The 2019-20 Budget: Overview of the Governor's Budget

The 2019-20 Budget: Overview of the Governor’s Budget LEGISLATIVE ANALYST’S OFFICE JANUARY 14, 2019 analysis full gutter 2019-20 BUDGET LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Executive Summary Budget Position Continues to Be Positive. In our November Fiscal Outlook publication, we noted that the budget is in remarkably good shape—a comment based in large part on the significant discretionary resources we estimated were available. The Governor’s budget proposal reflects a budget situation that is even better than our estimates. Largely as a result of lower-than-expected spending in health and human services programs, we estimate the administration had nearly $20.6 billion in available discretionary resources to allocate. That said, recent financial market volatility poses some downside risk for revenues. Governor’s Budget Prioritizes Debt Repayments and One-Time Spending. The figure shows how the Governor proposes allocating the nearly $20.6 billion in available discretionary resources. The Governor proposes spending nearly half of these resources, $9.7 billion, to pay down certain state liabilities, including unfunded retirement liabilities and budgetary debts. The Governor allocates $5.1 billion—25 percent—to one-time or temporary programmatic spending. The Governor allocates $3 billion—15 percent—to discretionary reserves. Although this represents a smaller share of resources than other recent budgets have devoted to reserves, the Governor’s decision to use a significant share of resources to pay down state debts is prudent. Ongoing Costs Are in Line With Estimates of Available Ongoing Resources, but Costs Could Grow. The Governor proposes spending roughly $3 billion on an ongoing basis, which is a significantly higher level than recent budgets have allocated. Our economic growth scenario in the November Fiscal Outlook indicated $3 billion was roughly the level of ongoing spending that the budget could support. This was just one scenario, however, and some ongoing proposals would have higher costs under different economic conditions. How the Governor Allocates Governor’s Budget Outlines $20.6 Billion in Discretionary Resources Many Policy Priorities Early. The (In Billions) Governor’s budget establishes a number of priorities for 2019-20 One-Time and beyond, many of which align Programmatic with recent legislative actions. In Spending many cases, the administration is still developing these proposals and One-Time Debt-Related some are not yet reflected in the Spending budget’s bottom line. By proposing Reserves these ideas at the beginning of the budget process, the Governor gives the Legislature the opportunity to Ongoing collaborate with the administration to Spending shape these policies. www.lao.ca.gov 1 analysis full gutter 2019-20 BUDGET 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET On January 10, 2019, Governor Newsom release several additional budget reports.) We begin presented his first state budget proposal to the with an overview of the big picture budget condition Legislature. In this report, we provide a brief under the Governor’s estimates and proposals. summary of the Governor’s proposed budget, Then we describe the Governor’s major policy primarily focusing on the state’s General Fund—the proposals in greater detail and provide our initial budget’s main operating account. (In the coming comments. weeks, we will analyze the plan in more detail and THE BIG PICTURE This section provides an overview of the state $144.2 billion in 2019-20 (7.5 percent average budget’s condition under the Governor’s proposal. annual growth). Spending remains flat between First, we discuss the General Fund’s bottom line 2018-19 and 2019-20 (growing about one-tenth of condition under the administration’s assumptions, a percent) mostly because the Governor attributes estimates, and proposals. Second, we discuss how at least $7 billion in certain debt repayment the Governor chooses to allocate discretionary proposals to the current year. Otherwise, General Fund resources in the proposed budget. spending would be higher in 2019-20. Under the In short, the Governor’s budget proposes a administration’s estimates, constitutionally required total reserve level of $18.5 billion and allocates General Fund spending on schools and community $20.6 billion in discretionary resources among a colleges is $55.3 billion in 2019-20. The box on variety of priorities, primarily focusing on one-time page 4 describes overall school and community spending and debt repayments. college spending in greater detail. Governor Proposes $18.5 Billion in Total BUDGET BOTTOM LINE Reserves in 2019-20. Under the Governor’s proposed budget and revenue estimates, 2019-20 Revenues Grow to $142.6 Billion in 2019-20. would end with $18.5 billion in reserves. This Figure 1 shows the General Fund condition under the Figure 1 administration’s estimates and assumptions. Over the three General Fund Condition Under year period, revenues (excluding Administration’s Estimates transfers) grow from $135.9 billion (In Millions) in 2017-18 to $146.1 billion in 2017-18 2018-19 2019-20 2019-20 (3.7 percent average Revised Revised Proposed annual growth). Relative to Prior-year fund balance $5,582 $12,377 $5,241 estimates in the 2018-19 Budget Revenues and transfers 131,495 136,945 142,618 Act, the Governor’s budget Expenditures 124,699 144,082 144,192 assumes revenues in 2017-18 and Ending fund balance $12,377 $5,241 $3,667 2018-19 will be $5.7 billion higher. Encumbrances 1,385 1,385 1,385 From 2018-19 to 2019-20, the SFEU balance 10,992 3,856 2,282 Governor estimates revenues will Reserves grow $5.1 billion (3.6 percent). SFEU balance $10,992 $3,856 $2,282 Spending Grows to Safety Net Reserve — 900 900 $144.2 Billion in 2019-20. Over BSA balance 10,798 13,535 15,302 the three year period, spending Total Reserves $21,790 $18,291 $18,484 under the Governor’s plan grows SFEU = Special Fund for Economic Uncertainties (discretionary reserve) and BSA = Budget Stabilization Account (constitutional reserve). from $124.7 billion in 2017-18 to www.lao.ca.gov 3 analysis full gutter 2019-20 BUDGET would represent about 13 percent of General Fund typically have increased expenditures as revenues and transfers—higher than the enacted caseload increases.) Including the $200 million 2018-19 level of 12 percent. The state’s budget deposit into the Safety Net Reserve enacted reserves would have the following components: in 2018-19, this proposed deposit would bring the total balance of the reserve to • Budget Stabilization Account (BSA) $900 million. The Governor proposes Balance of $15.3 Billion. Under the attributing this $700 million deposit to the Governor’s estimates and interpretation of the 2018-19 fiscal year, although the actual constitutional rules contained in Proposition 2 transfer likely would take place after June 30, (2014), the state is required to make a 2019. $1.8 billion deposit into its constitutional • No Deposit Into School’s Constitutional reserve, the BSA. Under these estimates, the Reserve Required. In addition to the BSA, reserve would reach $15.3 billion at the end of Proposition 2 established a specific statewide 2019-20. school reserve account (the Public School • Special Fund for Economic Uncertainties System Stabilization Account), which is (SFEU) Balance of $2.3 Billion. The state’s governed by a separate set of formulas. To other general purpose reserve account is the date, these formulas have not required any SFEU. Unlike the BSA, which has restrictions deposits being made into the school reserve. on its use of funds, the Legislature has As with other recent budgets, this Governor’s discretion to use the funds in the SFEU at budget does not include a deposit into the any time and for any purpose. The Governor school stabilization account. proposes a year-end balance in the SFEU of $2.3 billion, which is $321 million more than BSA Deposit Reflects Governor’s New the enacted level of the fund in 2018-19. Interpretation of Proposition 2. The Proposition 2 • Safety Net Reserve Increased to formulas require the state to set aside revenues, $900 Million. The Governor also proposes including those from capital gains, and use depositing an additional $700 million into them to increase reserves and pay down certain the Safety Net Reserve in 2019-20. The state debts. Recent budgets also have made 2018-19 budget package created this reserve additional, optional deposits into the BSA above to save money specifically for CalWORKs and these requirements. When the BSA reaches Medi-Cal. (During a recession, these programs 10 percent of General Fund taxes, additional Estimates of the Proposition 98 Minimum Guarantee Under Governor’s Budget Guarantee Revised Down for Prior and Current Year, Projected to Grow Moderately in Budget Year. The minimum guarantee is the constitutionally required funding level for schools and community colleges and is met with a combination of General Fund and local property tax revenues. The Governor’s budget package contains the latest estimates of the Proposition 98 minimum guarantee over the 2017-18 through 2019-20 period. Compared with June 2018 estimates, the minimum guarantee is down by $164 million in 2017-18 and $526 million in 2018-19. These revisions are mainly the result of student attendance coming in lower than the June estimates, coupled with the state’s 2017-18 maintenance factor obligation being revised downward. Under the Governor’s budget, the 2019-20 minimum guarantee is $80.7 billion, an increase of $2.8 billion (3.6 percent) over the revised 2018-19 level. Separate from growth in the 2019-20 guarantee, the Governor’s budget provides $687 million as a settle-up payment related to meeting the minimum guarantee for years prior to 2017-18. 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET funds required under the formulas must be spent expenditures. The administration attributes on infrastructure. The 2018-19 budget package much of this difference to funding shifts and anticipated the BSA would reach this constitutional other complex financing mechanisms. In threshold at the end of 2018-19 and allocated fact, significant current-year revisions to the future infrastructure spending requirements to Medi-Cal program have become common in specific purposes for three years. Under the new recent years—although they often occurred in Governor’s interpretation of Proposition 2, however, the other direction. optional deposits into the BSA do not count • Administration’s Estimates of IHSS toward the 10 percent threshold level. Under the and SSI/SSP Spending Lower by Over new administration’s estimates, mandatory BSA $400 Million. The administration’s estimates deposits represent 8.1 percent of General Fund of programmatic spending on the In-Home taxes, which is below the constitutional threshold. Supportive Services (IHSS) and Supplemental Security Income/State Supplementary DISCRETIONARY RESOURCES Payment (SSI/SSP) programs is lower than our November estimates by over $400 million Governor Allocates $20.6 Billion in the across 2018-19 and 2019-20. (This excludes 2019-20 Budget Process. We estimate that— policy changes that raise costs in both after satisfying constitutional requirements, programs in 2019-20.) In the case of IHSS, providing funds for caseload, price growth and these reduced costs are largely related to new legislation, and adjusting program cost slower growth in caseload and cost per case. estimates—the Governor had $20.6 billion in In SSI/SSP, these reduced costs are primarily discretionary resources available to allocate in due to lower-than-expected caseload and a the 2019-20 budget process. In our November technical change to current year spending. Fiscal Outlook report, we projected $14.8 billion would be available this year. There are three major Governor Allocates Most Discretionary components of this nearly $6 billion difference: Resources Toward One-Time Spending in 2019-20. Figure 2 shows how the Governor • Administration’s Revenues Are Higher by proposes to allocate the $20.6 billion in $500 Million. The administration’s revenue discretionary resources among spending and assumptions are very close to our November reserves. As the figure shows, the Governor 2018 Fiscal Outlook revenue estimates. allocates most of these resources to spending on a Across 2017-18 to 2019-20—before the effects of proposed policy changes—our Figure 2 estimates of General Fund revenues are How the Governor Allocates lower than the administration’s by less than $20.6 Billion in Discretionary Resources $100 million. The administration also proposes (In Billions) some changes to tax policy (described more later) which would raise an additional One-Time $400 million, on net, in 2019-20. Programmatic • Administration’s Estimates of Medi-Cal Spending Spending Are Lower by Nearly $4 Billion. The administration revised prior estimates One-Time Debt-Related of spending on Medi-Cal downward very Spending significantly. From 2017-18 to 2019-20, its Reserves estimates of baseline Medi-Cal expenditures (before accounting for policy changes) is $3.8 billion lower than we estimated in Ongoing November. This difference includes a roughly Spending $2 billion downward revision to current-year www.lao.ca.gov 5 analysis full gutter 2019-20 BUDGET one-time basis, both for programmatic expansions OTHER POLICY PLANS and to repay various state debts and liabilities. We In addition to these budget proposals which summarize these allocations below. In the next carry costs in 2019-20 and beyond, the Governor section, we describe and comment on some of the introduces a few policy goals with notable major proposals. budgetary implications. Because these proposals • $9.7 Billion One Time to Reduce Debts are still in development, they largely are not and Liabilities. The Governor proposes included in the administration’s budget bottom line. spending almost half of discretionary In particular, the Governor proposes: (1) funding resources—$9.7 billion—to pay down certain a work group to develop a plan for implementing state liabilities on a one-time basis. (This universal preschool, (2) directing the Department of total excludes required debt payments under Health Care Services to negotiate prescription drug Proposition 2.) The administration attributes prices on behalf of all Medi-Cal beneficiaries (and most of these debt repayments to fiscal year commits to reviewing existing state prescription 2018-19. The nearby box describes these drug negotiation and procurement practices), proposals in more detail. and (3) expanding paid family leave. In the case • $5.1 Billion to One-Time Programmatic of universal preschool and paid family leave, the Spending. The Governor proposes spending Governor notes the policies also would need to be about a quarter of discretionary resources, or accompanied with a new revenue source to fully $5.1 billion, on a one-time or temporary basis fund the new programs. for a variety of programmatic expansions. The largest proposals include $1.3 billion LAO COMMENTS for housing production and $750 million for expanding kindergarten facilities. Revenues • $3 Billion to Reserves. The Governor commits $3 billion (15 percent) of Revenues Estimates In Line With Our discretionary resources to reserves—the November Outlook, but Financial Market Poses SFEU and the Safety Net Reserve. (This Risk. The administration’s revenue assumptions excludes the $1.8 billion BSA deposit, are very close to our November 2018 Fiscal which we do not include as discretionary Outlook revenue estimates. Across 2017-18 to because of the administration’s new 2019-20—before the effects of proposed policy Proposition 2 interpretation.) changes—our November estimates of General Fund revenues are lower than the administration’s by less • $2.7 Billion to Ongoing Spending. The than $100 million. This difference is very small in Governor’s spending proposals also include budgetary terms. That said, stock prices fell sharply $2.7 billion in ongoing spending, representing at the end of 2018 and currently sit more than a bit more than 10 percent of resources 10 percent below their September peak. Both our available. Some of the largest of these and the administration’s estimates were developed proposals include nearly $350 million to before the full scope of this decline was realized. As increase CalWORKs grant levels, $300 million a result, capital gains revenues likely will be lower for California State University (CSU), than the Governor’s budget assumes unless stock $240 million for University of California (UC), prices grow significantly in the coming months. Our and $125 million to fund additional full-day review of historical stock performance suggests state preschool slots. Because some of that the required growth in stock prices needed to these ongoing proposals are phased in over meet revenue estimates occurred in 29 of the last a multiyear period, we estimate the cost at 70 years. If stock prices instead grow modestly in full implementation of all of these proposals is 2019—as suggested by the December consensus $3.5 billion. forecast of professional economists compiled by 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET The Governor’s Proposed Pay Down of Debt and Liabilities Governor Pays Down $5.3 Billion in Unfunded Pension Liabilities. Both CalPERS and CalSTRS have significant unfunded liabilities: $59 billion for CalPERS and $104 billion for CalSTRS (roughly one-third of this is considered the state’s share and about two-thirds is attributed to school districts and community colleges). In addition to required annual contributions, the Governor proposes that the state make supplemental contributions from the General Fund to the pension systems to reduce the unfunded liabilities and reduce state costs over the next few decades. Specifically: • $3 Billion Toward the State’s CalPERS Unfunded Liability. The administration plans to introduce trailer bill language that would make a $3 billion supplemental payment to CalPERS in 2018-19. • $2.3 Billion Toward Districts’ Share of CalSTRS Unfunded Liability. To reduce the districts’ share of the CalSTRS unfunded liability, the Governor proposes the state pay CalSTRS an additional $2.3 billion, also attributed to 2018-19. Governor Repays $4.4 Billion in Budgetary Liabilities. In addition to retirement liabilities, the state has a number of budgetary liabilities. Generally, these are debts the state incurred in the last decade to address its budget problems. The Governor proposes repaying: • $2.1 Billion for Special Fund Loans. During the Great Recession, the state loaned amounts to the General Fund from other state accounts known as special funds. The prior administration had a multiyear plan to repay these loans using Proposition 2 debt payment requirements. The new administration proposes repaying all remaining special fund loans this year and does not attribute them to Proposition 2. • $1.7 Billion to Undo Payment Deferrals. The administration also proposes undoing two budgetary payment deferrals. The first is a one-month deferral of state employee payroll from June to July and the second is a fourth-quarter deferral to CalPERS. • $687 Million for Settle Up. Required General Fund spending for schools and community colleges in any given fiscal year is based on numerous factors, including General Fund tax revenue and per capita personal income. Estimates of these factors often change after the level of funding is set in the budget. Sometimes the actual requirement turns out to be larger than the budgeted amount, meaning the state owes additional amounts— “settle up.” The Governor proposes repaying the outstanding settle up obligation of $687 million. (Typically, the administration reflects settle-up payments in the entering fund balance, however, only a portion of this $687 million planned payment is reflected there. Based on the information we have to date, this may mean the Special Fund for Economic Uncertainties balance is $475 million lower than currently estimated.) Governor Restructures Proposition 2 Plan to Pay Down State’s Share of CalSTRS Unfunded Liability. By paying down all remaining special fund loans with discretionary resources, the new administration has additional capacity within Proposition 2 requirements for other debt payments. The Governor proposes using this new capacity to reduce the state’s share of the CalSTRS unfunded liability. Specifically, the Governor proposes to pay an additional $1.1 billion to CalSTRS in 2019-20. Over the next few years, the administration anticipates an additional $1.8 billion would be paid to CalSTRS using these debt payments. That said, Proposition 2 requirements vary with economic and financial market conditions, which could result in higher or lower payments than anticipated. www.lao.ca.gov 7 analysis full gutter 2019-20 BUDGET Moody’s Analytics—capital gains revenues are likely in future years and in some cases reduces ongoing to fall below expectations by $1 billion to $2 billion. spending growth. Some Losses in Capital Gains Revenues Administration’s Interpretation of Would Be Offset by Lower Constitutional Proposition 2 Eliminates Planned Infrastructure Spending Requirements. In isolation, the financial Spending. The 2018-19 budget package market experience at the end of 2018 suggests anticipated the BSA would reach its constitutional there could be downside risk for the budget in the threshold of 10 percent of General Fund taxes, May Revision. This would be different than recent triggering required spending on infrastructure. years in which the Legislature has had more— Budget trailer language appropriated these rather than less—resources available to allocate in future, anticipated spending requirements for May. That said, a decline of $1 billion to $2 billion three purposes: (1) state infrastructure, (2) rail in capital gains revenues would be offset—likely infrastructure, and (3) affordable housing. Had in large part—by lower constitutionally required the new administration maintained the prior spending and reserve deposits. As a result, under interpretation of Proposition 2, it would have been current conditions, the net effect on discretionary required to dedicate $415 million to fund state resources would be less than the full revenue infrastructure, $173 million to rail infrastructure, and decline. Current financial market and economic $173 million to affordable housing. conditions can change significantly between now Ongoing Costs Are in Line With Estimates of and May, however, leading to greater revenue Available Ongoing Resources, but Costs Could effects. Grow. The Governor’s ongoing spending proposals total $2.7 billion in 2019-20, but these costs Budget Condition grow over time, reaching an estimated $3.5 billion Budget Position Continues to Be Positive. under full implementation. These expenditure In November, we noted that the budget is in levels are roughly in line with our assumptions in remarkably good shape—a comment based in our November Fiscal Outlook economic growth large part on the significant discretionary resources scenario. Under our assumptions in this scenario, we estimated were available. The Governor’s we found the state budget could have the capacity budget proposal reflects a budget situation that to take on about $3 billion in ongoing commitments is even better than our estimates, mostly due to without creating an operating shortfall. That said, lower-than-expected spending in health and human there are sources of uncertainty in these proposals services programs. not captured in these estimates. For instance, in Administration Allocates Smaller Share of a recession, the Governor’s proposal to increase Available Resources to Reserves, but Takes CalWORKs grant levels would increase in cost. Other Actions to Improve Budget’s Multiyear Another risk is the cost of disaster mitigation, Condition. Reserves are the most important response, and recovery. While the Governor’s tool that the Legislature has to address a budget budget includes mostly one-time spending for problem during a recession. The Governor takes these purposes, they are more likely to be ongoing an interpretation of Proposition 2 that requires costs. a higher reserve deposit into the BSA. But, in Schools Could Be Vulnerable to a Recession. percentage terms, the 2019-20 proposed allocation State school funding might be relatively vulnerable to reserves is low compared to recent years. The to a recession for two reasons. First, the state has Governor takes other actions, however, to improve made no deposit to date in the school stabilization the budget’s bottom line condition. In particular, the account. In the event of a recession, this could Governor focuses most of his spending proposals result in pressure to use BSA withdrawals for on one-time purposes and uses a significant schools. Second, the Governor’s budget includes portion of discretionary resources to pay down no one-time spending proposals inside the 2019-20 debts and liabilities. Doing so benefits the budget Proposition 98 minimum guarantee to mitigate the effects of a future drop in the guarantee. In each 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET of the past six years, the state has purposefully to ongoing programs if the guarantee experiences provided such a cushion. From 2013-14 through a year-over-year decline. The Governor’s budget 2018-19, the state set aside an average of about not only has no such cushion, it supports roughly $700 million per year inside the guarantee for $100 million ongoing program costs with one-time one-time purposes. This one-time spending funding, leaving a small ongoing shortfall in the provides a buffer that reduces the likelihood of cuts 2020-21 budget. KEY BUDGET PROPOSALS This section describes and provides our initial also includes $750 million (non-Proposition 98 assessment of the major General Fund budget General Fund) one time to create more full-day proposals included the Governor’s January budget, kindergarten programs. The funds are primarily including both discretionary and nondiscretionary intended for constructing new or retrofitting existing spending amounts. Figure 3 (see next page) school facilities needed to operate the longer-day lists the Governor’s major discretionary budget programs. Additionally, the Governor’s budget proposals for programmatic spending (while all of includes a total of $500 million for improvements these are currently proposed, most are attributed to to early education ($245 million for facilities, 2019-20, but some to 2018-19). $245 million for the child care workforce, and $10 million for a comprehensive plan to improve EDUCATION access and quality). At this time, the administration has few details on how these funding amounts would be allocated or used. Given the large dollar Early Education amounts at stake, we encourage the Legislature to Expanding Preschool Beginning With think about its priorities across the state budget. Low-Income Students Is a Reasonable, If the Legislature were to decide to use one-time Needs-Based Approach. The budget includes funds in the early education area, it could continue $125 million (non-Proposition 98 General Fund) to focus on facility and/or workforce issues, as ongoing to provide 10,000 full-day preschool slots these have long been areas of concern for the for children from low-income families. The funding field. The Legislature, however, might consider is to be the first of three augmentations, with the more targeted initiatives linked with specific goals. intent to provide a total of 30,000 additional slots For example, it could link any one-time workforce to serve all low-income four-year olds by 2021-22. funding to helping with a transition to a new child These slots would be on top of the almost 9,000 care reimbursement rate system and/or higher full-day slots the state added over the past three minimum program standards. years. Extending preschool to all children from Schools and Community Colleges low-income families is consistent with considerable research that has concluded the benefits of New Administration Maintains Local preschool are greatest for these children. Even Control Funding Formula (LCFF), Providing though we believe the Governor’s overall preschool Continuity for Districts. Even though LCFF was expansion is reasonable, the Legislature likely a key reform initiated by the prior administration, will want to consider the implementation details. the new administration continues to fund it. Timing; outreach to families; and any changes to The largest Proposition 98 augmentation in the program eligibility, contracting, and accountability Governor’s budget is $2 billion for LCFF, which will be particularly important issues to consider. covers a 3.46 percent cost-of-living adjustment. Other Early Education Proposals Largely The Governor’s budget also includes a few Placeholders, Offer Legislature Opportunity augmentations designed to improve support to Set Its Priorities. The Governor’s budget for districts not meeting the goals of their Local www.lao.ca.gov 9 analysis full gutter 2019-20 BUDGET Control and Accountability Plans (LCAP)—another as they budget, build their strategic academic linchpin reform of the prior administration. The plans, identify their performance problems, and 2019-20 package of budget proposals seems access support to address those problems. to signal the new administration’s willingness Special Education Proposal Unlikely to to support the LCFF and LCAP systems. Such Promote Early Intervention Programs. The continuity could be of significant benefit to districts budget provides a total of $577 million ($390 million Figure 3 Major Discretionary General Fund Programmatic Spending Proposals in Governor’s Budget (In Millions) One-Time or Ongoing Temporary Amount Education Provides funding to support full-day kindergarten, including facilities $750 — Expands child care facilities and provides workforce education 500 — Pays a portion of school districts’ pension costs 350 — Provides various augmentations to UC 153 $240 Provides various augmentations to CSU 264 300 Other education proposals 32 258 Health and Human Services Increases CalWORKs grant payments by 13.1 percent across the board — 348 Continues the 7 percent service hour restoration in IHSS — 342 Revises the county IHSS share of costs — 242 Ends General Fund offset of Medi-Cal spending using Proposition 56 — 218 Extends full scope Medi-Cal benefits to young adults regardless of immigration status — 134 Other health proposals 77 34 Other human services proposals 148 219 Housing and Homelessness Provides grants to local governments to increase housing production 750 — Proposes various initiatives to address homelessness 600 25 Expands the Mixed-Income Loan Program 500 — Disaster-Related Waives counties’ share of debris removal costs from recent wildfires 155 — Provides various augmentations to OES 146 36 Provides various augmentations to CalFire 18 87 Criminal Justice Provides various augmentations for the Judicial Branch 155 56 Provides various augmentations for CDCR 44 53 Other criminal justice proposals 16 117 Other Addresses deferred maintenance across various departmentsa 134 — Other proposals 339 10 Total, Programmatic Spending $5,132 $2,718 a Excludes some deferred maintenance proposals that are included in departments listed elsewhere. 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. FPL = federal poverty level; IHSS = In-Home Supportive Services; OES = Office of Emergency Services; CalFire = California Department of Forestry and Fire Protection; and CDCR = California Department of Corrections and Rehabilitation. 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET ongoing and $187 million one time) to districts Higher Education based on their unduplicated counts of low-income Provides Universities Large, Ongoing students, English learners, and students with Augmentations Dedicated to Specific Purposes. disabilities they serve. The administration indicates The Governor’s budget includes an increase schools may use these funds for either (1) special of $540 million ongoing General Fund for the education services for students with disabilities or universities—$300 million (7.6 percent) for CSU (2) early intervention programs for students who and $240 million (6.9 percent) for UC. Whereas the are not yet receiving special education services. previous Governor favored giving the universities Because special education costs have far outpaced unrestricted increases and allowing them to special education funding in recent years, most determine funding priorities, the new administration schools receiving funding under the Governor’s takes a different approach by itemizing proposed proposal likely would use the funds to help them funding increases. Specifically, for CSU, the cover their existing special education costs. If the augmentation is intended to cover increases in Legislature wanted to promote early intervention compensation, the Graduation Initiative, and programs, it likely would need to take a different enrollment. (The budget for CSU includes an approach—crafting a more targeted initiative with additional $64 million ongoing to cover higher specific requirements and accountability measures. retiree health benefit and pension costs.) For As a targeted early intervention program likely UC, $200 million of its ongoing augmentation is could benefit many students and keep some intended to cover increases in operating costs students from later needing more expensive special (including some employee compensation costs), educations services, the Legislature will want to student success initiatives, student hunger think carefully about which of the Governor’s two and housing initiatives, mental health services, goals it would most like to address. and 2018-19 enrollment. (For both segments, CalSTRS Budget Relief Proposal Raises the Governor links the proposed General Fund Near- and Long-Term Trade-Off. Separate augmentation with an expectation that tuition for from his proposals to pay down the CalSTRS resident students not be increased in 2019-20.) unfunded liability, the Governor proposes providing Centering the university budgets around explicit $700 million over the next two years ($350 million funding priorities likely will foster more productive per year) to provide school and community college budget conversations and enhance fiscal districts immediate budget relief. Specifically, accountability. the funds would reduce districts’ CalSTRS rates Proposes Two Cal Grant Policy Changes, in 2019-20 and 2020-21—freeing up resources Mostly Consistent With Recent Legislative for other parts of districts’ operating budgets. Priorities. The Governor proposes $122 million for Though district pension costs typically are covered greater living assistance for California Community using Proposition 98 General Fund, the Governor Colleges, CSU, and UC Cal Grant recipients who proposes using non-Proposition 98 General Fund have dependent children. The Governor also for this proposal. Whereas this proposal would proposes $9.6 million to fund an additional 4,250 provide districts with perceptible budget relief over Cal Grant competitive awards, which would raise the next two years, using the $700 million instead the total number of new competitive awards for paying down more of the CalSTRS unfunded authorized annually to 30,000. Over the past liability would provide a longer-term benefit. several years, the Legislature has focused on Although over the long term the districts’ CalSTRS certain financial aid goals, including: (1) increasing rate would be only slightly lower than it would be living assistance (especially for students enrolled otherwise, the value of a making a $700 million full time); (2) expanding the number of Cal Grant unfunded liability payment now would grow over competitive awards, as demand currently greatly time. Such future relief could be important during exceeds supply; and (3) simplifying the state’s the next economic downturn. financial aid system. Although the Governor’s proposals would advance the first two of these www.lao.ca.gov 11 analysis full gutter 2019-20 BUDGET goals, his living assistance proposal could insurance coverage in part by imposing a financial complicate rather than simplify the state’s financial penalty on those without health insurance aid system. By applying only to Cal Grant recipients (known as the “individual mandate”). In 2017, with children rather than to all Cal Grant recipients, Congress passed legislation that reduced the the Governor’s proposal adds new program rules amount of the individual mandate penalty to zero, that could make understanding and navigating the effectively making the mandate unenforceable. financial aid system more difficult for students. This change is expected to result in some— likely healthier—individuals dropping their health HEALTH AND HUMAN SERVICES (HHS) insurance coverage, leading to higher premiums. To encourage individuals to maintain coverage and avoid potential premium increases, the Governor Health Care Coverage proposes creating a state individual mandate Extends Full-Scope Medi-Cal Coverage modeled after the original federal mandate. The to Income-Eligible Young Adults Regardless Governor further proposes to use the revenues of Immigration Status. The Governor’s budget from the mandate to pay for additional subsidies proposes to extend full-scope Medi-Cal coverage for those who purchase health insurance through to all young adults ages 19 through 25 regardless Covered California. These state subsidies would of immigration status. Most of these individuals supplement federal subsidies already available to do not have full health insurance coverage. some households and would provide new subsidies The administration estimates this would extend to some relatively higher-income households that health care coverage to 138,000 undocumented currently do not currently qualify. immigrants and would cost $134 million General The Governor’s proposal raises a few issues for Fund in 2019-20. Estimates suggest the current consideration: number of uninsured Californians—including those who are undocumented—is roughly 3.5 million. • Dedicating Penalty Revenues to Fund Subsidies Creates Conflicting Goals. The Budget Does Not Assume Renewal of goal of a penalty associated with the individual Managed Care Organization (MCO) Tax, mandate is to encourage people to enroll in Foregoing a Potential General Fund Benefit. insurance coverage. The penalty is effective if Since 2016-17, the state has imposed a tax on more households gain or maintain coverage. MCOs that—when combined with a package of Consequently, penalty revenue should decline associated tax changes—generates a net General over time. The Governor, however, uses the Fund benefit of over $1 billion by drawing on individual mandate revenue to fund state additional federal funds. Under state law, the MCO health insurance subsidies. If the state penalty tax expires at the end of 2018-19. Extending the is effective and subsidy revenue declines, MCO tax past 2018-19 would require statutory less funding would be available for premium reauthorization from the Legislature and approval subsidies. One alternative would be to use from the federal government. Based on the recent General Fund revenues to cover subsidy federal approval of a similar tax in Michigan, costs. federal approval of a reauthorized California MCO tax appears likely. Despite this development, the • Mandate Penalty and Subsidies Could Be administration did not propose an extension of the Structured in Various Ways. Should the MCO tax in 2019-20, forgoing over $1 billion in Legislature proceed with the concept of a General Fund benefit. state individual mandate and state insurance subsidies, it will face various choices related Proposal to Fund Covered California to the structure of both the state subsidies Subsidies With New Health Coverage Mandate and the individual mandate. For example, Revenues Raises Issues. The federal Patient depending on its priorities, the Legislature Protection and Affordable Care Act sought to could focus on increasing assistance for reduce the number of people without health 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET relatively lower-income households that in a smaller grant increase—and would take effect already receive federal subsidies. The six months earlier than the Legislature’s plan. Legislature also could depart from the Continues Funding for 7 Percent IHSS structure of the federal individual mandate Service-Hour Restoration. Since 2016-17, the penalty, for example, by allowing penalty General Fund has supported the restoration of amounts to vary with a household’s income in IHSS service hours, which were previously reduced a different way. by 7 percent, as long as the MCO tax is in place. • Multiple Tools Available to Encourage Although the budget does not assume an extension People to Maintain Coverage and Mitigate of the MCO tax, it does propose the continued use Cost Increases. If the Legislature is of General Fund for the 7 percent restoration in concerned that the elimination of the federal 2019-20. The cost of the 7 percent restoration is penalty will reduce health care coverage estimated to be $342.3 million in 2019-20. While in California and increase premiums, there the administration is not proposing to eliminate the are other policies the state could consider. current statutory language that ties the 7 percent For instance, to increase the proportion of restoration to the existence of the MCO tax, we individuals with health insurance coverage, understand the administration intends for the uninsured individuals could be automatically restoration of IHSS service hours to be ongoing. enrolled into health plans. To mitigate premium Shifts Some County IHSS Costs to cost increases, the state could subsidize General Fund, Potentially Addressing Some health insurers’ costs for high-risk (high-cost) State-County Cost-Sharing Issues. The budget individuals. Alternatively, the state could take proposes a number of changes to the mechanism action to increase competition among insurers by which the state provides counties with participating in Covered California. funding for IHSS costs. These changes aim to address some of the shortcomings of the existing Other Major HHS Proposals cost-sharing structure, but counties likely would have unmet costs in future years. The budget Proposed CalWORKs Grant Increase also proposes changes to counties’ share of cost Reflects Step Toward Legislature’s Goal. The for locally established wages and how certain 2018-19 budget package included statutory funds for social services and health programs are intent language stating the Legislature’s goal to allocated. On net, these various proposals increase increase CalWORKs grants to ensure participating General Fund costs by $241.7 million in 2019-20. families’ incomes are above 50 percent of the These costs will increase substantially over time. federal poverty level (FPL) by 2020-21. The Under current estimates, they will reach nearly 2018-19 budget approved the first step of this plan $550 million in 2022-23. by providing an across-the-board 10 percent grant increase effective April 1, 2019. The Governor’s HOUSING AND HOMELESSNESS budget proposes to further increase CalWORKs grants by 13.1 percent, which would raise grant Governor Proposes $1.3 Billion (One Time) levels to 50 percent of FPL for a family of three. Aimed at Increasing Housing Production. The The proposal assumes the grant increase would go Governor’s budget includes two proposals aimed into effect October 1, 2019 and cost $348 million at increasing housing production. One is a grant to in 2019-20. Full-year costs are expected to be local governments; the other expands an existing $455 million in 2020-21. The administration’s loan program. proposal differs from the Legislature’s plan both in terms of the grant amount and the timing. • Grants to Local Governments. The Governor Specifically, the Governor’s target for 2019-20 is proposes $750 million in General Fund grants based on a narrower definition of family size (only to local governments meant to accelerate CalWORKs-eligible family members are counted) meeting new housing production goals (to than the target in the Legislature’s plan—resulting be developed by the Department of Housing www.lao.ca.gov 13 analysis full gutter 2019-20 BUDGET and Community Development). Of this Governor Proposes $600 Million for Various amount, $250 million could support various Proposals to Address Homelessness. The local government activities, like conducting Governor’s budget also includes a variety of planning and making zoning changes. As proposals to address homelessness. Dedicating local governments reach these new goals, an significant one-time resources to homelessness additional $500 million would be available to is consistent with the 2018-19 budget package, cities and counties for general purposes. which included $500 million in local government • Middle-Income Housing Loans. The grants for homelessness services. Governor’s budget proposes $500 million • Regional Homelessness Planning. The General Fund to expand the California Governor proposes $300 million General Fund Housing Finance Agency’s (CalHFA’s) in 2019-20 for local governments to expand Mixed-Income Loan Program. (This is in or develop emergency shelters, navigation addition to the $43 million allocated for the centers, and supportive housing. The funding program in the budget with revenue from the would be available to local governments recent real estate document recording fee.) that develop joint regional plans to address The program provides loans to developers for homelessness. housing developments that include housing • Funding for Jurisdictions Meeting Shelter for low- to middle-income households. and Housing Development Milestones. The Additionally, the budget proposes expanding the Governor proposes $200 million General Fund state’s housing tax credit program by $500 million. for local governments that show progress Of this amount, $300 million would be allocated toward developing shelters and housing for to the state’s existing low-income housing tax the homeless. credit program, which provides funding to builders • Funding for Whole Person Care (WPC) of low-income affordable housing. The remaining Pilot Programs. The state’s federal Medicaid $200 million would be allocated to a new program waiver allows for local initiatives that targeting housing development for households coordinate health, behavioral health, and with higher-income levels. However, the budget social services for Medi-Cal beneficiaries. assumes no reduction in revenues due to the These programs have the option of providing tax credit in 2019-20 or in its multiyear budget housing and supportive services. The plan, suggesting the administration believes that Governor’s budget proposes a one-time developers will not claim the tax credit in the $100 million General Fund grant to local budget year or the next few years. governments for WPC pilots—with the funds Housing Proposals Raise Questions available until July 2025—to fund housing and About Which Population to Prioritize. The supportive services for individuals who are number of low-income Californians in need of homeless or at risk of homelessness, focusing housing assistance far exceeds the resources on individuals with mental illness. of existing federal, state, and local affordable housing programs. Recent housing assistance DISASTER RESPONSE AND programs have allocated the majority of funding to housing targeted at low-income Californians. RECOVERY The Governor’s housing proposals spread limited Governor’s Plan for Disaster-Related resources to broader income levels, including Activities. For 2018-19, the budget assumes a middle-income Californians. The Legislature may net increase of $923 million will be needed from want to consider whether it prefers to target the General Fund for response and recovery the state’s limited housing resources toward the activities associated with the Camp, Woolsey, and Californians most in need of housing assistance. Hill fires that occurred in November 2018. This assumes that the federal government will reimburse 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET the state for 75 percent of the state’s eligible Figure 4 costs associated with these wildfires (though the Summary of Governor’s Disaster- Governor’s administration has requested the federal Related Proposals for 2019-20 government reimburse the state for 100 percent of certain eligible costs, the administration has yet to (In Millions) receive a response). The Governor also proposes Proposals Amount the state General Fund pay for the local share of Property Tax Backfill $31 debris removal costs associated with the fires, currently estimated at $155 million. In addition, the Other Wildfire Prevention and Response administration indicates that it intends to request Wildfire legislative packagea 235 a total of $60 million from the General Fund in the Other wildfire-related proposals 124 Subtotal ($359) coming months for a public education campaign ($50 million) and for the modernization of the 9-1-1 Other Disaster-Related system ($10 million). Public safety radio system $78 9-1-1 modernization 51 For 2019-20, the Governor’s budget also California Disaster Assistance Act 20 includes a total of $555 million for a number of Earthquake Early Warning System 16 proposals in several departments related to disaster Subtotal ($165) response and recovery (about one-third of this is Total $555 one time). Figure 4 summarizes the proposals for a Legislative package consists of Chapter 624 of 2018 (SB 1260, 2019-20, which include: Jackson), Chapter 626 of 2018 (SB 901, Dodd), Chapter 635 of 2018 (AB 2126, Eggman), Chapter 637 of 2018 (AB 2518, Aguiar-Curry), and Chapter 641 (AB 2911, Friedman). • $359 Million for Other Wildfire Prevention and Response Activities. The budget Note: Includes all fund sources. Excludes funding proposed for 2018-19. includes $235 million to implement a package recent legislation related to wildfires. Of this 9-1-1 system, $20 million (General Fund) for amount, $200 million is from the Greenhouse public infrastructure and local emergency Gas Reduction Fund for the California response costs through the California Disaster Department of Forestry and Fire Protection Assistance Act, and $16 million (General (CalFire) to complete forest thinning and forest Fund) to continue the implementation of the health projects. The budget also includes state’s Earthquake Early Warning System. $124 million, primarily from the General Fund, • $31 Million to Backfill Property Taxes for other wildfire response-related proposals, for Local Governments Affected by such as for additional CalFire fire engines Recent Wildfires. The Governor’s budget ($40 million) and prepositioning of Office of provides $31 million from the General Fund Emergency Services and local fire engines in 2019-20—to be expended over a few ($25 million). years—to backfill wildfire-related property tax • $165 Million for Other Disaster-Related loses for cities, counties, and special districts Proposals. The budget includes $165 million associated with certain major wildfires that in 2019-20 for various disaster-related have occurred since 2015. Additionally, to the proposals that are not specifically focused extent that schools and community colleges on wildfires. The largest share of this experience losses in local property tax funding—$78 million across various revenues as a result of these fires, the state departments from a combination of would automatically provide a corresponding General Fund and special funds—is for backfill from Proposition 98 General Fund. improvements to the public safety radio system and to purchase additional radios. Proposals Raise Several Issues for Legislative Other major proposals include $51 million Consideration. These proposals present some (mostly General Fund) to modernize the trade-offs. First, some proposals fund certain www.lao.ca.gov 15 analysis full gutter 2019-20 BUDGET activities that have traditionally been funded from have deviated notably from the initial estimates. special funds—such as those related to the 9-1-1 Given this, there is a good chance that the actual system—from the General Fund. Second, the increase in the number of qualifying taxpayers and proposals include significantly more funding to the total credit amount could be somewhat higher assist local governments recovering from disasters or lower than the administration’s estimate. than the state has provided in the past, such as Conformity Changes for property tax backfills. The Legislature will want to consider how best to prioritize providing local Conformity Simplifies Tax Administration, governments with greater assistance while meeting but Is Not Always in State’s Best Interest. other statewide priorities. Third, the Legislature The state usually incorporates many federal tax might wish to consider whether the Governor’s changes into state law. The state has yet to take decisions regarding the amount of funding action to conform to major changes to federal tax provided to fire prevention (such as forest health) law passed in 2017. The administration proposes versus disaster response (such as fire engines) is conforming to some of these changes that apply consistent with its priorities. to businesses and has identified a list of potential conforming actions for the Legislature to consider. TAX POLICY CHANGES The administration’s intent is for the state to adopt a package of conforming changes that increases Earned Income Tax Credit revenues by enough to cover the cost of their proposed expanded state EITC program—roughly Expands State Earned Income Tax Credit $1 billion per year. While state tax laws are easier (EITC). Working individuals and families with very to comply with and administer when they follow low earnings (less than $24,950 in 2018) may federal laws—especially for definitions of the claim a refundable tax credit when they file their types of income subject to tax and of the types of state income tax returns. Last year, 1.5 million expenses that can be deducted—some federal tax taxpayers received credits totaling $348 million. provisions may be inconsistent with state policy The administration proposes to expand the state goals. In these cases, the state has to weigh the EITC by making three changes: (1) providing an benefit of pursuing its own policy goals against additional $500 credit per child under the age the additional compliance and enforcement cost of six, (2) increasing the maximum qualifying associated with deviating from federal law. The income by about 20 percent, and (3) increasing magnitude of these costs would vary depending on the credit for individuals and families with earnings how the state chose to conform. at the higher end of the eligibility range. The Conformity Changes and EITC Expansion administration estimates these changes would Should Be Considered Separately. Attempting to increase the amount of credits received by offset revenue losses from an expanded state EITC $600 million—bringing total credits to around through a package of conformity actions would be $1 billion—and increase the number of taxpayers problematic. Estimates of the revenue impacts of receiving the credit by 400,000. The administration expanding the state EITC and possible conformity also proposes renaming the credit to the “Working actions are subject to significant uncertainty. In Families Tax Credit.” addition, the impacts of these different changes EITC Cost and Participation Changes Are likely would deviate from each other over time. For Difficult to Estimate. While the proposed changes example, the cost of the EITC could vary based likely would increase the number of taxpayers who on the economy. Additionally, revenues raised by qualify for and receive the credit by several hundred conformity actions could change as taxpayers thousand, it is difficult to estimate the extent of respond to any new incentives. This makes it these increases with a high level of confidence. difficult to craft a package of EITC and conformity Outcomes of previous changes to the state EITC changes that is revenue neutral. 16 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET CONCLUSION The budget situation continues to be positive. Outlook estimated $3 billion was roughly the level In putting together his January budget proposal, of ongoing spending that the budget could support. we estimate the Governor had $20.6 billion in This was just one scenario, however. Recent discretionary resources to allocate among spending experience indicates revenues could be somewhat and reserves. This is a larger surplus than our office lower than either we or the administration projected would be available just a few months estimated. ago. The Governor’s budget establishes a number of The Governor’s budget makes prudent choices in priorities for 2019-20 and beyond, many of which allocating these resources. Although the Governor align with recent legislative action. The details proposes using a smaller share of resources for of many of these proposals, however, are still in reserves than recent budgets, he uses almost half development. By proposing them at the beginning of the available resources to pay down some of of the budget process, the Governor gives the the state’s outstanding liabilities and focuses his Legislature the opportunity to collaborate with spending commitments on one-time purposes. the administration to shape these policies. The The Governor proposes spending roughly Legislature now can choose its own preferred $3 billion on an ongoing basis, which is significantly mix of reserves, one-time spending, and ongoing higher than other recent budget proposals. Our budget commitments. economic growth scenario in the November Fiscal www.lao.ca.gov 17 analysis full gutter 2019-20 BUDGET LAO PUBLICATIONS This report was prepared by Ann Hollingshead, with contributions from other staff in the office, and reviewed by Carolyn Chu. 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. 18 LEGISLATIVE ANALYST’S OFFICE