“The governor’s budget proposal reflects a budget situation that is even better than our estimates,” wrote the Legislative Analyst’s Office in its comments on Gov. Gavin Newsom’s 2019-20 budget proposal, which was released Jan. 10.

The LAO noted that the majority of the $20.6 billion of increased spending was being proposed for debt repayment, reserves and one-time spending. Only $3 billion was proposed for ongoing programs.

Much of the proposed spending, which would continue, is spread among many programs. But more than $650 million is for the state’s educational programs from full-day preschool to the universities and colleges. Another $350 million will go to increase CalWorks’ grant levels.

While the full-day preschool programs have some initial funding, the governor will establish a work group to develop a specific plan for implementing universal preschool.

This year’s funding will provide for 10,000 full-day preschool slots. The goal is to expand that by another 20,000 over the next two years. Although this is consistent with current educational research, the LAO acknowledged that the Legislature might want to review the implementation goals.

There also is another $500 million for improvement to early education.

Healthcare was another prominent priority in Newsom’s budget. He is proposing to expand Medi-Cal to all young adults, from ages 19 through 25 years, and regardless of immigration status. 

To fund the subsidies for individuals and families who purchase health insurance through Covered Cal, Newsom wants to implement an individual mandate. If a person does not have health insurance, a penalty would be assigned. The penalty revenues would be used to subsidize the Covered Cal premiums.

However, the LAO expressed concern that the two programs would be conflicting. The health insurance penalty is an incentive for individuals to buy health insurance. As more do purchase coverage, the penalty revenue will decline and, therefore, less will be available to subsidize Covered Cal premiums.

While the LAO noted that Newsom did not earmark billions for reserves, the reserve balance will increase about $200 million. Total reserves are projected to be $18.5 billion at the end of fiscal year 2019-20, which is about 13 percent of the General Fund.

However, Newsom did allocate about $9.7 billion toward debt and state liabilities. For example, $5.3 billion will be used to make supplemental payments to both Cal PERS and Cal STRS. The effort to reduce the state’s share of the unfunded liability for these programs should result in interest savings greater than $7 billion over the next 30 years.

The LAO also complimented Newsom for using $4.4 billion to repay several state debts, such as special fund loans and payment deferrals.

Always uncertain that the revenue collections will continue at the current pace, the LAO also noted that $5.1 billion, or about a quarter of the increased spending, was directed to one-time projects such as housing and kindergarten facilities.

Anticipating the May revision, the LAO cautioned that revenues, particularly from capital gains, may be lower than estimated because of the market’s downturn in December. If that occurs, the LAO noted that lower revenues also will lower several constitutionally mandated spending items, such as reserve deposits. Thus, the effect on discretionary revenues will be mitigated because the governor is not expanding ongoing spending by much.

The LAO was positive and complimentary reviewing Newsom’s first budget. “The governor’s budget makes prudent choices in allocating these resources,” concluded the LAO.