Budget Tightrope: Governor's 2024-25 Proposal Aims to Balance Strategic Investments in Higher Education with Fiscal Realities

The Governor’s proposed budget totals $292 billion and projects a $38 billion budget shortfall for 2024-25, with similar deficits anticipated for the following three fiscal years. The Legislative Analyst’s Office (LAO) projects a $68 billion shortfall.

Why do we see these shortfalls after years of surpluses? These budget challenges stem from the state’s reliance on high-income earners (and their stock market earnings) combined with unprecedented tax filing delays in 2023. More specifically, while the early pandemic years brought historic surpluses in the budget due to a strong stock market, 2022 brought poor market performance and 2023’s tax filing deadline extension meant the state wouldn’t know tax revenues until seven months later in November. While the stock market performed better in 2023, the state will not have clarity on tax receipts until after April 15, 2024 and, regardless, will have to make adjustments for deficits in the 2023-24 budget. This convergence of factors leads to a decrease in the funds available for the state’s budget, as well as a gloomy overall financial outlook in the coming years.

To address half of the $38 billion deficit, the Governor proposes a mix of reductions, delays, borrowing, shifts, and deferrals. The remaining deficit will be covered by withdrawing from various reserves. The governor does not propose any significant budget solutions that would address the deficit by raising new revenues. The proposed budget-balancing solutions aim to stabilize and protect California’s priorities for 2024, including investments in higher education.

Our analysis delves into the proposed budget’s impact on California Competes’s policy priorities. We first examine the overall proposed allocation to higher education and the governor’s effort to maintain the higher education agreements. Then, we review proposed changes to investments on student housing, workforce development, education data, and Cal Grant Reform. We conclude with recommendations for action between now and the governor’s May Revision.

Safeguarding Funding For Higher Education Compacts and Roadmap

The proposed higher education budget totals $23 billion, reflecting a 2.6% decrease from the 2023-24 enacted budget. The budget proposal relies on reserves to protect the CCC budget, while deferring the planned five percent funding increase ($468 million) outlined in the compacts for the University of California (UC) and California State University (CSU) until July 2025. The governor’s office notes this allows the UC and CSU to borrow against the state’s promise for repayment in the next budget year, which would ensure they can maintain spending levels as agreed upon. While the segments have responded with gratitude for the supportive budget, they have also voiced concerns about the lack of certainty in this funding promise and the need for a more comprehensive funding plan. The proposed deferral of $468 million for the UC and CSU compacts this year means the state needs to commit over $900 million to make the UC and CSU whole next year.

California Competes hopes to see the priorities outlined in our analysis of the compacts and roadmap advance through this budget downturn. The existence of these higher education agreements, coupled with the segments’ commitments to advance outlined goals, has likely played a role in averting cuts. As the economic downturn continues, it will be imperative for the segments to continue delivering on their end of the promise, not only for their own stability, but to fortify the administration’s resolve in upholding its part of the agreement.

Preserving the Affordable Student Housing Grant Program While Shuttering the Revolving Loan Fund

The Governor continues to prioritize the expansion of housing capacity to address college affordability through the Higher Education Student Housing Grant (HESHG) program (SB 169) that was established in 2021. The HESHG program remains funded in the budget proposal with $81 million for funding additional housing projects and $164 million ongoing for maintaining affordability of developed units and covering institutional financing costs. If completed, this program will create over 11,200 affordable housing units for low-income students.

However, the governor proposes suspending the California Student Housing Revolving Loan Fund Program (SB 117), which provides zero-interest loans to colleges for building below-market rate student housing. From this program, the proposal pulls back $194 million from the 2023-24 budget, along with the commitment to provide $1.5 billion over five years. Despite this setback, we remain hopeful that this funding could be reallocated to additional qualified applicants through the HESHG program or to support colleges who received HESHG funding with technical assistance to ensure housing built meets student needs.

We encourage the legislature and Administration to collaborate on a unified approach to meet the housing needs of students, including student parents and intersegmental housing to support transfer students, as recommended in our housing analysis.

Sustaining Key Workforce Development Efforts with Funding Delays for Specialized Programs

In 2023, Governor Newsom signed the Executive Order for Career Education (N-11-23), initiating the creation of the Master Plan for Career Education, which focuses on dismantling silos across agencies and creating a unified framework to ensure Californians receive education and training that leads to quality jobs. The proposed budget discusses advancing a multi-year effort to develop and implement this Master Plan.

While the governor acknowledges the crucial role of career pathways in high-demand fields, he proposes delays or reductions in specific initiatives to address budget shortfalls. It’s important to note that many of these delays target specialized programs, representing a strategic decision to safeguard the ongoing funding for more general workforce development efforts. Despite the proposed adjustments, the workforce budget largely maintains investments made in 2022 to advance the state’s workforce and employment goals. The proposed reductions and delays include:

California Jobs First (formerly the Community Economic Resilience Fund, or CERF): Delays $300 million general fund for this inter-agency partnership, which would now receive $100 million annually in 2024-25 through 2026-27.
The Healthcare Workforce Investments: Delays $140 million for the Nursing and Social Work Initiatives.
The Department of Health Care Access and Information: Maintains its current funding of $974 million through 2025-26 for various workforce investments, while delaying $189 million to 2025-26 due to lower-than-anticipated revenues from the Mental Health Services Act.
The High Road Training Partnerships: Reduces funding by $45 million for 2023-24.
The Apprenticeship Innovation Fund: Delays $20 million in 2025-26 and $20 million in 2026-27.
The Goods Movement Workforce Training Facility: Delays $40 million in 2024-25.
The California Youth Apprenticeship Program: Delays $25 million.
The Low Carbon Economy Workforce Program: Reduced by $15 million over two years.
The Displaced Oil and Gas Worker Pilot Fund: Claws back $10 million from 2023-24.
The Women in Construction Unit: Reduces ongoing funding by $5 million.
The California Experience Corps: Claws back $9 million from 2023-24.

Advancing Progress for the Development of a People-Powered Data System

The budget proposal provides a planned ongoing budget increase of $5 million drawn from Prop 98 funds for the California College Guidance Initiative (CCGI) for work with districts on scaling CaliforniaColleges.edu. This budget increase reflects the administration’s commitment to leveraging people-powered data to drive educational and career success. As dedicated partners, we will continue to serve governance and advisory roles in the data system’s development and implementation.

Keeping the Status Quo on Cal Grant Funding, Reform Awaits

The January budget proposal maintains current funding levels for the Cal Grant Program, the state’s main financial aid program for low-income students. Despite a 2022 commitment to reform the Cal Grant Program that could expand access to more than 150,000 students, particularly adult learners, the proposed budget does not allocate funds to advance these reforms. The Governor hasn’t ruled out the possibility of including funding for this work in the May budget.

The proposed budget also eliminates a planned $289 million one-time investment towards another state financial aid program, the Middle Class Scholarship. This program maintains its current funding level at $636 million.

Recognizing the significant role of financial aid in overcoming the cost barriers to college success, California Competes will continue to support financial aid reforms and work with policymakers to ensure college access for all Californians.

Recommended Actions Between Now and May Revision

Both the Governor and the LAO have underscored the uncertainties in crafting a balanced budget amid volatile, unpredictable revenues, anticipating substantial changes in May (when tax submissions provide clarity on available revenues). We encourage the administration to consider planning and implications for future year budgets within this fiscal year that will center college affordability and access to college and quality jobs for more Californians in the long term, as projected budget shortfalls in future years means balancing our state budget will only become more difficult.

The delicate balance sought in these budgetary decisions this year, as well as the forecasted upcoming deficit years, is crucial for the future of California’s education and workforce landscape. As uncertainties persist, it is our collective responsibility to advocate for smart investments and program fidelity to ensure a strengthened workforce that propels the state towards a brighter economic future.

If you would like to delve deeper into the proposed budget and join us in supporting the legislature and Administration in navigating these tough choices for a stronger California, please reach out to us or your legislative representative.

¹Delays generally refer to postponement of funding without specifying a due date, whereas deferrals are understood to refer to a postponement of funding to a predetermined time.

California Competes

Topics:

College Access and Success for Adults Cradle-to-Career Data System Higher Education and Workforce Alignment