The 2016-17 Budget: Overview of the Governor's Budget

The 2016-17 Budget: Overview of the Governor’s Budget MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • JANUARY 11, 2016 2016-17 BUDGET Legislative Analyst’s Office www.lao.ca.gov (916) 445-4656 Legislative Analyst Mac Taylor State and Local Finance Corrections, Transportation, and Environment Jason Sisney Anthony Simbol Brian Brown Carolyn Chu Drew Soderborg Justin Garosi Ann Hollingsheada Ashley Ames Seth Kerstein Ross Brown Ryan Miller Aaron Edwards Nick Schroeder Rachel Ehlers Brian Uhler Paul Jacobs Brian Weatherford Helen Kerstein Anita Lee Education Shawn Martin Jennifer Kuhn Jessica Peters Ryan Anderson Jonathan Peterson Edgar Cabral Health and Human Services Natasha Collins Jason Constantouros Mark C. Newton Virginia Early Ginni Bella Navarre Paul Golaszewski Amber Didier Judy Heiman Callie Freitag Dan Kaplan Ben Johnson Kenneth Kapphahn Lourdes Morales Ryan Woolsey Meredith Wurden Administration and Information Services Support Larry Castro Tina McGee Sarah Kleinberg Izet Arriaga Karry Dennis Fowler Sarah Scanlon Michael Greer Jim Stahley Vu Chu Anthony Lucero Sandi Harvey Rima Seiilova-Olson a The 2016-17 Budget: Overview of the Governor’s Budget publication coordinator. 2 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET EXECUTIVE SUMMARY This publication is our office’s initial response to the 2016-17 Governor’s Budget proposal, which was presented to the Legislature on January 7, 2016. Significant Increases in Revenues and School Funding. The administration’s revenue estimates for 2015-16 and 2016-17 are billions of dollars higher than they were in last year’s budget act. Higher revenues generate significant increases in Proposition 98 funding—$4.3 billion over the 2014-15 through 2016-17 period. After satisfying Proposition 98 and Proposition 2 requirements and funding adjustments to existing programs, the Governor’s plan allocates about $7 billion in discretionary General Fund resources. Governor’s Budget Prioritizes Reserves and Infrastructure. As shown in the figure below, in allocating discretionary resources for the 2016-17 budget, the Governor prioritizes reserves. Specifically, he proposes increasing total reserves to more than $10 billion. He allocates most other Graphic Sign Off discretionary resources to one-time infrastructure spending. Outside the General Fund, the Governor Secretary plans to: (1) spend $3.1 billion cap-and-trade auction revenues, (2) provide additional revenues for Analyst transportation, and (3) extend the managed care organization (MCO) tax. MPA Plan for Next Economic Downturn. California has enjoyed remarkable economic growth over Deputy the past year. That said, the state may be reaching the peak of this long expansion. In crafting this year’s budget, the Legislature will choose a mix of reserves, one-time spending, and ongoing budget commitments based on its priorities. We encourage the Legislature to begin this process with a robust target for reserves for the end of 2016-17 and concentrate spending on one-time purposes. This would still leave some funds available for targeted ongoing commitments—particularly if the Legislature passes an extension of the MCO Governor Prioritizes tax. Such a measured Reserves and Infrastructure in 2016-17 Budget approach would better position the state One-Time for any near-term Infrastructure Spending Optional Reserves economic downturn. Ongoing Spending Commitments MCO Tax Proceeds—Uncommitted www.lao.ca.gov Legislative Analyst’s Office 3 ARTWORK #160010 Template_LAOReport_mid.ait 2016-17 BUDGET 4 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET OVERVIEW On January 7, 2016 the Governor presented the SFEU by $1.1 billion over the level assumed in his 2016-17 budget proposal to the Legislature. As the 2015-16 Budget Act. Pursuant to Proposition 2 shown in Figure 1, the budget package proposes (2014), the budget makes a constitutionally spending $168 billion in 2016-17, an increase of required deposit of $2.6 billion to the BSA for 2 percent over revised levels for 2015-16. 2015-16 and 2016-17 combined. (We note that, by Budget Position Continues to Improve. May, the Proposition 2 revised “true-up” deposit Figure 2 (see next page) displays the for 2015-16 could increase by hundreds of millions administration’s summary data for the General or more for various reasons.) In addition, the Fund, the state’s main operating account. As shown Governor proposes that the Legislature approve in the figure, the General Fund is on steady footing. an optional deposit of $2 billion to the BSA. Under The administration’s revised revenue estimates for the Governor’s plan, by the end of 2016-17 reserves 2015-16 and 2016-17 are up by billions of dollars would total $10.2 billion, consisting of $2.2 billion compared to last year’s budget act, similar to our in the SFEU and $8 billion in the BSA. This total office’s most recent projections for 2015-16 and does not include over $1 billion in proposed, but 2016-17. (For more information about these revenue unallocated, revenues from the tax on managed estimates, please see our January 7 comment on care organizations (MCOs), which the Legislature the LAO Economy and Taxes blog.) After satisfying could use to benefit the General Fund. constitutional requirements for higher reserves Budget Also Focuses on Infrastructure. In and spending on education, the Governor proposes addition to building reserves, the Governor’s significant extra reserve deposits. He then uses the budget commits spending to infrastructure using remaining money for new spending commitments, both General Fund and special fund sources. This primarily one-time infrastructure spending. includes funding for maintenance, repair, and construction of state office buildings, the state Major Features of the Governor’s Budget highway system, local roads, university campuses, Figure 3 (see page 7) summarizes the major and county jails. features of the Governor’s budget. Other Significant Proposals on Education, Reserves Total Over $10 Billion. The Governor Health, and the Environment. The Governor proposes contributions to Figure 1 both state budget reserves: Governor’s Budget Expenditures the Special Fund for Economic Uncertainties (Dollars in Millions) (SFEU), the state’s Change From 2015-16 2014-15 2015-16 2016-17 discretionary reserve, and Fund Type Revised Revised Proposed Amount Percent the Budget Stabilization General Funda $112,974 $116,064 $122,609 $6,544 5.6% Account (BSA), the state’s Special funds 41,702 47,636 45,032 -2,604 -5.5 Budget Totals $154,676 $163,700 $167,641 $3,941 2.4% constitutional rainy Selected bond funds $5,145 $7,847 $3,086 -$4,761 -60.7% day fund. The budget Federal funds 90,049 99,761 91,899 -7,861 -7.9 increases the balance of a Includes Education Protection Account created by Proposition 30 (2012). www.lao.ca.gov Legislative Analyst’s Office 5 2016-17 BUDGET also makes other proposals. He uses most of the LAO Comments constitutionally required increase in Proposition 98 Governor’s Emphasis on Reserves Is spending to continue implementing the state’s Appropriate. After meeting constitutional formula for funding school districts. The Governor requirements on education spending and debt also has a revised proposal to restructure the tax on payments, the Governor proposes using a large MCOs while cutting other taxes on affected health portion of the remaining funds to grow the state’s plans. The Governor uses a small portion of the budget reserves. We believe this general approach revenues from this tax for the In-Home Supportive is prudent as a large budget reserve is the key Services program. He also proposes a plan to spend to weathering the next recession with minimal cap-and-trade auction revenues. disruption to public programs. Focus on Infrastructure Makes Sense, but Specific Proposals Raise Several Issues. Much of the state’s infrastructure is aging and needs to be Figure 2 renovated, adapted, or Administration’s General Fund Summary improved to meet current (In Millions) and future needs. As such, 2014-15 2015-16 2016-17 we think the Governor’s Revised Revised Proposed focus on infrastructure General Funda Condition Prior-year fund balance $5,356 $3,699 $5,172 makes sense. However, Revenues and transfers 111,318 117,537 120,633 the Governor’s specific Expenditures 112,974 116,064 122,609 proposals raise several Ending fund balance $3,699 $5,172 $3,196 issues that merit legislative Encumbrances 966 966 966 SFEU balance 2,733 4,206 2,230 consideration. For example, the Legislature Reserve Balances at the End of the Fiscal Year SFEU balance $2,733 $4,206 $2,230 will want to consider BSA balance 1,606 4,455 8,011 the appropriateness of Total Reserves $4,339 $8,661 $10,241 the proposed funding Revenues and Transfersa sources, ensure such Personal income taxes $76,079 $81,354 $83,841 funding is allocated Sales and use taxes 23,709 25,246 25,942 Corporation taxes 9,007 10,304 10,956 to the highest priority Other revenues 4,503 4,562 4,340 and most cost-effective Subtotal, Revenues ($113,298) ($121,466) ($125,078) infrastructure needs, Transfers to BSA -$1,606 -$2,849 -$3,556 Other transfers (net) -374 -1,080 -889 and allow for sufficient Totals $111,318 $117,537 $120,633 legislative oversight. Spendinga Governor Allocates Proposition 98 (General Fund) $49,554 $49,992 $50,972 About $7 Billion in Non-Proposition 98 63,420 66,072 71,637 Discretionary Resources. Totals $112,974 $116,064 $122,609 In assembling this budget, a Includes Education Protection Account created by Proposition 30 (2012). SFEU = Special Fund for Economic Uncertainties and BSA = Budget Stabilization Account. the Governor was faced 6 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET with decisions about how to allocate roughly doubles the size of budget reserves. He proposes $7 billion of discretionary General Fund resources. allocating most remaining discretionary funds (“Discretionary,” in this context, excludes to one-time infrastructure spending. Finally, he billions of dollars controlled by constitutional proposes ongoing budget commitments of around funding requirements, such as Proposition 98 $600 million. and Proposition 2, and added costs to maintain Legislature Can Allocate These Funds existing policies.) As shown in Figures 4 and 5 Differently. The Governor has communicated (see next page), the Governor prioritizes reserves his priorities for the budget: more reserves and and one-time spending. Specifically, he uses a new money for infrastructure. The California significant portion of the discretionary resources Constitution, however, entrusts the Legislature to increase total reserves to over $10 billion. This to craft the annual state budget. As such, the Figure 3 Major Features of the Governor’s Proposed Budget Revenues • Increases revenue estimates by $5.9 billion for 2014-15 through 2016-17 combined. Reserves • Makes required deposit of $2.6 billion into rainy day reserve. • Proposes extra deposit of $2 billion into rainy day reserve. • Increases discretionary reserve by $1.1 billion.a Infrastructure • Proposes $1.5 billion to replace and renovate state office buildings. • Provides $807 million ($500 million non-Proposition 98 General Fund) for statewide deferred maintenance projects. • Proposes $250 million grant program for replacing or renovating county jails. • Continues to propose transportation package of $3.6 billion in annualized funding. Education • Augments LCFF by $2.8 billion. • Shifts $1.7 billion from existing preschool programs into new preschool block grant. • Provides $1.2 billion for K-14 discretionary one-time purposes (counts against K-14 mandate backlog). • Augments UC and CSU by a combined $250 million. • Designates $200 million for new community college workforce program. Health and Human Services • Raises $1.3 billion (on net) annually with restructured MCO tax, while reducing other taxes on affected health plans. • Uses $236 million from MCO tax to maintain restoration of IHSS service hours. • Includes augmentations in DDS and SSI/SSP. Other • Proposes to allocate $3.1 billion in cap-and-trade auction revenues. • Meets Proposition 2 debt payment requirement ($1.6 billion in 2016-17) by repaying special fund loans and other obligations. • Sets aside $350 million (including $300 million General Fund) for 2016 collective bargaining process. • Provides $323 million ($212 million General Fund) for various drought-related response activities. a Amount by which the Special Fund for Economic Uncertainties grows relative to 2015-16 Budget Act. LCFF = Local Control Funding Formula; MCO = managed care organization; DDS = Department of Developmental Services; IHSS = In-Home Supportive Services; and SSI/SSP = Supplemental Security Income/State Supplementary Payment. www.lao.ca.gov Legislative Analyst’s Office 7 2016-17 BUDGET Figure 4 Legislature will now Governor’s Key Choices in Allocating Discretionary choose its preferred mix General Fund Resources of reserves, one-time spending, and ongoing (In Billions) budget commitments. Amount Figure 6 shows some Reserves Makes extra rainy day fund deposit $2.0 key questions for the Grows discretionary reserve balance 1.1 Legislature to consider in Subtotal ($3.1) its deliberations on these MCO Tax Proceeds—Uncommitteda $1.1 matters. For example, One-Time Spending when reviewing the Replaces and maintains state office buildings $1.5 Funds statewide deferred maintenance projects 0.5 Governor’s proposal to Provides grants for replacing and renovating county jails 0.3 deposit an extra $2 billion Subtotal ($2.3) in the BSA, the Legislature Ongoing Budget Commitments Grapmhayic w aSnitg ton c Oonfsfider Sets aside funds for 2016 collective bargaining process $0.3 Augments funding for UC and CSU 0.3 whether it prefers to Makes augmentations for CDCR and courts 0.1 Secre k t e a ep ry those reserves in Makes augmentations for SSI/SSP and DDS 0.1 Analyst a discretionary reserve Subtotal ($0.8) MPA Total $7.3 over which it has more a While the Governor places proceeds of this tax in a special fund, he chose not to use most of these to bene D fit epuctoyntrol. We discuss the General Fund or augment other programs. As a result, we include the unallocated proceeds in this figure. Note: Excludes spending on K-14 education, reserves, and debt (required by the California Constitution), other budgetary issues and added costs to maintain existing policies. Figure also excludes some smaller spending proposals. for consideration later in MCO = managed care organization; CDCR = California Department of Corrections and Rehabilitation; SSI/SSP = Supplemental Security Income/State Supplementary Payment; and DDS = Department of this document, and we Developmental Services. will identify others in our upcoming budget analysis Figure 5 publications. Governor Prioritizes Reserves and Infrastructure in 2016-17 Budget Plan for Next Economic Downturn. California One-Time has enjoyed remarkable Infrastructure Spending Optional Reserves economic growth over the past year. The state, however, may be reaching the peak of a long economic expansion. Planning for the next downturn—including setting aside budget Ongoing reserves—is an important Spending Commitments priority. As the Legislature considers the trade-offs MCO Tax Proceeds—Uncommitted among different budget Note: Excludes spending on K-14 education, reserves, and debt (required by the California Constitution), and added costs to maintain existing policies. Figure also excludes some smaller spending proposals. priorities, we encourage it 8 Legislative Analyst’s Office www.lao.ca.gov ARTWORK #160010 Template_LAOReport_mid.ait 2016-17 BUDGET Figure 6 Key Questions for Legislative Consideration in Crafting the 2016-17 Budget Reserves • What is the level of total reserves (SFEU and BSA combined) desired prior to next downturn? • Does the Legislature want to reach that targeted reserve level in 2016-17? 2017- 18? Later? • Does the Legislature want to put extra reserves in the constitutionally restricted BSA or in the SFEU?a • Would the Legislature prefer other alternatives that prepare the state for the next economic downturn while preserving legislative control? (For example, the Legislature could reject the Governor’s proposal to deposit extra funds in the BSA and instead prepay some 2017-18 bond debt service.) One-Time Spending • Does the Legislature believe there are other infrastructure projects that are more important to fund now? • If state building improvements are funded, should other buildings in Sacramento and elsewhere be considered? • What is the appropriate financing approach to fund state infrastructure needs—direct appropriation, renting or leasing, or borrowing (typically through bonds)? • Given the high growth rate of unfunded pension liabilities, should one-time pension payments take priority over some of the proposed infrastructure spending? Ongoing Budget Commitments • What is the Legislature’s tolerance for the risk of future budget problems? • Considering the future budget risks involved, does the Legislature want to make more ongoing commitments than the Governor proposes? • Which new ongoing commitments have the highest priority? • What should be the mix of one-time and ongoing spending commitments within Proposition 98? • If a downturn were to emerge soon, is there a plan for these new commitments (or other budget items) to be adjusted to help keep the budget in balance? a The sales tax rate temporarily declines in certain instances if reserve balances reach a particular level, pursuant to Sections 6051.4 and 6051.45 of the Revenue and Taxation Code. The quarter-cent sales tax reductions would amount to around $1.5 billion for each year that they are in effect. SFEU = Special Fund for Economic Uncertainties and BSA = Budget Stabilization Account. to begin with a robust target for budget reserves commitments—particularly if the Legislature for the end of 2016-17 and concentrate spending passes an extension of the MCO tax. Such a on one-time purposes. This approach would still measured approach would better position the state leave some funds available for targeted ongoing for any near-term economic downturn. PROPOSITION 98 Below, we highlight the major features of the $66.7 billion, an increase of $387 million compared Governor’s Proposition 98 package and offer our with the budget plan adopted last June. This preliminary assessment of it. upward revision is due primarily to an increase in the amount of local property tax revenue received Major Features of Governor’s Plan by schools and community colleges. (Because Test 1 Minimum Guarantees for 2014-15 and is operative in 2014-15, increases in property tax 2015-16 Revised Upward. As shown in Figure 7 revenue result in a higher overall Proposition 98 (see next page), the administration’s revised funding level rather than offsetting General Fund estimate of the 2014-15 minimum guarantee is costs.) The administration’s revised estimate of the www.lao.ca.gov Legislative Analyst’s Office 9 2016-17 BUDGET Figure 7 Tracking Changes in the Proposition 98 Minimum Guarantee (In Millions) 2014-15 2015-16 January January June 2015 2016 June 2015 2016 Estimate Estimate Change Estimate Estimate Change Minimum Guarantee General Fund $49,608 $49,554 -$54 $49,416 $49,992 $575 Local property tax 16,695 17,136 441 18,993 19,183 191 Totals $66,303 $66,690 $387 $68,409 $69,175 $766 2015-16 guarantee is $69.2 billion, an increase of shown in Figure 8, the Governor’s budget includes $766 million compared with the June budget plan. $71.6 billion in total Proposition 98 funding in This increase is due primarily to an increase in 2016-17. This funding level is $3.2 billion above the General Fund revenue, which requires the state to 2015-16 Budget Act level and $2.4 billion over the make a larger maintenance factor payment. Upon revised 2015-16 level. Under the Governor’s budget, making this maintenance factor payment, the state Test 3 is operative in 2016-17, with the higher will have paid off all maintenance factor created guarantee primarily resulting from a 2.4 percent during the last recession, leaving no maintenance increase in per capita General Fund revenue and factor outstanding for the first time since 2005-06. the higher prior-year level carrying forward. The 2016-17 Minimum Guarantee Increases administration estimates that the state creates Notably Over 2015-16 Budget Act Level. As $548 million in new maintenance factor in 2016-17. Figure 8 Proposition 98 Funding by Segment and Source (Dollars in Millions) Change From 2015-16 2014-15 2015-16 2016-17 Revised Revised Proposed Amount Percent K-12 Educationa General Fund $44,496 $44,536 $45,442 $906 2.0% Local property tax 14,834 16,560 17,802 1,242 7.5 Subtotals ($59,330) ($61,096) ($63,244) ($2,148) (3.5%) California Community Collegesb General Fund $4,979 $5,373 $5,447 $74 1.4% Local property tax 2,302 2,624 2,812 188 7.2 Subtotals ($7,281) ($7,997) ($8,259) ($262) (3.3%) Other Agenciesc $80 $82 $83 — 0.3% Totals $66,690 $69,175 $71,585 $2,410 3.5% General Fund $49,554 $49,992 $50,972 $980 2.0% Local property tax 17,136 19,183 20,613 1,430 7.5 a Includes State Preschool in 2014-15 and 2015-16 and proposed early education block grant in 2016-17. b Includes $500 million for adult education regional consortia in 2015-16 and 2016-17. c Consists entirely of General Fund. 10 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET Significant New Proposition 98 Spending. local education agencies (LEAs) and potentially Under the Governor’s budget, the combined other entities that currently offer State Preschool. increases in the minimum guarantees for the The Governor indicates the funds would be three-year period result in $4.3 billion in additional distributed based upon population and need, Proposition 98 spending. In addition, the Governor but the proposal also includes a hold harmless proposes to make a $257 million settle-up payment provision for LEAs and potentially other preschool related to meeting the 2009-10 guarantee. The providers. The Governor proposes developing Governor scores this amount as a Proposition 2 the details of the new preschool program payment. After making this payment, the state through a stakeholder process, with more details would have $1 billion in outstanding settle-up. released at the May Revision. Key details to be Under the Governor’s budget, K-12 Proposition 98 addressed include eligibility criteria, curriculum funding per pupil increases from a revised 2015-16 requirements, funding rates, staffing requirements, level of $10,237 to $10,605 in 2016-17, an increase child-to-staff ratios, and the possibility of non-LEA of $368 (3.6 percent). Proposition 98 funding for grant recipients. The Governor’s intent is that the community colleges increases from a revised block grant provide considerable local discretion. 2015-16 level of $6,878 per full-time equivalent Dedicates Substantial One-Time Funding to (FTE) student to $7,003 per FTE student in Paying Down Education Mandate Backlog. The 2016-17, an increase of $125 (1.8 percent). Below, Governor’s budget provides $1.4 billion to pay we highlight the Governor’s major Proposition 98 down the K-14 mandate backlog ($1.3 billion for spending proposals. K-12 and $76 million for community colleges). Dedicates Most New Ongoing K-12 Although the Governor outlines several areas that Proposition 98 Funding to Local Control Funding the funding could support (including professional Formula (LCFF). The Governor’s budget proposes development and deferred maintenance), LEAs a $2.8 billion augmentation to LCFF, reflecting a would be allowed to use the funds for any 6 percent per-pupil increase over the 2015-16 LCFF purpose. As in previous years, the funding would level. The Governor estimates this increase will be distributed to school districts, county offices close 49 percent of the remaining gap to the LCFF of education, charter schools, and community target rates. Under the Governor’s proposal, the colleges on a per-student basis. The administration LCFF would be approximately 95 percent funded in estimates about 60 percent of the amount allocated 2016-17. ($786 million) would reduce the backlog, with Restructures Preschool Programs. The many LEAs receiving funding in excess of their Governor proposes to redirect $1.7 billion in existing claims. After making this payment, the Proposition 98 funds to create a new block administration estimates the state would have a grant intended to benefit low-income and at-risk remaining mandate backlog of $1.8 billion. preschoolers (four year olds and young five year Creates New Workforce Program, Makes olds). Specifically, the proposal would redirect Another Permanent. The budget includes all Proposition 98 funds from State Preschool $200 million in new ongoing funding to implement ($878 million), Transitional Kindergarten recommendations of the Board of Governors Task ($726 million), and the State Preschool Quality Force on Workforce, Job Creation, and a Strong Rating and Improvement System (QRIS) Grant Economy. The new “Strong Workforce Program” ($50 million). The block grant would be given to would require community colleges to collaborate www.lao.ca.gov Legislative Analyst’s Office 11 2016-17 BUDGET with education, business, labor, and civic groups estimates, roughly $700 million is related to to develop regional plans for career technical the dissolution of redevelopment agencies. The education (CTE). The regions would be based administration’s lower estimate does not appear to on existing planning boundaries for the federal reflect growth in the tax increment associated with Workforce Innovation and Opportunity Act. former redevelopment agencies or the reduction in The budget also includes $48 million in ongoing redevelopment-related debt. The remaining roughly funding to support the CTE Pathways Program. $300 million difference is due to the administration Over the last 11 years, this program has supported having lower estimates of assessed property values. regional collaboration among schools, community Whereas the administration estimates that assessed colleges, and local businesses to improve career property values will grow by 5.6 percent in 2015-16 pathways and linkages. The state had scheduled and 2016-17, we estimate growth rates of 6 percent to sunset the program at the end of 2014-15 but in 2015-16 (based on the latest data submitted by extended it in 2015-16 using one-time funding. county assessors) and at least 6 percent in 2016-17 The Governor proposes that future CTE Pathway (based on continuing growth in housing prices). If funding align with the regional plans developed local property tax revenue comes in higher than the under the Strong Workforce Program, but the administration estimates, Proposition 98 General Pathway program would continue to have separate Fund costs will be correspondingly lower and categorical requirements. available non-Proposition 98 General Fund will be Initiates Five-Year Plan for Transitioning higher. All Subsidized Child Care to Voucher System. Budget Plan Provides Modest Cushion Against In addition to his major Proposition 98 preschool Potential Downturn. Though we anticipate the restructuring proposal, the Governor has a major state’s economic growth will continue in the near non-Proposition 98 child care restructuring proposal. term, the minimum guarantee could decrease in Currently, the state offers child care through a mix 2017-18 or future years if stock market prices were of direct contracts with providers and vouchers that to drop or growth in the economy and personal families can use for various child care arrangements. income were to decline. Such a scenario serves as a The Governor proposes trailer bill language that caution against the state committing all available would require the California Department of Proposition 98 funding for ongoing purposes. The Education (CDE) to develop a five-year plan for Governor’s budget dedicates $520 million of the eliminating direct contracts and transitioning all funding within the 2016-17 minimum guarantee subsidized child care to a voucher system. for one-time activities. This effectively reflects a cushion of less than 1 percent (0.7 percent). If LAO Comments the guarantee were to decline by more than this Administration’s Estimate of Local Property amount in 2017-18, the Legislature might have to Tax Revenue Too Low. The administration reverse its progress toward LCFF implementation estimates that local property tax revenue counting or make reductions to other ongoing programs. toward Proposition 98 will be $19.2 billion in The Legislature could consider dedicating a larger 2015-16 and $20.6 billion in 2016-17. We think share of 2016-17 funding for one-time activities to these estimates are about $1 billion too low across minimize the likelihood of such future reductions. the two-year period. Of the $1 billion difference Prioritizing LCFF Implementation Consistent between the administration’s estimates and our With State’s Prior-Year Actions. The Governor’s 12 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET plan to dedicate most additional ongoing K-12 the LCFF by keeping funding linked to children funding to LCFF implementation is consistent and treating similar children similarly—meaning with the Legislature’s approach over the past the state would provide the same or about the three years. By continuing to prioritize LCFF same amount of funding per low-income child implementation in 2016-17, both the Governor and regardless of district and expect the same or the Legislature would be fostering greater local about the same type and quality of service. As control and flexibility while simultaneously making with LCFF, having this type of transparency and progress toward providing additional funding for equity does not have to come at the expense of disadvantaged students. flexibility. Preschool providers still could build Recommend Legislature Adopt Governor’s their programs consistent with local interests and Basic Preschool Restructuring Approach. We priorities (such as using different learning content believe consolidating preschool funding and or emphasizing different wraparound services). prioritizing funds for low-income children would In building the new preschool program, we also be a major improvement over the state’s existing recommend the Legislature minimize initial preschool policies. Consolidating existing funding disruption to preschool providers while avoiding streams into one funding stream that has uniform permanently locking in funding allocations that application would simplify and streamline the would undermine other key principles, including existing system while potentially allowing for transparency, equity, and accountability. greater consistency in service. Prioritizing funds for Recommend Legislature Consider Most low-income children would ensure that the state’s Appropriate Way of Retiring Existing Mandate available resources are directed to those most in Backlog. We believe the Governor’s basic mandate need of the support, as low-income families are backlog approach of providing a per-student less likely than higher-income families to be able to allocation to all LEAs is reasonable, as all LEAs afford preschool on their own. Moreover, one of the were required to undertake specified mandated more consistent research findings is that preschool activities in previous years. A per-student provides greater initial benefits to children from approach, however, very likely will never eliminate low-income than high-income families. the existing backlog entirely because the amount of Ensure New Preschool Program Upholds remaining claims per student varies significantly Key Principles. In developing a new preschool across the state, with a few LEAs having much program for low-income children, we recommend higher per-student claims than other LEAs. We the Legislature keep certain key principles in estimate the state would need to provide more than mind. Of primary importance, we recommend the $150 billion to eliminate the existing backlog using Legislature establish a clear objective for the new such an approach. We recommend the Legislature program. California’s existing preschool programs consider ways to eliminate the backlog entirely have tended to suffer from a lack of both clarity without necessarily rewarding a few LEAs that filed and unity of overarching objectives. Without much higher claims than all other LEAs. One such clear objectives, the state would not be able to approach would be to provide an amount equal to assess whether a new program is functioning as or in excess of the remaining backlog, distribute on intended and producing desired public benefits. a per-student basis, but make a condition of receipt In building the new preschool program, we also that participating LEAs accept the funding in lieu recommend the Legislature build off the tenets of of all outstanding claims. www.lao.ca.gov Legislative Analyst’s Office 13 2016-17 BUDGET Better Regional Alignment of Workforce than adding to the complexity and fragmentation Education a Laudable Goal but Governor’s of the state’s workforce system, we recommend Approach Further Fragments Already Fragmented the Legislature remain focused on the overarching System. By creating a new workforce education vision of moving toward a more coherent and program and making permanent an otherwise integrated system. The Legislature could work expiring one, the Governor’s proposals would toward this end by further consolidating and hinder the state’s goal of creating a more coherent streamlining existing workforce programs rather and integrated workforce development system. than creating new ones. In 2015-16, the state budgeted $6 billion for more Recommend Legislature Adopt Child Care than 30 workforce programs administered across Restructuring Approach and Provide Guidance nine state agencies. Of these amounts, $2.6 billion to CDE in Developing Transition Plan. Shifting and nine programs were administered or all subsidized child care to a voucher system would co-administered by community colleges. To comply have many benefits, including allowing more with the requirements of these existing workforce low-income, working families to have flexibility programs, community colleges already participate in finding helpful child care arrangements. in numerous local and regional consortia of We recommend that the Legislature adopt the education, business, labor, and civic groups. Each Governor’s basic approach and provide guidance of these programs also has unique service and to CDE as it develops a transition plan. Specifically, accountability requirements. The new workforce we recommend that the Legislature task CDE with program the Governor proposes would add another creating a plan that would provide one child care set of rules to the current mix. Continuing the reimbursement rate structure, one set of minimum otherwise expiring CTE Pathways program would statewide standards, and one streamlined set of retain a separate set of rules permanently. Rather associated administrative processes. INFRASTRUCTURE Governor’s Proposals for transportation programs. These proposals are generally reflected in the Governor’s proposed The Governor’s budget includes various budget for 2016-17. Specifically, the Governor’s proposals to improve public infrastructure, such transportation funding package proposes to as the state highway system, state office buildings, provide an estimated $3.6 billion annual increase schools, local streets and roads, and county jail for state and local transportation infrastructure facilities. We describe each of these—and other— programs. Revenue from the funding package proposals below. would phase in during 2016-17 and 2017-18 and Transportation Funding Package ($3.6 Billion provide a permanent ongoing increase thereafter. Special Funds). On the day the Governor signed The funding package includes primarily new the 2015-16 Budget Act, he called a special tax revenues, but also redirects certain existing legislative session on transportation funding. As revenues. Specifically, the funding package part of this special session, the Governor proposed includes: last fall a package of proposals to increase funding 14 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET • $2 billion annually from a new $65 vehicle or replacement of some buildings up front on a registration tax. “pay-as-you-go” basis, rather than financed by borrowing through the use of long-term bonds. We • $1 billion annually from increases in note, however, that the administration envisions gasoline and diesel excise tax rates, constructing the new Natural Resources Building including indexing these rates for inflation. using a lease-to-purchase approach. The Governor’s proposal follows the July • $500 million annually from cap-and-trade 2015 release of a long-range planning study of auction revenues. office space in the Sacramento region that was • $100 million from efficiencies at the required as part of the 2014-15 budget package. California Department of Transportation The study identified various deficiencies at 29 state- (Caltrans) resulting from various minor owned office buildings and ranked the Natural changes to streamline project delivery Resources Building, Personnel Building, and Paul processes. Bonderson Building as those in most critical need of renovation or replacement. The study excluded In addition, the budget assumes that several buildings not considered as typical office $879 million in prior loans from transportation space, including the Food and Agriculture Annex accounts are repaid over a four year period from and State Capitol Building and Annex. 2016-17 through 2019-20. UC Merced Campus Expansion ($1.1 Billion The proposed budget allocates about half of the State and Nonstate Funds). Pursuant to Chapter 50 new transportation revenues to the state and half of 2013 (AB 94, Committee on Budget), the to local agencies to support various existing and Department of Finance (DOF), rather than the new programs. Specifically, the Governor proposes Legislature, approves the University of California’s to allocate about $1.5 billion to rehabilitate state (UC’s) capital outlay requests. For 2016-17, highways, about $1.4 billion for local streets and Chapter 50 requires DOF to submit an initial list roads, $400 million for transit, $200 million to of approved projects to the Legislature by February improve trade corridors, and $120 million for state 1, 2016 and a final list no earlier than April 1, 2016. highway maintenance. On September 1, 2015, UC submitted a proposal to State Office Buildings ($1.5 Billion General DOF to expand the Merced campus significantly. Fund). The Governor’s budget proposes one-time Specifically, the proposal seeks to grow enrollment funding of $1.5 billion from the General Fund to on the campus from 6,200 to 10,000 students by be deposited into a new State Office Infrastructure 2020. The project would cost $1.1 billion and add Fund (SOIF). Under the proposal, monies in 917,500 square feet of facility space to the campus this fund would be continuously appropriated (more than doubling existing space). The UC is for the replacement and renovation of various requesting from DOF the authority to use its main state office buildings in the Sacramento area. The General Fund appropriation to pay for debt service Governor proposes spending $10.1 million from on about half the project’s total costs (with nonstate SOIF in 2016-17 to initiate the replacement or funds used for debt service on the remainder). The renovation of three state buildings: the Food and UC plans to enter into a public-private partnership Agriculture Annex, the State Capitol Annex, and to finance, design, build, operate, and maintain the the Natural Resources Building. The SOIF could project’s facilities. enable the administration to fund the renovation www.lao.ca.gov Legislative Analyst’s Office 15 2016-17 BUDGET Deferred Maintenance ($807 Million equipment, and water conservation projects. The Various Funds). The Governor’s budget and the remaining $18 million is from the Motor Vehicle associated five-year infrastructure plan identify Account for the deferred maintenance needs at state infrastructure deferred maintenance needs of the California Highway Patrol and Department $77 billion, the large majority of which is related of Motor Vehicles. (By comparison, the 2015-16 to the state’s transportation system and addressed Budget Act included $120 million in one-time, by the transportation funding package discussed non-Proposition 98 General Fund support above. The budget proposes one-time spending for deferred maintenance and $148 million in totaling $807 million from various sources toward Proposition 98 funds for deferred maintenance addressing these needs. Of the total, the Governor projects and certain other one-time purposes at the proposes $500 million in non-Proposition 98 community colleges.) General Fund support for various entities as shown County Jail Construction ($250 Million in Figure 9. The proposal also includes $289 million General Fund). Since 2007, the state has approved from budget-year and prior-years’ Proposition 98 three measures authorizing a total of $2.2 billion funds for the California Community Colleges. in lease-revenue bonds to fund the construction Under the proposal, this funding could be used and modification of county jails. For example, the to address deferred maintenance, instructional 2014-15 budget package authorized $500 million in lease-revenue bonds for jail construction. Figure 9 The Governor’s budget for 2016-17 proposes an Administration’s General Fund additional $250 million from the General Fund for (Non-Proposition 98) Deferred Maintenance jail construction. According to the administration, Proposal the proposed funds would be awarded to counties (In Millions) that have either (1) not received any of the above Department/Program Proposed Amount $2.2 billion or (2) received less funding than they Water Resources $100.0 requested. Under the proposal, counties would be State Hospitals 64.0 subject to a 10 percent match requirement, except Judicial Branch 60.0 Parks and Recreation 60.0 that small counties (population of 200,000 or less) Corrections and Rehabilitation 55.0 would be subject to a 5 percent match requirement. California State University 35.0 School Facilities. The Governor continues to University of California 35.0 Developmental Services 18.0 express interest in working with the Legislature to Fish and Wildlife 15.0 improve the state’s existing school facility program Military Department 15.0 and revisit how the state and schools share facility General Services 12.0 Veterans Affairs 8.0 costs. While emphasizing the need for a revamped Forestry and Fire Protection 8.0 program, the Governor notes that the proposed State Special Schools 4.0 $9 billion school bond for the November 2016 California Fairs 4.0 Science Center 3.0 ballot makes no changes to the existing school Hastings College of the Law 2.0 facility program. Despite raising various concerns Emergency Services 0.8 with both the existing school facility program Conservation Corps 0.7 Food and Agriculture 0.3 and the already eligible school bond measure, the San Joaquin River Conservancy 0.2 Governor’s budget package contains no specific Total $500.0 alternative. 16 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET LAO Comments consideration with regard to any school facility funding changes. Much of the state’s infrastructure is aging and Consider Appropriateness of Funding Sources. needs to be renovated, adapted, or improved to In addition, the Legislature will want to consider meet current and future needs. Thus, we think the the appropriate sources of funding to address Governor’s attention to infrastructure makes sense. the identified infrastructure needs. For example, However, the Governor’s specific proposals raise the Governor proposes a mix of permanent tax several issues that merit legislative consideration. increases and one-time and ongoing uses of Specifically, in reviewing the proposals the existing special fund and General Fund resources Legislature will want to consider (1) its priorities for to fund the various infrastructure proposals. The funding infrastructure, (2) the appropriate sources Legislature may want to ensure that permanent of funding to address the identified infrastructure funding sources (such as new tax revenues) are needs, (3) the appropriate financing approach to used to meet ongoing needs, whereas one-time address the identified infrastructure needs, (4) the funding sources are aligned with one-time needs extent to which funding will be allocated to the (such as reducing backlogs of required maintenance highest priority and most cost-effective projects, work). (5) whether the proposals include adequate Weigh Trade-Offs of Proposed Financing long-term plans for addressing infrastructure Approaches. The Legislature will want to needs, and (6) whether the proposals allow for consider the appropriate financing approach sufficient legislative oversight. for infrastructure projects—whether direct Assess Priorities for Funding Infrastructure. appropriations (pay-as-you-go), renting or leasing, In reviewing the Governor’s infrastructure or borrowing (typically through the issuance of proposals, the Legislature will want to consider bonds). For example, the proposed SOIF could how it prioritizes infrastructure spending enable the administration to fund some renovations compared to other important state needs, as well and replacements of state office buildings on a as which types of infrastructure spending are of pay-as-you-go basis rather than through bonds. It highest priority. As it considers these priorities, the is reasonable to fund projects that provide services Legislature will want to think about whether there over many years, such as building replacements, are other ways to meet state infrastructure needs, through bonds that are repaid over time. While such as by adopting strategies to reduce demands bonds are somewhat more expensive than direct for infrastructure through policies that increase appropriations, as the state must pay interest on utilization, encourage less costly alternatives, or them, the difference in costs is less significant in improve efficiency. Similarly, the Legislature will the current low-interest rate environment. Thus, want to consider how recent policies have impacted the Legislature will have to weigh the benefits of the demand for certain infrastructure, such as the spreading costs out over time (thus freeing up passage of Proposition 47 (2014), which reduced funding for other legislative priorities) against the workload for county jails by reducing jail terms modest extra cost of using bonds. Additionally, the for certain offenders. Additionally, the Legislature Legislature will want to consider whether a public- will want to determine the extent to which the state private partnership is the preferred approach for should bear responsibility for costs related to local undertaking the UC Merced project, given that the infrastructure. This will be a particularly important www.lao.ca.gov Legislative Analyst’s Office 17 2016-17 BUDGET state has experienced some challenges with using Sacramento office space did not include a required public-private partnerships in the past. funding and sequencing plan for the renovation Ensure Funding Allocated to Most or replacement of state office buildings over the Cost-Effective and Highest Priority Projects. The next 25 years. Without such a plan, it can be Legislature will also want to ensure that funding difficult for the Legislature to adequately evaluate is allocated to the most cost-effective and highest the Governor’s proposal for funding state office priority projects. For example, the Governor’s buildings. deferred maintenance proposal does not include Allow for Sufficient Legislative Oversight. a specific list of proposed projects, which makes For any new funding provided, the Legislature it difficult to evaluate whether the administration will want to have accountability measures in place prioritized the distribution of deferred maintenance to ensure that funds are spent in a manner that funds to the highest priorities. Additionally, best meets the state’s needs. For example, we have funding highway maintenance is significantly more recommended in the past that the Legislature cost-effective than allowing highways to deteriorate establish project-level accountability for Caltrans such that major rehabilitation is needed. However, projects by requiring the independent California the Governor’s plan provides only a minor increase Transportation Commission to oversee the for highway maintenance. Moreover, we note that cost, scope, and schedule of all state highway the Governor’s transportation proposals would rehabilitation projects. create additional and more complex formulas for Additionally, we have recommended in allocating funds among programs. The Legislature the past that the Legislature evaluate projects could consider simplifying the system of allocating through the typical state budget process. Some transportation revenues to better ensure funding is 2016-17 proposals circumvent routine legislative allocated to the highest priorities. The Legislature oversight. For example, by being continuously also faces challenges in ensuring any new school appropriated, the Legislature would not have an facility funding goes to the most cost-effective and opportunity to evaluate SOIF projects through highest priority projects, as the Governor and many the typical state budget process. We strongly other groups believe the state’s existing allocation recommend the Legislature not take this approach approach is seriously flawed. to allocating SOIF funds as it would greatly reduce Require Long-Term Planning. Long-term the Legislature’s ability to ensure that funds are planning is required to ensure that infrastructure allocated to the highest priority projects and are is well constructed and maintained. Accordingly, adequately overseen. Additionally, by requiring the Legislature will want to make sure that the only DOF approval, the Legislature would not administration has provided sufficient information have an explicit opportunity to evaluate the UC on long-term plans to help ensure that the funds Merced project, despite it being a major, complex, will be spent in the most effective manner. For and costly campus expansion. The Legislature instance, while allocating one-time funding likely will want to consider what the appropriate for deferred maintenance is a step in the right process is for reviewing these types of projects, direction, the Governor has not identified a allocating associated funds, and maintaining long-term plan to address the overall backlog or adequate accountability. The Governor’s deferred the underlying causes of deferred maintenance. maintenance proposal also limits legislative Additionally, the long-range planning study of oversight by not identifying the specific projects 18 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET that would be funded. Rather, the proposal is to Legislature’s ability and time to ensure that the notify the Legislature of projects after enactment funded projects are aligned with its priorities. of the budget. This process essentially limits the HEALTH AND HUMAN SERVICES MCO Tax revenues from the restructured MCO tax would draw down sufficient federal funds Proposes Revised MCO Tax. The state’s to maintain the current $1.1 billion “offset” existing MCO tax leverages federal Medicaid for Medi-Cal costs that otherwise would funds that offset General Fund spending for be paid from the General Fund. Pending Medi-Cal local assistance by over $1.1 billion in legislative approval of a revised MCO tax, 2015-16. Under current law, this MCO tax expires the Governor’s budget proposal holds on July 1, 2016. The federal government issued most of the 2016-17 MCO tax revenues guidance that California’s MCO tax is likely in a special fund reserve. Therefore, the incompatible with federal Medicaid requirements expenditure authority would need to for health-care related taxes and California must be granted to spend these revenues on make changes necessary to bring the tax structure Medi-Cal or other purposes if an MCO tax into compliance by no later than the end of this is approved. The restructured tax would legislative session. While the administration also raise an additional $236 million in and the Legislature have considered different 2016-17. This amount would provide the approaches to structuring a permissible MCO nonfederal share of the Medicaid funding tax, to date no legislation has been enacted to needed to continue the restoration of IHSS authorize such a replacement tax. The Governor’s hours that were eliminated as a result of budget includes a revised MCO tax structured the previous 7 percent reduction in service with the intent of complying with federal Medicaid hours. (The 2015-16 budget restored these requirements. IHSS hours on a one-time basis using Governor’s Plan Structured to Meet Several General Fund resources.) Goals. The Governor’s proposed MCO tax plan is structured to meet three administration goals: • Limit Financial Impact of the Tax on • Meet Federal Requirements. According MCOs. While exact details are not yet to the administration, the proposed MCO available, the administration indicates its tax is structured so as to meet federal plan would cut other taxes paid by some requirements. However, the state would MCOs—specifically, their corporation and still need to seek formal federal approval insurance taxes that are paid to the state of any restructured MCO tax the state General Fund. The administration reports ultimately adopts. that its plan would reduce corporate and insurance taxes by about $370 million per • Aid General Fund and Pay for Restored year. After these tax cuts are taken into In-Home Supportive Services (IHSS) account, the administration estimates Hours. Under the Governor’s proposal, www.lao.ca.gov Legislative Analyst’s Office 19 2016-17 BUDGET the MCO industry overall would receive of the proposed MCO tax would require a $90 million net benefit annually. (We the state to formally request the federal understand that some individual plans may government to waive certain federal receive a net benefit under the plan, while requirements for health care-related taxes others may be worse off financially.) in seeking federal approval for the MCO tax. While the administration is of the view Possible Effects on Other Budget Items. Under the proposed MCO tax is permitted under the Governor’s proposal, revenues from the MCO federal Medicaid rules, federal approval is tax are not currently proposed to be spent in the not certain. Accordingly, if the Legislature Department of Developmental Services (DDS) passes a revised MCO tax, it should budget in 2016-17. The Governor’s budget summary consider contingency budget plans in the indicates “additional targeted spending proposals” event that the federal government rejects in DDS would likely be funded from a revised the state’s plan. MCO tax. The budget summary also indicates the administration may seek to end the state’s • General Fund Revenues and School Coordinated Care Initiative for persons eligible for Funding. The Governor’s proposal would both Medi-Cal and Medicare if a revised MCO tax cut taxes that MCOs pay to the state’s is not approved. General Fund. Reductions in General Fund Issues for Legislative Consideration. Given the tax revenues result in lower Proposition 98 need to seek federal approval, the administration school funding requirements in most years. has indicated it seeks swift approval of a revised Accordingly, the Governor’s plan could MCO tax. Below, we suggest several issues reduce school funding requirements in for legislative consideration in reviewing the some future years—perhaps by a couple Governor’s proposal: hundred million dollars, based on the • Distributional Impact on MCOs. While administration’s estimates of General Fund the administration considers that its revenue loss. The administration’s budget proposal would result in a net benefit to estimates do not consider these effects. In the MCO industry overall, the net financial addition, the administration’s estimates effects for individual plans would vary. do not consider the possible effects of Some plans would face a net fiscal liability recent appellate court and Franchise while other plans would benefit. The Tax Board determinations related to market impacts of the uneven distribution certain health plans’ tax obligations. Most of tax liability across plans should be notably, a September 2015 state appellate considered to assess whether there may be court decision (Myers v. State Board of unintended negative consequences for the Equalization) found that certain managed industry and consumers. care plans could potentially be regarded as insurers, which would subject them to • Required Federal Approval Is Not Certain. the state’s insurance tax. If the Governor’s In addition to obtaining authority from MCO tax plan relieves those plans of the Legislature to enact the proposed MCO their future obligations to pay insurance tax, the state must also seek approval from taxes, the resulting General Fund revenue the federal government. The structure 20 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET loss—and the related reduction in school Funding to Begin Compliance Efforts With funding requirements—may be larger than New Federal Regulations. The Governor’s budget discussed above. provides $17.1 million ($12.2 million General Fund) to support compliance by March 2019 with new Developmental Services federal requirements related to Medicaid-funded community-based services. California receives The 2016-17 budget provides for several new about $1.7 billion in federal funds annually for spending proposals in the DDS. These major budget these services in the DDS budget. The new federal proposals are primarily to support community rules require that services are provided in settings services and their development, as described below. that are integrated with the larger community. The budget also includes a proposal for additional The proposed funding would support 21 Program headquarters staff resources to improve DDS’ fiscal Evaluator positions within the RCs to evaluate and oversight of services provided to persons with monitor compliance and would provide resources developmental disabilities. to providers for service modifications and staffing Budget Assumes a New Rate for Certain needs to meet compliance. Noncompliance with Residential Facilities. The Governor’s budget these regulations could put federal funding proposes $46 million ($26 million General Fund) to at risk. While the Governor’s proposal shows allow for the development and implementation of the administration’s commitment to bringing a new rate for certain residential facilities serving California into compliance, it is unclear how this four or fewer individuals. These facilities are proposal would be implemented and the extent currently funded through a rate methodology— to which the funding levels provided for service known as the Alternative Residential Model (ARM) changes move the state toward full compliance with rate—which has not been updated in many years. the federal regulations. This rate methodology was established based on Additional Service Development Funds the assumption that each home would support Support Developmental Center Closures. six residents. Therefore, the current individual In May 2015, the administration announced rate-per-consumer paid to facilities assumes plans to initiate closure of the state’s remaining that overhead and staffing costs is spread across developmental centers, with some exceptions. The six placements, even though Regional Centers 2015-16 spending plan reflects the Legislature’s (RCs) are increasingly using facilities with fewer approval of the Governor’s intent in concept. On placements, which is generally consistent with October 1, 2015, DDS submitted to the Legislature federal policy direction. The new rate would a plan to close Sonoma Developmental Center and be based on a four-bed model. Because many in November 2015 announced intent to submit individuals residing in DDS-funded residential similar closure plans for Fairview Developmental homes are in ARM-rate facilities, we think Center and the general treatment area at Porterville the Governor’s proposal merits consideration. Developmental Center. The Governor’s budget However, the Governor’s budget does not include includes $78.8 million ($73.9 million General Fund) any other proposed rate adjustments or reforms in one-time resources for service development for any other community service provider rates, targeted for individuals transitioning from these which continue to be of significant interest to the centers. The state is at risk of losing additional Legislature and part of ongoing stakeholder and federal funding related to these developmental legislative discussions. www.lao.ca.gov Legislative Analyst’s Office 21 2016-17 BUDGET centers due to violations generally related to clients’ of compliance with one or more caseload-ratio health, safety, and rights. The state was able to requirements for the past two years. The Governor’s reach a settlement agreement with the federal budget includes $17 million ($13 million General government that would continue funding if certain Fund) to support an estimated 200 additional RC terms are met, which include a commitment service coordinator positions. Caseload reports to transition individuals out of Sonoma show RCs have had a longstanding noncompliance Developmental Center. The state is in similar in meeting caseload-ratio requirements. We note negotiations related to the other developmental that the Governor’s proposal does not appear to centers proposed for closure. provide adequate funding to bring RCs into full Budget Includes Funds to Support compliance with these ratios, and to the extent that Improvements in RC Caseload Ratios. Current RCs are out of compliance with federal caseload reports to DDS indicate that all RCs were out ratios, some federal funding could be at risk. 22 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET www.lao.ca.gov Legislative Analyst’s Office 23 2016-17 BUDGET LAO Publications The Overview section of this report was prepared by Ann Hollingshead and Ryan Miller, and many other LAO staff members also contributed to the publication. 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. 24 Legislative Analyst’s Office www.lao.ca.gov