The 2018-19 Budget: Overview of the Governor's Budget

The 2018-19 Budget: Overview of the Governor’s Budget MAC TAYLOR LEGISLATIVE ANALYST JANUARY 12, 2018 analysis full gutter 2018-19 BUDGET LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET Executive Summary Governor Prioritizes Reserves. The Governor’s 2018-19 proposed budget places a high priority on building reserves. To that end, the Governor proposes a total reserve balance of nearly $16 billion, including an optional $3.5 billion deposit into the state’s rainy day fund. We believe the Governor’s continued focus on building more reserves is prudent in light of economic and federal budget uncertainty. In considering the Governor’s proposal, we advise the Legislature to first set its own optimal level of reserves in preparation for a future recession. Governor Allocates Funding Increases for Schools and Community Colleges. Under the administration’s estimates, there are sizeable resources available to allocate within the constitutionally required funding guarantee for schools and community colleges. The Governor makes a few major decisions in allocating these funding amounts. These include: (1) fully funding the implementation of the K-12 Local Control Funding Formula, (2) increasing community college apportionments and implementing a new allocation formula, and (3) creating a new high school career technical education program. Governor Makes Various Infrastructure Proposals. After setting aside reserves and fulfilling constitutionally required spending, the Governor uses some discretionary funds for a variety of new infrastructure projects. While these proposals have merit, the Legislature may wish to consider whether it has a different set of priorities for infrastructure spending. Moreover, while many of the infrastructure proposals in the Governor’s budget include relatively small spending amounts for 2018-19, some carry growing and significant costs in later years. More Resources May Be Available in May. The Legislature may have more resources available to allocate in May for two reasons. First, the administration’s revenue estimates may be higher. Second, the Congress may authorize a higher federal cost share for the Children’s Health Insurance Program, resulting in General Fund savings. www.lao.ca.gov 1 analysis full gutter 2018-19 BUDGET 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET On January 10, 2018 the Governor presented his proposed budget. (In the coming weeks, we will analyze initial 2018-19 budget plan to the Legislature. In this the plan more thoroughly and release several additional report, we provide a brief summary of the Governor’s budget analysis publications.) THE BIG PICTURE This section presents a broad overview of the THE GENERAL FUND CONDITION Governor’s proposed budget. Figure 1 shows the Governor’s key budget proposals. These focus on three Governor Proposes $15.7 Billion in areas of the budget: Total Reserves • Building more reserves. Figure 2 (see next page) shows the General Fund’s • Allocating sizeable funding increases available condition from 2016-17 through 2018-19 under within the constitutionally required guarantee for the Governor’s budget assumptions and proposals. schools and community colleges. The administration proposes to end 2018-19 with • Supporting a variety of new infrastructure $15.7 billion in total reserves. This would consist of proposals. two amounts: $13.5 billion in the state’s constitutional rainy day fund (reserves available for future budget Below, we discuss the administration’s estimate of emergencies), as well as $2.3 billion in discretionary the overall condition of the General Fund under these reserves (available for any purpose). The budget proposals. Then, we discuss how new federal tax would increase the rainy day fund by over $5 billion in changes may affect state revenues. 2018-19, including an optional $3.5 billion deposit. Figure 1 Key Features of the Governor’s Budget Plan Reserves Proposes extra deposit of $3.5 billion into rainy day reserve (in addition to $1.5 billion in required deposits). Proposes discretionary reserve balance of $2.3 billion. Schools and Community Colleges Fully funds the Local Control Funding Formula ($2.9 billion). Provides $396 million in additional apportionment funding for community colleges and changes the allocation formula. Proposes a new high school career technical education program ($212 million). Creates an online community college ($100 million one time, $20 million ongoing). Provides $1.8 billion in one-time per pupil discretionary grants. Infrastructure and Equipment Provides $375 million for the design and construction of trial courts. Proposes $134 million to purchase new voting systems in counties. Provides $136 million for infrastructure projects and equipment at correctional facilities. Proposes various other infrastructure projects and equipment purchases. Other Extends and changes business tax credits (future annual losses of over $200 million). Provides $210 million for trial court operations. Provides $92 million each for CSU and UC, a 3 percent General Fund base increase for both segments. Provides $131 million for counties to address Incompetent to Stand Trial wait list. www.lao.ca.gov 3 analysis full gutter 2018-19 BUDGET Higher Revenue Estimates. Relative to the June General Fund spending for schools and community 2017 budget package, the administration estimates colleges (due to offsets from increased local property that General Fund revenues will be $1.2 billion higher tax revenue), and $360 million for several natural across 2016-17 and 2017-18 combined. In 2018-19, the resource programs. administration projects revenues will grow by $5.8 billion 2018-19 Budget Plan (4.5 percent). Most of this increase is attributable to the personal income tax, which grows by an estimated In this section, we describe key features of $4.2 billion (4.7 percent). The administration also the Governor’s 2018-19 General Fund proposed estimates a 2017-18 ending balance in the state’s budget. We first describe increases that result from discretionary reserve fund of $4.2 billion. constitutionally required spending and recent legislative Higher 2017-18 Spending. Relative to the June changes. We then describe how the Governor allocates 2017 budget plan, General Fund expenditures in discretionary resources available after fulfilling these 2017-18 are higher by $1.4 billion. This increase commitments. is partially due to new spending of $760 million for Provides $4.5 Billion in Constitutionally Required response and remediation related to the California General Fund Increases. The state has two key wildfires in late 2017. (The state may receive constitutional spending formulas, which each year reimbursements from the federal government for require the state to spend minimum amounts. The much of these costs in the future.) In addition, the first—required by Proposition 98 (1988)—is a formula administration estimates that 2017-18 spending for the for determining the minimum amount of state funding Medi-Cal program will be $544 million higher relative to for schools and community colleges. The second— the June 2017 estimates. This increase is due to the required by Proposition 2 (2014)—is a formula that net effect of multiple factors. requires state spending on debt payments and reserve Lower 2016-17 Spending. Relative to the June deposits into a rainy day fund. These formulas generally 2017 budget plan, the administration’s January require more spending and rainy day fund deposits estimates of General Fund expenditures in 2016-17 are as General Fund tax revenues increase. Reflecting in lower by $2.3 billion. This downward revision includes part the administration’s revised revenue estimates, lower spending of: about $700 million for health and the Governor’s budget proposal provides $1.5 billion human services programs, nearly $500 million in for constitutionally required increases in General Fund spending on schools and community colleges between 2016-17 and Figure 2 2018-19. In addition, the budget General Fund Condition provides $1.5 billion each ($3 billion Under Administration’s Estimates total) for constitutionally required debt payments and rainy day fund (In Millions) deposits. 2016-17 2017-18 2018-19 Revised Revised Proposed Budget Implements Various Legislative Initiatives and Prior-year fund balance $5,029 $4,610 $5,351 Agreements. The proposed Revenues and transfers 118,669 127,252 129,791 budget next funds caseload growth, Expenditures 119,087 126,511 131,690 primarily in health and human Ending fund balance $4,610 $5,351 $3,452 services programs, and implements Encumbrances 1,165 1,165 1,165 a variety of legislative initiatives SFEU balance 3,445 4,186 2,287 and agreements from recent years. Reserves SFEU balance $3,445 $4,186 $2,287 For example, in 2018-19, the BSA balance 6,713 8,411 13,461 budget allocates $170 million in Total Reserves $10,158 $12,597 $15,748 Proposition 56 (2016) revenues for SFEU = Special Fund for Economic Uncertainties (discretionary reserve) and BSA = Budget year-over-year growth in the Medi-Cal Stabilization Account (rainy day fund). program and $680 million to fund 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET payment increases for Medi-Cal providers. The amount the Medi-Cal program in certain cases when General for payment increases is largely consistent with a Fund revenues exceed constitutionally required two-year agreement reached in the 2017-18 budget spending for schools and the “workload budget” package. However, it is less than the fully authorized costs of government programs that were in place as amount of $800 million because, according to the of January 1, 2016. The Director of Finance is given administration, a portion of the spending will shift to significant discretion in making calculations under this 2019-20. The budget also provides $69 million to budget formula. While the administration acknowledges complete a multiyear agreement to increase slots and that it had billions of surplus General Fund dollars to reimbursement rates for child care and preschool allocate to discretionary reserve deposits and some providers. In addition, the budget allocates $29 million to provide Figure 3 eight hours of paid sick leave Governor’s Key Choices in per year for In-Home Supportive Allocating Discretionary General Fund Resourcesa Services providers, consistent with (In Billions) 2016 legislation that also increased the state’s minimum wage. Amount Governor Prioritizes Growing Reserves Reserves. After satisfying Extra rainy day fund deposit $3.5 constitutional requirements and Discretionary reserve balance 2.3 providing funds for caseload Subtotal ($5.8) Other Proposals growth and new legislation, the Infrastructure and equipment $0.4 Governor identifies $7 billion in Funding for trial court operations 0.2 available discretionary resources. As Base increases for CSU and UC 0.2 Figures 3 and 4 show, the Governor Funding increases for child care and preschool 0.1 proposes using the vast majority Funds for counties to address IST wait list 0.1 of these resources to grow the Other 0.2 state’s combined discretionary and Subtotal ($1.2) mandatory budget reserves to nearly Total $7.0 a $16 billion—about 12 percent of Table excludes spending on K-14 education, reserves, and debt required by the State Constitution and funding for caseload and recent legislation. Also excludes some discretionary funding below $50 million. estimated General Fund tax revenues IST = Incompetent to Stand Trial. in 2018-19. In particular, the Governor proposes an optional deposit into Figure 4 the state’s constitutional rainy day fund of $3.5 billion in 2018-19 (in addition to the $1.5 billion mandatory How the Governor Allocates deposit). This increase in rainy day fund reserves would $7 Billion in Discretionary Resources bring that account’s total balance to $13.5 billion, which the administration estimates is equal to the rainy day Other Proposals fund’s current constitutional maximum of 10 percent of General Fund tax revenues. As shown in the figures, after setting aside these reserves, the Governor uses the remaining discretionary funds for mostly one-time and some ongoing new budget commitments. No Added Funding to Medi-Cal From Proposition 55. In 2016, voters passed Proposition 55, Reserves which extended tax rate increases on high-income Californians. Proposition 55 includes a budget formula that goes into effect in 2018-19. This formula aims to provide up to $2 billion of additional annual funding for www.lao.ca.gov 5 analysis full gutter 2018-19 BUDGET new spending in the overall budget, its Proposition 55 Federal Law Already Affecting Revenues. formula calculation identifies a $1.9 billion deficit In December 2017, the state experienced a in funding workload budget costs. As a result, the multibillion-dollar revenue influx. This revenue surge Governor’s plan provides no additional funds for likely resulted from (1) economic growth and high stock Medi-Cal in 2018-19 under Proposition 55. prices and (2) decisions of individuals and businesses to $12 Billion of Gann Limit Capacity Estimated. maximize their near-term benefits under the new federal Under the administration’s 2018-19 General Fund tax law. Similar factors probably contributed to record and special fund estimates, the state would be left high daily levels of personal income tax withholding in with $12 billion of “room” (essentially, extra spending early January 2018. capacity) under its constitutional spending limit, known In general, when the federal government passes new as the “Gann limit.” After the administration withdrew its tax laws, individuals and businesses have incentives to proposal last year to change the state’s administration accelerate some income and expenses (and delay other of the Gann limit, we understand that Department types of income and expenses) in order to maximize of Finance staff reviewed its Gann limit calculations. their benefits under the tax code. These “shifts” in This year’s estimate of $12 billion of Gann limit room taxpayer income and expenses likely have boosted includes an approximately $8 billion upward revision state tax receipts by billions of dollars during the last since last year in the state’s estimated costs to meet few weeks. In the coming months, these shifts may federal health and human services mandates, which are boost state revenues in some months and depress excluded from the limit. revenues in other months. (For example, the upcoming mid-January round of quarterly income tax payments REVENUES AND FEDERAL TAX LAW may be smaller than usual because many high-income people sent their payments in December.) A fuller Revenues Likely to Be Higher Than Estimated. understanding of what is happening will take months or Prior to passage of the federal tax bill, our office’s years to develop. November 2017 Fiscal Outlook estimated that General Effects on U.S. Economy. In addition to the Fund revenues would be billions of dollars higher taxpayer shifts described above, a significant change than prior administration estimates in 2017-18 and to federal taxes affects the national economy. These 2018-19 combined. Our November estimates for effects are complicated, difficult to determine with the four largest General Fund taxes are a combined precision, and potentially variable from one part of the $3.4 billion higher than the administration’s new country to another. Economic effects also often differ in January 2018 revenue estimates. Currently, our the short run and the long run. assessment is that state revenues in 2017-18 and In the short run, many economic analysts expect the 2018-19 combined will most likely be higher than the plan to boost national economic growth through the administration’s new estimates. That being said, the end of this decade. One key reason is that the federal recent federal tax legislation introduces significant plan reduces various taxes on businesses. Moreover, in new uncertainties to typically uncertain state revenue the near term, a large portion of the nation’s taxpayers projections, as discussed below. is expected to benefit from a decline in their federal Federal Action Not Yet Reflected in Governor’s taxes. These tax reductions are expected to stimulate Proposal. The President and the Congress agreed the national economy, temporarily boosting growth. to major changes to federal individual, corporate, and For example, Moody’s Analytics anticipates that the estate taxes in December 2017. By that time, many key tax law will boost real gross domestic product growth elements of the administration’s budget plan already by four-tenths of a percentage point in 2018, with a had been completed. As such, the administration’s smaller boost in 2019. January 2018 budget plan generally does not reflect In the longer run, this short-term economic stimulus changes to the economy and taxpayer financial is expected to diminish. With unemployment rates decisions that will result from the new tax law. The May now low, wage and price pressures caused by the Revision is expected to reflect some changes resulting stimulus could create new economic concerns. Higher from the federal plan. federal deficits and resulting higher interest rates may 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET depress economic growth below what it would have LAO COMMENTS been. Because many of the federal plan’s features were temporary, there is also uncertainty about which May Revision Could Reflect More Resources features will be extended in future years. Moody’s Available. There are two key reasons the May Revision could reflect more resources available relative to what Analytics projects that the net economic boost from the the administration now projects: tax plan will be small over the long term—increasing U.S. economic growth by 0.05 percentage points per • Higher Revenues. As discussed earlier, the year. administration’s revenue estimates may be higher Effects on California. The tax plan’s short- and in May. In most years, increases in General Fund longer-run effects on the U.S. economy—discussed revenues lead to increases in the Proposition 98 above—will affect the California economy too, including and Proposition 2 requirements. However, near-term reductions in federal taxes for a large portion under current conditions, even if revenue were of individual Californians and businesses. Concerns to increase several billion dollars from the have been expressed about parts of the federal plan Governor’s January budget level, General Fund that could have a disproportionately negative effect spending on the minimum guarantee would be on California and other states that have higher taxes unlikely to increase significantly. Similarly, higher and home prices. For example, about 15 percent of 2017-18 revenues would not lead to higher rainy California individual income tax filers—largely those day reserves by the end of 2018-19 because the making $100,000 or more per year—reportedly fund is at its constitutional maximum under the claimed $10,000 or more in state and local tax (SALT) proposal. Higher 2018-19 revenues could lead to deductions under the prior tax law. These deductions higher debt payment requirements, however. will now be capped, and some of these filers will pay • Children’s Health Insurance Program more in individual income taxes under the plan. In (CHIP). Second, the budget assumes, addition, changes to the SALT and mortgage interest beginning in January 2018 and onward, the deductions have led some to conclude that growth federal government will reauthorize CHIP at in California house prices will slow under the new tax its historical 65 percent federal cost share, law. Offsetting these concerns are the plan’s significant rather than the higher 88 percent share it has reductions in corporate and other business taxes, the appropriated in recent years. In December (after benefits of which are likely to help high-income earners the administration was finalizing its proposal), with significant stock holdings and other investments. Congress approved the higher share on a Upcoming Tax Agency Report. California state temporary basis. In May, this will lead to an income taxes generally do not automatically conform estimated $150 million in additional General Fund to changes in federal tax law. Yet, the recent changes savings. Moreover, if Congress reauthorizes the to federal tax law will result in various changes in state program at the higher level for a longer period, it taxpayer liabilities or behavior—some of them indirect would result in additional General Fund savings of or unintended. The Franchise Tax Board (FTB) is already about $750 million for the remainder of 2017-18 required to provide a consolidated report by April 20 on and all of 2018-19. how the new federal law will affect state tax revenues. It will be impossible for FTB to identify all potential issues Recommend Legislature Consider Its Optimal related to the plan with precision in such a short time Level of Reserves. As the Legislature crafts the frame, but this information should be useful for finalizing 2018-19 budget, we urge it to first consider its optimal the budget after the May Revision and considering level of reserves. In this budget, the Governor proposes possible changes to state tax law this year or in the depositing enough reserves into the state’s rainy day future. fund that it reaches its constitutional maximum. We believe the Governor’s continued focus on building more reserves is prudent in light of economic and www.lao.ca.gov 7 analysis full gutter 2018-19 BUDGET federal budget uncertainty. The Legislature may want Recommend Scrutiny of Proposition 55 to consider whether the proposed level of reserves Calculation. The calculation in the is its optimal level or if it wishes to have more or less Proposition 55 measure adds an additional layer of total reserves (including those outside of the rainy complexity to the state budget. Any future change to day fund) at this point in time. While the Governor is General Fund revenues or spending has the potential— correct that filling the rainy day fund now would help depending on the methodology used by the Director the state budget weather the next recession, filling that of Finance—to (1) trigger or (2) increase or decrease reserve now involves various trade-offs for the state. the likelihood of a required supplemental appropriation For example, Proposition 2 requires the state to spend to Medi-Cal under the measure. As the new formula moneys in the rainy day reserve in excess of 10 percent methodology in this budget may set a precedent for on infrastructure. As a result, filling the rainy day fund the future, we recommend the Legislature scrutinize the now may constrain the Legislature’s ability to build more administration’s calculations. reserves or make other budget commitments in the coming years. KEY BUDGET PROPOSALS PROPOSITION 98 activities. Figure 5 summarizes the major components of the Governor’s Proposition 98 spending plan. Below, we highlight the major components of the Higher Spending Driven Primarily by Higher Governor’s Proposition 98 package and provide some State Revenues. Of the $6.3 billion increase in high-level comments about the package. spending, $3.1 billion reflects estimated growth in the 2018-19 Proposition 98 minimum guarantee from Overview of Governor’s Plan the revised 2017-18 level. This growth is attributable Across Three Years, $6.3 Billion in Proposition 98 to a 4.1 percent increase in per capita General Fund Spending Proposals. The Governor’s budget contains revenue. The administration also revises its estimate a total of $6.3 billion in new Proposition 98 spending of General Fund revenue upward in the current year, proposals for K-12 education, the California Community resulting in a $687 million increase in the 2017-18 Colleges, and preschool. Of the augmentations, guarantee. Another $2.2 billion in spending results from $3.9 billion is ongoing and $2.4 billion is for one-time the expiration of various one-time initiatives, with the associated funding repurposed for new commitments in 2018-19. The other sources of Figure 5 funding in the Governor’s budget Major Components of Governor’s Proposition 98 Spending Plan consist of $214 million from unspent prior-year funds, $100 million from a Ongoing Augmentations settle-up payment related to meeting • Fund full implementation of K-12 Local Control Funding Formula ($2.9 billion). the 2009-10 guarantee (scored as • Increase community college apportionments and implement new allocation formula a Proposition 2 debt payment), and ($396 million). $37 million freed up from various • Create new high school career technical education program ($212 million). • Fund new system of regional and county support for low-performing school districts net technical adjustments (primarily ($70 million). lower-than-expected costs for • Cover operating costs of new fully online community college ($20 million). community college apportionments). One-Time Initiatives Per Student Funding Increases • Provide school districts with per-student discretionary grants ($1.8 billion). Notably for Schools and Colleges. • Address deferred maintenance at the community colleges ($275 million). Figure 6 shows the distribution of • Fund startup costs of new fully online community college ($100 million). Proposition 98 funding by segment 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET and source across the period. Under the Governor’s COLA ($161 million) and fund 1 percent enrollment budget, K-12 funding per student increases from the growth ($60 million). The Governor also proposes 2017-18 level of $11,165 to $11,628 in 2018-19, an a new allocation formula and provides $175 million increase of $463 (4.1 percent). Community college to ensure no college receives less under the new funding per full-time equivalent student increases from formula than it would receive under current law. the 2017-18 level of $7,624 to $8,099 in 2018-19, an Under the proposed new formula, about one-half of increase of $475 (6.2 percent). apportionment funding would be allocated based on Largest Ongoing K-12 Augmentation Is for Full enrollment, about one-quarter based on the number of Implementation of LCFF. The Governor estimates that low-income students served (as measured by eligibility the $2.9 billion increase for the Local Control Funding for fee waivers and federal Pell grants), and another Formula (LCFF) is sufficient to close the remaining one-quarter based on performance measures (such gap to the formula targets and provide a 2.51 percent as three-year degree/certificate completion rates). cost-of-living adjustment (COLA). Reaching full By comparison, apportionment funding currently is implementation in 2018-19 would be two years ahead allocated based primarily on enrollment, with none of schedule. based on performance. Largest Ongoing Community College Governor Has Three Other Notable Ongoing K-14 Augmentation Is for Apportionments. The Governor Priorities. The Governor proposes a new $212 million proposes to provide more funding for community high school career technical education (CTE) program college apportionments and change the associated funded through the existing Strong Workforce program allocation formula. Specifically, the Governor’s budget administered by the community colleges. Of this increases apportionments to cover a 2.51 percent amount, $200 million would be provided to existing Strong Workforce consortia consisting of colleges, Figure 6 Proposition 98 Funding by Segment and Source Dollars in Millions Except Per-Student Amounts Change From 2017-18 2016-17 2017-18 2018-19 Revised Revised Proposed Amount Percent Funding by Segment K-12 Education $62,048 $65,340 $67,695 $2,355 3.6% California Community Colleges 8,283 8,654 9,207 553 6.4 Preschool 975 1,122 1,338a 216 19.2 Other agencies 85 95 85 -10 -10.7 Totals $71,390 $75,211 $78,324 $3,114 4.1% Funding by Source General Fund $49,993 $52,741 $54,564 $1,823 3.5% Local property tax 21,397 22,470 23,761 1,291 5.7 Totals $71,390 $75,211 $78,324 $3,114 4.1% Enrollment K-12 average daily attendance 5,960,037 5,961,253 5,944,090 -17,163 -0.3% Community college FTE students 1,134,809 1,135,081 1,136,813 1,733 0.2 Funding Per Student K-12 Educationb $10,588 $11,165 $11,628 $463 4.1% California Community Colleges 7,299 7,624 8,099 475 6.2 a Includes $125 million for one-time grants to fund the expansion of early education programs, including preschool. Excluding this amount, the increase from 2017-18 is $91 million (8.1 percent). b Per-pupil amount combines funding for K-12 education, preschool, and other agencies. FTE = full-time equivalent. www.lao.ca.gov 9 analysis full gutter 2018-19 BUDGET school districts, and industry partners. The consortia, mitigating reductions to ongoing programs such as in turn, would decide how to allocate the new funds to LCFF and community college apportionments. school districts. The remaining $12 million would fund Governor Has Reasonable Set of Priorities, but local industry experts who would provide technical Legislature Could Modify. Many of the Governor’s assistance to school districts with CTE programs. The proposals relate to issues of longstanding interest Governor also proposes $120 million to create a fully and concern to the Legislature. Over the past several online community college, with most of the associated years, for example, the Legislature has prioritized funding dedicated to startup costs. The college would implementing LCFF, expanding CTE, increasing create and coordinate online courses and programs community college apportionments, and addressing targeted towards working adults with a high school maintenance backlogs. The Governor’s budget diploma but lacking a college degree or certificate. provides one reasonable starting point for making Additionally, the Governor proposes a $70 million further progress in these areas. On the other hand, the package of initiatives to provide county and regional Legislature has expressed other priorities too, such as support to low-performing districts. Of this amount, increasing per-student funding for special education the majority ($55 million) would fund county offices services. Over the coming months, the Legislature of education (COEs) to support districts flagged for could adopt the Governor’s priorities or establish a improvement under the state’s new accountability somewhat different set of its own priorities. system. Several Proposals Are Complex and Raise Many Several One-Time Initiatives. The Governor’s Issues. The new community college funding formula budget also includes $1.8 billion for K-12 discretionary represents the most significant change to community grants. Similar to previous years, funds would be college funding in many years. We think the Legislature allocated on a per-student basis and the grants would should carefully consider this proposal, especially offset any existing mandate claims. This year, however, the incentives created by the formula to serve certain the state would first deduct any outstanding obligations student subgroups. The proposed online college districts have under a recent agreement with the is another significant proposal, raising several key federal government over Medi-Cal billing practices. issues. The governance structure of the new college, Regarding community colleges, the Governor’s budget its program offerings, and its relationship to existing includes $275 million in one-time funding for deferred online community college programs will be particularly maintenance. important to consider. The package of proposals to support and improve low-performing school districts LAO Comments also involves many key decisions, including the role of Split Between Ongoing and One-Time Initiatives COEs in the state’s new K-12 accountability system. Is Reasonable. The Governor’s budget allocates all In all these cases, we recommend the Legislature of the funding increases associated with 2017-18 and begin analyzing these proposals early so that it has prior years to one-time initiatives. Regarding 2018-19 time to understand the problems the Governor seeks funding, the Governor’s budget allocates $1.3 billion to address and determine the most effective way to to one-time initiatives and $3.9 billion to ongoing address the root issues. In some cases, the Legislature programs. We think this split is reasonable, and we may find it has several options for achieving the recommend the Legislature adopt a final budget identified goals of a particular proposal. plan that continues to rely upon a mix of one-time Proposed K-12 Discretionary Grants Continue and ongoing spending. The state has taken such an Inefficient Approach to Retiring the Mandate an approach the past several years. Setting aside Backlog. We are concerned that the Governor’s some funds for one-time purposes helps the state per-student funding approach likely will never eliminate avoid overcommitting to programs it might be unable the mandate backlog. The backlog currently totals an to sustain during tighter fiscal times. If the minimum estimated $870 million, with most remaining claims guarantee were to drop in 2019-20, for example, the concentrated in a few districts. With two-thirds of expiration of one-time initiatives would provide a buffer, districts having no claims, much of the $1.8 billion included in the Governor’s budget would have no 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET effect on the backlog. We estimate that the state complete these three projects, plus two others already would need to provide around $200 billion to eliminate in process, would be almost $1 billion, to be financed the backlog using the Governor’s approach. As in by lease revenue bonds supported by the General previous years, we recommend the Legislature consider Fund. ways to eliminate the backlog more efficiently. One $134 Million for Voting Systems. The budget approach would be to provide an amount somewhat in proposes $134 million in one-time General Fund excess of the remaining backlog, distribute funds on a spending to purchase new equipment for county per-student basis, but require districts receiving funds voting systems. This equipment includes hardware, to write off all remaining claims. This approach would software, and initial licensing to replace existing make substantially more progress toward eliminating systems and technology. Under the proposal, counties the backlog without rewarding districts that submitted would provide a dollar-for-dollar match to receive the unusually costly mandate claims. state funding. The $134 million estimate assumes that there is a widespread shift by jurisdictions to the INFRASTRUCTURE AND new “vote center” elections model, as authorized by EQUIPMENT Chapter 832 of 2016 (SB 450, Allen). $136 Million for State Correctional Facilities. The Governor’s budget includes a variety of The budget proposes $136 million in one-time General proposed spending on infrastructure and equipment. Fund spending for infrastructure and equipment at the First, the Governor implements recent legislative California Department of Corrections and Rehabilitation initiatives on infrastructure consistent with current law (CDCR). This includes $61 million to replace roofs under Chapter 5 of 2017 (SB 1, Beall), Chapter 852 of at three facilities, $33 million to replace public safety 2017 (SB 5, de León), and Chapter 365 of 2017 radio communication systems, $20 million for mold (SB 3, Beall). In 2017, the Legislature passed SB 1 to remediation, $18 million to replace and purchase increase state funding for California’s transportation additional vehicles for inmate health care services, and system. In 2018-19, the budget allocates $4.6 billion $4 million to replace dental equipment. in transportation spending, consistent with the Other Infrastructure Projects and Equipment measure’s statutory formula for allocating revenues. Proposals. The budget also proposes a variety of If approved by voters in 2018, SB 5 and SB 3 would smaller proposals related to infrastructure projects and each authorize $4 billion in general obligation bonds equipment procurement. This includes the following for natural resources-related projects and housing, amounts in 2018-19: respectively. Assuming both measures are approved by voters, the budget allocates $1 billion for the first • $98 Million for Helicopters. The budget year of implementation of SB 5 and $285 million for proposes $98 million in one-time General SB 3. Second, the Governor makes a variety of new Fund spending to purchase and replace four proposals for spending related to infrastructure projects helicopters for the Department of Forestry and and equipment for 2018-19. The remainder of this Fire Protection. section describes these proposals. • $30 Million for State Office Buildings. The budget proposes $30 million in General Governor’s Proposals Fund resources for planning activities for the $375 Million for Trial Court Construction. construction of proposed new state office The budget proposes $375 million for design and buildings. This includes two renovation projects construction of trial courts. First, the budget authorizes and the construction of one new office building. $343 million in lease revenue bonds, to be repaid The future costs of completing these projects from the General Fund, for the construction of five would be about $1.3 billion, to be financed by courthouse projects. The budget also proposes lease revenue bonds supported by the General spending $32 million from the Immediate and Critical Fund. Needs Account to complete the design of three • $15 Million for Earthquake Early Warning additional courthouse projects. The future costs to System. The budget proposes spending www.lao.ca.gov 11 analysis full gutter 2018-19 BUDGET $15 million in General Fund to purchase and Trade-Offs Related to Funding and Financing install sensors for the California Earthquake Early Approaches. The Legislature may want to consider Warning system. alternative financing approaches to the Governor’s • $14 Million for California Conservation Corps. infrastructure proposals. For example, the Governor The budget proposes $14 million in General Fund proposes using lease revenue bonds to fund the resources for acquisition and preliminary plans for design and construction of state office buildings. The the construction of four new residential centers Legislature may want to consider whether more should and rehabilitation of two existing centers at the be done through pay-as-you-go financing or leasing. California Conservation Corps. The future costs Additionally, it may want to consider the proposed to complete these projects would be $248 million, funding approaches. For example, the Governor’s financed by direct General Fund appropriations courthouse proposal is a significant departure from past and lease revenue bonds supported by the practices to fund court construction with court fine and General Fund. fee revenue rather than from the General Fund. • $12 Million for Emergency Communications. Legislature’s Election Administration Priorities. The budget proposes spending $11.5 million from Most counties’ voting equipment is quite old, and the State Emergency Telephone Number Account historically, the state has assisted counties in replacing (SETNA) to replace the state’s 911 system. their election systems. The Governor’s proposal to The proposal would also revise the SETNA assist counties has merit. In considering the proposal, fee structure for users to a per-subscription the Legislature may wish to consider the extent to flat-rate on all voice and data plans. Future costs which this grant program can advance its overall associated with this proposal are much higher, priorities for election administration in the state. For with average annual costs around $40 million. example, the Legislature could design a grant program that incentivizes counties to switch to the SB 450 vote center model. Our office also has suggested LAO Comments that the state could encourage counties to improve Decisions About Infrastructure Funding the timeliness of vote counting, cybersecurity, voter Priorities. The Governor’s budget would fund a registration processes, and other outcomes. variety of infrastructure projects in 2018-19, such as the replacement of roofs at specified CDCR facilities. OTHER KEY BUDGET PROPOSALS While these particular projects may have merit, the full magnitude of departments’ infrastructure and Over $200 Million in Business Tax Credits. The equipment needs is unclear. For example, in the Governor proposes extending the California Competes case of CDCR, it is uncertain whether the proposed tax credit program—which provides tax subsidies to projects are of the highest priority both in terms of select businesses that agree to expand employment roof replacement and overall maintenance needs. or investment in the state—for five more years. The Legislature may wish to consider whether it has a The program would be able to provide $180 million different set of infrastructure priorities in 2018-19. of credits to businesses each year. Provisions of Some Proposals Have Significant Out-Year current law reserved some of these credits for small Costs. While many of the infrastructure proposals in businesses, but these provisions would be removed. the Governor’s budget include relatively small spending A future proposal is anticipated for a new program amounts for 2018-19, some would have growing and to provide $20 million in annual assistance to small significant costs in later years. In particular, committing businesses. In addition, the Governor proposes to the state to new debt service obligations would replace the state’s little-used New Employment Hiring commit General Fund resources for decades in the Credit with a new business tax credit—budgeted at future. The Legislature may want to consider these $50 million per year—to encourage hiring of parolees, out-year commitments as it evaluates the Governor’s CalWORKs recipients, and veterans. infrastructure proposals for 2018-19. 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET $210 Million for Trial Court Operations. The $131 Million for Counties to Address Governor proposes an augmentation of $150 million in Incompetent to Stand Trial (IST) Waitlist. When a General Fund resources to support operations at the defendant in a criminal proceeding has a mental health trial courts. This includes $75 million in discretionary condition that renders him or her unable to understand funding, $48 million to equalize funding across trial the nature of the proceedings, a trial court can refer courts, and $19 million to expand self-help services. that person to the Department of State Hospitals for The budget also proposes some smaller increases for treatment. These referrals have grown in recent years, various programs, such as language access services resulting in roughly 850 offenders waiting to receive and a pilot program for the online adjudication of IST treatment. The budget proposes $131 million certain traffic violations. The budget also includes an ($128 million General Fund) to work with counties additional $34 million in General Fund resources to to address the waitlist. Most of these funds would backfill shortfalls in criminal fine and fee revenue and be spent on diversion programs over the next three $26 million for trial court employee retirement and years to prevent individuals from being referred to IST health benefit costs. treatment. $92 Million Each for CSU and UC. The Governor $40 Million for the 2020 Census. During the few proposes augmenting General Fund spending for years preceding each decennial U.S. Census, California CSU and UC by $92 million each, which represents typically funds outreach efforts to encourage resident an increase of about 3 percent at each university participation in the nationwide population count. system. This increase is somewhat lower than the The 2017-18 state budget plan included $7 million 4 percent to 5 percent base increases the state has for grants to local governments that participate in a provided in recent years. Coupled with the proposal, program to review and update Census address lists, the Governor indicates he does not want either CSU as well as $3 million in start-up funding for the state’s or UC to increase tuition charges for resident students main outreach effort: the California Complete Count in 2018-19. Both the CSU Trustees and UC Regents initiative. In his 2018-19 budget plan, the Governor are in the midst of considering such increases. In proposes that $40 million be provided from the General addition, the Governor’s budget does not establish new Fund to California Complete Count. The money would enrollment targets for CSU or UC or designate any new be available to spend over three fiscal years, ending in funding for enrollment growth. 2020-21. www.lao.ca.gov 13 analysis full gutter 2018-19 BUDGET LAO PUBLICATIONS This report was prepared by Ann Hollingshead, with contributions from other staff in the office, and reviewed by Jason Sisney. 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. 14 LEGISLATIVE ANALYST’S OFFICE