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It’s a good kind of problem to have.

During the last cataclysmic recession, California’s state government was forced to cleave billions from its budget to close an historic deficit. This year, thanks to a very unequal economic downturn and a tax code that relies on the wealthy, the state is swimming in cash, even during the pandemic. The waterline inched up even more earlier this week when the California Department of Finance announced that tax revenue is coming in $14.3 billion over an earlier forecast. And now that President Joe Biden has signed the biggest economic relief bill in U.S. history, another wave of money is on its way.

The only challenge left for state lawmakers is to figure out how to spend it all.

Before they do, they will have to answer some thorny questions: In a year of unprecedented need, whose pleas for help will be prioritized? Between the governor, who has wielded unprecedented emergency spending power since the beginning of the pandemic, and an increasingly frustrated Legislature, who will ultimately make those decisions and who will oversee the spending? And once the windfall from Uncle Sam arrives, what terms and conditions apply?

“This has not been like any other budget season that we’ve had,” said Assemblymember Vince Fong of Bakersfield, lead Republican on the Assembly Budget Committee. Earlier this year, state lawmakers passed a series of emergency spending bills — on cash assistance, a school reopening plan, rental assistance — breaking from the typical budget-writing schedule.

“In addition to that, you have the state windfall and then you have the federal resources coming as well,” said Fong. “We’ve got so many moving parts. I don’t know if there’s a playbook for that.”

Few strings attached

Roughly $150 billion is on its way to California from Washington, D.C., from the $1.9 trillion American Rescue Plan. The bulk of that cash either circumvents the state government — including $40 billion in checks to households and $16 billion in direct relief to cities and counties — or has to be spent on specific programs such as vaccinations, child care or preparing schools for reopening.

But $26 billion will go directly into a state budget already brimming with cash. Those funds come with very few strings attached; in a memo issued Tuesday, the nonpartisan Legislative Analyst’s Office called it “flexible funding.”

Under the broad conditions set by the federal legislation, this latest round of relief money to the state has to be spent addressing some aspect of the “public health emergency” or its “negative economic impacts,” on pay for essential workers, on making up for lost tax revenue or on making “necessary investments in water, sewer, or broadband infrastructure.”

In other words, it can be spent on a whole lot. The state has until the end of 2024 to spend the $26 billion.

There are a few other restrictions. The federal relief bill also prohibits states from using the funds to either prop up their pension systems, something Republicans in Washington were loath to subsidize, or to cut taxes.

The prohibition on tax cuts could prevent California from passing COVID-related relief that enjoys bipartisan support in Sacramento. Those blocked proposals include one that would keep small businesses that received federal loans last year from having to pay taxes on the rescue money, along with tax credits for poorer Californians and housing developers. Last week, Keely Bosler, director of California’s Department of Finance, wrote a letter to Treasury Secretary Janet Yellen seeking some extra flexibility around those rules.

But even with those conditions, the federal bill gives state lawmakers plenty of leeway over how to divvy up the cash. And even in a state the size of California, $26 billion is a significant chunk of change.

In January, Gov. Gavin Newsom put forward his preliminary budget for the current year, proposing a record-breaking $165 billion in discretionary spending. The federal relief money expands that pot of cash by another 16%.

Hands out

Phil Ting, the Democratic chairperson of the Assembly Budget Committee, contrasts this year’s financial picture with the one California lawmakers faced in 2009. Amid the collapse of the national housing market and substantially less federal relief, legislators cut nearly $16 billion in spending and raised taxes by another $4 billion that year.

“As we learned last time…going too small extends the recession,” said Ting, who represents San Francisco.

And though the incoming federal money and the cushion of extra state tax revenue constitutes an unprecedented budget windfall, Ting said the need is also unprecedented. “It doesn’t feel like that much money given the amount that was lost in the economy.”

Among the expensive problems the pandemic has foisted on state government: Closed schools, a backlogged and chronically dysfunctional unemployment claims system, spiking utility debts and the need to vaccinate every adult in California. Homelessness, wildfire prevention, patchy Internet access and poverty are perennial challenges that haven’t gone anywhere.

The requests from activists and lobbyists are already pouring into the state Capitol.

Last week, a coalition of county governments, hospitals and nonprofits asked the governor to set aside $8 billion for broadband internet.

That came a week after the California Cable & Telecommunications Association sent in its own request that $1 billion go to a high-speed internet development program — and that the state temporarily nix the cable bill surcharge that pays for it.

The California Chamber of Commerce is likewise hoping lawmakers will use some of the extra cash to pay down the state’s unemployment insurance debt, which is set to be paid for with a payroll tax.

Anthony York, a spokesperson for the California Medical Association, which advocates for the state’s doctors in Sacramento, has another idea: “There’s a strong case to be made that much of that money should go to health care and expanding health coverage and fortifying our health care infrastructure.”

He’d like the state to support small physician practices that have struggled as patients have delayed non-essential visits, and to boost the rates that doctors receive from Medi-Cal, the public health insurance system for low-income Californians.

Homelessness, wildfire prevention, patchy Internet access and poverty are perennial challenges that haven’t gone anywhere.

Advocates for low-income Californians say they hope funds are prioritized for those most harmed by the pandemic and economic downturn, even if that demographic employs fewer lobbyists.

“There’s a frenzy I’m sure to come up with good ideas” for how to use the money, said Jennifer Fearing, who lobbies for the state’s association of nonprofits, including Meals on Wheels. “I would surmise that not all of them are tied to our values or to some of the pressing disparities that were really made clear during the pandemic. I would hope we can prioritize those.”

Chris Hoene, executive director of the California Budget & Policy Center, said he welcomes that political debate.

“There’ll be political contention about what should be prioritized and what should receive more funding,” he said. “But that’s certainly a better situation to be in than having to have political fights over who gets cut and who doesn’t get cut, which is what we experienced last time around.”

Who decides spending?

Another source of political tension: The contention between the Newsom administration and the Legislature over which branch of government has the ultimate say over where this money goes.

It’s a fundamental separation-of-powers debate that’s been brewing in Sacramento for more than a year now. California law gives governors expansive authority to spend money as they see fit during emergencies. Newsom has made ample use of that power since the beginning of the pandemic.

That’s rankled some legislators, including Democrats, who have been complaining since last summer of being snubbed or left out of the loop. Calls for additional oversight have become louder following media reports on no-bid contracts awarded by the Newsom administration to businesses that were either poorly vetted or to political donors or favored businesses.

Because the federal money will arrive in the middle of the budget-writing process, it ought to be subject to the same checks, balances and transparency requirements as any other kind of spending, said Ting.

But the governor’s most recent budget proposal includes a provision that would allow the administration to make use of incoming federal funds for COVID relief however it chooses without notifying the Legislature.

Calls for additional oversight have become louder following media reports on no-bid contracts awarded by the Newsom administration to businesses that were either poorly vetted or to political donors or favored businesses.

In an Assembly hearing last week, Department of Finance analyst Stephen Benson said the administration would use the power only “in the specific situations where immediate response is necessary.”

Asked whether that provision would allow the governor to spend federal money without approval from the Legislature, Ting said there was legal ambiguity.

“Ask ten lawyers and you’ll probably get 20 different opinions,” he said. But, he noted, “the Legislature’s main authority is to appropriate money.”

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