The 2023-24 Budget

Cap-and-Trade Expenditure Plan and Greenhouse Gas Reduction Fund Revenue Estimates

Background

Cap-and-Trade Auction Revenue. Revenues from quarterly cap-and-trade auctions are deposited in the Greenhouse Gas Reduction Fund (GGRF) and the funds generally are allocated to climate-related programs. Under current law, a total of 65 percent of auction revenue is continuously appropriated to the following programs: the high-speed rail project (25 percent), Affordable Housing and Sustainable Communities Program (20 percent), Transit and Intercity Rail Capital Program (10 percent), low carbon transit operations (5 percent), and Safe and Affordable Drinking Water Program (5 percent, up to $130 million). In addition, beginning in 2022-23, $200 million is continuously appropriated for forest health and wildfire prevention activities. This funding is taken “off the top” before calculating the other continuous appropriation amounts. The remaining revenue (about 30 percent) is available for appropriation by the Legislature through the annual budget for other ongoing funding commitments (such as state administrative costs and statutory transfers), as well as discretionary spending programs.

February Cap-and-Trade Auction Update

February 2023 Auction Update. Based on preliminary results, the state will receive an estimated $983 million in revenue from the February 15, 2023 auction. This is roughly equivalent to the amount the state received from the November 2022 auction ($961 million). The price of allowances increased slightly (from $26.80 to $27.85 for 2023 vintage allowances, and from $26.00 to $27.01 for 2026 vintage allowances). All state-owned allowances offered for sale at the February auction were purchased.

February 2023 Auction Revenues About $350 Million Higher Than 2022-23 Budget Act Assumptions. The preliminary auction results exceeded the expectations of the 2022-23 Budget Act for this auction—$630 million, which reflected the administration’s projections—by about $350 million. This is in line with historic trends, in which the administration’s estimates have been sizably lower than actual revenues. The February auction revenues provide about $210 million more for continuously appropriated expenditures, with about $140 million potentially available for additional discretionary expenditures.

Future Auction Revenue Continues to Be Subject to Uncertainty. General uncertainty about future auction revenue continues. As the program nears its current statutory expiration date of 2030, various factors could affect cap-and-trade auction revenues. We discuss such issues in our December 2021 Cap-and-Trade Auction Update and GGRF Projections post.

Governor’s Proposal

Governor Proposes $861 Million in Discretionary Spending. The Governor’s budget assumes cap-and-trade revenues of $2.8 billion in 2023-24, as shown in Figure 1. This includes $2.5 billion from projected budget-year auction proceeds and $298 million from other GGRF revenues (such as interest earnings, additional current-year revenues from the November 2022 auction, and utilizing the existing GGRF fund balance). Under the Governor’s proposal, about $1.6 billion would go to continuously appropriated programs, $351 million would go toward other existing commitments, and $861 million would be used for proposed discretionary spending (all to backfill proposed General Fund cuts, as described below). We note that the $376 million for other statutory obligations includes $25 million to “make up” the full $130 million intended for drinking water programs, since under the Governor’s estimates, the required 5 percent of continuously appropriated revenues would not fully fund that intended amount.

Proposal Mostly Backfills Zero-Emission Vehicle (ZEV) Programs Proposed for Reductions. As shown in Figure 1, the Governor would commit $611 million of GGRF discretionary funds to backfill proposed General Fund reductions to recent ZEV funding commitments. (Please see our recent report, The 2023-24 Budget: Crafting Climate, Resources, and Environmental Budget Solutions, for a more detailed discussion of which programs would receive GGRF funds under the proposal.) In addition, the Governor would direct $250 million in 2023-24 discretionary GGRF revenues to backfill a proposed General Fund reduction to the AB 617 Community Air Protection program. This program—established by Chapter 136 of 2017 (AB 617, C. Garcia)—has historically been supported using discretionary GGRF revenues, however, the 2022-23 budget package planned to provide it with General Fund in the budget year.

Proposes Trigger Restoration Approach for GGRF. The Governor also proposes a trigger restoration approach for GGRF revenues that the state might receive above current estimates during the 2023-24 fiscal year. Specifically, proposed budget control section language would require the administration to allocate additional GGRF revenues to backfill other proposed reductions to ZEV programs. The language identifies specific activities for which these revenues could be used—fueling infrastructure grants, transit and school buses, ports, community-based efforts, emerging opportunities, and charter boat compliance—but would allow the Director of the Department of Finance (DOF) the discretion to determine which of these ZEV programs to augment and at what levels, up to the total amount of General Fund that was reduced.

Commits Out-Year GGRF Revenues. In addition to using the full $861 million of discretionary GGRF revenues to backfill proposed ZEV and AB 617 program General Fund reductions in 2023-24, the Governor also proposes using $414 million annually in future GGRF discretionary funds to backfill proposed cuts to intended General Fund for ZEV programs in 2024-25 and 2025-26.

Assessment

Governor’s Revenue Assumptions Are Conservative. We find the Governor’s 2022-23 and 2023-24 GGRF revenue assumptions to be conservative. The administration assumes all allowances will sell at the floor price, which is not a typical scenario as allowances have sold above the floor price over the last couple of years. Under our base revenue scenario (which represents stable allowance prices), we estimate total revenues over the two-year period would be $2 billion higher than assumed under the Governor’s budget (including $700 million additional revenues in 2022-23 and about $1.3 billion more in 2023-24). As noted above, substantial uncertainty remains regarding how auction revenues will materialize, so it is possible that revenues could come in below our estimates. We will provide the Legislature with updated revenue forecasts in the coming months as more information becomes available, including the results of future quarterly auctions.

Several Hundred Million Dollars More Could Be Available for Discretionary Spending. After accounting for the continuous appropriations and off-the-top allocations, our estimates project the state will have a total of about $800 million available in additional discretionary GGRF revenues from the current and budget years compared to the administration.

• 2022-23. We project current-year discretionary revenues will be about $380 million above the amount allocated in the 2022-23 Budget Act. The Governor’s spending plan for the budget year incorporates the additional $100 million from the November auction, but we think an additional roughly $280 million in discretionary revenue might be available from the February auction and upcoming May auction (about $140 million from each) that is not yet included in the Governor’s spending plan.

• 2023-24. After taking continuous appropriations into account, compared to the Governor’s estimates, we project the state will have about $520 million of additional funding available for discretionary expenditures in the budget year. (We note that under our estimates, the drinking water program would be fully funded with $130 million through the 5 percent continuous appropriation, negating the need to spend discretionary revenues to make the program “whole.”)

Fund Balance Uncertainty. The Governor’s budget information displayed a very high anticipated fund balance for GGRF remaining after accounting for proposed 2023-24 spending—$1.3 billion. DOF indicates that this amount likely is significantly overstated due to circumstances that prevented DOF from fully reconciling GGRF funds in time for the January 10 budget deadline. DOF indicates that it plans to provide an updated fund balance estimate as part of the May Revision.

Issues for Legislative Consideration

Do Continuous Appropriations Continue to Reflect Legislative Priorities? The Legislature might want to consider the degree to which both continuous appropriations and past discretionary spending programs continue to be consistent with its current priorities, particularly in the context of the constrained General Fund condition and proposed spending reductions to other programs. Most of the continuous appropriations were established as part of the 2014-15 budget and legislative priorities may have changed over the last several years.

While Governor Prioritizes ZEVs, Legislature May Prefer Different Allocation of Discretionary Funds. The Governor’s proposal allocates funding to backfill proposed General Fund reductions in two categories of spending: the AB 617 program and various programs intended to support ZEVs. The Legislature could consider a different mix of programs to fund, as GGRF revenues have typically supported a greater diversity of programs. This could include backfilling General Fund reductions for different programs than those the Governor identifies or augmenting funding for other priorities.

Administration’s Approach Would Significantly Limit Legislative Authority Over Midyear GGRF Revenues. As described above, we estimate that several hundred million dollars in additional discretionary revenues will be available in 2023-24, as compared to what the Governor’s budget assumes. Under the Governor’s proposal, DOF would have authority to automatically allocate these revenues to ZEV programs (up to the amount of the General Fund reduced). The Legislature will want to consider (1) whether restoring funding for ZEV programs is its greatest priority for higher-than-anticipated GGRF revenues, and (2) whether it wants to grant this unprecedented level of midyear spending decisions to the administration. (As discussed in our recent report, we recommend the Legislature reject or modify this proposed trigger approach to preserve legislative authority and flexibility.)

Is the Legislature Comfortable Committing Out-Year GGRF? As described above, the Governor proposes to commit out-year discretionary GGRF revenues for specific purposes—specifically, for ZEV programs—as part of this year’s budget package, which is unusual. While this approach would help preserve some intended spending while helping to address projected out-year General Fund shortfalls, the Legislature will want to consider whether it is comfortable making this commitment now. Such an approach would leave a lower amount of GGRF revenues available for discretionary spending—and to address potential emerging and evolving priorities—in future years. This decision could be particularly important if the budget problem continues, as future GGRF revenues could be used to help preserve support for important legislative priorities—which might extend beyond ZEV programs—should the Legislature be faced with making additional reductions.

How Much Funding Remains in the GGRF Fund Balance? As described above, the administration is still refining its estimates for what balance would remain in the GGRF at the end of 2023-24 under the Governor’s proposal. This information would help the Legislature better understand the potential availability of resources that could be used for additional discretionary spending. Rather than waiting for the May Revision, the Legislature may want to ask DOF to provide a more accurate estimate as soon as possible to aid in its budget deliberations.