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Senate hearing probes $3.9 billion ‘settle up’ hold and May Revision Prop 98 changes
Summary
Department of Finance told the Senate subcommittee that the May Revision raises the Proposition 98 minimum guarantee across the three‑year window while retaining a $3.9 billion settle‑up balance to guard against revenue volatility; the LAO urged more targeted resiliency measures such as a reserve deposit or advance payments to districts.
Alex Shope of the Department of Finance outlined the Governor’s May Revision for Proposition 98 funding, saying the administration now projects the calculated minimum guarantee will rise by about $28 billion across the three‑year budget window compared with the 2025 Budget Act and by $6.4 billion relative to the Governor’s January budget. “Within the 3‑year budget window, the May Revision projects that the calculated minimum guarantee will increase by approximately $28,000,000,000 relative to the 2025 budget act,” Shope said.
DOF presented year‑by‑year figures: a roughly $1.1 billion increase in 2024‑25 for a total minimum guarantee of about $124.9 billion; a roughly $3.7 billion increase in 2025‑26 for a calculated minimum guarantee near $125.1 billion; and a roughly $1.6 billion increase in 2026‑27 for a total minimum guarantee near $127.1 billion. Shope also described changes to reserve and transfer activity, including a larger mandatory Prop 98 deposit in 2024‑25 and a discretionary deposit that increases the Prop 98 reserve to an estimated $10.3 billion.
Committee members pressed DOF on the administration’s decision to delay full payment of the outstanding ‘‘settle up’’ obligation. The May Revision reduces the January proposal’s settle‑up from $5.6 billion to $3.9 billion; Chair Powell asked what indicators justify holding $3.9 billion rather than paying it down. Shope explained the retained amount reflects forecast uncertainty and statutory rules that protect schools from retroactive appropriation reductions if revenues decline.
The Legislative Analyst’s Office recommended alternatives to delaying settlement. Ken Kappant of the LAO said the administration’s smaller settle‑up is an improvement but warned that delaying payment “sets up larger deficits and more difficult decisions in subsequent budgets.” He urged that the state consider options such as fully funding the adopted Prop 98 estimates and using excess funds to build a reserve that would protect ongoing programs.
LAO staff offered practical options for managing volatility: an optional deposit into the Proposition 98 reserve, or an advanced payment mechanism that would give districts an extra monthly payment (effectively 13 payments in a fiscal year) as a hedge against future downturns. “If revenue meets expectations, we have that funding available; if funding drops, the state can take back that deposit with no effect on school programs,” Kappant said.
DOF officials rebutted that the $3.9 billion choice balances the improved revenue outlook with the legal and cash management risk of over‑appropriation. They also noted that personal income tax timing and concentrated gains from a small set of tech firms produce continued revenue uncertainty through the fiscal year.
The committee did not take a vote at the hearing; members signaled that they will weigh the LAO’s alternatives and the administration’s approach as they draft budget recommendations.
