The 2018-19 Budget: The Administration’s Proposition 55 Estimates

The 2018-19 Budget: The Administration’s Proposition 55 Estimates MAC TAYLOR LEGISLATIVE ANALYST MARCH 1, 2018 Summary Proposition 55 (2016). Proposition 55, which extended tax rate increases on high-income earners, aimed to increase funding for Medi-Cal under a formula administered by the Department of Finance (DOF). This is the first year the department is required to produce estimates of Medi-Cal funding under these provisions. In this brief, we provide background on the measure’s language and describe how DOF has interpreted it. The Medi-Cal Formula. The Proposition 55 Medi-Cal formula has three major inputs. First, it directs DOF to estimate the upcoming year’s available revenues. Second, it subtracts from this total the constitutional minimum funding level for schools and community colleges. Third, the formula subtracts an estimate of the “workload budget,” which is defined as the costs of continuing to provide state services (“currently authorized services”) in place on January 1, 2016. If a surplus results from this calculation, half is to be dedicated to Medi-Cal. Administration’s Approach Results in No Additional Funding to Medi-Cal. In 2018-19, the administration’s Proposition 55 calculation identifies a $1.9 billion deficit, and so provides no additional funds to Medi-Cal. In administering the calculation, the administration makes two key choices that lead to this result. First, the administration’s decision to subtract $3.5 billion from available revenues to account for its proposed optional reserve deposit significantly reduces the calculation’s starting point, eliminating a surplus that would have directed funds to Medi-Cal. Second, the administration’s workload budget approach is based on a broad definition of currently authorized services, which also has the effect of reducing the amount of potential funds for Medi-Cal under the measure. Other interpretations of these two matters could increase available funds for Medi-Cal under the measure—this year or in the future. Calculation This Year Will Set Precedent for Future Years. Estimates under the Medi-Cal funding formula this year will have implications for how the calculation is interpreted and administered in future years. This can affect the amount of Medi-Cal funding for over a decade to come. Different decisions about the measure could result in more or less funding for Medi-Cal by hundreds of millions—or even billions—of dollars in the future. analysis full gutter 2018-19 BUDGET INTRODUCTION Proposition 55 (2016) extended tax rate increases on This is the first year DOF is required to produce high-income earners from 2018 until 2030 (which voters estimates of funding requirements for Medi-Cal under originally passed on a temporary basis in 2012 as part the formula set forth in Proposition 55. In this report, of Proposition 30). Revenues raised by the measure we lay out the key elements of this calculation, as benefit the General Fund. These revenues increase set out in the measure. We describe each of these required spending on schools and community colleges elements by (1) providing background on the measure’s through the funding requirements under Proposition 98 language and (2) describing how DOF has interpreted (1988) and increase reserve requirements and debt and administered the components of the calculation. payments under Proposition 2 (2014). In addition, We conclude with some high-level findings about Proposition 55 aimed to increase funding for Medi-Cal, the implications of the administration’s method of the state’s health insurance program for low-income implementation in its first year. Californians, through a formula administered by the Department of Finance (DOF). THE MEDI-CAL FORMULA UNDER PROPOSITION 55 In this section, we first provide an overview of the Half of Any Surplus Allocated to Medi-Cal. If Medi-Cal funding formula in Proposition 55, including a surplus results from this third step, half of it, up the bottom line results from the administration’s to $2 billion, is dedicated to increase spending on calculation in 2018-19. We then discuss each of Medi-Cal. If a deficit results, there is no additional the three major inputs into the calculation in turn. Figure 1 How the Proposition 55 Formula Works OVERVIEW OF THE FORMULA Available Revenues Proposition 55 Formula Features Three Major Inputs. The Proposition 55 formula has three − major inputs, which are shown in Minimum Funding Guarantee Figure 1. First, the measure directs DOF to estimate the upcoming year’s available revenues. Second, − Workload Budget it subtracts from this total the constitutional minimum funding level for schools and community colleges. Resulting Surplus Third, the formula then subtracts an (If Any) estimate of the “workload budget” costs of government programs that 50% were in place as of January 1, 2016. Put simply, the workload budget is the cost of continuing to provide $ = Additional Funding for Medi-Cal state services in place at that time. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET funding for Medi-Cal. Through this formula, Figure 2 Proposition 55 aims to provide additional funds Department of Finance’s Medi-Cal to Medi-Cal when General Fund revenues exceed Calculation Under Proposition 55 constitutionally required spending for schools and existing services. (In Billions) Under Administration’s Calculation, No Available revenues $129.8 Additional Funding for Medi-Cal in 2018-19. Minimum funding guarantee -54.6 While the Governor’s 2018-19 budget plan proposes Workload budget -77.1 allocating billions of surplus General Fund dollars Resulting Deficit -$1.9 to discretionary reserve deposits and some new spending, its Proposition 55 formula calculation a budgetary accounting perspective, this deposit is identifies a $1.9 billion deficit. (In large part, this is due reflected as a negative transfer—out of the General to the administration’s treatment of reserve deposits, Fund and into the Budget Stabilization Account as described below.) As a result, the administration’s (BSA). Under the administration’s current revenue calculation—summarized in Figure 2—provides estimates, the constitutional deposit this year would no additional funds for Medi-Cal in 2018-19 under be $1.5 billion. In addition, the Governor proposes Proposition 55. depositing an additional, optional deposit of $3.5 billion Calculation Will Be Finalized at Budget Act. into the BSA. In the budget’s official accounting, both Proposition 55 requires the administration to produce of these deposits are reflected as a negative transfer the Medi-Cal calculation by June 30th of each year, out of the General Fund, reducing total revenues by the the day before the new fiscal year starts. As such, the same amount. administration’s current calculation represents a point in Administration’s Approach Uses Revenues Net of time, reflecting the Governor’s January budget plan. Optional Deposit. In the Proposition 55 calculation, the administration reflects the 2018-19 proposed optional AVAILABLE REVENUES deposit into the BSA as a negative transfer in available revenues. This action reduces available revenues by The first part of the formula is an estimate of General $3.5 billion. Fund revenues in the upcoming fiscal year. Specifically, “Available Revenues” Arguably Should Include the measure requires DOF to estimate “available Optional Deposit. Under an alternative approach, General Fund revenues,” including the incremental optional deposits would be included as available increases in General Fund revenues that result from the revenues rather than counted as a negative transfer. measure. Proposition 55 does not define “available General In Other Budgetary Contexts, Revenue Fund revenues.” In our view, this term could be more Estimates Reflect the Effect of Transfers. In planning reasonably interpreted to mean any revenues that are documents and other budgetary formulas, “General not committed to specific purposes under the State Fund revenues” includes, most notably, proceeds of Constitution or existing statute. Using this definition, taxes, but also other revenues from licenses and fees, “available” refers to resources that are available for and the net effect of transfers and loans. Each year, the legislative priorities, including spending increases, tax General Fund makes transfers and loans from and to reductions, and optional transfers to reserves. Taking other state accounts, known as special funds. Transfers this approach makes the $3.5 billion optional reserve and loans can be either positive, if they are benefiting deposit proposed by the administration available, the General Fund, or negative, when they are made out resulting in a surplus that would provide $800 million of the General Fund. to Medi-Cal (see Figure 3, next page). (Constitutional Proposition 2 Requires Annual Transfer to deposits under Proposition 2 would still reduce General Reserves. Each year, Proposition 2 requires a minimum Fund revenues.) annual deposit into the state’s rainy day fund. From www.lao.ca.gov 3 analysis full gutter 2018-19 BUDGET WORKLOAD BUDGET Figure 3 Medi-Cal Calculation Under The third step of the Proposition 55 calculation is Proposition 55 With Optional Deposit to identify the costs of the workload budget or the estimated costs in the upcoming year of providing (In Billions) services authorized in the 2015-16 budget. Available revenues $133.3 Proposition 55 References “Workload Budget” Minimum funding guarantee -54.6 From January 1, 2016. Proposition 55 defines Workload budget -77.1 the workload budget with the meaning set forth in Resulting Surplus $1.6 Government Code §13308.05, as it read and “was Additional Funding for Medi-Cal $0.8 interpreted by the Department of Finance on January 1, 2016.” Under this section of Government Code, the MINIMUM EDUCATION workload budget is defined as the budget-year cost of FUNDING GUARANTEE “currently authorized services,” adjusted for a variety of factors including enrollment, caseload, population, and In the second portion of the calculation, the measure the nine others listed in the nearby box. Proposition 55 directs DOF to subtract from available revenues an adds that currently authorized services must be estimate of the “minimum funding guarantee of Section interpreted as those that were “currently authorized” as 8 of Article XVI” of the California Constitution. of January 1, 2016. Proposition 98 Defines Constitutional Minimum Statutory Workload Budget Language Funding Level for K-14 Education. Proposition 98 Developed for Different Purpose. Government governs most state funding for schools and community Code §13308.05 provides a framework for determining colleges. The measure establishes formulas for a the upcoming year’s workload budget costs— minimum annual funding requirement in Article XVI that is, the cost of continuing to provide already of the constitution. This minimum funding level is authorized services. As discussed in the nearby commonly referred to as the minimum guarantee. Each box, Government Code §13308.05 was originally year the minimum guarantee rises or falls with a variety developed in 1990 to determine whether current of inputs related to the economy, student attendance, services could be afforded. Specifically, the 1990 and state revenues. The Legislature can provide more statute considered currently authorized services on a than the minimum funding level, but these funding year-to-year rolling basis—allowing the Legislature to increases generally result in increases in the minimum determine whether the budget could afford its recently guarantee in future years. authorized commitments. Proposition 55 applies this Administration Indicates It Will Use Constitutional statute framework very differently. Proposition 55— Minimum Funding Level. Representatives of which references Government Code §13308.05 as it the administration have indicated to us that, for was written in 1990—ties the definition of authorized each year of the calculation, they will use the services to a single point in time in the past (January 1, constitutional minimum funding level as the input to 2016), locking in a given set of services that are not the Proposition 55 calculation. This means that if adjusted for policy changes. the Governor were to propose or the Legislature to enact a level higher than the constitutional minimum, One Possible Interpretation of the calculation would reflect the lower constitutional Workload Budget level, not the higher appropriated level. Moving Below, we present one possible interpretation of forward, however, the next year’s calculation would the definition of the workload budget in the context of reflect the higher minimum guarantee resulting from Proposition 55. the prior-year’s appropriation. This interpretation Start With Enacted 2015-16 Budget and Adjust seems consistent with the measure’s language on a for Allowable Changes. Under this interpretation of the “constitutional minimum.” workload budget, DOF would begin with an estimate of 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET the actual expenditure level from the 2015-16 Budget people ages 26 to 30.) Adjusting the expenditures in Act. Then, the department would adjust that level for the 2015-16 budget package in each subsequent year the list of allowable changes under the measure. In for these allowable changes would together result in an general, these adjustments fall into two categories: estimate of the workload budget in 2018-19. Exclude the Effects of Chaptered Legislation. • Certain Cost Increases of Existing Services. This approach excludes the effects of chaptered Government Code §13308.05 references legislation under the logic that its inclusion would caseload, enrollment, and population as allowable undermine the measure’s intent. In the original 1990s adjustments to the workload budget calculation. application of the workload budget concept, chaptered In addition, it allows for statutory cost-of-living legislation was included as a required adjustment adjustments and price increases for operating and to currently authorized services. This accounted for equipment. Together, these represent ordinary changes in current law since the prior fiscal year, cost increases associated with continuing to which made sense in the context of a calculation provide authorized services. that considered currently authorized services on a • Increases in Costs Outside of Legislature’s year-to-year rolling basis. Transferring this concept to Control. The code section also allows for a the Proposition 55 calculation is problematic because second type of adjustments, which generally it ties the definition of authorized services to a single could be considered increases in costs that are point in time in the past. Reflecting the effects of all imposed on the state outside of the Legislature’s subsequent chaptered legislation, most notably the control. These include federal and court mandates annual budget act and associated trailer bills, would and costs incurred pursuant to constitutional make the workload budget equal to whatever the state requirements. enacted in any year. This would render the calculation Under this method, only explicitly allowable adjustments mostly meaningless. would be made to increase workload budget costs. For Administration’s Approach to example, if a program was providing a service to certain Interpreting Workload Budget people ages 18 to 25, the state could increase the workload budget to account for a projected increase Administration’s Approach Adjusts 2018-19 in that age cohort. (Similarly, it could not make such Proposed Budget. The administration takes a very an adjustment if the state extended the service to Government Code §13308.05 Allowable Adjustments to the Workload Budget. In addition to changes related to caseload, enrollment, and population, Government Code §13308.05 allows for adjustments to the workload budget that are related to the following: (1) statutory cost-of-living adjustments, (2) chaptered legislation, (3) one-time expenditures, (4) the full-year costs of partial-year programs, (5) costs incurred pursuant to constitutional requirements, (6) federal mandates, (7) court-ordered mandates, (8) state employee merit salary adjustments, and (9) state agency operating expense and equipment cost adjustments to reflect price increases. Workload Budget in Early 1990s. Government Code §13308.05 was originally passed in 1990. It was enacted with a series of statutes that were aimed to make across-the-board cuts to General Fund programs when the budget faced a shortfall. Specifically, the measures required automatic reductions up to 4 percent if General Fund revenues were insufficient to cover the costs of the “workload budget” as defined in Government Code §13308.05. The workload budget calculation took the prior-year’s General Fund expenditures and adjusted them for changes listed above. These automatic reduction provisions were triggered and enacted only once (in the 1991-92 budget package) before they were repealed in 1996. www.lao.ca.gov 5 analysis full gutter 2018-19 BUDGET different approach to the workload budget than the For example, in 2017-18, the state created the one described above. The administration’s calculation Emergency Child Care Bridge Program, which begins with its proposed 2018-19 General Fund allows foster families to access subsidized child expenditure level. From that amount DOF subtracts care funding immediately. The administration a small number of program expenditures that it includes this program in workload budget under determined were not currently authorized services the rationale that the state has long provided in 2015-16. The administration argues that services funding for foster services and related support should be excluded when they are entirely new services for foster parents, even if this particular service— provided by the state. Examples of programs DOF immediate access to subsidized child care—is excluded from the workload budget are: new. • A Broad Interpretation of “Currently.” In some • Health Care Workforce Augmentation. This cases, the administration appears to interpret 2016-17 budget plan provided $100 million currently to include any programs authorized at over three years to provide additional medical any time prior to 2016, even if the program was residency slots for primary care physicians. The not in place on January 1, 2016. For example, the General Fund cost of this program in 2018-19 is state eliminated Denti-Cal benefits for nearly all therefore $33.3 million. adult beneficiaries when it faced budget problems • Medically Tailored Meals Pilot Program. in the late 2000s. The state restored some of The 2017-18 budget package established this these benefits before January 1, 2016, but did program to provide medically tailored meals to not restore all of the rest of them until 2017-18. Medi-Cal patients with chronic diseases. The Nonetheless, the administration included the full 2018-19 General Fund cost of this program is cost of providing these benefits in the workload $2 million. budget. Figure 4 lists the small number of other programs— Examples of Services That an Alternative totaling $37.3 million—that the administration excluded Approach Would Exclude. There are many categories from the $77 billion workload budget. Under this of services and benefits that the administration includes interpretation, all other legislative and policy changes in its workload budget that an alternative reading of the the state has made since January 1, 2016 are workload calculation would exclude. For example: budget changes. Administration Broadly Interprets Currently • New Services Within Existing Programs. In Authorized Services. The list of programs in 2017-18, the Legislature expanded the scope Figure 4 is short because DOF interprets currently authorized Figure 4 services very broadly. Specifically, the Programs Excluded From administration has: Department of Finance’s Workload Budget • A Broad Interpretation of (In Millions) “Authorized Services.” In Program 2018-19 Cost some cases, the administration appears to be interpreting Oversight of Immigration Detention Facilities $1.0 Health Care Workforce Augmentation 33.3 currently authorized services Diabetes Prevention Program 5.0 to mean any services of the Medically Tailored Meals Pilot Program 2.0 general type that were in place Parkinson’s Disease Registry 1.0 on January 1, 2016, even if Eliminate Statewide Fingerprinting Imaging System -5.8 the specific service was not Arts for At-Risk Youth 0.8 funded or available at that time. Total $37.3 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET of the Immigration Services Funding grant but are not adjustments explicitly allowed in program to include deportation defense services, the workload budget definition of Government previously not an allowable use of grant funds, Code §13308.05. For example, in the spring and increased support for the program by of 2016 the Legislature passed legislation that $15 million over the prior year. The administration increased the statewide minimum wage over includes these enhancements in the workload a period of several years. The higher minimum budget under the rationale that funding for wage increases the wages of service providers for immigration services is a longstanding state some human services programs. We estimate this service, and, as such, the 2017-18 funding has led to low hundreds of millions of dollars in change represents an enhancement of historical higher General Fund spending on those programs services, rather than funding for a new service. in 2018-19. The administration included these • Benefit Increases Associated With Existing costs in the workload budget under the rationale Services. Prior to 2016-17, a child born in a that this legislation increases the costs of existing family that had received continuous CalWORKs services, rather than providing a new service. assistance for more than the preceding • Administration’s 2018-19 Budget Proposals. ten months was excluded for purposes of In our Overview of the Governor’s Budget determining the amount of the family’s grant. As publication, we identified that the Governor used a result, the family did not receive an increase to $1.2 billion for various discretionary spending their monthly grant to reflect the birth of the child. proposals. These funds were dedicated to several This policy, referred to as the “maximum family uses, including to trial courts for construction grant,” was ended as part of the 2016-17 budget. and operations and to counties for new voting This change increased the grants of families that systems. All of this proposed spending is had previously been affected by the policy. The included in the administration’s workload budget administration includes the roughly $70 million for 2018-19. That is because, under DOF’s General Fund cost of this change in workload interpretation, these proposals are related to budget under the rationale that it expands existing services that the state had already authorized as services, rather than providing a new service. of January 1, 2016. • One-Time Programs. The 2014-15 budget first Alternative Reading Could Lead to Millions or provided $3 million in one-time state funds for Billions in Lower Workload Budget Costs. Under an precision medicine research. The Legislature alternative reading of the measure, none of the costs again provided $10 million in one-time funding listed above would be included in the workload budget. for this purpose in 2016-17 and 2017-18. In the These examples, along with other similar ones, would 2018-19 budget plan, the Governor proposes result in lower workload budget costs of hundreds of providing $30 million for precision medicine, again millions—potentially over a billion—dollars. Under the on a one-time basis. The administration includes administration’s current estimates and interpretation these 2018-19 proposed costs in the workload of available revenues, workload budget costs would budget under the rationale that precision medicine have to be at least $1.9 billion lower in order for the funding was originally provided before 2016 and formula to yield increased funding for Medi-Cal in in ensuing years. this calculation. As such, a different interpretation of • Legislation That Increases the State Cost of the workload budget may not—alone—lead to more Existing Services. Since January 1, 2016, the Medi-Cal spending in 2018-19, but could result in Legislature has passed a variety of laws that increased Medi-Cal funding under the measure in future increase the costs of existing state services, years. www.lao.ca.gov 7 analysis full gutter 2018-19 BUDGET LAO FINDINGS Measure is Difficult to Interpret and Implement. such, there is a trade-off between a strict interpretation The workload budget portion of the Medi-Cal formula of the measure and the ease of implementing it. under Proposition 55 references a section of law that Many Determinations Must Be Made on was passed in the 1990s for a very different purpose. Case-by-Case Basis. Under any interpretation of the Along with the general conceptual difficulty of defining measure, each decision about whether a program a workload budget in the first place, this means that should be included in or excluded from the workload some features of the Proposition 55 calculation are budget must be made on a case-by-case basis. difficult to interpret and implement. While the administration could use specific criteria or Administration’s Interpretation Reduces categories to guide its determinations (for example, Additional Funding to Medi-Cal. In administering “exclude benefit increases from the workload budget”), the calculation, the administration makes a variety it would still need to make individual assessments of choices that result in less funding for Medi-Cal about every legislative change to determine whether it (relative to an alternative approach). In particular, the fits those criteria. This makes it difficult for both DOF administration (1) reduces the amount of available to administer the calculation and for the Legislature to revenues by all BSA deposits, rather than just required exercise oversight over it. deposits, reducing the amount of available revenues, Measure Gives Significant Discretion to Director and (2) makes a variety of choices that result in a larger of Finance to Implement Formula. Proposition 55 workload budget, which reduces the available surplus gives the Director of Finance the discretion to determine under the calculation. Changing the administration’s how to interpret and make estimates under the interpretation of both available revenues and the calculation. In particular, the formula references DOF’s workload budget would lead to more payments to interpretation of the workload budget on January 1, Medi-Cal under Proposition 55. 2016 and explicitly gives the administration the authority Alternative Workload Budget Interpretation to produce the estimates. As such, while the Legislature More Difficult Over Time. If the administration were to can always exert its oversight role in evaluating the adopt the alternative interpretation of workload budget calculation, the Legislature cannot independently presented earlier, it would lead to greater administrative change the calculation as part of its budget package. complexity. Under the alternative interpretation, the Calculation This Year Will Set Precedent for administration would need to track the hypothetical Future Years. The administration of the Medi-Cal cost increases of programs in the 2015-16 budget funding formula under Proposition 55 this year will have supposing the Legislature had made no policy changes implications for how the calculation is interpreted and to those programs. The difficulty of making such administered in future years. This can affect the amount estimates would increase over time. Depending on of Medi-Cal funding provided under the formula for how broad or narrow this interpretation was, it could over a decade to come. As such, in this budget year, lead to hundreds of individual estimates related to the we recommend the Legislature ask the administration hypothetical costs of dozens of state programs. As for a clear explanation of its underlying rationale in interpreting the measure as it has. CONSIDERATIONS FOR A FUTURE MEDI-CAL ALLOCATION Two Options for Using Medi-Cal Funding. If funding should be used. Proposition 55 requires that the Proposition 55 calculation provides funding to funds allocated to Medi-Cal by the formula be used to Medi-Cal in the future, questions arise about how that increase funding for existing programs and services in 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET Medi-Cal, not supplant existing General Fund support such, this approach could be interpreted as supplanting for the program. We describe two possible approaches existing General Fund support for Medi-Cal. that could be used exclusively or in combination, and Augment Medi-Cal Services. Alternatively, the their implications, in the two paragraphs below. Legislature could use Proposition 55 funding for Pay for Year-Over-Year Growth in Medi-Cal Medi-Cal to augment the program (for example, by Costs. The administration has indicated that, if the increasing provider rates or expanding the scope Proposition 55 calculation at some point provides of services). We note that Proposition 55 funding additional funding to Medi-Cal, it may propose to use for Medi-Cal will vary from year to year. Thus, if the these funds to cover the amount by which the state’s Legislature augments the Medi-Cal program—on costs to operate the Medi-Cal program have grown an ongoing basis—using funds allocated under the over the prior year. This approach would not provide calculation, the funding in future years may not be new services or increase funding for the program sufficient to cover that augmentation. In those years, beyond what would have been provided absent the Legislature would have to either reduce services or Proposition 55 funding. Arguably, however, voter increase General Fund support for Medi-Cal. One way approval of Proposition 55 demonstrated a desire to to address concerns about funding volatility would be increase funding to Medi-Cal beyond what is needed to to spend funds on one-time purposes. pay for the costs of the program under current law. As www.lao.ca.gov 9 analysis full gutter 2018-19 BUDGET 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2018-19 BUDGET www.lao.ca.gov 11 analysis full gutter 2018-19 BUDGET LAO PUBLICATIONS This report was prepared by Ann Hollingshead, and reviewed by Carolyn Chu and Ryan Woolsey. 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. 12 LEGISLATIVE ANALYST’S OFFICE