The 2012-13 Budget: Overview of the May Revision

The 2012-13 Budget: Overview of the Mac Taylor Legislative Analyst May Revision May 18, 2012 2012-13 BudgeT 2 Legislative Analyst’s Office www.lao.ca.gov T EXECUTIVE SUMMARY Governor I Revenues Down Since January, but Proposition98 Obligations Are Up. In January, the 2012-13 Governor’s Budget the 2012-13 General Fund budget. In the May Revision, the administration estimates that this budget schools and community colleges in 2012-13. May Revision Projects $1Billion Reserve if Governor’s Proposals Are Adopted. includes a few billion dollars of additional expenditure reductions and other budget-balancing actions to address the larger budget problem and assumes passage of the Governor’s revised tax initiative, which is expected to generate more tax revenue than the original tax initiative measure he included in also estimates the plan would leave the state with a small structural surplus in the coming few years and make progress in reducing what the Governor has termed the state’s “wall” of budgetary debts. Revenue Forecast Reasonable, but Redevelopment Estimates Are Uncertain Revision economic and revenue forecasts to be reasonable. Our 2011-12 and 2012-13 revenue estimates are just a few hundred million dollars below the administration’s in each year. We are concerned, however, that the administration is overstating the amount of property tax revenues from former redevelopment agencies (RDAs) that will be distributed to schools in 2011-12 and 2012-13. Our rough by the administration because these lower property tax revenue distributions would increase the state’s One of the largest May Revision proposals is to strengthen the state’s authority to expedite the transfer of the former RDAs’ liquid assets (cash) to estimate of liquid assets available for distribution is subject to considerable uncertainty. While it is of these funds. www.lao.ca.gov Legisl ative An alyst’s 3 2012-13 BudgeT How Should the State approach the 2012-13 Budget? What Should Be the State’s Key Budgetary Goals Now? The state should address two key budgetary goals now: (1) retiring the accumulated deficit of recent years, now estimated by the administration to be $7.6 billion; and (2) making additional solid progress toward addressing the ongoing annual operating, or structural, deficit—which we think is somewhere around $10 billion— through realistic and ongoing budget actions. Adopting various one-time actions to address the $7.6 billion accumulated deficit is appropriate, as the Governor proposes. Continuing to make progress on the operating deficit, however, requires more ongoing actions—principally multiyear or permanent reductions in program spending; revenue increases; and reductions in tax expenditures, such as tax deductions, credits, and exemptions. The Governor has proposed numerous ongoing actions that would go a long way to addressing the operating deficit. (We will release a summary of our updated forecast of the state’s future annual deficits or surpluses under the Governor’s plan next week on our website.) Need for Realistic Budgetary Solutions Particularly Significant Now. There are some particularly strong reasons for the state to focus this year on adopting realistic budgetary solutions. Economic and revenue forecasting is very difficult now due to a variety of issues, including uncertain federal fiscal policies, difficulties in forecasting recent corporation tax policy changes, the usual issues of stock market volatility, and Facebook. Given these forecasting challenges, state leaders should not be surprised if 2012-13 state revenues end up several billion dollars lower (or higher) than current projections. This makes the adoption of realistic budgetary actions—including realistic trigger cuts—particularly important if the state is to continue making progress toward eliminating the stubborn structural deficit. alternatives to the Governor’s Proposals In this report, we describe and assess the administration’s major May Revision proposals. In some cases, we offer alternative ways to achieve the savings targeted by the Governor. With regard to Proposition 98, we offer alternatives to both the Governor’s basic budget plan and his trigger plan. The alternative to the Governor’s basic budget plan would reduce the 2012-13 minimum guarantee by $1.9 billion but still maintain programmatic spending at virtually the same level as the Governor. This would free up funds that could be used to mitigate proposed reductions in other areas of the budget. The alternative to the Governor’s trigger plan would achieve somewhat less total budget solution than the Governor but has the significant benefits of (1) cutting programmatic funding for schools and community colleges notably less than the Governor and (2) avoiding problematic new rebenchings. It would, however, require other parts of the budget to share more in trigger reductions. 4 Legislative Analyst’s Office www.lao.ca.gov 2012-13 BudgeT OvErviEw Projected 2012-13 Budget Problem lower and the minimum school funding guarantee—Proposition 98—typically Budget Problem Rises to $15.7 Billion. In drives off trends in state revenues, the May January, the 2012-13 Governor’s Budget projected Revision reflects higher school funding that the state needed to address a budget problem of requirements in 2012-13 than the $9.2 billion in order to balance the 2012-13 General administration estimated in January. Fund budget. Spring tax collections showed that the Essentially, this is because the year-to-year estimates included in the Governor’s budget were growth of General Fund revenues from too optimistic about 2011-12 tax revenues. Required 2011-12 to 2012-13 now is considerably state expenditures on schools under current law higher. This results from the large drop and tax policies also are estimated to be higher. In in 2011-12 projected revenues and the total, the administration’s estimate of the size of the much smaller drop in 2012-13 revenues budget problem increased by $6.5 billion between (in part, due to the newly included effects January and May to now total $15.7 billion. The of the Facebook IPO). In addition, the various changes to the administration’s estimate Proposition 98 May Revision forecast of the budget problem between January and May reflects assumptions about lower local include: property taxes available to school districts • Lower Revenue Assumptions ($883 million over the two years), including ($4.3 Billion). As a result of the weak lower assumptions about the amount spring tax collections, the Governor’s of former redevelopment agency (RDA) May Revision reduces projected 2011-12 property tax revenue distributions. In revenues substantially. In addition, the the May Revision, these property taxes administration has lowered its estimates available to fund schools are estimated to of current-law personal income tax (PIT) total $1.8 billion in 2011-12 and 2012-13 and corporation tax (CT) collections in (down from $2.1 billion in January). In 2012-13. These lowered revenue total, due to higher funding requirements assumptions increase the size of the state’s and lower local property tax estimates, the budget problem by $4.3 billion. (Revenue administration projects that Proposition 98 assumptions would have been even lower General Fund costs under current tax than this but for the inclusion in the May policies is now $2.4 billion higher in forecast of an estimated $1.5 billion of PIT 2012-13 than it estimated in January. collections related to the Facebook initial public offering [IPO]. The IPO had not yet • Lower Anticipated Net Costs in Other been announced in January and thus was Areas (-$0.2 Billion). The administration not a factor in the earlier administration estimates that various categories of health forecast.) and human services costs in 2011-12 and 2012-13 increased by $1.3 billion • Higher General Fund Proposition 98 due largely to federal and court actions Costs ($2.4 Billion). While revenues are blocking previously adopted budgetary www.lao.ca.gov Legislative Analyst’s Office 5 2012-13 BudgeT reductions. In addition, prison medical Figure 2 summarizes the administration’s care costs managed by the court- major May Revision budget-balancing proposals. appointed Receiver are expected to be We characterize $8.8 billion of the administration’s over $400 million higher in the two fiscal budget actions as revenue actions, $5.2 billion as years than previously estimated. Offsetting expenditure actions, and $5.4 billion as other actions these $1.7 billion of projected expenditure (principally non-recurring fund shifts, transfers, and increases are $1.9 billion of expenditure loans). These are offset by the $2.9 billion increase declines, partially due to lower-than- that the administration projects in the Proposition 98 expected caseload in Medi-Cal and guarantee due to higher revenues from the Governor’s various social services programs. In total, tax measure. (As in our review of the January budget current-law General Fund expenditures proposal, we list the administration’s estimates for outside of Proposition 98 are now forecast each of its proposals but two—the administration’s to be about $200 million less than they cap-and-trade and mandate proposals.) were in January. Revised Tax Initiative Proposal Is Centerpiece of Governor’s Plan. In March, the Governor introduced Governor’s may revision Proposals a revised temporary tax initiative with lower sales and use tax (SUT) rates and higher PIT rates on $16.7 Billion of Budget Actions Proposed. In higher-income Californians. The Governor’s revised the May Revision, the administration estimates that tax proposal includes two temporary tax increases, its revenue, expenditure, and other budget proposals resulting in additional state revenues estimated by the produce $16.7 billion of General Fund fiscal benefit in administration at $8.5 billion in 2011-12 and 2012-13 2011-12 and 2012-13. These actions would address the combined. projected $15.7 billion budget problem and leave the state with an estimated reserve of $1 billion at the end • 0.25 Percent SUT Rate Increase for Four of 2012-13, as shown in Figure 1. Years. The measure would temporarily increase the state SUT rate by 0.25 percent for four Figure 1 years—from Governor’s May Revision January 1, 2013, through General Fund Condition the end of 2016. Under General Fund and Education Protection Account Combined (In Millions) the measure, the average Proposed for 2012-13 SUT rate in the state Proposed Percent 2011-12 Amount Change would increase to around 8.4 percent. The SUT Prior-year fund balance -$2,844 -$2,535 Revenues and transfers 86,809 95,689 10.2% increase is projected by Total resources available $83,965 $93,154 the Governor to generate Expenditures $86,500 $91,387 5.6% $605 million of additional Ending fund balance -$2,535 $1,767 revenues in 2012-13 (half Encumbrances $719 $719 year) and about $1.3 billion Reservea -$3,254 $1,048 and more annually in a Reflects the administration’s projection of the balance in the Special Fund for Economic Uncertainties. (The 2012-13 Governor’s Budget proposes to continue suspending transfers to the Budget Stabilization subsequent years. Account.) 6 Legislative Analyst’s Office www.lao.ca.gov 2012-13 BudgeT • PIT Rate Increase for Higher-Income would rise by 1 percent, 2 percent, or Taxpayers for Seven Years. The initiative 3 percent—depending on the level of their would temporarily increase marginal PIT income—starting in the 2012 tax year and rates for roughly the 1 percent of California ending at the conclusion of the 2018 tax taxpayers with the highest annual incomes. year. The PIT increase is projected by the Specifically, their marginal PIT rates administration to generate $7.9 billion of Figure 2 Budget-Balancing Actions Proposed by the Governora 2011-12 and 2012-13 General Fund Benefit (In Millions) Revenue Actions Increase personal income and sales and use taxes through voter initiative $8,479 Make permanent the existing tax on Medi-Cal managed care plans 188 Implement changes to unclaimed property program 78 Expand Franchise Tax Board authority to issue wage garnishments 38 Implement other revenue actions (net) 54 Subtotal ($8,837) Increased Proposition 98 Costs Due to Proposed Tax Increases -$2,908 Expenditure Actions Make various Proposition 98 adjustments $1,498 Restructure and reduce CalWORKs and subsidized child care program costs 1,332 Defer payments to Medi-Cal providers and other related actions 663 Reduce Medi-Cal costs through program efficiencies and other changes 556 Negotiate state employee compensation reductions 402 Change Cal Grant awards and eligibility requirements and other higher education actions 292 Reduce In-Home Supportive Services costs and services 225 Defer payment on pre-2004 local mandate obligationsb 100 Reduce Healthy Families Program managed care rates 49 Reduce various other program costs 115 Subtotal ($5,230) Other Actions Use cash assets of former redevelopment agencies to offset Proposition 98 General Fund obligation $1,405 Delay loan payments to special funds 1,158 Delay court construction, use local trial court reserves for operations, and other actions 544 Use part of cap-and-trade program auction revenues to offset General Fund costsc 500 Use weight fee revenues to offset General Fund costs 385 Borrow from disability insurance fund to pay costs of federal unemployment insurance loans 313 Transfer funds from the Motor Vehicle Fuel Account 312 Borrow from the Motor Vehicle Account 300 Use proceeds from mortgage settlement to fund housing debt service and other activities 292 Shift funds from Proposition 10 state commission to General Fund programs 80 Suspend county share of child support collections on one-time basis 32 Implement other fund shifts and transfers 31 Subtotal ($5,353) Total $16,512d a Reflects administration scoring of all May Revision proposals, including revised estimates of many January Governor’s budget proposals. Excludes some proposed program augmentations. b Contrary to the Governor’s approach, does not list as a solution $729 million related to past-year costs of suspended mandates. c Although the administration’s workload budget includes those funds, we continue to characterize this as a budget-balancing proposal. d The administration characterizes the Governor’s proposed budget-balancing actions as totaling $16.7 billion. Our estimate is $229 million lower due to the differences described in footnotes b and c above. www.lao.ca.gov Legislative Analyst’s Office 7 2012-13 BudgeT additional revenues in 2011-12 and 2012-13. shifts of funding responsibility from the General (While essentially all of this revenue would Fund to other funds, loans, loan extensions, and be received in 2012-13, a portion would be transfers—contribute over $5 billion in budgetary attributed to 2011-12 under the Governor’s solutions. The largest action is the administration’s January revenue accrual proposal.) The new proposal to facilitate the transfer of liquid $7.9 billion administration projection assets of former RDAs to local governments, includes about $400 million related to the thereby increasing school district property Facebook IPO. tax moneys and reducing the state’s near-term Proposition 98 General Fund obligations. The The additional revenues generated from these tax administration predicts that this proposal would increases result in an increase in the Proposition 98 generate $1.4 billion of General Fund savings in minimum guarantee. The administration estimates 2012-13 (in addition to the $1.8 billion of former that this increase totals $2.9 billion in 2012-13. RDA tax increment mentioned earlier, which Accordingly, the net benefit to the General Fund is reflected in the administration’s “workload from the tax measure would be $5.6 billion in this budget”). The May Revision proposes extending the budget under the May Revision projections. General Fund’s repayment dates for $490 million Various Expenditure Actions. As Figure 2 of outstanding loans from state special funds (in shows, the largest expenditure action relates addition to $668 million of savings from loan to Proposition 98. The $1.5 billion consists of a repayment extensions, including ones originally variety of actions, including counting $450 million proposed in January). The May Revision includes of 2011-12 funding toward a specific statutory new proposals to transfer to the General Fund obligation, thereby saving a comparable amount certain excise taxes for fuel purchased for in 2012-13 funding for the Quality Education off-highway vehicles ($312 million of 2011-12 Investment Act (QEIA) program (with no impact and 2012-13 General Fund benefit, with ongoing on services). Also among the largest administration future savings), borrow $300 million from the expenditure proposals are restructurings of the Motor Vehicle Account, and use proceeds from California Work Opportunity and Responsibility the recent national mortgage settlement to offset to Kids (CalWORKs) and subsidized child care General Fund housing debt-service costs and other programs, as well as various changes to the expenses ($292 million of General Fund benefit in Medi-Cal Program. The May Revision modifies and this budget cycle, plus an additional $118 million in adjusts estimates for various January proposals, 2013-14). including the CalWORKs and child care proposals Administration Forecasts Small Structural mentioned above. It also includes major new Surpluses if May Revision Adopted. The proposals to reduce state employee administration’s out-year budget forecast indicates compensation costs ($402 million), Medi-Cal a current-law budget problem of around $8 billion payments to hospitals ($325 million, in addition to per year in 2013-14 and 2014-15 and a $5.6 billion other Medi-Cal savings proposals), and hours in budget problem in 2015-16. If the Governor’s the In-Home Supportive Services (IHSS) program May Revision is approved in full—including by 7 percent ($99 million, in addition to other IHSS the proposed tax initiative—the Department of savings proposals). Finance (DOF) projects small structural surpluses Other Actions. Other proposed budget actions of $300 million to $800 million in future fiscal shown in Figure 2—principally non-recurring 8 Legislative Analyst’s Office www.lao.ca.gov T collection of no state estate taxes, given the low particularly our volatile income taxes—declined likelihood that the federal government will take precipitously, resulting, among other things, in the actions providing these collections in the future.) Trigger Cuts Focused on Schools if Voters 2009 alone. Reject Tax Measure. Since the end of the recession, the state’s economic and tax bases have recovered gradually, reject the proposed tax measure in November. and the state and many local governments have relied on temporary infusions of cash from the federal government, temporary tax increases, program reductions, and one-time measures to bridge budget gaps. With the nation now about three of California and its local governments remain How Should the State Approach the 2012-13 Budget? How Did We Get Here? revenues and General Fund expenditures—has shortfall of annual General Fund revenues compared fallen substantially, but remains stubbornly high at result of many actions taken by the Legislature, out-year revenue estimates. Governors, the state’s voters, the federal government, ongoing commitments (both spending increases and tax reductions) with uncertain revenue increases, accounting for its tax proposals and other proposed constraining legislative decision making as a result budget actions—the administration estimates this of prescriptive ballot initiatives, and relying too heavily on temporary budget solutions (such Figure 3 Proposed Trigger Reductions if Voters Reject Governor’s Tax Initiative situation was exacerbated 2012-13 General Fund Benefit (In Millions) Proposition 98 funding for schools and community colleges $5,494 economic downturn since University of California 250 California State University 250 the Great Depression—a Department of Developmental Services 50 worldwide recession from Local water safety patrol grants 11 2007 to 2009. Its impact CalFire 10 Department of Water Resources flood control programs 7 was particularly severe in Department of Fish and Game 4 California, as marked by Department of Parks and Recreation 2 a devastating collapse of Department of Justice law enforcement programs 1 the housing market and Total $6,077 www.lao.ca.gov Legisl ative An alyst’s 9 2012-13 BudgeT What Should Be the State’s Key Budgetary problem, the Legislature needs to ensure adoption Goals Now? We believe the state should address of realistic budget solutions—those that have a high two key budgetary goals now: (1) retiring the probability of achieving budgeted savings in the accumulated deficit of recent years, now estimated 2012-13 budget. As we noted in November 2010, by the administration to be $7.6 billion, and the Legislature can maximize the probability of (2) making additional solid progress toward achieving such realistic solutions by providing clear addressing the ongoing annual operating deficit authority to the administration in well-crafted of approximately $10 billion through realistic and legislation that describes specifically how the ongoing budget actions. The $7.6 billion problem reductions are to be realized. is essentially a one-time issue. Adopting some Need for Realistic Budgetary Solutions one-time actions to address this problem is Particularly Significant Now. There are some appropriate. Continuing to make progress on the particularly strong reasons for the state to focus operating deficit, however, also requires ongoing this year on adopting realistic budgetary solutions. actions—principally multiyear or permanent As we discuss later in this report, economic and reductions in program spending, revenue increases, revenue forecasting is unusually difficult now due and reductions in tax expenditures (deductions, to a variety of issues, including uncertain federal credits, and exemptions). Economic growth over fiscal policies, difficulties in forecasting recent CT the next few years should aid this effort, but policy changes, the usual issues of stock market the state’s revenue estimates already assume a volatility, and Facebook. Given these forecasting strengthening economic recovery. challenges, state leaders should not be surprised Since 2009, the Legislature has adopted various if 2012-13 state revenues end up several billion ongoing expenditure reductions across most dollars lower (or higher) than current projections. of state government, along with temporary tax Adopting hundreds of millions of “extra” budget- increases that expired last year. In essence, state balancing actions to accumulate a state reserve leaders have taken a multiyear approach to solving is one possible response to this uncertainty, but the state’s operating deficit problem, similar to what we advise the Legislature to focus instead on we suggested in our November 2010 publication, developing realistic, ongoing budget-balancing California’s Fiscal Outlook. In fact, with the help of actions, even if those actions result in only a small recent growth in the state’s economy and revenues, projected year-end reserve. the state appears to be roughly on the schedule we Finally, given that the Governor’s proposal suggested in November 2010 to eliminate annual assumes that voters approve his tax increase initiative operating deficiencies. in November, the Legislature will likely need to adopt This year, it is important for the state to something like the proposed trigger mechanism to continue its progress towards eliminating the implement automatic reductions in school, university, persistent operating deficit. To do this, the state and other spending if voters reject the tax initiative. needs to adopt additional ongoing budget-balancing (Triggers will be necessary in order to facilitate the actions. If the Legislature chooses to reject one of state’s required annual cash-flow borrowing from the Governor’s ongoing expenditure reductions, investors.) Triggers also need to involve realistic for example, it should try to adopt an alternative and, preferably, ongoing budget solutions if the state ongoing action in its place. Moreover, as it adopts is to continue its progress toward restoring annual these actions to keep “chipping away” at the budget operating balances. 10 Legislative Analyst’s Office www.lao.ca.gov 2012-13 BudgeT By focusing on ongoing and realistic budget finances, ending the cycle of annual legislative actions both in the triggers and its other budgetary sessions focused largely on budgetary issues, and actions, the Legislature can make important restoring public trust in the budget process and progress toward restoring the stability of state state government itself. rEvEnuES and tHE EcOnOmy Administration’s Forecasts for 2011-12 and especially given the variability and volatility 2012-13 Are Reasonable. The administration’s involved in forecasting state revenues (see below). overall economic and revenue forecasts for the Administration’s Out-Year Revenues Are 2012-13 budget cycle are reasonable. Figure 4 Higher Than Ours. For fiscal years after 2012-13, summarizes our office’s updated General Fund our estimates diverge. For instance, in 2013-14, revenue forecast, which, like the administration’s our revenue forecast is $1.3 billion lower than the official budget projections, assumes passage of administration’s. In 2014-15 and 2015-16 (the last the Governor’s tax initiative in November (with year of the administration’s multiyear forecast), increased tax revenues deposited to the proposed we forecast revenues to be around $3.5 billion Education Protection Account or EPA). to $4 billion lower than the Governor each year. For total General Fund and EPA revenues The out-year forecast differences are attributable and transfers, our forecast of $86.7 billion mainly to differences in PIT estimates, as well is $158 million (0.2 percent) below the as the administration’s inclusion of estate taxes administration’s in 2011-12, and our forecast of in its revenue forecast. (We omit estate taxes $95.3 billion is $392 million (0.4 percent) lower entirely from our budget projections, given the than the administration’s in 2012-13. For revenue low likelihood that federal action will permit estimates, these differences are extremely small, resumption of state estate tax collections. The Figure 4 LAO May 2012 Revenue Forecasta General Fund and Education Protection Account Combined (In Millions) 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 Personal income tax $52,366 $59,368 $58,844 $64,475 $68,998 $72,876 Sales and use tax 18,927 20,765 22,772 24,280 25,725 26,296 Corporation tax 8,623 8,869 9,375 9,580 10,095 10,180 Subtotals, “Big Three” taxes ($79,916) ($89,003) ($90,991) ($98,335) ($104,818) ($109,352) Insurance tax $2,150 $2,093 $2,239 $2,323 $2,405 $2,489 Other revenuesb 2,800 2,712 2,679 2,746 2,815 2,886 Net transfers and loansc 1,784 1,489 -1,042 -668 -831 130 Total Revenues and Transfers $86,650 $95,297 $94,867 $102,736 $109,207 $114,857 a Assumes passage of Governor’s tax and other policy proposals, including the Governor’s personal income tax and sales and use tax initiative. Includes amounts deposited to the proposed Education Protection Account. Includes revenues related to the Facebook initial public offering. Assumes Bush tax cuts expire at the end of 2012, with resulting accelerations of personal income tax revenue from 2013 to 2012. b Includes no estate tax revenues, given what we assess as the low likelihood that anticipated future federal legislation will include provisions that allow a resumption of California’s state-level estate tax. If the current-law estate tax were to resume, it could generate over $1 billion per year in General Fund revenue by the end of this forecast period. c Does not reflect any transfers to the Budget Stabilization Account. www.lao.ca.gov Legislative Analyst’s Office 11 2012-13 BudgeT administration’s multiyear estimates, however, during the summer of 2011 during the federal debt project that the budget would remain balanced ceiling debate—economic performance could be with higher PIT collections than we forecast, even weaker than projected. In addition to the debates if the state collects estate tax revenues.) about taxes and spending, the federal government Backup Data Available on Our Website. For also will have to consider raising its debt ceiling more information on our revenue and economic again by early 2013. Billions of dollars of projected estimates, select the “Revenues” policy area on the 2012-13 state revenues could be affected by these “2012-13 Budget Recommendations” page of our federal decisions and perceptions about those website. decisions by businesses and consumers. What Will Investors Do? The May Revision Both “upside” and “downside” to the forecasts estimate how much income investors 2012-13 revenue Forecast will accelerate in response to the assumed Large Level of Variability Around Both LAO expiration of the Bush tax cuts at the end of this and Administration Forecasts. As noted above, year. Specifically, before the tax reductions expire, the administration’s and our revenue estimates investors—particularly those who are high-income are now similar for both 2011-12 and 2012-13. taxpayers—will have an incentive to realize capital We want to emphasize, however, the large level of gains and certain other income sooner than they variability inherent in both the administration’s would otherwise in order to take advantage of revenue estimates and our own. The variability in the current lower tax rates. As in our February General Fund revenue estimates probably is much 2012 “base forecast,” our revenue forecast now greater now than is usually the case. Specifically, assumes that investors will accelerate 20 percent General Fund revenues could easily be billions of of the capital gains they otherwise would realize dollars lower or higher than either of our forecasts in 2013 to 2012, as well as small portions of their in 2012-13 for the reasons noted below. wage income and income from dividends, interest, What Will Congress and the President and rent. The administration makes similar Do? The May Revision economic forecasts—the assumptions in its forecast. To some extent, what administration’s and ours—effectively assume investors assume that federal leaders will do may that Congress and the President will agree later matter more than whether or not the tax cuts for this year to extend the “Bush tax cuts” and recent high-income taxpayers and others actually are payroll tax cuts for at least one year. The economic extended. Some investors already are accelerating forecasts also assume that federal leaders agree to capital gains to 2012 in anticipation of higher a more gradual reduction of federal spending than tax rates in 2013. If, however, investors do not included in the current-law budget sequestration accelerate as much income to 2012 as our forecasts for both domestic and defense spending. If assume, General Fund revenues could be hundreds Congress and the President cannot reach agreement of millions of dollars lower than we project in on sequestration or tax policy changes or if they 2012-13 (with similar increases in later fiscal years). decide to take significantly different policy actions, What Will Happen to California’s Corporate this could decrease or increase projected economic Taxes? Recent CT policy changes at the state level activity in 2013. Moreover, if the process for have greatly complicated our ability to predict what negotiating these changes diminishes consumer level of profits multistate companies will apportion and business confidence—as appeared to occur to California, what level of deductions and credits 12 Legislative Analyst’s Office www.lao.ca.gov 2012-13 BudgeT they will claim, and even when they will pay their major-currency trading partners in 2012—mainly taxes. These challenges magnify the difficulty that due to the recession in Europe (where a 0.5 percent would be present anyway due to uncertainty about contraction in gross domestic product is assumed how the economy will recover from the recent in 2012). By comparison, China’s economy is recession. Receipts of the CT in recent months have assumed in our forecast to be headed for a “soft been far below prior expectations. Accordingly, landing” rather than a severe decrease in that both our office and the administration have country’s significant rate of economic growth. Our reduced our CT forecasts substantially in recent forecast also assumes that refiners’ acquisition costs months. Currently, our lowered CT forecast is still for crude oil—$102 per barrel in 2011—averages higher than the administration’s by $415 million in $113 per barrel in 2012 due to emerging market 2011-12 and $381 million in 2012-13. This reflects demand and heightened geopolitical risks (such as many factors, including our expectation that tax international tensions related to Iran). Significant collections in late June 2012 will come in higher changes from some of these key assumptions could than DOF forecasts. If the DOF forecast is closer materially affect revenue results in 2012-13. to correct, our revenue estimates may end up What Will Happen With Facebook and being too high by a few hundred million dollars. Capital Gains? Both our forecast and the Policy makers should expect these forecasting administration’s assume that California will challenges to continue for several years until clearer experience a revenue boost due to the Facebook information is available on the impact of recent IPO of about $2 billion spread across 2011-12 and CT policy decisions, including the revenue effects 2012-13, assuming passage of the Governor’s tax of the elective single sales factor apportionment measure. (We described our respective forecasts policy, recent changes related to credit and net related to the IPO in a recent post on our website.) operating loss deduction usage, and other issues. As we noted, there are many unknowns in Additional information on tax year 2011 CT forecasting California’s revenues related to the returns will begin to be available late this fall and IPO, including Facebook’s share price six months next spring. after the IPO (which is, by far, the most important What Will Happen to the Global and U.S. variable related to state tax revenue resulting from Economies? State revenue forecasts are premised the IPO) and the extent to which current Facebook on dozens of key assumptions about the U.S. investors who are Californians choose to realize and global economies, as well as the California capital gains in the coming months. Because of economy itself. Our forecast assumes that job such uncertainties, IPO-related revenues could growth and strengthening of the housing market be hundreds of millions of dollars lower than continue in 2012 and beyond, as the current tepid our forecasts or, in some scenarios, $1 billion to economic recovery continues. $2 billion higher. In the U.S. and California, consumer demand Our forecast assumes that California residents actually has been quite strong recently due in will realize $88 billion of non-Facebook net capital part to increased credit availability, improving gains in 2012 (including capital gains accelerated household balance sheets, and pent-up demand due to the anticipated increase in federal tax from the recent recession. Among other rates) and $62 billion in 2013. These estimates are assumptions, our forecast anticipates significant above those that we published in our February weakening of economic growth in the U.S.’s revenue update and are now more optimistic than www.lao.ca.gov Legislative Analyst’s Office 13 2012-13 BudgeT the administration’s assumptions. Our updated on April 30, 2012 (an increase of 11 percent). As forecast for 2012 stock market growth is stronger of the time this publication was written, the stock based on: (1) stock market data through April 2012 market had experienced losses during the month and (2) 2010 tax return information reported by of May. The S&P 500 stock index, for example, had the Franchise Tax Board in late April showing that declined from 1398 on April 30 to 1305 on capital losses (one component of net capital gains) May 17 (a decline of 6.7 percent). If this weaker were running below our expectations. trend continues, our current forecast of stock- Between January and April 2012, the stock related gains may be too optimistic. If, for example, market experienced considerable gains that are net capital gains in 2012 and 2013 end up closer to incorporated into our more optimistic stock market the lower levels we assumed in February, 2012-13 forecast. The S&P 500 stock index, for example, state revenues could be around $2 billion below our increased from 1258 on December 30, 2011 to 1398 May Revision forecast. PrOPOSitiOn 98—K-14 EducatiOn G overnor ’ s M ay r evision P roPosal Revises Rebenching Adjustments. Under the May Revision, the Proposition 98 minimum Updated Revenue Estimates Result in Lower guarantee is affected not only by updated Current-Year Guarantee, Higher Budget-Year revenue estimates but also by various rebenching Guarantee. As shown in Figure 5, the Governor’s adjustments. The May Revision makes a number of revised revenue estimates affect the Proposition 98 these types of adjustments to account for shifts of minimum guarantee for both the current and local property taxes to schools as well as shifts of budget years. In the current year, the $2.1 billion programs in or out of the Proposition 98 minimum drop in General Fund revenues contributes to guarantee. In some cases, the May Revision a $1.3 billion reduction in the Proposition 98 rebenches using the “current-year method.” Using minimum guarantee—lowering the guarantee the current-year approach ensures that shifts from $48.3 billion to $47 billion. In the budget result in dollar-for-dollar effect. (For example, year, despite a $300 million drop in projected shifting $1.4 billion in one-time local property revenues between January and May, the minimum tax revenues to schools and community colleges guarantee increases by $1.2 billion—from results in $1.4 billion in Proposition 98 General $52.5 billion to $53.7 billion. Because revenues fall Fund savings.) In other cases, the May Revision further in 2011-12 than 2012-13, the year-to-year rebenches using the “1986-87 method,” whereby General Fund growth rate increases, resulting in the minimum guarantee is adjusted to reflect the a larger maintenance factor payment and higher value of shifts had they occurred back in 1986-87. corresponding guarantee compared to January. (Whereas the January Figure 5 budget contained a Changes in Proposition 98 Minimum Guarantee $1.4 billion maintenance factor payment, the (In Millions) May Revision contains a January May Change $2.9 billion maintenance 2011-12 minimum guarantee $48,288 $47,024 -$1,264 factor payment.) 2012-13 minimum guarantee 52,527 53,735 1,208 14 Legislative Analyst’s Office www.lao.ca.gov 2012-13 BudgeT In particular, the May Revision uses the 1986-87 changes in budget-year spending. One of the most approach for the rebenching associated with notable changes is a proposal to pay down an the shift of ongoing local property tax revenues additional $446 million in K-14 deferrals—bringing from dissolved RDAs to schools and community the total proposed pay down to $2.8 billion. colleges. Relative to the current-year method, using Intended to conform to one of the current-year the 1986-87 method in this case increases the accounting changes, the May Revision also counts guarantee by slightly more than $200 million. $450 million for QEIA toward the Proposition 98 Makes $785 Million in Current-Year minimum guarantee. In addition, the May Revision Accounting Adjustments. The May Revision officially reflects both the restoration of Home-to- recognizes slightly higher current-year revenue School Transportation funding ($496 million) and limit costs ($183 million) relative to the January the cost of ensuring no district’s per-pupil funding estimates—increasing spending from $47.6 billion is reduced in 2012-13 due to the implementation to $47.8 billion. (Under the Governor’s January of the proposed weighted student formula budget plan, current-year Proposition 98 spending ($90 million)—both commitments the Governor was $661 million below the minimum guarantee, made earlier this year. Other notable changes such that a new settle-up obligation would have include recognizing less savings from the proposal been created.) With the drop in the guarantee not to initiate the Transitional Kindergarten resulting from lower revenues, spending is now program and increasing (rather than cutting) estimated to be $785 million above the current-year funding for preschool. guarantee. Rather than making programmatic Makes Significant Changes to Weighted cuts, the May Revision proposes to maintain Student Formula Proposal. In addition to making spending at $47.8 billion but count $785 million specific adjustments in Proposition 98 spending, of that spending toward unmet prior-year the May Revision includes a number of policy Proposition 98 obligations. Specifically, the May adjustments, including notable changes to the Revision counts $450 million toward a statutory Governor’s January proposal to restructure the obligation from 2005-06 (discussed further below) Figure 6 and $335 million toward Changes in 2012-13 Proposition 98 Spending outstanding settle-up (In Millions) obligations for 2006-07, January May Change 2008-09, and 2009-10. The Baseline adjustments $2,775 $2,333 -$442 first of these payments Pay down K-14 deferrals 2,369 2,815 446 Create K-14 mandate block grantsa 110 110 — results in corresponding Do not initiate Transitional Kindergarten -224 -92 132 General Fund savings of Modify preschool funding -58 33 92 $450 million in the budget Swap with one-time funds -57 -112 -55 Eliminate Early Mental Health Initiative -15 -15 — year. Restore Home-to-School Transportationb — 496 496 Increases Budget-Year Fund QEIA program — 450 450 Spending by $1.2 Billion. Hold harmless for weighted student formulab — 90 90 Total Changes $4,900 $6,108 $1,208 As shown in Figure 6, the a Proposes no change in overall spending but shifts $11 million from schools to community colleges. May Revision contains b Reflects proposals the administration made shortly after releasing the January budget. a number of proposed QEIA = Quality Education Investment Act. www.lao.ca.gov Legislative Analyst’s Office 15 2012-13 BudgeT way the state allocates K-12 funding. While the mandate claiming process.) The May Revision weighted student formula is maintained, the May also establishes a uniform block grant rate of Revision increases the value of the associated base $28 per pupil for all local education agencies grant, decreases the value of the supplemental grant (districts, charter schools, county offices of for English Learners and low-income students, education, and community colleges) rather than excludes two large programs from the formula providing different per-pupil rates for different (Home-to-School Transportation and the Targeted types of agencies. This revision results in a shift of Instructional Improvement Block Grant), and $11 million from the K-12 portion of the mandate lengthens the phase-in period to seven years. The block grant to the community college portion. Governor also proposes to delay implementation Guarantee Drops $2.8 Billion Under Revised of the new formula if voters do not approve Trigger Plan. Just as the May Revision contains his tax measure in November as well as delay several changes to the Governor’s basic budget implementation in future years if Proposition 98 plan, it also contains a number of changes to funding does not meet predetermined growth the Governor’s January trigger plan. Figure 7 thresholds. Additionally, the revised proposal summarizes the Governor’s proposed changes to includes intent language that future growth in his trigger plan—both as it affects the minimum Proposition 98 funding be split evenly between guarantee (top part) and spending (bottom part). deferral pay downs and increases in general Were voters to reject the Governor’s tax measure purpose funding, with existing revenue limit in November, the administration proposes to formulas and the new formula increasing in maintain the rebenching for debt-service payments tandem over the phase-in period. (Under the ($194 million) but eliminate the rebenching January plan, most growth in Proposition 98 associated with the shift of additional student funding had been designated for deferral pay mental health services to schools (-$103 million). downs.) When combined with the estimated loss of tax Makes Notable Changes to Education revenues, the Proposition 98 minimum guarantee Mandates Proposal. The May Revision also makes would drop $2.8 billion (to $50.9 billion). notable changes to the Governor’s earlier education Proposes Deeper Trigger Reductions to Schools mandates proposal. Though the Governor still and Community Colleges. Though the guarantee proposes to target virtually the same set of K-14 would drop by $2.8 billion, the trigger plan mandates for ultimate elimination (roughly contains about double that level of reductions. This half of all existing education mandates), he now is because the Governor proposes to accommodate proposes to eliminate six of the costliest of these both facility debt-service payments ($2.6 billion) education mandates immediately (rather than and the Early Start program ($238 million) within suspending them in the budget year). He also the guarantee (thereby generating equivalent modifies his proposal such that local education non-Proposition 98 General Fund savings). As agencies would be able to receive funding for shown in the bottom part of Figure 7, the May the remaining mandated activities only through Revision trigger plan proposes to rescind the the block grant. (The Governor previously had $2.8 billion associated with paying down K-14 proposed allowing local education agencies to deferrals and cut $2.8 billion in K-14 general choose whether to accept block grant funding purpose funding. Whereas rescinding the deferral or receive reimbursement through the existing pay downs would have little or no programmatic 16 Legislative Analyst’s Office www.lao.ca.gov 2012-13 BudgeT effect, the cut in general purpose funding would administration proposes to make a maintenance equate to a programmatic loss of $415 per factor payment on top of Test 1 rather than Test 2. K-12 student and $275 per community college (The Proposition 98 model is based on a student. Were this programmatic reduction to be complicated comparison of three underlying tests— implemented, the May Revision proposes to allow commonly known as Test 1, 2, and 3.) As a result, districts to reduce the school year by a combined maintenance factor payments are made such that total of 15 days in 2012-13 and 2013-14. they permanently ratchet up Proposition 98 base funding above the level needed to address prior lao a ssessMent shortfalls. Using the administration’s approach Despite Larger Budget Problem, Governor’s fundamentally delinks the creation and payment May Revision Spends More on Education. Despite of maintenance factor obligations. It also results in a major decline in state revenues resulting in a the Proposition 98 requirement being $1.7 billion worsened state budget problem over the next higher relative to the alternative approach. If, 14 months, the Proposition 98 funding requirement instead, the maintenance factor payment were has increased significantly. Given the deterioration applied to Test 2, the 2012-13 guarantee would in the state’s fiscal estimates relative to the have dropped from the January level by about Governor’s January estimates, the Legislature may $500 million due to the drop in revenues rather want to reconsider the Governor’s overall May than increasing $1.2 billion. Moreover, $1.7 billion Revision package—a package that spends more on in proposed May Revision cuts to other areas of the schools and community colleges while budget would not have been necessary. simultaneously cutting other areas of the state budget (primarily health, social services, courts, and state employee compensation) more Figure 7 deeply. Changes to Governor’s Proposition 98 Trigger Plan Governor’s Plan (In Millions) Continues to Rely January May on Questionable Changes in 2012-13 Minimum Guarantee Maintenance Factor Application. One of Revenue drop due to measure failing -$2,444 -$2,907 Rebench for debt-service payments 200 194 the main reasons the Eliminate rebenching for student mental health services — -103 Proposition 98 minimum Total Changes -$2,244 -$2,815a guarantee increases Changes in 2012-13 Proposition 98 Spending despite the drop in state Accommodate debt-service payments $2,593 $2,551b revenues is due to the Accommodate Early Start program — 238 way the administration Rescind deferral pay downs -2,369 -2,815 Reduce general purpose funding -2,468 -2,789c makes the 2012-13 Total Changes -$2,244 -$2,815 maintenance factor a As estimated in the May Revision, the Proposition 98 minimum guarantee would drop from $53.7 billion payment. For the first to $50.9 billion. b Reflects updated amounts. The May Revision had relied on earlier point-in-time estimates. time since the inception c Reflects updated general purpose reduction assuming administration wants to fund at minimum guarantee. of Proposition 98, the www.lao.ca.gov Legislative Analyst’s Office 17 2012-13 BudgeT Rebenching Adjustments Inconsistent. As makes to the weighted student formula and described above and as shown in Figure 8, the mandate proposals reflect at least modest administration is inconsistent in its rebenching improvements. For example, (1) adding grade-span adjustments—in some cases using the current-year weights to the weighted student formula would method and in other cases using the 1986-87 better align funding rates with underlying costs method. Specifically, the May Revision uses the and (2) immediately eliminating rather than current-year method in three cases and the 1986-87 suspending the six costliest education mandates method in three other cases. Using different would improve transparency. Given the additional rebenching methods within the same budget plan spending contained in the May Revision, we also (as well as changing rebenching methods across think dedicating more to paying down deferrals years) at least creates the perception that the state is reasonable, as it enables the state to make more likely is selecting the method that always works payments on time as well as minimizes midyear to its maximum benefit. (Despite this perception, disruptions if the administration’s tax measure one of the rebenchings in the May Revision does were to be rejected. not work to the General Fund benefit to the state.) Concerns With Other May Revision It also calls into question the meaningfulness of Modifications. We have serious concerns, however, the Proposition 98 calculations if the same types with several other May Revision of local property tax and programmatic shifts can modifications, including: (1) pulling Home-to- affect the minimum guarantee in different ways School Transportation and the Targeted depending on the rebenching method used. Instructional Improvement Block Grant out of Specific Spending and Policy Changes: Some the weighted student formula and creating two Modifications Improve Earlier Versions. In separate pots of funding as permanent “add-ons,” reviewing the specific May Revision Proposition 98 (2) retaining activities as formal mandates but proposals, we think some modifications represent eliminating the formal mandate reimbursement improvements whereas others appear to weaken process, and (3) applying a confusing and the Governor’s original proposals. In particular, inconsistent policy regarding funding for districts we think some of the changes the administration that operate two-year kindergarten programs. We Figure 8 Inconsistency in Rebenching Adjustments Rebenching Method Used: 2011‑12 Budget Act January May Shift: ERAF and triple flip 1986-87 1986-87 1986-87 Ongoing redevelopment-related revenues Current-year 1986-87 1986-87 One-time redevelopment-related revenues Not applicable Not applicable Current-year Gas tax swap Current-year None None Child care Current-year 1986-87 Current-year Student mental health services Current-year 1986-87 Current-year Debt-service paymentsa Not applicable 1986-87 1986-87 Early Starta Not applicable Not applicable None a Applicable only under Governor’s trigger plan. ERAF = Educational Revenue Augmentation Fund. 18 Legislative Analyst’s Office www.lao.ca.gov 2012-13 BudgeT have also raised issues with the Governor’s overly As discussed below, both the alternative basic optimistic budget assumptions relating to RDA plan and the alternative trigger plan assume that property tax distributions (as discussed in more maintenance factor is paid from the Test 2 level and detail in a later section of this report). Additionally, rebenchings are calculated using the current-year we are concerned that the May Revision method. (Whereas the maintenance factor substantially overfunds the QEIA program. assumption significantly affects the Proposition 98 Even More Serious Concerns With May minimum guarantee, the rebenching assumption Trigger Plan. In The 2012-13 Budget: Proposition 98 has a relatively minor effect.) These two components Education Analysis (February 2012), we raised are not dependent upon each other. The Legislature, issues with the Governor’s January trigger plan, for example, could adopt the maintenance factor particularly its rebenching approach for debt-service application but not the rebenching approach payments. The May trigger plan not only retains the contained in the alternative plans. Both the alternative questionable rebenching approach for debt-service basic plan and the alternative trigger plan also contain payments but also (1) shifts the Early Start program a number of specific spending components. These into the guarantee without any rebenching at all and spending components can be assessed independently (2) eliminates the 2012-13 rebenching for the shift too, such that the Legislature could adopt certain of student mental health responsibilities to schools aspects while rejecting others. (which the state had planned to implement as the Alternative to Governor’s Basic Plan Achieves second phase of a rebenching already undertaken More State Budget Solution. Figure 9 (see page in the current year). Such inconsistent treatment 20) lays out a possible alternative package to the across years and among programs is problematic Governor’s basic Proposition 98 budget plan. The from both a fiscal and a policy perspective. From a alternative spends $1.9 billion less on schools and budgetary perspective, the May Revision appears community colleges, thereby representing an arbitrary in adjusting the guarantee by a small additional budget-balancing action relative to the amount when a large expenditure (debt service) is May Revision. It does so by making what we believe shifted within it and not adjusting the guarantee to be a series of reasonable adjustments with little at all when two other programs are included. to no additional programmatic impact on schools Moreover, from a policy perspective, the May and community colleges. Moreover, the $1.9 billion Revision appears arbitrary in its decisions regarding in freed-up funding could be used for restoring what constitutes an “education” program— May Revision cuts to other areas of the state budget seemingly identifying a new education program or addressing other likely budget holes. Below, we when expedient for budget purposes. highlight the major components of this alternative plan. a a P 98 P n lternative roPosition ackaGe Use Historical Method for Paying Maintenance Given the concerns expressed above, the Factor Application. Making the required Legislature could consider a different overall maintenance factor payment on top of the Test 2 Proposition 98 package. This section lays out an level would reduce the minimum guarantee by alternative to the Governor’s basic Proposition 98 $1.7 billion in 2012-13—dropping the guarantee from budget plan. (The following section lays out an the May Revision level of $53.7 billion to $52 billion. alternative to the Governor’s Proposition 98 trigger This method has significant conceptual benefits plan.) over the administration’s approach in that it retains www.lao.ca.gov Legislative Analyst’s Office 19 2012-13 BudgeT the fundamental link between maintenance factor Though notably less than the amount in the creation and payment. That is, it creates maintenance May Revision, it is only somewhat less than the factor whenever state revenues are relatively weak amount the Governor proposed to pay down and pays maintenance factor such that Proposition 98 under his February proposal, reflects a 14 percent funding over the long run is unaffected by prior-year reduction in total deferrals, and would allow the reductions due to weak state revenues (or suspension). state to convert about one month of late payments Use the Current-Year Method for Rebenchings. to on-time payments. More importantly, it Using the current-year method consistently for all would allow the state to reduce spending to the rebenchings would lower the current- and budget-year lower minimum guarantee without affecting minimum guarantees slightly ($108 million in 2011-12 programmatic support for schools and community and $113 million in 2012-13). Not only is such an colleges. approach consistent, but it would allow the state to Pay Off More Settle Up, Cover QEIA Costs. retire a small amount of additional settle up in the Under the alternative, the state would score an current year as well as generate a small amount of additional $108 million as a settle-up payment in additional savings in the budget year. 2011-12 due to rebenching adjustments. Relative Reduce Deferral Pay Down. Rather than to the May Revision, this approach achieves some increasing the deferral pay down to $2.8 billion additional one-time savings in future years. As as under the May Revision, this alternative under the May Revision, the alternative would fund would provide $1.5 billion toward this purpose. the QEIA program using Proposition 98 General Figure 9 An Alternative Proposition 98 2012-13 Budget Package (In Millions) Governor Alternative Difference Spending Changes Baseline adjustments $2,333 $2,333 — Pay down K-14 deferrals 2,815 1,525 -$1,290 Restore Home-to-School Transportation 496 496a — Fund QEIA program within Proposition 98 450 328 -122 Create K-14 mandate block grants 110 110 — Hold harmless for weighted student formula 90 90 — Modify preschool funding 33 — -33 Use unspent prior-year EIA monies — -350b -350 Swap with one-time funds -112 -186c -73 Do not initiate Transitional Kindergarten -92 -75 17 Eliminate Early Mental Health Initiative -15 -15 — Totals $6,108 $4,257 -$1,851d a Alternative would treat this program comparable to other flexed categorical programs rather than maintain as permanent “add-on.” b Offsets districts’ 2012-13 EIA allocation by unspent prior-year funds. c Recognizes an additional $74 million in available one-time monies. d Reflects reduction in the minimum guarantee if maintenance factor is paid using historical approach ($1.739 billion) and the current-year method is used for all rebenchings (additional reduction of $113 million). Minimum guarantee would be reduced from May Revision level of $53.735 billion to $51.884 billion. This amount reflects savings that could be redirected to other state budget purposes. QEIA = Quality Education Investment Act and EIA = Economic Impact Aid. 20 Legislative Analyst’s Office www.lao.ca.gov 2012-13 BudgeT Fund monies. The alternative, however, would kindergarten, we recommend the Legislature provide only what is needed to cover projected adopt a consistent statewide policy that would program costs in 2012-13 ($328 million). (Program disallow districts from receiving funding for costs have been declining for several years due to two-year kindergarten programs (but still would declining enrollment and are expected to decline allow children on a case-by-case basis to enroll in further in 2012-13 due to some participating schools traditional kindergarten prior to turning five years not meeting programmatic requirements.) of age). Modify Certain May Revision Policy a a P 98 n lternative roPosition Proposals. In addition to these spending changes, t P riGGer lan the Legislature could consider alternatives to the Governor’s May Revision policy proposals. For Step 1: Count Overappropriation in 2011-12 example, we recommend the Legislature fold as Settle-Up Payment. In addition to exploring funding for Home-to-School Transportation and an alternative to the Governor’s basic budget plan, the Targeted Instructional Improvement Block the Legislature could consider an alternative to the Grant into districts’ existing revenue limit Governor’s trigger plan. As shown in Figure 10, allocations rather than creating two separate if the Governor’s tax measure were rejected, the “add-ons” to the weighted student formula. Proposition 98 minimum guarantee would drop Such an approach holds districts harmless in the to $45.6 billion in 2011-12. The primary cause of near term but still equalizes per-pupil funding the drop in the guarantee is due to the loss of tax rates in the long term. Regarding mandates, we measure-related revenues. To address the drop in continue to recommend the Legislature replace the 2011-12 guarantee, the Legislature could count the existing mandate reimbursement process with all spending above the guarantee ($1.4 billion) a discretionary block grant. If the Legislature, toward unmet prior-year settle-up obligations. Such however, were to adopt the Governor’s May action would achieve out-year savings for the state Revision proposal to retain certain Figure 10 mandated activities, Comparing Proposition 98 Trigger Plans then we recommend the (In Millions) Legislature retain the Governor Alternative Difference mandate reimbursement process. This would help 2011-12 Ongoing Proposition 98 funding $47,024 $45,637 -$1,387 avoid constitutional issues Settle-up payment 335 1,722 1,387 and reduce the risk of QEIA-related payment 450 450 — associated litigation (and Totals $47,810 $47,810 — 2012-13 likely not increase state Ongoing Proposition 98 funding excluding new shifts $48,131 $49,384 $1,253 costs significantly, as few New shifts proposed in May revisiona 2,789 — -2,789 school districts would Fund debt service and Early Start as under current law — 2,789 2,789 have fiscal incentives Totals $50,920 $52,173 $1,253b a The Governor’s May Revision trigger plan funds K-14 general obligation debt-service payments and the Early Start program to file reimbursement using Proposition 98 funds. b claims). Regarding Due to higher costs, the alternative plan provides this amount less in budget solution than the Governor’s trigger proposal. QEIA = Quality Education Investment Act. www.lao.ca.gov Legislative Analyst’s Office 21 2012-13 BudgeT without any near-term programmatic impact on actions to be adopted in other areas of the state schools and community colleges. budget. This loss of savings is the major drawback Step 2: Fund at Lower Minimum Guarantee of the alternative trigger plan. in 2012-13. The above action would lower the Alternative Trigger Plan Has Significant minimum guarantee in 2012-13 by $1.4 billion Benefits. Despite this drawback, the alternative has (assuming the Test 2 method of paying major advantages over the Governor’s trigger plan. maintenance factor). Taken together with the One of the significant advantages is that it involves loss in tax measure-related revenue, the 2012-13 shifting no programs in or out of the minimum minimum guarantee would be $49.4 billion. guarantee and no corresponding rebenchings. Given the drop in the minimum guarantee, the Another significant benefit is that districts have Legislature could first rescind all deferral pay a better “worst-case” scenario in 2012-13, which downs (similar to the Governor’s plan) with would allow districts to sustain a bigger and/ little or no programmatic effect on schools and or better educational program in the coming community colleges. In addition, the Legislature school year. That is, under the alternative trigger could reduce school and community college plan, districts could plan for only $1 billion in general purpose funding by $1 billion and adopt programmatic cuts rather than $2.8 billion in cuts. some corresponding flexibility measures to help As repeatedly emphasized by districts over the last districts respond. (These could include removing few months, even though the tax measure would restrictions on contracting out, modifying the provide considerable benefits beginning in 2013-14, “50 percent law” that applies to community it would provide little immediate benefit for colleges, and allowing for the school year to be districts in the 2012-13 school year. The alternative shortened a few days on a one-time basis.) This trigger plan attempts to achieve the best possible alternative would cut a total of $4.4 billion from outcome in 2012-13 for districts regardless of the schools and community colleges. outcome of the tax measure. Were the tax measure Though still a steep reduction, less to be approved, it would provide significant benefits education-related budget solution would be thereafter. achieved, thereby requiring additional budget StudEnt Financial aid G overnor ’ s M ay r evision P roPosal savings estimates for Cal Grant reductions. To offset these higher costs, the Governor proposes In his January budget, the Governor proposed additional fund shifts and two major policy $766 million in fund shifts and $302 million in changes. Cal Grant program reductions. The May Revision Additional Fund Shifts. The Governor proposes recognizes $135 million in additional Cal Grant to replace $107 million of General Fund support costs relative to the January proposal, including for Cal Grants with expanded fund shifts from two additional spending to cover the California State different sources of funding: (1) $67.4 million from University’s approved 2012-13 tuition increase, the federal Temporary Assistance for Needy Families fix an unintended consequence of 2011 legislation Block Grant and (2) $30 million from the Student limiting student eligibility, and revise January Loan Operating Fund. These fund shifts depend 22 Legislative Analyst’s Office www.lao.ca.gov 2012-13 BudgeT on the availability of funds from other sources and Tightened Institutional Criteria Should Be would have no programmatic effect on Cal Grants. Phased In. We think the Governor’s focus on Tighter Restrictions on Institutional Eligibility. institutional performance makes substantially more Recently enacted legislation prohibits certain sense than reducing grant amounts solely based on institutions with federal student loan default rates the type of institution a student attends, as another of 24.6 percent or more from fully participating in of the Governor’s proposals would do. While we Cal Grant programs. The default limit is scheduled believe the general approach merits consideration, to rise to 30 percent in 2012-13. In January the we are concerned that this proposal overreaches. Governor proposed to freeze the limit at its current It could immediately disqualify from Cal Grant level. The May Revision now proposes to reduce the participation institutions that currently serve about default rate limit to 15 percent, slightly above the one-third of Cal Grant students in the proprietary national average for all institution types. In addition, sector, giving neither students nor institutions the Governor proposes to disqualify certain sufficient time to adjust to new requirements. In institutions with student graduation rates below addition, the Governor’s savings estimates fail to 30 percent. The administration estimates savings account for the likely movement of students from of $38.4 million from this proposal beginning in ineligible schools to eligible ones. As a result, the 2012-13. Governor’s savings estimates are likely overstated Prorated Cal Grant Award Amounts. Beginning in the budget year and significantly overstated in in 2013-14, the Governor proposes to reduce Cal out-years. We recommend adopting the Governor’s Grant tuition awards for some students, using a January proposal to freeze the default rate limit at federal financial need calculation. Specifically, Cal the current-year level—or an incrementally lower Grants would be prorated based on the size of the level—and phasing in tighter restrictions over a few federal Pell Grant for which a student qualified. For years. example, a University of California (UC) student Prorating Proposal Should Be Part of Larger who qualifies for half of the maximum $5,550 Pell Reform. The Governor’s proposal to prorate award Grant would receive half the Cal Grant tuition award amounts, in contrast, does not go far enough. (which currently covers full systemwide tuition We have recommended a more comprehensive and fees). This proposal would have no budget-year approach to reform of Cal Grant programs that impact, but would provide out-year savings in the could include adjusting grant amounts based on hundreds of millions of dollars. financial need as well as changes to eligibility determination, maximum award levels, and other lao a ssessMent features of the programs. The Governor’s proposal The Governor’s May Revision proposals makes one significant change in isolation, missing address important policy concerns. The proposals the opportunity to improve the operation and collectively would strengthen incentives for performance of the programs more fundamentally. institutions to improve their student financial and Furthermore, proposing such a major departure academic outcomes, eliminate from Cal Grant from existing policy one month before the budget participation institutions with poor outcomes, and must be adopted leaves insufficient time for a better tailor the size of Cal Grant awards to relative thorough evaluation of its implications and could need. result in unintended consequences in the near www.lao.ca.gov Legislative Analyst’s Office 23 2012-13 BudgeT term. We recommend the Legislature direct an reform in a more comprehensive, deliberative way independent study of the state’s student financial through the policy process in the next legislative aid programs with the purpose of addressing session. FundS FrOm rEdEvElOPmEnt diSSOlutiOn o dissolved RDAs and requires county auditors to verview deposit each RDA’s property tax revenues into trust The May Revision assumes K-14 districts will funds. Money in these trust funds are used to pay: receive a total of $3.3 billion in the current and budget year from the dissolution of RDAs. This • Financial obligations of the former RDA that are identified by dollar amount on a amount includes (1) $1.8 billion in RDA property Recognized Obligation Payment Schedule tax revenues (down from $2.1 billion assumed in the (ROPS) that is approved by DOF and a local January budget) and (2) $1.5 billion in RDA cash and oversight board. (A nearby box provides other liquid assets (a new budget solution in the May information on the ROPS approval process.) Revision). As shown in Figure 11, the May Revision proposes to count $3.2 billion of these funds as an • Certain administrative costs. offset towards meeting the state’s Proposition 98 minimum funding guarantee. Districts would receive • Under the administration’s interpretation the remainder in a manner that would not count as a of ABX1 26, local agency pass-through Proposition 98 offset. payments. (We discuss the implications of this interpretation in our February 2012 s P t r chool roPerty ax evenues report, The 2012-13 Budget: Unwinding How RDA Dissolution Increases K-14 District Redevelopment.) Property Tax Revenues. Chapter 5, Statutes of 2011-12 After paying these obligations, ABX1 26 directs First Extraordinary Session (ABX1 26, Blumenfield), county auditors to distribute any remaining Figure 11 trust fund revenues as Administration Estimates: K-14 District Redevelopment Funds property taxes to schools and other local agencies. (In Millions) Based on the state’s 2011-12 2012-13 Totals property tax distribution Property Tax $818 $991 $1,809 laws, K-14 districts Proposition 98 offset (818) (981) (1,799) Not an offset (10) (10) receive about half of the Assets — $1,478 $1,478 remaining trust fund Proposition 98 offset — (1,405) (1,405) revenues. County auditors Not an offset — (74) (74) make these trust fund Totals $818 $2,469 $3,287 distributions twice a year: Proposition 98 offset (818) (2,386) (3,204) Not an offset — (84) (84) on June 1st and January 1st. Detail does not add due to rounding. 24 Legislative Analyst’s Office www.lao.ca.gov 2012-13 BudgeT May Revision Estimate of K-14 District administrative costs, and pass-throughs, leaving RDA Trust Fund Revenues. The May Revision little or no funds to distribute to schools and other assumes $818 million of RDA trust funds will be local agencies. distributed to K-14 districts in the current year After reviewing these county auditors’ and $991 million in 2012-13. These amounts are reports—and adjusting them to reflect the about $300 million lower than anticipated in likelihood that DOF will (or already has) reduced the administration’s January budget proposal. the amounts shown on many ROPS—we estimate Beginning in 2012-13, the May Revision proposes that K-14 districts could receive about $200 million to exclude 1 percent ($10 million) of the revenues in June, or over $600 million less than the May K-14 districts receive from RDA trust funds Revision anticipates. This funding shortfall reflects for purposes of calculating the Proposition 98 (1) partial-year implementation of ABX1 26, guarantee. (2) successor agency ROPS totaling sums that Assessment: Current-Year K-14 Revenues sometimes exceed the level of property tax revenues Overstated. On May 1, county auditors submitted the former agency received, and (3) payment of a to DOF estimates of the amounts they expect to backlog of pass-through payments (caused by some distribute on June 1 from RDA trust funds to RDAs failing to make pass-through payments in schools and other local agencies. (For reasons January after the court upheld their dissolution). that we discuss in a box on page 26, this June 1 Assessment: Budget-Year K-14 Revenues Also distribution will be the only distribution from the Overstated. Going forward, schools and other local RDA trust funds to schools and local agencies in agencies will receive two disbursements annually 2011-12 and, thus, will represent a partial-year from the redevelopment trust fund and the backlog implementation of ABX1 26.) In these reports, of pass-through payments will be cleared. In county auditors informed DOF that virtually addition, it is likely that some obligations listed on all RDA trust funds will be used to pay ROPS, agencies’ ROPS will be retired and that county RDA ROPS Approval Requirement Given the direct fiscal link between items listed on an entity’s Recognized Obligation Payment Schedule (ROPS) and trust fund distributions to schools and other local agencies, Chapter 5, Statutes of 2011-12 First Extraordinary Session (ABX1 26, Blumenfield), requires redevelopment agencies’ (RDAs) “successor agencies” (entities managing the dissolution of RDAs) to update their ROPS every six months and submit them to local oversight boards and the Department of Finance (DOF) for approval. Over the five months since the court upheld ABX1 26, oversight boards have assembled and reviewed ROPS, but typically not made significant changes to them (even when proposed ROPS spending exceeds the amounts previously spent by the dissolved RDA). The DOF’s review, in contrast, often has resulted in successor agencies removing items from proposed ROPS, reducing the total payable amounts by 10 percent to 20 percent. Even with these DOF-ordered changes, however, items on some ROPS add to a level of spending that is higher than the amounts spent by the former RDAs, a factor that reflects the difficulty associated with state review of complex local contracts within a short period. www.lao.ca.gov Legislative Analyst’s Office 25 2012-13 BudgeT audits (due in July 2012) will determine that some RDA assets transferred to another public agency ROPS obligations can be paid from revenues other after January 1, 2011, provided that the asset has than the redevelopment trust fund (such as RDA not been contractually committed to a third party. lease revenues or bond proceeds). All of these actions RDA Liquid Assets Included as Budget will leave more trust funds available to disburse Solution. The May Revision assumes $1.5 billion to schools and other local agencies. Accordingly, of former RDAs liquid assets will be distributed we anticipate that annual K-14 revenues from to K-14 districts in 2012-13 and over $600 million redevelopment will increase significantly in 2012-13 in 2013-14. Similar to the administration’s to $700 million, $300 million less than the $1 billion proposal related to redevelopment property tax assumed by the administration. trust funds, the May Revision proposes to count 95 percent of these revenues as an offset to the r a a edeveloPMent Gency ssets state’s Proposition 98 minimum funding guarantee. How K-14 Districts Receive Funds From RDA The remaining 5 percent ($74 million in 2012-13) Assets. Prior to 2011, RDAs had considerable would be provided to K-14 districts in addition to resources, including several billion dollars of funds provided under Proposition 98. To facilitate cash and other liquid assets. After the Governor recapture and distribution of redevelopment assets, proposed RDA dissolution in January 2011, RDAs the May Revision proposes legislative changes that began shifting these assets to other entities, such (1) set deadlines for successor agency asset transfer as their sponsoring city or county and economic and distribution and (2) authorize reductions development corporations. The RDA asset transfers of local sales and property tax revenues from continued until early 2012. Seeking to preserve agencies not complying with DOF and SCO orders RDA assets so that they could be distributed to regarding redevelopment assets. other local agencies, ABX1 26 directs the State Assessment: Significant Risk. Updated Controller’s Office (SCO) to order the return of estimates of the amount of unencumbered funds distributing rda Property taxes Before and after the Supreme court ruling Before they were dissolved, redevelopment agencies (RDAs) received over $5 billion in property tax revenues annually. While county property tax disbursement policies varied, auditors typically distributed over 50 percent of this amount in December and most of the remaining property taxes in the spring. Because the Supreme Court had not ruled on Chapter 5, Statutes of 2011-12 First Extraordinary Session (ABX1 26, Blumenfield), by mid-December, auditors distributed over $2 billion of property taxes directly to RDAs at that time. (That is, auditors did not put RDA funds into trust funds and follow the payout provisions of ABX1 26.) The upcoming June 1, 2012 disbursement, therefore, will be the first time that county auditors follow ABX1 26’s procedures and distribute revenues from the RDA trust funds to schools and other local agencies. As part of the May Revision, the administration proposes legislation that seeks to recapture some of the funds auditors provided RDAs in December 2011. Our estimate assumes that a portion of these funds would be captured in the June 1, 2012 distribution and that more will be captured in future years’ distributions. 26 Legislative Analyst’s Office www.lao.ca.gov 2012-13 BudgeT held by RDA successor agencies will not be 2013-14 is subject to considerable uncertainty. available until county audits are complete in July. Specifically, while it is possible that schools could In addition, the SCO’s review of transferred RDA receive more than $1.5 billion in 2012-13 from assets is in its early states and the Controller’s redevelopment assets, we think it is much more authority to order the return of transferred assets likely that schools will receive significantly lower likely will be challenged in court. (We note, for amounts—at least in the budget year. To maximize example, that some cities contend that economic the administration’s and SCO’s capacity to recoup development corporations are not public agencies transferred subject to the return provisions of ABX1 26.) redevelopment assets and have them distributed Finally, some RDA assets transferred over the last to schools in the budget year, we recommend the year have been spent or contractually committed Legislature carefully review the administration’s to third parties. As a result, the administration’s legislative proposals and take actions to clarify and, estimate of RDA liquid assets available for where appropriate, strengthen their authority. distribution to local agencies in 2012-13 and HEaltH and Human SErvicES c al work s and c hild c are The May Revision maintains this framework but introduces three significant changes by: Governor’s Proposal (1) permitting recipients to meet work requirements through any combination of activities allowed Continues to Propose Redesigned CalWORKs by current state law—as opposed to aligning to Program Structure, but With Several Significant more restrictive federal requirements—for the first Changes. The Governor’s January budget proposed 24 months of CalWORKs Basic, (2) expanding to redesign the California Work Opportunity and the CalWORKs Basic time limit to 48 months Responsibility to Kids (CalWORKs) program by for adults meeting federal work participation replacing it with a three-part system, consisting of requirements through any combination of activities two CalWORKs subprograms—CalWORKs Basic allowed by federal law (such as unsubsidized and and CalWORKs Plus—and a Child Maintenance subsidized employment, education, and training), program. Accompanying this redesign, the and (3) eliminating the counting of prior months Governor proposed three significant policy changes in exemptions and sanction toward the adult to create budgetary savings: (1) reducing cash time limit. Under these proposed changes, the grants for the majority of cases, (2) shortening CalWORKs Basic program would essentially the adult time limit for receipt of benefits, and maintain the CalWORKs program as it exists now (3) modifying work requirements. Altogether, the for 24 months for all work-eligible recipients and Governor’s January proposals would have resulted for 48 months for all adults meeting federal work in $985 million in budget-year savings. The May participation requirements (by any combination of Revision policy changes discussed below result allowable work activities). As with the Governor’s in roughly equivalent net savings as the policy January proposal, the CalWORKs Plus program changes proposed in January. would provide an increased cash grant to families www.lao.ca.gov Legislative Analyst’s Office 27 2012-13 BudgeT that are meeting federal work requirements reducing family income eligibility thresholds, through unsubsidized employment. All non-work- lowering payment rates for both child care vouchers eligible cases, as well as those that fail to meet and state-run child care centers, and limiting work requirements, would be placed in the Child eligibility to parents who were working a required Maintenance program, which remains unchanged number of hours. The May package maintains from the Governor’s January proposal. many of these proposals, but notably loosens the Phases In Work Requirements for Previously proposed work eligibility restrictions. Specifically, Exempt CalWORKs Cases. In each of the last three the revised proposal would allow parents to receive years, the state has reduced county single allocation subsidized child care benefits for two years while funding for employment services and child care they attend educational or training programs, and as a means of achieving budgetary savings. In restores funding for an associated 25,000 child 2011-12, single allocation funding was reduced care slots. To offset the $180 million cost of this by $377 million. These reductions have been expanded eligibility, the May Revision proposes accompanied by expanded exemptions from work to make additional reductions—beyond what was requirements, known as “young child” exemptions, proposed in January—to the maximum voucher which allow counties to manage the single amount the state would provide for families to allocation reduction by reducing employment purchase child care. Specifically, the proposal services and child care caseloads. Under current would drop maximum voucher rates from the law, the young child exemptions enacted as part 85th percentile to the 40th percentile of regional of the 2011-12 budget will expire on June 30, 2012, market rates (RMR) based on data collected in at which time all previously exempt cases will 2005. (The January proposal would have reduced become subject to work requirements and therefore voucher rates to the 50th percentile based on 2009 eligible for county-provided child care and RMR data.) employment services. The May Revision proposes laO assessment to: (1) postpone expiration of the young child exemptions until October 1, 2012 and (2) require Revisions Address Several Concerns With counties to engage all previously exempt cases January Proposal, but Some Concerns Remain. in welfare-to-work activities during a 12-month In our prior analysis of the Governor’s January period beginning in October 2012. While the CalWORKs proposal, we recommended two administration intends for counties to phase these specific changes be made: (1) not counting prior exempt cases into the welfare-to-work system months in exemption towards the adult time limit over a 12-month period, discretion is provided to and (2) making allowances for mental health and counties as to how this process would take place. substance abuse services that would be overly During the 12-month phase-in period, cases would restricted by aligned state and federal work maintain their exemption status until the county requirements. The May Revision has incorporated engages them in welfare-to-work services. both of these changes into the Governor’s Maintains Same Overall Level of Child Care CalWORKs proposal. It also addresses other Reductions, but Changes Mix of Cuts. As in concerns raised by the Legislature. By allowing January, the May Revision proposes to reduce child recipients to meet work requirements through care funding by roughly $400 million compared to participation in education and training after 2011-12 levels. January savings proposals included 24 months of aid, the May Revision addresses a 28 Legislative Analyst’s Office www.lao.ca.gov 2012-13 BudgeT primary concern raised by the Legislature that 40th percentile. The administration is hoping to the January proposal would too severely limit collect additional data to be able to set specific rates educational opportunities for CalWORKs families. for each county and type of provider. Also, the Governor’s proposal to gradually phase Legislature Has Alternative Options for out the young child exemptions would avoid a Making Reductions to CalWORKs and Subsidized potentially impractical increase in employment Child Care. We have compiled a number of services caseloads for the counties. alternative approaches for the Legislature to Despite these improvements, some significant consider should it desire to make different concerns remain with the Governor’s proposal. reductions from those proposed by the Governor. Specifically, it still focuses reductions on child-only (A discussion of these alternatives can be found cases, which may face comparatively more barriers in our report, The 2012-13 Budget: The Governor’s to self-sufficiency. In addition, the Governor’s CalWORKs and Child Care Proposals.) proposal likely continues to underfund county For CalWORKs, other options include responsibilities, as it includes a significant enacting an across-the-board cash grant reduction, reduction to county single allocation funding modifying the earned income disregard, continuing which is not accompanied by commensurate the current-year county single allocation reduction, reductions in county responsibilities. and targeting cash grant reductions at cases that Proposal Cuts Child Care Voucher Rates Too have received aid for extended periods of time Deeply. Our initial review suggests the Governor’s (eight to ten years). For child care, alternatives proposal would drop current child care voucher include additional reductions to income eligibility levels by at least one-third. While the proposal ceilings, eliminating care for some school-age generates savings without eliminating child care children, and raising parent fees. The Legislature slots, we are concerned the reductions are so deep could replace some of the Governor’s proposals that families would struggle to find qualified which raise concerns—including focusing cash providers willing to accept such low payments. grant reductions primarily on child-only cases Specifically, while the proposed rates would have and the dramatic reduction to child care provider provided families access to 40 percent of licensed rates—with some of these alternatives to create a child care providers in 2005, we estimate that budget package that best reflects how it wishes to in the current market families would be able to balance the multiple objectives of these programs afford a notably lower proportion of licensed child and achieves a desired amount of savings. care providers. (As under current law, families i -h s s n oMe uPPortive ervices would have the option of selecting providers who charge more than the state’s maximum voucher Governor’s Proposal level, but they would be responsible for paying the difference.) In January, the Governor proposed $1.2 billion Moreover, our review suggests the proposed from the General Fund ($5.3 billion total funds) for threshold is well below the policies adopted for support of the In-Home Supportive Services (IHSS) subsidized child care in other states. Analyzing program. The Governor’s revised budget proposes the feasibility and impacts of the proposal is $1.5 billion from the General Fund for IHSS. This complicated by the fact that the state does not increase in General Fund costs is primarily due to currently maintain RMR survey data down to the (1) the elimination of previously assumed savings www.lao.ca.gov Legislative Analyst’s Office 29 2012-13 BudgeT from the implementation of the IHSS provider tax to assume that the state will ultimately prevail due to a lack of federal approval for the tax, (2) a in current litigation and be able to implement a reduction in the estimated savings from requiring 20 percent across-the-board reduction in IHSS recipients to obtain a health certificate, and (3) a service hours effective April 2013. It is important later implementation date for both the Governor’s to note that if the state is able to implement January proposal to eliminate domestic and related the 20 percent across-the-board reduction, the care services for most recipients in shared living proposed 7 percent across-the-board reduction arrangements and for the previously adopted would be in addition to the 20 percent reduction. 20 percent across-the-board reduction in hours that laO assessment currently has been enjoined by a federal district court judge. These increased costs are partially Magnitude of a Proposed Reduction in Service offset by a lower caseload than was estimated in Hours Impacts Legal Risk. Although the state has January and a new savings proposal to implement been able to implement a 3.6 percent across-the- a 7 percent across-the-board reduction in IHSS board reduction in service hours without legal hours, which we discuss below. challenge to date, a federal district court judge has Additionally, the Governor continues to issued an injunction that prevents the state from propose to make IHSS a managed care benefit implementing the 20 percent reduction in hours. through his Coordinated Care Initiative (CCI). There were various reasons for this injunction, one (Please see our comments on this initiative in of them being that the reduction in hours could the “Medi-Cal” section of this report.) For more place recipients at risk of entering an institution, information on the details of previously enacted and could therefore violate the Americans with IHSS policies and the Governor’s January budget Disabilities Act. Although the 7 percent reduction proposals, please see our March 2012 publication, is not as large as the 20 percent reduction, and The 2012-13 Budget: In-Home Supportive Services therefore its impact on IHSS program beneficiaries Budget Update. would be significantly less, it is uncertain at what A 7 Percent Across-the-Board Reduction in point the reduction would be significant enough in Hours. The Governor’s May Revision proposes to the eyes of the courts to place recipients at risk of implement a 7 percent across-the-board reduction institutionalization. in IHSS service hours effective August 2012. Under LAO Savings Alternatives. In our March report, current law, effective in 2010-11, IHSS recipients we offered two savings alternatives that we considered have had their service hours reduced by 3.6 percent, posed less legal risk than the Governor’s January but this reduction is set to expire at the end of June budget savings proposals for IHSS. The Legislature 2012. Similar to the 3.6 percent reduction currently may also wish to consider these in light of the legal in place, under the Governor’s proposal recipients risk potentially posed by the Governor’s May Revision would determine which of their authorized services proposal. These alternatives included (1) extending will be impacted by the reduction. This reduction the current 3.6 percent across-the-board reduction is estimated to result in net General Fund savings in service hours (if the 20 percent across-the-board of $99 million in 2012-13. The administration reduction were not implemented) and (2) reenacting estimates that the average IHSS recipient will lose a reduction in state participation in provider wages to 6.1 hours per month as a result of this reduction. a level, determined by a study, that does not impact As previously mentioned, the budget continues recipient access to services. In January, we estimated 30 Legislative Analyst’s Office www.lao.ca.gov 2012-13 BudgeT the General Fund savings from the extension of the (2) delaying the start date from January 1, 2013 to 3.6 percent reduction in service hours to be about March 1, 2013, and (3) indicating its intention to $60 million in 2012-13. The level of savings associated eventually transition IHSS collective bargaining with a reduction in state participation in wages would from the local government level to the state. This depend upon the amount of the reduction that is revised proposal is estimated to reduce General supported by the study. Fund costs by $663 million in 2012-13 (slightly lower than that assumed by the January budget M -c edi al proposal), savings which are largely achieved by The Governor’s May Revision includes several delaying payments to Medi-Cal managed care significant policy changes to the budget for the plans and providers. Medi-Cal Program. In addition, lower caseload LAO Assessment. The administration has made estimates and other budgetary adjustments are several changes and updates to its proposal that expected to result in reduced expenditures of begin to address many of the concerns we raised in $200 million in 2011-12 and $700 million in our February report. For example, it has provided 2012-13. We describe some of the significant policy more information on its vision of how IHSS would adjustments below. be integrated as a managed care benefit, established a series of stakeholder workgroups to work out coordinated care initiative implementation details, and proposed to delay the Governor’s Proposal. As part of the January initial implementation timeline to increase the budget, the Governor proposed the CCI, which likelihood of successful implementation. However, would integrate all services, including medical we continue to have many of the same concerns care and long-term supports and services, into about the complex and difficult implementation managed care for nearly all seniors and persons issues that still need to be addressed. These issues with disabilities (including “dual eligibles,” who include, for example, integration of IHSS as a are eligible for both Medicare and Medi-Cal) managed care benefit, beneficiary outreach and statewide beginning in January 2013. At the center enrollment, and setting rates paid to managed of this proposal, the Governor proposed to expand care plans. In addition, our primary concern a recently authorized demonstration project remains—the proposal would prematurely expand (originally scheduled to begin in January 2013) that a pilot project statewide before the results have been will test this new model of integrated care in up to properly evaluated. four counties. Our initial assessment of the CCI Hospital Payment changes can be found in our February 17, 2012 report, The 2012-13 Budget: Integrating Care for Seniors and Governor’s Proposal. The May Revision Persons With Disabilities. assumes combined General Fund savings of Since the release of our initial assessment, the $325 million in 2012-13 from implementing administration has provided more details on how changes to Medi-Cal payments for three categories certain aspects of the CCI would be implemented. of hospitals: private hospitals, designated public In addition, as part of the May Revision, the hospitals (DPHs), and non-designated public administration is making several changes to the hospitals (NDPHs). There are about 300 private proposal, including: (1) reducing the number of hospitals in California. The state’s 21 DPHs are initial implementation counties from ten to eight, operated by counties and the UC system, while the www.lao.ca.gov Legislative Analyst’s Office 31 2012-13 BudgeT 46 NDPHs are generally operated by local health $200 million in unspent federal funding to an care districts and cities, with some NDPHs located uncompensated care funding pool for DPHs. Under in rural areas. The May Revision also proposes a the May Revision, $100 million, or 50 percent, of six-month delay of the currently authorized switch this reallocated amount would be deposited in to a diagnostic-related group methodology for the state General Fund. The May Revision also private hospital payments, pushing the start date to proposes to reduce supplemental payments to July 1, 2013. private hospitals, eliminate public hospital grants, Under the May Revision, $75 million in and eliminate increases to managed care plans for General Fund savings would be achieved by supplemental payments to DPHs—for savings of requiring NDPHs to certify their costs incurred $150 million General Fund in 2012-13. from providing Medi-Cal inpatient services. LAO Assessment. We note that the proposal Starting July 2012, these locally funded Certified to adopt a CPE payment methodology and obtain Public Expenditures (CPEs) would replace additional federal funding for NDPHs requires General Fund expenditures as the non-federal federal approval of both a State Plan Amendment share of Medi-Cal matching funds for NDPHs. and an amendment to the 1115 Bridge to Reform The administration also proposes to seek federal waiver. The May Revision also proposes a approval for NDPHs to access additional federal seemingly aggressive timeline for transitioning funding to minimize the financial impact on NDPHs to the CPE methodology. A too-rushed these hospitals from switching to a CPE-based transition could affect the short-term financial reimbursement mechanism. stability of some NDPHs, particularly those The Department of Health Care Services hospitals operating on tight margins. has requested federal approval to reallocate criminal JuSticE and Judiciary J udicial B ranch r eductions courts to retain reserves in the future, as well as authorizes the Judicial Council Proposal. The Governor’s May Revision to retain funds as a statewide reserve to proposes a $544 million ($125 million ongoing) address budget shortfalls of individual trial General Fund reduction to the judicial branch courts. in the budget year. (This reduction is in addition to the continuation of the $350 million ongoing • Second, the Governor proposes a delay of reduction enacted in 2011-12.) The administration 38 court construction projects, thereby proposes to achieve the $544 million reduction in permitting the one-time redirection of three ways. $240 million in court construction funds • First, the Governor proposes to use for trial court operations in 2012-13. $300 million of local trial court reserves (Beginning in 2013-14, the Governor on a one-time basis to offset General proposes to redirect $50 million in court Fund costs for the trial courts. The construction funds on an annual basis.) administration also proposes to eliminate • Third, the Governor proposes generating the statutory authority allowing local $4 million in ongoing savings by increasing 32 Legislative Analyst’s Office www.lao.ca.gov 2012-13 BudgeT employee retirement contributions for all LAO Comments. We are concerned that the state judicial branch employees. administration’s request for additional funding for inmate medical care in 2011-12 circumvents the Additionally, the Governor proposes to establish process established in the budget act for requesting a working group to evaluate the state’s progress a supplemental appropriation for unanticipated in achieving the goals of statewide trial court expenses. State law requires agencies to seek realignment initiated 15 years ago by the supplemental appropriations from the Legislature Legislature. prior to the expenditure of funds. It appears LAO Comments. While the Governor’s May that the Receivership has continued a pattern Revision proposals for the judicial branch merit in recent years of expending state funds beyond consideration, they raise several issues for legislative its budget authority, then seeking supplemental review. For example, while the proposals to funding from the Legislature after the fact to pay eliminate local court reserves and create a statewide for these substantial additional costs. We are also reserve move the state closer to achieving the concerned that the Governor’s proposal to increase legislative goals of statewide trial court realignment, funding for inmate medical care in 2012-13 does they raise questions related to the respective roles not account for potential efficiencies that could of local courts and the Judicial Council in setting be achieved. For example, in our recent report, fiscal and program priorities. The Legislature will Providing Constitutional and Cost-Effective Inmate want to consider how the elimination of local Medical Care (April 2012), we identified tens of reserves affects individual trial court operations millions of dollars in savings that could be achieved and fiscal planning practices, as well as how the from more consistent application of the Receiver’s proposed statewide reserve will be implemented utilization management system for determining and administered. (For more information on recent when inmates should be referred to specialty budget reductions to the judicial branch, as well as medical care and from increased utilization of how those cuts have been addressed, please see our telemedicine technology. In addition, we note recent brief, The 2012-13 Budget: Managing Ongoing that the Receiver could achieve additional savings Reductions to the Judicial Branch.) of $20 million annually in inmate pharmacy i ncreased F undinG For i nMate M edical c are costs from improving prescribing practices and inventory management. Proposal. The Governor’s May Revision proposes a General Fund augmentation of d J J (dJJ) ivisionoF uvenile ustice $295 million in 2011-12 for the federal Receiver’s Proposal. The Governor’s May Revision inmate medical care program. According to reverses a proposal made in his January budget the administration, the additional funding is plan to close the state’s juvenile detention facilities requested due to the inability to fully achieve the and realign the responsibility for supervising all level of savings assumed in the 2011-12 budget juvenile offenders to counties. Specifically, the ($163 million), as well as higher-than-expected costs May Revision maintains DJJ as a commitment for inmate pharmaceuticals ($86 million) and health option for juvenile offenders, as well as proposes care guarding ($46 million). Similarly, the May various changes designed to achieve $25 million Revision proposes an additional $128 million for in budget-year savings. Specifically, the Governor inmate medical care in 2012-13. proposes to (1) reduce DJJ administrative staff, www.lao.ca.gov Legislative Analyst’s Office 33 2012-13 BudgeT (2) complete the realignment of juvenile parole longer sentences. To the extent this occurs, there could on January 1, 2013 (rather than July 1, 2014, be some additional state prison costs in the future. as specified under current law), and (3) charge a ’ B dMinistrations luePrintFor counties $24,000 per year for each ward committed r s P eorGanizationoF tate risons to DJJ by the juvenile courts beginning July 1, 2012. In addition, the administration proposes reducing Proposal. The Governor’s May Revision from 25 to 23 the maximum age at which an includes a plan (referred to as the “blueprint”) offender can be housed in a DJJ facility. to reorganize various aspects of California LAO Comments. In our recent report, The Department of Corrections and Rehabilitation 2012-13 Budget: Completing Juvenile Justice (CDCR) operations, facilities, and budget in Realignment (February 2012), we recommended response to the effects of the 2011 realignment approving the Governor’s January proposal to close of adult offenders, as well as to meet various DJJ and require counties to manage all juvenile federal court requirements (such as reducing the offenders. While we still believe that proposal would inmate population to meet specified population promote efficiency and accountability in juvenile cap targets). For example, the blueprint includes justice, we find that the alternative savings measures plans to (1) request court approval of increased included in the Governor’s May Revision also warrant prison capacity of 145 percent, (2) construct new or consideration. For example, the proposal to increase renovate existing prison facilities, and (3) end the fees charged to counties would result in counties use of out-of-state contract beds. bearing a greater share of the costs of local decisions LAO Comments. As we discuss in our recent to send juvenile offenders to state facilities, as well brief, The 2012-13 Budget: State Should Consider as potentially increase the incentive for counties to Less Costly Alternatives to CDCR Blueprint, much identify less costly alternatives for managing these of the administration’s blueprint merits legislative offenders. consideration. However, we find that the General While the plan warrants consideration, the Fund costs of the planned approach—in particular, Governor’s proposal to lower the DJJ age jurisdiction an estimated $78 million in annual debt service—is carries the risk that more juvenile cases would a significant trade-off. The state could meet be filed in adult court rather than juvenile court. specified population cap targets at much lower Because there is no upper limit on the adult court’s ongoing General Fund costs than proposed by the age jurisdiction, prosecutors may opt to pursue more administration, potentially saving the state as much eligible juvenile cases in adult court as a way to secure as a billion dollars over the next seven years. OtHEr PrOPOSalS M ortGaGe s ettleMent no less than 90 percent ($370 million) be used to compensate the state for the harms caused by the Proposal. As part of a nationwide settlement allegedly unlawful foreclosure practices of the obtained against five major mortgage lenders, the lenders and to facilitate direct relief to consumers. state will receive about $411 million in 2011-12. The remaining 10 percent ($41 million) is paid as The use of these funds is restricted by the terms a civil penalty and may be used at the discretion of the settlement agreement, which requires that 34 Legislative Analyst’s Office www.lao.ca.gov 2012-13 BudgeT of the state. As part of his May Revision, the the revenue deposited into the Motor Vehicle Governor proposes to use the entire $411 million to Fuel Account. An unintended effect of the swap benefit the General Fund in 2011-12 ($171 million), has been a substantial increase in the amount of 2012-13 ($121 million), and 2013-14 ($118 million). revenues transferred to several special funds that Specifically, the Governor proposes to (1) transfer receive a specified percentage of the fuel excise the $41 million civil penalty directly to the General tax attributable to fuel purchased for off-highway Fund, (2) offset $70 million in General Fund costs vehicles, including the Off-Highway Vehicle Trust for the Division of Law Enforcement and the Public Fund, the Harbors and Watercraft Revolving Fund, Rights Legal Division within the Department of and the Department of Agriculture Account. Justice (DOJ), (3) offset $12 million in General These funds would otherwise have been available Fund costs for the Civil Rights Law program within to support various transportation projects. The the Department of Fair Employment and Housing, Governor’s May Revision proposes to amend the and (4) use $287 million to support debt-service 2010 fuel tax swap and transfer this increased costs on housing bonds authorized by revenue to the General Fund—$184 million in Propositions 46 and 1C. 2011-12 and $128.2 million annually beginning in LAO Comments. Given the state’s current 2012-13. fiscal situation and the magnitude of General LAO Comments. The Governor’s proposal is Fund savings achieved, we find that the Governor’s consistent with the intent of the fuel tax swap to proposal merits legislative consideration. However, increase the flexibility of the use of transportation some of the proposed expenditures could fall funds in meeting the state’s spending priorities. outside the intent of the settlement agreement Unlike other transportation funds, the funds to the extent that they do not directly relate to proposed to be transferred to the General Fund consumer fraud, borrower relief, services for are not restricted in their use under the State homeowners, or other permitted uses. For example, Constitution. Given the state’s current fiscal the administration proposes to fully supplant condition, we believe the proposed transfer merits General Fund support for DOJ’s Division of Law legislative consideration. Enforcement, which conducts investigations into e c MPloyee oMPensation organized crime, gangs, and drug trafficking. The Legislature will want to consider any potential legal Governor’s Proposal risks associated with using the settlement proceeds for the proposed purposes. Reduction in Employee Compensation. Under Control Section 3.90, the administration proposes t F F M ransFer unds roM otor reducing the state’s employee compensation costs v F a ehicle uel ccount by $839 million ($402 million General Fund). Proposal. In 2010, the Legislature enacted a This represents about a 5 percent reduction in “fuel tax swap” to increase its flexibility over the pay for state workers, equivalent to a one-day- use of transportation funds while maintaining per-month reduction. Under Control Section fuel tax revenues at approximately the same level. 3.90, as submitted to the Legislature on May 14th, Under the swap, the state no longer charges a sales the administration proposes to achieve these tax on gasoline and instead imposes an additional savings through “(1) the collective bargaining excise tax (18 cents per gallon) on gasoline, with process, and/or (2) legislative reductions in the www.lao.ca.gov Legislative Analyst’s Office 35 2012-13 BudgeT state workweek and changes in work schedules, Leave balances must be cashed out at an and/or (3) furloughs, and/or (4) other reductions employee’s final salary level. A four-day for represented and non-represented employees workweek may result in increased leave achieved with existing administrative authority.” balances. The work schedule would give The proposed control section authorizes these employees three-day weekends each week. actions “notwithstanding any other provision With more time off, employees could be of law.” The May Revision summary document, less inclined to use vacation. however, suggests that the administration wishes • Hinder Services in Many Cases. The to use the collective bargaining process “to avoid proposal could hinder state services if furloughs and to mitigate layoffs.” Specifically, the applied to employees who interact with summary document suggests the administration other governmental entities or businesses plans to achieve the savings through (1) a reduction that operate on the traditional five-day in pay resulting from employees working two fewer workweek. hours each week and (2) changes in employee and retiree health coverage to offset rising state health • May Not Reduce Energy Costs or Be care costs. Convenient for Many. The possible energy A New Workweek. In the summary document, savings from a four-day workweek are the administration proposes to achieve the difficult to quantify and are probably reduction in employee work hours by adopting a not significant (as the administration four-day, 38-hour workweek for the majority of acknowledges). In 2008, Utah implemented state employees. (The only exception to the new a four-day state workweek to reduce workweek appears to apply to employees who energy costs. In 2011, Utah reverted to work at 24-hour institutions.) The administration the traditional five-day workweek partly suggests that this new workweek would allow because the energy savings were not the state to (1) offer better services to the public significant and lawmakers were concerned by being open longer than the traditional 8-hour that the Monday through Thursday workday and (2) reduce energy usage in state- workweek was not convenient for many owned and leased buildings. residents. laO comments Employee Compensation May Need to Be Part of Budget Solution, but No Ideal Options. Employee Four-Day Workweek Problematic. The compensation, including salaries and benefits, will four-day workweek proposed by the administration cost the state’s General Fund $10.5 billion in 2012-13. may allow some departments to offer services Given the severity of the state’s budget shortfall, outside of regular hours that are more convenient we think the Legislature will need to consider for some residents. We do, however, see a few reductions in these costs. There are, however, no potential problems with this idea. Specifically, a ideal ways to achieve such reductions. In addition to four-day workweek raises the following issues: the issues above related to a four-day workweek, the • May Increase Leave Balances. When an Legislature should take into account the following employee separates from state service, the issues when considering other alternatives to state must compensate (or “cash out”) the reductions in employee compensation costs. employee for certain unused leave days. 36 Legislative Analyst’s Office www.lao.ca.gov 2012-13 BudgeT • Bargaining Typically Necessitates reserves the right not to approve or fully Concessions. While bargaining is probably fund any provision of a memorandum the preferred approach to achieving of understanding which requires the savings, it often requires an employer to expenditure of funds. Assuming the offer to employees some offsetting benefits. Legislature approves pending agreements These typically increase costs in the future that would extend four contracts, all 21 and can increase, rather than reduce, the bargaining units will have contracts that state’s ongoing structural deficit. expire in July 2013. If the Legislature authorized unilateral state actions to reduce • Layoffs Take Months and Can Affect State pay in 2012-13 (and/or in future years), Services. Layoffs reduce state employee this could result in some savings, but could compensation costs by reducing the size of require the administration to negotiate with the state workforce. There are a number of unions for new contracts under the terms of disadvantages to using layoffs including: the Dills Act. Unilateral state actions of this (1) the potential ability of the Governor type may produce significant state savings, to decide where to take layoffs without but pose many concerns. Such concerns considering the Legislature’s priorities, include negative effects on employee- (2) the slow layoff process, (3) the fact management relations. that layoffs typically are based on inverse seniority without any consideration of the v P acant ositions quality of an employee, and (4) the effects of layoffs on a department’s ability to fulfill its Background mission and serve the public. State Has Many Vacant Positions. All state • Furloughs and Leave Programs departments have some vacant positions due to Have Future Costs. Authorizing the normal personnel turnover and hiring delays. In administration to impose furloughs past decades, a typical state vacancy rate was about or personal leave programs (known as 5 percent—meaning that 5 percent of authorized PLPs) allows the state to cut employee positions were vacant. According to the SCO, compensation costs without reducing the the current average vacancy rate is now about size of the workforce. Data from the SCO 15 percent and has hovered around that level for suggest that the recent furloughs and PLPs a number of years now. As shown in Figure 12 created a liability for the state by greatly (see page 38), some departments have much increasing some employees’ leave balances. higher vacancy rates. The Legislature authorizes As a result, furloughs and PLPs increased positions so that departments may increase staffing out-year costs that offset the near-term levels to accomplish a specified activity. A high savings. vacancy rate could mean that a department is not able to accomplish all intended activities or that • Non-Negotiated State Actions Raise the department has found ways to accomplish Concerns. Under the Ralph C. Dills Act, the the activities without filling some positions (for legislation authorizing collective bargaining example, by instead using overtime or contract for state employees, the Legislature personnel). www.lao.ca.gov Legislative Analyst’s Office 37 2012-13 BudgeT Vacancies Generate Salary Savings. When a • Unallocated Cuts. The Legislature has position is vacant or filled by an employee at a pay approved many unallocated cuts, especially level lower than the department’s budget assumes— to General Fund departments. When the department captures “salary savings.” Since implementing unallocated cuts, the the early 1940s, the state budget has assumed that administration chooses how to achieve the most departments have “normal salary savings”— reduction. We understand that it is common historically, assuming vacancies equal to about for departments to hold positions vacant 5 percent of authorized personnel—and reduces to absorb unallocated cuts. As a result, departments’ personnel budgets accordingly. (In departments largely funded by the General other words, departments are not appropriated any Fund have noticeably higher vacancy rates funds for normal salary savings.) “Excess salary than special fund departments. savings”—savings from vacant positions in excess • Leave Cash Outs. The number of state of normal salary savings—typically can be used retirements has increased as employees of for personnel or operations expenditures but are the baby boom generation reach retirement displayed in a department’s personnel budget. age. Upon retirement, the state must State Policies Likely Caused High Vacancy compensate (or cash out) an employee Rates. Over the past decade or so, a number of for certain unused leave days. Generally, decisions made by both the administration and departments do not receive supplemental Legislature have contributed to high vacancy rates. appropriations to cover these costs. Some The policies described below have created incentives departments cannot absorb these costs for departments to generate excess salary savings by without holding positions vacant. deliberately holding positions vacant. • Overtime Costs. Some departments, especially those with 24-hour institutions, Figure 12 consistently incur high overtime costs. Like Vacancy Rates Across Largest Departments leave cash outs, departments sometimes do Established Vacancy not receive supplemental appropriations Department Positions Rate (%) for these costs. Departments with high Corrections 60,950 18.6 overtime costs often have high vacancy Transportation 20,989 6.6 rates to generate excess salary savings. Mental Health 11,429 13.1 Highway Patrol 11,254 7.8 Employment Development 10,099 18.9 Proposal Motor Vehicles 8,392 6.1 Developmental Services 5,957 15.7 Governor Proposes Significant Change to How Franchise Tax Board 5,394 11.6 the State Budgets for Positions. In an effort that it Justice 4,936 21.8 claims will make the budget more transparent, the CalFire 4,773 15.6 Board of Equalization 4,666 11.3 administration proposes several actions related to Social Services 4,494 21.0 vacant positions. Public Health 3,742 21.0 Health Services 3,331 18.4 • Eliminate Large Number of Vacant Water Resources 3,112 7.8 Authorized Positions. The administration Source: State Controller’s Office data. proposes to eliminate a net number of about 38 Legislative Analyst’s Office www.lao.ca.gov 2012-13 BudgeT 11,000 “historically vacant” positions (after transparency in some cases. We question the accounting for increases in temporary wisdom of undoing seven decades of budgetary help included in the administration’s decisions and precedent based solely on a calculations). In most cases, we are told, nine-week internal administration drill. We have these positions were unfunded positions many questions about how this would work. as a result of normal salary savings. The During the next four weeks, it would be impossible positions proposed for elimination were for the Legislature to fully examine the proposal, selected through discussions within the particularly while it considers all of the administration after issuance of a “budget administration’s other budget proposals. letter” (a DOF directive to departments) in Legislative Priorities Not Considered. Each March 2012. position proposed for elimination in this proposal previously has been authorized by the Legislature— • Eliminate Salary Savings. The budget in most cases, to staff a particular program would no longer reflect salary savings. intended to achieve some legislative priority. No departmental budgets would be The list of each individual position proposed for increased over their current levels in the elimination in each departmental program, once administration’s plan. Instead, departments’ it is submitted to the Legislature, will be based personnel and operations budgets would solely on the administration’s priorities and not come closer to reflecting actual costs in necessarily those of the Legislature. those respective areas. In future position requests submitted to the Legislature, laO recommendation departments would ask for an amount of Reject Governor’s Proposal, Suggest money needed to support the positions Governor Submit Detailed Proposals Later. This without any explicit provision for salary proposal should be more fully developed by the savings. administration and, if resubmitted later, fully vetted by the Legislature over at least several • Hold Departments Harmless. The months in some future year. While the proposal proposal would shift money between a seemingly would have no effect on the number department’s operations and personnel of people currently employed by the state or the budgets so that each reflects something amount of money spent by departments, it could closer to actual expenditures in those areas. result in staffing levels far different from priorities As noted above, the total amount of money of the Legislature. The proposal apparently would budgeted to a department would not be contribute nothing to balancing the 2012-13 affected by the proposal. budget. As a result, we recommend that the Legislature reject the Governor’s proposal now laO comments and suggest that the administration may choose to Why the Rush? The administration’s goal of submit detailed proposals in the future justifying making departmental budgets more transparent why vacant positions should be eliminated and how has merit. We are intrigued by this idea. We are this new position budgeting process would work in concerned, however, that the proposal seems future years. Legislative review of such a proposal rushed and may not advance the goal of would require extensive time of legislators and staff. www.lao.ca.gov Legislative Analyst’s Office 39 2012-13 BudgeT LAO Publications The Legislative Analyst’s Office (LAO) is a nonpartisan office that 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