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Senate Budget and Fiscal Review Committee California State Senate
Follow its sittingsSpeaker 2
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
Speaker 3
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. I've been calling,
Speaker 2
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 subcommittee 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 $20,000,000,000 debt to the federal government for unemployment insurance.
During the pandemic, the employ the the economy shut down, and, probably half the states in the 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 $20,000,000,000.
Speaker 2
is truly a daunting task for us, and, it is now, I'm gonna use a term that comes from, auto mechanics. A device on an engine to limit its output is called a governor. Small g governor. 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.
Speaker 1
Thank you. And I look forward to many more car analogies in your your talks. Before we move to to Ms. Lee, we have achieved a quorum. Would you please call the roll?
Speaker 4
Senator Slayer? Here. Nilo? Here. Lakespeare?
Here. Cabaldon? Here. Choi? Here.
Doroso? Please. Gonzales? Grove? Hurtado?
Here. McNerney? Yep. Manjibar? Ochoa Bogue?
Here. Perez? Here. Reyes? Here.
Richardson? Here. Sarto? Here. Smallwood Cuevas?
Here. Weber Pearson.
Speaker 1
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 Paddock, the legislative analyst.
And then following that, we will have questions and comments from members. So Ms. Lee, welcome to the committee.
Speaker 4
Thank you. Good morning, Chair Laird, Vice Chair Nilo, and members of the committee. Erica Lee with the Department of Finance, and I'm here today to present on the governor's 2627 budget. And before getting into the 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 2728, that's over 20,000,000,000 and, continuing beyond that. So while the governor's budget does address the budget year, the administration is proposing to partner with legislature to also address the structural imbalance in the budget year '1 or 2728 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, it's 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 350,000,000,000 in expenditures, of which about 250,000,000,000 is general fund. That is roughly 19,900,000,000.0 over what was in the Budget Act. The revenues, as was also mentioned, have been upgraded since the Budget Act to over $42,000,000,000 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, forecasting a budget year deficit of about 2,900,000,000.0, and I just wanna walk you through that to understand how having $42,000,000,000 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 two.
Proposition 98 is for funding our k through 12 k through 14 education. Prop two is for the rainy day fund. And so together, the two are about $20,000,000,000 of that excess revenue that's coming in. We also started this year with a shortfall of about $12,600,000,000 so we had to address that issue. So you have the $20,000,000,000 from Prop 98.
Prop two, you have the 12,600,000,000.0 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 safe, fund for economic uncertainty because we are certainly surrounded by a lot of uncertainty uncertainty these days, and so having that reserve is going to be important going forward. And so that is what gets us to, our 2,900,000,000.0 budget deficit. As I mentioned, the out years, we are looking at about 22,000,000,000 in negative in a deficit in budget year plus one, which is '27, '28, and over twenty billion beyond that.
Again, we acknowledge this this budget needs to address not just budget year, but it 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 $23,000,000,000 And of that, that's $14,400,000,000 in our rainy day fund. About $4,100,000,000 is set aside for our education rainy day fund. And then, again, as I mentioned, the SFEU is 4,500,000,000.0. So together, that makes about 23,000,000,000 in reserves for the state.
The one thing I would like to mention as we talk about reserves is we have 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're suspending the current year revenue of about 2,800,000,000.0, which we believe is in line with the solution that we took in twenty twenty four, twenty five when we had a budget a budget emergency, and we're withdrawing from the rainy day fund. So we are maintaining that alignment and not not truing up the current year BSA amount, 2.8. That pretty much addresses that $2,900,000,000 shortfall.
And so given all of these numbers, this is really a 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 what we mean by workload given the fact that we are trying to solve for a deficit. That sort of big picture, big number, so I'm just gonna go into some of the policy areas and and then pass it over to my colleague.
The budget within the budget, as I I'd like to call proposition 98, has been upgraded as a result of upgraded revenues. And so we're looking at 21,700,000,000.0 more over the budget window. So that's the prior year, the current year, and the budget year. And that is 21,700,000,000.0 more than what we were expecting at the 2025 budget act. We had a settle up at the 2025, meaning we owed proposition 98 about $1,900,000,000.
We are proposing to pay that for the 2425 year. However, we are proposing, a new settle up for this current year of 2526, of $5,600,000,000, 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, 1,900,000,000.0, 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 state 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 $716,000,000 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 2526. 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 multiyear plan, which is about 2,100,000,000.0 of that total $10,000,000.
And I just wanna point out that $314,000,000 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 $200,000,000 one time, and these are these are special funds, to keep ZEVS affordable and accessible for all with a new light duty ZEV incentive program. On for health and human services, we maintain we assume the the continuation of Cal AIM. We also include additional cost as a result of HR one and HR one impacts of about 1,400,000,000.0 total across HHS in the budget year. That grows in the out years, but the costs are split up about 1,100,000,000.0 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.
In CalFresh, we're looking at both savings and and costs as a as a result of HR one impacts and changes to policy, resulting in a net cost of of about 300,000,000, and I'd say largely due to the increased state share of CalFresh administration moving from 25% to 50%. For child care, we include about 90,000,000 ongoing for a COLA, and then we also have 11,500,000.0 one time proposition $64 for child infrastructure, particularly specifically targeted toward communities that were impacted by the recent fires. 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 new renewable sources rather than crude oil. And then lastly, the budget proposes to extend the California Competes tax credit, which is currently scheduled to sunset in 2728 by another five years. And with that, I just wanna thank take this opportunity to thank the committee for the 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.
Speaker 1
Thank you very much. And we're going to hold questions until after the legislative analyst presentation. Welcome to the committee.
Speaker 5
Good morning. Thank you, Chair Laird and Vice Chair Nilo 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 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 just touch on with that said, let me just touch for a moment on some of the main features of the budget that Ms.
Li also referred to. But as you may know from our November fiscal outlook, our office estimated that the state faces an $18,000,000,000 budget deficit for the upcoming budget year, and the administration has estimated that it's about 3,000,000,000. And so, the main explanation for this difference, of course, does have to do with the administration's revenue estimates, which are about 30,000,000,000 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 2,000,000,000 in higher costs across the rest of the state budget than we did in November.
And I'll 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 $600,000,000 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 4,500,000,000.0 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 condition summary. And if you look at the column for twenty twenty six, twenty seven, 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 $20,000,000,000 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 the administration is estimating that revenues are up by 42,000,000,000 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 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 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 that in normal times, that that measure would be about three times higher than that. And the only times this measure has gotten this low was in the 2007 and in late nineteen ninety eight. 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 a 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 norm, the normal level that we see.
And then the last one on here is just a measure of how much equity is being held by households across the country. How the level of stock holdings. Now, 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 seventy years. And this is also a 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 the state budget and before the legislature, 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, know, 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, the market has actually been up.
It's increased around 50% over the two years. And yet, 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, 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 watermark. Okay. So moving on to the next page. Basically, is an attempt to sort of 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 down turn, but they're more structural in nature.
They've 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 speaking to here. However, his proposal stopped short of making material recommendations for how to address those.
So, And 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.
You but even 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 5,000,000,000, 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 $42,000,000,000 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 $20,000,000,000 per year. And so, we would encourage you to consider identifying plan, at least, this year for shrinking it by $10,000,000,000 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 that what the situation is by May.
We we strongly believe there's this downside risk. However, we're talking about the budget year, goes until June 2027. And so it might be that in May, we don't know yet at that time that the down turn 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 don't 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 the we did this in our fiscal outlook, this calculation. But if the if our number, if it was a $35,000,000,000 annual structural deficit, in order for that to resolve itself naturally through revenue growth, you don't need 35,000,000,000. We estimate you would need more like $60,000,000,000 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 is not plausible. It would be like counting on an eightieth 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 where we recommend that approach.
So I'll stop with that and here with my colleagues in case you have any questions for us.
Speaker 1
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 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, Blake Spear, and Kabolden. Let me just add as I see them. Okay. This is good. Well, it's okay.
We'll get to everybody eventually. Great. I'm going to begin by asking a few questions, and some of them play off of the comments that you just made. Let me ask the legislative analyst. 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 that it corrects later than you anticipated? How will that be built into your projection?
Speaker 5
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, 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 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's 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 state's structural fiscal position if we were to take actions that were living under the numbers that we put forward. I don't know if, Brian, you'd want to add.
Speaker 1
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 and 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.
Speaker 6
Senator, Brian Mueller 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 see these out of 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 year deficits, we take no action, we actually hit the downturn and instead of it being 35,000,000,000, it's a $60,000,000,000 budget problem and now you have a much worse situation that you weren't prepared for.
Right? And so, as Gay mentioned, our approach attempts to sort of take a middle ground of those two things to not suggest you prepare for that 60,000,000,000 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 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 Gay 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.
Speaker 1
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. So how will you engage with the legislature in the next few months before the May revise to talk about some of those options?
Speaker 4
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.
Speaker 1
Okay. We're anxious to have those conversations and not feel like we're jammed at the end. Correct. And then both of you spoke about the reserves, and this is a significant reserve by historic standards. And I mean going from $14,400,000,000 to $23,000,000,000 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 how we might be able to build those reserves during the next few years. I don't know. Who wants to go first?
Speaker 4
Yeah. I mean, I think, as you know, we withdrew from the rainy day fund over a period of two years to the tune of about 12,000,000,000. 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, a 10% cap based on proposition two. The legislature and the administration can always exceed that and put more in, and we have that we have done discretionary deposits into the 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 $11,400,000,000 planned to and then over the next three years to put in the reserves, 3,000,000,000 in budget year?
Speaker 5
to 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. 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 on 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, Anne, 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.
Speaker 7
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 or, 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 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.
Speaker 1
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 identified 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 get about this year because the idea of a reserve for volatility is you really fill it during the good times and are ready for the bad times. But that's the only way we're going to have further steps to deal with volatility, so we should talk about it. My last question is of the Department of Finance and it's in 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.
Speaker 4
The current year is not yet certified. And so we also, just acknowledging the same uncertainty that you've mentioned, don't want to certify that until we actually know what the calculation will bear out in the end. And so creating that settle up acknowledges that uncertainty. And also, to comment on one of the things that my colleague Kara said in terms of, Safi, instead of creating a settle up of $5,600,000,000 putting that in a reserve, and I would just say the result of that would be then we would need an additional $5,600,000,000 in cuts in the year. And I think just acknowledging that that should be 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 the long term and the short term, coming up with solutions to bridge that gap. So I don't know if there's anything that like my colleague would like to add.
Speaker 8
Alex Shope, Department of Finance. So I would just add that for the settle proposal, which is in twenty five-twenty six, 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. It acknowledges, obviously, there's the uncertainty in revenue projections and acknowledges the statutory restrictions on being able to reduce Proposition 98 once twenty five-twenty six becomes the past year. Next year, right, of course, that was the kind of issue we had with the 2024 Budget Act, with fiscal year 'twenty two-'twenty three when we were significantly over appropriated and, you know, had to, include the language to kind of start accounting for that kind of incrementally on the non-ninety eight side of the budget in the out years.
Speaker 1
Okay. And thank you. And I really appreciate I was going to acknowledge that we would have to find 5,600,000,000.0 in solutions if it weren't there. People are moving up. I move on, did the LAO have a comment you wanted to make on this?
Speaker 9
I think the conversation walked through the main trails. I think what I would highlight is that essentially under the administration's budget, you're right, there would need to be $5,600,000,000 in solutions in the twenty six-twenty seven budget. But as the governor's budget is constructed, that means that there will be an additional $5,600,000,000 in solutions on top of the estimate of the structural deficit that will need to be addressed next year if the governor's revenues were to materialize.
Speaker 1
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 Manjivar, Richardson, Reyes, Blakespeare, Kibaldin, Grove, Ochoa Boggs, Siyarto, Weber Pearson, Smallwood, Cuevas, Dorazo, and Choi. I'm sure there's more.
Somebody's indicating they're not chopped liver over here. Senator Perez. So you'll be added to the list. And Senator McNerney. We'll go to Senator Mangiovara and Senator Richardson.
You are on deck.
Speaker 10
Thank you, mister chair. So what I'd like to do is I I know I I gotta respect time. I just wanna ask questions not to be answered, all of them, today, but just to give a preview for your staff to be prepared in sub three 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 gonna reverbate it from your report.
Delaying until May forces 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 subcommittee discussions based on a proposal that it's gonna be obsolete completely, that is not considering the 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 gonna be completely switched off, And then each subcommittee will have one to two hearings only to discuss the 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, in I apologize that I I gotta use your words, but you share that the budget is the approach is the the more compassionate way possible was what you 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, it 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 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 illegally, 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 h r one. There's no response here to how we're gonna, address h r one impacts. There's no, solutions for how the counties are supposed to address the impacts and cuts to h r one. I know director Steppenshaw talked about working with counties on the impacts of h r one.
I haven't heard any additional information. I don't know when that information's gonna 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 gonna 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, and don't know why we're going above and beyond the cuts that the federal requirement 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 o 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.
It can't 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 my gonna be my focus in sub three. The the third tier, I don't know how we're gonna propose to get to maintain people on health insurance. If we're asking for six month determinations, 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 shut we're throwing down a lot to the county without any additional support for them to absorb, the 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 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 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 and impacting our revenues?
Speaker 5
Yes. I believe the S and 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. You know, so much of our revenue, as Ms. Lee 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 the best 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 over exuberance 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 we're concerned about. And that type of volatility is precisely the thing that represents a major risk to our revenues.
Speaker 10
And then when you 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.
Speaker 4
Last year. Well, we withdrew from the rainy day fund, and and we also suspended the deposit. And we are now doing suspending the deposit for the the current year.
Speaker 10
So the current year suspension is for 2,800,000,000.0. Does that mean we're now adding $2.02 2 years of 2,800,000,000.0 suspension that we'll have to pay back? Or I I just didn't understand that.
Speaker 4
So the the basically, that will have to be we 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 2,800,000,000.0 into the rainy day fund.
Speaker 4
For the current year. But I will turn it to our expert for details. Lisa Merzinsky with the Department of Finance. So you don't have to pay back that 2,800,000,000.0. That's just not put into the reserve.
Speaker 5
my comments, our recommendation is to reject that proposal. We think if we're assuming in our budget that revenues are up by 42,000,000,000 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. Lee said, the $2,800,000,000 is the lion's share of their solution to the $2,900,000,000 deficit that they've identified. And so that's the trade off.
Speaker 10
Okay. Okay. Thank you for that. And then just for DOF, I shared a lot about HR one. Can I just get some preliminary feedback on how we're really approaching HR one impacts and why we didn't see any solutions, overall themes?
Speaker 4
Sure. And I'll just note, as I did at the top of my remarks, we are planning we anticipate an additional $1,400,000,000 in general fund costs in the budget year as a result of HR1 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 who of the state's 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.
Speaker 10
But what protections exist for people in these programs? Or why isn't there a proposal, too?
Speaker 4
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 $46,000,000,000 general fund program growing to just under $50,000,000,000 next year, and we get over 100,000,000,000 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 at this point, I would say, in response to your question, this is part of the conversation we would like to have with legislature about how we approach the changes that are happening at the federal level.
They're they will result in costs, 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 what position 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.
Speaker 4
Right. And 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 costs.
Speaker 10
Thank you. Final comment is, forgot to mention, MCO tax also, it's gonna be a big topic. We're taking a huge assumption that they're gonna approve us all the way to December. I don't know what friends you have over there, and I didn't think we had any friends in the federal government. So that's a high that's a big assumption that we're taking.
Speaker 4
It is, and we acknowledge that if that extension, that transition period doesn't extend to the end of the year, that that's an additional $1,100,000,000 in costs.
Speaker 1
Thank you. We'll go to Senator Richardson, and on deck is Senator Reyes.
Speaker 12
Well, thank you, Mr. Chair. I don't mind batting second with the Dodgers. That's normally mooky bets. So I will properly represent today in his honor.
Speaker 12
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.
Your 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 Five, 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, they 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 gonna have to 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 ten 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've added after Ohtani 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 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 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 is kind of late, we need some responses of what are your options to deal with what we see. We see the tsunami is 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 what are gonna be our options to deal with this? Because to think it's not gonna happen is just not an option.
We we need real options. And so I wanna 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, is is a derelict of duty because we cannot continue to operate the way that we are.
So, I would hope, come May, not only will we 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 gonna 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.
Speaker 4
Sure. I'll just want to touch on a couple of 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 legislature is a necessary step before, way before the May revision. I don't I also want to be really clear, like, don't we don't want to drop something on the legislature at the May revision, and it's the first time you see it. So too too many of of the members' points. And not not backfilling for federal loss is, again, I 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 I 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 on MCO.
Speaker 13
Laura Ayala, Department of Finance. Just to provide some general comments on MCO tax. The governor's budget does assume the full transition period. 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 $1,100,000,000 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 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 billion dollars for support for hospitals. So we are waiting for federal guidance, but we didn't want to make premature cuts when we or to let the federal government know that we can backfill those dollars because we can't.
Speaker 5
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 two 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 is being driven by particularly 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 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.
Speaker 12
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 vote. 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, my first comment. My second thing, getting more now into the specifics of sub five, 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 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 existing facilities.
But there still are, as my understanding, 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.
Speaker 15
Hi. Good morning. Theresa Keller, 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.
Speaker 1
I'm going to ask a quick follow-up question because you have roughly $100,000,000 for Exposition Park. Isn't some of that going for the Olympics?
Speaker 15
Right. That's a broader amount. And some of that could be used in support of upcoming events, including the Yes.
Speaker 12
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 pre-nineteen thirty two of that Olympics. And so, we're now almost one hundred 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 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 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.
Speaker 1
Senator Richardson, could you begin to wrap up? And maybe if there's issues that you haven't gotten to, you can ask for information they could provide to you. Sure.
Speaker 12
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 $320,300,000 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 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.
Speaker 16
Hi. Good morning. Mark Jimenez, Department of Finance. So, there's no the budget maintains $80,000,000 ongoing general fund available for the judicial branch to address facility modifications and repairs. We have not augmented that, we've maintained that.
And that's generally the part of funding that they use to make those repairs, and we defer to the judicial branch to allocate that funding based on their priorities.
Speaker 16
We understand that there are the judicial branch maintains a list of facility modifications, deferred maintenance. Generally, we understand that there is
Speaker 12
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.
Speaker 16
I recognize that, and that's certainly one of the reasons why we augmented the judicial branch's 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.
Speaker 12
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, you know, 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? Know, you can't 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.
Speaker 4
Right. So, 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 is a risk. We don't know when that will happen. As was discussed earlier, Elio believes it may happen soon.
We've never incorporated a correction or a downturn in our forecast and for many of the same reasons as were discussed in regards to what that might be impact in terms of having to make decisions 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 and even controversy over that. But in regards to the displaced work program itself, I believe those funds are maintained. But I will If
Speaker 4
Allison Hewitt, I believe that there were some onetime 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,
Speaker 12
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.
Speaker 1
Thank you very much, and I think that highlights what the senator is going to highlight in her subcommittee. We're gonna move to senator Reyes, and senator Blake Spear is on deck.
Speaker 11
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?
Speaker 4
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.
Speaker 11
Thank you. I came from the assembly and had the privilege of sitting on every subcommittee 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 straight answers. 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 receive 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 two, 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 SB nine zero one conference committee.
We acknowledged the importance of Cal Fire to work. We supported and allocated $200,000,000 through fiscal year twenty three-twenty four, 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 SB nine zero one has continued through last year's through AB eight forty, which includes a designated tier toward healthy and resilient forests. In addition to that allocation, page 38 of the governor's proposed of the proposal outlines that $1,000,000,000 in discretionary funding will go through GGRF, $750,000,000,000 million 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?
Speaker 17
Steven Benson, Department of Finance. So the $200,000,000 that started with SB nine zero one, as you referred to in SB or AB eight forty, when they sort of redid the cap and invest program last year, they set up a tier three. And that healthy forest related funding is in tier three. And it now establishes caps. And you get up to those caps amounts based on how much the 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 would get $141,000,000 roughly. That obviously won't be known until all of the auctions are done for 'twenty six, 'twenty seven. And if the auction proceeds come in higher, well, then they'll be up towards 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 CalFFA. Agreement with who? The budget agreement between the administration and legislature was to do $1,000,000,000 of general fund backfill in 'twenty five-'twenty six, 1,250,000,000.00 in 'twenty six-'twenty and then $500,000,000 in twenty seven-twenty eight and in twenty eight-twenty nine. 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.
Speaker 11
In essence, the discretionary fund from GGRF is being used completely for CAL FIRE. Is that correct?
Speaker 17
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 do GGRF.
Speaker 18
Good morning. Andrew March, Department of Finance. So as my colleague mentioned, and I think as you mentioned, chair, that there's 750,000,000 of the 1,000,000,000 discretionary funding is being used to fund a portion of the Cal Fire general fund shift. And then the other $250,000,000 is actually spoken for in SB eight forty. So some of that funding is already allocated That's in 1.43.
So there's Tier three? I'm sorry? From Tier three? 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 back fill. There's a manufacturing tax credit. There's, state operations, so for staff that are funded out of GGRF. And then the, we've also reserved funding for the Legislative Council Climate Bureau that was created or alluded to in SB eight forty. Tier two is $1,000,000,000 for ice speed rail, $1,000,000,000 of discretionary funding.
In that tier two of that $1,000,000,000 of discretionary funding, $750,000,000 is for CAL FIRE, and then $250,000,000 is allocated in SB eight forty by the legislature last year.
Speaker 18
So it was slated one time funding for fiscal year twenty six-twenty seven in SB eight forty. That of that $250,000,000 does not continue into 'twenty seven, 'twenty eight, or 'twenty eight, 'twenty nine, but there will be further discussions between the legislature and the administration about how to spend that discretionary funding.
Speaker 11
Okay. 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?
Speaker 18
So it really depends. So the last few years, we've seen really high interest earnings, around $600,000,000 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 $550,000,000 of interest earnings in the budget year.
Speaker 11
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 3,700,000,000.0 already in zero emission cars, trucks and off road equipment. Now he's proposing an additional 200,000,000 in one time special funds to establish new light duty ZEV incentive programs. Yesterday, the Assembly had their hearing, and I do want to align my remarks with my Assembly counterpart, Assembly Member 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 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?
Speaker 18
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, was $132,000,000 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, 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 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 $200,000,000 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?
Speaker 11
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 two 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 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 SB57 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-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 mentioned these especially because I do want preparation before the subcommittee hearings. As we know, questions go out before the hearing, and they're no surprise, and being prepared for those answers, I think, is something we deserve. The other area I want to talk about is AB six seventeen. 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 SB three fifty two last year, I was glad to see the oversight in the bill complemented by $250,000,000 dedicated to AB six seventeen 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. AB six seventeen 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 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 fifteen years, and now hospitals, as noted earlier, are closing in several communities. How should the legislature think about prioritizing investments in Medi Cal programs?
Speaker 4
Before I respond to that question, I just wanted to make a note that the ZEV proposal is a 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 a in a in a place where we can backfill for all lost federal funds, but that it will be important to have discussions with the legislature and 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. Patek 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 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.
Speaker 11
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, our moral values. This is we as representatives who 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 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.
Speaker 1
Thank you very much, Madam Chair. We're going to move to Senator Blakespeare, and on deck is Senator Kibaldin.
Speaker 19
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 LAR revenue outlook, tackle budget problem, and shrink multiyear 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. 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. Patek 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 $500,000,000 for homelessness in HAP or something that is HAP 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 10 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, a 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 on 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. 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
Speaker 19
sustain that directionality if we have a reduction in funding by half at $500,000,000 instead of $1,000,000,000 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 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 two the need to fund the wildlife coexistence program at 15,000,000 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, 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, 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.
Speaker 1
Thank you very much. I appreciate your comments. We'll move to Senator Cabaldon, and Senator Grove is on deck.
Speaker 21
All right. Thank you, Mr. Chair. And I want to associate myself with 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.
Pretty good. It's not unusual.
Speaker 21
Last year at this hearing, which is the first time I was a member of this committee, this hearing was consumed by justified fury. We were facing a $10,000,000,000 Medi Cal problem in terms of overspending. And I and my colleagues were angry. Like, 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, hesitant to use any colorful adjectives or adverbs. And so when you see a report by the legislative analysts 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. I just want to say, so if we were to eliminate all general fund spending on corrections and rehabilitation, all general fund 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 general fund money for transportation, and all general fund money for UC and CSU, we would still not be at $60,000,000,000 which is with the downside risk number that the legislative analyst is describing. That's the scale of what we're talking about.
We could eliminate everything except for K-twelve 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 the difference between 2,000,000,000 and 60,000,000,000 is hard to comprehend, but that's the scale of what we're describing. It 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 that. Every month we're spending $3,000 more than we're taking in our wages. And how are we going to grapple with this?
And mom walks in and says, hey, good news. Good news. We just got 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 plant that we're working at 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. And so I think part of our challenge here is that we are trying to, as we always have in California, obsessed about what's the right forecast number? Which one of you is right between this $30,000,000,000 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 costs 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, should be developing two parallel budgets. An A budget that's basically Department of Finance's forecast, and a B budget that is somewhere in the, not at the bottom, 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.
Because that structural uncertainty is so much more significant than it has ever been before. This 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, health care, everything else that is important for all the reasons that Senator Reyes outlined, A much larger proportion of our budget is two people, which makes cuts much harder than it used to be when it was like, 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 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 revise conversations now, but instead, how do we make real the budget subcommittee's hearings and processes, answer the questions, grapple with our choices, 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 real.
I think the other two points I want to make, because I know that I'm not looking at them, but I'm sure the chair is looking at me, is that last year, in budgets of four, under the leadership of our chair, Senator Hurtado, last year Senator Smolokuavis and Senator Nila, when I heard the proposals from the administration for, I think, dollars 20,000,000 for achieving hundreds of millions of 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. One of them was convening a task force of volunteers twice to 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 $1,000,000 cost. And their mouths were wide open and it caused me to think for a second, oh my god, they're right.
Like how crazy is that that we spend a half $1,000,000 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 so forth, 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, the Medi 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 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 we 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 four, and I know Senator Hertz Auto is focused very much on this as well.
That is that last year the last couple of years when there have 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 it wasn't working. Cities and counties are getting all this money, and where's the results? We're not seeing any impacts.
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, governor says, hey, good news, it's working. And here's five and six counties and cities that are showing the way and we're leading the country in our effectiveness on homeless and housing. 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 1,000,000,000 is from last year's budget.
So I am trying to grapple with what is the administration's real view on investments that we have made don't matter and somehow cities and counties are accomplishing significant improvements in housing and homelessness by immaculate conception? Or do they matter? Have they been working? And if so, 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.
Everyone knows it, so we should just call that out and name this theater where we go through it 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? 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 we'll always have, of course, if you need to respond, the chair's 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 homeless resources along the lines that Senator Blake Spear said, and then make it in the budget so that people can have in California communities can actually make the investments and the plans hire the people that they need in order to meet their needs. Thank you and apologize, Mr.
Speaker 1
Schaffner. Thank you. We have seven people left and I can see public comment with wings on it heading out door because we have a hard stop at 11:45. We have 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 Boak.
Speaker 22
Thank you. Thank you, mister chair, for this. I will probably hopefully be done in less than five minutes, and I will do my best to hurry. I'm gonna make a few comments. My colleague who chairs budget sub three, we have our work cut out for us this year to defend the people that are most vulnerable in California, 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 gonna comment on this step, but because my colleagues did. We had a deal on the table a few years ago with the MCO tax, then that was swept into the budget. The bottom line is that anybody who operates a hospital or a medical facility has a pathway to bankruptcy because our Medi Cal reimbursement rate is so low and people with high populations for treatment for that population of our state, you can't make it up with the commercial market. It 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 gonna happen again this year?
Speaker 13
Laura Ayala, Department of Finance. Thank you, senator. The calendar year 2025, provider payments are going out. 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.
Speaker 22
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 vending machines not being broken in the courthouses that she have. We're closing down courthouses. My constituents have to drive two, two 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 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 look 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 a $100,000 a year or more spending money in that community.
So we have a situation there. We coulda did we coulda 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 sub 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 the reduction in the refinery capacity that we have, increased cost for every Californian for fuel, job loss like no tomorrow because now you have Crinson, 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. If we were bold enough 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¢ a kilowatt. Who doesn't want to pay 6¢ a kilowatt? What municipality? This building.
If we weren't paying 41¢ a kilowatt in this building per hour for energy, we have that answer, but it's been sitting at Cal Jim 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 hours of battery storage, instantly dispatched to the grill 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 PG and E 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 talk about all that stuff, but my colleagues brought it up. I just have a question on the investment for CalPERS. CalPERS lost about $330,000,000 last year, 71% of the loss of the $680,000,000 investment that was for, clean technology or clean energy. Is that calculated in the budget?
I know overall that the the 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 $22,000,000 off of it. We should probably don't 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 gonna be adequate resources available to make sure that retirees in the next five years have those investments available to them?
Yeah. I don't have
Speaker 4
the specifics of the investment loss that you're speaking to. But in regards to the state's contribution to PERS, that is maintained. There's I think there are as with many investment, there are ups and there there are downs. And I and the returns, I believe, have been higher than the base. Is that right?
7%? Yeah. Yeah. And so there there's no concern in regards to our retirees Okay. On that front.
Speaker 22
Okay. Is there a concern about the energy industry and what we have and the potential of 8 to $10 gallon gas? I know that's something that you guys aren't calculating in to 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 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 millionaire's tax or billionaire's tax, I know that. I had a guy set across the table for me just a week ago, slid me a Wyoming driver's license.
Bet I he pays anywhere from $30,000,000 to $40,000,000 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, looking at that as well? Or is that just something that we don't want?
Speaker 1
And can 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.
Speaker 22
I'd 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.
Speaker 1
Thank you. We'll go to Senator Achoboag and then Senator Ciardo. And let me ask if it's possible that you could ask 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 Chogabog, Senator Ciotto on deck.
Speaker 23
Good morning and thank you, Mr. Chair, and good morning. I'm glad to have you folks here. I wanna highlight just a couple of things that are important for our for my area in in in the Inland Empire, both Riverside and San Bernardino County, and that is with regards to the court system. It was mentioned.
I really do appreciate the 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 374,000,000, 54,000,000 from the general fund, $320,000,000 for the lease revenue bond fund, for various phases of nine court construction projects. These include and, 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 1,800,000.0 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, to the criminal justice system, which makes it I'm shocked. I'm shocked that
Speaker 1
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.
Speaker 23
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 really Let's
Speaker 24
Sorry. Thank you for the question. Sally Lukenbill, Department of Finance. So, 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 recommend.
And it's all based on level of deficiency in each courthouse, and the need for immediate repairs.
Speaker 1
And then, could I ask a favor? Could you work with Senator Ochoa Boggs office outside the hearing to get her those factors and acknowledge why it's an issue with the ones that are in her area?
Speaker 1
Noted also for Senator Reyes. Okay. Anything else subject wise to take an answer outside the hearing before we move out?
Speaker 23
No. Question on that end. It has to do with the unemployment insurance that was brought up earlier today. We are currently going back to the courthouse, sorry. Just one last question.
Speaker 1
Well, let's do this quickly because you're cutting into time for your colleagues.
Speaker 23
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 billed 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 we've borrowed $21,000,000,000, as mentioned earlier by my the vice chair. We have not paid it back. The only state that has not paid it back.
We're allocating $662,000,000 in interest payments. And when do we start addressing the principal amount, for those, $21,000,000,000? And what is the expectant date of, saying that we're gonna finish, paying that off? Because that is, as I mentioned earlier, carried by our business owners. They're actually providing the jobs in California.
Speaker 4
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.
Speaker 1
Thank you very much. Senator Ciardo and Senator Smallwood Quivas is on deck.
Speaker 20
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 while we only have a 62% rise over the last few years in revenues. If we keep doing that, we're going to get worse and worse. And so this needs to be this year.
We need to start working on this. My comment about EDD. We need a three to five year plan on how to pay this off. We can't just keep kicking this can down the road. The the question that my colleague has, I have the same question.
I would like those answers. My answer my question is how much of the principle is being foisted on the businesses because if it's the minimum amount, just like a minimum amount on a credit card, you will never pay that off. They're just gonna keep paying that. And we'll keep paying the interest which is getting more and more. Right now, it's $662,000,000 in interest that we are paying out of the general fund for that.
It needs to be fixed. The courts that system has to be fixed in order for prop 36 to work if it's fully funded. Wildfire. I wanna focus on this for just a minute. Prop four wildfire funding is $2,100,000,000 if I'm not mistaken.
Is that correct? Two Okay. Did that take the place of general funding, general fund funding for those projects? Are they funding it through this prop four instead? No.
That's the short answer. Okay. Where is the general fund What's the general fund amount that was in there last year that is paying for what we're paying for with prop four funding in this budget?
Speaker 17
The funding that's proposed from prop four this year wasn't being funded by the general fund previously. There were some one time investments from the climate budgets of '21 and '22 that in prior budgets, we back last year, we offset some general fund with This prop budget doesn't include any offsets.
Speaker 20
right. So here's my comment. When you're using bonds to pay for ongoing expenses and just like mowing your lawn one week and then the next week and needs mowed again, this is going to be an ongoing expense. If we use our bond money to pay for this instead of our general fund, in the future, we're gonna be looking at our general fund going, how are we gonna continue to keep doing these projects? So bond money should be used for infrastructure that's going to be there for a while.
Like, if we're you for bonding for camps for the three seeds who are expanding the scope of what they do to help us with our wildfire issues. So I don't believe that we should be using bonding for these recurring expenses and that's what it looks like is happening in this budget. And then the last thing on Medi Cal. $50,000,000,000 is our cut, and then the federal share is a 140,000,000,000. Is that correct?
Speaker 20
And that's in general fund. Ours. What about the feds? The entire budget is like 190,000,000,000, 190,000,000,000.
Speaker 20
For the Medi Cal program in California. Correct. So that's higher than the budgets of all but like 30 countries. And the same thing can be said with our school budget. Last thing is on education.
So our education budget keeps going up through prop 98 funding. But what I'm hearing on the ground from teachers is we have to buy our own tissues. We have to buy our own supplies. And they're complaining because the enrollments are going down and yet we're making this money up here. Where's the money coming where is it going?
If it's not getting to them where they have to buy their own stuff, we need to look at that and correct it. Those are my comments. Thank you.
Speaker 1
Thank you. Appreciate it very much. Senator Smallwood Quavis with Senator D'Arrazzo on deck.
Speaker 25
Thank you, Mr. Chair, and really appreciating this robust discussion and conversation. And I want to thank the Department of Finance and the LAO office for their presentation today. I'm appreciating the fact that we're all in agreement that we have a structural problem. And I am also appreciating that we understand that it's not temporary.
I also want to make sure we're clear that when we talk about affordability and how our communities are hurting right now, I think it's important to also think about all of the other ways in which we are going to have to come to terms with the $2,500,000,000 a year loss from the expired ACA premium subsidies, the more than $10,000,000,000 I'm sorry, 7,000,000,000 in TANF cash assistance that's been held. Another example, dollars 18,000,000,000 at NIH in scientific research that has been cut by the Trump administration. We can look at our environmental infrastructure, our NEA, NEH, and dollars $7.00 8,000,000. Dollars 1,700,000,000.0 in infrastructure that we were in the process of doing that was cut. Dollars 28,000,000 cut from nonprofit immigrant legal services that we have to help to try to protect and secure.
We also are looking at $25,000,000,000 cost to households from tariffs, about 64,000 jobs lost. This is all impacting California. So there's a lot that we haven't talked about in terms of the gaps. And the question, I think, before us is not if we backfill, but how we backfill. Because all of these things are converging on our communities.
You know, in my district where we are hosting the Olympic Games, where we are hosting, this year, the World Cup, we see significant impact on what our state will look like if we don't fix this problem. For example, in South LA, where Exposition Park sits, Medi Cal is not an abstract, because we have some of the highest density of Medi Cal users in and around the front yard of the Olympic Games in Expo Park. We have folks in those communities that are managing chronic illness, mental health, pregnancy, disability, needing emergency and urgent care, and all of this at a time where the governor has proposed to leave us trying to figure out how we're going to fill this gap for Medi Cal. We also are trying to figure out how we're going to fill this gap to make sure that even our facilities that are going to be used during the games are going to be able to sustain the number of foot traffic that will be in and around there. State estimated there was about $220,000,000 in critical infrastructure needs, and this budget has given about $96,000,000 to fill that gap.
I say all that to say is that we have a number of issues that are converging at once on our communities. We are trying to understand and I guess my question for you today is, how are these federal actions under H. R. One driving this large Medi Cal savings assumptions in the governor's budget? Can you speak a little bit about how these cuts are likely to impact communities that are also going to be absorbing disruptions and major infrastructure needs and events planning during the Olympics at the same time?
And how is the state ensuring that communities that are in this very unique situation, like my district, are not simultaneously asked to absorb health care cuts, safety net reductions, and rising costs. I had my county hospitals visit me yesterday and explain that they're looking at about 1,300 layoffs on the front end, and trying to figure out how they're going to keep more than a dozen clinics open. So all of these things are converging at once. I would really appreciate the ways in which you're looking at offsetting some of these costs. I appreciate the points made earlier about doing this early and having these conversations early, and that no option is off the table to ensure that we are, one, caring and protecting Californians, but also, we are prepared to welcome the world to our stage.
Because so much of the cuts and the suffering are going to be converging all at once on a community, like the movie, Everything All at Once at the Same Time. So if you could give me some sense of how you're thinking about these unique communities, the situation, and ways that you are looking to offset some of those costs.
Speaker 4
Senator, may I provide some of that information to your office in written form for the sake of time? But, agree that there are a lot of things happening all at once and converging, in a in a time where we don't have a lot of surplus dollars to address them without going back to the actual structure of these programs and relooking at them and relooking at some of our investments. So I am happy to provide additional information, especially in regards to the HR1 impacts on the two programs in particular, what we estimate to be enrollment declines and as a result, you mentioned savings, and that is largely due to not just the ineligibility of populations but additional workload that would have to be done that would likely lead to disenrollment. So we will provide that to your office.
Speaker 25
Doctor. Yeah, I appreciate that. And I also appreciate the comments made about ensuring that when folks come before us in committee, that we have some sense of what the impact assessment looks like from each of the agencies. You know, for example, on the CalFresh numbers, it's saying we're going to have a cost savings on CalFresh. But the reality is the Trump eligibility requirements are going to kick so many of our families off of CalFresh.
So that's a cost savings in one sense. But on the other sense, there's gonna be more harm and hurt that we're gonna have to spend and fund someplace else. So I just wanna make sure that we are understanding the impact of every cut that is being presented, every cost saving that is being presented so that we can make the decisions that need to be made to ensure that we're protecting particularly our most vulnerable communities.
Speaker 4
Yes. And in regards to HR1 impacts, our staff will have as much information as they can, as well as departments, and what we believe to be those impacts that are directly related to the changes at the federal government.
Speaker 1
Well, I have to apologize to the public, but I think we're going to have to take public comment in writing. I don't see how we're going to be able to do it in this meeting. And then we have three more senators, and I want to get to them before 11:45. And so it's Senator D'Arrazzo, Senator Choi, Senator McNerney, and we did have Senator Perez on the list. She had to step out.
I don't think she's going to be back on time. So let's go with Senator D'Arrazzo.
Speaker 14
Okay. And my questions, I guess I'll let you give me the information afterwards, but I do want to put them out there. On the Medi Cal, the same conversation we had last year, where we asked for options on how to address the shortfall and
Speaker 14
deficit. Instead of putting it on the backs of the people who need it most, that's how we fixed the budget problem. They are taxpayers. They are getting excluded from the same thing that other taxpayers get, health care coverage. And that's okay for a lot of people, but it's not okay for some of us.
We have got to get back on giving equal access to health care, no matter what your status is. So I want to hear about options. And one of those is to generate revenue such as, how about we stop subsidizing all the corporations that put their employees on Medi Cal? We, as taxpayers, have to pay for That just doesn't come up in the conversation anywhere, and that's a reality that's worth tens of billions of dollars. So that's one.
On the GGRF, the fund, What happened to the legislative part of the discretionary fund? It's a billion dollars that says it's ours at our discretion. Last year, we were told a billion for fire, a billion for high speed rail, a billion for legislative discretionary fund. And now that $1,000,000,000 is being taken away from us, who knows for what, how that all fits in. On transportation, we had In 2023 and 2022, we had increased dramatically.
It was really important to increase the public transportation fund. Somehow, it's just not included. That funding is not included. So I just want clarification as to the funding that we had approved in the past. We increased it.
That kind of funding gets cars off the highways. It adds for our clean air, and it creates good paying jobs. So I'm really focused on transportation. There are many other single issues that we'll take up in subcommittee five. So with that, thank you very much.
Speaker 1
Thank you very much. And let me just ask the finance that if you do respond I know there's one for Senator Ochoa Bogan, here's another one. You do respond to any of the questions, if you make sure you copy the committee because we'll probably want to make sure everybody gets them. They because they heard the questions here in the committee.
Speaker 4
Sure. And we can work through staff to get that information Thank to you
Speaker 1
you very much. We have senator Choi and then our last senator, senator McNerney. Senator Choi.
Speaker 3
Thank you, chair. I've been so nervous whether I'm gonna have a chance to speak on my own. Listening to all the problems so so far and the $22,000,000,000 of a deficit, even though our revenue has grown. The fine fine finance, miss Lee, you started out as a saying that we have no deficit, the balanced budget. But it is so puzzling what the definition of what definition of balancing and the deficit.
Deficit is $22,000,000,000 that you have said already many, many times in many different areas and the many different years from the past and to the future projections. Our governor is boasting and also many of us, in fact, boast that the California is the fourth largest economy. And so it is so puzzling that why with that kind of a economic power, economic engine that we are facing this kind of deficit issues and not solving the problem that we have been facing year after year. Because of the time, I have so much to talk about about one example is that policy issue. In '19 you know, in 02/2122, when I was in the assembly, I introduced, for example, for paying off the on the federal debt for the unemployment insurance.
So that was a b fifteen ninety six. We had, at that time, almost a $100,000,000,000, specifically $97,500,000,000 surplus at that year. And then the total loan debt unemployment insurance debt to the federal government was $19,300,000,000. So my bill proposed we have such a large surplus, let's pay that off. But my bill was killed.
Right now, since then, it continues to pay each year over $600,000 of interest. And to my calculation is that from 2021 to even up to this year is $1,600,000,000 of interest have been paid. This is a kind of a budget. When your personal income, not not personally saying to you that our situation is that all of us, we consider our revenue versus spending. I mean, when you don't overspend it, that's a balance.
But when you dip into your savings, to me, that is imbalance. That's borrowing the money. But I think we need to start with the correct definition rather than just trying to tell not the truth to the pub public. Let me because of the time limited, let let me ask you one specific question. That is how are we gonna are you going to both departments suggest to us and then also to the governor what the methodology will be using to break this continuous structural deficit problem.
Specifically, you you have to identify certain areas that will have to be sacrificed. So name couple of three areas. What has to be sacrificed to to balance the budget?
Speaker 1
And I'd really appreciate it if you both could be really brief. Just to get to senator
Speaker 4
Sure. Just acknowledging that we do have a problem that we need to fix. I think I've said that very clearly, that we, the administration, want to work with the legislature on that structural deficit, which is the $22,000,000,000 in not this coming year, but the following year. By definition, we are balanced constitutionally with a positive SFEU, and that's exactly the definition for a balanced budget. However, what those three topics are, I think we wanna talk with the legislature about your priorities, what the governor's priorities are before making big decisions and big cuts because that's what's gonna require, as mister Walden had has mentioned, over many different program areas.
Speaker 3
Now will governor listen to our discussion here and your recommendations and then also LAO recommendations to them or it doesn't matter. Are we all wasting our time?
Speaker 5
quick add on Just quickly say, yeah, we are working right now on trying to find our proper placement for this our proper role in this as we're the analysts as opposed to actual policymakers. But we're working in our office behind the scenes on ideas and kind of going through our analysis of the at the staff level of all the programs to try to be helpful. And I was anticipating to be in contact with your office chair and others to how we can best be helpful in this regard.
Speaker 1
Thank you very much. Thank you, Senator Choi. Senator McRooney, close us out.
Speaker 26
Thank you, Mr. Chairman, and the presenters. It's been very enlightening and disturbing. Part of the problem we're facing with the deficit is the volatility of the state budget. And it's inherently volatile.
I think it's time for a statewide discussion about how to even out this volatility, even though those are difficult conversations, as been noted, as been tried before. I'm planning on having some overnight hearings, oversight hearings, and revenue and taxation about how we can find solutions to that problem. And I'm looking forward to that discussion. No question there. The second comment, as I'd like to flag, is that we don't see any substantial investments in our water infrastructure in this budget plan.
The Department of Water Resources released a report last fall that subsidence in the Central Valley, if unaddressed, could reduce water, the state water project's carrying capacity by 87%. Now that's water for 27,000,000 Californians. Furthermore, the Delta, which is my district and also share with other members of the committee, that supplies water to the state water project, has 1,000 miles of levees. Many of which haven't been improved since the eighteen hundreds. So we're seeing significant risk on our state water supply.
The Delta Stewardship Council has created a delta levy investments strategy, which is completely unfunded. This needs urgent attention in my opinion. And I'm ready to work with my colleagues across the state to find a way to solve this problem. And with that, I'll yield back with no questions.
Speaker 1
Thank you very much. I really appreciate it. And I appreciate all the members who would have liked to have asked expanded questions.
Speaker 1
The minute we adjourn we'll leave the microphone system on. The one thing is that we are likely going to have another hearing in mid February. And as a result of not taking public comment here, we will prioritize public comment at that hearing. We also though encourage anybody that had feedback and wants the budget committee to know to submit your comments and suggestions in writing to the budget and fiscal review committee or visit our website. We want to hear from you.
We will prioritize the oral comment at the next meeting. I apologize for the fact that this was just such a tight timeframe. We haven't gotten to it. And normally we would make closing comments, but I would just say this was a very successful hearing in so many issues being raised and us highlighting what the concerns are of the budget committee. And that's what they will be going forward.
So thank you to everyone for their patience and cooperation. Includes the agenda for today's hearing. The Senate Committee on Budget and Fiscal Review stands adjourned.
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