Major Features of the California Budget

ppOOLLIICCYY BBRRIIeeFF Major Features of California’s 2010-11 Budget MAC tAYLOR • L e G I S L A t I V e A n A L Y S t • OCtOBeR 12, 2010 oVerVieW Addressing an $18 Billion Budget Problem. ➢ $3.3 billion of revenue actions (including The 2010-11 Budget Bill was passed by the Legis- $1.4 billion in higher assumed baseline lature and signed by the Governor on October 8, state revenues consistent with our May 2010. The plan attempts to address one of the most 2010 state revenue forecast). vexing state budget shortfalls in California’s his- ➢ $2.7 billion of largely one-time loans, tory—the product of a continuing structural imbal- transfers, and funding shifts. ance between state revenues and expenditures and a slow recovery from a severe recession that began The package does not include the Governor’s in 2007 and ended in 2009. proposed elimination of the California Work Op- In May 2010, the administration estimated portunity and Responsibility to Kids (CalWORKs) that there would be a gap of $17.9 billion be- and subsidized childcare, and it does not include tween General Fund resources and expenditures reductions in social services grant levels. in 2010-11 under then-existing laws and policies. If all of the assumptions are met in the pack- To address this projected gap, the Legislature and age, the state would be left with a $1.3 billion Governor opted for a package of budget actions General Fund reserve at the end of 2010-11, as summarized in Figure 1 (see next page). That shown in Figure 2 (see page 3). package (including vetoes) includes the following Longer-Term Budget and Pension Changes. actions (based on our offi ce’s categorization): The budget package includes legislation pro- ➢ $7.8 billion of expenditure-related solu- posed by the Governor to decrease pension ben- tions (including ongoing and temporary efi ts for state employees hired in the future. The cost or service reductions). package also places a measure on a future state ballot that is intended to stabilize state fi nances ➢ $5.4 billion of new federal funding (most in the future by increasing amounts deposited to of it not yet approved by Congress). the state’s rainy-day fund in certain years. While these changes would help the state’s longer-term An LAO RepORt fiscal situation, they would have little effect in Governor’s Vetoes. When signing the bud- the shorter term. We estimate that well over get, the Governor vetoed $963 million in Gener- two-thirds of the 2010-11 budget solutions are al Fund spending that had been approved by the one-time or temporary in nature. This means that Legislature. In doing so, the anticipated year-end California will continue to face sizable annual reserve increased from $364 million to $1.3 bil- budget problems in 2011-12 and beyond. lion. The vetoes included: Figure 1 General Fund Budget Solutions in the 2010‑11 Budget Plan (In Billions) Reduced Costs or Increased Revenues Expenditure‑Related Solutions Reduce Proposition 98 costsa $3.4 Reflect savings in state employee payroll, benefit, and related costs 1.6 Reduce budget for prison medical care 0.8 Assume accelerated receipt of federal TANF fundsa 0.4 Defer or suspend local government mandatesa 0.4 Achieve IHSS savings through various actions 0.3 Reflect reductions in adult prison population 0.2 Offset UC and CSU General Fund costs with federal economic stimulus funding 0.2 Require managed care enrollment for certain Medi-Cal recipients 0.2 Adjust other spending (net reduction)a 0.3 Subtotala ($7.8) Federal Funding and Flexibility Solutions Assume enhanced federal funding and/or additional cost flexibility $4.1 Score savings from recent congressional action to extend FMAP support 1.3 Subtotal ($5.4) Revenue‑Related Solutions Adopt LAO’s May 2010 revenue forecast $1.4 Suspend for two years the ability of businesses to deduct net operating losses 1.2 Score additional revenues from previously authorized sale leaseback of state office buildings 0.9 Adopt other compliance actions and reductions in business taxes (net reduction) -0.1 Subtotal ($3.3) Loans, Loan Extensions, Transfers, and Funding Shifts Borrow from special funds $1.3 Extend due dates for repayment of existing loans from the General Fund to special funds 0.5 Fund courts from previously authorized shift from redevelopment agencies 0.4 Use hospital fees to support Medi-Cal children’s coverage 0.2 Transfer special fund monies to the General Fund 0.1 Use Student Loan Operating Fund monies for Cal Grant costs 0.1 Adopt other funding shifts 0.1 Subtotal ($2.7) Total, All Budget Solutionsa $19.3 TANF=Temporary Assistance for Needy Families; IHSS = In-Home Supportive Services; FMAP = Federal Medical Assistance Percentage; LAO = Legislative Analyst’s Office. a Amount listed includes Governor’s vetoes. 2 Legislative Analyst’s Office www.lao.ca.gov An LAO RepORt ➢ The elimination Figure 2 of CalWORKs 2010-11 Budget Act Stage 3 child care General Fund Condition ($256 million), (In Millions) effective Novem- 2010‑11 ber 1, 2010. This Percent will mean the 2009‑10 Amount Change loss of subsidized Prior-year balance -$5,375 -$4,804 child care for Revenues and transfers 86,920 94,230 8.4% Total resources available $81,545 $89,426 approximately Total expenditures $86,349 $86,552 0.2% 55,000 children Fund balance -$4804 $2,874 from low-income Encumbrances $1,537 $1,537 families who Reserve ‑$6,341 $1,337 formerly received Note: Department of Finance estimates. cash aid through the CalWORKs Specifically, he vetoed $80 million for program. child welfare services, $52 million for HIV/AIDS programs, $10 million for ➢ The assumed accelerated receipt of health clinics, and $6 million for commu- future federal Temporary Assistance for nity-based programs in the Department Needy Families funds, allowing a like of Aging. reduction ($366 million) in state CalWORKs General Fund spending. ➢ The deletion of $133 million of funding for the AB 3632 mandate for students’ ➢ The rejection of various legislative aug- mental health services. As part of the veto, mentations to health and social services the Governor declared his intent that the programs. The Governor vetoed similar mandate be suspended for 2010-11. amounts as part of last year’s budget. 2010-11 Budget SolutionS E -r S funding requirement (commonly known as the xpEnditurE ElatEd olutionS minimum guarantee) for 2010-11. Absent sus- Proposition 98—K-14 Education pension, we estimate the minimum guarantee Proposition 98 Funds. Figure 3 (see next would require $53.8 billion, which is $4.1 billion page) shows Proposition 98 funding levels under higher than the amount appropriated for 2010-11. the budget plan. As shown, ongoing Proposition The state also is ending 2009-10 with a “settle- 98 funding is slightly higher in 2010-11 up obligation,” meaning the state appropriated ($49.7 billion) than the revised 2009-10 level less in 2009-10 than the revised estimate of the ($49.5 billion). To fund at this level, the Legis- minimum guarantee for that year. We estimate lature suspended the Proposition 98 minimum www.lao.ca.gov Legislative Analyst’s Office 3 An LAO RepORt the 2009-10 settle-up obligation is $1.8 billion. recent federal grants provided specifically to help The budget also spends $242 million in 2010-11 retain K-12 jobs, and $272 million is from the last using one-time Proposition 98 funds available round of federal stabilization funding from the from prior years. 2009 stimulus package. Increased Spending for Community Col- Deferrals Significant Component of Budget leges. The budget reflects a net increase of Package. Though the state is providing slightly $108 million in ongoing Proposition 98 funding more ongoing funding in 2010-11 than for community colleges. This largely is the result 2009-10, the large reliance on one-time solu- of a 2.2 percent increase in budgeted enrollment. tions last year resulted in the need for 2010-11 Settle-Up Funds. In addition to Proposition reductions. Under the budget plan, however, the 98 funds, the budget plan for 2010-11 provides reductions largely are treated as deferrals of pay- $300 million as a payment to begin to meet the ments rather than cuts. Specifically, the package state’s outstanding 2009-10 Proposition 98 settle- defers $1.9 billion in additional K-14 payments up obligation. Of these settle-up monies, ($1.7 billion for K-12 education and $189 million $90 million is provided for annual education for community colleges). Rather than being paid mandate costs and $210 million will be distribut- in the spring of 2011, these payments will be ed on an equal per-student basis and applied to made in July 2011 (that is, the next fiscal year). school districts’ and community colleges’ unpaid Virtually all other K-12 reductions are technical prior-year mandate claims. adjustments designed to align appropriations Federal Funds. In addition to these state with anticipated program costs, such as for the funds, related budget bills provide K-12 educa- K-3 Class Size Reduction program. The package tion with $1.5 billion in special one-time federal also makes some reductions in child care fund- funding. Of this amount, $1.2 billion is from ing. Most notably, the package achieves child Figure 3 Proposition 98 Spending Under Budget Package (Dollars in Millions) Change From 2009‑10 2008‑09 2009‑10 2010‑11 Final Revised Budgeted Amount Percent K‑12 Education General Fund $30,075 $31,662 $32,249 $588 1.9% Local property tax revenue 12,969 12,105 11,529 -576 -4.8% Subtotals ($43,044) ($43,767) ($43,778) ($11) (—) California Community Colleges General Fund $3,918 $3,722 $3,885 $163 4.4% Local property tax revenue 2,029 1,962 1,907 -55 -2.8 Subtotals ($5,947) ($5,683) ($5,792) ($108) (1.9%) Other Agencies $105 $93 $89 -$4 -4.5% Totals, Proposition 98 $49,096 $49,543 $49,658a $115 0.2% General Fund $34,098 $35,477 $36,223 $746 2.1% Local property tax revenue 14,997 14,066 13,435 -631 -4.5 a Due to the Governor’s veto of CalWORKs Stage 3 child care, the administration intends to create an additional $256 million settle-up obligation, to be paid in the future. 4 Legislative Analyst’s Office www.lao.ca.gov An LAO RepORt care savings by drawing down some provider Fund departmental budgets by $450 million—a reserves, reducing the reimbursement rate for roughly 5 percent decrease—to account for the license-exempt providers (from 90 percent to administration’s “workforce cap,” which consists 80 percent of the licensed-provider rate), and of reductions in hiring. An additional reducing the administrative allowance for certain $130 million of savings is assumed due to re- providers (from 19 percent to 17.5 percent of duced departmental operating costs related to total contract amounts). As described above, the the workforce cap. Governor also vetoed $256 million in funding for Health and Social Services child care. Changes to In-Home Supportive Services Higher Education (Non-Proposition 98) (IHSS) Program. The vast majority of the Legis- Augmentations for Universities. The bud- lature’s budget actions in the social services area get increases spending on higher education result from changes in the IHSS program programs. The budget provides General Fund ($300 million). About $190 million in savings is augmentations of $250 million for the University anticipated from applying the sales tax to IHSS of California and $260 million for the California providers and using the revenue to obtain ad- State University. These augmentations are each ditional federal funding. The providers subject to $106 million lower than the amount proposed in the tax will receive a supplementary payment. the May Revision, reflecting that the universities Legislation also reduces authorized service hours recently each received a like amount of federal for IHSS recipients by 3.6 percent for an addi- stimulus funding. tional savings of $35 million. Finally, the budget General Fund Reduction in Cal Grant Costs was adjusted to reflect lower-than-anticipated Offset by Other Funding. The budget includes caseload for savings of $75 million. a reduction of $100 million for the state’s Cal Medi-Cal Changes. The majority of the Grant financial aid programs, and backfills this budget solutions in health come from the Medi- reduction with $100 million in excess revenue Cal Program. The budget reflects about in the Student Loan Operating Fund (monies de- $187 million in savings in the Medi-Cal Program rived from the servicing of federal student loans). from the phase-in of mandatory enrollment of certain seniors and persons with disabilities into Employee Compensation managed care in some counties. The budget also General Fund Personnel Cost Reductions of reflects approximately $100 million in savings $1.6 Billion. The budget assumes that General from rate freezes and rate reductions to specified Fund employee pay and benefits are reduced Medi-Cal providers. About $26 million in savings by $896 million, which includes (1) savings from from Medi-Cal antifraud efforts are assumed in recent agreements with unions and (2) over the budget plan. $600 million of additional reductions resulting Governor’s Vetoes. In addition to these IHSS from future union agreements or other adminis- and Medi-Cal changes passed by the Legislature, trative actions. (Comparable personnel savings the Governor vetoed several hundred million are budgeted for state accounts outside of the dollars of health and social services spending, as General Fund.) The budget also reduces General described earlier. www.lao.ca.gov Legislative Analyst’s Office 5 An LAO RepORt Judiciary and Criminal Justice receivables” (backed by the state’s repayment obligation) and use the proceeds to pay local Cuts in Funding for Prisons, Including the agencies for their outstanding mandate claims. Receiver. The budget package assumes a total of Under the plan, the state would pay interest on $1.1 billion in General Fund savings within the the receivables at a rate of 2 percent per year. California Department of Corrections and Reha- Local agencies would pay any additional interest bilitation. This amount includes an $820 million or debt-issuance costs. unallocated reduction in the federal court- appointed Receiver’s inmate medical services F F EdEral unding and program. (This funding decrease is offset by F S lExibility olutionS $532 million in various workload adjustments to Most Funds Have Yet to Be Approved by support the Receiver’s planned information tech- Congress. The budget plan assumes that the fed- nology projects and increased contract medical eral government will provide the state with the costs.) The Receiver intends to achieve the as- ability to reduce General Fund costs by sumed savings by releasing certain infirm inmates $5.4 billion in 2010-11. These savings could early from prison and placing them on parole result either from increased federal funding to the based on their medical status, as well as other state or federal approval for certain reductions in unspecified operational and policy changes. The state costs or service levels. By approving exten- budget package also assumes $219 million in sion of enhanced Federal Medical Assistance General Fund savings from mostly unspecified Percentage funding levels for Medi-Cal and re- adult correctional population changes. lated programs, Congress and the President have General Fund Cuts for Courts Offset by approved about $1.3 billion of funding to date. Other Fund Sources. The budget package reduces General Fund support for the trial courts r -r S EvEnuE ElatEd olutionS in 2010-11 by $405 million. However, this reduc- Adopts Legislative Analyst’s Office Rev- tion would largely be offset by a one-time shift enue Estimates. The budget package adopts our of $350 million in redevelopment funding to the office’s May 2010 General Fund revenue fore- courts, as well as a shift of $30 million from re- cast—$1.4 billion higher than the administration’s serves held by individual trial courts. In addition, forecast for 2009-10 and 2010-11 combined. the budget reflects increased court fees (such as (As of the end of September, the state’s personal civil filing fees and fees charged to offenders) and income and corporation tax revenues to date the redirection of various special funds to offset are $1.4 billion higher than those projected in trial court costs. the administration’s monthly revenue estimates. Other Provisions Much of this difference, however, may be related to early receipt of taxes that had been expected Local Mandate Securitization. The budget later in the fiscal year.) package includes a measure that allows cities, Two-Year Extension of Business Tax In- counties, and special districts to receive pay- creases and Other Changes. The budget package ments of up to $1 billion for their outstanding extends for two additional tax years—2010 and state mandate reimbursement claims. Specifical- 2011—the previously enacted temporary suspen- ly, the budget package authorizes a joint powers sion of businesses’ abilities to use net operating authority to issue ten-year “local mandate claim 6 Legislative Analyst’s Office www.lao.ca.gov An LAO RepORt losses to reduce tax liabilities. This extension ex- properties. Generally, the state’s rent costs will empts small businesses with net income of under increase in future years. (Because $289 million $300,000 per year. The suspension is projected was assumed from the sale by the administration to increase state revenues by $1.2 billion in in its workload budget, this solution contributes a 2010-11 and about $400 million in 2011-12. net amount of $911 million to closing the budget In future years, these gains would be offset by gap, as reflected in Figure 1.) revenue losses of a roughly similar amount. The l , t , oanS ranSFErS and budget package also includes (1) decreases in F S unding hiFtS taxes for certain businesses that sell intangible products and services and (2) reductions in pen- $2.7 Billion of Loans, Transfers, and Fund alties for some businesses that are determined to Shifts. The budget plan includes $2.7 billion of have taxes higher than those reported on their tax loans, loan repayment extensions, transfers, and returns. These two reductions are estimated to fund shifts from special funds, which generally reduce 2010-11 revenues by around $150 million. are fee-supported funds that pay for specified Sale Leaseback of State Office Buildings. state functions. A significant portion of these The budget plan assumes $1.2 billion in one-time actions relate to the state’s transportation revenue from the sale of 11 state office proper- accounts, including the Highway Users Tax ties as authorized in last year’s budget agree- Account ($762 million loan), the Motor Vehicle ment. This amount reflects the net revenue from Account ($180 million loan and $72 million the sale after the state pays off the outstanding transfer), and other special funds related to the debt on the buildings and the transaction’s ex- Department of Transportation ($231 million of penses. The state would immediately lease back loan repayment extensions). the office buildings in order to retain use of the State CaSh ManageMent Measures to Reduce Chance of State IOUs backlog in bills, over the next few weeks without Over Next Few Weeks. During the unprecedent- resorting to registered warrants (also known as ed three-month budget impasse, the state has not IOUs). To reduce the likelihood that IOUs will be paid several billion dollars in bills due to a lack of needed during this period, the budget package available appropriations, and the state’s regu- includes legislation authorizing the Controller to lar annual cash-flow borrowing from investors delay specified school and community college (revenue anticipation notes [RANs]) has not been payments, as well as other payments, in Octo- able to proceed. Without proceeds from the ber by several days. The State Treasurer plans to RANs, the state would have difficulty paying all market the RANs in November. October and November payments, as well as the www.lao.ca.gov Legislative Analyst’s Office 7 An LAO RepORt longer-terM reforMS Proposed Constitutional Amendment to Reductions in Pension Benefits for Future Build State Reserves. The budget package con- State Employees. The budget package includes tains a proposed constitutional amendment—to a measure to reduce pension benefits for newly go before voters at a future statewide elec- hired state employees. (Labor agreements re- tion—intended to increase the state’s budgetary cently ratified by the Legislature also reduce reserves and stabilize the state’s financial health pension benefits for future employees in several over time. The measure would increase the bargaining units, and these reductions remain maximum size of the existing Budget Stabiliza- in effect.) In general, the measure sets benefit tion Account (BSA) from 5 percent to 10 percent levels for future employees at levels that were in of annual General Fund revenues and provide place for employees prior to 1999. In addition, all new requirements for depositing state funds to future state employees would have their pension that account. It also would restrict withdrawals benefits calculated based on their highest aver- from the BSA to certain situations. age annual pay over any consecutive three years of employment, not the one-year period appli- cable for some current state employees. These requirements would not affect pension benefits for current state employees and retirees. 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 website at www.lao.ca.gov. the LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 8 Legislative Analyst’s Office www.lao.ca.gov