The 2019-20 Budget: Assessing the Governor's 1991 Realignment Proposals

The 2019-20 Budget: Assessing the Governor’s 1991 Realignment Proposals GABRIEL PETEK LEGISLATIVE ANALYST MARCH 8, 2019 analysis full gutter 2019-20 BUDGET LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Executive Summary The Impetus for This Report. In 1991, the Legislature shifted significant fiscal and programmatic responsibility for many health and human services programs from the state to counties—referred to as 1991 realignment. Many changes have been made to this system over the last 28 years. Most recently, the 2017‑18 Budget Act made significant changes to how the state and counties share in the cost of In‑Home Supportive Services (IHSS). As a result of these changes, the funding provided to counties for 1991 realignment responsibilities would no longer fully cover counties’ costs. Consequently, the budget agreement required the Department of Finance (DOF) to review and report on the funding structure of 1991 realignment as part of its January 2019 budget proposal. After reviewing the funding structure and cost and revenue growth, DOF concluded that the amount of revenue available under 1991 realignment cannot support counties’ existing share of costs. As a result, the 2019‑20 Governor’s Budget proposes a number of changes to 1991 realignment. This report evaluates the changes the Governor proposes and assesses whether the changes better position 1991 realignment to achieve its intended benefits and meet the principles of a successful state‑county fiscal partnership. Governor’s Proposal. The Governor proposes changes to 1991 realignment related to IHSS, health, and mental health, summarized in the figure below. Governor Proposes Reasonable Approach for Bringing 1991 Realignment Into Financial Balance. Our office and the administration agree that 1991 realignment today no longer meets many of the core principles of a successful state‑county fiscal partnership. We find that the 2019‑20 Governor’s Budget proposes a reasonable approach for bringing 1991 realignment into financial balance. In particular, the proposed rebasing of the IHSS county maintenance‑of‑effort and lower annual adjustment factor make significant progress to align counties’ costs with their realignment revenues and protect counties against significant future increases in program costs. However, whether realignment revenues will be sufficient to cover counties’ costs long term is Key Features of the Governor’s 2019‑20 Realignment Package Proposals IHSS‑Related Changes • Rebase IHSS county MOE to lower amount in 2019‑20 • Lower the annual adjustment factor for IHSS county MOE beginning in 2020‑21 • Eliminate General Fund assistance for IHSS county MOE and redirected VLF growth funds • Increase county share of cost for locally established IHSS wage and benefit increases once state minimum wage reaches $15.00 per hour Health and Mental Health‑Related Changes • Increase redirection of realignment funding for health from 60‑percent counties to state • Temporarily eliminate growth allocations to CMSP • Establish fixed general growth allocation among mental health and CalWORKs IHSS = In‑Home Supportive Services; MOE = maintenance‑of‑effort; VLF = vehicle license fee CMSP = County Medical Services Program; and CalWORKs = California Work Opportunity and Responsibility to Kids. www.lao.ca.gov 1 analysis full gutter 2019-20 BUDGET unclear. We recommend the Legislature monitor whether realignment revenues are sufficient to cover counties’ IHSS costs over time. State IHSS Costs Will Increase More Over Time. While the Governor’s budget proposal alleviates IHSS‑related costs pressures for counties, it does so by increasing state costs. While a higher state share of IHSS costs is appropriate, the state’s ability to control the increasing cost pressures associated with IHSS is limited. Thus, the Legislature should consider how to best plan for the impact of a growing senior population on the state budget. Implications of Health and Mental Health-Related Changes. Because of counties’ reduced responsibility over low‑income, uninsured residents since the Patient Protection and Affordable Care Act and the Governor’s proposal to expand eligibility for comprehensive Medi‑Cal coverage to income‑eligible undocumented immigrants ages 19 through 25, we find that an increase in the redirection of realignment revenues from counties to the state likely is appropriate. However, we have concerns about the proposed redirection’s magnitude and scope. We also are concerned that the Governor’s proposal does not address ongoing uncertainty about key issues. Accordingly, we recommend the Legislature (1) consider the impact on public health funding when evaluating the Governor’s proposal; (2) consider the continued viability of the County Medical Services Program given revenue changes proposed by the Governor and decreasing low‑income, uninsured population; and (3) assess alignment of funding for county health and mental health with county responsibilities. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET INTRODUCTION California has shifted programmatic and funding structure of 1991 realignment as part of its January responsibility between the state and counties 2019 budget proposal. for various programs over the last 40 years. In anticipation of the DOF report, we published Historically, these shifts—or realignments—aimed a report in October 2018, Rethinking the 1991 to benefit both the state and counties by providing Realignment, that outlined key historical fiscal and greater local flexibility over services, allowing programmatic changes made to 1991 realignment counties opportunities to innovate and improve that go beyond the more recent changes to the program outcomes, and encouraging cost savings IHSS financing structure. We also discussed how by requiring counties to share in program costs. these changes generally increased program costs In particular, the 1991 realignment package: among existing realigned programs and expanded (1) transferred several programs and responsibilities program responsibilities within 1991 realignment. from the state to counties, (2) changed the way Ultimately, we found that 1991 realignment today state and county costs are shared for certain no longer meets many of the core principles of human services programs, (3) transferred health a successful state‑county fiscal partnership and and mental health service responsibilities and provided the Legislature with some options to costs to the counties, and (4) increased the sales consider to improve 1991 realignment. tax and vehicle license fee (VLF) and dedicated DOF reached similar conclusions in its recently these increased revenues to the new financial released report, Senate Bill 90: 1991 Realignment obligations of counties for realigned programs and Report. Specifically, after reviewing the funding responsibilities. structure and cost and revenue growth, DOF Since 1991, this realignment has gone through concluded that the amount of revenue available a number of structural and programmatic changes. under 1991 realignment cannot support counties’ Most recently, the 2017‑18 Budget Act made existing share of costs. As a result, the 2019‑20 significant changes to how the state and counties Governor’s Budget proposes a number of changes share in the cost of the In‑Home Supportive to 1991 realignment. Services (IHSS) program, by far the costliest human This report evaluates the changes the Governor services program in 1991 realignment. As a result proposes and assesses whether the changes better of these changes, the funding provided to counties position 1991 realignment to achieve its intended for 1991 realignment responsibilities would no benefits and meet the principles of a successful longer fully cover counties’ costs. Consequently, state‑county fiscal partnership we identified in our the budget agreement required the Department of October report. Finance (DOF) to review and report on the funding BACKGROUND What Is Realignment? Realignments change Responsibility to Kids (CalWORKs) program. The the administrative, programmatic, and/or fiscal State Constitution requires the state to reimburse responsibility for programs between the state local governments for state‑required programs and the counties. Most realignments have shifted and services. As a result, when realigning responsibility and resources from the state to administrative, programmatic, or fiscal responsibility counties. These realignments have affected from the state to counties, the state must provide responsibility for many program areas including counties with funds to cover the cost of those criminal justice, health and mental health, child increased responsibilities. Rather than reimburse welfare, and the California Work Opportunity and counties based on their actual costs, the state www.lao.ca.gov 3 analysis full gutter 2019-20 BUDGET typically provides counties specific revenue 1991 Realignment Basics. In 1991, sources—like a portion of the sales tax—to pay for the Legislature shifted significant fiscal and their increased fiscal responsibilities (share of cost) programmatic responsibility for many health under realignment. and human services programs from the state Benefits and Principles of Realignments. to counties—referred to as 1991 realignment. Realignments are intended to have long‑term The 1991 realignment package: (1) transferred benefits for counties by providing (1) greater several programs and responsibilities from the local flexibility over programs and services based state to counties, (2) changed the way state and on local needs and (2) incentives to encourage county costs are shared for certain social services counties to innovate to achieve better program programs, (3) transferred health and mental outcomes. Better program outcomes also benefit health service responsibilities and costs to the the state fiscally because counties’ service counties, and (4) increased the sales tax and VLF improvements have the potential to reduce overall and dedicated these increased revenues to the costs. Moreover, with a share of cost, counties new financial obligations of counties for realigned have an incentive to control program costs in programs and responsibilities. Today, counties areas over which they have more control (like receive about $6.5 billion (over $3 billion from administration). To achieve these benefits, we sales tax, $2 billion from VLF, and about $1 billion believe realignments need to follow certain core transferred from another realignment for mental principles. Below we identify what we believe these health) through 1991 realignment. core principles to be. While 1991 realignment moved in the right direction to better align county costs with their • Counties’ Share of Costs Reflect Their level of program control and create better fiscal Ability to Control Costs in the Program. incentives for counties, many changes have been Realignments should aim to align the state’s made to this system over the last 28 years. These and counties’ share of cost based on their changes fall into two main categories: cost impacts relative control over those programs. That and revenue changes. Impacts to cost mainly is, counties should be financially responsible have been driven by changes to program rules over those program aspects for which their and responsibilities or increases in caseload. For decisions affect cost. example, IHSS costs have significantly increased • Revenues Generally Cover Costs Over since 1991, in part, due to significant caseload Time. In some years, the revenues the state growth and policy changes that have made the provides may exceed counties’ costs. In other program more costly. Revenue changes have years, the revenues provided by the state may been due to state actions. While the state did not not be sufficient to cover counties’ costs. increase realignment revenues in response to cost Over time, however, the revenue provided impacts that increased costs (or directly reduce is intended to generally cover counties’ counties’ share of program costs), the state has costs for their required realigned program redirected revenues when realignment costs went responsibilities. down. For example, the Patient Protection and • Flexibility to Respond to Changing Needs Affordable Care Act (ACA) significantly reduced and Requirements. Funding allocations counties’ low‑income health responsibilities that should be sufficiently flexible to allow counties were funded through realignment. As a result, to use funding where it is most needed. the state required counties to redirect freed‑up • Funding Is Transparent and realignment revenues to the state. These freed‑up Understandable. The funding provided to revenues directly offset state costs for CalWORKs counties should be easily understandable. grants and county administration thereby making Total program funding also should be easily resources available for the new state costs known. associated with the ACA. 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET 1991 Realignment No Longer Meets Many allow counties to respond to changing needs and LAO Principles. Due to the various changes to requirements. As a result, 1991 realignment likely 1991 realignment programs without corresponding is not achieving the desired benefits. (Refer to our changes to the funding structure, 1991 realignment recent report, Rethinking the 1991 Realignment, for today no longer meets many of the core principles a comprehensive description of 1991 realignment, of a successful state‑county fiscal partnership. the key changes to the system in subsequent Today, counties’ share of some program costs years, and our analysis for why 1991 realignment exceeds their ability to control those costs. In no longer meets many of the core principles of addition, overall realignment revenues are not a successful realignment.) In the sections below, sufficient to cover the costs of those programs we describe and assess the Governor’s proposed over time. Lastly, the flow of funds in realignment changes to 1991 realignment. is extremely complex and not flexible enough to OVERVIEW OF THE GOVERNOR’S PROPOSAL In its January 2019 report, Senate Bill 90: state and county—share of IHSS service costs 1991 Realignment Report, DOF found the amount and 30 percent of the nonfederal share of IHSS of revenue available under 1991 realignment administrative costs. Beginning in 2012‑13, cannot support the costs of the current programs however, the historical county share of cost within the realignment. As we discussed model was replaced with an IHSS county previously, we reached the same conclusion in maintenance‑of‑effort (MOE), meaning county costs our report, Rethinking the 1991 Realignment. would reflect a set amount of nonfederal IHSS In response to the findings of its report, the costs as opposed to a certain percent of nonfederal administration proposed a number of changes to IHSS costs. In 2017‑18, the initial IHSS MOE was 1991 realignment summarized in Figure 1. Below eliminated and replaced with a new county MOE we describe the proposed changes. financing structure—referred to as the 2017 IHSS MOE. (For further information on the development IHSS-Related Changes of the 2017 IHSS MOE, refer to our report, The History of IHSS County Costs. Historically, 2017‑18 Budget: The Coordinated Care Initiative: counties paid 35 percent of the nonfederal— A Critical Juncture.) Under the 2017 IHSS MOE, Figure 1 Key Features of the Governor’s 2019‑20 Realignment Package Proposals IHSS‑Related Changes • Rebase IHSS county MOE to lower amount in 2019‑20 • Lower the annual adjustment factor for IHSS county MOE beginning in 2020‑21 • Eliminate General Fund assistance for IHSS county MOE and redirected VLF growth funds • Increase county share of cost for locally established IHSS wage and benefit increases once state minimum wage reaches $15.00 per hour Health and Mental Health‑Related Changes • Increase redirection of realignment funding for health from 60‑percent counties to state • Temporarily eliminate growth allocations to CMSP • Establish fixed general growth allocation among mental health and CalWORKs IHSS = In‑Home Supportive Services; MOE = maintenance‑of‑effort; VLF = vehicle license fee CMSP = County Medical Services Program; and CalWORKs = California Work Opportunity and Responsibility to Kids. www.lao.ca.gov 5 analysis full gutter 2019-20 BUDGET the counties’ share of IHSS costs was reset to understanding that the administration roughly reflect the counties’ share of estimated determined the changes to the IHSS MOE 2017‑18 IHSS costs based on historical county based on what realignment revenues could cost‑sharing levels (35 percent of the nonfederal support in 2019‑20. The administration share of IHSS service costs and 30 percent of the indicates it will revise the MOE reduction nonfederal share of IHSS administrative costs). in May based on updated estimates of Additionally, the 2017 IHSS MOE increased annually realignment revenues. by (1) an adjustment factor (which, depending on • Lower the Annual Adjustment Factor realignment revenue growth, could be 5 percent Beginning in 2020-21. Under current law, or 7 percent) and (2) counties’ share of costs from the IHSS MOE increases by 5 percent or locally established wage increases. (For example, 7 percent annually (depending on the growth over the past five years, total IHSS county MOE in realignment revenues) and counties’ costs have increased from less than 1 percent to share of costs from locally established wage 4 percent annually as a result of locally established increases. The budget proposes to lower wage increases for IHSS providers.) the annual adjustment factor to 4 percent 2017 IHSS MOE Exceeded Realignment beginning in 2020‑21. The IHSS MOE will also Revenue Available. When the 2017 IHSS MOE continue to increase annually by counties’ was implemented, there was concern that share of costs from locally established wage realignment revenues would no longer cover increases. counties’ share of costs. In fact, the 2017 IHSS • Eliminate General Fund Assistance and End MOE exceeded realignment revenues by about Redirection of Health and Mental Health $530 million (though temporary General Fund VLF Growth Funds. Current law provides assistance and redirected VLF revenues were substantial General Fund assistance to provided to counties to mitigate the majority of counties to mitigate the cost of the 2017 IHSS this shortfall). Moreover, there was concern that MOE—$400 million beginning in 2017‑18 realignment revenues would never “catch‑up” to and declining to $150 million by 2020‑21. pay for increasing IHSS county costs in future years Additionally, counties temporarily are receiving because revenues were not growing as fast as the VLF revenue that would otherwise go to health annual adjustment factor. and mental health programs to partially cover Key Proposals to Address IHSS Costs. The counties’ IHSS costs. Given the Governor’s DOF report found that 1991 realignment could proposal to significantly reduce the cost of the no longer support counties’ IHSS costs primarily IHSS MOE, the budget proposes to eliminate because of programmatic changes that have made the temporary General Fund assistance and IHSS more costly over time and reduced the state’s stop the redirection of VLF revenue beginning and counties’ ability to control program costs. To in 2019‑20. address this problem, the administration proposes • Increase County Share of Cost for Locally to restructure the IHSS MOE so that counties’ Established IHSS Wage and Benefit share of cost better reflects their ability to control Increases Once State Minimum Wage costs and revenues generally cover counties’ IHSS Reaches $15.00 Per Hour. Under current law, costs over time. Below, we describe in detail these counties pay for 35 percent of the nonfederal changes. (The Governor’s budget also proposes costs associated with locally established IHSS technical changes to how certain realignment wage and benefit increases and the state revenues flow to counties and what program costs pays for the remaining 65 percent up to the are included in the IHSS MOE.) state participation cap ($13.10 per hour in 2019). Counties pay for 100 percent of costs • Rebase IHSS County MOE to Lower over the state participation cap. (Currently, Amount in 2019-20. The budget proposes the state participation cap increases as the to reduce the IHSS MOE from $2 billion state minimum wage increases, remaining to $1.56 billion in 2019‑20. It is our 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET $1.10 per hour above the state minimum two distinct approaches for determining the wage.) Once the state minimum wage reaches amount of health funding to redirect from counties $15.00 per hour (scheduled to occur on to CalWORKs. Certain counties—primarily rural January 1, 2022), the budget proposes to counties that jointly administer health care services (1) increase the counties’ share of nonfederal for their uninsured, low‑income populations as part costs associated with locally established IHSS of the County Medical Services Program (CMSP)— provider wage and benefit from 35 percent were required to redirect 60 percent of the funding to 65 percent (with the state paying for the they would have received for overall health activities remaining share of cost) and (2) eliminate the (health care and public health). Twelve counties state participation cap. were required to redirect their realignment health funding according to a formula that accounts for Health and Mental Health-Related net changes in county health care costs since the ACA. The remaining 12 counties were given the Changes option to decide whether to redirect 60 percent Counties Receive Separate Realignment of funding or use the formula approach. While Revenue Streams for Health and Mental Health. formula redirection is intended to more precisely Through 1991 realignment, the state provides account for the reduction in counties’ health care flexible health realignment funding for counties to costs, the formula is administratively burdensome (1) provide health care services to their uninsured, to manage. In contrast, the 60 percent redirection low‑income populations and (2) carry out local is not precise. Counties may redirect more or less public health activities. The state also provides of their health care revenue to the state than their separate funding through 1991 realignment for actual experience may warrant. This approach, mental health services. For the most part, there however, does not create the administrative was no preexisting statewide model counties have challenges observed in the formula redirection. to follow for mental health service responsibilities. Five counties chose the 60 percent redirection Counties had greater flexibility to establish a local approach. Current law prevents counties from program structure and administer these service changing their redirection approach. Figure 2 (see responsibilities independent of what other counties next page) shows the redirection approach used for were doing, based on the mental health needs of each county. their county residents. Administration Proposes to Increase Redirection of Health Realignment Revenues Redirection of Realignment Funding for Currently Offsets General Fund Costs in Health From “60-Percent” Counties to State. CalWORKs. Following the implementation of The Governor proposes to expand eligibility the ACA in 2014, the number of low‑income for comprehensive Medi‑Cal coverage to Californians without health care coverage income‑eligible undocumented immigrants ages decreased dramatically. This reduced counties’ 19 through 25. In connection with this proposal, the costs for health care services for this population Governor also proposes to increase the redirection and increased state costs. In response, the state of county realignment funding for health from redirected health realignment funding to pay 60 percent to 75 percent in 60‑percent redirection for an increased county share of costs in the counties. (Refer to our recent report, The 2019‑20 CalWORKs program, which provides cash grants Budget: Analysis of the Medi‑Cal Budget, to learn and employment services to low‑income families. more about the Governor’s proposed Medi‑Cal The increased county share of cost directly offsets expansion.) This proposal is intended to defray General Fund spending, thereby lowering state a portion of the General Fund cost (estimated to costs. be $63 million) of expanding Medi‑Cal coverage Approaches for Determining Counties’ by redirecting what the administration assumes Redirection of Health Realignment Revenues. At the counties would otherwise spend on health the time of ACA implementation, the state identified care services for their uninsured, low‑income www.lao.ca.gov 7 analysis full gutter 2019-20 BUDGET populations. (As we describe later, we think this realignment revenues to cover the costs of actually reflects more county savings than likely to providing health care services to the uninsured be experienced under the Governor’s proposal.) residents of participating counties. Counties Temporarily Eliminate Growth Allocations that participate in CMSP also receive their own to CMSP. Under 1991 realignment, the CMSP allocation of health realignment revenues, but this program receives a separate allocation of health funding is used to support public health activities that are not administered by the CMSP program. As CMSP health Figure 2 care costs have declined since the State Has Two Main Approaches for ACA, CMSP has built up a large Redirecting Health Realignment Revenues reserve of over $360 million—more than ten times its annual operating 60 Percent Redirection budget. Beginning in 2019‑20, the CMSP Counties Non‑CMSP Counties Formula Redirection Governor proposes to eliminate Alpine Placera Alameda any growth in the allocation of Amador Sacramentoa Contra Costa health realignment revenue to Butte Santa Barbaraa Fresnoa CMSP until its operating reserves Calaveras Stanislausa Kern fall below those required to sustain Colusa Yoloa,b Los Angeles operations for three months. Del Norte Merceda (These realignment revenues El Dorado Monterey Glenn Orangea would instead be allocated using Humboldt Riverside the “general growth” process we Imperial San Bernardino describe below.) Inyo San Diegoa Establish Fixed General Kings San Francisco Growth Allocation Among Mental Lake San Joaquin Health and CalWORKs. Under Lassen San Luis Obispoa current law, annual growth in Madera San Mateo Marin Santa Clara realignment revenues are allocated Mariposa Santa Cruza in a series of steps. First, growth is Mendocino Tularea allocated to cover cost increases in Modoc Ventura certain caseload‑driven programs, Mono such as IHSS. Second, CMSP Napa receives a portion of the remaining Nevada growth according to a statutory Plumas formula. Third, any remaining San Benito Shasta growth is split among health, Sierra mental health, and CalWORKs for Siskiyou increases to grants. This third step Solano is referred to as general growth. Sonoma Today, the share of general growth Sutter allocated to mental health depends Tehama on an annually updated schedule Trinity determined through a complex Tuolumne Yuba series of calculations involving a various historical allocations. Health These counties had the option of choosing either the 60 percent redirection or the formula redirection. programs receive a fixed share b Yolo County joined CMSP in 2011. For purposes of redirection of health realignment revenue, of about 18 percent of general Yolo County is treated as a non‑CMSP county. CMSP = County Medical Services Program. growth. Although the share of 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET general growth allocated to mental health has varied CalWORKs grants. The Governor proposes to set slightly in recent years, it generally has been close these percentages in statue moving forward—about to 37 percent. The remaining general growth is 37 percent for mental health, about 44 percent for allocated to defray General Fund costs on increased CalWORKs, and about 18 percent for health. KEY ISSUES FOR LEGISLATIVE CONSIDERATION This section analyzes the Governor’s proposals • The elimination of the temporary General on 1991 realignment and raises issues for Fund assistance and ending the redirection Legislative consideration. Figure 3 (see next page) of VLF growth funds unwinds some of the summarizes how the Governor’s proposals address complexity introduced by the 2017 IHSS our realignment principles and provides our MOE, thereby making modest improvements assessment of those proposals. to the transparency and understandability of the 1991 realignment funding structure. Proposed IHSS MOE Changes IHSS MOE Financing Model Reduces Improve 1991 Realignment Structure Financial Risk to Counties. The IHSS MOE Proposed Changes to IHSS MOE Better financing model offers counties protection against Align 1991 Realignment With LAO Realignment significant future increases in program costs. Principles. Based on our realignment principles, While the proposed IHSS MOE adjustment factor realignment revenues should generally cover (4 percent) generally reflects recent growth in program costs over time and counties’ share of realignment revenues year to year, it is far lower program costs should reflect their ability to control than the average annual growth in total IHSS costs those programs. Below we describe how the (11 percent). To the extent that total IHSS costs Governor’s proposed changes improve alignment of continue to grow at a faster rate than the proposed 1991 realignment with our principles. IHSS MOE adjustment factor, counties will be responsible for a decreasing share of total IHSS • As a result of the proposed reduction to costs over time. As we discuss later, a trade‑off the IHSS MOE, realignment revenues are of the significant reduction in counties’ costs, expected to fully cover county costs in the however, is increased state costs. near term. Additionally, the proposed lower Counties’ Long-Term Financial Balance adjustment factor improves the chances of Less Certain. Whether realignment revenues will realignment revenues covering county costs be sufficient to cover counties’ costs long term over time. is unclear. In 5 of the last 13 years, realignment • Even though the proposed reduction to the revenues grew less than 4 percent (including IHSS MOE is based on what realignment years when realignment revenues did not grow or revenues can support, rather than an analysis were negative). In all other years, primarily after of counties’ ability to control IHSS cost, we the Great Recession, realignment revenue growth believe that the proposed reduction moves in exceeded 4 percent. If in future years average the right direction and more accurately reflects growth in realignment revenue is lower than the counties’ ability to control IHSS costs today. IHSS MOE annual adjustment factor, IHSS county • The proposed increase to counties’ share of costs would exceed revenues. As a result, counties nonfederal costs for county negotiated and would face increasing cost pressures from their established wage and benefit increases (from 1991 realignment responsibilities. We recommend 35 percent to 65 percent) seems to right‑size the Legislature monitor—through the annual counties’ fiscal responsibility for a cost budget process—whether realignment revenues are counties can control. sufficient to cover counties’ IHSS costs over time. www.lao.ca.gov 9 analysis full gutter 2019-20 BUDGET State IHSS Costs the program, the net cost to the state is estimated Will Increase More Over Time to increase to $547.3 million by 2022‑23. Below, we explain the growing cost trends associated with While the Governor’s budget proposal alleviates IHSS and the state’s limited ability to control overall IHSS‑related costs pressures for counties, it does program costs. so by increasing costs pressures experienced by IHSS Has Experienced Significant Growth in the state. Specifically, the administration estimates Program Costs and Caseload. Over the past five that the proposed reduction to the IHSS MOE and years, total IHSS costs have grown by 11 percent lower annual adjustment factor will shift, on net, annually, on average. While the reasons for the $241.7 million in IHSS costs from counties to the significant growth in IHSS program costs are not state in 2019‑20. Due to the increasing costs of completely understood, it may be attributable to Figure 3 Summary of LAO’s Assessment on Governor’s Proposals Governor’s Proposal Primary Principle Addressed LAO’s Assessment IHSS-Related Changes Rebase IHSS County MOE Counties’ share of costs reflect their ability to Reduced share of cost in IHSS for counties is a move in the control costs in the program. right direction. However, IHSS MOE is based on available revenue, rather than counties ability to control costs in the program. Revenues generally cover costs over time. Realignment revenues would generally cover county costs, at least in near term, but would place significant and growing cost pressures on General Fund. Lower the Annual Adjustment Revenues generally cover costs over time. Lower adjustment factor generally aligned with recent Factor for IHSS MOE growth in annual realignment revenues, thereby improving the chances of revenues covering total county IHSS costs over time. However, the adjustment factor is far less than average annual growth in IHSS costs, resulting in growing cost pressures on General Fund. Eliminate General Fund Funding is transparent and understandable. Reasonable to eliminate General Fund assistance to Assistance and Redirected counties given financial relief provided by rebased MOE VLF Growth Funds and lower annual adjustment factor. Redirection frees up revenue for health, mental health, and CalWORKs. While complexity remains, these changes unwind some of the complexity introduced by the 2017 IHSS MOE. Increase County Share of Cost Counties’ share of costs reflect their ability to Increase to counties’ share of nonfederal costs for county for Locally Established IHSS control costs in the program. negotiated wage and benefit increases seems to right-size Wage and Benefit Increases counties fiscal responsibility over a cost counties can control. Health and Mental Health-Related Changes Increase Redirection for Health Counties’ share of costs reflect their ability to Additional redirection likely appropriate, but scope and From 60-Percent Counties control costs in the program. magnitude of proposed redirection raises questions. Temporarily Eliminate Growth Revenues generally cover costs over time. Reasonable to limit CMSP revenue growth until reserves Allocations to CMSP reduced, but raises concerns about right level of reserves. Establish Fixed General Funding is transparent and understandable. Eliminates need to prepare an annual schedule that is Growth Allocation Among administratively burdensome to develop and fluctuates Mental Health and minimally from year to year thereby modestly reducing CalWORKs complexity. IHSS = In‑Home Supportive Services; MOE = maintenance‑of‑effort; VLF = vehicle license fee; CalWORKs = California Work Opportunity and Responsibility to Kids; and CMSP = County Medical Services Program. 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET growth in caseload and recent policy decisions Implications of Health and Mental that have made the program more costly. For Health-Related Changes example, over the past five years IHSS caseload New IHSS MOE Frees-Up Realignment growth has remained, on average, at 5 percent Revenues for Health, Mental Health, and annually, increasing from 444,000 in 2014‑15 to CalWORKs. As previously mentioned, VLF growth an estimated 564,000 in 2019‑20. The growth in funds within 1991 realignment for health, mental caseload could be related to the state’s increasing health, and CalWORKs are temporarily redirected senior population (adults aged 65 and older) and to provide counties with additional funds to pay a growing preference to age at home. Additionally, for the 2017 IHSS MOE. The administration a number of recent policy decisions, such as the estimates that counties will no longer need VLF implementation of state minimum wage increases growth funds to pay for IHSS county costs given and federal overtime rules, have made the the proposed reduction to the IHSS MOE in operation of IHSS program more costly. 2019‑20. As a result, the budget proposes to The State’s Ability to Control Overall IHSS stop the temporary redirection of VLF growth, Cost Is Limited. Since 1991, IHSS largely has meaning these funds will instead flow as intended become an entitlement program. As a result, to health and mental health realigned programs the state’s and counties’ ability to control and offset state CalWORKs costs. Additionally, by program costs is limited. In the past, the state reducing the IHSS MOE, the Governor’s proposal has attempted to reduce IHSS costs, but these frees‑up sales tax growth for these programs. The attempts were largely not implemented. Specifically, administration estimates the increase in revenues during the recession, the state proposed a number for county mental health programs in 2019‑20 to of changes to IHSS intended to create budget be about $70 million. The proposed changes also savings, including the institution of stricter eligibility would result in additional growth funding for health rules and reducing service hours by 20 percent. programs of about $30 million. Multiple class action lawsuits were brought against An Additional Redirection to State From the state to prevent these changes from taking Health Funding Likely Is Appropriate . . . effect, largely on the basis that they violated federal For CMSP and the other 60‑percent redirection Medicaid rules and federal protections for persons counties, the reduction of low‑income, uninsured with disabilities. residents due to the ACA arguably resulted in State’s Financial Responsibility Over IHSS greater county savings than the redirection policy Expected to Increase. In general, IHSS is the anticipated. Caseload for CMSP, for example, fell state’s largest community‑based program that by close to 99 percent—from around 90,000 before provides low‑income seniors and people with the ACA to around 1,000 today. Moreover, disabilities with long‑term services and supports following implementation of the ACA, the state (LTSS) so that they can remain safely in their expanded comprehensive Medi‑Cal coverage to homes. As the senior population continues to income‑eligible, undocumented children, further grow, utilization of the IHSS program may increase, reducing counties’ costs. The state did not resulting in the program becoming more costly over redirect additional health realignment funding from time. To the extent that this does occur, the state CMSP and the other 60‑percent counties for this will, under the Governor’s proposal, pay a higher expansion. (In contrast, formula counties’ health share of the increased nonfederal IHSS costs. While funding adjusts automatically based on savings due a higher state share of IHSS costs is appropriate, to reduced caseload.) For these reasons, we find the state’s ability to control the increasing cost that an increase in the redirection of realignment pressures associated with IHSS is limited. Thus, the revenues from counties to the state likely is Legislature should consider how to best plan for appropriate. the impact of a growing senior population on LTSS programs, like IHSS, and the state budget. www.lao.ca.gov 11 analysis full gutter 2019-20 BUDGET . . . However, the Magnitude and Scope of funding provided directly to the counties for Governor’s Proposed Redirection Potentially health programs, including for both health Goes Too Far. Although we find that, some care services and public health activities. increase in the redirection is likely appropriate, we Some of these counties dedicate a significant have concerns about the proposed redirection’s share of their health realignment dollars magnitude and scope. The following bullets to public health activities. Across the five highlight several of our concerns: counties, about $20 million of the $40 million in health realignment funding available is • Increase in the Redirection Larger used for public health. For these counties, Than the Projected Reduction in the realignment dollars are often the only source Uninsured. The projected proportional of flexible public health funding. As such, the increase in Medi‑Cal coverage as a result proposed increase in the redirection could of the Governor’s proposed expansion (and cause these counties to have to scale back corresponding decrease in county health care their public health activities. Across these five service responsibilities) is smaller than the counties, the state currently redirects about proposed percent increase in the realignment $60 million. The Governor’s budget would redirection. Under the coverage expansion, redirect an additional $15 million, about half California’s uninsured, low‑income population of which currently supports public health would decrease by less than 10 percent, while activities. We recommend the Legislature the Governor’s realignment proposal would consider the potential impact on core public reduce remaining health realignment funding health activities and decide whether it should by more than 25 percent. If the intent is to backfill the loss. Longer term, we suggest solely account for the savings associated the Legislature consider an evaluation of the with the proposed Medi‑Cal expansion, the role of local public health more generally to magnitude of the redirection proposed by the determine an appropriate amount of funding Governor may be too large. for these efforts and whether these efforts • Redirection Affects Counties That Will Not and funding levels should be considered See Realignment Savings From Governor’s separately from realignment. Medi-Cal Coverage Expansion. Some, including Placer and Santa Barbara Counties, Reasonable to Limit CMSP Revenue Growth do not use realignment dollars to offer health Until Reserves Are Reduced, but Raises care coverage to low‑income, uninsured, Questions About the Right Level of Reserves undocumented residents. (Instead, these and Ongoing Viability of CMSP. We find the counties use their health realignment funding Governor’s overall policy to eliminate the growth for public health.) Expanding Medi‑Cal to allocation for CMSP until its reserves are lower these residents will not free up realignment reasonable and worthy of serious consideration by funding for these counties. Despite this, the Legislature. The Governor’s proposal to reduce the proposal would redirect some of their CMSP reserves to three months of costs likely goes health realignment funding to the state. This too far, however. During a recession, realignment suggests that the scope of the redirection revenues—sales tax and VLF—can decrease proposed by the Governor may be too broad. for many months. Without sufficient reserves, CMSP likely would have to reduce services for • Potential Impact on County Public Health low‑income, uninsured individuals in participating Activities. For the 60‑percent counties counties. While CMSP can operate in the near that do not participate in CMSP and Yolo term by spending down its reserves, when CMSP’s County (which is treated as if it does not reserves eventually are spent down, it is not clear participate in CMSP for purposes of the that new growth in realignment revenues going to redirection), the proposed increase in the CMSP would be enough to allow it to continue to redirection applies to overall realignment operate. Additionally, as the number of low‑income 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET state residents without health care coverage • . . . For Local Public Health. The current decreases, the role of CMSP is called into question. amount of realignment funding available for We suggest the Legislature consider the long‑term public health activities is essentially a function financial plan for CMSP and its mission. of how much remains after the redirection Establishing Fixed General Growth Allocation and, subsequently, counties’ choices on Among Mental Health and CalWORKs whether to dedicate the remaining funding to Reasonable, Makes Modest Improvements to public health activities or health care services. Funding Transparency and Understandability. Knowing the “necessary” or “right” amount Understanding the flow of funds within to spend on public health activities is not an 1991 realignment is very challenging. As a result easily answered question. Understanding of changes to 1991 realignment programs over the how counties currently use realignment public years, the tracking of realignment revenues and health funding, however, could be useful. program expenditures has increased in complexity The Governor’s proposal does not assess and the flow of funds is more labyrinthine. The counties’ use of these resources. Governor’s proposal to set the share of general • . . . For Remaining Uninsured Population. growth allocated to mental health programs While the Governor’s proposal to expand at about 37 percent (and consequently setting Medi‑Cal coverage would reduce the state’s the general growth allocation for CalWORKs), number of remaining uninsured, around one eliminates the need to prepare an annual schedule million undocumented adults would remain that is administratively burdensome to develop, without coverage. Although counties are and fluctuates minimally from year to year. This not required to provide health care services proposal and other aspects of the realignment to undocumented immigrants, many do. package make modest improvements to the The Governor’s proposal would reduce the funding transparency and understandability of amount of realignment funding available 1991 realignment. to provide health care services to this Remains Unclear Whether Health and Mental uninsured population going forward. Should Health Realignment Funding Is Aligned With the Legislature wish to continue to dedicate Counties’ Current Responsibilities . . . Counties realignment funding to counties to provide have flexibility to determine how to allocate health health care services for low‑income, uninsured and mental health services funding. Moreover, residents (who are primarily undocumented counties braid multiple funding sources together adults), it is unclear whether the amount to meet their health and mental health priorities. of realignment funding for health under the As a result, determining whether funding is aligned Governor’s proposal would be sufficient. with county responsibilities is very difficult. The In light of this uncertainty, we suggest the Governor’s proposal does not address this ongoing Legislature direct the administration to work uncertainty. with counties to determine if revenues and • . . . For Mental Health. The administration’s responsibilities align for health and mental health. proposal does not address key structural At minimum, this would require determining what issues within the state’s financing of mental specific services should be paid by the health and health services that make it difficult to mental health revenues and collecting data from determine whether overall county mental counties on the cost of those services. health funding is aligned with county mental health service responsibilities. Data on the total costs incurred by counties to provide mental health services and on how counties utilize different funding sources to pay for those services are not readily available. www.lao.ca.gov 13 analysis full gutter 2019-20 BUDGET SUMMARY OF CONCLUSIONS Governor Proposes Reasonable Approach costs, however, is increased state costs. While the for Bringing 1991 Realignment Into Financial state is better positioned than counties to address Balance. Our office and the administration agree growing costs in IHSS given it has more control that 1991 realignment today no longer meets over policy decisions that drive program costs the many of the core principles of a successful Legislature may want to begin to consider how to state‑county fiscal partnership. We find that the address the needs of the state’s growing elderly 2019‑20 Governor’s Budget proposes a reasonable population. approach for bringing 1991 realignment into Recommend Other Improvements. There are financial balance. In particular, the proposed additional steps we recommend the Legislature rebasing of the IHSS county MOE and lower annual take to strengthen the 1991 realignment structure adjustment factor make significant progress to align and improve state oversight of realigned programs. counties’ costs with their realignment revenues. A Figure 4 summarizes those recommendations. trade‑off of the significant reduction in counties’ Figure 4 Summary of LAO Recommendations LAO Recommendations • While the higher state share of cost for IHSS proposed by the Governor is appropriate, the state’s ability to control increasing cost pressures associated with IHSS is limited. We recommend the Legislature plan for the impact of a growing senior population on the state budget. • Whether realignment revenues will be sufficient to cover counties’ costs long term remains unclear. We recommend the Legislature monitor—through the annual budget process—that realignment revenues generally cover program costs over time. • In some cases, the Governor’s proposal would redirect revenue currently supporting counties’ public health activities. We recommend the Legislature consider the impact on public health funding when evaluating the Governor’s proposal. • Governor proposes to limit CMSP’s revenue and various policies have reduced the number of low‑income state residents without health care coverage, which CMSPs serve. We recommend the Legislature consider the continued viability and purpose of CMSP going forward. • Remains unclear whether health and mental health realignment funding is aligned with counties’ current responsibilities. We recommend the Legislature assess the alignment of funding for county health and mental health with county responsibilities. IHSS = In‑Home Supportive Services and CMSP = County Medical Services Program. LAO PUBLICATIONS This report was prepared by Lourdes Morales and Jackie Barocio, with assistance from Ben Johnson, Ryan Woolsey, Ryan Millendez, and Sonja Petek, and reviewed by Ginni Bella Navarre and 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. 14 LEGISLATIVE ANALYST’S OFFICE