Overview of the Governor’s December 2010 Special Session Proposals

POLICY BRIEF Overview of the Governor’s December 2010 Special Session Proposals MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • DECEMBER 7, 2010 On December 6, 2010, Governor rules of Proposition 25 (the majority‑vote budget Schwarzenegger declared a fiscal measure) approved by voters last month. It is also emergency pursuant to Proposi‑ the first to occur following the passage of Propo‑ tion 58 (2004) and called the new Legislature sitions 22 and 26, which, respectively, restrict the into special session to address the anticipated Legislature’s ability to use certain local funds to 2010‑11 General Fund deficit—estimated by our balance the budget and require a two‑thirds vote office at $6.1 billion in our November 10 publi‑ to approve many charges that were previously cation, California’s Fiscal Outlook. Proposition 58 considered fees. contains provisions to encourage the Legislature This brief overview is divided into two to pass measures addressing the fiscal emergency sections: (1) a summary of the Governor’s within 45 days (in this case by January 20, 2011). special session proposals—which consist mainly Prior to January 20, however, the new Governor of proposals made by this administration earlier will be inaugurated and present his proposed this year—along with our overall reactions to 2011‑12 budget package, as well as an updated the proposals, and (2) a description of the major estimate of the size of the General Fund budget new proposal in the package, which would use problem for 2010‑11 and 2011‑12. This special vehicle weight fees to offset General Fund debt‑ session is the first for the Legislature under the service costs. THE SPECIAL SESSION PROPOSALS Governor Proposes $9.9 Billion of reducing the $25.4 billion budget problem that Budget Actions for Next 18 Months we have identified to $15.5 billion. This $15.5 bil‑ lion remaining budget problem—to be addressed Proposals Would Reduce Near-Term Budget by the Legislature and the administration in the Problem Significantly. As shown in Figure 1 (see next six months—would consist of a $4.2 billion next page), the Governor’s special session pro‑ deficit at the end of 2010‑11 and an $11.3 billion posals would decrease the gap between General gap between projected revenues and expendi‑ Fund revenues and expenditures by $1.9 billion tures in 2011‑12. (These estimates may change in 2010‑11 and by $8 billion in 2011‑12, thereby AN LAO REPORT following the release of the new Governor’s to health, child care, and social services pro‑ budget forecasts on January 10, 2011.) The Gov‑ grams. These include $2.2 billion resulting from ernor’s plan assumes approval by the Legislature the proposed elimination of the California Work by January 1. Opportunities and Responsibility to Kids Governor’s Social Services, Health, and (CalWORKs) program, $1.4 billion from the pro‑ Child Care Proposals. The Governor’s $9.9 bil‑ posed elimination of state‑subsidized child care lion of proposed budget solutions in 2010‑11 and services, $1.3 billion from various reductions and 2011‑12 consist of $7.4 billion of expenditure‑ eliminations of services in the Medi‑Cal Program, related reductions (according to our categoriza‑ and $900 million from reductions to county tion of the proposals). Essentially all of these mental health funding. proposals were rejected earlier this year by the Two Major Revenue Proposals. The special prior Legislature. The Governor’s expenditure session package includes two major revenue proposals rely almost exclusively on reductions proposals rejected earlier this year. First, the Figure 1 General Fund Budget Solutions in Governor’s Special Session Package Reduced Costs or Increased Revenues (In Millions) 2010‑11 2011‑12 Expenditure‑Related Solutions Eliminate CalWORKs program $110 $2,086 Eliminate child care funding, except preschool 200 1,157 Implement various Medi-Cal cost containment measures, such as caps and copayments 6 996 Reduce county mental health realignment funds by 60 percent 301 602 Commit certain non-serious offenders to county jails 112 650 Reduce SSP grants for individuals to the federal minimum 45 182 Eliminate Medi-Cal adult day health care services 21 189 Eliminate Cash Assistance Program for Immigrants 29 124 Contract for lower-cost state employee and retiree health benefit costs — 144 Eliminate full-scope Medi-Cal benefits for certain immigrants 15 120 Eliminate Drug Medi-Cal Program 18 93 Eliminate California Food Assistance Program 15 69 Implement various Healthy Families Program cost containment measures 9 43 Implement electronic court reporting to reduce judicial costs 7 13 Implement other cost reductions (net) 2 -4 Subtotals ($888) ($6,465) Revenue Solutions Implement automated speed enforcement program to offset trial court costs — $412 Levy property insurance surcharge for emergency response activities — 350 Extend hospital fees to June 2011 to offset Medi-Cal costs $160 — Subtotals ($160) ($762) Funding Shifts Use weight fee revenues for transportation debt service costs $850 $727 Implement other funding shifts 11 8 Subtotals ($861) ($735) Totals, All Proposed Solutions $1,909 $7,962 2 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT Governor proposes an automated speed enforce‑ LAO Comments on the ment program to offset trial court costs, thereby Special Session Proposals reducing General Fund expenses by $400 mil‑ Now Is the Time to Begin Action on These lion in 2011‑12. Second, the Governor proposes and Other Serious Budget Options. The size of a property insurance surcharge to offset CalFire the budget problem to be addressed in the next and other emergency services costs, thereby six months is so large that lawmakers need to reducing General Fund costs by an assumed consider significant expenditure reductions in $350 million in 2011‑12. Beginning in 2012‑13, every major area of state expenditures—includ‑ the Governor proposes to use at least some of ing the areas addressed in the Governor’s special the revenues from the surcharge to enhance session proposals, as well as areas not addressed emergency response activities. in his package, such as appropriations for the New Transportation Proposal to Relieve universities and courts. The Legislature also will General Fund Debt Service Costs. The need to consider additional revenue options. administration’s new weight fee “swap” proposal Early enactment of budget solutions makes it (described later in this report) would use these more likely that they can actually be achieved. vehicle fees to pay $1.6 billion of General Fund Many of the Governor’s Proposals Have transportation debt‑service costs over 2010‑11 Merit. Our office has reviewed almost all of the and 2011‑12 combined. special session proposals previously, as summa‑ Proposals Would Reduce Out-Year General rized in Figure 2 (see next page). Given the Fund Shortfall Significantly. Our November 10 severity of the budget problem the state has forecast estimated that the state faced a structural faced recently, we have recommended that the shortfall—a persistent gap between revenues and Legislature adopt some of the Governor’s major expenditures—of at least $19.4 billion in each special session proposals. For other proposals, fiscal year through 2015‑16. The Governor’s we have recommended scaled‑down alterna‑ special session proposals would involve perma‑ tives that aim to preserve the core services of nent reductions in state spending or increases in programs. We will continue to refine our recom‑ revenues. Accordingly, the Governor’s propos‑ mendations for the Legislature in the coming als—if they were all adopted—would significant‑ weeks. In some cases, the state will need to ly reduce this shortfall. Our very rough estimate consider even greater expenditure reductions is that the 2015‑16 deficit would be reduced from than we have recommended previously in some $19.4 billion to somewhere around $12 billion. In programs. In addition, the Legislature will need our November 10 report, we recommended the to consider temporary or permanent revenue Legislature chip away at the state’s budget prob‑ increases to close the massive General Fund lems with $10 billion in permanent—as opposed budget gap. to temporary—budget solutions in 2011‑12. Help School Districts by Sending Signals Additional permanent solutions would need to Early. In our November 10 California’s Fiscal be added in future years. The Governor’s pro‑ Outlook publication, we noted that school and posals would achieve the vast majority of this community college districts would face billions $10 billion target. of dollars in programmatic reductions in www.lao.ca.gov Legislative Analyst’s Office 3 AN LAO REPORT Figure 2 Prior LAO Analyses of Major Special Session Proposals Prior LAO Publication Special Session Issue Prior LAO Comments With More Information Elimination of CalWORKs Recommended achieving reductions in costs, but avoiding Overview of the May Revision loss of federal funding and shifting of costs to counties that (May 18, 2010), p. 22. would result from total program elimination. (Enhanced federal funding stream for CalWORKs expired in September 2010.) Elimination of child care funding, Recommended cost reductions, but not elimination of funding Handout: Options for Generating except preschool for the program. Savings in Child Care Budget (June 14, 2010). Place certain non-serious offend- Recommended modifying administration proposal to change Handout: Governor’s May Revi‑ ers sentenced to three years offenders affected, lessen burden on county jails, and sion Proposal to Shift Certain or less in county jails, not state provide counties with more flexibility. Offenders to County Jails prisons (May 26, 2010). Reduce SSP grants for individu- Recommended adopting Governor’s proposal and explore How the Special Session Actions als to the federal minimum options for increasing food stamp assistance for low-income Would Affect Social Services individuals to offset some of these reductions. (January 29, 2010), p. 7. Eliminate Cash Assistance Recommended achieving part of the proposed savings by How the Special Session Actions Program for Immigrants and making changes prospectively, phasing out benefits Would Affect Social Services California Food Assistance gradually, or conditioning benefits on progress toward citi- (January 29, 2010), p. 12. Program zenship. Shift county mental health Raised concerns whether the proposal could be implemented Website Analysis: “Mental Health realignment funding to social due to Proposition 63 maintenance-of-effort requirements. Realignment Risky” services programs (May 19, 2010). Various Medi-Cal cost contain- Recommended alternatives to several administration proposals, Website Analysis: “Medi-Cal Cost ment measures—including including exceptions to a cap on adult physician visits and Containment Proposals” copayments and “hard caps” lower copayments in some cases. (May 20, 2010). on benefits Eliminate full-scope Medi-Cal Recommended adoption of Governor’s proposal to eliminate How the Special Session Actions benefits for certain immigrants full-scope benefits for certain immigrants, while continuing Would Affect Health Programs emergency and other services such as long-term care for (January 22, 2010), p. 5. these groups. Elimination of Medi-Cal adult day Recommended adoption of Governor’s proposal to eliminate How the Special Session Actions health care services the program. Direct administration to estimate costs from Would Affect Health Programs shift of eligible participants to other programs due to closure. (January 22, 2010), p. 4. Elimination of Drug Medi-Cal, Offered several alternatives to save lesser amounts of monies Website Analysis: “Options for except for perinatal and youth in this program, including copayments and some limits on Reducing Costs in the Drug services programs individual and group counseling sessions. Medi-Cal Program” (December 6, 2010). Automated speed enforcement Recommended adoption of Governor’s proposal with modifica- Automated Speed Enforcement tions to encourage local government participation. Merits Authorization (January 27, 2010). Emergency Response Initiative— Recommended rejection of Governor’s surcharge proposal The 2010‑11 Budget: Resources property insurance policy and, in its place, the adoption of a wildland fire protection and Environmental Protection surcharge for CalFire and other fee. (March 8, 2010), p. RES-30. emergency response Reduce state employee and Noted that while the proposal was worth considering, it was The Governor’s Employee retiree health costs by moving unlikely to produce savings within a one-year time frame. Compensation Proposals plan administration from (January 27, 2010), p. 7. CalPERS or by other means 4 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT 2011‑12 under the Proposition 98 minimum spending. Acting now also would help minimize funding guarantee. We encourage the Legislature the magnitude of the programmatic cuts that to begin working now to give school districts districts could be required to make in 2011‑12. early signals about the budgetary and program‑ In addition, a significant way to assist districts matic framework they will be operating under in would be to retain existing flexibility provisions the coming fiscal year and beyond. In particular, (most notably, continuing to make certain cat‑ districts would benefit from the earliest‑possible egorical funding flexible), extend some of those notice of changes to their budgeted state funding. provisions (for example, to apply to the K‑3 Class In November, we suggested that the Legislature Size Reduction and Home‑to‑School Transporta‑ consider eliminating the $1.8 billion in K‑14 pay‑ tion programs), and explore new types of flexibil‑ ments deferred in the 2010‑11 budget package ity (such as removing restrictions on contracting until July 2011. If it were to do so now, districts out and priority and pay for substitute teaching would have the greatest possible time to react positions). and avoid committing those funds to additional WEIGHT FEE PROPOSAL The administration’s December special ses‑ been loaned to the General Fund to help allevi‑ sion package proposes to use vehicle weight fees ate the state’s fiscal problems. to pay $1.6 billion of General Fund transporta‑ Fuel Tax Swap Increased Funds Available to tion debt‑service costs over 2010‑11 and 2011‑12 Pay Debt Service. In March 2010, the Legislature combined. Below, we provide background infor‑ enacted a “fuel tax swap” to provide the state mation about recent changes in state transporta‑ with greater flexibility over the long run in how it tion financing, then outline and comment on uses taxes on fuels for the state’s spending priori‑ how the Legislature could respond to these latest ties. The fuel tax swap changed the way the state proposed changes. taxes fuels in order to provide ongoing reim‑ bursements to the General Fund for the payment Background of debt service on transportation bonds. Prior to Transportation revenues come mainly from passage of this legislation, the state charged an taxes on fuels and vehicle weight fees and are 18 cents per gallon excise tax on gasoline and generally used for transportation purposes. diesel fuel. The state also charged a 6 percent Transportation programs also benefit by receiving sales tax on the purchase of these fuels. A major funds from the sale of general obligation bonds. provision of the fuel tax swap was for the state to The debt service on these bonds has historically stop charging a sales tax on gasoline, and instead been paid by the state’s General Fund. Recently, impose an additional excise tax (17.3 cents per however, transportation funds have been used gallon in 2010‑11) on gasoline to generate an to reimburse the General Fund for some of the amount equivalent to what would have been debt‑service costs on certain transportation collected from the sales tax. This is because the bonds. In addition, transportation funds have state has more flexibility to use excise tax rev‑ enues to help the General Fund condition. The www.lao.ca.gov Legislative Analyst’s Office 5 AN LAO REPORT legislation did not change the total amount of Governor’s Special Session Proposal transportation revenues collected by the state. Use Vehicle Weight Fees for General Fund The fuel tax swap along with other actions Relief. The Governor’s December special ses‑ adopted in the 2010‑11 Budget Act would have sion package proposes to transfer vehicle weight provided the state with $1.6 billion in General fee revenues to the General Fund. This would Fund relief in the current year. Specifically, in the achieve an estimated $850 million in budget budget plan, $491 million was to be used to solutions in 2010‑11 and $727 million in 2011‑12 reimburse the General Fund for highway and by reimbursing the General Fund with weight road debt service, and $762 million was to be fee revenues for certain transportation bond debt loaned to the General Fund. In addition, the service costs, and also loaning a portion of the budget plan included reimbursements for transit weight fee revenues to the General Fund. Under debt service amounting to $287 million. Various the proposal, the fuel tax revenues that would transportation funds amounting to $109 million have helped the General Fund prior to Proposi‑ were also to be loaned to the General Fund. tion 22 would now be available for transporta‑ Proposition 22 Increases the Current-Year tion programs. Deficit. On November 2, 2010, the voters ap‑ proved Proposition 22, a complex measure that LAO Recommendations made numerous changes to the state Constitution Overall, we think the Governor’s proposal is and to the way transportation funds are allo‑ reasonable and could achieve the level of sav‑ cated. This measure has an immediate impact on ings proposed. Because of the complexity of the state’s fiscal situation. Specifically, the state the state’s system for funding transportation, we is no longer allowed under Proposition 22 to use propose that the Legislature take a two‑step ap‑ fuel tax revenues to reimburse the General Fund proach regarding the use of transportation funds for transportation debt service. Similarly, borrow‑ to help the state’s fiscal condition. First, we rec‑ ing of fuel tax funds is also prohibited. This has ommend the Legislature adopt during the special the immediate impact of increasing the current‑ session the Governor’s proposal and an addi‑ year budget deficit by roughly $900 million. tional General Fund solution we describe below Proposition 26 Reduces State Flexibility. At to achieve total estimated General Fund savings the November 2010 election, voters also passed of $900 million. Second, we recommend that the Proposition 26. Among other things, this mea‑ Legislature develop and enact comprehensive sure could be interpreted—as we assumed in legislation to address the use of transportation our recent fiscal forecast—to repeal the fuel tax funding in the future. swap effective November 3, 2011, and return the Maximize General Fund Benefit in the Short state to taxing fuels as it did prior to the passage Term. Changes made to the Constitution by of the swap. While the full impact of Proposi‑ Proposition 22 do not explicitly prohibit the use tion 26 is still unclear, it is likely that the state will of weight fees for the payment of debt service lose flexibility in how it uses transportation funds or General Fund loans. While Proposition 22 and that the allocation of transportation funds for will likely be subject to judicial interpretation, various purposes would change significantly. we think the Governor’s approach is reason‑ 6 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT able. The amount of General Fund benefit of Fund. Assuming the fuel tax legislation is re‑ the Governor’s proposal could be increased by pealed by Proposition 26 in November 2011, about $50 million. That is because the state will there would no longer be sufficient fuel excise collect an estimated total of $900 million from tax revenues to backfill for the weight fee weight fees in 2010‑11. Given the state’s severe revenue sent to the General Fund under the budget problem, we recommend adopting the Governor’s proposal without major programmat‑ Governor’s proposal and borrowing the remain‑ ic impacts on transportation. A long‑term solu‑ ing $50 million in weight fees to help address the tion to benefit the General Fund beyond this date state’s current General Fund deficit. would likely require the Legislature to reenact More Comprehensive Fix Needed for the fuel tax swap legislation or other actions. We are Future. The Governor’s weight fee proposal is continuing to analyze the components of a more only a short‑term benefit to the state General comprehensive solution to these problems. www.lao.ca.gov Legislative Analyst’s Office 7 AN LAO REPORT 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