The 2011-12 Budget: Overview of the Governor’s Budget

The 2011-12 Budget: Overview of the Mac Taylor Legislative Analyst Governor’s Budget January 12, 2011 2011-12 BUDGET CONTENTS Executive Summary ..................................................................................................3 Overview ...................................................................................................................5 Economics, Revenue Projections, and Tax Proposals ..........................................10 State-Local Realignment ........................................................................................16 Redevelopment ......................................................................................................20 Expenditure Proposals ...........................................................................................22 2 Legislative Analyst’s Office www.lao.ca.gov 2011-12 BUDGET EXECUTIVE SUMMARY $25.4 Billion Budget Problem Identified by Administration Administration’s Estimate Seems Reasonable. The administration’s budget proposal identifies a $25.4 billion budget problem that the Legislature and the Governor must address between now and the time they agree on a 2011‑12 budget package. Our initial assessment is that this estimate is reasonable. The $25.4 billion problem consists of an $8.2 billion deficit that would remain at the end of 2010‑11 absent additional budgetary action, as well as an estimated $17.2 billion gap between current‑law revenues and expenditures in 2011‑12. Reasons for the Budget Shortfall. As we discussed in our November 2010 report, California’s Fiscal Outlook, the major reasons for this budget problem are the inability of the state to achieve previous budget solutions in several program areas, the expiration of various one‑time and tempo‑ rary budget solutions approved in recent years, and the failure of California to obtain significant additional federal funding for key programs. A weak economic recovery continues, meaning that elected leaders cannot rely on the economy to solve this huge budget problem. Governor’s Plan: Realignment, June Election, and Expenditure Cuts Realignment and Voter-Approved Tax Increases Are Key Elements. Two significant and inter‑ related themes run through the Governor’s budget proposal: (1) his plan to submit a proposed exten‑ sion of the four temporary tax increases adopted in February 2009 to voters in a June 2011 special election and (2) his plan to restructure the state‑local relationship in the delivery of services (by shifting funding and responsibility to local governments for those services). Expenditure Reductions Touch Nearly Every Area of State Funding. The Governor’s budget includes many significant ongoing program reductions, posing very difficult decisions for the Legislature. His proposals touch nearly every area of the state budget—often (as in Medi‑Cal) with proposed reductions similar to ones suggested by the prior Governor and rejected by the Legislature. While the Governor’s revenue proposals result in a $2 billion increase in the Proposition 98 minimum funding guarantee for schools above its current‑law level, his budget would result in a small programmatic funding decline for K‑12 and more significant reductions for community colleges and child care programs. Plan Would Improve Budget Situation Considerably Administration Estimates $1 Billion Reserve at End of 2011-12. The administration estimates that the Governor’s plan would cut the 2010‑11 deficit in half and leave the state with a $1 billion reserve at the end of 2011‑12. The plan relies on legislative approval of statutory changes necessary to achieve budget solutions by March 1. Administration Says Plan Would Eliminate Deficit for at Least a Few Years. The administra‑ tion projects that the Governor’s proposed budget package would eliminate California’s budget deficit for at least the next three years and leave the state with a surplus during that period, albeit a very small one in some years. The Governor proposes that voters approve only five‑year extensions of temporary taxes, some of which would be used to fund realigned local services. At this time, it is unclear how the Governor plans to replace the proposed temporary taxes when they expire at the end of this five‑year period. www.lao.ca.gov Legislative Analyst’s Office 3 2011-12 BUDGET LAO Comments Governor’s Proposal Is a Good Starting Point. The state faces another huge budget deficit. In light of this dire circumstance, the Governor’s proposal includes reductions in nearly every area of the state budget and a package of revenue proposals that merit serious legislative consideration. We think the Governor’s package is a good starting point for legislative deliberations. Focuses on Multiyear and Ongoing Solutions. We credit the Governor’s efforts to craft a budget plan that is heavily focused on multiyear and ongoing solutions. As such, his proposal shows great promise to make substantial improvements in the state’s budgetary health—both in the short run and over the long term. The administration, in fact, estimates that its plan would eliminate the state’s deficit—at least for the next three fiscal years. Our early assessment of the outyear effects of the Governor’s budget is somewhat less favorable than the administration’s. Nevertheless, its adop‑ tion would go a long way toward eliminating the state’s persistent budget gap. Governor Puts Some Bold Ideas on the Table. The Governor’s proposals to “realign” state and local program responsibilities and change local economic development efforts have much merit. His realignment proposal would shift $5.9 billion in state program costs to counties and provide a comparable amount of funds to support these new county commitments. We believe that this type of decentralization of program delivery and authority could promote innovation, efficiency, and responsiveness to local conditions. The Governor also puts forward dramatic changes in the area of local economic development by proposing the elimination of redevelopment agencies. We think this makes sense, as the state’s costs associated with redevelopment have grown markedly over the years even though there is no reliable evidence that the program improves overall economic performance in the state. Still…Some Significant Risks in the Governor’s Plan. The Legislature should favor budget solutions that have a strong likelihood of actually achieving budgeted savings or revenue increases. As such, there is significant work ahead to fill in the details of some of the Governor’s ambitious, complex budget proposals—especially the realignment and redevelopment proposals, which involve many legal, financial, and policy issues. Acting to pass key budget legislation by March 1, as the Governor proposes, would be helpful even if a special election were not called. Early budget actions give departments more time to implement spending reductions. If it adopts the Governor’s timeline and special election approach, the Legislature would have the opportunity in the months after March 1 to review routine budget proposals for departments, adopt clean‑up legislation to clarify elements of this complex budget package, and consider alternative budget‑balancing solutions in case voters reject the June ballot measures. In total, around $12 billion of the Governor’s proposed budget solutions (tax extensions and changes to Proposition 10) are dependent upon voter approval in June. Conclusion California’s elected leaders need to take big steps toward restoring the state government to fiscal solvency and rebuilding the trust of California’s residents in state government. The Legislature’s most important function is its control of the state budget. In drafting a 2011‑12 budget plan, the Legislature will have to make difficult decisions on both its spending and tax commitments, but it also has the opportunity to reorder state and local government functions to improve the delivery of public services. In the coming weeks, we will work to provide additional guidance on the Governor’s proposals and, where appropriate, offer alternatives to them. 4 Legislative Analyst’s Office www.lao.ca.gov 2011-12 BUDGET OVERVIEW The Governor released his proposed 2011‑12 Governor Proposes $26.4 Billion of General budget package on January 10, 2011, one week after Fund Solutions. In total, the Governor proposes a his inauguration. This report is our office’s initial total of $26.4 billion in budget solutions. If adopted reaction to this package. In the coming weeks, and achieved in full, the Governor’s budget plan as more information becomes available from the would leave the state with a reserve of around administration, we will provide further analysis to $1 billion at the end of 2011‑12. assist the Legislature in its budget deliberations. How the Budget Addresses the Shortfall Administration Estimates a A Mix of Expenditure Reductions and Tax $25.4 Billion Shortfall Increases. Figure 1 (see next page) shows our Failed Budget Solutions and Expiring office’s categorization of the $26.4 billion in pro‑ Measures Contribute to the Shortfall. Based on posed budget solutions. The Governor proposes to a review of current‑law General Fund revenues reduce current‑law General Fund state expendi‑ and program spending, the 2011‑12 Governor’s tures by $12.5 billion, as summarized in Figure 1. Budget estimates that, without corrective action by (These expenditure‑related solutions include both the Legislature and the Governor, the state would reductions in services and benefits and use of other end 2011‑12 with a $25.4 billion deficit. Under funding sources in lieu of the General Fund.) The the administration’s estimates, the Legislature Governor proposes a total of $14 billion in new rev‑ and the Governor would need to identify at least enues, of which $3 billion is attributed to 2010‑11. $25.4 billion of General Fund budget solutions The additional revenues to be deposited in the between now and the time that they adopt the General Fund would result in a $2 billion increase 2011‑12 Budget Act. Specifically, the administra‑ in the Proposition 98 minimum funding guarantee tion estimates that the General Fund will end for schools and community colleges. (The adminis‑ 2010‑11 with a deficit of $8.2 billion (as opposed tration scores its revenue package at $12 billion over to the $1.5 billion reserve balance assumed when two years: the $14 billion described above, less the the October 2010 budget package was adopted). $2 billion increase in the Proposition 98 guarantee. For 2011‑12, the Governor estimates that the Figure 1 categorizes the Proposition 98 change gap between expenditures and revenues will be separately from the revenue package.) The remain‑ $17.2 billion. ing $1.9 billion in solutions comes from borrowing Our office also pegged the size of the 2011‑12 from special funds and other sources. We discuss budget problem at $25.4 billion in our November the significant proposals in the Governor’s budget 2010 report, California’s Fiscal Outlook. As we in more detail later in this report. discussed in that report, the reasons for this year’s Realignment and Voter-Approved Revenues state budget shortfall include the inability of the Are Key Elements. Two significant and inter‑ state to achieve previous budget solutions in several related themes run through the Governor’s budget program areas, the expiration of various one‑time package: (1) his plan to submit a proposed exten‑ and temporary budget solutions approved in recent sion of the four temporary tax increases adopted in years, and the inability of the state to obtain signifi‑ February 2009 to voters in a June 2011 special elec‑ cant additional federal funding for key programs. tion and (2) his plan to restructure the state‑local www.lao.ca.gov Legislative Analyst’s Office 5 2011-12 BUDGET relationship in the delivery of services (by shifting increases proposed for the June special election funding and responsibility to local governments ballot (the 1 percentage point sales tax increase for those services). Two of the temporary tax and the 0.5 percentage point increase in the vehicle Figure 1 Budget Solutions Proposed by the Governor (General Fund Benefit, in Billions) 2010-11 2011-12 Totals Expenditure-Related Solutions Shift redevelopment funds to Medi-Cal and trial courts — $1.7 $1.7 Reduce benefits and provider payments and charge copayments in Medi-Cal — 1.7 1.7 Impose time limits, grant reductions, and service cuts for CalWORKs — 1.5 1.5 Reduce UC and CSU budgets — 1.0 1.0 Use Proposition 10 reserves and some ongoing revenues for children’s programs — 1.0 1.0 Fund transportation debt costs primarily using weight fees $0.3 0.8 1.0 Use Proposition 63 funds to support community mental health services — 0.9 0.9 Reduce developmental center and regional center spending — 0.8 0.8 Shift some adult and all juvenile offenders to local jurisdictions — 0.6 0.6 Reduce IHSS hours of service, limit domestic services, and tighten eligibility — 0.5 0.5 Reduce state employee salary and medical costs — 0.4 0.4 Suspend, defer, or repeal state mandates — 0.3 0.3 Reduce SSI/SSP grants for individuals to the federal minimum — 0.2 0.2 Adopt unallocated funding reduction for the courts — 0.2 0.2 Reduce Receiver’s inmate medical care budget 0.1 0.2 0.2 Achieve efficiencies in state operations — 0.2 0.2 Reduce other spending — 0.3 0.3 Subtotalsa ($0.4) ($12.1) ($12.5) Revenue Solutions General Fund Revenue Solutions Extend the 0.25 percentage point personal income tax surcharge for five years $1.2 $2.1 $3.3 Extend reduction in dependent exemption credit for five years 0.7 1.2 2.0 Make single sales factor mandatory for multistate firms 0.5 0.9 1.4 Repeal enterprise zone tax credits 0.3 0.6 0.9 Adopt other revenue measures 0.4 0.1 0.5 Subtotals ($3.2) ($4.9) ($8.1) Local Realignment Revenue Solutions Extend 0.5 percentage point vehicle license fee increase for five years $1.4 $1.4 Extend 1 percentage point state sales tax increase for five years — 4.5 4.5 Subtotals (—) ($5.9) ($5.9) Total Revenue Solutions ($3.2) ($10.9) ($14.0) Borrowing and Transfers Loans, transfers, and loan extensions from special funds $0.5 $0.9 $1.4 Borrow from Disability Insurance Fund for UI interest payments — 0.4 0.4 Other loans and transfers — 0.1 0.1 Subtotals ($0.5) ($1.4) ($1.9) Increase Proposition 98 Guarantee Due to Revenue Proposals — -$2.0 -$2.0 Totals, All Solutions $4.1 $22.3 $26.4 a Subtotal may not add due to rounding. IHSS = In-Home Supportive Services; UI = Unemployment Insurance. 6 Legislative Analyst’s Office www.lao.ca.gov 2011-12 BUDGET license fee [VLF]) would be dedicated to funding Eliminate the Deficit for at Least a Few Years. The the realignment of programs from the state to local administration projects that the proposed budget entities. The Governor also proposes a significant solutions would eliminate the state’s budget deficits change to the way that local redevelopment activi‑ for the next three years and leave the state with ties are funded. a surplus, albeit a very small one in some years, Most Solutions Extend Beyond the Budget through this period. (Specifically, the administra‑ Year. Apart from the temporary borrowing of tion estimates that the General Fund would have $1.9 billion, the vast majority of the proposed an operating surplus of $15 million in 2012‑13, budget solutions are intended to last beyond the $2.4 billion in 2013‑14, and $7 million for 2014‑15.) budget year. In the case of the temporary tax At this time, it is unclear how the Governor plans increases, they would be in effect for five years. to replace the proposed temporary taxes—which are to be used to fund ongoing realigned local General Fund Condition services—when they expire at the end of five years. Solutions Estimated to Leave State With Absent a plan to replace these taxes, there could be $1 Billion Reserve at End of 2011-12. Figure 2 shows a substantial fiscal “cliff” for the General Fund after the administration’s estimates of the General Fund the five‑year period. condition under the Governor’s proposals. The esti‑ Proposed Accelerated Budget Timeline mated deficit at the end of 2010‑11 would be cut in half to about $4.1 billion. In 2011‑12, revenues would Administration Proposes Trailer Bills—Not decline 4.8 percent to $89.7 billion, while expendi‑ Budget Act—by March 1. The administration has tures would decline 8.2 percent to $84.6 billion. The proposed an accelerated budget process with a state would have an operating surplus of $5.1 billion, target date of March 1 to have all of the enabling offsetting the carry‑in deficit and leaving a $1 billion legislation necessary to implement the budget reserve at the end of 2011‑12. solutions in place. It is our understanding that the Administration Says Its Solutions Would administration does not propose to have a budget act passed by March 1, but rather only “trailer bills” Figure 2 (the legislation that makes Governor’s Budget the statutory changes General Fund Condition required to implement (Dollars in Millions) budgetary solutions or Proposed for 2011-12 to place items on the Actual Proposed Percent special election ballot). 2009-10 2010-11 Amount Change This approach would Prior-year fund balance -$5,147 -$5,343 -$3,357 allow the Legislature and Revenues and transfers 87,041 94,194 89,696 -4.8% Total resources available $81,894 $88,851 $86,339 the administration to Expenditures $87,237 $92,208 $84,614 -8.2% put in place the budget Ending fund balance -$5,343 -$3,357 $1,725 solutions required to Encumbrances $770 $770 $770 address the budget deficit Reservea -$6,113 -$4,127 $955 in March and then final‑ a Special fund for economic uncertainties. ize action on the budget www.lao.ca.gov Legislative Analyst’s Office 7 2011-12 BUDGET bill—presumably in June—prior to the Legislature’s Most, but not all, budget solutions also appear to be June 15 constitutional deadline for adopting a scored reasonably, assuming that they are enacted balanced budget. In the view of the administra‑ on the Governor’s accelerated budget legislation tion, this would allow for the incorporation of deadline. (We discuss our reactions to specific any updated May Revision forecasts, as well as the budget proposals throughout this report.) results of the special election. Expenditure Reductions Touch Nearly Every Most or all of the trailer bills passed by March Area of State Funding. The Governor’s budget under the administration’s approach seemingly includes many significant ongoing program would require a two‑thirds vote of each house of reductions, posing very difficult decisions for the the Legislature. This is because Proposition 25 Legislature. His proposals touch nearly every area (approved by voters in November 2010) appears to of the state budget—often (as in Medi‑Cal) with require passage of a budget act to designate trailer proposed reductions similar to ones suggested by bills needing only a majority vote. the prior Governor and rejected by the Legislature. June Special Election. It is our understanding While the Governor’s revenue proposals result in a that the Governor proposes to put two ballot $2 billion increase in the Proposition 98 minimum measures before the voters in a June special funding guarantee for schools above its current‑law election: (1) a constitutional measure to extend the level, his budget would result in a small program‑ temporary tax increases by another five years and matic funding decline for K‑12 and more significant to dedicate two of these revenues to realignment reductions for community colleges and child care and (2) a measure to change Proposition 10 to allow programs. the funds to be used in the Medi‑Cal Program. Tax Package Includes Some Sound, Policy- (In addition, two measures have already qualified Based Proposals. The Governor’s plan includes for the next statewide ballot through the initia‑ several tax proposals that we have previously tive process: a measure to change the term limits recommended, including adoption of mandatory currently in place for legislators and a measure to single sales factor apportionment for multistate and increase cigarette taxes to fund additional cancer multinational firms and elimination of enterprise research.) We understand the Governor will ask zone tax credits. As we describe later in this report, that a separate measure be placed on a future the proposed extension of the temporary increases election ballot to allow new mechanisms for in income and sales tax rates poses more difficult funding redevelopment at the local level. issues, but we think the Governor’s proposed tax extensions merit serious consideration. LAO C Omments Focuses on Multiyear and Ongoing Solutions. The Governor’s Package Is a We credit the Governor’s efforts to craft a budget Good Starting Point plan that is heavily focused on multiyear and ongoing solutions. As such, his proposal shows Reasonable Estimate of the Size of the Budget great promise to make substantial improvements Problem. Our initial assessment is that the in the state’s budgetary health—both in the short Governor’s budget provides a reasonable estimate run and over the long term. The administration, of the size of the budget problem the Legislature in fact, estimates that its plan would eliminate the and the Governor must address between now and state’s deficit—at least for the next three fiscal years. the time they agree to a 2011‑12 budget package. 8 Legislative Analyst’s Office www.lao.ca.gov 2011-12 BUDGET Our early assessment of the out‑year effects of the complex and cut across many aspects of govern‑ Governor’s budget is somewhat less favorable than ment, it is unsurprising that just one week into the the administration’s. Nevertheless, its adoption new administration’s term, there are areas where would go a long way toward eliminating the state’s specific implementation and practical details are persistent budget gap. missing. For example, the budget does not indicate specifically how much of the proposed savings in Governor Puts Some Bold Ideas on the Table the Department of Developmental Services (DDS) Restructuring the State-Local Relationship. would be achieved. This lack of detail should not The Governor’s budget includes a major “realign‑ preclude a prompt beginning to legislative consid‑ ment” of state and local program responsibilities. eration of any proposal. Nevertheless, the imple‑ It would shift $5.9 billion in state program costs mentation details—the administration’s approach to counties and provide a comparable amount of to navigating the legal and practical complexities funds to support these new county commitments. of many proposals—will determine the level of risk We believe there is much merit in the proposal and the corresponding likelihood of successful as decentralizing program delivery and authority implementation. As we have stated previously, we could promote program innovation, efficiency, and suggest that the Legislature favor budget solutions responsiveness to local conditions. that have a strong likelihood of actually achieving Overhauling Redevelopment. The budget budgeted savings or revenue increases. also puts forward dramatic changes in the area Some Savings Estimates Are Optimistic. As of local economic development, by proposing the we discuss in detail later in this report, our initial elimination of redevelopment agencies. We think review of the Governor’s budget suggests that in this makes sense, as the state’s costs associated with some key program areas, the administration’s esti‑ redevelopment have grown markedly over the years mated savings are optimistic. These areas include even though there is no reliable evidence that this some proposals in corrections, state employee program improves overall economic performance health plans, and In‑Home Supportive Services in the state. (IHSS). In addition, the budget plan includes $200 million of unallocated reductions to state Still…Some Significant Risks in the operations for efficiency purposes. In some cases, Governor’s Plan the administration has not provided significant Realignment and Redevelopment Proposals detail yet on how the savings from these proposals Pose Challenges. While the proposals on realign‑ would be achieved. Historically, such lack of detail ment and redevelopment have great promise, both often has been associated with budget actions will require considerable work by the Legislature that fail to produce the desired level of savings. to sort through many legal, financial, and policy Proposed budget solutions of over $1 billion could issues. Implementing these complex proposals in be affected, based on our very early review. a way that ensures the programmatic benefits and Much Would Depend on the Outcome of budgetary solutions will be challenging—especially the June Special Election. Under the Governor’s given the short time frame laid out in the budget proposals, around $12 billion of the proposed plan. budget solutions (tax extensions and changes to Many Details Still Need to Be Worked Out. As Proposition 10) will depend on voter approval in some of the solutions proposed by the Governor are the June special election. If the voters reject some www.lao.ca.gov Legislative Analyst’s Office 9 2011-12 BUDGET or all of these solutions, the Legislature would need proposals for departments, adopt clean‑up legisla‑ to promptly enact additional cuts or alternative tion needed to clarify elements of this complex revenue solutions prior to the start of the new fiscal budget package, and consider alternative budget‑ year in July. balancing solutions in case voters reject the June ballot measures. Legislature Needs to Act Quickly The Legislature Faces Many Critical Decisions Accelerated Timeline. If the Legislature accepts in the Coming Weeks. If the Legislature chooses the administration’s proposed approach for a the Governor’s proposal as a starting point, there June special election, the proposed timeline—to are still a number of critical questions to be adopt key budget‑balancing statutory measures by addressed, such as the Legislature’s preferred mix March 1—has significant advantages. Aside from of spending cuts and revenue increases, the amount the timing requirements for the special election of authority to be devolved to the administration in and the desire to provide voters a clear idea of the the form of unallocated or unspecified reductions Legislature’s path to balancing the budget, many of in some departmental budgets, and what actions the Governor’s proposals will require lead time to (if any) to put before the voters in a June special plan and implement. Given the proposed acceler‑ election. Also, although the Governor’s proposal ated budget process, the Legislature will need to contains many new ideas, there are a significant work quickly with the administration to develop number (such as those proposed in Medi‑Cal) details on each of the proposals and to develop that the Legislature has previously considered and well‑crafted legislation on how the solutions are to rejected. The Legislature will need to consider if a be implemented. If the Legislature chooses different change of approach to these proposals is appropri‑ solutions than those presented by the Governor, a ate at this time or whether there are alternative similarly accelerated timeline may still be needed actions that it prefers. In the coming weeks, we to maximize the opportunity to realize the full will work to provide additional guidance on the amount of budgeted solutions. In the months Governor’s proposals and, where appropriate, offer following March 1, the Legislature would have alternatives to them. the opportunity to review routine budget change ECONOMICS, REVENUE PROJECTIONS, AND TAX PROPOSALS The Governor’s budget package includes the e COnOmiC And R evenue F OReCAst administration’s forecast of national and state Economic Forecast economic activity and state revenues—including Current Modest Recovery Forecasted to its tax increase and other revenue proposals. (We Continue. The administration’s new economic fore‑ refer to the forecast of state revenues without the cast assumes continuation of the currently modest Governor’s revenue proposals as the “current‑law” economic recovery, including ongoing actions of revenue forecast.) This section first discusses the the Federal Reserve—through its support of low economic and current‑law revenue forecast of the interest rates and a policy known as “quantitative administration. Next, it describes the Governor’s easing”—to support the recovery. As shown in major revenue proposals. 10 Legislative Analyst’s Office www.lao.ca.gov 2011-12 BUDGET Figure 3, the administration’s January 2011 eco‑ legislation. As shown in Figure 3, the most recent nomic forecast is more pessimistic than our office’s U.S. economic forecast of IHS Global Insight, a May 2010 forecast, upon which the revenue esti‑ national forecasting firm, projects significantly more mates in the October 2010 state budget were based. robust growth in 2011 due in part to the federal tax The budget’s 2011 forecast reflects the economy’s measure. Currently, our office’s national economic generally disappointing performance in 2010 and outlook aligns more with that of IHS Global Insight. is quite consistent with the economic forecast our Accordingly, there appears to be some upside for office released in our November 2010 publication, the national economy in 2011. Since California’s California’s Fiscal Outlook. economy generally rises or fall with the U.S. Economic Forecast for 2011 May Be Too economy, this upside has the potential to affect state Pessimistic. In December 2010, Congress enacted revenues positively in 2010‑11 and 2011‑12. a major tax and unemployment benefits measure. 2012: Modest Recovery and Continued High Among other actions, this federal measure extended Unemployment. For 2012, as Figure 3 shows, the federal income tax cuts adopted during the prior administration’s new national economic forecast presidential administration, as well as long‑term tracks closely with that of IHS Global Insight. The unemployment insurance benefits. These actions feared “double‑dip” recession now seems quite appear to be reflected in the administration’s new unlikely. Like our office’s recent outyear forecasts, economic forecast. The administration notes, however, the administration’s forecast assumes that however, that its forecast does not consider the the economic recovery will continue to be modest new payroll tax relief, one component of the recent and the state unemployment rate will remain above federal legislation. This omission occurred because 10 percent for a prolonged period. Weak housing much of the administration’s work on the forecast markets and the depressed level of home building had to be completed prior to passage of the federal also should remain major drags on the California Figure 3 Comparing Governor’s Economic Projections With Recent Forecasts 2011 2012 Governor’s Governor’s LAO Budget IHS Global LAO Budget IHS Global Forecast— Forecast— Insight— Forecast— Forecast— Insight— May 2010a January 2011 January 2011 May 2010 January 2011 January 2011 United States Percent change in: Real Gross Domestic Product 3.0% 2.2% 3.2% 3.1% 2.9% 2.9% Employment 2.0 1.0 1.4 2.7 1.8 2.0 California Percent change in: Personal income 4.4 3.8 NA 4.4 4.0 NA Employment 0.9 1.5 NA 1.5 2.5 NA Housing permits (thousands) 70 74 NA 93 122 NA Unemployment rate (percent) 11.9 12.1 NA 10.9 11.3 NA a The assumptions for state revenue adopted in October 2010 in the 2010‑11 Budget Act were derived from our office’s May 2010 economic and revenue forecast. NA = Not applicable. IHS Global Insight does not produce state-level forecast information of this type. www.lao.ca.gov Legislative Analyst’s Office 11 2011-12 BUDGET economy. All of these factors are likely to depress · Various technical adjustments, including consumer confidence and, therefore, the willing‑ updated assumptions concerning accruals ness and ability of individuals and firms to spend of revenues to particular fiscal years. and invest for some time. California’s elected The bulk of the remainder of the decrease in leaders cannot count on the near‑term budgetary 2010‑11 current‑law revenues probably results problems of state and local governments to be largely from the new economic forecast. It appears solved by a rebounding economy. that these forecast‑related differences represent a relatively small portion of the $3.5 billion decrease. Current-Law Revenue Forecast 2011-12. In the current‑law revenue forecast Current‑law revenue forecasts project receipts for 2011‑12, General Fund revenues and transfers of taxes and other revenues, without incorporating drop from forecasted 2010‑11 levels by $7.2 billion proposed tax changes. The administration develops (7.9 percent) to a total of $83.5 billion. This decline a current‑law revenue forecast as part of its budget reflects the scheduled expiration in current law of development process. temporary increases in sales and use taxes (SUT), 2010-11. The administration now forecasts PIT, and VLF that were adopted by the Legislature current‑law General Fund revenues and transfers in February 2009. of $90.7 billion in 2010‑11. This is up by $3.7 billion The administration’s SUT estimate for 2011‑12 (4.2 percent) from 2009‑10 revenues, but down by is $1.3 billion lower than our November 2010 state $3.5 billion (3.7 percent) from the revenue forecast budget forecast, but $1.1 billion of this difference adopted with passage of the state budget in October results from the administration’s treatment of 2010. This $3.5 billion decrease from the 2010‑11 the 2010 “fuel tax swap” in its forecast. The swap budget act assumptions—including a $1.7 billion eliminated General Fund sales taxes on gasoline, decreased assumption for personal income tax but our November forecast assumed the swap (PIT) revenues—includes: would end in November 2011 due to the passage · A $782 million decrease due to recent federal of Proposition 26. By contrast, the administration tax changes resulting in the loss of all planned makes no such assumption in its current‑law fore‑ estate tax revenues in 2011 and 2012. cast. Furthermore, the Governor’s budget package proposes that the Legislature “re‑enact” the swap · About $400 million of decreased state with a two‑thirds vote. Accordingly, if one excludes revenue in 2010‑11 due to expected the fuel tax swap, the administration’s current‑law changes in taxpayer behavior as a result forecast is very similar to our November forecast of the recent federal tax legislation. The for SUT. Governor’s budget proposal assumes that taxpayers delayed realizing some capital LAO Comments gains, dividend, and other income from Administration’s Economic Forecast May Be 2010 to later due to the extension of lower Too Pessimistic for 2011. As described above, the tax rates for these items. effects of the recent federal tax legislation, among · Around a $400 million decrease resulting other factors, cause us to be somewhat more opti‑ from Proposition 22’s prohibition of the mistic than the administration about the course state borrowing of funds from certain of the national economy in 2011. The various transportation accounts. 12 Legislative Analyst’s Office www.lao.ca.gov 2011-12 BUDGET federal tax cuts, including the payroll tax, and the gains by taxpayers—an increase of 29 percent in extended unemployment benefits seem likely to 2011 and 24 percent in 2012. The huge amount of have a stronger near‑term stimulative effect on accumulated capital losses by investors resulting economic activity than reflected in the Governor’s from the implosion of financial, housing, and other budget forecast. This, in turn, should promote asset markets in recent years makes it particularly stronger economic activity in California in 2011. difficult to rely on such positive capital gains As shown in Figure 3, the administration’s forecast assumptions for purposes of budgetary planning. for U.S. gross domestic product growth in 2011 is Moreover, an enormous stock of corporate net about 1 percentage point below that of some other operating losses—carried forward from prior years, forecasters. As a rule of thumb, a 1 percentage point but unable to be used by firms through tax year increase in national economic growth translates 2011 due to provisions included in recent budgets— roughly to similar growth in the state economy and makes us somewhat cautious about the 2011‑12 revenues. baseline CT forecast as well. Initial Impression: Revenue Forecast Is G ’ R P OveRnORs evenue ROPOsALs Reasonable. For 2009‑10, 2010‑11, and 2011‑12 combined, our initial assessment is that the admin‑ The key feature of the Governor’s revenue istration’s revenue forecast is reasonable. Our early proposals is his request that the Legislature place impression is that there is somewhat more potential before voters in June 2011 measures that would for an “up side” to the revenue forecast than a extend for five years the four temporary tax “down side.” increases approved in February 2009: In 2010‑11, monthly “agency cash” revenues · A 0.25 percentage point increase in each of from the General Fund’s “Big Three” taxes (PIT, the state’s basic marginal rates for the PIT, SUT, and corporation tax [CT]) are about $1 billion which would be extended to apply to tax above the administration’s monthly forecast years 2011, 2012, 2013, 2014, and 2015. through December 2010. Recently, PIT withhold‑ · An extension (as above, for tax years 2011 ing—largely derived from wages and salaries—has through 2015) of the temporary reduction been running more than 10 percent above the of the PIT dependent exemption credit to same months from 2009. Sales taxes also have been the same level as the personal exemption performing reasonably well. We are optimistic that credit. (For the 2010 tax year, the personal these trends will continue for the rest of the fiscal exemption credit was $99. Prior to the year. Balancing this optimism, however, is the weak temporary tax increases, the dependent performance to date of CT revenues—$355 million exemption credit was $309.) (8.9 percent) below the 2010‑11 forecast through December—and our uncertainty that estimated · An extension of the 1 percent SUT rate PIT payments will meet monthly targets over the increase for fiscal years 2011‑12 through next six months. 2015‑16. This would maintain the state For 2011‑12, our initial impression is that the General Fund’s share of the total tax rate at current‑law revenue forecast appears reasonable. 6 percent. While the administration’s overall economic fore‑ · An extension of the 0.5 percent VLF cast is cautious, the budget package also assumes increase for fiscal years 2011‑12 through the resumption of significant growth in net capital www.lao.ca.gov Legislative Analyst’s Office 13 2011-12 BUDGET 2015‑16, maintaining the rate at would require companies to use the single sales 1.15 percent. factor method and (2) eliminate tax credits for certain investments made in enterprise zones. Increased Revenues for General Fund and Combined, these two proposals would increase Proposed Local Realignment Funds General Fund revenues by $811 million in 2010‑11 $9.6 Billion More Revenues and Transfers and $1.5 billion in 2011‑12. The administration’s for General Fund Over Two Years. As shown in General Fund estimates also assume $1.4 billion of Figure 4, the Governor’s budget package would new loans, transfers, or loan extensions from state increase General Fund revenues and transfers by special funds over the two fiscal years, a $362 million $9.6 billion over 2010‑11 and 2011‑12 combined. loan to the General Fund from the Unemployment Of this $9.6 billion, about $5.2 billion ($1.9 billion Compensation Disability Fund to pay the state’s in 2010‑11 and $3.3 billion in 2011‑12) consists of unemployment insurance loan interest obligations revenue from the proposed extension of the two to the federal government, and several other smaller temporary PIT increases described above. The revenue measures. Governor also proposes that the Legislature enact $5.9 Billion for Proposed Local Realignment two measures that would primarily increase CT rev‑ Funds in 2011-12. Under the Governor’s pro‑ enues, but also would increase payments by certain posal, voter approval to extend the temporary tax PIT filers. These two measures would: (1) replace the increases also would provide $5.9 billion of SUT optional single sales factor method for apportioning and VLF funds for the proposed local govern‑ a multistate or multinational firm’s taxable income ment realignment funds—outside of the General to California with an apportionment method that Fund—in 2011‑12. Over the five‑year extension, Figure 4 Governor’s Proposals Increase General Fund Revenues and Transfers by $9.6 Billion Over Two Years (In Billions) 2010-11 2011-12 Administration’s Total Administration’s Total Current-Law Governor’s Forecasted Current-Law Governor’s Forecasted Forecast Proposals Revenues Forecast Proposalsa Revenues Personal Income Tax $45.5 $2.3 $47.8 $46.2 $3.6 $49.7 Sales and Use Tax 26.7 — 26.7 24.1 — 24.1 Corporation Tax 10.8 0.7 11.5 9.7 1.2 11.0 Subtotals, “Big Three” ($83.0) ($3.0) ($86.0) ($79.9) ($4.8) ($84.8) Insurance Tax $1.8 — $1.8 $2.0 — $2.0 Vehicle license feeb 1.5 — 1.5 0.2 — 0.2 Sales of fixed assets 1.2 — 1.2 — — — Other revenues 2.3 — 2.3 2.2 $0.1 2.3 Net transfers and loans 1.0 $0.5 1.4 -0.8 1.2 0.5 Total Revenues and $90.7 $3.5 $94.2 $83.5 $6.1 $89.7 Transfers a Does not include proposed $4.5 billion of increased sales and use tax and $1.4 billion of vehicle license fee revenue, which would be deposited to local realignment funds— not the General Fund. b Revenues for 2011-12 consist of late receipts of prior years’ fees payable to the General Fund. 14 Legislative Analyst’s Office www.lao.ca.gov 2011-12 BUDGET these amounts would be expected to grow. The Large Elements of Governor’s Tax Proposals administration’s forecast assumes that the SUT and Are Sound, Policy-Based Proposals. In prior pub‑ VLF amounts grow to $7.3 billion in 2014‑15. lications and legislative testimony, we have voiced Estimates on Budget Proposals Incorporate support for enactment of several of the Governor’s New Accrual Method. Generally, the state oper‑ key revenue proposals: ates under an “accrual” accounting system that · Adoption of a mandatory single sales factor requires recognition of revenues and expenditures apportionment method for the income of to the fiscal year in which they are realized. The multistate and multinational firms. administration’s budget package estimates 2010‑11 · Elimination of enterprise zone tax credits. and 2011‑12 revenues from its PIT and CT proposals with a new budgetary accrual technique that accrues · Reduction of the PIT dependent exemption a portion of final payments to the prior fiscal year. credit to the same level as the personal Such final payments previously have been accrued to exemption credit. the same fiscal year in which they are received. The · Adoption of a VLF rate of around new accrual method increases estimated General 1 percent—similar to the base tax rate for Fund revenues in 2010‑11 and 2011‑12 (combined) other property. by $860 million. By changing year‑over‑year revenue growth, this method may affect calculation of the We recommend that the Legislature either Proposition 98 minimum funding guarantee. There approve these proposals and enact them into law may be legitimate accounting reasons to adopt the or, as the Governor suggests for the temporary tax new approach, but additional justification from the measures, submit a request to voters to approve the administration is needed. increases. Temporary PIT and SUT Rate Increases LAO Comments Merit Consideration. The proposed extension Basing Budget Plan on June 2010 Election of the temporary increases in the PIT and SUT Obviously Carries Some Risk. With a two‑thirds rates poses more difficult issues. The current rates vote of each house, the Legislature would have are some of the highest in the nation, and the the option of approving extensions of the tem‑ continuation of the rates would affect the work porary tax increases without resorting to a vote and investment decisions of many individuals and of the people. The Governor, however, proposes firms. On the other hand, as temporary increases, submitting the temporary tax increase measures they would have less negative impacts on economic to voters. These proposed temporary tax increases planning and decision making than permanent provide over $11 billion of the Governor’s proposed ones. More importantly, adoption of the proposed $26 billion in budget solutions. The proximity of temporary tax extensions would “buy time” for the the proposed early June 2010 special election date Legislature to develop additional ongoing solutions with the Legislature’s June 15 deadline for enacting in future years while delaying additional cuts on a balanced budget highlights the risks inherent in top of the billions of dollars in permanent spend‑ this approach. Should voters reject the measure, ing reductions already proposed by the Governor. the Legislature would have to ensure that alternate Accordingly, we think that the Governor’s proposed budget‑balancing measures were promptly put into tax extensions (or something similar) merit serious place. consideration. www.lao.ca.gov Legislative Analyst’s Office 15 2011-12 BUDGET STATE-LOCAL REALIGNMENT Major Proposals because the new realignment revenues would be allocated to counties, not the state. Major Realignment of State-Local Programs. Multiyear Approach. Parts of the administra‑ A centerpiece of the Governor’s budget proposal tion’s proposed realignment are phased in over is a major realignment of program duties, similar time. For example, the community supervision to the plan enacted by the state in 1991. In short, responsibilities sent to counties would expand over the Governor’s plan raises $5.9 billion in taxes, time as more state inmates were released from and shifts $5.9 billion to counties to implement prison. The administration estimates that counties increased program obligations. To enable counties would be responsible for about 18,500 parolees in to manage their increased fiscal responsibilities, the budget year, growing to 66,900 upon full imple‑ the administration proposes giving them increased mentation in 2014‑15. In addition, the Department authority over the realigned programs. of Forestry and Fire Protection (CalFire) would Although much of the Governor’s proposal continue to provide fire protection and medical makes sense, certain key elements—including the emergency response until local governments extent of county program authority and the meth‑ assumed these responsibilities. During the first odology for allocating funds—still are under devel‑ years of this realignment plan, therefore, some of opment. As such, the Legislature will have much the realignment revenues would be allocated to the work to do in reviewing the proposal, shaping it to state to pay for its costs to continue operating the meet its policy objectives, and potentially placing a realigned programs. funding measure before the state’s voters in June. The administration also indicates that it plans Proposed Revenues. Under the plan, the to propose in the future a second realignment state’s voters would decide whether to extend by (“Phase 2”) mainly involving health care and social five years two tax increases due to expire on services. June 30, 2011: a one cent sales tax and the 0.5 percent VLF General Fund rate. If the voters Key Issues approve these tax extensions, the revenues would Concept of Re-Sorting Program be dedicated to implementing the realignment Responsibilities Makes Sense. Several times over plan. After the taxes expire in 2016, the state would the last 20 years, the Legislature has achieved be responsible for providing local governments notable policy improvements by reviewing state‑ with replacement revenues, but these revenues are local program responsibilities and taking action to not specified in the plan. If voters do not approve realign program and funding responsibility to the the proposed tax extensions, the realignment plan level of government likely to achieve the best out‑ would not be implemented. The administration comes. In 1991, for example, the Legislature shifted indicates, however, that it would continue with state mental health responsibilities to counties, its plans to shift to counties the responsibility for giving counties a more reliable funding stream and certain lower‑level adult and juvenile offenders. The the authority to develop innovative and less costly administration indicates that it did not include the approaches to providing services. While implemen‑ $5.9 billion realignment revenues in its calculation tation of realignment proposals has been complex, of Proposition 98’s minimum funding guarantee the net result of these changes is that California 16 Legislative Analyst’s Office www.lao.ca.gov 2011-12 BUDGET state and local governments have better ability to Most of the Programs in the Administration’s implement their programs successfully. Plan Make Sense. Figure 5 (see next page) summa‑ Could the state improve other program out‑ rizes our initial review of the programs proposed comes by further realigning state‑local responsibili‑ for inclusion in the administration’s realignment ties? If so, which programs should the state control plan. Most of the programs we list in the first group and which should local government control? While (“Programs Suited for Realignment”) are ones that there is no single “right” answer to these questions, this office previously has proposed for realignment we find that programs tend to be more effectively to local government. In our view, decentralized controlled by local government if (1) the program is program delivery and authority could promote closely related to other local government programs, program innovation, efficiency, and responsiveness (2) program innovation and experimentation are to local conditions, and these potential program desired, and (3) responsiveness to local needs and benefits outweigh whatever benefits are realized priorities is important. In addition, assigning full from the programs being uniformly administered control over program governance and financing at the state level. to a single level of government has the benefit of Very few programs in this first group, however, reducing fragmentation of government programs could be realigned without addressing some sig‑ and focusing accountability for program outcomes. nificant legal or policy issues. Most notably, in the The Legislature will need to carefully assess case of the administration’s plan to realign Child these issues in crafting realignment proposals, as Welfare Services, the Legislature would need to once implemented, they can be very difficult to address how a decentralized system could work modify. (The nearby box lists LAO reports that with a federal government that sets regulations, provide a more extensive discussion of program oversees program performance, and assesses state realignment.) penalties when performance is inadequate. LAO R R eALiGnment ePORts Over the years, our office has pub‑ Report Years lished numerous Parole Realignment and the 2008‑09 Budget 2008 reports (see list) on Realignment and the 2003‑04 Budget 2003 the subject of state Realignment Revisited: An Evaluation of the 1991 Experiment 2001 and local program In State‑County Relations realignments. With The Governor's 1995‑96 State‑County Realignment Proposal 1995 one exception, all of Making Government Make Sense: Applying the Concept 1993 the reports were pub‑ In 1993‑94 lished in “Part V” of Making Government Make Sense: A More Rational Structure 1993 For State and Local Government the Perspectives and Issues in February of the year shown. Making Government Make Sense: Applying the Concept in 1993‑94 was published separately in May 1993. These reports are available on our website: www.lao.ca.gov. www.lao.ca.gov Legislative Analyst’s Office 17 2011-12 BUDGET In addition, one program in this first group— appropriate because it would consolidate related AB 3632 Services—merits realignment, but not pots of money for behavioral (substance abuse and in the manner proposed by the administration. mental health) services. These changes could allow Instead, schools should have programmatic and counties to spend these funds more flexibly and financial responsibility for this program providing better coordinate mental health services with other mental health services to special education pupils. county‑run programs, such as a realigned drug While schools may wish to contract with county and alcohol treatment system and rehabilitation mental health departments to provide these pro‑ programs for criminal offenders. At the same time, grams, the primary fiscal and program responsibil‑ however, we note that federal health care reform ity should reside with schools. expands the number of persons eligible to receive Realigning Some Programs Merits Careful Medi‑Cal mental health services beginning in 2014. Review. The second group of programs in Consolidating behavioral health programs with Figure 5—the Early and Periodic Screening, counties could limit the state’s options for better Diagnosis and Treatment Program (EPSDT), coordinating mental health services with other Mental Health Managed Care, Substance Abuse Figure 5 Treatment, and Existing Which Programs Are Suited for Realignment? Community Mental LAO Initial Review of Governor’s 2011-12 Realignment Plan Health Services—merit (In Millions) careful legislative con‑ 2011-12 2014-15 sideration for several Programs Suited for Realignment reasons. First, the admin‑ Fire and Emergency Response Activities $250 $250 Local Public Safety Programs 506 506 istration proposes to use Local Jurisdiction for Lower-Level Offenders and Parole 1,802 908 Proposition 63 funds to Violatorsa Adult Parole to the Countiesa 741 410 pay the first year costs of Juvenile Justice Programs 258 242 the three of these pro‑ Adult Protective Services 55 55 grams (EPSDT, Mental AB 3632 Servicesb — 104 Foster Care and Child Welfare Services 1,605 1,605 Health Managed Care, Program Meriting Consideration and AB 3632), a use of this Substance Abuse Treatment 184 184 measure’s funds that may Early and Periodic Screening, Diagnosis and Treatment — 579 not be permissible. Programb Mental Health Managed Careb — 184 Second, realigning Existing Community Mental Health Services — 1,077 EPSDT, Mental Health Program Not Suited for Realignment Managed Care, and Court Security 530 530 Substance Abuse Unallocated Revenue Growth — 621 Treatment raises questions Totals (Administration Estimates) $5,931 $7,255 regarding program flex‑ 1% Sales Tax $4,549 $5,567 ibility and the implemen‑ 0.5% Vehicle License Fee 1,382 1,688 Total Revenues (Administration Estimates) $5,931 $7,255 tation of federal health a Costs decline by 2014-15 as state reimbursements end. Funding in 2014-15 assumes this program is care reform. Realigning fully county operated and at lower costs. b First-year costs for this program are paid from Proposition 63 resources. these programs appears 18 Legislative Analyst’s Office www.lao.ca.gov 2011-12 BUDGET Medi‑Cal services across the state. Thus, although would require achieving a broad consensus among this office previously has recommended realigning many parties. Achieving this broad consensus most behavioral health programs to counties, we within the timeframe to prepare a measure for the recommend the Legislature consider these factors June ballot will be difficult. Counties are likely to before including these programs in the realignment have many questions about the source of revenues plan. to replace the sales tax and VLF in five years, the Finally, the last program in this category extent of program authority that will be transferred includes all mental health services funded under to counties, the initial program funding levels, the 1991 realignment plan. The administration the potential for future state increases in county proposes to include these programs within its 2011 program requirements, and whether the rate of realignment plan—and allow use of the mental realignment revenue growth will match the rate of health funds from the 1991 realignment plan for program growth. other purposes. Because very few details regard‑ Fiscal Estimates Require Further Review. ing this change are available, we cannot assess the Although most of the administration’s estimates merits of this component of the plan. regarding the fiscal impact of the proposed Court Security Shift Is Problematic. While realignment programs appear reasonable, some the state is now responsible for the operations of of the estimates require further examination. For the trial courts, current law requires that security example, our preliminary review indicates that the for the trial courts generally be provided by county administration may be double counting certain sheriffs at a cost to the state. Under the administra‑ savings associated with shifting adult and juvenile tion’s realignment plan, state funding to pay for offenders to counties. That is, the administration security for trial courts would be shifted to counties scores the same savings twice—in the realignment and state General Fund support in the judicial plan and as part of the department’s budget. Our budget for court security would be reduced by a preliminary review also indicates that the realign‑ commensurate amount. In our view, this approach ment plan understates the cost of the AB 3632 does not make sense. While control of funding program by up to about $200 million. for court security would be shifted to counties, Alternatives the state judicial system would continue to be responsible for the overall operation of the courts. Could the Legislature Change the Mix of Absent financial control, the courts would have dif‑ Programs? There is no perfect list of programs ficulty ensuring that the sheriffs provided sufficient to realign. The Legislature could modify the security measures. We believe a better and more Governor’s proposed list of programs to meet its cost‑effective approach would be to (1) clarify that policy objectives. In considering alternative pro‑ the state is responsible for trial court security and grams for inclusion in realignment, we recommend (2) adopt a separate state law change authorizing the Legislature: the state to use competitive bidding by various · Focus on programs where innovation, private or public entities, including sheriffs, for the responsiveness to community interests, and provision of these security services. efficiency are paramount. Need to Address Local Concerns. Given the requirements of the California Constitution and · Avoid programs where statewide unifor‑ voter‑approved measures, enacting realignment mity is important, where statewide benefits www.lao.ca.gov Legislative Analyst’s Office 19 2011-12 BUDGET are the overriding concern, or where the avoid adding programs to the realignment package primary purpose of the program is income that are inconsistent with the concept of realign‑ redistribution. ment—or programs over which the Legislature is unwilling to grant counties greater control. Our initial review suggests that there are Conversely, should the Legislature determine other programs to consider for realignment. For that it wishes to raise fewer revenues than it wishes example, the Legislature could consider realign‑ to realign programs, we recommend the Legislature ing pharmaceutical costs for Medi‑Cal patients avoid deleting programs from the realignment receiving specialty mental health services to the package. Instead the Legislature could finance the counties, thereby ensuring that all costs for provid‑ realignment plan, in part, by redirecting existing ing services to patients are consolidated. It could state or local revenues. also consider going back to the voters to allow Is it Possible to Implement Realignment the permanent realignment of all Proposition 63 Without Raising Taxes? While realignment often is funding to counties, along with increased flexibility associated with tax increases, it need not be imple‑ in the use of these funds. Finally, the Legislature mented that way. Although it would be difficult in could consider realigning funding and responsibil‑ light of the state’s fiscal difficulties, the Legislature ity to the counties to provide treatment to persons could enact realignment by earmarking a portion determined by the courts to be incompetent to of existing state revenues as the dedicated revenues stand trial for criminal offenses. We will continue for realignment. to explore these and other options. Addressing Legal Complexities in State Could the Legislature Change the Scale of Ballot Measure. The administration’s plan will Realignment? Realignment, implemented cor‑ require considerable work by the Legislature to rectly, can improve the management and delivery sort through many legal, financial, and policy of programs. For this reason, we believe the issues. Certain voter‑approved measures also Legislature’s decision to realign a program should will constrain the Legislature’s authority to shift focus on program policy objectives—not simply on program responsibilities to counties and redirect raising a specific amount of revenues. To that end, the use of mental health funds. For example, we recommend that the Legislature begin its work Proposition 63 may not permit the proposed shifts by identifying programs that would benefit from in mental health funds. In addition to requesting realignment. Should the Legislature determine that voter approval for any proposed tax increase, the it wishes to raise more revenues than it wishes to Legislature also may wish to request voter approval realign programs, we recommend the Legislature of these elements of the realignment plan. REDEVELOPMENT Major Proposals enterprise zones (discussed previously). To give communities greater capacity to promote economic Shift Responsibility for Local Economic development, the administration indicates that it Development. The administration proposes a sub‑ will support a constitutional amendment to allow stantive shift in responsibility for local economic local voters to approve tax increases and general development programs. The budget phases out obligation bonds for these purposes by a 55 percent state authorization for two economic development majority. programs: redevelopment (discussed below) and 20 Legislative Analyst’s Office www.lao.ca.gov 2011-12 BUDGET Phase Out Redevelopment. For more than 50 · The additional K‑14 district property years, state law has authorized cities and counties taxes would augment their existing to create redevelopment agencies. The administra‑ state funding (not offset state education tion proposes to revise these laws to (1) dissolve the spending) and would be distributed to state’s 425 redevelopment agencies and (2) transfer districts throughout the county based their revenues (primarily, over $5 billion of annual on enrollment. property tax revenues) to local successor agencies. · The property taxes that otherwise The successor agencies would use these funds to would be distributed to enterprise retire redevelopment debts and contractual obliga‑ special districts would be allocated tions and make other payments described below. instead to counties. (These districts The successor agencies also would shift any unspent primarily are fee‑financed water and redevelopment housing funds to local housing waste disposal districts.) authorities to use for low‑ and moderate‑income housing. Key Issues Use of Funds in First Year. In 2011‑12, the successor agencies would use the redevelopment Proposal Has Merit . . . Shifting responsibility revenues to: for local economic development to local govern‑ · Pay redevelopment debts and obliga‑ ments makes sense. Local communities are in the best position to determine the types of programs tions, estimated by the administration and assistance needed to promote development to cost $2.2 billion. in their communities. Ending state‑assisted local · Offset $1.7 billion of state Medi‑ economic development programs like redevelop‑ Cal ($840 million) and trial court ment also makes sense. Redevelopment projects ($860 million) costs. divert property taxes from K‑14 districts, increasing state education costs by billions of dollars annually. · Allocate $1.1 billion to schools and The state’s costs associated with redevelopment other local agencies pursuant to has grown markedly over the last couple decades, current laws that require redevelop‑ yet we find no reliable evidence that this program ment agencies to “pass through” some improves overall economic development in of their funds to affected local agencies. California. Finally, recent passage of Proposition 22 · Distribute $210 million to cities, coun‑ limits the Legislature’s authority to modify the ties, and special districts in proportion scope of redevelopment to reduce its costs on the to these agencies’ current shares of the state or local agencies. property tax. . . . But Faces Considerable Implementation Issues. The administration’s plan will require Use of Funds in Future Years. Beginning in considerable work by the Legislature to sort 2012‑13, any property tax revenues remaining after through many legal, financial, and policy issues. the successor agencies pay redevelopment debt Several voter‑approved constitutional measures, for would be distributed to other local governments in example, constrain the state’s authority to redirect the county. Distributions of these revenues generally redevelopment funds, use property tax revenues to would follow provisions in existing law, except that: pay for state programs, or impose increased costs www.lao.ca.gov Legislative Analyst’s Office 21 2011-12 BUDGET on local agencies. In addition, the administration’s distribution of these new property tax revenues plan does not address many related issues, such further complicates an already complicated school as clarifying the future financial responsibility for finance system. low‑ and moderate‑income housing (currently, a Need to Pause New Redevelopment Activities. redevelopment program). Developing the statutory measures to implement Redevelopment Debt Costs May Be this important, but complex, proposal will take Understated. Although the administration’s considerable work by the Legislature. During this approach to estimating the annual cost of redevelop‑ time—potentially several weeks or months—it is ment debt is reasonable, their assumptions regarding possible that redevelopment agencies could take debt terms, interest rates, and other factors err on actions that increase their bonded indebtedness the side of understating debt costs. Our initial review and contractual obligations. If so, these new finan‑ indicates that the annual cost to pay these debts cial obligations could constrain the state’s ability to could be $1 billion or more higher than the admin‑ redirect redevelopment revenues and to realize the istration assumes. If our initial review is correct, this state savings and local benefits anticipated in the would reduce the funds available for other purposes. administration’s proposal. Accordingly, we recom‑ For example, the Legislature may not be able to use mend that the Legislature pass urgency legislation $1.7 billion of these revenues for state programs and as soon as possible prohibiting redevelopment make $1.1 billion in pass‑through payments to local agencies—during this period of legislative review— governments. from taking actions that increase their debt. Rationale for Increased School Funding Not Specifically, the urgency legislation would prohibit Clear. The rationale for providing school districts redevelopment agencies from (1) taking on any new with property tax revenues in addition to their debt that would be included on their Statement of existing property taxes is not clear. The administra‑ Indebtedness—the statement that identifies redevel‑ tion’s proposal does not devolve more responsibili‑ opment agency debt and makes the agency eligible ties to school districts. The distribution of these for property tax revenues, or (2) creating, amending, additional school property tax revenues would be or extending any redevelopment project areas. This uneven throughout the state, with schools in 15 approach would preserve the Legislature’s options as counties (where there is little or no redevelopment) it reviews the administration’s proposal, but would not getting additional property taxes and schools not have a lasting effect on redevelopment agencies if in counties (where there is extensive redevelop‑ the Legislature elects not to adopt it. ment activity) receiving significant sums. The EXPENDITURE PROPOSALS P ROPOsitiOn 98 reduces total Proposition 98 spending by less than 1 percent from the current year to the budget year. As Major Proposals shown in Figure 6, K‑12 funding would change neg‑ Proposition 98 funds K‑12 education, child care, ligibly from 2010‑11 to 2011‑12. By comparison, CCC the California Community Colleges (CCC), and funding would be reduced $361 million or 6.3 percent. various other state agencies (including the state special The Governor’s Proposition 98 plan includes no cost‑ schools and juvenile justice). The Governor’s budget of‑living‑adjustments but funds enrollment growth for 22 Legislative Analyst’s Office www.lao.ca.gov 2011-12 BUDGET K‑12 education (0.22 percent) and CCC (1.9 percent). programmatic funding per student decreases by Below, we discuss Proposition 98 K‑14 and child care about $100 or 1.4 percent from 2010‑11 to 2011‑12. issues in more detail. In the higher education section, Most of the decline in K‑12 per student funding is we discuss various other community college issues attributable to the loss of federal stimulus funding (such as student fees) in more detail. (though many districts reserved a significant Assumes Tax Package Adopted, Funds portion of their federal education jobs funding Minimum Guarantee. The Governor’s proposal for 2011‑12, thereby mitigating the cliff effect). funds Proposition 98 at the minimum guarantee As shown in Figure 7 (see next page), K‑12 per in 2011‑12. The proposed spending level assumes student programmatic funding in 2011‑12 would be adoption of the Governor’s tax plan to raise 6.4 percent lower than the 2007‑08 level. $4.8 billion in additional state General Fund rev‑ Figure 8 (see page 25) lists the budget’s major enues, primarily from the extension of higher per‑ Proposition 98 spending proposals for 2011‑12, the sonal income tax rates. These additional revenues most significant of which are discussed in more increase the Proposition 98 minimum guarantee detail below. by $2 billion in 2011‑12. Absent these additional Proposes Large New Deferrals. The most revenues, the minimum guarantee would have substantial component of the Governor’s fallen year over year whereas, with the additional Proposition 98 plan consists of $2.2 billion in new revenues, the guarantee stays virtually flat. (The inter‑year deferrals from 2011‑12 to 2012‑13— Governor’s proposals to maintain higher rates for $2.1 billion from K‑12 revenue limit payments the sales tax and the vehicle license fee would not and $129 million from CCC apportionment pay‑ increase the Proposition 98 minimum guarantee ments. Although the administration has not yet since those revenues would flow directly to local determined from which months K‑12 revenue limit governments for realignment.) payments would be deferred, it has indicated that K-12 Programmatic Funding Declines Slightly deferrals likely would not be repaid until September Year Over Year. Under the Governor’s plan, K‑12 or October of 2012. For community colleges, the Figure 6 Proposition 98 Funding (Dollars in Millions) Change From 2010-11 2009-10 2010-11 2011-12 Final Revised Proposed Amount Percent K-12 Education General Fund $31,732 $32,239 $32,401 $162 0.5% Local property tax revenue 12,328 11,557 11,406 -152 -1.3 Subtotals ($44,060) ($43,796) ($43,807) ($11) (—) California Community Colleges General Fund $3,721 $3,885 $3,542 -$343 -8.8% Local property tax revenue 2,000 1,892 1,873 -19 -1.0 Subtotals ($5,721) ($5,777) ($5,415) (-$361) (-$6.3%) Other Agencies $93 $85 $78 -$7 -8.7% Totals, Proposition 98 $49,874 $49,658 $49,300 -$358 -0.7% General Fund $35,546 $36,209 $36,021 -$188 -0.5% Local property tax revenue 14,327 13,449 13,279 -170 -1.3 www.lao.ca.gov Legislative Analyst’s Office 23 2011-12 BUDGET deferral would be made from apportionment pay‑ reform proposals (discussed later in the report). ments otherwise made in January through May With regard to the 35 percent rate reduction, the of 2012 and also would likely not be repaid until administration proposes providing local agencies September or October of 2012. (In addition to discretion over how to translate lower subsidies the inter‑year deferrals, the Governor proposes to into reduced payments to child care providers, continue intra‑year deferrals to help with the state’s with the expectation that child care slots and cash flow problems. The Governor’s intra‑year days of service remain the same. The savings deferral plan would delay $2.5 billion in K‑12 pay‑ resulting from these proposals would be offset by ments and $200 million in CCC apportionments a $256 million increase to the CalWORKs Stage 3 beginning in July 2011, reflecting the same magni‑ program—reflecting a proposed restoration of an tude as the 2010‑11 intra‑year deferrals.) earlier budget act veto. After accounting for various Significantly Reduces Child Care Funding. other federal and state adjustments, the Governor’s The Governor proposes to achieve $750 million 2011‑12 proposal would reduce total funding for in Proposition 98 child care savings by making Proposition 98‑supported child care programs by four major policy changes: (1) reducing child about $652 million (29 percent) and child care slots care subsidies by about 35 percent; (2) reducing by about 9,900 (3 percent) compared to 2010‑11. income eligibility for subsidized child care from Proposes Various Other Changes. The 75 percent to 60 percent of state median income Governor proposes a $400 million reduction to (SMI), (3) eliminating subsidized child care for community college apportionments. In addition, 11‑ and 12‑year olds, and (4) reducing California the Governor reduces Proposition 98 funding for Work Opportunity and Responsibility to Kids the Division of Juvenile Facilities by $8.7 million (CalWORKs) Stage 2 caseload based on CalWORKs to reflect a three‑year phase‑out linked with his Figure 7 K-12 Programmatic Fundinga (Dollars in Millions Unless Otherwise Specified) 2007-08 2008-09 2009-10 2010-11 2011-12 Final Final Final Revised Proposed Programmatic Funding K-12 ongoing fundingb $48,883 $43,215 $40,717 $42,945 $43,131 New payment deferrals — 2,904 1,679 1,719 2,063 Settle-up payments — 1,101 — 267 — Public Transportation Account 99 619 — — — Freed-up restricted reservesc — 1,100 1,100 — — ARRA fundingc — 1,192 3,575 1,192 — Federal education jobs fundingc — — — 421 781 Totals $48,982 $50,130 $47,070 $46,544 $45,975 Per-Pupil Programmatic Funding K-12 attendance 5,947,758 5,957,111 5,933,761 5,951,826 5,964,800 K-12 per-pupil funding (in dollars) $8,235 $8,415 $7,933 $7,820 $7,708 Percent Change From 2007-08 — 2.2% -3.7% -5.0% -6.4% a Excludes federal funds not associated with stimulus package, lottery, and various other local funding sources. b Includes ongoing Proposition 98 funding, Proposition 98 accounting adjustments, and funding for the Quality Education Investment Act. c Reflects LAO estimates of funds spent in each year. 24 Legislative Analyst’s Office www.lao.ca.gov 2011-12 BUDGET realignment proposal and provides no funding of existing K‑14 fiscal relief options. For both school authority for the state’s student and teacher districts and community colleges, the Governor data systems pending a comprehensive review proposes to extend “categorical flexibility” from of the two projects. In contrast to the proposed 2012‑13 through 2014‑15. (With this flexibility, reductions, the Governor proposes two notable school districts can use the funding associated with K‑12 augmentations. First, the Governor provides about 40 categorical programs for any educational $90 million to cover the ongoing cost of about purpose and community colleges can use the 35 K‑14 mandates. Though this is the same level funding associated with about a dozen programs of support as provided in the current year, the for any categorical‑program purpose.) For school state used one‑time funds in 2010‑11. Second, the districts, the plan also would extend the existing Governor provides $43 million in ongoing funding K‑3 Class Size Reduction (CSR) rules from 2011‑12 (and $11 million in one‑time funding) for the through 2013‑14. (These rules apply more modest Emergency Repair Program. This program provides funding reductions to K‑3 classes that exceed 20 grants to low‑performing schools to pay for school students.) Additionally, for school districts, the facility repairs that are needed for public health or Governor proposes extending for two years the safety reasons. (In response to a lawsuit, the state existing statutory provisions that reduce routine adopted statute specifying that it would provide a maintenance requirements, suspend deferred total of $800 million for the program. To date, the maintenance requirements, postpone instructional state has provided $338 million.) materials purchases, and lower unrestricted budget Extends Flexibility Provisions Two Years. The reserve requirements. Governor’s plan also includes a two‑year extension Eliminates the Office of the Secretary of Education (OSE). To help streamline the state’s K‑12 Figure 8 governance structure, the Major Proposition 98 Spending Changes Governor’s budget elimi‑ 2011‑12 (In Millions) nates OSE. Eliminating Proposed Changes Amount OSE would result in Backfill prior-year one-time K-14 actions $2,167 non‑Proposition 98 Fund K-12 revenue limit cost increases 470 General Fund net savings Make various other K-14 adjustments 96 Fund ongoing K-14 mandates 90 of roughly $400,000 in Fund Emergency Repair Program 43 the current year and Defer K-12 revenue limit payments -2,064 $1.6 million in the budget Eliminate Special Disabilities Adjustment -74 Make technical reduction to Economic Impact Aid -54 year. Phase out Department of Juvenile Facilities funding -9 Restore CalWORKs Stage 3 child care veto 256 Key Issues Reduce child care subsidies by 35 percent -577 Reduce child care income eligibility ceiling to 60 percent of SMI -79 Magnitude of Cuts Eliminate child care eligibility for 11- and 12-year olds -59 in Each Area Could Be Reflect Stage 2 child care savings from CalWORKs reforms -34 Reexamined. In building Reduce CCC apportionments -400 Defer CCC apportionment payments -129 his plan, the Governor Total Changes -$358 reflected his priori‑ SMI = state median income. ties—largely to insulate www.lao.ca.gov Legislative Analyst’s Office 25 2011-12 BUDGET school districts from further cuts while notably proposals. Specifically, we think the Governor’s reducing the state’s child care programs and requir‑ proposal to lower the income eligibility ceiling to ing a significant cut to the community colleges. In 60 percent of SMI is reasonable in that it targets building its Proposition 98 package, the Legislature services for the neediest families. Similarly, the pro‑ has many factors to consider, such as the different posal to lower the age limit merits consideration. populations, needs, programmatic quality, and While we know of no other state that limits sub‑ public benefits of K‑12 education, community sidized child care to children 10 or younger (most colleges, and child care. After weighing the asso‑ states set maximum age at 12 or 13), California ciated trade‑offs, the Legislature may want to funds an extensive before and after school program consider distributing Proposition 98 reductions in which slots could be prioritized for displaced 11‑ differently among the three areas. and 12‑year olds. We have serious implementation Further Reliance on Deferral Raises concerns, however, with the proposed 35 percent Important Questions. The state’s reliance on across‑the‑board rate reduction. This proposal deferrals over the past several years has placed would result in a substantial reduction to provider a large cash flow burden on school districts and rates that are already below federal guidelines, community colleges. At existing levels, 16 percent and it raises questions as to what quality of care of 2010‑11 Proposition 98 program will be paid in such low payments would be able to purchase. 2011‑12. Under the Governor’s proposal, 20 percent Furthermore, ceding authority to local organiza‑ of 2011‑12 Proposition 98 program would be paid tions (which are in most cases not public agencies) in 2012‑13. Nonetheless, adopting deferrals would to implement the reduction by adjusting provider help mitigate the reductions that districts and rates and family copayments in different ways likely community colleges otherwise would need to make would lead to further inconsistencies in the avail‑ in 2011‑12. We are concerned, however, that addi‑ ability and quality of care. tional deferrals would continue the deterioration of Some Savings Potentially Unachievable. We school district and community college fiscal health believe that up to $128 million of the Governor’s and could result in the need for state emergency anticipated Proposition 98 savings cannot be loans to avoid insolvency. These deferrals would realized. Specifically, the Governor assumes a be especially problematic if, as indicated by the $54 million technical reduction to the Economic administration, they are not paid until the fall of Impact Aid (EIA) program given the program 2012 (all existing deferrals are paid by August). has not spent all budgeted funds in recent years. The intra‑year deferrals further exacerbate the However, the state already has made substantial situation—in essence deferring already‑deferred downward adjustments to EIA base funding payments until even later in the next fiscal year. amounts in recent years, and newly released data Combined, the inter‑year and intra‑year deferrals indicate very little of the 2010‑11 appropriation will could result in school districts and community col‑ go unused. Combined with the projected growth leges facing significant cash flow difficulties in the in K‑12 enrollment, this information suggests summer and fall of 2012. the Governor’s estimates are overly optimistic. Approach to Child Care Reductions Has Some Additionally, the Governor assumes $74 million Merit, Some Serious Flaws. We believe two of the in savings due to the sunset of one component of Governor’s child care proposals merit consideration the state’s special education program known as the whereas we have serious concerns with one of the Special Disabilities Adjustment. We believe making 26 Legislative Analyst’s Office www.lao.ca.gov 2011-12 BUDGET this reduction could violate federal maintenance‑ positions. Additionally, we continue to recommend of‑effort (MOE) requirements, in which case the linking categorical “flex” funding to average daily state would need to continue providing the same attendance, thereby assuring that the associated amount of funding for some other special educa‑ funding remains connected to students. We also tion purpose. think the Governor and Legislature could make more significant strides toward improving the K‑12 Alternatives for Legislative Consideration school finance system by not merely extending the Other Child Care Options Could Be Better sunset for the existing flexibility provisions but by Than Across-the-Board Reduction. After contem‑ thinking about how to strategically redesign the plating the desired mix of Proposition 98 reduc‑ state’s K‑12 school finance system such that it better tions, the Legislature could consider a different serves districts and the public in both the short and combination of policy changes to realize child care long term. savings. In making these changes, we recommend H e iGHeR duCAtiOn using the guiding principle of prioritizing services for the most needy families and children. The Major Proposals Governor’s proposals to reduce income and age Sizable General Fund Reductions for All eligibility ceilings meet this criterion. To generate Segments. The Governor’s budget includes unallo‑ additional savings, the Legislature could further cated $500 million General Fund reductions for the reduce eligibility below the proposed 60 percent University of California (UC) and the California of SMI and age ten. Other options the Legislature State University (CSU). The Governor intends that could consider in lieu of reducing subsidies by these reductions be achieved primarily by reduc‑ 35 percent include: more moderate, statewide ing instructional cost. The budget also includes a reductions to provider rate ceilings for licensed $400 million reduction in general purpose “appor‑ and/or license exempt providers; increasing paren‑ tionment” funding for the community colleges, and tal fees; and reducing the amount agencies receive proposes unspecified changes in funding formulas. for program administration and parental support. Tuition Increases for All Segments. The UC Could Go Further in Providing More and CSU have already approved tuition increases Flexibility, Improving School Finance System. of 8 percent and 10 percent, respectively, for the While extending the flexibility provisions by two 2011‑12 academic year. Total tuition revenue for years provides additional fiscal relief to districts, the universities is estimated to increase by about the Governor’s plan misses some opportunities to $400 million, supporting core programs and further expand flexibility. For example, as recom‑ campus‑based financial aid. The Governor mended last year, we continue to recommend the proposes to increase community college fees from state extend flexibility to three of the state’s largest $26 per unit to $36 per unit, generating about stand‑alone K‑12 categorical programs—K‑3 CSR, $110 million in additional revenue that would in Home‑to‑School Transportation, and After School effect fund enrollment growth of almost 23,000 Safety and Education. We also continue to recom‑ full‑time equivalent (FTE) students. mend consolidating career technical education Full Funding for Financial Aid Programs. programs and removing certain restrictions related Unlike his predecessor, the Governor proposes no to contracting out for noninstructional services reductions in existing financial aid programs. The as well as priority and pay for substitute teaching budget proposal includes augmentations to fully cover www.lao.ca.gov Legislative Analyst’s Office 27 2011-12 BUDGET fee increases in the Cal Grant programs, and assumes savings by reducing the universities’ current‑year full fee waivers at the community colleges covering augmentations. Such an approach would smooth more than one‑half of all credit FTE students. out the volatility of augmentations and cuts that Major Financial Aid Fund Shift. The would otherwise result. Evidence suggests that the Governor’s proposal would shift $947 million in universities were already preparing for smaller Cal Grant costs from the General Fund to federal current‑year augmentations prior to enactment Temporary Assistance for Needy Families (TANF) of the budget in October. This alternative would funds. This fund swap would have no net effect bring the universities’ current‑year funding on total funding for Cal Grants. As discussed more into line with those contingency plans, and later in the report, the TANF funds would be would preserve more funding for the segments provided through an interagency agreement with to provide education services in the budget year. the Department of Social Services, whose TANF This would allow additional time for the state funding would be freed up by the Governor’s pro‑ to seek alternative savings for the future, or for posed cuts in CalWORKs. the segments to align their out‑year costs with projected funding levels. Key Issues Ensure Reductions Meet Legislature’s University Cuts Needed, but Volatility an Expectations. The Legislature could amend the Issue. Volatility in public funding is one of the budget package to specify how the segments persistent challenges universities confront in man‑ accommodate General Fund reductions. For aging their operations. The universities received example, it could specify the number of FTE a double‑digit General Fund augmentation in the students it expects the universities to enroll and current year, followed by the Governor’s even larger the maximum tuition levels the universities proposed reduction for 2011‑12. Efforts should be should charge. To ensure compliance, General made to smooth out these peaks and valleys, while Fund appropriations could be tied to the meeting still achieving needed General Fund savings. of these expectations. Similarly, the Legislature Unclear How Segments Would Accommodate could specify whether it will permit CCC to reduce General Fund Cuts. Although the administration overall funded enrollment, and how it expects cam‑ intends that the segments’ General Fund reductions puses to prioritize course enrollment. For example, be achieved primarily through cost reductions and the Legislature could limit the total number of increased efficiency, the proposed budget package taxpayer‑subsidized credit units that students may includes no language that would ensure such an earn at a community college. outcome. In the past, the segments have responded Develop Longer-Term Fee Strategy for to unallocated cuts in a variety of ways, including Community Colleges. The Governor’s proposal midyear tuition increases, enrollment reductions, to increase community college fees makes sense, and furloughs, as well as some efforts at increased because California’s fees are by far the lowest in the efficiency. country, and existing financial aid programs shield low‑ and moderate‑income students from paying Alternatives for Legislative Consideration fees. Moreover, federal tax credit programs ensure Shift Part of Universities’ Cuts to Current that most fee‑paying students will be reimbursed Year. Rather than impose a $500 million cut for the fees they pay, up to about $60 per unit. For for each university in the budget year, the this reason, the Legislature could increase fees Legislature may wish to achieve part of that 28 Legislative Analyst’s Office www.lao.ca.gov 2011-12 BUDGET beyond the $36 per unit proposed by the Governor in which the adult was meeting federal participa‑ as a way of leveraging more federal funds to tion requirements would be allowed to receive aid support CCC programs. beyond 48 months. This proposal would result in savings of $833 million. C A AsH ssistAnCe Continuation of Block Grant Reductions Major Proposals While Repealing Participation Exemptions. For 2009‑10 and 2010‑11, the Legislature reduced the SSI/SSP Grant Reduction. Effective June 1, county block grants for welfare‑to‑work services 2010, the budget for the Supplemental Security and child care by approximately $375 million each Income/State Supplementary Program (SSI/SSP) year. To help counties prioritize resources given proposes to reduce the maximum grant for indi‑ this reduction in funding for CalWORKs services, viduals to the minimum required by federal law budget legislation exempted families with a child (from $845 per month to $830 per month). The under age two, or with two or more children under revised grant would be approximately 92 percent the age of six, from work participation require‑ of the 2010 federal poverty guideline. This proposal ments. Prior budget legislation also provided would result in General Fund savings of $15 million that, for any month for which a recipient has been in 2010‑11 and $177 million in 2011‑12. excused from work participation requirements due CalWORKs Grant Reduction. The Governor to lack of support services, the case does not count proposes to reduce CalWORKs grants by 13 percent toward the state’s time limit for their receipt of cash effective June 1, 2011, resulting in General Fund aid. The Governor’s budget proposes to continue a savings of $14 million in 2010‑11 and $405 million reduction of $377 million in county block grants in 2011‑12. For a family of three, this proposal while repealing the exemptions. would reduce maximum monthly grants from $694 Figure 9 lists the proposed solutions for SSI/SSP to $604 in high‑cost counties and from $661 to and CalWORKs, totaling $1.7 billion. $575 in low‑cost counties. Repeal of July 2011 Changes. In 2009 the Legislature enacted a series of changes to sanc‑ Figure 9 tion policies, time limits, and eligibility rules for Cash Assistance Programs CalWORKs. The Governor’s budget proposes to Major Solutions delete these changes, resulting in a cost of about (General Fund Benefit, in Millions) $135 million. Program/Solution 2010-11 2011-12 Establishment of a 48-Month Time Limit. In SSI/SSP lieu of the 2009 CalWORKs changes, the budget Reduce grants to the federal $15 $177 minimum proposes, effective July 1, 2011, to establish a CalWORKs 48‑month time limit, applied retroactively, on Establish 48 month-time limit — 833 the receipt of CalWORKs cash assistance for all Reduce grants by 13 percent 14 405 recipients. This would apply to both adults and Reduce county block grants — 377 Repeal July 2011 sanctions — -135 children, with narrow exceptions. Previous months and time limits of cash aid would count toward the 48‑month limit, Reduce age eligibility for — 34 including months in which a recipient had been child care Subtotals (CalWORKs) ($14) ($1,514) exempted from participation requirements or was Totals $29 $1,691 temporarily disabled. However, children in families www.lao.ca.gov Legislative Analyst’s Office 29 2011-12 BUDGET Key Issues low‑income families. Moreover, an increase in CalFresh benefits (formerly known as Food Stamps) Minimal Budget Risk and No Loss of Federal partially offsets (about 22 percent) the grant reduc‑ Funds. The Governor’s proposals warrant serious tion. For a family of three in a high‑cost county, consideration by the Legislature, given that they the combined grant and CalFresh benefits would provide $1.7 billion in budgetary savings that the drop from $1,155 to about $1,090 per month, or state is likely to achieve with no loss of federal about 71 percent of the federal poverty level (FPL). funds. This is because the CalWORKs federal block However, we also note that the state has never grant is fixed at $3.7 billion, and the federal portion reduced grants by more than 6 percent before. The of the SSI/SSP grant is not affected by the level of proposed grant package would be the lowest level in state supplementation. Due to the CalWORKs MOE decades relative to the FPL. requirement, about $530 million of the General Block Grant Reduction Problematic Without Fund savings is achieved within the CalWORKs County Flexibility. As noted earlier, the previously budget and about $950 million is achieved by trans‑ enacted two‑year reduction in county welfare‑ ferring freed‑up TANF funds (from the proposed to‑work block grant funds was accompanied by programmatic reductions) to the Student Aid additional exemptions from work participation Commission to offset General Fund costs there. requirements, which allowed counties to manage Balancing the Need for CalWORKs Savings the reduction in funding. The Legislature should With Program Goals. The Legislature can control consider adopting similar work participation costs in CalWORKs through changes in eligibility exemptions, or some other mechanism to allow rules, grant levels, and the availability of welfare‑ counties more flexibility, if it adopts the proposed to‑work services to assist recipients in becoming reduction in funding for these CalWORKs services. self‑sufficient. The Governor’s proposals impact The Impacts of the Proposed 48-Month Time all three areas. In considering these proposals, the Limit. The proposed 48‑month time limit presents Legislature faces a difficult balancing act. On the very difficult issues for the Legislature. Historically, one hand, the Legislature must achieve savings the CalWORKs program has provided a safety net because of the state’s budget deficit. On the other for children even when the parents have exhausted hand, the policy goal of the Legislature in creating their allowable five years of assistance. Moreover, the CalWORKs program has been to (1) maintain in the past, the Legislature explicitly provided that a safety net for low‑income families with chil‑ months when a family did not receive welfare‑to‑ dren who cannot support themselves financially work services would not count toward their time (especially during a deep recession); (2) encourage limit. Under this proposal, about 115,000 families CalWORKs recipients to transition to self‑suffi‑ and 234,000 children would lose all benefits. They ciency through work, education, and training; and would be eligible for General Assistance, potentially (3) preserve a county delivery system committed to resulting in a cost shift to counties in the hundreds these goals. As it evaluates the Governor’s budget of millions annually. reduction proposals, the Legislature should con‑ Research by the Public Policy Institute of sider the trade‑offs involved among these factors. California (PPIC) (focusing on a period when the Grant Reduction: Pros and Cons. The grant economy was healthier) suggests that time limits reduction proposal has some merit in that it with complete family benefit terminations do not achieves significant budgetary savings while significantly increase overall poverty rates among retaining some level of income maintenance for 30 Legislative Analyst’s Office www.lao.ca.gov 2011-12 BUDGET children of single mothers. The PPIC study also sug‑ to achieve state savings of $128 million in 2011‑12. gested, however, that while enforcement of tighter This across‑the‑board reduction would be in addi‑ time limits for aid would motivate some families to tion to a 3.6 percent reduction enacted as part of obtain work and move out of poverty, some families the 2010‑11 budget. The budget assumes that an would likely end up poorer due to such a change. appeals process would allow 21,000 recipients to This study did not address retroactive application of receive a full restoration of hours and 62,000 recipi‑ time limits as the Governor proposes. ents to receive a partial restoration of hours. Elimination of Domestic Services for Alternatives for Legislative Consideration Recipients in Shared Living Environments. Under Modifying the Earned Income Disregard. current law, domestic services are reduced some‑ Under current law, California “disregards” (does what based on the number of persons in the house‑ not count) the first $225 of income and 50 percent hold. The Governor’s budget proposes to eliminate, of each dollar earned beyond $225 when calculating with certain exceptions, domestic and related care a family’s monthly grant. This policy provides a services for recipients who live with others to save work incentive for families. Savings in the range $237 million in 2011‑12. Domestic and related care of $200 million annually could be achieved by services include housework, meal preparation, meal simplifying the disregard to a flat 50 percent of all clean‑up, laundry, shopping, and errands. income earned. Eliminate All Services for Recipients Without Prospective and or Phased Implementation. If a Physician’s Certificate. Lastly, the Governor the Legislature wants to pursue a family benefit ter‑ proposes to eliminate from IHSS recipients who mination time limit, it could elect to adopt it pro‑ do not have certification by a physician that they spectively, allowing current recipients some time to need these services to prevent their placement in work their way off cash aid before hitting the time an institution, such as a nursing home. The budget limit. Similarly, because the state has never reduced assumes that 43,000 recipients (10 percent) will grants by more than 6 percent, the Legislature lose IHSS eligibility and that the state would save could phase in the 13 percent over two years. While $121 million in the budget year. these approaches would reduce the benefit to the Figure 10 (see next page) lists the proposed General Fund from the Governor’s proposal, they solutions for IHSS totaling almost $0.5 billion. would still achieve a measure of savings that would Key Issues grow over time. Further Reductions to Welfare-to-Work Legal Risks Exist. Any time services are Services. Another potential budget solution would reduced or eliminated, there is some risk of litiga‑ be to increase the Governor’s proposed reduction to tion asserting that the change puts recipients at risk county block grants in accordance with increased of institutional placement, which could violate the county flexibility or exemptions. U.S. Americans with Disabilities Act. The Governor has proposed several measures, such as the appeals i -H s s n Ome uPPORtive eRviCes process to restore domestic hours, to limit legal Major Proposals risks associated with these proposals. On the other hand, recent litigation in Washington State sug‑ Additional Reduction in Hours for Services. gests that there is some legal risk for the proposals The Governor’s budget proposes to reduce autho‑ to eliminate domestic and related care services for rized hours for all IHSS recipients by 8.4 percent www.lao.ca.gov Legislative Analyst’s Office 31 2011-12 BUDGET wish to reconsider reduc‑ Figure 10 ing state participation In-Home Supportive Services in IHSS provider wages Major Solutions for 2011-12 as part of the 2011‑12 (General Fund Benefit, in Millions) budget plan. A reduction Solution Amount from $12.10 to $10.10, for Additional reduction in hours for services $128 example, could save about Eliminate domestic services in shared living environments 237 Eliminate all services for recipients without a physician’s certificate 121 $100 million annually. To Total $486 address some of the con‑ cerns of the federal court, recipients who live with other persons. the wage reduction could Savings Estimates May Be Overstated. Some be reenacted in a way that allows a reduction down savings estimates, such as the one related to the to $10.10 contingent on the results of a state study adoption of physician certification requirements, now under way to determine the potential impact appear to be overstated. on the supply of available providers. High-Hour Recipients Lose Most. When P 10 e C ROPOsitiOn ARLy HiLdHOOd making reductions to the IHSS program, we have d P eveLOPment ROGRAms generally recommended an approach in the past of targeting reduction to those least likely to enter Major Proposal a skilled nursing facility. However, the proposed Ballot Measure. Proposition 10, enacted by across‑the‑board reduction in service hours results the California voters in the November 1998 elec‑ in the greatest loss of hours for recipients who are tion, imposed a 50‑cent increase in excise taxes on assessed to need the most hours. We have proposed cigarettes and other tobacco products to fund early that the Legislature begin to move toward a system childhood development programs. The Governor’s that would better target services to those most at budget proposes to place a measure before voters risk of institutionalization. in a June 2011 special election to allow the use of Proposition 10 funds for Medi‑Cal coverage for Alternatives for Legislative Consideration children in a way that would reduce state General Reduce State Participation in Provider Wages Fund costs. Specifically, the proposed ballot Pursuant to a Study. The state, together with measure would (1) sweep $1 billion on a one‑time counties, provides funding to support the wages basis from state and local commissions’ fund paid to IHSS workers. The federal courts enjoined reserves to pay for Medi‑Cal services for children California from implementing a 2009‑10 reduc‑ up to age five and (2) redirect on an ongoing tion in state participation in wages from $12.10 basis 50 percent of state and local commissions’ to $10.10. The court ruled that the state should future revenues to fund various state children’s have conducted a study of the impacts of a wage programs. This proposal would result in General reduction on the supply of available providers. In Fund savings of $1 billion in 2011‑12 and approxi‑ the meantime, this case has been appealed to the mately $215 million in 2012‑13. This amount would U.S. Supreme Court, and the Legislature adopted a decline gradually in the out‑years in accordance statute that postpones the wage reduction. with an ongoing trend of declining tobacco product Despite these prior actions, the Legislature may consumption. 32 Legislative Analyst’s Office www.lao.ca.gov 2011-12 BUDGET Key Issues hospital fee for additional General Fund relief of $160 million in the current year. In addition, the Amount Available for Sweep Uncertain. The budget plan proposes to achieve almost $1.7 billion administration has cited 2009 data as the basis for in General Fund savings in the Medi‑Cal Program. its conclusion that $1 billion in Proposition 10 state This would be achieved through a combination of and local commission fund reserves are available to copayments, caps on benefit utilization, elimination be swept. Under this proposal, the actual amount of benefits, and payment reductions to certain pro‑ available for the one‑time sweep would depend on viders, as shown in Figure 11 (see next page). the commissions’ fund balances as of June 30, 2011. Governor Pursues Provider Rate Reductions. Governance of Proposition 10 Funds. The spending plan assumes that the courts will rule Although the state and local commissions provide in favor of the state regarding prior rate reductions some important services to young children, they and let it go forward with a 10 percent rate reduc‑ are in accordance with their priorities, which may tion to certain types of Medi‑Cal providers, for differ significantly from the Legislature’s priorities, savings of $537 million to the General Fund. The especially in times of fiscal distress. Moreover, administration anticipates that the U.S. Supreme the commissions have separate staff and govern‑ Court will decide to hear the state’s appeals of ing boards. Eliminating the commissions would lower‑court rulings that enjoined these prior remove this layer of bureaucracy. budget reductions by mid‑January 2011 and will Alternatives for Legislative Consideration rule by July 1, 2011. In addition to the favorable court outcome, the spending plan also assumes that Governor’s Proposal Could Be Modified. The net savings of $172 million General Fund can be Legislature could go further than the Governor’s achieved by reducing certain long‑term care pay‑ proposal by seeking elimination of the state and ments by 10 percent. local commissions and use those funds to pay for Governor Proposes Copayments, Hard Caps, General Fund‑supported children’s programs. and Benefit Eliminations. The governor proposes Alternatively, the Legislature could use these to achieve almost $1 billion in General Fund revenues as part of any realignment of health and savings in Medi‑Cal through the imposition of social services programs. These options would also copayments, caps on the utilization of certain ben‑ require voter approval. efits, and the elimination of certain benefits, such m -C edi AL as Adult Day Health Care (ADHC). Major Proposals Key Issues Governor Proposes Alternative Funding Merit in the Governor’s Approach. Given the Sources and Reductions. The Governor’s state’s difficult fiscal condition and the significant spending plan shifts $1 billion in funding from growth that would otherwise occur in the General Proposition 10 and $840 million in local redevelop‑ Fund budget of the Medi‑Cal Program, we believe ment agency funds to offset state Medi‑Cal costs. the Legislature should carefully consider the (We discuss these proposals in more detail in Governor’s proposals for budget reductions in earlier sections of this report.) The Governor also Medi‑Cal as well as other alternatives to achieve proposes a two‑quarter extension of the existing savings. We note that the administration’s options www.lao.ca.gov Legislative Analyst’s Office 33 2011-12 BUDGET to control costs in Medi‑Cal through reductions there is a significant risk that the courts will in eligibility are limited by requirements imposed rule against the state in regard to the previously by the federal Affordable Care Act (also known as enacted provider payment reductions. If so, the health care reform). While some savings could be state would lose significant savings assumed in the achieved by scaling back eligibility for state‑only 2011‑12 budget plan. The newly proposed payment benefits, other major eligibility reductions that reduction for long‑term care facilities also could could save hundreds of millions of dollars are not be subject to legal challenge. Furthermore, federal permissible because of the federal legislation. approval may be required in order to implement Some Medi-Cal Budgetary Savings Risky or several of the Governor’s proposals, including rate Overstated. In recent years, the Legislature has reductions. Recent actions by federal Medicaid adopted a number of different measures to contain authorities suggest that the reductions proposed in costs in the Medi‑Cal Program that have been the Governor’s budget could receive close scrutiny. blocked as a result of legal challenges. Given prior We caution that some of the Governor’s savings court injunctions in recent years, for example, estimates may be somewhat overstated because Figure 11 Medi-Cal Program Selected Budget Solutions (General Fund Benefit, in Millions) 2010-11 2011-12 Impose Caps Physician and clinic visits at ten per year (adults) — $196.5 Drugs at six prescriptions (adults) — 11.0 Durable medical equipment at 90th percentile (adults) — 7.4 Medical supplies at 90th percentile (adults) — 2.0 Hearing aids at 90th percentile (adults) — 0.5 Subtotals (—) ($217.4) Impose Copayments $5 copayment for visits to physicians and certain clinics — $152.8 $100 copayment per hospital inpatient day — 151.2 $3 and $5 pharmacy copayments — 140.3 $50 copayment for nonemergency emergency room (ER) visits — 73.2 $50 copayment for emergency ER visits — 38.4 $5 copayment for dental office visits (adults) $0.2 1.3 Subtotals ($0.2) ($557.2) Reduce Benefits Eliminate Adult Day Health Care services $1.5 $176.6 Limit nutritional supplements 0.5 14.4 Eliminate selected over-the-counter drugs 0.1 2.2 Subtotals ($2.1) ($193.2) Implement Provider Payment Reductions Assume courts will allow certain provider payment reductions $9.5 $537.0 Impose a 10 percent payment reduction on long-term care facilities — 172.3 Subtotals ($9.5) ($709.3) Totals $11.8 $1,677.1 34 Legislative Analyst’s Office www.lao.ca.gov 2011-12 BUDGET they do not capture the net effect of the proposal. and service providers and through the implementa‑ For example, savings from the elimination of the tion of statewide service standards. The statewide ADHC benefit would be offset by additional costs standards would set guidelines to promote consis‑ in Medi‑Cal and other state programs, such as the tency in the array of services provided by RCs and DDS. would be developed with input from stakeholders. Alternatives for Legislative Consideration Key Issues Copayments and Caps on Services Could Be More Information Needed to Assess Whether Modified. In the event that the Legislature does not Savings Are Achievable. The administration’s pro‑ wish to adopt in full some of the specific budget posals to achieve savings in the DDS program have reductions contemplated in the Governor’s budget merit in concept, given the significant historical plans, options are available to the Legislature increases in spending and caseload for community that would still achieve some measure of state programs. However, we believe the Legislature savings. For example, the Legislature could imple‑ requires additional detail to evaluate the proposal ment copayments for certain Medi‑Cal services for $533 million in savings in RC operations and in smaller dollar amounts than the copayments programs. proposed by the governor. Similarly, the Legislature H F P eALtHy AmiLies ROGRAm could adopt the proposed caps on the utilization of certain benefits, but with allowance for exceptions, Major Proposals thereby allowing Medi‑Cal beneficiaries to access Plan Would Implement Premium Increases, critical care. Benefit Eliminations, and Copayments. The Governor’s budget plan would achieve $39 million d d s ePARtmentOF eveLOPmentAL eRviCes in General Fund savings in the Healthy Families Major Proposals Program (HFP) through benefit eliminations, Major Reductions in Regional Center (RC) premium increases, and the implementation of Programs. The governor’s budget plan proposes copayments for certain services. Specifically, the to achieve $750 million in General Fund savings plan proposes to eliminate the vision benefit and in DDS. About $125 million of the savings will increase premiums by between 75 percent and come from alternative funding sources, such as 88 percent based upon family income levels. The the continuation of $50 million in funding from plan also would increase copayments for emergency Proposition 10 and three separate proposals to room visits from $15 to $50 and inpatient hospital draw down a combined total of $75 million in stays from $0 to $100 per day with a maximum of federal funds. Another $92 million in savings $200 per stay. would come from the continuation of a 4.25 percent Managed Care Tax Would Be Extended. The reduction to RC operations and provider payments. tax assessed on managed care plans provides rev‑ The remaining $533 million in savings would be enues that are used to fund rate increases in Medi‑ achieved by a proposal described as increasing the Cal and provide health coverage in HFP. This tax accountability and transparency for the use of state expires on June 30, 2011. The budget plan proposes funds for the administrative expenditures of RCs to make the tax permanent and use the revenues to fund Medi‑Cal and HFP for savings of $97 million. www.lao.ca.gov Legislative Analyst’s Office 35 2011-12 BUDGET Key Issues Similarly, the proposed budget assumes that the full $200 million from an unallocated inmate Federal Approval of Tax Measure Uncertain. population‑related reduction will not be achieved We caution that the managed care tax is subject to in either 2010‑11 or 2011‑12. federal approval and, based upon our review, there Increased Funding for CDCR Salary and is some risk that it may not be approved. Other Costs. The budget provides an additional Alternatives for Legislative Consideration $395 million in General Fund support for the California Department of Corrections and Some of the Governor’s Proposals for HFP Rehabilitation (CDCR) for expenses that the Could Also Be Modified. Similar to the options department indicates have exceeded its budgeted presented under Medi‑Cal, the Legislature could authority in previous years. These expenses include adopt more moderate reductions than the ones correctional officer salaries and wages, overtime proposed by the Governor, albeit at a reduced for correctional officers, and costs associated with savings level. For example, the Legislature could transporting and guarding inmates at health care adopt lesser premium increases or copayments than facilities outside prison walls. proposed by the administration. CDCR Workforce Cap Adjustment. As a result J C J udiCiALAnd RiminAL ustiCe of an unallocated 5 percent reduction to the per‑ sonnel budgets of most state departments (referred Major Proposals to as the workforce cap), the 2010‑11 budget Public Safety Realignment. As we discussed assumed a total of about $292 million in personnel earlier in this report, the administration proposes savings for CDCR. The Governor’s budget assumes to realign several public safety programs to coun‑ that the department will only be able to achieve ties. These programs include adult parole, jurisdic‑ $20 million of these savings in the current year. tion of lower‑level adult offenders and all juvenile However, the proposed budget assumes that the full offenders, court security, and various local public $292 million in savings will be achieved in 2011‑12. safety grant programs (such as the Citizens’ Option Unallocated Reduction to Trial Courts. The for Public Safety program and local detention proposed budget includes an unallocated reduction facility subventions or booking fees). of $200 million to the General Fund support budget Redevelopment Fund Shift to Trial Courts. The of trial courts. Governor’s budget proposes to offset $860 million in trial court costs in 2011‑12 with redevelopment Key Issues funding. (Please see the “Redevelopment” section Significant Risk in Fully Achieving Assumed of this report for a more detailed discussion of the CDCR Savings. At this time, the administration Governor’s proposal.) has not presented specific plans as to how the Revised Corrections Savings. The enacted savings related to inmate medical care services and 2010‑11 budget includes an $820 million unal‑ the workforce cap proposal will be achieved. Given located reduction to the Receiver’s inmate medical the absence of such plans, we believe that assuming services program. The Governor’s budget includes the level of savings contained in the Governor’s additional funding based on the assumption that budget poses significant risks. For example, in only about $177 million in these savings will be order to achieve the magnitude of savings proposed achieved in 2010‑11 and $257 million in 2011‑12. in the inmate medical care budget, the Receiver 36 Legislative Analyst’s Office www.lao.ca.gov 2011-12 BUDGET would need to identify and begin to implement Legislature could direct the trial courts to imple‑ major operational changes now. Moreover, CDCR’s ment electronic court reporting and to utilize com‑ ability to achieve the workforce cap savings appears petitive bidding to reduce costs for court security. to be limited since the department’s personnel t RAnsPORtAtiOn costs are largely tied to the operations of the state prisons—which must be staffed on a 24‑hour basis. Major Proposals Funding for CDCR Salary and Other Costs Transportation Funds Would Provide General Raises Some Concerns. Although CDCR has Fund Relief. The 2010‑11 Budget Act assumed that exceeded its budget authority in recent years, the the state would achieve roughly $1.6 billion in administration’s approach to address the problem General Fund relief under a fuel tax swap that per‑ may not be fully justified. For example, the depart‑ mitted significant changes in the use of transporta‑ ment requests an augmentation of $36 million to tion funds. However, the enactment of Propositions its base level of funding for correctional officer 22 and 26 on the November 2010 ballot could overtime of $104 million, in order to account for prevent the state from fully achieving this budget higher costs that have resulted from increases in solution. Proposition 22 restricts the use of certain correctional officer salaries over the past decade. transportation funds and Proposition 26 could be However, CDCR reports that it spent a total of interpreted to repeal the fuel tax swap legislation as about $416 million on overtime for correctional of November 2011. officers in 2009‑10—over $300 million above the The Governor’s budget proposes to address level for which the department is budgeted. This these problems in several ways. First, it would suggests that much of the requested funding is reenact the prior fuel tax swap. The Governor’s related to excessive overtime costs. The department package would allow $262 million in vehicle weight has not presented a plan to reduce these high costs fees to be used to pay transportation debt in the on an ongoing basis. current year, and permit roughly $800 million in Consider Specific Cost-Savings Options for the State Highway Account (SHA) monies (primarily Courts. Although the state’s court system—and in from weight fees) to pay transportation debt in particular the trial courts—have had reductions 2011‑12. Also, some transportation funds would in General Fund support in recent years, much of be loaned to the General Fund. Altogether, these these reductions have been offset by fund shifts actions would achieve $1.6 billion in General and revenue from court‑related fee increases. As Fund relief in the current year and $944 million in a result, these reductions have not resulted in 2011‑12 under this proposal. substantial decreases in the total level of funding for the courts. Thus, the Governor’s proposal Key Issues to achieve $200 million in court savings merits Maximize General Fund Benefit. Our analysis legislative consideration. While the administra‑ indicates that these proposals, similar to ones tion has not identified how these savings would be proposed by the former Governor in the December achieved, we believe that the Legislature should 2010 special session but not yet adopted, are work with the courts to determine what specific reasonable and could achieve the level of savings actions are needed to achieve these, and potentially proposed. However, as we noted in December, the even greater, savings, in a way that minimizes proposal does not maximize the use of weight fee impacts on access to the courts. For example, the revenues for potential benefit to the General Fund. www.lao.ca.gov Legislative Analyst’s Office 37 2011-12 BUDGET We believe the amount of General Fund benefit year, the administration proposes adding a new in the current year could be increased by at least health plan that provides somewhat less compre‑ $50 million and potentially by a similar amount in hensive coverage at a somewhat reduced cost to the budget year, while still maintaining an adequate employees electing the plan. The budget assumes reserve in the SHA. that this plan will attract enough employees so that the state would realize $72 million in General Fund Alternatives for Legislative Consideration savings in the budget year. Develop Comprehensive Fix for the Future. Unallocated Cut. The budget includes a The Governor’s proposal would help to ensure $200 million General Fund unallocated cut to that transportation funds could be used for state operations to be achieved through various General Fund relief in the future. We believe this efficiencies. is appropriate. In addition, we think this is a good Key Issues time for the Legislature to consider a more com‑ prehensive approach that would provide additional Erosions of Current-Year Savings. While the General Fund relief and address other problems 2010‑11 Budget Act assumed $1.5 billion of General in the current transportation funding system. For Fund savings in employee compensation costs, example, we believe the Legislature should examine the budget indicates that the state will not realize the current fragmentation of funding into various more than a third of this amount. The shortfalls special funds that each allows only limited uses. include: $281 million from state departments not We are exploring what steps the Legislature and reducing employment costs fully pursuant to the the voters could take to allow for more flexible and ongoing state workforce cap, $166 million from effective use of these funds. lower‑than‑anticipated savings associated with the ratified MOUs and administrative actions, and s O tAte PeRAtiOns $100 million from unrealized operating expenses Major Proposals and equipment savings. The budget assumes, however, that the state will realize virtually all of Savings From Collective Bargaining and the workforce cap savings in 2011‑12. Administrative Actions. Currently, 6 of the state’s Assumed Budget-Year Savings Unrealistic. 21 employee bargaining units (about 25 percent The proposed savings associated with health plans of its workforce) are working under expired con‑ and the unallocated cuts are not realistic. The tracts. The budget assumes that new memoranda new health plan is not likely to attract enough of understanding (MOUs) and/or administrative employees to substantially reduce state costs, and actions related to these employees will generate the state’s experience with across‑the‑board cuts $308 million in General Fund savings in 2011‑12. suggests that they are not likely to generate the This amount is equivalent to a 10 percent salary anticipated savings. reduction for these employees. The current three‑ day a month furlough, in contrast, is equivalent to a Alternatives for Legislative Consideration 14 percent salary cut. Greater Savings From Employees With Health Plan Savings. The state’s contribution Expired Contracts. Given that the state is not to employee health coverage is based on the average likely to achieve all of the savings associated with cost of the four health plans with the most enrolled the health plan and unallocated cut proposals, the state employees. Beginning in the 2012 calendar 38 Legislative Analyst’s Office www.lao.ca.gov 2011-12 BUDGET Legislature and administration could consider projects and bond programs through the bond increasing the level of proposed savings associ‑ sale in the fall. New projects or local assistance ated with employees with expired contracts. For grants, however, could be delayed depending upon example, approving MOUs or authorizing admin‑ departments’ remaining balances. The Governor’s istrative actions that continue the current level of proposal did not include details on projects or savings associated with these employees (14 percent programs that could be affected by the delay. We of salary costs) could reduce General Fund costs by recommend the Legislature request details on the over $100 million in 2011‑12. potential effects of the pause in bond sales in order Extend Personal Leave Program. The to ensure that available funds are directed toward Legislature could authorize administrative actions its highest priorities. that extend the one day a month “personal leave Savings Represent Temporary Solution. Given program,” beginning November 2011, for employees the state’s fiscal condition, it is reasonable to con‑ represented by Service Employees International sider the delay of the spring bond sale. The avoided Union Local 1000 and for employees not represented debt‑service costs would reduce pressure on the by a union. (Extending this program to the six other General Fund in 2011‑12. Such relief, however, is bargaining units with active MOUs, in contrast, is temporary. The state still has roughly $50 billion in not permitted under the terms of their MOUs.) authorized but unsold bonds, most of which would be sold and spent over the next few years under O P tHeR ROPOsALs current practices. The delayed spring sale simply Debt Service defers the debt‑service costs associated with these bonds to future years. Proposal: Delaying Spring General Obligation Alternative: Permanently Eliminate or Reduce Bond Sale. The state typically sells general obliga‑ Some Bond Programs. The planned sale of the tion bonds in the spring and fall, but the admin‑ remaining authorized bonds would add more than istration plans to eliminate the spring sale in the $3 billion annually to the state’s debt‑service obliga‑ current year. This one‑time pause in the issuance of tions. The Legislature and voters approved many of new bonds, combined with the Governor’s proposal these programs when the state was on more sound to use weight fees and other revenues to cover a fiscal footing. In light of the state’s current fiscal portion of transportation debt‑service costs, would condition, the Legislature may wish to evaluate slow the growth of General Fund debt‑service obli‑ whether these programs remain state priorities. gations. General Fund debt service would increase For example, some bond programs support func‑ in the budget year by approximately $60 million tions that are not traditionally state responsibilities or 1 percent under the proposal. This is a modest and the Legislature may wish to focus the state’s increase compared with earlier projections. (The resources on its core infrastructure responsibilities. previous administration’s assumptions included issuing $7 billion in bonds this spring, which would CalFire have increased debt costs by about $475 million in Eliminate the Fourth Firefighter on CalFire 2011‑12.) Engines. In addition to the proposal to shift some Most Departments Have Sufficient Funds wildland firefighting responsibility to the local to Operate Bond Programs Through the Fall. level, as described in the “State‑Local Realignment” According to the administration, most depart‑ section of this report, the administration proposes ments have sufficient funds to continue existing www.lao.ca.gov Legislative Analyst’s Office 39 2011-12 BUDGET $30.7 million in 2011‑12 General Fund savings in recommended this approach on the basis that the CalFire from eliminating the fourth firefighter department has not demonstrated that this level of on CalFire fire engines, returning to the pre‑2003 increased staffing is cost‑effective. level of per‑engine staffing. We have previously 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. 40 Legislative Analyst’s Office www.lao.ca.gov