The 2010-11 Budget: Overview of the Governor’s Budget

The 2010-11 Budget: Overview of the mac Taylor Legislative Analyst Governor’s Budget January 12, 2010 2010-11 Budget anaLysis Contents Executive Summary ............................................................................. 3 Budget Overview ................................................................................. 5 Economic and Revenue Projections ..................................................... 7 Major Budget Proposals by the Governor .......................................... 9 Analysis of Transportation and K-14 Education Proposals ............... 16 LAO Comments on the Governor’s Budget Package ........................ 22 LAO Recommendations to the Legislature ........................................ 24 Conclusion ......................................................................................... 27 OV-2 LegisLatiVe anaLyst’s Office 2010-11 Budget anaLysis ExEcutivE Summary the Governor’s Budget Proposal $19 Billion Budget Problem Identified. With billions of dollars of temporary budget solu‑ tions from last year set to expire and the economy recovering slowly, California once again faces a mammoth budget problem. In the 2010‑11 Governor’s Budget, the administration puts the size of the problem to be addressed in the coming months at $18.9 billion. This consists of a General Fund deficit of $6.6 billion at the end of 2009‑10—assuming no corrective budget ac‑ tions by the Legislature and the Governor—and an additional $12.3 billion operating deficit in 2010‑11. The Governor declared a fiscal emergency on January 8, 2010, calling the Legislature into special session to begin taking action on the $19.9 billion in solutions he proposes to ad‑ dress the budget problem and create a $1 billion reserve. Around 40 percent of the Governor’s budget solutions relies on funding or flexibility to be provided by actions of the federal govern‑ ment. Another 40 percent consists of reductions to state spending. The remainder of the Gov‑ ernor’s proposals consist of various fund shifts. These include a transportation tax proposal and a proposal that the Legislature put measures before voters in June 2010 to allow use of a com‑ bined $1 billion of Proposition 10 early childhood development funds and Proposition 63 men‑ tal health funds to help balance the budget. (Voters rejected similar measures in May 2009.) Governor’s Proposals Rely Heavily on Washington. Federal funds and federal approval of flexibility to make reductions in various programs are at the core of the Governor’s budget proposals. In case the federal government fails to provide the relief requested in his base budget proposal, the Governor proposes that the Legislature approve the “triggering” of alternative program reductions and revenue increases, including elimination of significant health and social services programs. LaO comments Reasonable Estimate of the Problem…but Some Downside Risk. In November 2009, our office put the size of the 2009‑10 and 2010‑11 budget problem at $20.7 billion. The administra‑ tion’s $18.9 billion estimate of the size of the problem is reasonable, but the Governor’s base‑ line estimates of both revenues and expenditures are somewhat more optimistic than ours. A variety of lawsuits also threaten to expand the state’s budget problems. Accordingly, to balance the 2010‑11 budget, the Legislature and the Governor eventually may have to address a budget problem a few billion dollars larger than the administration identifies. Governor Correct to Seek Additional Federal Relief… As we suggested in November, the Governor’s plan aggressively seeks additional federal funding related to health, social services, education, and prison programs and flexibility to reduce spending in several areas, including the In‑Home Supportive Services (IHSS) program and Proposition 98 school funding. Com‑ LegisLatiVe anaLyst’s Office OV-3 2010-11 Budget anaLysis bined, these federal relief requests total about $8 billion—around 40 percent of the Governor’s proposed budget solutions. . . . But Not Realistic to Expect All the Federal Relief Assumed. While the odds seem favor‑ able for some federal relief sought by the administration, we believe that the likelihood of Wash‑ ington agreeing to all of the Governor’s requests is almost non‑existent. In crafting the 2010‑11 budget package over the next few months, the Legislature needs to operate on the assumption that federal government relief will total billions of dollars less than the Governor wants. No Way to Avoid Reprioritizing State Finances. The Legislature must make very difficult choices affecting both state revenues and spending. The Governor’s trigger cuts—to take effect if federal funding is less than the Governor hopes for—are painful and in some cases draconian. Nevertheless, there is no way that the Legislature can avoid making some similarly difficult deci‑ sions this year. At the same time, in determining its priorities, the Legislature need not be limited by the specific choices put forward by the Governor. For social services programs, for example, we advise the Legislature to consider more targeted changes so that benefits would be provided to only the most vulnerable recipients rather than completely eliminating the programs. LaO Bottom Line The Legislature faces incredibly daunting challenges in balancing this year’s budget. Many of the major expenditure reductions in this budget will require significant lead‑time for departments to implement. Accordingly, the Legislature and the Governor will need to agree to a framework to solve much of the budget problem by the end of March. While it is reasonable to assume the state will secure some additional federal funding and flexibility, securing all of the federal re‑ lief the Governor seeks is very unlikely. Therefore, in developing a plan to balance the 2010‑11 budget and rebuild state finances for the long term, the Legislature must make the types of very difficult decisions suggested by the Governor’s “trigger list” of cuts and revenue increases—even if the Legislature rejects some of the specifics of the Governor’s list. Decisions like this will facili‑ tate steady progress toward a new, sustainable budget framework. Such progress is imperative to restore the state’s fiscal health and enhance public trust in state government. OV-4 LegisLatiVe anaLyst’s Office 2010-11 Budget anaLysis BudGEt OvErviEw administration Estimates an ous actions that would reduce Proposition 98 $18.9 Billion Shortfall spending on K‑14 education. For 2010‑11, the Governor proposes $18.7 billion of additional Reasons for the Shortfall Similar to Those solutions, including about $7.8 billion of solu‑ We Described in November. After a very dif‑ tions requiring either funding or the flexibility to ficult budget process in 2009, policymakers change programs from the federal government acknowledged that there would be more work and $6.6 billion of expenditure‑related solu‑ to be done to balance the 2010‑11 budget. tions for which federal approval generally is not Based on a review of current‑law General Fund required. Another $4.3 billion would come from revenues and program spending, the 2010‑11 other 2010‑11 solutions—mainly shifts of various Governor’s Budget estimates that, without cor‑ state funds to other purposes and the Governor’s rective action by the Legislature and the Gov‑ proposed funding shift related to transportation ernor, the state would end 2010‑11 with an programs. In the event that federal funds do not $18.9 billion deficit. In this estimate, the General materialize as the Governor hopes, the adminis‑ Fund would end 2009‑10 with a $6.6 billion tration proposes additional spending reductions deficit (as opposed to the $500 million reserve and revenue increases that would occur through balance estimated by the administration when an automatic trigger. (We describe these trigger the Governor signed the July 2009 budget pack‑ budget solutions later in the report.) age). Moreover, the gap between revenues and Special Session Proposals. During the fiscal expenditures would total an additional $12.3 bil‑ emergency special session, the Governor pro‑ lion in 2010‑11. The main reasons for the budget poses that the Legislature adopt $8.9 billion of his gap are similar to the ones we identified in our $19.9 billion of budget solutions and put mea‑ November 2009 report, California’s Fiscal Out‑ sures on the June 2010 ballot to facilitate Gen‑ look: the inability of the state to achieve previous eral Fund budget relief of a combined $1 billion budget solutions in several areas, the effects of from Proposition 10 and Proposition 63 funds. several adverse court rulings, and, for 2010‑11, Including the ballot proposals, the special session the expiration of various one‑time and temporary requests encompass around three‑fourths of the budget solutions approved in 2009. Governor’s total expenditure reduction and fund‑ How the Budget addresses the Shortfall ing shift proposals. In many cases, the adminis‑ tration believes that approval of solutions prior Federal Relief Is a Large Component of to March 1 is necessary to achieve the savings the $19.9 Billion of Proposed Solutions. Fig‑ estimated in the Governor’s budget. ure 1 (see next page) shows the $19.9 billion in budget solutions proposed by the Governor in General Fund condition his budget package (which includes a $1 billion Solutions Estimated to Leave State With reserve). In 2009‑10, the Governor proposes $1 Billion Reserve at End of 2010‑11. Figure 2 $1.2 billion of General Fund solutions, including (see page 7) shows the administration’s estimates around $893 million of savings related to vari‑ LegisLatiVe anaLyst’s Office OV-5 2010-11 Budget anaLysis Figure 1 Budget Solutions Proposed by the Governor (General Fund, in Billions) 2009‑10 2010‑11 totals Expenditure Solutionsa Reduce Proposition 98 spending $0.9 $1.5 $2.4 Reduce employee salaries, payroll, and state’s retirement contributions — 1.6 1.6 Implement various Medi-Cal changes — 1.1 1.1 Reduce inmate medical care costs — 0.8 0.8 Implement jail term instead of prison term for specified felonies — 0.3 0.3 Defer or suspend mandate reimbursements — 0.2 0.2 Implement various Developmental Services changes — 0.2 0.2 Reduce SSI/SSP grants for individuals to the federal minimum — 0.2 0.2 Eliminate Cash Assistance Program for Immigrants — 0.1 0.1 Implement various changes in Healthy Families Program — 0.1 0.1 Implement various changes in CalWORKs — 0.1 0.1 Suspend new competitive CalGrant financial aid — 0.1 0.1 Eliminate California Food Assistance Program — 0.1 0.1 Reduce reimbursements to child care providers — 0.1 0.1 Reduce other spending — 0.1 0.1 Subtotals ($1.0) ($6.6) ($7.6) Federal Funds and Flexibility Solutions Increase base FMAP rate in Medi-Cal to national average — $1.8 $1.8 Extend enhanced ARRA FMAP rate in Medi-Cal — 1.2 1.2 Reduce IHSS substantially, which requires federal approval $0.1 0.9 1.0 Receive payments related to Medicare and prescription drug costs — 1.0 1.0 Increase federal fund reimbursements for special education — 1.0 1.0 Obtain full reimbursement for undocumented felon costs — 0.9 0.9 Extend CalWORKs ARRA funding — 0.5 0.5 Extend ARRA for various health programs — 0.3 0.3 Extend ARRA funding and other relief in various social services programs — 0.2 0.2 Subtotals ($0.1) ($7.8) ($7.9) Other Solutions Swap Proposition 42 transfer for gas excise tax and related proposalsb $0.1 $0.9 $1.0 Use Proposition 10 funding in various children’s programs — 0.6 0.6 Redirect county savings related to health and social services reductions — 0.5 0.5 Use Proposition 63 funding for mental health services — 0.5 0.5 Assume increase in miscellaneous revenues — 0.5 0.5 Authorize automated speed enforcement to offset trial court costs — 0.3 0.3 Use hospital fees to support children’s health coverage in Medi-Cal — 0.2 0.2 Implement insurance surcharge for emergency response — 0.2 0.2 Approve Tranquillon Ridge oil lease 0.1 0.1 0.2 Other solutions — 0.6 0.6 Subtotals ($0.2) ($4.3) ($4.5) totals, all Solutions $1.2 $18.7 $19.9 a Some solutions in this category may require federal approval, such as elements of the Medi-Cal and Proposition 98 proposals. b This transportation funding proposal also facilitates a portion of the Proposition 98 budget solutions, for a total savings of $1.8 billion. OV-6 LegisLatiVe anaLyst’s Office 2010-11 Budget anaLysis of the condition of the General Fund under (This level of expenditures is roughly equivalent the Governor’s proposals. The reserve deficit to the state’s 1993‑94 General Fund expendi‑ at the end of 2009‑10 would be $5.4 billion. tures, adjusted for population and inflation.) The In 2010‑11, revenues would increase a modest state would be left with a $1 billion reserve at 1.4 percent to $89 billion, while expenditures the end of 2010‑11. would decline 3.7 percent to under $83 billion. EcOnOmic and rEvEnuE PrOjEctiOnS Sluggish Economic recovery Still personal income is forecast to grow 2.4 percent Expected for nation and State in 2010 and 3.6 percent in 2011. These growth rates are well below the state’s average rate of The Department of Finance’s (DOF) national 5.5 percent between 1990 and 2007. State jobs and California forecasts for 2010 and 2011 em‑ are expected to shrink 0.7 percent in 2010 but bedded in the Governor’s budget project a slow grow 1.3 percent in 2011. recovery from the recession. Its outlook is slightly more upbeat than its May 2009 forecast and is revenues would Grow Less than consistent with the general consensus among 2 Percent under Governor’s Forecast forecasters. Projected real gross domestic prod‑ The administration’s revenue forecast is con‑ uct growth nationally is 2.2 percent for 2010 and sistent with its modest economic outlook. From 2.9 percent for 2011. These are typical growth an adjusted base of $82.8 billion in 2008‑09, the rates for an economy in a mature expansion, but budget anticipates General Fund revenue growth low for a recovery from a deep recession such as of 6.4 percent in 2009‑10, reaching $88.1 billion. the nation endured in 2008 and 2009. California In 2010‑11, however, revenues increase only Figure 2 1.4 percent to $89.3 bil‑ Governor’s Budget lion. This modest gain General Fund condition reflects the reduction of (Dollars in Millions) $1.6 billion in General Proposed for 2010‑11 Fund sales and use tax actual Proposed Percent (SUT) revenues that are 2008‑09 2009‑10 amount change part of the administra‑ Prior-year fund balance $2,314 -$5,855 -$3,863 tion’s transportation tax Revenues and transfers 82,772 88,084 89,322 1.4% Total resources available $85,086 $82,229 $85,459 proposal (described later Expenditures $90,940 $86,092 $82,901 -3.7% in this report). If not for Ending fund balance -$5,855 -$3,863 $2,558 this policy proposal, the Encumbrances $1,537 $1,537 $1,537 budget‑year revenue reservea ‑$7,391 ‑$5,400 $1,021 total would increase a Special fund for economic uncertainties. 3.2 percent. This modest LegisLatiVe anaLyst’s Office OV-7 2010-11 Budget anaLysis increase also reflects the sizable amount of one‑ in personal income in California over the next time revenue accelerations adopted in this year’s two years, although DOF’s gains are slightly high‑ budget and included in the 2009‑10 total. er in 2010 and slightly lower in 2011. Our state Adjustments to Current‑ and Prior‑Year job growth forecast is also quite similar to DOF’s, Revenues. The budget significantly revises rev‑ with both our projected losses in 2010 and our enues for 2008‑09 and 2009‑10. In 2008‑09, expected gains in 2011 slightly larger. Both the revenues decline by $1.3 billion compared to the Governor’s budget (which reflects the revenue level assumed in the 2009‑10 Budget Act. The proposals described above) and LAO Novem‑ changes reflect that final receipts in the major tax ber estimates are significantly down from the programs fell significantly short of the amounts budget act projection for all three fiscal years. anticipated last summer. Similarly, total 2009‑10 For 2009‑10, our November estimate is virtually revenues have been revised down by $1.5 bil‑ identical to the revised estimate included in the lion—as tax collections in the first six months of Governor’s budget (although the projections for the year have fallen short of expectations and the the individual sources vary somewhat). Overall, administration is no longer counting on $1 billion DOF’s forecast is consistent with our estimates, in revenues from the sale of portions of the State but we have some concern with the administra‑ Compensation Insurance Fund (SCIF). tion’s 2010‑11 forecast, as discussed below. Revenue Trend in 2010‑11. The budget Risks in the 2010‑11 Revenue Forecast. The projects increases in most revenue sources in administration’s baseline estimate for 2010‑11 is 2010‑11. Corporate and SUT revenues are ex‑ $3.1 billion higher than our forecast. Our con‑ pected to grow at 5.3 percent and 6.9 percent, cern is based on three factors: respectively. (The SUT rate reflects baseline ➢ Corporate Liabilities. First, the budget growth in tax revenues absent the Governor’s assumes that baseline corporate tax (CT) transportation tax proposal.) The budget, how‑ liabilities will grow 28 percent in the ever, estimates that personal income tax (PIT) budget year, increasing revenues by more revenues will grow only 0.5 percent in the bud‑ than $2 billion from the current year. In get year, in part due to the expiration of a tempo‑ contrast, our forecast assumes baseline rary 0.25 percent PIT rate increase at the end of growth of 12 percent in CT revenues. 2010. The budget includes $450 million in new While CT revenues after past recessions 2010‑11 General Fund revenues—but does not have grown by more than 20 percent, the have any policy proposals attached to them. administration’s economic forecast does not seem to justify such a rapid “bounce LaO assessment: reasonable back” of revenues. Given the projected Forecast, but Some risks slow recovery of residential and commer‑ Overall Outlook Similar to November LAO cial construction in California, we expect Forecast. The DOF economic and revenue esti‑ that profits in the financial sector (which mates are similar to the forecast published in our had fueled CT revenue growth in the California’s Fiscal Outlook report in November. mid‑2000s) also will be slow to improve. Our forecast projects virtually the same growth For these reasons, we are concerned that OV-8 LegisLatiVe anaLyst’s Office 2010-11 Budget anaLysis the budget’s projection of CT revenues design. Since the pickup tax is not part may prove to be too aggressive. of the current federal program, the state exemption would not be restored under ➢ Estate Tax. Based on the provisions of the House bill. current federal law, the budget assumes $892 million in revenues from the estate ➢ Incomplete Forecast. Finally, several tax in 2010‑11, and our November esti‑ revenue‑related proposals that are part of mate also included these revenues. It ap‑ the Governor’s plan are incomplete. For pears increasingly unlikely, however, that instance, the budget includes $450 mil‑ the federal government will allow the res‑ lion of new revenues for which there are toration of the state estate tax exemption no specific proposals. Similarly, revenue in 2011 (known as the state “pickup” tax) losses from the administration’s proposed as provided for under current law. In De‑ homebuyer tax credit and sales tax ex‑ cember, for instance, the U.S. House of emption for “green” technology are not Representatives passed legislation (which reflected in its revenue estimates. To‑ is pending action by the U.S. Senate) that gether, these oversights potentially could would reauthorize the federal estate tax reduce revenues by more than $650 mil‑ beginning in 2010 based on its current lion in the budget year. majOr BudGEt PrOPOSaLS By tHE GOvErnOr Below, we describe first the Governor’s as a result of various actions proposed by the proposed non‑federal budget solutions (gener‑ Governor, which are described in more detail ally, those not requiring federal approval), includ‑ later in this report. The administration estimates ing expenditure solutions (such as reductions that its various changes and the transportation to state programs) and other solutions (such as funding shift would result in lower Proposition 98 fund shifts). Next, we describe the proposed funding requirements by $893 million in 2009‑10 federal budget solutions, including the alterna‑ and $1.5 billion in 2010‑11. Roughly $600 million tive revenue solutions and additional expenditure of these proposed reductions would require that solutions that would be triggered if federal funds the U.S. Secretary of Education provide a waiver are not received in the amount the Governor as‑ from maintenance‑of‑effort (MOE) funding re‑ sumes. (Unless indicated, dollar figures relate to quirements included in the American Recovery the General Fund.) and Reinvestment Act (ARRA). Employee Compensation Savings ($1.6 Bil‑ Proposed Expenditure Solutions lion). The Governor’s budget assumes the end Proposition 98 Savings ($2.4 Billion Over of the current three‑day‑per‑month employee Two‑Year Period). Proposition 98 spending on furlough program as scheduled on June 30, 2010. K‑14 education would be reduced by $2.4 billion To continue generating significant state personnel LegisLatiVe anaLyst’s Office OV-9 2010-11 Budget anaLysis savings in 2010‑11, the Governor proposes what proposals would produce $2.9 billion of savings has been described as its “5/5/5 proposal,” as across all state funds, of which $1.6 billion would follows: be saved for the General Fund. ➢ 5 Percent Salary Reduction. State em‑ Various Medi‑Cal Changes ($1.1 Billion). The Governor proposes various measures to ployee salaries would be reduced across cut Medi‑Cal costs through unspecified limits the board by 5 percent. on services, utilization controls, and increased ➢ 5 Percent Increase in Employee Pension cost sharing with benefit recipients through co‑ Contributions. State employee pension payment requirements or premiums—which are contributions—now typically between scored collectively at $750 million. (Some such 5 percent and 8 percent of employee sal‑ changes may require federal approval.) The pro‑ aries, depending on the bargaining unit— posal also would save $294 million in 2009‑10 would be increased by an additional and 2010‑11 combined by eliminating full‑scope 5 percent of payroll. This would reduce Medi‑Cal services for certain immigrants, elimi‑ the state’s employer contributions to the nating adult day health care benefits, delaying California Public Employees’ Retirement payments to institutional providers, and rescind‑ System (CalPERS) by a like amount. ing a family planning rate increase. Expanded antifraud efforts are proposed to reduce costs by ➢ 5 Percent Unallocated Reduction to $26 million. Departmental Personnel Costs. The Inmate Medical Care Costs ($811 Million). administration would direct departments The Governor’s budget assumes that per inmate to reduce salary costs by 5 percent. medical costs can be reduced from $11,627 per (Constitutional officers are exempt from year to $5,740 per year, producing $811 mil‑ this proposed cut because, according lion of savings in 2010‑11. The administration to the administration, their departments indicates that such a reduction would bring the received permanent reductions in the state’s per inmate medical costs roughly to the 2009‑10 budget package that equal or amount that New York spends on such medical exceed this reduction.) Departments care. According to the administration, the reduc‑ would have flexibility for how they tion could be achieved by July 1, 2010 through would achieve these savings, but many unspecified measures, such as to reduce clini‑ likely would seek to meet their savings cal salaries and unnecessary referrals to outside target through attrition and leaving posi‑ providers. tions vacant. Other Non‑Federal Savings Proposals Reflecting the state’s longstanding practices in ($1.6 Billion). As indicated in Figure 1, a wide making employee compensation adjustments, variety of other non‑federal expenditure solu‑ the 5/5/5 proposals would be applied to both tions in the Governor’s proposal produce savings General Fund and non‑General Fund personnel estimated at about $1.6 billion. Such proposals costs in departments. In total, the administra‑ include: tion estimates that its employee compensation OV-10 LegisLatiVe anaLyst’s Office 2010-11 Budget anaLysis ➢ Jail Time—Not Prison—for Specified statutorily required to be repaid com‑ Felonies. The budget assumes savings pletely by 2020‑21. related to proposed statutory changes ➢ Reducing Social Services Cash Grants. to require that offenders convicted of In the Supplemental Security Income/ certain non‑serious, non‑violent, non‑ State Supplementary Program, the Gover‑ sex‑offense felonies serve a maximum nor proposes to reduce grants for indi‑ sentence of one year in county jail in lieu viduals by $15 per month (1.8 percent) of a state prison sentence. The adminis‑ to the federal minimum effective June tration estimates this would reduce costs 1, 2010. (Grants for couples already are by $25 million in 2009‑10 and $292 mil‑ at the minimum.) This would result in lion in 2010‑11. savings of $178 million in 2010‑11. The ➢ Department of Developmental Services Governor also proposes a 15.7 percent (DDS) Reductions. The Governor propos‑ reduction in CalWORKs grants for a state es that the state achieve a total of about savings of $117 million in 2010‑11. $200 million in 2010‑11 savings through ➢ Other Reductions and Program Elimina‑ four cost‑control measures in DDS: tions. Among other non‑federal actions (1) scoring full‑year savings from cost‑ that would produce less than $200 mil‑ cutting measures that are already being lion of 2010‑11 savings each are guber‑ implemented in the current year, (2) ex‑ natorial proposals to eliminate the Cash tending a 3 percent provider payment re‑ Assistance Program for Immigrants and duction into 2010‑11, (3) assuming approv‑ the California Food Assistance Program, al of a Medi‑Cal state plan amendment both of which provide state‑only benefits that will allow the state to draw down to legal immigrants not eligible for certain additional federal funds, and (4) assuming federal benefits. Several other propos‑ $25 million in savings to be developed als would affect other health and social through a workgroup process involving services programs. the department and stakeholders. ➢ Suspension or Delay of Local Govern‑ Other non‑Federal Solutions ment Mandate Payments. The Gover‑ Other non‑federal budget solutions include nor proposes savings of $137 million the Governor’s proposed transportation funding by suspending mandates not related to shift and a variety of shifts of other state funds to elections, law enforcement, and property pay for General Fund expenses. taxes, similar to recent legislative budget‑ ➢ Transportation Funding Shift ($1 Bil‑ balancing actions. In addition, $95 mil‑ lion). The transportation funding shift is a lion would be saved by deferring sched‑ key element of the Governor’s proposal uled 2010‑11 mandate payments for costs and is summarized in more detail later incurred prior to 2004‑05, which are in this report. The funding shift would LegisLatiVe anaLyst’s Office OV-11 2010-11 Budget anaLysis benefit the General Fund directly to the The budget also assumes substantial tune of about $1 billion in 2009‑10 and savings due to additional federal funds 2010‑11 as funds would be used to pay for foster care and adoption assistance transportation debt‑service costs. Includ‑ programs. Counties would share in these ing the effects on Proposition 98, the savings, and the Governor proposes to transportation funding shift results in a redirect about 75 percent of these freed‑ total of $1.8 billion of General Fund sav‑ up county funds to offset other General ings in the Governor’s proposal. Fund costs. ➢ Proposition 10 Ballot Proposal ➢ Proposition 63 Ballot Proposal ($550 Million). The Governor requests ($452 Million). The administration’s June that the Legislature place before voters 2010 ballot proposal, if approved by vot‑ in the June 2010 election a measure to ers, would allow the shift of $452 million allow use of Proposition 10 early child‑ of Proposition 63 mental health funds hood development funds for General to pay General Fund costs for specified Fund‑supported DDS and Department of Department of Mental Health programs Social Services programs that serve chil‑ in each of the 2010‑11 and 2011‑12 fis‑ dren. The proposal includes: (1) sweeping cal years. This proposal is similar to the $308 million on a one‑time basis from failed Proposition 1E at the May 2009 the state commission’s Proposition 10 election. reserves and (2) redirecting 50 percent of ➢ Automated Speed Enforcement to Offset state and local commissions’ revenues— Trial Court Costs ($297 Million). The amounting to an estimated $242 million Governor proposes to use automated in 2010‑11—for five years to fund state speed enforcement systems to identify programs. The budget also assumes that and fine persons speeding through inter‑ Proposition 10 local commissions will sections. The administration estimates that voluntarily provide additional funds on this would produce $338 million of rev‑ a one‑time basis to DDS and Managed enues, of which $297 million would be Risk Medical Insurance Board programs used to reduce state costs for trial courts. in 2010‑11. This proposal is similar to the failed Proposition 1D at the May 2009 ➢ Other Proposals ($1.7 Billion). As indi‑ special election. cated in Figure 1, there are a number of other smaller solutions that fit into this ➢ Redirecting County Health and Social category. Among these proposals is the Services Savings ($506 Million). The Governor’s Emergency Response Initia‑ budget proposes substantial reductions tive, which would impose a 4.8 percent to IHSS and California Work Opportunity statewide surcharge on all residential and Responsibility to Kids (CalWORKs), and commercial property insurance—an as described elsewhere in this report. estimated $200 million in 2010‑11—that OV-12 LegisLatiVe anaLyst’s Office 2010-11 Budget anaLysis would cover what would otherwise be ➢ Increasing Federal Funding Ratio for General Fund fire protection costs of the Medi‑Cal ($1.8 Billion). Long sought by Department of Forestry and Fire Protec‑ California, this action by the federal gov‑ tion. (Funds in future years also would be ernment would save $1.8 billion in state dedicated to emergency response pro‑ Medi‑Cal costs in 2010‑11 by having the gram expansions.) In addition, the Gover‑ federal government increase California’s nor’s budget assumes either that the State Federal Medical Assistance Percent‑ Lands Commission or the Legislature age (FMAP) funding ratio to 57 percent, approves a lease for the extraction of oil which the administration states is con‑ and gas from lands off the Santa Barbara sistent with the FMAP provided to the coast known as Tranquillon Ridge. An ten most populous states, as well as the estimated $197 million would benefit the nationwide average. budget over the 2009‑10 and 2010‑11 ➢ Extend Federal Stimulus Provisions fiscal years. The administration proposes for Medi‑Cal FMAP ($1.2 Billion). The that most of these lease revenues be ARRA of 2009 increased states’ Medicaid dedicated to relieve General Fund costs FMAP, but this relief for state Medi‑Cal for the state parks system. funding will expire by the end of calen‑ dar year 2010. The Governor wants the Federal Funds and Flexibility federal government to extend California’s The Governor’s proposal relies heavily on ARRA‑enhanced FMAP through June 30, the federal government providing funding ($6.9 2011, for $1.2 billion of savings. billion) or, in other cases, operating flexibility ($1 billion) for state‑federal programs in order to ➢ Funding for Medicare Services and allow the state to cut expenses and services. Fig‑ Prescription Drug Costs ($1 Billion). The ure 1 shows that federal funds and flexibility are budget assumes $1 billion in Medi‑Cal necessary to implement $7.9 billion of the Gover‑ relief from various federal moneys the nor’s proposed solutions. (It is sometimes difficult administration believes are owed to Cali‑ to categorize individual proposals as to whether fornia. These funds include those relating federal approval is required, and therefore, this is to Medi‑Cal’s payment of health costs for a rough estimate. In addition, elements of some disabled individuals who were actually of the administration’s other budget solutions, eligible for Medicare and changes to the such as its Proposition 98 and Medi‑Cal reduc‑ required level of state funding for pre‑ tions, may require federal approval.) scription drug costs. Governor Requests $6.9 Billion of Federal ➢ Increased Reimbursements Related Funds. The administration identifies $6.9 billion to Special Education ($1 Billion). The of requested federal funds to relieve 2010‑11 budget assumes a $1 billion federal state costs, some of which—if received—would reimbursement of General Fund costs be one‑time or temporary in nature. Requested related to mandated special education federal funds include: LegisLatiVe anaLyst’s Office OV-13 2010-11 Budget anaLysis services. (It is assumed that this reim‑ changes in IHSS, including a reduction in state bursement could be spent by the state for participation in IHSS provider wages and benefits any purpose.) Federal law references the to a combined $8.60 per hour and an elimina‑ federal government’s commitment to pro‑ tion of IHSS services for recipients with function‑ vide 40 percent of the additional cost of al index scores of less than 4. The administration meeting special education requirements. states that these changes would require addition‑ Despite this commitment, the federal al flexibility from the federal government as part government never has contributed the of a new “federal‑state relationship.” In addition, full amount, and in California, the federal as discussed earlier in this report, achieving the share of cost is currently less than half of administration’s $892 million estate tax revenue this target. projection for 2010‑11 is dependent on the out‑ come of congressional deliberations. ➢ Increased Reimbursements for Un‑ More Cuts and Revenues Would Be Trig‑ documented Felons ($880 Million). gered if D.C. Does Not Deliver. If the $6.9 bil‑ The budget assumes that the federal lion of federal funds sought by the administration government will provide the state with is not on the way by July 15, the Governor’s $880 million of additional funds to fully proposal would cause other expenditure reduc‑ offset the costs of incarcerating undocu‑ tions and revenue increases to be triggered. (We mented immigrants, which is estimated to await full details of the administration’s proposed be roughly $1 billion. For the past several trigger mechanism.) Figure 3 shows the list of years, the state has received $111 million $6.9 billion of additional expenditure reductions, annually to support such costs. revenue increases, and other actions that would ➢ Other Federal Funding Requests ($1 Bil‑ be triggered in this circumstance under the Gov‑ ernor’s plan. Included in the list are: lion). Other federal funding requests include the extension of ARRA funding ➢ Triggered Expenditure Reductions for CalWORKs ($538 million) and other ($3.8 Billion). In addition to other pro‑ programs, as well as other federal fund‑ gram reductions discussed above, trig‑ ing, such as increased federal payments gered reductions (generally permanent) for foster care. would include the elimination of CalWORKs, IHSS, and the Healthy Fami‑ Federal Actions Necessary to Implement lies Program, as well as an additional IHSS and Other Proposed Budget Solutions. 5 percent state employee salary reduc‑ In addition to the federal funding requests, the tion and other program reductions. federal government likely would have to provide additional operating flexibility for California in ➢ Triggered Revenue Increases ($2.3 Bil‑ order for other proposed cuts to be made. For lion). Triggered, one‑time revenue example, the budget scores about $1 billion of increases would include an extension of savings in 2009‑10 and 2010‑11 from various recent business tax changes relating to OV-14 LegisLatiVe anaLyst’s Office 2010-11 Budget anaLysis net operating losses, an extension in the ➢ Other Solutions ($847 Million). In temporary reduction in the dependent addition to the measures listed above, PIT credit approved last year, delayed the trigger proposals include a further implementation of the ability of unitary $847 million funding of state mental groups of companies to use tax credits, health services with Proposition 63 funds. delayed implementation of the change This would require voter approval at the to a single sales factor allocation method June 2010 election along with the Propo‑ for apportioning multistate corporate sition 63 fund shift described earlier. income, and a lowered first year phase‑ in of the ability of corporations to carry Other Proposals back losses to offset prior tax profits. In addition to his budget proposals, the Gov‑ ernor made other pro‑ Figure 3 posals in his final State of trigger Solutions in 2010‑11 Governor’s Budgeta the State Address to the (2010-11 General Fund Savings, in Millions) Legislature on January 6, 2010. Governor’s Jobs Expenditure Solutions ($3,752) Package. In his speech, Eliminate CalWORKs $1,044 Reduce Medi-Cal eligibility to federal minimum and eliminate some 532 the Governor proposed optional benefits a jobs package, which Reduce state employee salaries by an additional 5 percent 508 he described as includ‑ Eliminate IHSS program 495 Redirect additional county savings to benefit the General Fund 325 ing $500 million to “train Eliminate most inmate rehabilitation programs and implement 280 up to 140,000 workers inmate population and other parole changes and help create 100,000 Eliminate Healthy Families Program 126 Eliminate funding for UC/CSU enrollment growth 112 jobs.” Some elements of Eliminate various Proposition 99 programs 115 the package are incor‑ Reduce trial courts’ budget 100 porated in the budget Freeze eligibility and level of awards for CalGrant financial aid 79 Eliminate funding for housing programs for foster youth 36 proposal, such as bor‑ revenue Solutions ($2,339) rowing from the Dis‑ ability Insurance fund to Extend suspension of net operating loss changes $1,200 Extend reduction in dependent tax credit 504 support training grants to Delay implementation of sharing of tax credits 315 employers and a $3,000 Delay single sales factor for corporate taxes 300 per job tax credit pay‑ Delay changes in carry-back losses for corporations 20 able to employers for Other Solutions ($847) new employees retained Fund existing mental health services with Proposition 63 funds $847 for at least nine months. total trigger Solutions $6,938 In addition, the Governor a Proposals would go into effect if $6.9 billion in federal funds was not received. proposed homebuyer tax IHSS = In-Home Supportive Services. credits of up to $10,000 LegisLatiVe anaLyst’s Office OV-15 2010-11 Budget anaLysis for the purchase of new or existing homes and ➢ Allowing appropriations made in the an exemption from the sales tax for “green‑tech” budget bill, amendments to the budget manufacturing equipment. As discussed earlier, bill, and budget trailer bills to be passed this tax credit and sales tax exemption were not by a majority vote in each house of the reflected in the budget package’s revenue esti‑ Legislature. mates. ➢ Making fee increases subject to a two‑ Constitutional Amendment Related to thirds vote of the Legislature in certain Prison and University Funding. The Governor limited circumstances. also proposed in his speech a constitutional amendment that would in future years set a ➢ Giving the Governor new midyear ex‑ minimum funding guarantee well above current penditure reduction authority. funding levels for the University of California and California State University systems and a maxi‑ ➢ Limiting the use of specified nonrecurring mum funding level well below current spending state revenue for one‑time expenditures. for state prisons. The measure would provide ➢ Requiring the identification of funds to California Department of Corrections and Re‑ pay for certain state program expansions. habilitation (CDCR) with certain new authority intended to allow it to reduce costs, including ➢ Requiring the Legislature to review the increased abilities to contract with private prisons performance of state programs at least and private prison staff. once every ten years. Constitutional Amendment Related to the Budget Process. The Governor also asked the ➢ Extending the Legislature’s deadline for Legislature to put before voters an initiative that passing the annual budget by ten days— has been proposed by California Forward. This from June 15 to June 25—and prohibiting proposal would make significant changes to the the Legislature from ever being paid for state’s budget process, including: the days during a late‑budget impasse. anaLySiS OF tranSPOrtatiOn and K‑14 EducatiOn PrOPOSaLS Two of the most important—and more com‑ T F ransporTaTion unding plicated—programmatic proposals in the Gover‑ Governor’s Proposal nor’s package are those related to the proposed The Governor’s budget proposes to sig‑ transportation funding shift and Proposition 98, nificantly change (1) how the state generates which provides funding to K‑14 education. These revenues to fund transportation programs and two programs are discussed below. (2) what programs would be funded with these revenues. Currently, the state imposes an OV-16 LegisLatiVe anaLyst’s Office 2010-11 Budget anaLysis 18 cents per gallon tax on gasoline and diesel portation funds to pay other General fuel (known as the gas tax). These monies are Fund debt‑service costs.) used for state highways and local streets and As a result, there would be a net reduction roads. The state also charges a sales tax on these in transportation revenues of about $1 billion in fuels, and the revenues are used for public transit 2010‑11. This would effectively provide Cali‑ and rail, as well as state highway expansion and fornia motorists a tax cut equivalent to about local street and road improvements. The Gover‑ 5 cents per gallon at the pump. No new state nor proposes to: funding would be provided for public transit and ➢ Eliminate the state sales tax on fuel and rail in the budget year. Under current law, about make up most of the lost revenues with $1.6 billion would have been provided for these an increase in the per gallon gas tax. The purposes. gas tax increase would be capped so that Beyond the budget year, the Governor’s in total motorists would not pay more proposal would provide an ongoing dedicated than they do now in gas and sales tax source of funding, in addition to the General combined. Fund, to pay transportation debt service. De‑ pending on how the level of transportation debt‑ ➢ Use the revenues from the gas tax service costs changes from year to year, the gas increase to (1) pay debt service on tax rate would be adjusted, up to the proposed transportation bonds and (2) fund state cap. As a result, it is uncertain whether motorists highways and local streets and roads at would continue to receive a tax cut at the pump amounts equivalent to what each would in future years. Additionally, there would be no get under current law. The funding for future state funds for transit and rail. Also, as state highways would be available for described below in the “Proposition 98” section, maintenance and rehabilitation (major re‑ the repeal of a General Fund revenue source pairs), in addition to expansion purposes. (the sales tax on fuel) and its replacement with a No Funding for Transit and Rail, but Debt‑ non‑General Fund excise tax would reduce the Service Expenditures and a Tax Cut. For 2010‑11, school funding guarantee. the proposal would reduce fuel sales tax rev‑ issues for Legislative consideration enues by $2.8 billion. The budget proposes to partially offset the revenue loss with a 10.8 cents While the Governor’s proposal includes per gallon gas tax increase, which would gener‑ some features that have merit, it also raises a ate about $1.9 billion for the following: number of policy and potential legal issues. We ➢ $629 million for state highways. discuss these below. Funding State Transportation Based on Road ➢ $629 million for local roads. Use Has Benefits. Under the proposal, the state would rely on the gas tax as the primary funding ➢ $603 million for debt service on trans‑ source for state transportation programs. This is portation bonds. (The Governor would consistent with past recommendations we have use an additional $400 million in trans‑ made to the Legislature. Because the gas tax is LegisLatiVe anaLyst’s Office OV-17 2010-11 Budget anaLysis collected based on the amount (gallons) of fuel amounts historically provided by the state for consumed, the charge is linked to the provi‑ these purposes. Under current law (and recent sion of a service—that is, the use of the roads court rulings) these revenues cannot be redirect‑ by a driver. This would also be a more stable ed to other purposes. In weighing the Governor’s source of funding for transportation purposes. proposal to eliminate state funding for public In contrast, fuel sales tax receipts fluctuate not transportation, the Legislature should consider only with the amount of fuel consumed, but also whether providing funding assistance to regional with changes in the price of fuel. Moreover, the and local transit and rail is a policy priority, and amount of sales tax paid by a motorist may not the type (capital versus operating) and level of closely reflect their use of the highway and road any assistance it chooses to provide. Because system. the Constitution prohibits using the gas tax to Proposal Provides Ongoing General Fund support transit operations, the Legislature would Relief. The Governor’s proposal would provide a have to identify a different source of funding if substantial and ongoing source of funding—hun‑ the Governor’s package were adopted. dreds of millions of dollars a year—to pay trans‑ Proposal Provides No Additional Highways portation debt service. This would significantly Funding. As we have noted in past reports, fund‑ lessen the burden on the General Fund. The state ing for highway maintenance and rehabilitation has authorized about $30 billion in transporta‑ has not kept pace with cost increases due to an tion bonds in recent years. Annual debt service aging system and inflation, and the state faces costs on these bonds are projected to exceed billions of dollars in highway repair and recon‑ $1 billion by 2011‑12. A large portion of these struction needs. The Governor’s proposal would costs could be paid for from the new gas tax. not provide any additional funding specifically Constitutional and Statutory Requirements for these activities. Instead, it would allow fund‑ May Pose Legal Problems. The use of state sales ing currently available for highway expansion to tax on fuel is restricted under provisions of the be used for rehabilitation instead. The Legislature State Constitution and statute passed by the vot‑ should consider whether the gas tax should be ers. The Governor’s proposal would not amend increased beyond the proposed level in order to or eliminate any of the restrictions. Rather, the provide funding for highway rehabilitation. proposal would eliminate the source of revenues p 98 roposiTion that are subject to the restrictions. The Legisla‑ ture should carefully review whether all aspects Governor’s Proposal for Proposition 98 of the proposal can be implemented in keeping K‑14 Education with these legal restrictions. Figure 4 shows Proposition 98 spending from What Should Be the State’s Role in Fund‑ 2007‑08 (actual) to 2010‑11 (proposed) for K‑12 ing Transit? In recent years, due to increasing education, the California Community Colleges, fuel prices, the amount of fuel sale tax revenues and other Proposition 98‑supported agencies available to public transportation programs has (including the state special schools and juvenile ballooned to extraordinary sums—hundreds justice). As shown in the figure, the Governor‘s of millions of dollars a year—compared to the January proposal has total Proposition 98 spend‑ OV-18 LegisLatiVe anaLyst’s Office 2010-11 Budget anaLysis ing virtually flat across 2009‑10 and 2010‑11. addressed the issue by (1) statutorily setting the Despite total spending remaining flat year over 2008‑09 Proposition 98 minimum guarantee at year, the state’s General fund share would in‑ $49.1 billion, (2) establishing a certain long‑term crease (4.1 percent) whereas the share covered obligation (commonly called a “maintenance by local property tax revenues would decrease factor”) of $11.2 billion, and (3) designating that (8.7 percent). While the slumping housing market associated maintenance factor payments be contributes to the drop in local property tax made as otherwise specified in the Constitution. revenues, the bulk of the decline is attributable The Governor’s January proposal: (1) recognizes to the one‑time $850 million contribution from a notably lower 2008‑09 minimum guarantee redevelopment agencies in 2009‑10 (required as ($46.8 billion), (2) assumes the payment of part of the 2009‑10 budget package). $1.3 billion in maintenance factor in 2008‑09, Governor Claims Proposition 98 Pro‑ and (3) delays the start of the remaining mainte‑ posal Meets Constitution Obligations. For both nance factor payments until 2012‑13. In addition, 2009‑10 and 2010‑11, the Governor states he the elimination of the sales tax on fuels described is funding at the constitutionally required mini‑ earlier reduces General Fund revenues and, mum level (commonly called the “minimum therefore, also the minimum guarantee in guarantee”). Nonetheless, the administration 2010‑11. Through these actions, the administra‑ acknowledges that it is veering away from the tion is able to achieve related savings in 2009‑10 July 2009 budget agreement. Last year, disagree‑ and 2010‑11. ment emerged over the state’s long‑term Proposi‑ Governor Proposes Relatively Small Midyear tion 98 funding obligations. The July budget deal Adjustment. Figure 5 (see next page) highlights Figure 4 Proposition 98 Spending Stays virtually Flat under Governor’s Plan (Dollars in Millions) change From 2009‑10 2007‑08 2008‑09 2009‑10 2010‑11 Final Final revised Proposed amount Percent K‑12 Education General Fund $37,752 $30,260 $30,844 $32,023 $1,179 3.8% Local property tax revenue 12,592 12,726 13,237a 11,950 -1,287 -9.7 Subtotals ($50,344) ($42,986) ($44,082) ($43,974) (-$108) (-0.2%) california community colleges General Fund $4,142 $3,918 $3,722 $3,981 $259 7.0% Local property tax revenue 1,971 2,011 1,953 1,913 -40 -2.0 Subtotals ($6,112) ($5,929) ($5,675) ($5,895) ($219) (3.9%) Other agencies $121 $105 $94 $85 -$9 -9.1% totals, Proposition 98 $56,577 $49,019 $49,851 $49,954 $103 0.2% General Fund $42,015 $34,282 $34,660 $36,090 $1,430 4.1% Local property tax revenue 14,563 14,737 15,191a 13,864 -1,327 -8.7 a Includes $850 million in one-time shift of local government revenues. LegisLatiVe anaLyst’s Office OV-19 2010-11 Budget anaLysis the Governor’s specific Proposition 98 proposals. cifically, the Governor proposes to achieve this As shown in the figure, the Governor proposes a savings by: (1) requiring school districts to spend $568 million reduction in Proposition 98 spend‑ less on central administration, (2) consolidating ing for 2009‑10. The only major midyear propos‑ certain county office of education functions, and al is to recognize $340 million in savings from (3) removing restrictions on the contracting out of the K‑3 Class Size Reduction program. Beginning non‑instructional services. For most K‑14 pro‑ in 2008‑09, the state allowed school districts to grams, the Governor also proposes to recognize increase class size above the previous 20‑student an anticipated 0.38 percent decline in the cost of cap but applied funding penalties to those who living (for savings of $230 million). In addition, the chose to do so. As some districts increased K‑3 Governor proposes to tighten eligibility for Cal‑ class sizes for the 2009‑10 school year, these WORKs Stage 3 child care and reduce reimburse‑ funding reductions are leading to sizeable state‑ ment rates for child care vouchers (for combined wide savings. The remainder of the reduction is savings of $200 million). The Governor’s plan also due to various technical changes, which are due includes an increase of (1) $126 million to fund primarily to student attendance being slightly 2.2 percent growth in community college enroll‑ lower than projected. ment and (2) $77 million to fund three K‑12 man‑ Heavy Reliance on One‑Time Solutions in dates (including a newly recognized mandate Current Year Leads to More Than $2 Billion in relating to behavior intervention plans for special Budget‑Year Reductions. Although the Governor Figure 5 proposes to keep overall Proposition 98: Governor’s major Spending Proposals Proposition 98 spend‑ (In Millions) ing virtually flat across the two years, his plan midyear 2009‑10 Proposals contains $2.2 billion in Recognize K-3 Class Size Reduction (CSR) savings -$340 budget‑year programmat‑ Make various other baseline adjustments -228 total changes ‑$568 ic reductions (detailed in 2010‑11 Proposals Figure 5). These reduc‑ Backfill prior-year one-time solutions $1,908 tions are necessitated Make various other adjustments 238a by the heavy reliance Reduce K-12 revenue limits: Spend less on school district administration -1,184 on one‑time solutions Remove restrictions on contracting out -300 in 2009‑10. The largest Consolidate County Office of Education functions -45 of the proposed reduc‑ Make K-14 cost-of-living adjustments (-0.38 percent) -230 Recognize additional K-3 CSR savings -210 tions for 2010‑11 is a Reduce CalWORKs Stage 3 child care funding -123 $1.5 billion cut to K‑12 Reduce child care reimbursement rates -77 general purpose funding Fund CCC apportionment growth (2.21 percent) 126 total changes $103 (commonly known as a Includes growth for revenue limits, special education, and child nutrition. Also includes funding for three revenue limits). Spe‑ K-12 mandates. OV-20 LegisLatiVe anaLyst’s Office 2010-11 Budget anaLysis education students). All other mandates would could be significantly higher than asserted under be suspended under the plan. the Governor’s January plan. If this were the New Flexibility Options Proposed for case, the Legislature could be required to sus‑ 2010‑11. To provide some help to districts as pend Proposition 98 if it wanted to fund K‑14 they respond to another tight budget, the admin‑ education at the Governor’s proposed levels. (In istration proposes several new flexibility options. addition to these interpretation issues, the mini‑ Most notably, the Governor proposes three new mum guarantee in both years could increase due flexibility options relating to teacher policies: to changes in final 2008‑09 revenues.) (1) eliminating seniority rules that apply to layoffs, Minimum Guarantee for 2010‑11 Could assignments/reassignments, transfers, and hires; Increase Even Further Due to Interaction With (2) eliminating rules regarding priority for receiv‑ Revenue Proposals. As is the case almost every ing substitute teaching assignments; and (3) ex‑ year, the Proposition 98 minimum guarantee tending the layoff notification window to 60 days in 2010‑11 is sensitive to changes in the state’s after the state budget has been enacted. General Fund condition. The uncertainty is heightened in 2010‑11, however, due to the LaO assessment of Governor’s administration’s major new revenue proposals. Proposition 98 Plan Most notably, the Governor’s proposal to elimi‑ Overall, we give the Governor’s January nate Proposition 42 monies would lower the Proposition 98 plan a mixed review. On the Proposition 98 minimum guarantee for 2010‑11 one hand, the plan contains several major risks by roughly $800 million. Were the Legislature discussed below. (In addition, risk is associated to reject this proposal, the minimum guarantee with the Governor’s assumption that California would rise accordingly. Moreover, if the Legis‑ will obtain $1 billion in one‑time federal funding lature were to adopt other major proposals that related to special education. This risk is assessed increased/decreased General Fund revenues (or alongside the other federal funding proposals revenue increases were triggered), the minimum later in this report.) On the other hand, the plan guarantee also would end up being significantly has some merit—maintaining flat year‑to‑year higher/lower than under the Governor’s plan. funding within a difficult budget context while Uncertain if Federal Government Will Ap‑ providing local education agencies with new prove Waiver Request. The Governor’s January forms of flexibility. plan assumes the United States Department of Unclear if Constitutional Obligations Would Education will approve its request to be exempt‑ Be Met; Obligations Could Increase Significantly. ed from an MOE requirement included in ARRA. The administration’s claim that it is meeting the Under the Governor’s January plan, K‑12 funding constitutionally required Proposition 98 minimum is roughly $600 million below the required MOE guarantee in 2009‑10 and 2010‑11 is based on level in 2010‑11. Under ARRA provisions, states its interpretation of the State Constitution. Based are allowed to apply for a waiver from the MOE upon other interpretations of the Constitution, requirement if they can show that education is however, the state’s Proposition 98 obligations receiving the same or greater share of the state LegisLatiVe anaLyst’s Office OV-21 2010-11 Budget anaLysis budget as in the prior year. Under the Gover‑ school districts facing a reduction in program‑ nor’s January plan, the state appears to meet matic resources in 2010‑11.) this waiver requirement. Ultimately, whether the Flexibility Proposals Have Potential. We also waiver requirement will be met for 2010‑11 will think the Governor’s flexibility proposals have depend on many factors that will remain in flux merit. For example, we recommend the Legis‑ until a new budget package is adopted. More‑ lature pursue the administration’s proposals to over, ARRA gives the federal Secretary of Educa‑ remove restrictions on contracting out as well as tion discretion in deciding whether to approve modify various teacher policies though in some states’ waiver requests. cases with significant refinements. Furthermore, Governor’s Proposition 98 Plan Might Be we recommend the Legislature consider various All State Can Afford. Despite all the risks high‑ other flexibility options, such as consolidating lighted above, the Governor’s Proposition 98 additional categorical programs and sponsoring plan has some merit. Given the state’s large a ballot measure to repeal the autopilot funding budget shortfall and the proposed reductions for formula of Proposition 49. Finally, we recom‑ other sectors of the budget, education is treated mend against taking major actions that would relatively favorably under the Governor’s January restrict local discretion and thereby work at plan. Within this overall budget context, holding cross‑purposes with new flexibility options. For total Proposition 98 spending flat from 2009‑10 example, we recommend the Legislature reject to 2010‑11 might be the most that the state can the Governor’s district administration proposal afford. (Due to various one‑time issues discussed which provides no new flexibility but instead earlier—combined with the one‑time nature of restricts how school districts can use existing billions of dollars of ARRA funds provided in general purpose funding. 2009—flat Proposition 98 funding would leave LaO cOmmEntS On tHE GOvErnOr’S BudGEt PacKaGE Estimate of the Budget Problem still a possibility for further erosion in such bud‑ reasonable, but Some downside risk geted savings or increases in other baseline costs for various departments assumed in the budget A major cause of the newly‑identified 2010‑ package. In addition, several major court cases 11 budget shortfall is the failure of several major related to past budget solutions could expand budget solutions enacted in 2009 to produce the budget problem if those cases conclude expected savings. The administration, for example, adversely for the state. Finally, as discussed in the has adjusted its budget to reflect the state’s in‑ “Economic and Revenue Projections” section of ability to achieve certain 2009 budget solutions this report, the administration’s 2010‑11 revenue related to the sale of SCIF and solutions related forecast is subject to several notable risks. These to CDCR and Medi‑Cal, among others. There is risks could add a few billion dollars to the budget OV-22 LegisLatiVe anaLyst’s Office 2010-11 Budget anaLysis problem that the Legislature and the Governor can be achieved. The administration’s proposed have to solve. measure to dramatically cut prison medical care costs of the Receiver—difficult to achieve in any risks in implementing numerous event—would at the very least require months of Proposed Budget Solutions lead time in order to be implemented. Also very Significant Legal Risks for Some Proposals. difficult to achieve would be the unallocated Just as the Legislature should be aware of several personnel cost reductions that are part of the ad‑ risks that could increase the size of the budget ministration’s employee compensation proposal. problem, it should be cautious about enacting Most of the General Fund savings would have budget solutions that are subject to significant to be identified by CDCR (which comprises the legal risk. For example, it is quite unclear if the majority of General Fund personnel costs), and it state can unilaterally—without agreements with is very unlikely the department could do so un‑ its employee unions—increase required employ‑ less those changes are accompanied by specific ee contributions for CalPERS pensions. While sentencing, policy, or operating changes, many the state’s collective bargaining law explicitly of which would require legislative approval and gives the Legislature the authority to not fund significant lead time. Finally, if voters again reject some costs—such as salaries—included in state the Proposition 10 and Proposition 63 proposals, employee collective bargaining agreements, the Legislature would need to identify alterna‑ retirement funding decisions are subject to much tives quickly after the June election. more stringent legal restrictions. In addition, nu‑ Adverse Fiscal Consequences for Some Pro‑ merous lawsuits challenging recent budget solu‑ posals. In some cases, the Governor’s proposals tions concerning health, social services, transpor‑ may not generate the level of savings he assumes tation, and other areas suggest that many of the in his budget package. For example, the Gover‑ Governor’s proposed solutions could face court nor proposes to limit IHSS services to individuals challenges. The Legislature should be careful to with the most severe impairments, resulting in draft budget‑balancing measures (both budget General Fund savings of about $650 million. This and trailer bills) that anticipate such lawsuits and eligibility restriction would make about 87 per‑ attempt to put the state in the strongest possible cent of the existing caseload ineligible for ser‑ legal position to win them. vices. Although the Governor’s budget includes Many Proposals Would Require Implemen‑ about $50 million to cover increased develop‑ tation Time. Another issue will be the timing of mental services costs for some of these indi‑ budget actions, relative to the July 1 start of the viduals, the budget does not appear to include fiscal year. Often, as noted by the administra‑ additional funding for long‑term care costs which tion in calling a special session, several months are also likely to increase when former IHSS of lead time are required to implement major recipients seek out‑of‑home care. We believe a program reductions, particularly in health, cut of this magnitude could result in increased social services, and criminal justice programs. long‑term care costs which could exceed the The earlier that such program changes can be estimated savings in IHSS. adopted, the more likely that estimated savings LegisLatiVe anaLyst’s Office OV-23 2010-11 Budget anaLysis much of the Federal Funds and Flexibility goals. Moreover, there is a huge tension be‑ Sought by Governor not Likely tween—on the one hand—some of the admin‑ istration’s proposals to cut health and social Legislature Needs to Be Realistic. In our services programs and—on the other hand—the view, the federal government can and should pro‑ administration’s requests for extensions of ARRA vide some relief to the state on an ongoing basis, and other federal relief. Such federal relief ac‑ especially in cases, such as special education, tions typically come with “strings attached” in where it mandates certain services and does not the way of limitations on the state’s ability to cut pay its designated share. Also, a series of federal services in these programs, as was the case in mandates and court rulings restrict the state’s abil‑ 2009 with ARRA. ity to reduce health and social services costs. The Legislature needs to approach the 2010‑11 We believe there is a good prospect for the budget realistically with all of these issues in mind. state receiving some significant new federal re‑ The inability to secure the federal funds and flex‑ lief—perhaps several billion dollars worth—that ibility sought by the Governor will mean the state will help balance the 2010‑11 budget. (A federal must make even more difficult spending and rev‑ jobs package—effectively a further round of eco‑ enue decisions than it would otherwise, such as nomic stimulus—could be a vehicle that would those included in the Governor’s trigger proposal deliver additional federal funds to California and or alternatives. We, therefore, recommend that other states.) Nevertheless, the chance that any‑ the Legislature adopt a more modest assumption where near all of the federal funds and flexibility of new federal funds in its budget package. (For a sought by the Governor in his budget package discussion of the difficulty in structuring a federal is almost nonexistent. The state is very likely to funds trigger, see the box on page 26.) fall several billion dollars short of the Governor’s LaO rEcOmmEndatiOnS tO tHE LEGiSLaturE time is of the Essence magnitude of expenditure reductions necessary for many Proposals to balance the budget often will require months of lead time. Not all budget solutions, however, Action No Later Than March Needed for need to be enacted on such an accelerated time‑ Many Proposals. In our opinion, many key line. For example, major uncertainties with vari‑ decisions necessary to balance this year’s bud‑ ous Proposition 98 factors suggest the Legislature get problem probably need to be made by the might want to wait to make significant K‑14 edu‑ end of March. First, action by March is neces‑ cation decisions until it has better information. sary to put measures on the June 2010 ballot. (At the same time, it may be difficult to put other A straightforward package of proposals seeking major pieces of the budget solution in place early fiscal flexibility from the state’s voters could yield without knowing the overall approach to Propo‑ substantial benefits. Second, as noted above, the sition 98.) In any event, the longer that lawmak‑ OV-24 LegisLatiVe anaLyst’s Office 2010-11 Budget anaLysis ers wait to develop their budget framework, the ties at roughly their current level—far above the less likely that a balanced budget in 2010‑11 relative fate of other program areas. The Legisla‑ actually can be achieved and the more likely that ture will need to determine if it shares this prior‑ the choices facing the Legislature over the next ity with the Governor. (Regardless of the budget year or two will be even more dire. approach adopted for higher education this year, based on our experience in dealing with the no way to avoid reprioritizing state’s many budget restrictions, we cannot advise State Finances the Legislature strongly enough to reject the Gov‑ Very Difficult Cuts Required. By relying on ernor’s proposed constitutional amendment on billions of dollars of federal funds, the Governor’s prison and university funding. It is a “feel good,” base budget proposal (not including the trigger but ultimately ill‑conceived, autopilot budgeting cuts) is able to escape directly putting forward measure that would unwisely tie the budgetary some of the most dramatic programmatic chang‑ fates of two very different state programs.) es discussed in recent budget deliberations. The revenue actions Should Be a Governor’s list of trigger cuts, however, includes Part of the Budget Solution reductions that sometimes are draconian. Un‑ fortunately, based upon a more realistic view of Governor’s Trigger Proposals on Revenues likely federal assistance, we see no way that the Are Worth Considering. The Legislature also Legislature can produce a credible balanced bud‑ needs to consider increased revenues as part get that avoids the types of choices posed by the of its budget solutions. We do not recommend Governor’s trigger list. The Legislature will have further stressing the economy with additional to make very painful cuts to programs in order to broad‑based tax rate increases above their cur‑ balance this year’s budget. Those choices about rent levels. Nevertheless, several revenue options priorities likely will shape state government for on the Governor’s trigger list do not violate this years to come. criterion and merit legislative consideration for Legislature Not Limited by the Choices Put this year’s budget. For example, we urge con‑ Forward by the Governor. While balancing the sideration for extending the dependent personal budget will require very difficult decisions, the income tax credit reduction, a proposal on Legislature need not be limited by the specific the Governor’s trigger list—perhaps even on a choices put forward by the Governor. For many permanent basis. In addition, modification or of the proposed reductions in social services pro‑ elimination of tax expenditure programs—spe‑ grams, for example, the Legislature has the option cial credits, deductions, and exemptions—that of making more targeted changes so that benefits are not cost‑effective can raise revenues without would be provided to only the most vulnerable resulting in marginal tax rate increases. The Leg‑ recipients rather than completely eliminating the islature—like the Governor in some cases—also programs. This is particularly true in the state‑only should look to increasing fees in cases where the programs for noncitizens where there are no fed‑ costs of state programs currently supported by eral constraints. In addition, even with the trigger the General Fund can appropriately be shifted to cuts, the Governor’s plan would leave universi‑ specific beneficiaries. LegisLatiVe anaLyst’s Office OV-25 2010-11 Budget anaLysis multiyear approach is needed sometimes painful cuts—shows a multibillion‑ dollar deficit problem (under its own estimates) Majority of Solutions Need to Be Ongoing that would linger for the state in 2011‑12, or Multiyear in Nature. With a slow economic 2012‑13, and 2013‑14. The state’s budget prob‑ recovery expected and many federal relief funds lem is so severe that the Legislature will not be likely to be one‑time in nature, the majority of able to close the entire budget shortfall with on‑ the Legislature’s budget‑balancing decisions in going solutions this year. Nevertheless, this year, 2010 need to be ongoing or multiyear in nature lawmakers should aim for a mix of one‑time and in order to begin restoring state finances to a ongoing solutions that results in a much smaller sound footing. Even the administration’s pro‑ structural deficit—preferably well under $10 bil‑ posal—with ongoing new federal assistance and lion per year in future years. C C F F t onsiderations in onstruCting a ederal unds rigger The concept of a federal funds trigger proposed by the Governor—having a back‑up plan in case the assumed influx of additional federal funds does not materialize—makes sense. Solely relying on an assumption of billions of dollars in federal funds could easily leave California with another multibillion dollar budget shortfall early in 2010‑11. Moreover, it would threaten the state’s ability to secure enough cash‑flow borrowing from investors during the summer to allow the continued timely payment of state expenses. One year ago, the Legislature took a similar approach in crafting its February 2009 budget package, which was enacted within days of the passage of the federal stimulus package. Yet, at that time, what the Legislature approved was a trigger to determine how much the stimulus package would benefit the budget—not if funds would be forthcoming. At the time this report was prepared, we had not received the administration’s initial trigger language. We understand, however, that it will be a simple “all‑or‑ nothing” determination on July 15—if increased federal funds totaling at least $6.9 billion is not expected, then all of the alternative spending and revenue proposals would go into effect. For a number of reasons discussed below, we believe crafting a trigger for the 2010‑11 budget will require a more sophisticated approach. Timing Considerations. Unlike 2009, it is not clear now if the federal government will be providing the state with significant fiscal relief in 2010. Consequently, it is also not clear when the right time would be for a trigger determination. The later that the state waits, the more information it will have regarding the federal government’s intentions. Yet, waiting until the start of the state’s fiscal year or later would make it impossible to achieve full‑year savings for many alternatives. (For instance, most health and social services reductions would require at least three months to get up and running.) As a result, a late trigger decision would necessitate even deeper reductions for the remaining months of the year under alternative proposals to maintain a dollar‑for‑dollar equivalent to the federal funds assumption. The chances are nearly nonexis‑ tent that the federal government will provide anywhere near $7 billion in new fiscal relief for OV-26 LegisLatiVe anaLyst’s Office 2010-11 Budget anaLysis cOncLuSiOn The Legislature faces incredibly daunting state will secure some additional federal funding challenges in balancing the budget during the and flexibility, securing all of the federal relief fiscal emergency special session, as well as its the Governor seeks is very unlikely. Therefore, in regular session, this year. In order to make the developing a plan to balance the 2010‑11 budget major expenditure reductions that will be re‑ and begin the multiyear approach of rebuilding quired in this budget, the Legislature and the state finances, the Legislature will need to make Governor will need to agree to a framework to the types of very difficult decisions suggested by solve much of the budget problem by the end the Governor’s trigger list of cuts and revenue of March. While it is reasonable to assume the increases—even if the Legislature rejects some of continued from previous page 2010‑11. We, therefore, advise using a more modest federal funds assumption and adopt other solutions to help: (1) ensure that adopted solutions have enough time to generate expected sav‑ ings and (2) the public and program beneficiaries have an accurate understanding of the im‑ pacts of the budget as early as possible. Budget Reductions Interact With Federal Assumptions. The magnitude and type of the additional federal funding the state may receive affects the types of solutions that the Legislature may want to or could implement. For example, if the American Recovery and Reinvestment Act (ARRA) funding for the California Work Opportunity and Responsibility to Kids (CalWORKs) program is extended as the Governor assumes, the proposed 15.7 percent grant cut results in state savings of $117 million and a loss of $468 million in federal funds. Conversely, if ARRA is not extended, state savings from this grant reduction would be about $470 million. To help maximize the receipt of federal funds, some social services proposals, such as this CalWORKs grant reduction, could be adopted on a contingent basis, whereby the cut is made only if speci‑ fied federal funding streams are not available. On the other hand, some reductions otherwise contained in the budget may be prohibited if federal relief comes with new strings attached. Setting Legislative Priorities. Under the administration’s approach, the receipt of $2 bil‑ lion in federal relief would still cause all $6.9 billion in alternative solutions to be implemented. A tiered trigger, rather than an all‑or‑nothing approach, would allow the Legislature to better delineate its priorities. For instance, if only $2 billion in general‑purpose relief is provided, what cuts or revenue increases would the Legislature want to avoid? Another way to reflect legisla‑ tive priorities in a trigger is to make any determination by the Director of Finance and/or other officials as ministerial as possible. By precisely crafting the trigger language to anticipate as many contingencies as possible, the Legislature can help ensure that the executive branch is not forced to make judgments about the language’s intent. Such judgments, on the natural, would reflect the administration’s priorities—rather than the Legislature’s. LegisLatiVe anaLyst’s Office OV-27 2010-11 Budget anaLysis the specifics of the Governor’s list. Decisions like this will facilitate steady progress toward a new, sustainable budget framework. Such progress is imperative to restore the state’s fiscal health and enhance public trust in state government. LAO Publications The Legislative Analyst’s Office (LAO) is a nonpartisan office which provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an E-mail subscription service, are available on the LAO’s Internet site at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. OV-28 LegisLatiVe anaLyst’s Office