articles Ratings /ratings/en/research/articles/200603-california-governor-s-may-budget-revision-outlines-school-cuts-and-reserve-drawdowns-11515339 content
Log in to other products

Login to Market Intelligence Platform


Looking for more?

Request a Demo

You're one step closer to unlocking our suite of comprehensive and robust tools.

Fill out the form so we can connect you to the right person.

If your company has a current subscription with S&P Global Market Intelligence, you can register as a new user for access to the platform(s) covered by your license at Market Intelligence platform or S&P Capital IQ.

  • First Name*
  • Last Name*
  • Business Email *
  • Phone *
  • Company Name *
  • City *
  • We generated a verification code for you

  • Enter verification Code here*

* Required

Thank you for your interest in S&P Global Market Intelligence! We noticed you've identified yourself as a student. Through existing partnerships with academic institutions around the globe, it's likely you already have access to our resources. Please contact your professors, library, or administrative staff to receive your student login.

At this time we are unable to offer free trials or product demonstrations directly to students. If you discover that our solutions are not available to you, we encourage you to advocate at your university for a best-in-class learning experience that will help you long after you've completed your degree. We apologize for any inconvenience this may cause.

In This List

California Governor’s May Budget Revision Outlines School Cuts And Reserve Drawdowns


S&P Global Ratings Definitions


This Time Is Different: An Anemic And Uncertain Passenger Recovery Will Challenge U.S. Airports' Credit Quality


U.S. Airport Ratings Placed On CreditWatch Negative On Severe Passenger Declines And Weakening Credit Metrics


COVID-19 Impact: Key Takeaways From Our Articles

California Governor’s May Budget Revision Outlines School Cuts And Reserve Drawdowns


Our Rating Incorporates An Expectation Of Cyclicality

Our current 'AA-/Stable' rating incorporates our view that California is subject to above average revenue cyclicality, and could come close to fully drawing down its currently strong reserves before recovering. We view the current drop in revenue as a more sudden version of the state's historical swings. The stable outlook reflects our expectation that California will have adequate liquidity to ride out the current recession, and that the state's economy will at least partially bounce back after pandemic restrictions are lifted. Before the current recession, the state had achieved structural balance (with recurring revenues sufficient to fund California's legally required ongoing expenditure base), albeit at a high point in the economic cycle, and we believe the state will make upcoming adjustments to its fiscal 2021 budget to enable it withstand the recession, although with potentially large drawdowns in its substantial budget stabilization account (BSA). We believe that the use of the BSA, spending cuts, and access to large internally borrowable non-general fund cash will enable the state to avoid severe liquidity pressure until the state is able to restore structural budget balance.

Overview Of The Governor's May Revision

The governor's recent May revision to his January fiscal 2021 budget proposal projects substantially lower revenue, large reserve drawdowns, and large expenditure cuts, which would be partially reversed if additional federal aid is received for pandemic related tax revenue losses. Such federal aid is not in current federal legislation, and seems unlikely to be received by July 1. However, even without additional federal aid, the May revision projects fiscal 2021 would end with what we would view as still strong total general fund reserves equal to 8.0% of expenditures, on a budgetary basis of accounting.

The pace of expected reserve drawdowns from peak total reserves equaling 16.2% expenditures at fiscal end 2018 (see table 1) to a projected 8.0% in 2021, however, demonstrates, in our view, the above average cyclicality of California tax revenues and the severity of the current downturn. We view California's tax revenue as particularly cyclical due to its dependence on income tax for about 69% of general fund revenue, and the large proportion of income tax derived from top taxpayers and their cyclical capital gains. In 2018, the state estimates about 46% of income tax came from the top 1% of taxpayers.

The state forecasts about a 6% baseline drop in fiscal 2020 general fund tax revenue and a 22% baseline drop in 2021 revenue, compared to the governor's January budget proposal, before proposed revenue enhancements.

In actual dollar terms, the state projects general fund tax revenue will drop $9.4 billion, or 6.8%, from revised fiscal 2020 tax revenue to revised fiscal 2021, including the positive effect of $4.4 billion of corporate revenue enhancements, primarily from temporarily suspending certain corporate tax losses and limiting certain corporate deductions. Projections of capital gains tax realizations were reduced from the state's January forecast to $119 billion from $151 billion for calendar 2020, to $70 billion from $147 billion in 2021, and to $84 billion from $144 billion in 2022.

Total K-12 general fund spending would decline a large $6.9 billion, or by 12.6%, including a Proposition 98 K-14 local school aid spending cut ($7.5 billion in fiscal 2021, about a 14.2% decrease)—not surprising as Proposition 98 K-14 spending makes up about 38% of total general fund spending. The state would make a one-month school aid deferral of about $1.9 billion of school aid from June 2020 to July 2020 (into the next fiscal year), and add on top of that another $3.4 deferral in the next 2021 fiscal year, for a total one-month deferral of school aid payments from June 2021 into July 2021 (into fiscal 2022) of $5.3 billion. The pending senate budget bill would increase this one-month school aid deferral in June 2021 by an extra $3.7 billion, from the $5.3 billion cumulative deferral in the governor's plan to $9.0 billion, if additional federal aid is not received, according to the California Legislative Analyst's Office (LAO), as part of total senate deferrals of $10 billion.

The LAO calculates that K-12 funding would be held essentially flat in fiscal 2021, if one-time federal and other aid and deferrals are also included in funding contributions. Since statewide enrollment is declining, that translates into a small increase in per pupil funding, although rising pension and other costs also continue to squeeze local school districts.

Draft Senate Budget Bill

If additional federal aid is not received, the pending state senate budget bill could raise school deferrals further to $9.0 billion (compared to $5.3 billion in the governor's plan), as part of total deferrals of all types of $10.8 billion. The draft senate bill would not make cuts until Oct. 1, as opposed to a July 1 trigger under the governor's proposal, and if additional aid were not received it would lower reserves further to about 5% of its proposed higher expenditures, than the 8% total reserve level in the governor's proposal. Under the draft senate bill, if no additional federal aid was received, fiscal end 2021 total budgetary reserves would equal less than the cash deferrals.

According to the LAO, the senate bill also assumes $3.6 billion less in Medicaid costs than in the May revision proposal; spends about $4.2 billion more; provides about $1.0 billion in extra revenue from managed care organizations; and without the additional federal aid would draw down total general fund reserves to about 5.5% of expenditures, compared to the governor's proposal to draw down reserves to 8.0% of expenditures. In the senate's current plan, without additional federal aid, one-month school funding deferrals would total more than the fiscal end 2021 total budgetary general fund reserves, indicating a need for internal cash flow borrowing and a potential substantial structural deficit that might need to be addressed in fiscal 2022.

If something close to the senate bill passes, S&P Global Ratings will evaluate the impact on credit of potentially larger structural gaps that may need to be closed when the fiscal 2022 budget is adopted next year.

Structural Imbalance In The Governor's Proposed May Revision

The rapid projected drawdown in total general fund reserves in the governor's May budget revision indicates that the state may need to make substantial additional cuts in fiscal 2022. While currently strong reserves allow the state some time to right the ship, maintenance of credit quality will depend on how well the state can arrive at structural balance when reserves run out and cash liquidity may not be as strong as at present.

The state projects that general fund revenues for the combined two fiscal years 2020 and 2021 will decrease about $41 billion compared to the state's January revenue forecast, and estimates that without implementation of the proposals recommended in the May budget revision, out-year budget gaps would be about $45 billion annually, instead of the $16 billion gap now projected in 2024.

Compared to the January budget proposal, which assumed both higher revenue and higher spending than the year before, the state now projects a budget gap difference of $54 billion for remaining fiscal 2020 and all of fiscal 2021, including extra COVID-19 related costs and lower revenue estimates.

The governor proposes to meet the $54 billion gap from the January budget proposal by:

  • Cancelling about $6.1 billion in program expansions and spending increases, including some that were of a one-time nature.
  • Redirecting $2.4 billion in expected one-time extra CALPERS pension liability pay downs to instead pay regular annual pension contributions.
  • Drawing down $450 million in fiscal 2020 from a Safety Net Reserve in fiscal 2020, and drawing down $8.3 billion of reserves in fiscal 2021, including $7.8 billion from the BSA.
  • Borrow and transfer $4.1 billion from special funds.
  • Raise $4.4 billion of additional revenue, primarily from limiting corporate tax credits for research and development, and temporarily suspending net operating losses.
  • Use of $8.3 billion enacted one-time federal Coronavirus Aid, Relief, and Economic Security Act funds for additional COVID-19 related expenditures. These include $4.4 billion to address learning loss for local school closures, which must be spent by Dec. 31, 2020.
  • Implement $14.0 billion of other cuts if additional federal aid is not received by July 1 to compensate for lost revenue due to the pandemic. These include a 10%, or $6.5 billion reduction to the K-12 education local control funding formula, including elimination of a cost-of-living adjustment; $1.4 billion of general fund savings from yet to be negotiated 10% cuts in employee pay-- the state says it will impose reductions if it cannot reach an agreement; a 10% cut to higher education; cuts in pre-school funding; child care cuts; certain social service cuts; and various other cuts, such as in trial court funding.

The governor proposes to help local school districts by redirecting $2.3 billion of previously allocated money for extra pension liability pay downs of CALSTRS and school CALPERS liabilities to allow school districts to use the money for regular annual pension contributions. The governor proposes to increase mandated Proposition 98 spending in out-years by up to $4.6 billion in fiscal 2024—this would be a permanent constitutional requirement to increase K-14 spending as a percent of the state's general fund, from about 38% of general fund spending to about 40%, under Proposition 98's "test 2", which allows for increases as a percent of general fund spending, but never a decrease. As a result, it would permanently increase the state's fixed costs in the out-years. Scheduled increases in state contribution rates to CALSTRS would be put on hold for three years.

The estimated fiscal 2021 budgetary balance may paint an overly optimistic picture since it does not include $5.3 billion in one-month K-12 school aid deferrals from June 2021 to July 2021, creating a one-time deferral into fiscal 2022 that does not show up in the fiscal 2021 budgetary balances. Schools would receive a "double" monthly payment in July, which does not affect the budgetary ending balance, but reduces state liquidity until the following June, when the next year's deferral is made.

Multi-Year Forecast

The state's multi-year financial projection, made as part of the May revision, estimates that about $2.4 billion of fiscal 2020 budget adjustments are of a one-time nature (1.7% of expenditures), and a large $19.3 billion of proposed fiscal 2021 budget adjustments are one-time (14.4% of projected expenditures) (see table 2). The $19.3 billion of one-time budget adjustments in fiscal 2021 include $8.3 billion of combined reserve drawdowns, $5.3 billion one-time school aid deferrals from June to July, over $1 billion of federal Medicaid assistance program savings, $975 million for CALPERS pension liability pay downs re-directed to replace annual pension contributions, and additional aid for additional one-time COVID-19 related expenses.

A $6.5 billion projected budget gap in fiscal 2022--about 4.7% of projected 2022 expenditures, after use of $5.4 billion of BSA reserves--will remain and need to be closed. However, total combined reserves, including the BSA, would turn negative in fiscal 2022 without further budget adjustments. The projected out-year fiscal 2024 out-year gap rises higher to $16.2 billion (10.8% of expenditures) without future budget adjustments, although this includes the governor's proposal to add $4.6 billion in additional Proposition 98 guarantee spending not in current law (see table 2).

The state is currently projecting that the pace of its economic recovery will be similar to its slow recovery coming out of the Great Recession, which may be too pessimistic. IHS Markit currently projects California real gross state product will fall 6.9% in calendar 2020, and rise 5.4% in 2021, and 4.6% in 2022, while personal income will fall 0.8% in calendar 2020, and rise 3.0% in 2021, and 4.05 in 2022. To the extent economic recovery exceeds the state's long term projections, the projected out-year gaps could diminish.


We believe California's cash position is currently quite strong, although the cash position could diminish over the next several years.

At the end of April 2020, the state controller still reported that the state still had $44.4 billion of month-end unused internally borrowable resources, even though one-month April 2020 general fund cash receipts fell 30.0% below the same one-month April period in 2019. (Cumulative revenue through April 30 was up 1.9% over the prior year period, and only 3.6% below the adopted fiscal 2020 budget forecast).

A strong April end cash position is notable, because of lost April income tax due to the extension of the income tax filing period to July. The state estimates that the extension of the April income tax filing deadline to July will shift about $15.6 billion of fiscal 2020 income tax collections into fiscal 2021, and shift temporarily about $4.4 billion of corporate tax into fiscal 2021.

The governor proposes, in fiscal 2021, $4.1 billion of general fund borrowing from special funds. While this helps support the general fund, it will result in a small drawdown in total internally borrowable resources.

To the extent that the state implements deferrals of school spending from June into July, it will correspondingly decrease state liquidity while leaving budgetary fund balances unchanged. The draft senate budget bill could lead to $10.8 billion of total deferrals at fiscal end 2021 (according to the LAO), if additional federal aid is not received by Oct. 1—greater than projected general fund reserves.


The state's proposed solution to tax revenue losses leans heavily upon its large existing reserves and deferring substantial amounts of school aid to July from June, similar to the deferrals made during the Great Recession. These earlier school aid deferrals were eliminated during the subsequent economic recovery and have now become available for use again as a sort of extra reserve. The substantial $19.3 billion one-time budget solutions proposed in fiscal 2021 will lead to a large structural budget gap that will need to be closed in fiscal 2022, when one-time resources may not be as robust. The one-time budget adjustments proposed in fiscal 2021 equal about 14% of projected expenditures, indicating balancing the fiscal 2022 budget may be difficult. Future credit quality will depend to a large degree on how well the state can come up with structural budget solutions in the out-years.

Table 1

California General Fund Financial Results--Budgetary Basis
(Mil. $)
--Fiscal year-end June 30--
Governor's May Budget Revision Proposal
Budgetary basis results 2021P 2020P 2019E 2018 2017 2016
Revenues 124,867 140,835 144,485 136,198 123,135 119,113
Expenditures 133,901 146,497 141,861 124,735 119,873 114,360
Net (9,034) (5,662) 2,624 11,463 3,262 4,753
Net as percentage of expenditures (6.7) (3.9) 1.8 9.2 2.7 4.2
Net transfers (to)/from other funds and other additions 12,550 (3,998) (4,426) (3,673) (4,003) (3,031)
Unreserved-undesignated plus SFEU (1,556) 1,960 6,353 9,231 1,934 3,071
Safety net reserve 450 900 900 200 0 0
Public school system stabilization account 0 0 0 0 0 0
Budget Stabilization Account (BSA) 8,350 16,156 13,968 10,798 6,713 3,529
Combined BSA and other general fund reserves 10,760 15,501 21,221 20,229 8,647 6,600
Reserves and stabilization account as a percentage of expenditures- May revise 8.0 10.6 15.0 16.2 7.2 5.8
Proposition 98 school cash payments deferred into July 2022- May revise 5,300 1,900
Senate Budget Proposal
Combined BSA and other general fund reserves (assumes no additional federal aid- if full additional federal aid is received, reserves would be $500 million more than the governor's May revision) 7,600
Reserves and stabilization account as a percentage of expenditures- Senate budget 5.5
Senate Budget Proposal Proposition 98 school deferrals (assuming no additional federal aid) 9,000
SFEU--Special fund for economic uncertainty. P-projected in governor's May 2020 budget revision proposal. E-Revenue estimate from May revise proposal; 2019 expenditure and fund balance estimates from January 2020 budget proposal. Sources: Governor's May Revision Proposal; Governor's January Budget Proposal; California Legislative Analyst's Office

Table 2

General Fund Multi-Year Forecast 2020-2021 May Revision
(Mil. $)
Fiscal Year 2020 2021 2022 2023 2024
Combined revenues and non-BSA transfers 138,997 129,611 123,821 128,055 134,218
Transfer (to) from Budget Stabilization Fund (2,160) 7,806 5,405 2,945 0
Total Resources- combined prior balances/transfers/revenues 148,117 139,037 134,361 129,652 121,031
Proposition 98 school expenditures 52,352 44,872 45,734 47,871 50,222
Proposition 98 additional proposed supplemental payment 0 0 1,806 3,697 4,624
Non-Proposition 98 expenditures 94,145 89,030 88,169 91,270 95,619
Total Expenditures 146,497 133,902 135,709 142,838 150,465
Budget Stabilization Account 16,156 8,350 2,945 0 0
Total Reserves 15,501 10,760 (1,578) (16,362) (32,609)
One-time adjustments 2,435 19,305 0 0 0
Revenues/Transfers minus Expenditures, exluding BSA transfer (7,500) (4,291) (11,888) (14,783) (16,247)
Source: California Department of Finance

This report does not constitute a rating action.

Primary Credit Analyst:David G Hitchcock, New York (1) 212-438-2022;
Secondary Contact:Oscar Padilla, Farmers Branch (1) 214-871-1405;

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and and (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: