funds to keep ZEVs affordable and accessible for all.

With a new light duty ZEV incentive program for health and human services we maintain, we assume the continuation of CalAIM and we also include additional cost as a result of HR1 and HR1 impacts of about 1.4 billion total across HHS in the budget year.

That grows in the out years but the costs are still slid up about 1.1 billion in the MEDI Cal program and that's largely because of reduced federal match for emergency services, reduced hospital Quality Assurance fee program, the HQAF and CalFresh.

We're looking at both savings and costs as a result of HR1 impacts and changes to policy resulting in a net cost of about 300 million. And I'd say largely due to the increased state share of CalFresh Administration moving from 25% to 50%. For childcare we include about 90 million ongoing for a COLA.

And then we also have 11.5 million one time proposition $64 for child infrastructure, particularly and specifically targeted toward communities that were impacted by the recent fire. And the last thing that I'll mention is that we do include three tax proposals.

The first one is what we call for marketplace facilitators and it proposes, we're proposing to require third party delivery services that facilitate orders through a website such as Grubhub or DoorDash to collect and remit taxes on behalf of the tens of thousands of businesses using their platforms. So this is not a new tax, but it does.

We project it will increase tax compliance. The budget also proposes to create a new tax credit to incentivize companies that produce aviation fuel from renewable sources rather than crude oil. And then lastly, the budget proposes to extend the California Compete's tax credit which is currently scheduled to sunset in 27-28 by another five years.

And with that, I just want to take this opportunity, opportunity to thank the Committee for allowing me to present this year's governor's budget. As I stated in my opening remarks, we look forward to a partnership recognizing the difficult task that lies ahead.

I think the goal is not only to contain the cost so that California can continue to support its core health and safety net programs and other vital programs, but also to do so in the most compassionate way possible for Californians. Thank you.

Thank you very much. And we're going to hold questions until after the Legislative Analyst's presentation. Welcome to the Committee.

Good morning. Thank you. Chair Laird and Vice Chair Niello and Members, I also want to thank you for having me here today to make my presentation on behalf of our office today.

Before you, you should have a copy of this handout that I'll walk through, also a copy of the overview of the governor's budget report that we put out.

I'll refer to both of those in my remarks and the report for anyone watching remote or the well, both the report and the handout are available on our website, Lao.ca.gov so with that, I wanted to begin today by noting that in my comments, in my remarks here today, I plan to focus mostly on what our office thinks are the main risks facing the state budget.

This is a little bit of a different approach than perhaps in prior overview presentations where I might have walked through in more detail the accounting of the governor's deficit and where we may differ from that.

But this year I plan to do less of that, both because we think these larger challenges are so pressing and also because when we look through the accounting choices that are made, the net result of those, we find the differences to be understandable and generally reasonable.

So let me let me just touch on with that said, let me just touch for a moment on some of the main features of the budget that Ms. Lee also referred to.

But as you may know from our November fiscal outlook, our office estimated that the state faces an 18 billion budget deficit for the upcoming budget year, and the Administration has estimated that it's about 3 billion.

And so the main explanation for this difference, of course, does have to do with the administration's revenue estimates, which are about 30 billion above what our revenue estimates are. The difference in the deficit estimates is not that great, though, of course, because as Ms. Lee pointed out, with the higher revenues come higher constitutional spending requirements.

And also the Administration estimates around 2 billion in higher costs across the rest of the government rest of the state budget than we did in November. And I will also just mention a couple of proposals that will be relevant for the presentation. One is this proposed creation of a proposition 98 settle up in the budget.

And then secondly is this proposal to suspend the true up deposit to the rainy day fund, the budget stabilization account. Both of these proposals have the effect of creating additional spending capacity for the state in the upcoming budget year. In addition to that, the governor's proposal, we tally up about 600 million in discretionary spending proposals.

I provide the overview report because in the appendix of that report we list out these proposed spending items. And then also, as was mentioned, the governor's proposal includes providing for about 4.5 billion in the special Fund for economic uncertainty or the discretionary ending balance or reserve for the state.

So with that being covered, I wanted to then return the focus of my remarks to the proposal as it relates to the state's budget resilience. And if you look at this handout that I just, that you have on the first page, we have the General Fund conditions summary.

And if you look at the column for 2026-27 or if you were to look at the administration's multi year projections for the state budget, what you would see is that revenues and transfers in the budget year are about 20 billion lower than expenditures. That's sort of the operating deficit in the multi year document.

And the only way that we can have a balanced budget and have that situation is that we have this large carry in balance at the beginning of the year. And as was mentioned, you know, we have, the Administration is estimating that revenues are up by 42 billion compared to June.

And yet we barely, we have a very precariously balanced budget even with that. And so that kind of leads into what we think are some of the concerns that I'll speak to here on the second page. There are two main overarching concerns that I wanted to highlight.

The first, first is that our office really believes there's considerable downside risk to the administration's revenue estimates. As Ms. Lee mentioned. And we would agree the revenue strength that we have seen year to date is really being driven very much by the stock market trends.

And even within that, a lot of it is coming from the enthusiasm around artificial intelligence and, and all of that type of investor optimism. And this is something we've looked closely at. We've been looking at the market performance over many years to try to understand what is going on and what are the risks.

And this page has a couple of indicators. There are several indicators, but I put a few on this page that speak to our view that the market is at considerable risk of experiencing a downturn at some point in the next year or so.

The first one on here is basically telling us that stock prices have gotten so high that the expected risk adjusted rate of return that investors can expect from stocks going forward has shrunk. It's actually down to 1.5%. And in normal times that measure would be about three times higher than that.

And the only times this measure has gotten this low was in the summer of 2007 and in late 1998. And we know that after, around that time we experienced a market peak and then the market went into retrenchment thereafter. The second one that we've been tracking is the amount of leverage out there in the system.

And what we find is that the investors have taken really been aggressive. This is an aggressive investment strategy where they're borrowing, this is called margin debt, they're borrowing from their brokerages to buy stocks. And it's the sign of excessive aggressiveness in the market when this gets very high.

This measure has increased by about one third over just the past year and is now at three times the historic, the normal level that we see. And then the last one on here, it's just a measure of how much equity is being held by households across the country.

The level of stock holdings, the current level of equity holdings is now at 200% of disposable income. And so this is far and away the highest measure we've seen in the past 70 years. And this is also a thing that tends to happen when the market is nearing a peak.

And so, you know, the way I would look at this is, you know, you've heard the old adage, this time is different. And it might be, we cannot rule that out. But our view from the LAO is that we cannot recommend that you should build a budget on the assumption that it is okay.

So then the next page is speaking to our second main challenge that we see before, before the state budget and before the legislation, which is these chronic multi year deficits. And on this, yes, this is an area where our office and the Administration are generally in agreement about this challenge.

The reason to us that this stands out as a serious concern at this time is, as was already said here, all of the risks that I'm talking about with a market downturn are out there, but we haven't actually had one yet. And despite that, we have these projected deficits.

And in fact, on the contrary, you know, the market has actually been up. It's increased around 50% over the last two years. And yet we have these, we have these projected deficits. And this would be the fourth consecutive year where the state has actually faced a deficit.

And so it may not kind of feel like it, but throughout this period, state revenues have actually been growing. They've actually been growing. And so, you know, to us that's a concerning trend. And we view that there's some possibility that the revenues that we're seeing now are at something of a high water mark.

So moving on to the next page, basically this is an attempt to sort of see, speak to the question that I think hangs over all of this. How did we get here? How are we in this situation?

And I think it's probably quite complicated, but in a very, the most succinct way I can put it, I think, is that approximately four years ago, after two years of extraordinary revenue growth, the state experienced a very serious revenue downturn, a double digit downturn in our revenues.

And since that time, we have seen revenue resume growth, but it hasn't been enough to catch up to the new spending level that was established. And that's the reason that we say from our vantage point that these are no longer cyclical deficits that occur because there's been a downturn, but they're more structural in nature.

They become a structural problem. So then that takes to the next page, which is speaking to sort of the core question before you as a Legislature this year, which is do you want to take action to address these challenges and if so, what should be your approach?

You know, the Governor and the budget proposal gives a lot of recognition to the risks and the challenges that I'm seeing speaking to here. However, his proposal stops short of making material recommendations for how to address those.

And so one other reason I wanted to pass out the overview report again is that we do provide several high level steps for the Legislature to consider for how to respond to this situation.

The first, of course, is that I would recommend that the Legislature should use our revenue numbers as a way of incorporating the downside risk that I'm talking about into the budget plan. And then the second step would be to turn and tackle the corresponding budget deficit problem. Of course, if you use our revenues, that problem is larger.

It becomes more of a challenge in this current budget period. But even if, but even if you were to use the administration's revenues that are higher, we would then recommend that you make two notable changes to the proposal. The first is when it comes to this settle up obligation that's being created of over 5 billion.

We would encourage you to consider setting that amount aside in a reserve rather than building it into because it's freeing up spending capacity for the budget. It gets built into the spending of the budget proposal and it can then in the future create an additional budget problem for the Legislature to have to solve.

So we would recommend taking that amount if you're going to do this and set it aside in a reserve. The second one is that we would recommend that you reject the proposal to suspend the deposit or the true up deposit to the rainy day fund. I mean, in basic fiscal logic, if you have your revenues.

If we're going to adopt a budget that assumes revenues are up by 42 billion across the budget window, that is not a time when you should be suspending deposits to the rainy day fund, in our view.

And so then the third high level recommendation is to spend some time focusing on how to shrink these multi year deficits under the administration's numbers. That's around $20 billion per year.

And so we would encourage you to consider identifying a plan at least this year for shrinking it by 10 billion, even if all of those provisions are not adopted immediately and it's rolled out over a couple of years. On the last page, I just wanted to sort of speak to the timing of all of this.

The governor's proposal asks you to wait until May to find out what the numbers look like and, you know, see what the situation is at that time. And we think that it would be better to start now. The reason is it provides more of a venue for the public to have input.

It provides more flexibility to the Legislature to have your input on it. We would like to avoid for you to be in a situation where you're sort of forced to adopt in a rushed manner proposed solutions to a problem that may be identified at that time.

But also, and maybe most importantly, we may not know what the situation is by May. We strongly believe there's this downside risk. However, we're talking about the budget year which goes until June of 2027. And so it might be that in May, we don't know yet at that time that the downturn is upon us.

It could happen after that, and we still think the risk is present. And many times when a downturn does begin, we don't have confirmation of that until after the fact. So the other question is, why not just wait until next year to begin looking at the structural deficit?

And you know, in fact, our office has before recommended a wait and see approach, we do not relish the idea of the Legislature having to make very difficult changes to the budget or reductions or tax increases for deficits that don't wind up materializing. We do not view it that way.

At this point in time, the structural deficits seem quite real to us. We're in agreement with the Administration on this matter. And I would just point out that if we did this in our fiscal outlook, this calculation. But if the. If our number.

If it was a $35 billion annual structural deficit, in order for that to resolve itself naturally through revenue growth, you don't need 35 billion. We estimate you would need more like $60 billion in higher revenue per year relative to our estimates to eliminate that sort of on the natural. And so.

And if you were to use the administration's number, it would be something slight, you know, less than that. But still, we think that kind of revenue performance is not plausible. It would be like counting on an 80th percentile revenue performance into the future. And we just think that's a risky approach.

And lastly, I'll just say that I think beginning this work sooner rather than later, it would be our recommendation, because waiting to make all of these changes at once will inherently be more difficult than kind of breaking it into pieces. And so that's why we recommend that approach.

So I'll stop with that and here with my colleagues in case you have any questions for us.

Thank you very much. And let me just recap for Members that walked in. We have to be done by 11:45, and we're going to try to. To allow the last half hour for public comment. So we're just hoping for a little bit of discipline in speeches and questions. I already have a list of five people.

Menjivar, Richardson, Reyes, Blakespear, and Cabaldon. There's. Let me just add as I see them. Okay.

And this is good. Well, it's okay. We'll get to everybody eventually. Okay.

Okay, great. And I'm going to begin by asking a few questions and some of them play off of the comments that you just made. So let me ask the legislative analyst; you, you built in the risk of an economic downturn: how do you factor in the estimated timing?

I mean, what if we head to this and the timing of a downturn is it corrects later you anticipated: how will that be built into your projection?

Very fair question. Just to specify we're not assuming that there's a downturn. What we do, Brian can, my colleague can probably speak to this, but what we do is we incorporate the risk of a market downturn into our economic our forecast models and we develop this range of revenue outcomes that we think is the most plausible range.

And by including this market risk indicator, it kind of lowers the top end of that range. And then the middle of that range is what our main forecast is. And so I just want to make sure it's understood. We're not assuming there's a market downturn, but we are acknowledging the elevated risk of one.

If there were a market downturn, our numbers would wind up looking very positive. It would actually be much worse than even the numbers we have. As for the timing, you know, I do want to say, you know, people described the stock market in the mid-1990s as experiencing irrational exuberance. That was, Alan Greenspan said that in 1996.

But the market went on to grow for a few more years before we had the downturn. And so we can't know for sure when it will happen. We think there is heightened risk of it happening.

But even, like I said, even if you were to adopt the governor's revenue estimates and, or our estimates, let's say you adopt our revenue estimates and the market doesn't turn down because of the structural deficits, it still can be beneficial for the stake's structural fiscal position if we were to take actions that were living under the proposed the numbers that we put forward.

I don't know if, Brian, you'd want to add?

Well, let me just accept that as a reasonable answer. Although using the name Alan Greenspan and exuberance in the same sentence seems kind of faulty off the top.

But let me just follow up quickly, because even if you haven't factored in this major downturn, you factored in some downturn, and you said in your testimony the last thing you wanted us to do is have to make cuts in an out year if in fact they don't materialize.

I'm still looking for a little balance in how you would take this estimate and decide when it's real for us having to make actual decisions?

I don't know, maybe you can add?

Yeah. Senator, Brian Uhler with the Legislative Analyst Office, I think one way that we think about both our revenue estimates and our advice that we're giving you in terms of your budget approach is that you always are balancing two kinds of risks, right, both with the estimate and the approach you take to your budget.

One is the risk that Gabe mentioned that. You know, you see these out your deficits, you act now to address them and then it turns out we had more revenue growth than we anticipated and you made more cuts than you really needed to. That's certainly one real risk.

The other is that we see these out your deficits, we take no action. We actually hit the downturn and instead of it being 35 billion, it's a 60 billion dollar budget problem. And now you have a much worse situation that you weren't prepared for. Right.

And so as Gabe mentioned, our approach attempts to sort of take a middle ground of those two things, to not suggest you prepare for that 60 billion situation, but also not suggest that you do nothing. And so our numbers kind of pick a point in the middle where you won't be fully prepared for the downturn if it comes, but you'll be in a much better situation.

And if you do make some of those cuts now, you're not doing as much as you would if you were assuming to fix the whole problem in a very conservative assumption say. And also as Gabe mentioned, with those sort of at your structural deficits, if you were to take our numbers and make some of those adjustments now, you know, whether they're needed in the budget year or at some point in the out years, both us and Department of Finance seem to agree at some point those kinds of solutions will be needed to address the structural problem.

Thank you. And let me ask a follow up question of the Department of Finance, because both the Governor and the Department of Finance commented on a desire to work with the Legislature on those out year problems. But if we get them in the May revise, we have a very limited amount of time to deal with them.

And so how will you engage with the legislature in the next few months before the May revise to talk about some of those options?

Yes, absolutely. And as I mentioned before, the sooner we can begin having those discussions the better because these are not. We don't want to plop something in the May revision and give the legislature four weeks to look at something that isn't our intention at all.

But we plan on reaching out to leadership to start having fruitful discussions as soon as people are available.

Okay. We're anxious to have those conversations and not feel like we're jammed at the end. And then both of you spoke about the reserves. And this is a significant reserve by historic standards, and I mean going from 14.4 billion to 23 billion, if you include the single year reserves as well as the rainy day fund.

Can both of you comment on what an appropriate level of reserves might be and how we might be able to build those reserves during the next few years? I don't know who wants to go first?

Yeah, I mean, I think as you know, we withdrew from the rainy day fund over a period of two years to the tune about 12 billion. And so I think you're seeing that we are trying to build that up again. And obviously we have a 10% cap or, yeah, 10% cap based on Proposition 2.

The legislature and the administration can always exceed that and put more in. And we have that. We have done discretionary deposits into the reserve as well. I would say we continue to want to build that up. We intend to.

As part of this governor's budget, we have about 11.4 billion planned to and then over the next three years to put in the reserves, 3 billion in budget year.

Let me ask if the legislative analyst would like to comment.

Yes. Well, we think it's a tough question in the sense that it's not an easy time to build substantially add to reserves when the state is in the midst of deficits that are recurring. We, as I mentioned in the remarks, we do recommend against the suspension of the deposit to the budget stabilization account.

Longer term, our staff did do some quantitative analysis that would resulted in a report that would examine how to increase the state's budget reserve. And to some extent there's a choice in the part of the legislature. How much of a downturn would you want to be prepared to cover?

And that's really more of a policy choice that probably belongs in your hands. But I don't know. And, if my colleague, it was the author of the report, if there's anything briefly that you would want to add to that about that.

This is certainly a long term perspective and not a short term perspective given that the state, you know, faces these structural deficits and kind of major budgetary challenges.

But from the report's perspective, what we looked at was, you know, given the state's current revenue structure, given the volatility in the current revenue structure, what kind of reserve would you need to kind of fully smooth spending and revenues over time with reserves. Right?

So if we sort of say we've got the volatility that we've got, we're not going to reform the system.

We're going to use reserves to put money aside when revenues are dropping and then use those to cover spending, I'm sorry, vice versa, to put money aside when revenues are surging and then to use that to pay for spending when revenues are dropping. What kind of reserve do we look at?

And under our analysis, we found that despite the fact that the state has a 10% cap on reserves, meaning that reserves can't exceed 10% of state revenues, that a reserve of 50% would actually be more appropriate. So it is quite a significant increase.

Then one observation before I move to my last question, and the observation is, I mean Governor Schwarzenegger had a panel to try to deal with the volatility, and we all identify volatility as an issue.

If we were really to do the tax structure, the only way to ease the volatility is to give the wealthiest Californians a break and expand taxation into the middle class and other places. Politically, that is untenable.

And so it seems that the reserve is our volatility safety valve, and we are not having it at a level thus far that handles the real volatility. And so the question is what we do over time.

And I, I get about this year because the idea of reserve for volatility is you really fill it during the good times and are ready for the bad times. And but that's the only way we're going to have further steps to, to deal with volatility. So we should talk about it.

My last question is of the Department of Finance and it's an education on Proposition 98. And it's, I'm just wondering why the settle up payment is being created for the budget year we're in, if the risk is really in the next budget year.

The current year is not yet certified. And so, we also just acknowledging the same uncertainty that you've mentioned, want to certify that until we actually know what the calculation will bear out in the end. And so, creating that settle up allows, acknowledges that uncertainty.

Also, you know, just to comment on one of the things that my colleague here said: in terms of instead of 5.8, creating a settle up of 5.8, sorry, 5.6 billion, putting that in a reserve, and I would just say the result of that would be then we would need an additional 5.6 billion in cuts in the year.

And I think just acknowledging that is it should be part of a larger part of the larger discussion, as I mentioned, if that is something that is what the legislature wants to do, then we as part of that larger discussion in terms of long term and the short term coming up with solutions to bridge that gap.

So I don't know if there's anything that you'd like - my colleague would like to add.

Alex Shoap, Department OF Finance: so, I would just add that for the settlement proposal, which is in 25-26, which is currently the current year. Right. It's sort of the similar intent as the settle up that was included in the budget act last year.

And it acknowledges, you know, obviously there's the uncertainty in revenue projections and it acknowledges the statutory restrictions on being able to reduce Proposition 98, once 25-26 becomes the past year next year. Right.

Of course, that was the kind of issue we had at the 2024 Budget Act, with fiscal year 22-23 when we were significantly over appropriated and you know, had to, you know, include the language to kind of start accounting for that kind of incrementally on the non-98 side of the budget in the out years.

Okay. And thank you. And I really appreciate - I was going to acknowledge that we would have to find 5.6 billion in solutions if it weren't there. So people are moving up. And before I move on, did the LAO have a comment you wanted to make on this?

Edgar Cabral with the Legislative Analysis Office. I think the conversation kind of walked through the main trail, so, I think what I would just highlight is that essentially under the Administration's budget, you're right that there aren't—there would need to be $5.6 billion in solutions in the '26-'27 budget.

But as the Governor's budget is constructed, that means that there will be an additional $5.6 billion in solutions on top of their estimate of the structural deficit that will need to be addressed next year if the Governor's revenues were to materialize.

Thank you. We probably could have done without that comment because it's brutal.

But I do appreciate you making it. Okay, my list is Menjivar, Richardson, Reyes, Blakespear, Cabaldon, Grove, Ochoa Bogh, Seyarto, Weber, Pierson, Smallwood-Cuevas, Durazo, and Choi. I'm sure there's more. Somebody's indicating they're not chopped liver over here. Senator Perez. So, you will be added to the list. And Senator McNerney. We'll go to Senator Menjivar, and Senator Richardson, you are on deck.

Thank you, Mr. Chair. So, what I'd like to do is—I know I gotta respect time.

I just want to ask questions—not to be answered all of them today—but just to give a preview for your staff to be prepared in sub 3 hearings so that I don't get a "let me get back to you" response in those hearings.

But I'll start off by elevating what the LAO mentioned because I think it's really important. I'm going to read verbatim from your report. Delaying until May forces the Legislature to either accept solutions that have not received sufficient public discussion or defer action even more.

I think it's really important that we have these discussions now and not have Subcommitee discussions based on a proposal that it's going to be obsolete completely. That is not considering the reality of our situation.

I think it's a disservice to us, as legislators, and the public to have discussions that come may are going to be completely switched off.

And then, each Subcommittee will have one to two hearings only to discuss the drastic changes and then shove down our throats to accept shortly after. Completely unacceptable approach for how we deal with the fourth largest economy of the world.

So, in Health, in particular—I apologize that I got to use your words, but you share that the budget is—the approach is the more compassionate way possible was what you quoted. But we are creating, once again, a third demographic, a third hierarchy for those who will have health insurance or not.

Last year was very vocal that we created the haves and have nots with the UIS population and the documented population. We are now creating a third tier of individuals with certain access to health insurance. So, now, this third tier will be asylees, refugees, VAWA. Women under VAWA, who are here legally, will have less insurance than the undocumented population. So, three tiers.

We'll have the fully scoped individuals, the undocumented population that we limited their scope last year, and now, this third demographic will have even less health insurance than the undocumented population, who are here illegally.

Regardless of how you feel, if you're here legally, creating this third demographic I think is barbaric. We are saying literally we're looking at people and saying, you can have it, you can have some of it, you can have none of it. I think we need to do better than that.

I'm disappointed that the state of California, with all its rhetoric that we're fighting against the Federal Government, completely takes the knee and absorbs every single request from HR 1. There is no response here to how we're going to address HR 1 impacts. There's no solutions for how the counties are supposed to address the impacts and cuts to HR 1.

I know Director Stepenshaw talked about working with counties on the impacts of HR 1. I haven't heard any additional information. I don't know when that information is going to come on what we expect the Administration to have there. One of the other biggest cuts, it's around CalFresh. We are completely—we're going to have a lot of people lose access to CalFresh.

I'm also wondering why we are accepting work requirements for the undocumented population even though they're not required to have worker requirements. That's something that we went above and beyond the Federal Government.

I don't know why we're going above and beyond the cuts that the Federal Government is asking us to do if we don't have to do that. I recognize we have to do cuts. I get it. I'm okay that we have to balance the budget. I'm disappointed that there is no proposal to change how our revenues come in.

We just can't cut our way out of it. I think it should be a mixture of cuts, being strategic with how we use our dollars, but also looking to change our revenue, our revenue streams. So, those are going to be my focus in sub three, the third tier.

I don't know how we're going to propose to get—to maintain—people on health insurance if we're asking for six-month redeterminations. A lot of paperwork. How are we making it easier for people not to fall off of Medi Cal?

If the Federal Government is asking to kick people off of Medi Cal because of the bureaucracy, how are we helping people? We're asking counties to absorb the overtime for IHSS. We're throwing down a lot to the county without any additional support for them to absorb the increase in cost.

I'm interested in finding why we eliminated the statewide Medi Cal mobile crisis benefit that's been really beneficial in our time. It's shown decreases with interactions with law enforcement. It's helped to deescalate situations. A lot of us have seen it firsthand. So, I'd like to know why that was cut. And my actual, my actual questions now.

So, those are where I'm going—thinking about. My actual questions are start with LAO for clarity and I apologize, I don't know much. I'm not an expert in this whole in the stock market issues, but yesterday, it was reported that the DOW dipped really, really low, one of the lowest since October.

Are incidents like that what impacts what you talked about, the stock market dipping an impact on revenues?

Yeah, I believe the S&P 500 stock index went down about 2% yesterday, which is a large one-day decline. It is the type of volatility that all of my remarks about the risk to the revenues were reflected.

That, you know, so much of our revenue, as Ms. Li said and our office has said, so much of our revenue growth has been driven by this very strong stock market gains. It's been up, like I said, 50% over the last two years. But it's very difficult to predict the future when it comes to the market.

Many people have tried over many, many decades to predict when there will be a market downturn. The best we can do is identify these indicators that have all kind of lined up the way they are right now in the past decades before there was a downturn and they are lining up like that.

We can't say for sure what the precipitating factor will be. Yesterday's, from all the news articles I read, had to do with the discussion around tariffs being imposed on Europe and Greenland and all of that. And so, what we've been talking about is that there's this overexuberance in the market around artificial intelligence.

But we don't know for sure what will be the precipitating incident or factor that will cause the market to suddenly realize that it's over its skis essentially. But that is the risk, that is the risk that we're concerned about. And that type of volatility is precisely the thing that represents a major risk to our revenues.

And then, when—you talked a little bit about this, the BSA deposit. We suspended it last year and the proposal is to do it again this year.

Last year.

Well, we withdrew from the rainy day fund and we also suspended the deposit, and we are now doing—suspending the deposit for the current year.

So, the current year suspension is for $2.8 billion. Does that mean we're now adding two years of 2.8 billion suspension that we'll have to pay back, or—I just didn't understand that.

So, basically, that will have to be, in the future, we would be truing up the subsequent, in the past years. It's just, this year, we're not, we're proposing to not put that 2.8 billion into the rainy day fund.

So, it doesn't accrue. It's just a total of 2.8 billion?

For the current year. But I will turn it to our expert for details.

Lisa Merzanski with the Department of Finance. So, you don't have to pay back that 2.8 billion. That's just not put into the reserve.

Under my comments, our recommendation is to reject that proposal. We think if we're assuming in our budget that revenues are up by $42 billion, that's not the time you should not be making the true up deposit.

That being said, I recognize that what I'm saying adds to the challenge before you because, as Ms. Li said, the 2.8 billion is the lion's share of their solution to the $2.9 billion deficit that they've identified. And so, that's the tradeoff.

Okay. Okay, thank you for that. And then just for DOF, I shared a lot about HR 1. Can I just get some preliminary feedback on how we're really approaching HR 1 impacts and why we didn't see any solutions—overall feedback?

Sure. And I'll just note, as I did at the top of my remarks, that we are planning—we anticipate an additional 1.4 billion in General Fund costs in the budget year as a result of HR 1, for both the Medi Cal and the CalFresh program.

And that's due to a lot of largely changes in sort of the ratio of states' responsibility to pay. And we anticipate that those costs will grow in the out years, particularly for CalFresh.

And there is the risk of, because of the error rate provisions, that we may end up paying more of what is currently 100% federally funded benefits on the CalFresh side. So, there is that projection as well. But those are the immediate impacts and the immediate costs that you're seeing in this Governor's budget.

What protections exist for people in these programs? Why isn't there a proposal to?

So, I think, to be perfectly frank and clear, where there have been decreases in federal support for programs, we are not in a position to backfill. And so, I think where we can have conversations with the Legislature, and should, is in some cases where we do want to support. In many, many cases, as in Medi Cal, Medi Cal is essentially a $46 billion General Fund program growing to just under 50 billion next year.

And we get over 100 billion from the feds to support. If they withdraw tens and tens of billions of dollars, we're just not in a position where we can backfill.

So, at this point, I would say, in response to your question, this is part of the conversation we would like to have with the Legislature about how we approach the changes that are happening at the federal level. They will result in costs, and we will have to address those costs.

And they will result in people falling off both Medi Cal, CalFresh, other federally funded programs because they're no longer eligible. And so, I think we need to have the discussions about what position do we—can we—take, fiscally, to actually backfill some of those, if we can even do that.

So, that's just a very frank, realistic, kind of a numbers answer. But as I also said, we also have to consider the real impacts on people's lives.

Right. Creating a smooth process so people don't fall off.

Right. And to, to your point, in terms of Administration at the county level, we continue to have conversations. We are having conversations to better understand not just what the potential cost could be for them, but how things can be done differently to help reduce costs and contain cost.

Thank you. Final comment is, I forgot to mention MCO tax also. It's going to be a big topic. We're taking a huge assumption that they're going to approve us all the way to December. I don't know what friends you have over there. I don't think we had any friends in the Federal Government. So, that's a high—that's a big assumption that we're taking.

It is. And we acknowledge that if that extension, that transition period, doesn't extend to the end of the year, that's an additional 1.1 billion in costs.

A lot of ifs in this January budget. Thank you, Mr. Chair.

Thank you. We'll go to Senator Richardson, and on deck is Senator Reyes.

Well, thank you, Mr. Chair. I don't mind batting some second with the Dodgers. That's normally Mookie Betts. So, I will properly represent today in his honor.

Well, then you're headed to the playoffs.

That's right. That's right, exactly. Let me preface my comments by thanking you, Mr. Chair, for the way that you've brought us forward early. You're really encouraging participation amongst not only the Subcommittee chairs, but all members in the Committee. I think you've really taken an approach that's one that we desperately need in these times.

And I want to thank you for your leadership. I also want to acknowledge, as Subcommittee Chair of Sub 5, I have the opportunity to work with incredible people here, both Nora, Eunice, and Diego. I want to personally thank you guys. They're educating Rita as we speak.

For those of you who are old enough to know the movie Educating Rita, they're doing a great job and I'm looking forward to being a part of your team. That said, I'm going to make a couple general comments and then I'm going to get into specific questions related to the Committee that I chair.

I'm going to defer to the other members who are on those other various subcommittees. I'm sure they're going to highlight their points. And if I have—if we have additional time, I may chime in there.

But the first general comment I'd like to make is from the Department of Finance perspective, I think we owe it to the California public to say why has there been this increase over the years? So, I don't think it's enough to say we've had an increase. I think we need to give the public an answer.

The increase is due to increase of population. I just sat here and googled—we had an increase of population, then we had a decrease during the pandemic, and then we popped back up another 109,000. So, what does that mean to the public in terms of what we have to provide?

I think people need to understand that more than just the number. Why are we seeing this spending increase? Because if we're going to ask for additional funding, which you did not, I think we're going to have to give a people—give the people—a reason why.

The second thing is, I'd like to respectfully request, is if you could provide how the agencies have grown in their funding over the last 10 years. I think we need to seriously look at if there are agencies where there's bloated funding.

We—our numbers are so big that we're looking at, you know, it's kind of almost like a helicopter view. But given the seriousness of what we're facing, certainly, there are some agencies that really have bloated to an extent.

And I think there needs to be an answer to why and whether, in fact, it's necessary to maintain at that level. The second point I'd like to make, ironically, that I batted after Otani over there, of Senator Menjivar, I want to concur with her comments of my concern of the MCO tax, and I respect that you're in a difficult position.

Your comment was we're not in a position to backfill. Let me paint a picture for you of my district and many of our districts. You're talking about hospitals that are on the verge of closing.

You're talking about sitting in a hospital emergency room. I don't know if you've had an opportunity to do that recently, but you're talking about going into hospitals where people are waiting hours to receive care, where hospitals are doing everything that they can.

I have a hospital in my district where they have seats and they're taking pulse and doing the pre, you know, pre testing before a person even gets in a room, because they can't get in a room.

We have firefighters and paramedics who are waiting in emergency rooms, standing by people because they physically cannot leave them because the people can't be seen yet. So, to say we're not in a position, I would say we unfortunately are in that position, whether we like it or not.

The question is going to be how do we respond to it. But to say we're not in the position, we can't do anything. Do we plan on being Zombieland, where we're going to have Californians walking around hospitals who can't get care? That's not going to be an option.

So, if that's not going to be an option, I would strongly urge your Department that, sooner than later, and rather for my comment, May is kind of late. We need some responses of what are your options to deal with what we see. We see the tsunami as coming. You see it.

So, for us to kind of go, you know, this is where our numbers are and, you know, be an ostrich and put our head in the sand is not going to work. We need real discussions of options. What are going to be our options to deal with this?

Because to think it's not going to happen is just not an option. We need real options. And so, I want to concur. I'm not saying I necessarily support revenue options that may come forward. I may or I may not.

But to not have any of that in your presentation in the budget, I think really is derelict of duty because we cannot continue to operate the way that we are.

So, I would hope, come May, not only have, I'm sure, I would hope, some ideas of how funds can be moved around, what potential cuts we're going to have to make, but also, I think there has to be a discussion of what other options there might be, particularly regarding revenue. In my hospitals, I'm having people where they're receiving less than 75% on the dollar, meaning they're providing a service and their reimbursement is less than 75%.

How can they remain open? They cannot. They've been borrowing on their reserves. They're, you know, robbing Peter to pay Paul. But there's only so long they can do it. And we're going to have to have some other considerations.

So, I'd respectfully ask for information regarding down to the Department level, looking at where the increases have come, why have they come, and some of those areas we might consider being able to cut. And then, also, what other options do you have on the table, particularly regarding the MCO tax?

I don't want to tiptoe too much on my colleague over there, but I just want to concur for emphasis that this is something that's going to be desperately needed. I can pause if you wanted to respond.

I just want to touch on a couple things that you've said, and I think not addressing the problem is not a solution. I agree with you and I think, as I mentioned before, we intend on beginning discussions with leadership on what those solutions are. And the realization is the Administration shouldn't and can't do this on its own.

And so, the idea of partnering with the Legislature is a necessary step before—way before May Revision. I don't—I also want to be really clear, like we don't want to drop something on the Legislature at the May Revision and it's the first time you see it.

So, to many of the members' points and not backfilling for federal loss is, again, I stated that as a position because we don't have—we have finite dollars and we can't print money. But making the decisions to maintain hospitals and other things, that is something I think is part of the greater discussion.

Things can't stay the way they are because they're not sustainable—the way programs are being run. I think we all acknowledge that as we look to the out years and so, addressing some of that, the goal would be to maintain the hospitals and to maintain a lot of the core programs that are important to us, important to millions and millions of Californians.

So, just want to reiterate that because it isn't a no, we can't backfill, so, let's not have a conversation about it; it's we have to talk about it differently. And I think that's what we need to do and we need to do that as soon as possible. I will turn to my colleague for a response at MCO.

Laura Ayala, Department of Finance. Just to provide some general comments on MCO tax, the Governor's budget does assume the full transition period, and I know that that's that is an if, but the Administration is—one did not want to assume prematurely that we would get six months less.

As my colleague mentioned earlier, it's a $1.1 billion additional General Fund shortfall and we felt that it would be even harder to come with the Governor's budget already making premature cuts when we are still fighting and working really hard and waiting for federal guidance to obtain those additional six months.

And on the Hospital Quality Assurance Fee, we are also waiting for federal guidance, but the Administration collaborated with is collaborating with CMS and was able to obtain an extension through mid-March to submit a modified request. And this, again, is to obtain around $6.6 billion for support for hospitals.

So, we are waiting for federal guidance, but we didn't want to want to make premature cuts when we—or to let the gov, the Federal Government, know that we can backfill those dollars because we can't.

Yes.

So, Senator, I thought maybe I would offer to weigh in a little bit on your first question as well about the growth of state expenditures. And it's a really good question. And one of the things to remember, I guess about California finance, is that the voters have established some of the spending requirements too.

And so, over the years, Proposition 98 and Proposition 2 mandate essentially that when our revenues grow, so does our spending. So, not all of the increase in spending is a result of new policy choices by the Legislature.

That being said, back in 2024, our office did do some work on what were the biggest drivers of the expenditure growth. We found that overall expenditures—this is part of the origins of the structural deficit, which is why I think it's such a great question because that's the thing that we're expressing concern about.

But that expenditure growth had exceeded—had come to a point where it was exceeding—our revenue growth, the historically normal rate of revenue growth. And so, we wanted to dig into that and what was behind it.

What we found at that time is that it was being driven by particularly medi— growth in Medi Cal—and growth in IHSS, but also, we had provided more funding to the UCs, CSU, and childcare. And so, there were policy choices involved in that, of course.

Last year, when the state was facing a deficit, there were difficult choices made by the Legislature to make reductions in Medi Cal. That helped, from a fiscal standpoint, bring down the growth rate of the expense expenditures.

And so, at this point, what we see now is that the growth rate of expenditures is more in line with the growth rate of revenues. So, in that sense, it's good. It's just that the level of expenditures is still stuck way above the level of revenues, and so, we still have this big gap.

But that's a quick summary, I think, of our understanding of what is going on there.

I appreciate your expertise, and for both of you, I think the fact that we're all here present and we're all here prepared to ask these questions says that we are partners with you and we realize that we're all in this boat and if it sinks, it's all of us in it, not just, you know, one of us; it's all of us.

And so, I just encourage you—thank you for that information, Mr. Chair—I just encourage all of us, we've got to figure out a way, how do we message to the public what has happened, why it's happened, what can we do to resolve this so the public isn't just looking at us and saying, oh, you know, costs are too high, you're bloating, you're this, you're that, when they're really not understanding these details.

And I think also working frankly in conjunction with the media to make sure that we can properly communicate to the public. So, that's my first comment. My second thing, getting more now into the specifics of Sub 5, of which I'm Chair, I'd like to point out a couple things.

One, I noticed in transportation there is a reference to help in particular with one of our opening locations, which I saw certainly support and concur, but I didn't see any mention further of FIFA, the Olympics, Paralympics, and that is two years away. And I know, from having meetings with the Committee, there are additional resources.

California, it's my understanding we're being asked to assist or support far less than we normally would have, given the fact that we're using extensive existing facilities. But there still are, as my understand it, additional requirements from a public safety perspective, transportation, and so on.

And I was just surprised that there was no mention of it given the significance to California.

Hi, good morning. Teresa Calvert, Department of Finance. There's no new funding proposed here in the Governor's budget associated with the Olympics. As you recall, there was funding last year in the transportation area for Caltrans.

There was also a set of trailer bills that were worked on in coordination with the host Committee to help set the stage for the Olympics. But at this time, there's nothing new proposed. Conversations continue. We have conversations with both the city and the coordinating committee, but as you noted, no new funding is proposed in this Governor's budget.

I'm going to ask quick follow up question because you have roughly $100 million for Exposition Park. Isn't some of that going for the Olympics?

Right. That's a broader amount and some of that could be used in support of the upcoming events including, including the Olympics.

Yes, I did see that. However, and my colleague here that represents that area, Senator Smallwood, I will tell you though that that facility was built back 1932 of that Olympics. And so, we're now almost 100 years later. So, that will be—you're talking about hundreds of thousands and millions of people who are coming and those are overdue work that has been done.

And the point is that there are many venues throughout California where the Olympics and Paralympics will take place. Quite a few of them will be in my district.

I don't want to spend speak out of turn by naming names. We're probably not supposed to do that, but I would just encourage you, again, it might be helpful, regarding the staff, when we're getting a budget to talk about things.

Hey, we didn't mention these specifically, but these things are kind of on the table that may require some additional funding that we need to keep our eye on because as has been said, we're going to start our budget hearings and if we're starting them in a vacuum of assuming that's all we're going to need, it's my understanding that's not all we're going to need.

So, if we're going to need more, we need to at least communicate, again, to the public that additional resources might be required to put on a very safe event.

Senator Richardson, could you begin to wrap up and maybe if there issues that you haven't gotten to, you can ask for information they could provide to you?

Sure, I'll just end with two other points in particular. One has to do with the Judicial Branch. And we're planning on having one of our first hearings specifically about the Judicial Branch. There has been allocated in the budget 320.3 million for Public Building Construction Fund.

Could you please share what is the budget regarding specifically for repairs and maintenance? And I won't take a whole lot of time because I do plan on having one of our hearings on this, but courthouses in my district, you have where there's been major water damage, there aren't places for people to sit while they're waiting.

There's no places for people to eat. It is really not a place where we can hardly carry on justice. The court—the funding for the courts themselves is just not sufficient. So, I wanted to hear a little bit more about the Administration's thoughts on what are we going to do.

Hi, Good morning. Mark Jimenez, Department of Finance. So there's no. The budget maintains $80 million ongoing General Fund available for the judicial branch to address facility modifications and repairs. We have not augmented that and we've maintained that. And that's generally the pot of funding that they use to make those repairs.

And we defer to the judicial branch to allocate that funding based on their priorities.

Are you aware that additional funding is needed?

We understand that there are. The judicial branch maintains a list of facility modifications, deferred maintenance, generally, we understand that there is.

Are you aware that elevators are not working in our courthouses? Are you aware that people can't even get to the rooms? There's no water, there's no food. They have two vending machines in my district and one of those doesn't work.

I recognize that, and that's certainly one of the reasons why we augmented the judicial branches budget recently on an ongoing basis to increase their budget for facility modifications. However, in this budget, we are not proposing any new augmentations. We are maintaining the augmentations that we have committed in previous budgets.

So I would just suffice to say again, we only have so much money to do everything that we need to do. However, this is an area which we will be covering in a hearing where it is unsafe, it's unsanitary, and it's difficult to do business.

And we have an obligation of being a democracy to actually provide government at its best. And right now it's not operating like that. So the number is not sufficient and it's not safe. When I represented the Long Beach area, the escalator was down and a person died because the OES couldn't.

The paramedics couldn't get to them fast enough. This is a serious problem. This isn't enough. My last point will be on also in this Committee that has to do with the displaced worker program. You know, there's been discussions about closing refineries.

The Department of Finance, we're banking our budget on an economy fueled by AI for all intents and purposes. So are we thinking about that also? The implementation of AI is the replacement of workers. And so what is our plan on that end? You, you know, you can't.

My, my mom used to always say, you can't have your cake and eat it too. And so we can't be eating and feasting off, oh, an increase of revenue with AI without understanding that with the implementation of AI, you have a lot of workers who are now going to be displaced.

And that program, I don't see a comprehensive plan to deal with some of these upcoming closures and impacts that we know are going to happen.

Right. So our plan is not a replacement of humans with AI. I think going back to your initial statement about our revenues banking on AI, I think we recognize as noted that that is a risk. We don't know when that will happen. As was discussed earlier, LAO believes it may happen soon.

We've never incorporated a correction or a downturn in our forecast for many of the same reasons as were discussed in regards to what that might be impact in terms of having to make decisions on cuts, maybe untimely versus over a trajectory of years.

And in regards to AI and workforce, I think that is those are discussions that continue to happen. Understanding that there is a lot of sensitivity in somewhat and even controversy over that. But in regards to the displaced work program itself, I believe those funds are maintained. But I will.

If you could please be brief. We really need to move on here.

Allison Hewitt, I believe that there were some one time investments that were industry specific going back to the 2223 budget for oil and gas workers. And that was a one time allocation. There's no new allocations for displaced workers in the governor's budget, no cuts.

So the point I'm just trying to bring to your attention is it's been well publicized the closures of refineries in the state of California. And so there is going to be additional support needed for those workers. Those are workers who typically make over $100,000.

And finally to say that, you know, we're going to wait and see again about the impacts of AI, I would encourage you. I took my mom to dinner at Denny's and a little robot, a robot came and brought the food, opened up the trays for you to take out your food from. It is here. It's not coming. The train is here. Thank you.

Thank you very much. And I think that highlights what the Senator is going to highlight in her Subcommitee. We're going to move to Senator Reyes and Senator Blakespear is on deck.

Thank you so much. I want to preface my comments by saying that I absolutely, absolutely agree with my two colleagues who have spoken. We cannot wait until May. The question was asked by the chair, how will the Governor engage the Legislature on the May revise?

Before the May revise, what I heard is we intend to have discussions with leadership before May. Does leadership include the chair of this Committee and the chairs of the subcommittees or is it only the speaker and the pro tem?

Well, as I was speaking with the chair earlier today. We have meetings already being scheduled for discussions, and I think I would actually leave it up to leadership to decide how communication occurs in each of the Houses. But our intent is to have robust conversations and have them soon with Members.

Thank you. I came from the Assembly and had the privilege of sitting on every Subcommitee except for one and chairing one of those in the absence of one of my colleagues. One of the things that often happened is questions were asked and they weren't asked out of the blue. They were all provided before the hearing.

Yet we did not get. This is something my colleague talked about when we have the hearings. In order for us to make those difficult decisions, we need straight talk. We need straight answers. We don't need disinformation. We want to rely on the answers given to us so that we can then make those difficult decisions.

We want the responses to be prepared. If they aren't and we never received the proper answer, then we're making decisions based on half information. We need all of the information. As my colleague said, we are partners in this and we want to be true partners.

Now, as the chair of sub 2 natural resources, environmental protection and Energy, I do want to ask a few questions from that section. Addressing wildfire risk in California, especially in vulnerable areas, is something critical. It's a critical issue that must be addressed. Back in 2018, I had the privilege of being part of the SB901 Conference Committee.

We acknowledged the importance of Cal FIRE to work. We supported and allocated $200 million through fiscal year 2324, and that has been ongoing through to the present. And this is to help address healthy forests as well as other fuel reduction projects.

The work of SB901 has continued through last year through AB840, which includes a designated tier toward healthy and resilient forests in addition to that allocation. Page 38 of the governor's proposed proposal outlines that $1 billion in discretionary funding will go through GGRF 750 billion to be directed to Cal Fire.

My question is, can Finance make clear the current GGRF commitment already made to Cal Fire and the rationale for more investment, considering their current streams of income? And are there details you are able to provide regarding the impact of the additional funding?

Stephen Benson at the Department of Finance. So the $200 million that started with SB901, as you referred to in AB840, when they sort of redid the Cap and Invest program last year, they set up a tier 3 and that healthy forest related funding is in tier 3 and it now establishes caps, and you get up to those CAPS amounts based on how much auction proceeds come in.

So the governor's budget produced that was just released indicates what the current estimates are of what the Cal Fire will receive of that under current estimated auction proceeds. So right now we're estimating that of the 200 Cal Fire, we get 141 million roughly. That obviously won't be known until all of the auctions are done for 2627.

And if the auction proceeds come in higher, well, then they'll be up towards, you know, they'll get closer to that cap. If we get enough auction proceeds to fulfill all of the caps in tier three, then, you know, that's great. But projections right now are that that is not the case regarding the other portions.

So part of the agreement last year was to do a backfill of CAL FIRE agreement. The budget agreement between the Administration and the Legislature was to do a billion dollars of General Fund backfill in 25-26, $1.25 billion in 26-27, and then 500 million in 27-28 and in 28-29.

That was part of the solving for the General Fund issues in last year's budget deal. And so we're maintaining that in this budget

In essence, the discretionary fund from GGRF is being used completely for Cal Fire, is that correct?

Not completely, but there are other folks here who are more experts in GGRF than I am that could come up and talk to that if you want to depend on ggrf.

Good morning. Andrew March, Department of Finance. So, as my colleague mentioned, and I think, as you mentioned, chair, that there's 750 million of the 1 billion discretionary funding is being used to fund a portion of the Cal Fire General Fund shift. And then the other 250 million is actually spoken for in SB840.

So some of that funding is already allocated.

That's 1.43. Tier 3.

I'm sorry

From Tier 3.

No. So if you think about the new GGRF structures, there's tier one, which is sort of our existing obligations that are not necessarily able to be changed. So there's the SRA backfill, there's a manufacturing tax credit, there's state operations.

So for staff that are funded out of GGRF. And then we've also for the legislative Council Climate Bureau that was created or alluded to in SB840, tier 2 is a billion dollars for high-speed rail, a billion dollars of Discretionary funding. In that tier two of that billion dollars of discretionary funding, 750 million is for Cal Fire.

And then $250 million is allocated in SB 840 by the Legislature last year. And being continued this year. So it was, it was slated one time funding for fiscal year 26-27 in SB 840. So that sort of, that 250 million does not continue into 27-28 or 28-29.

But that will be further discussions between the Legislature and the Administration about how to spend that discretionary funding.

Okay. And the governor's budget accounts for the significant amount of interest earnings from GGRF to provide funding solutions. How much interest does the cash in GGRF generate on a yearly basis and how much is available now? How dependable are those funds as a projection?

So it really depends. So the last few years we've seen really high interest earnings around $600 million. But it's difficult to project. Some of it's dependent on the actual cash in the fund and what the how those projects are being spent.

So some of it, a large portion of it is associated with affordable housing, high speed rail and the various transit and transportation programs that have been funded out of GGRF. That sort of makes up that cash balance that's fairly large.

And so as that gets spent down and also the Federal Government's interest rate changes, that affects our interest earnings. So we're projecting, I believe around $550 million of interest earnings in the budget year.

Thank you. The next area I'd like to ask about is zero emission vehicles. On page 40 of the summary, the Governor highlighted that the state has invested nearly 3.7 billion already in zero emission cars, trucks and off road equipment.

Now he's proposing an additional 200 million in one time special funds to establish new light duties of incentive programs. Now yesterday the Assembly had their hearing and I do want to align my remarks with my Assembly counterpart, Assemblymember Bennett and highlight the lack of funding for heavy duty vehicles.

Why is the Administration focusing these funds on light duty vehicles? Medium and heavy duty vehicles and equipment have an outsized impact on air quality and there's significant momentum around cost parity and with diesel trucks with the introduction of the new electric semi truck. Yet the governor's budget does not include funding for medium and heavy duty vehicle incentives. Can you explain why?

So it's correct that there is no new funding for heavy duty vehicles in the governor's budget. However, I will point to last year there was $132 million for heavy duty vehicle incentives. That funding is still going out right now. So it's not without any funding for heavy duty vehicles.

And the goal, as the Governor stated last year, if the Federal Government was to pull back of the zero emission vehicle federal tax credit, that the state would step in.

And so this proposal is to step in in that case where the federal tax credit was not targeted towards heavy duty vehicles, it was targeted towards consumer purchases of light duty vehicles. And so this is the governor's budget proposal is to fill that void, partially backfill. To partially fill that void.

Obviously we're not going to be able to fund it at the level $200 million is not the level that the Federal Government was funding at, but it's to partially offset that to continue the adoption of zero emission vehicles in the consumer passenger space.

I would use the word backfill and I do that purposely because we are backfilling some things and we are not backfilling others when we say that we can't backfill what we're losing to take care of people's health, yet we're using our money to backfill on these vehicles.

And that's a comment and something that I will go into in greater detail during our sub 2 hearings. The next area I'd like to talk about is data centers. Mainly a comment on page 49 of your summary you mentioned the anticipation anticipated growth of data center development.

I want to take a moment to highlight the importance of understanding the impacts of large industrial energy users like data centers. And I want to voice my support for the funding of SB 57 by Senator Padilla.

I also want to highlight that this is a critical time to continue vital conversations on the use of water at data centers as well as evaluating their impact on the surrounding communities, such as the type of backup generation used on the site. Oftentimes the communities that are most impacted are the communities that are most vulnerable.

They are the ones that are already super impacted. And here is one more thing on top of everything else, another area that I will be talking about in my subcommittees. I mention these especially because I do want preparation before the Subcommitee hearings. As we know, questions go out before the hearing and they are no surprise.

And being prepared for those answers I think is something we deserve. The other area I want to talk about is AB617 on page 66 of the Governor's summary. He lauds the development of the Community Air Protection Program as a key initiative aimed at enhancing clean air, climate action and public health benefits for California.

As the author of SB352 last year. I was glad to see the oversight in the Bill complemented by 250 million dedicated to AB617 in the cap and invest allocation. I also acknowledge that given the status of revenue today, there is significant risk that the program will not receive full funding.

AB617 was a promise made to the pollution burdened communities throughout California nearly a decade ago that has yet to be fully realized. While there has been significant investment by the state, we have not seen a proportional reduction in emissions. Using diverse strategies to aggressively reduce air pollution in overburdened communities must be a priority.

And finally, an area that is not in my sub but I do want to emphasize what has been discussed. The General Fund, specifically spending on Medi Cal has doubled over the last six years and then we had the reductions.

However, fee for service rates for hospitals haven't been increased in 15 years and now hospitals, as noted earlier, are closing in several communities. How should the Legislature think about prioritizing investments in Medi-Cal programs?

Before I respond to that question, I just wanted to make a note that the ZEV proposal is special funds, not General funds.

So just making that point in regards to your comment on backfill, I would just go back to what I had said about the state not being in a capacity in a place where we can backfill for all lost federal funds, but that it will be important to have discussions with the Legislature to decide what funds we would want to and could be in a position to fund.

So I just want to make that note.

Thank you.

Yes, and in regards to Medi-Cal, it has, as Mr. Petek stated, has been one of the key drivers of expenses for the state in terms of the last few years because we have, as the Administration and the Legislature has decided to invest in that program, invest in particular aspects of that program.

But we do need to take a look at the program as a whole and how we spend and what we spend on all sides. So I would just say that as an answer to your question is part of that overall discussion has to be a look at how the state provides health care to Californians and to also.

Remember that if I may, final statement that our budget is a reflection of our.

I forgot the phrase...of our priorities, of our moral values. This is we as representatives, we were elected to represent the people of California in our respective districts. And what we do here with this budget is to show Californians how we are protecting them economically, health wise, the environment. In every area, we have to protect them.

That is our responsibility. And in the end we, we do that with a balanced budget, trying to figure out where we reduce, where we also find so that the reductions aren't harming people. They should also be balanced in other ways, not just on the backs of the people. So thank you so much for your comments.

I look forward to my hearings in sub two.

Thank you very much, Madam Chair. We're going to move to Senator Blakespear and on deck is Senator Cabaldon.

Thank you very much. Thank you Chair for convening this and leading us through this discussion. I appreciate your leadership and I want to say thank you to the Department of Finance and the LAO as well. This is very useful and I'm grateful for the information you've provided.

I think I'd like to start with this core question that the LAO presented to us, which is do you want to take action to address these risks?

So I want to start by making just the statement that I do want to and so steps for recognizing revenue risk and addressing structural deficits are acknowledge downside risk by adopting LAO revenue outlook, tackle budget problem, and shrink multi year deficits.

And I would just like to say that I do support doing all those things and I think it's important that we get ourselves out of the position as the fourth largest economy of being in a multi-year, multi-billion dollar budget deficit.

Because I think that it's simply an irresponsible position to be putting ourselves in and it does expose us to tremendous risks in the event and likelihood that we do have a downturn in our economy. So getting ourselves in a different position in the biggest picture is a priority of mine.

I also recognize I'd like to support the idea of funding the rainy day Fund and not suspending that deposit.

But also I just want to recognize that my next comments, like Mr. Petek said from the LAO, he said what I'm saying adds to the problem before you and I recognize that what I'm about to say after this will add to the problems before us. But this is our opportunity to highlight priorities.

So, I want to make sure to say the things that I think are important that are missing in this budget.

So one of the big ones to me is the lack of inclusion of 500 million for homelessness in HHAP or something that is HHAP-adjacent; some type of program to maintain and sustain the city's support for our unsheltered street homelessness crisis.

And I'm specifically going to be advocating to increase the capacity for our emergency and interim housing, which is something that we have not prioritized as much. We have close to at least 200,000 people who sleep on our streets and sidewalks and parks and Caltrans right of ways.

And I just continue to find this to be completely unacceptable and think that - recognize that we have made some progress and we have devoted a lot of money to this problem. But when you walk around with outreach workers and talk to people who are unsheltered and their first question is, "Do you have a bed for me tonight? Do you have a place for me to stay?"

And nine out of ten times the answer, at least in the county of San Diego is no, "We do not have a place for you. But here's a granola bar and a water bottle, and let's have a lot of additional conversations of follow up to build rapport."

To me that is not properly prioritizing what we want to do in our state budget. So the solution to have a rapid increase in net additional beds for both interim and shelter capacity is a high priority for me. I think we obviously need to continue to focus permanent units, permanent supportive, market rate.

But these take years if not decades to build. And in the meantime the streets continue to be the waiting room for people who are unsheltered. And we need to address that as the top crisis that it is in the state and that constituents continually tell us in polling that it is so.

And I also just want to recognize that the Governor highlighted, in the State of the State, the positive momentum around exits from homelessness and he was celebrating that.

And it's important to think about how we're going to sustain that directionality if we have a reduction in funding by half at 500 million instead of a billion for our cities. So that's a really top priority. I think I also recognize that CARE court does have funding in it, but it, it needs to have a throughput requirement.

We have very few people being processed in CARE Court. It's very process heavy and it is very staffing heavy. And so having a continuing commitment of funding needs to be paired with the accountability that CARE Court process through a certain number of people. So it's not just open ended in the way that it is currently.

I also want to recognize as a member of Budget Sub 2, the need to fund the wildlife coexistence program at 15 million about a year, which is something that had been funded in previous years and despite its success, was defunded. And this is related to the relationship between people and wildlife, so the Wildlife Coexistence Program.

We also need to fund Prop 36. Prop 36 was passed by all counties: 58 counties in the state of California. Every single one passed Prop 36 by large margins.

And so delivering on what voters promised means that we need to have clarity on how implementation will be funded and how capacity gaps will be addressed. The reports from where CARE Court is operating are very positive.

People say that when they were forced to take treatment, because otherwise they would go to jail, they took the drug treatment and rehab, and they're in a much, much better place because of it.

So, recognizing the benefits of that and investing around our treatment pathways, I very much encourage the administration to outreach to those on the ground, to the counties, to law enforcement, to courts, to identify the most important places for funding.

You know, we are lobbied by all the different parts of our city and county government, but it's really important, I think that the administration do their own assessment of where do you think the funding would be most productive.

And then finally, I'll just end with, we have many of our transit agencies on the brink, and so we need to have sustainable funding for transit.

And this is something that comes up in a lot of different contexts, but recognizing that a lot of transit money is one time right now, and it is available for infrastructure and less for service. And so really tackling the reality that we want to have transit grow in the state of California.

For - to fight climate change, for affordability reasons, for public health reasons, for literally every reason, but we have to invest in it. And it's something that does seem like it's been a bit on the back burner.

So, I just want to mention that today, and I'll also recognize that my colleagues have talked about some really important things, and I won't repeat them, but I know we have a little brief moment here to communicate with you, so I wanted to make sure and put those things out there.

And with that, I'll yield back to the Chair. Thank you.

Thank you very much. I appreciate your comments. We'll move to Senator Cabaldon and Senator Grove is on deck.

All right, thank you, Mr. Chair. And I want to associate myself with pretty much all the remarks that have made. I agreed with the Chair's 100% of the Chair's opening remarks and 95% of the Vice Chair's opening remarks. You know, it's not unusual.

I mean, last year at this hearing, which was the first time I was a member of this committee, this hearing was consumed by justified fury. We were facing a $10 billion Medi-Cal problem, in terms of overspending. And I and my colleagues were angry. How could this happen? How could the forecast have been so wrong?

Why didn't somebody raise the alarm about these issues? And we're back here this year, and I think the question we have to ask ourselves is if somebody had told us about that before last year, would we have listened? The legislative analyst, like most legislative analysts, always to me, seems a little Canadian.

Very, very polite, you know, hesitant to use, you know, any colorful adjectives or adverbs.

And so when you see a report by the legislative analyst that both verbally but also in writing, many times uses words like alarming, this is exactly the kind of moment that we said we wanted to know about in advance last year. And we have to take action appropriately in that regard.

LAO does not use alarming casually, and they're not incorrect. So we were talking earlier about the potential downside risk, and I just want - so, if we were to eliminate all general fund spending on corrections and rehabilitation, all general funding for environmental protection and natural resources, water supply, air pollution, everything else. All general fund spending for housing and homelessness, all general fund spending for labor and workforce development, all legislative, all general fund money for transportation, and all general fund money for UC and CSU, we would still not be at $60 billion, which is with the downside risk number that the legislative analyst was describing.

That's the scale of what we're talking about. We could eliminate everything except for K12 and health and human services, and we still would not be in a position to meet the challenge that the legislative analyst is putting before us.

And so sometimes, you know, the difference between 2 billion and 60 billion is hard to comprehend, but it is - that's the, that's the scale of what we're describing.

Feels a little bit like I'm at the family dinner in December with Mom and dad and 100 people watching us, and we're having the conversation because our rent's gone up, our health insurance premiums have gone up, and we're trying to grapple with. Now, we have every month we're spending $3,000 more than we're taking in in our wages.

And how are we going to grapple with this? Mom walks in and says, "Hey, good news, good news. We just got a - we just found a $36,000 bonus at work."

And then dad walks in and says, "Yeah, but I don't know if you saw on Reddit, but there's rumors out there that the plant that we're working at is, might close next year." So what do we do now? You can do neither of two things.

You cannot simply assume you're going to get a bonus forever at a factory that may be closing. But also, you can't just simply not spend any money at all. So, I think part of our challenge here is that we are trying to, as we always have in California, obsessed about like, what's the right forecast number?

You know, which, which one of you is right between this $30 billion? But that is not the point this year. The point is the structural deficit married with the structural uncertainty, which is just as massive as the deficit itself.

And the cost of getting that wrong are so large that we cannot simply say we're going to plan for one or the other. Personally, I believe we should be in the legislature. We should be developing two parallel budgets. An "A" budget that's basically Department of Finance's forecast, and a "B: budget that is, you know, somewhere in the - not at the bottom, but at the lower range of the LAO forecast.

So, that we are simultaneously preparing for the range of what is the most likely outcomes that we'll be facing in May and in June. We have to vote on a final budget.

We are - because that structural uncertainty is so much more significant than it has ever been before. This is new.

Part of that is because so much of our spending now is much more of it is on direct payments to people or direct payments for services to people, which was not our budget in the last two major downturns, but through investments in education, healthcare, and everything else that is important.

For all the reasons that Senator Reyes outlined, a much larger proportion of our budget is to people, which makes cuts much harder than it used to be. When it was like, cut it. Let's just cut that agency 10%. And so we have to grapple with that uncertainty and preparing for both.

Because the other thing I just want to point out is that nobody needs to ask the Senate, like, how should we communicate about these hard choices over the next several months. Nobody needs to wait for the President pro tem to answer a call to say, who should you talk to.

It's in our rules, it's in our structure, it's in our committees. The process is fully laid out, and it is a process that is to be for the entire senate and for the people of California through their elected representatives.

This is not a year to say, "Hey, let's take the closed door negotiations of the final two weeks and let's have closed door negotiations for five months." That is not the outcome.

That's not the standard we should be setting because this is going to be the challenges that are before California are just as big as we're facing here in this committee.

And so I would just urge the administration to not think about shortcutting to how do we get to the may revised conversations now, but instead how do we make real the budget subcommittee's hearings and processes answer the questions, grapple with hard choices, and then as I say, in my view, we should be developing an "A" budget and a "B" budget to try to grapple with those issues so that the subcommittees are not theater.

But they are, but they are real.

I think the other two points I want to make, because I know that I'm not looking at him, but I'm sure the Chair is looking at me, is that, you know, last year in Budget Sub 4 and under the leadership of our Chair, Senator Hurtado, you know, last year Senator Smallwood Cuevas and Senator Niello, when I heard the proposals from the administration for, I think $20 million, for achieving hundreds of million dollars of savings and what have you, we do have to focus on redesign of state government.

Yesterday in this very room, the California Association of Student Councils were here and they make their very earnest proposals about what to do in state government. And one of them was convening a task force of volunteers twice. I don't remember what the topic was.

And I had to give them the bad news, that's likely to get scored by the Appropriations Committee and the Department of Finance as a half a million dollar cost. And their mouths were wide open. And it caused me to think for a second, "Oh my God, they're, they're right."

Like, how is that, how crazy is that that it costs - we spend a half a million dollars to bring 18 people together twice a year and write a report? That's nuts. We have a cost disease problem in state government that we have to tackle.

And in Sub 4, it's clear every single hearing, we are spending too much to deliver too little in terms of the efficiency and effectiveness of our services. And so I'm looking forward to hearing about the results of the consultant contracts on that issue last year. But we really have to focus on that.

Another area where that can make a difference is on the, just as an example, on the Medi-Cal issues as was pointed out by the chair of Sub One, is that one of the issues here is how are folks going to get pushed off by the increasing requirements for verification.

Things like hours worked, for example, for Medi-Cal. Well, we can collect that data through the EDD system.

In addition to thinking about backfill or not backfill, how do we prevent folks falling off the system by connecting our data systems and making sure we have the right data so they don't have to validate and verify and get kicked off by the bureaucracy.

And so I hope through the breakthrough project, through the work of the Data Innovation Unit and all of that, that we can also think about how we are helping Californians, even where we cannot do a backfill, that will help make sure that they are not falling victim to the machinations in Washington that are intended to try to push them off their benefits.

And so the last thing I will say is just to add on, because the Housing and Homelessness program is also in Budget Sub 4, and I know Senator Hurtado is focused very much on this as well. And that is last year, the last couple of years when there had been proposals for zero money in that program.

And we held extensive hearings about this, and the response from the administration was this was needed because the money, it wasn't working. Cities and counties are getting all this money and where's the results? We're not seeing any impacts. And so, like, we're not putting any more money in this.

And then we go through this annual dance of negotiations where we say, "No, it's a top priority throughout the state and so do the people of California." This year in the state of the state address, the Governor says, "Hey, good news, it's working. And here, like, here's five and six counties and cities that are, that are showing the way and we're leading the country in our effectiveness on homeless and housing. And therefore I am again proposing no money for the program other than the money that we insisted on and agreed to be triggered this year."

But it's not actually - so, that half a billion is from last year's budget. So, I am trying to grapple with what is the administration's real view on this. Is it that the investments that we have made don't matter and somehow cities and counties are accomplishing significant improvements in housing, in homelessness by immaculate conception, or do they matter?

Have they been working? And if so, why is that? Why would we be in all the areas in the entire budget hitting homelessness and housing among the hardest? And I know the dance that's happening and I just want everyone knows it.

So we should just call that and name this theater where we go through every year and pretend that this is a top priority for the legislature and it's not a priority for the administration. I get all of that.

Can you pick on some other policy area just once and not go after homelessness and just let it, because this money is already one time. It's already by application. It's already uncertain to add on that we're not even going to be able to tell cities and counties. Whether the pot exists until June at the end of the negotiations makes it very hard for cities and counties and communities and continuums of care to be able to meet the needs on the street.

And so it's not a question. Of course, if you need to respond, but the Chair is going to cut us both off.

But this has to be a priority.

Please let us not wait and dance on this in theater between now and May and June and let's figure out the homelessness resources along the lines that Senator Blakespear said and then make it in the budget so that people can have in the in California communities can actually make the investments and the plans and hire the people that they need in order to meet their needs.

So thank you and apologize, Mr. Chairman. Thank you.

We have seven people left and I can see public comment with wings on it heading out the the door. So because we have a hard stop at 11:45, we have to to stop. And actually the notion that we might do two budgets is not what I signed up for. Just for the record.

Next up is Senator Grove and on deck is Senator Ochoa Bogh.

Thank you. Thank you, Mr. Chair, for this. I will probably hopefully be done in less than five minutes and I will do my best to hurry. I'm going to make a few comments.

My colleague who chairs Budget Sub 3, we have our work cut out for us this year to defend the people that are most vulnerable in California. And I will be right by your side and we will do everything we can to protect them because they deserve it.

Regarding the financially distressed hospital bills, I wasn't even going to comment on this stuff, but because my colleagues did. We had a deal on the table a few years ago with the MCO tax and then that was swept into the budget.

The bottom line is that anybody who operates a hospital or medical facility has a pathway to bankruptcy because our Medi-Cal reimbursement rate is so low in people with high populations of that high populations for treatment for that population of our state. You can't make it up with commercial market.

Doesn't matter how much you get with your Blue Crosses and your Blue Shields and all this stuff, you cannot make up that difference. And that MCO tax that I think all of us voted on should have covered that, but the administration keeps sweeping that into other than what it was intended for by this legislative vote.

Is that going to happen again this year?

Laura Ayala, Department of Finance. Thank you, Senator. The calendar year 2025 provider payments are going out. That the plan is for the hospitals to receive the funding that was estimated for them from the MCO tax.

The calendar year 2026 payments are the ones that are still pending just because we're waiting for federal guidance on the additional six months of revenue.

Okay, thank you. So skipping off of hospitals, trying to move quickly so that we honor everybody else's time. My colleague, I love her, she's awesome. She talked about, you know, vending machines not being broken in the courthouses that she have. We're closing down courthouses.

My constituents have to drive 2, 2 and a half hours in order to even get to court. And some of these people that have to go to court for either family matters or traffic tickets or offenses, they don't have a car to drive two and a half hours down a mountain to get to a courthouse.

So I agree with my colleague about fixing our courthouse and would be interested in the information that's provided so that we can put courthouses back in the budget? I don't have a question, just a comment. Sorry, sorry. Great job, though, coming to the mic. You were ready for me. I could tell. You know, we have solutions.

If we were willing to take on these problems and provide these solutions; we had a solution at the end of last year's budget to save Valero, we wouldn't be losing over 600 union jobs in the Valero facility.

You wouldn't have Benicia, with the city that has like 16 to 20% of the budget that Valero provided, not to mention the ancillary cost where you have 600 employees that make $100,000 a year or more spending money in that community. So we have a situation there. We could have did - we could have fixed that before we left here last session.

And that was on the Senate. That failed in the Senate. It wasn't the Governor. I know everybody likes to lay blame there. I know that he was trying hard to make sure that that happened. He had the Vice Chair there. So my comment is against there.

We had real solutions. After Valero said they were leaving, willing to write a billion dollars worth of contracts off to buy out contracts that they had, they stopped that because there was a deal, per se on the table for three policy fixes - three policy fixes and a portion of a shutdown that they have due in April.

And we didn't come through on that. So now we're grappling with a reduction in the refinery capacity that we have, increased cost for every Californian for fuel, job loss like no tomorrow because now you have Crimson, the pipeline workers, the pipe trades, ancillary costs. We have a domino effect that's very - it's a mess.

And we could have fixed that, but we didn't. So that's on us. We did the production piece, and I'm grateful for that. But you can't produce it because you don't know where it's going to go. I mean, there's a lot of problems that need to be fixed in that.

So we create these problems, is what I'm trying to say. But we have the answers. And if we were bold enough to take this, to take on the solutions and fix it, we have the answer to financially distressed hospitals. We have the answers to job loss in the energy industry. We have the answer to affordability.

When you look at energy costs, 6 cents a kilowatt. Who doesn't want to pay 6 cents a kilowatt? What municipality? This building, if we weren't paying 41 cents a kilowatt in this building per hour for energy, we have that answer.

But it's been 70 sitting at CalGEM since 2017 because, oh, my God, it has to do with depleted oil fields. And, you know, it's oil and it's - you know, that always has a preference of a bad word. It's a thousand worse. It's a thousand hours of battery storage instantly dispatched to the grid, all underground.

Firefighters love it because it doesn't catch on fire like batteries. It just burns toxins into the air. And the West Kern Water District, that pumps the water over to my Los Angeles colleagues that can't afford the PGE bill anymore: they're all for it. But, we can't get it out of an administrative facility that's governed by this body.

So we have solutions that would bring affordability to the budget. I wasn't going to talk about all that stuff, but my colleagues brought it up. I just have a question on the investment for CalPERS. CalPERS lost about $330 million last year. 71% of the loss of the $680 million investment that was for clean technology or clean energy: is that calculated in the budget?

I know overall that the investments performed well, not these investments, but overall we did have an increase. But is there a concern at all about our retirees, our state retirees, the CalPERS program with the investments, and not to mention that the people who made that investment made $22 million off of.

We should probably done use those people anymore. I don't think they performed well. Is there a concern with the CalPERS investments and where we put our money? And is there going to be adequate resources available to make sure that retirees in the next five years have those investments available?

I don't have the specifics of the investment loss that you're speaking to, but in regards to the state's contribution to perspective that is maintained. I think there are, as with many investment, there are ups and there are downs and the returns, I believe, have been higher than the base. Is that right? 7%? Yeah.

And so there's no concern in regards to our retirees on that front.

Okay. Is there a concern about the energy industry and what we have in the potential of 8 to 10 dollar a gallon gas? I know that's something that you guys aren't calculating into your budget per se, but I mean that's a concern for all of us.

I would think, on this dais, because 20% of our refinery capacity, not to mention the job loss associated that all signatory positions, all signatory positions. Are we concerned about that at all? And what the impact. I mean, I guess we lose the tax rate revenue. We all those jobs lost create a tax revenue. We're heavily tax based.

So losing those jobs and the tax based structure that's in, you know, for our budget, the millionaires tax or billionaires tax, I know that. I had a guy sat across the table from me just a week ago, slid me a Wyoming driver's license. I bet he pays anywhere from 30 million to 40 million dollars in taxes.

How many of us does it take to make up that one guy leaving? So we have to have real solutions. And I'm just wondering if there's a hesitancy. Are you calculating in job losses? I don't even know what the estimate of my colleague's Benicia refinery is for payroll. I heard it was in the billions.

What's the impact of our budget based on billions of dollars of payroll that won't be paid anymore? I mean, are we looking at that as well or is that just something that we don't?

And could I please ask for a brief answer? We have seven more senators. We've reached the time that we were going to end senate comments. I want to give them each a couple minutes and give somebody a chance to do public testimony.

Skip it and reply back to my office. You don't have to respond like answers on those kinds of things because the higher the job loss the less revenue that we have. Thank you. Mr. Chair, thank you.

Thank you. I will go to Senator Ochoa Bogh and then Senator Seyarto, and let me ask if it's possible that you could ask for for answers that come outside of the hearing to just try to move through because I want to try to get to public comment by 11:30 and we have to adjourn by 11:45.

I apologize for the fact that we're in this situation. Senator Ochoa Bogh, Senator Seyarto to on deck.

Good morning and thank you Mr. Chair. And good morning; glad to have you folks here. I want to highlight just a couple of things that are important for our for my area in in the Inland Empire, both Riverside and San Bernardino County, and that is with regards to the court system as mentioned.

I really do appreciate the comments that were made by Senator Richardson earlier today. But I just, according to my notes here, I have that the Governor's budget proposes a total of 374 million, 54 million from the general fund, 320 million for the lease revenue bond fund for various phases of nine court construction projects.

These include and accommodate new judgeships in King, San Joaquin and Sutter Counties. We also have the ability to replace facilities that have critical deficiencies in Fresno, Nevada, Plumas, San Luis Obispo and Solano Counties, and and then some funding for to relocate courtrooms from federally owned facilities scheduled for divestment in LA County.

The total estimated cost for these nine projects approximately 1.8 million - billion with a "B". My question is the Inland Empire. Nowhere has it been mentioned here and it is the fastest growing region in the state of California. It is completely underfunded when it comes to the courthouses, accessibility to the criminal justice system which makes it - I'm shocked. I'm shocked that -

And if we could give her a chance to do a quick answer and then anything that can't be answered she'd get to you after the hearing.

That'd be great. So, prioritizing the Inland Empire right now I think would be incredibly helpful especially considering the fact that we are the fastest growing. Nothing has been allocated for it, nothing mentioned here and maybe I missed it somewhere but I would -

Let's give her a chance to answer. Thank you.

Absolutely, sorry.

Thank you for the question. Sally Lukenbill, Department of Finance. So, the court renovations and court replacements are based on a list of priorities that's established in the 2019 reassessment plan for the court. So there's a very calculated order that we go into that we recommend.

And it's all based on level of deficiency in each courthouse and the need for immediate repairs and for immediate replacement.

And then could I ask a favor? Could you work with Senator Ochoa Bogh's office outside the hearing to get her those factors and acknowledge why it's an issue with the ones that are in her area? Thank you. All right. Okay. Noted also for Senator Reyes. Okay.

Anything else subject wise, that they can answer outside the hearing before we move out?

No question on that end. It has to do with the unemployment insurance that was brought up earlier today. We're currently. Oh, going back to the courthouse. Sorry, just one last question.

Well, let's do this quickly because you're cutting into time for your colleagues.

Okay, just...well, everybody had a lot of time, so.

Okay, but we're cutting off the public then, so keep going and we'll cut off the public .

Just on that end, the other thing that I wanted to just mention is does the state need to prioritize a larger pot of funding for our court to be bill deficiencies to be addressed and just have accessibility to it? Do we need to reevaluate what we're spending on that end?

And then the other one is the unemployment insurance that has to do with. We're currently borrowed $21 billion as mentioned earlier by the Vice Chair, we have not paid it back. The only state that has not paid it back, we're allocating $662 million in interest payments.

And when do we start addressing the principal about for those $21 billion? And what is the expected date of saying that we're going to finish paying that off? Because that is, as mentioned earlier, carried by our business owners, they're actually providing the jobs in California.

Thank you. We'll provide additional information to your office and to the offices of the Members who I saw raise their hands. Thank you.

Thank you very much. Senator Seyarto and Senator Smallwood-Cuevas is on deck.

All right, so number one, public budgets are supposed to be based on low risk, conservative estimates for revenue and expenditures shouldn't be exceeding those projections. And every year for the last few years we've done that and it's reflected in this 77% rise in our expenditures.