The 2024‑25 Budget

Broadband Infrastructure at May Revision

Summary

Proposed Delays and Reductions of Broadband Infrastructure Funding at May Revision Reasonable Given Fiscal Pressure Facing State. We find the elimination of proposed funding for the middle-mile network across two fiscal years and the proposed elimination of the Loan Loss Reserve Fund (LLRF) to be reasonable given the serious budget problem in 2024‑25 and projected budget deficit in 2025‑26 and future years. We also find the delay of last-mile project grant funding from 2025‑26 to 2027‑28 to be reasonable, though additional delays or reductions of funding for this purpose could be contemplated if needed as alternatives to other General Fund solutions at May Revision.

Recommend Rejection of Revised Provisional Budget Bill Language Allowing Middle-Mile Network Augmentation in 2024‑25. However, we recommend the Legislature reject the revised provisional budget bill language that would allow administration approval of an additional $1.5 billion General Fund for the middle-mile network in 2024‑25 as there is: (1) no funding set aside to support the augmentation, (2) incomplete information about the standalone construction projects that would be funded, and (3) limited legislative oversight afforded by written notification of the Joint Legislative Budget Committee (JLBC) for such a large request.

Recommend Approval of Alternate Provisional Budget Bill Language Requesting Middle-Mile Network Information. Instead, we recommend the Legislature approve alternate provisional budget bill language with no additional funding that requests, at a minimum, (1) more detailed information about the standalone construction projects funded by the current spending plan, and (2) a business plan for the middle-mile network that explains how it will be maintained and operated going forward.

Recommend Approval of Increased Federal Funding Authority for Federal Broadband Equity, Access, and Deployment (BEAD) Program… We also recommend the Legislature approve the one-time increase in the California Public Utilities Commission’s (CPUC’s) federal funding authority to receive the state’s $1.86 billion BEAD program allocation and proposed provisional budget bill language.

…With Limited-Term Funding for Requested Positions and Revised Provisional Budget Bill Language. However, we recommend the Legislature make the 31 new, permanent positions in the request limited term, and revise the provisional budget bill language to request information from CPUC on (1) how the program funds will be allocated, (2) any conditions placed on the funding, and (3) any changes to state-administered BEAD program processes required by the federal government.

Background

Major Federal and State Broadband Infrastructure Programs and Projects Underway. In recent years, the state has initiated a few significant programs related to broadband, in part due to funding provided by the federal government. There are currently three major state broadband infrastructure programs and projects underway pursuant to Chapter 112 of 2021 (SB 156, Committee on Budget and Fiscal Review): (1) a statewide, open-access middle-mile network; (2) grants to internet service providers, public entities, nonprofit organizations, and others for last-mile broadband infrastructure projects; and (3) grants to local government entities, nonprofit organizations, and tribes to help them obtain financing for last-mile projects (that is, the LLRF). The federal Infrastructure Investment and Jobs Act also provides $65 billion in federal funding for broadband infrastructure projects nationwide, with $42.45 billion allocated to the BEAD program mostly for state-administered last-mile broadband infrastructure project grants. For more information on each of the federal and state broadband infrastructure programs and projects, see our February 28, 2024 brief—The 2024‑25 Budget: Broadband Infrastructure.

Governor’s January Budget Proposed Additional Middle-Mile Network Funding, Delays and Reductions in Last-Mile Project Financing and Funding. In January, the administration proposed additional appropriations of $250 million General Fund in 2024‑25 and $1.25 billion General Fund in 2025‑26 for the middle-mile network. (In addition, the Governor’s January budget included $250 million General Fund in the California Department of Technology’s [CDT’s] state operations budget as an anticipated appropriation based on uncodified statutory language in Chapter 48 of 2022 [SB 189, Committee on Budget and Fiscal Review].) The administration also proposed $100 million in last-mile project grant funding be delayed from 2024‑25 to 2026‑27, as well as $250 million from the LLRF be reduced across two fiscal years—$150 million in 2024‑25 and $100 million in 2025‑26. The aforementioned brief contains more detail on each broadband infrastructure proposal in the Governor’s January budget.

Early Legislative Action Adopted Delays and Reductions in Last-Mile Project Financing and Funding Proposed in Governor’s January Budget. Chapter 9 of 2024 (AB 106, Gabriel) included, among other actions, adoption of: (1) the proposed delay of $100 million General Fund in last-mile project grant funding from 2024‑25 and 2026‑27, and (2) the proposed reduction of $250 million General Fund from the LLRF across both 2024‑25 ($150 million) and 2025‑26 ($100 million).

Proposal

Middle-Mile Network

Eliminates $1.5 Billion General Fund ($250 Million in 2024‑25, $1.25 Billion in 2025‑26) Proposed in Governor’s January Budget. The May Revision eliminates the additional $1.5 billion General Fund—$250 million in 2024‑25 and $1.25 billion in 2025‑26—proposed in the Governor’s 2024‑25 budget for the middle-mile network. The elimination of this proposal is scored as one of the solutions to the budget problem facing the state in 2024‑25 and projected budget deficit in 2025‑26. However, the May Revision does maintain the $250 million General Fund included in CDT’s state operations budget in 2024‑25. We include an updated broadband infrastructure spending plan as of the 2024‑25 May Revision at the end of this section.

Revised Provisional Budget Bill Language Would Allow the Administration to Augment Middle-Mile Network Funding in 2024‑25 by $1.5 Billion General Fund. The May Revision package also includes revised provisional budget bill language that would allow the Director of the Department of Finance (DOF) to augment CDT’s budget by $1.5 billion General Fund in 2024‑25 for the middle-mile network. (Proposed provisional budget bill language in the Governor’s January budget allowed the administration to increase the 2024‑25 appropriation by $500 million General Fund.) The revised language includes a 30-day written notification period for the JLBC to consider the request.

Last-Mile Project Grants

Delays $200 Million General Fund From 2025‑26 to 2027‑28. The May Revision proposes to delay $200 million General Fund for last-mile projects planned for appropriation in 2025‑26 by two fiscal years to 2027‑28. If approved, $100 million General Fund would remain in 2024‑25 and no funding would be appropriated in 2025‑26.

LLRF

Eliminates Remaining $500 Million General Fund ($175 Million in 2023‑24, $150 Million in 2024‑25, $175 Million in 2025‑26). The May Revision eliminates the remaining $500 million General Fund appropriated or planned for appropriation for the LLRF—$175 million in 2023‑24, $150 million in 2024‑25, and $175 million in 2025‑26.

Federal BEAD Program

Authorizes $1.86 Billion in Additional Federal Trust Fund Authority for CPUC to Receive the State’s BEAD Program Allocation. The May Revision proposes a one-time increase in CPUC’s Federal Trust Fund authority to receive the state’s $1.86 billion allocation from the federal BEAD program in 2024‑25. The proposal also requests 31 new, permanent positions for CPUC to administer the program, and provisional budget bill language to (1) encumber and expend the funds through June 30, 2031 and (2) re-appropriate some unspent initial BEAD planning funds for encumbrance or expenditure through November 30, 2027. Figure 1 below provides the broadband infrastructure spending plan as of the 2024‑25 May Revision.

Assessment

Elimination of Additional Middle-Mile Network Funding Proposed in Governor’s January Budget Reasonable… Given the serious budget problem in 2024‑25 and the significant projected budget deficits in 2025‑26 and future years, the elimination of the additional $1.5 billion General Fund for the middle-mile network that was proposed in the Governor’s January budget is reasonable. As one of the few discretionary spending proposals in the Governor’s January budget, the elimination of this additional funding frees up General Fund resources in 2024‑25 and 2025‑26 without reducing core state services. Furthermore, the current spending plan suggests an operational middle-mile network of at least 8,300 miles can be developed with existing and planned funding that would remain.

…But Revised Provisional Budget Bill Language Is Problematic. However, the revised provisional budget bill language that would allow the Director of DOF to augment CDT’s budget by $1.5 billion General Fund in 2024‑25 for the middle-mile network is problematic for at least three reasons:

• No Funding Set Aside for Augmentation. First, there is no funding set aside at May Revision for said augmentation, which means any additional funding would require higher-than-projected revenues or lower-than-projected expenditures to materialize in 2024‑25. While it is at least possible additional funding could become available, it is also possible (as we discuss later in the post) the Legislature might want to use that funding for another purpose.

• Lack of Information About Standalone California Department of Transportation (Caltrans) Construction Projects. Second, there is still a lack of information about the standalone Caltrans construction projects that are currently funded, let alone additional construction projects that would be funded by this augmentation. Moreover, the administration is considering additional changes to these projects that could impact whether they, in fact, require construction (or could be joint-built, leased, and/or purchased). Changes in the delivery, length, and location of these projects (among other possible changes) necessitate that more information be shared with the Legislature.

• Proposed JLBC Notification Process Limits Legislative Oversight. Third, a General Fund augmentation of this magnitude being reviewed and approved with only 30-day written notification of the JLBC limits legislative oversight. In addition to the short time frame the JLBC would have to review the request, the language also assumes any additional funding available for the augmentation would be prioritized by the Legislature for middle-mile network implementation. Given the variety of General Fund solutions already passed as part of the 2024‑25 budget process, as well as the myriad currently under consideration at May Revision, it is quite likely the additional funding could be prioritized by the Legislature for other purposes.

Last-Mile Project and LLRF Changes Reasonable… In our analysis of the broadband infrastructure proposals in the Governor’s January budget, we recommended that the Legislature consider additional reductions in last-mile project funding and in the LLRF to address the serious budget problem in 2024‑25 and significant future budget deficits in 2025‑26 and 2026‑27. The administration’s proposed delay of additional last-mile project funds and elimination of the LLRF at May Revision are consistent with our previous recommendations and, therefore, we find them to be reasonable. To the extent that the Legislature does not agree with some General Fund solutions proposed across the May Revision budget, it may look for additional, alternative solutions. The Legislature could consider additional delays and/or reductions in last-mile project funding as one alternative solution, as $100 million General Fund remains appropriated in 2024‑25 (with $450 million General Fund delayed into 2026‑27 and 2027‑28).

…But Careful Legislative Consideration of Associated Impacts Warranted. While we find the changes in last-mile project funding and elimination of the LLRF at May Revision to be warranted given the serious budget problem in 2024‑25 and significant future budget deficits, we acknowledge there will be impacts on grant applicants associated with these changes. To help ameliorate some of the trade-offs associated with these changes, such as less broadband infrastructure funds for unserved and underserved communities and households, the Legislature could consider ways to mitigate the impacts of these changes. For example, the Legislature might consider how the remaining last-mile project funds could be used together with federal BEAD program funding to directly serve the aforementioned communities and households, especially in historically disadvantaged areas of the state. Continued oversight of the middle-mile network implementation also will be critical to make sure last-mile projects in these areas are able to connect to the network and provide high-speed internet access to their community institutions and households.

Request for Additional Federal Trust Fund Authority to Receive State’s BEAD Program Allocation Is Reasonable, With Opportunity for Legislative Oversight. We raise no concerns with the requested one-time increase in federal funding authority for CPUC to receive the state’s $1.86 billion BEAD program allocation or the proposed provisional budget bill language. We also find CPUC’s request for 31 new, permanent positions to administer the program generally reasonable. However, given the federal BEAD program implementation time line is roughly five years, the Legislature might consider whether limited-term approval of these positions may be warranted. Finally, consistent with previous recommendations on the broadband infrastructure proposals in the Governor’s January budget, we find CPUC’s request for additional federal trust fund authority to be a ripe opportunity for the Legislature to consider revisions to the proposed provisional budget bill language and seek clarification on how federal BEAD program funds will be allocated once received. Additional information about any conditions placed on the funding by the federal government, as well as about any required changes to state-administered BEAD program processes, also could be contemplated as part of these revisions.

Recommendations

Approve May Revision Changes to Funding for Middle-Mile Network, Last-Mile Project Grants, and LLRF. We recommend the Legislature approve the following General Fund solutions in the May Revision: (1) the elimination of the $1.5 billion General Fund ($250 million in 2024‑25 and $1.25 billion in 2025‑26) proposed in the Governor’s January budget for the middle-mile network; (2) the delay of $200 million General Fund for last-mile projects from 2025‑26 to 2027‑28; and (3) the elimination of the remaining $500 million General Fund in the LLRF ($175 million in 2023‑24, $150 million in 2024‑25, and $175 million in 2025‑26). We also recommend that the Legislature consider additional reductions in last-mile project funding, if needed, as alternatives to other General Fund solutions in the May Revision budget overall. Finally, we recommend the Legislature consider ways to mitigate negative impacts of these changes on unserved and underserved communities and households, especially in historically disadvantaged areas of the state.

Reject Proposed Middle-Mile Network Provisional Budget Bill Language and Consider Alternative Language Requesting More Information. We recommend the Legislature reject the proposed provisional budget bill language that would allow the Director of DOF to augment CDT’s budget by $1.5 billion General Fund in 2024‑25 for the middle-mile network. We instead recommend provisional budget bill language with no additional funding that requests, at a minimum, (1) more detailed information about the standalone construction projects funded by the current spending plan, and (2) a business plan for the middle-mile network that explains how it will be maintained and operated going forward.

Approve Additional Federal Trust Fund Authority and Limited-Term Positions to Receive State’s BEAD Program Allocation With Revised Provisional Budget Bill Language. We recommend the Legislature approve the one-time increase in CPUC’s Federal Trust Fund authority to receive the state’s $1.86 billion allocation from the federal BEAD program in 2024‑25, as well as the proposed provisional budget bill language. However, we recommend the Legislature consider approving the 31 new, permanent positions on a limited-term basis (for example, three fiscal years) to reassess whether all or only some of these positions continue to be needed given the time-limited nature of the program. Lastly, we recommend the Legislature revise the provisional budget bill language requesting information from CPUC on (1) how the program funds will be allocated, (2) any conditions placed on the funding, and (3) any changes to state-administered BEAD program processes required by the federal government.