The 2019-20 Budget: California Spending Plan (Final Version)

The 2019‑20 Budget: California Spending Plan GABRIEL PETEK LEGISLATIVE ANALYST OCTOBER 2019 analysis full gutter 2019-20 BUDGET LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Table of Contents Budget Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Evolution of the Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Major Features of the 2019‑20 Spending Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Tax and Other Revenue Policy Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Debt and Liability Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Programmatic Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 www.lao.ca.gov analysis full gutter 2019-20 BUDGET LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Each year, our office publishes the California 2019, but we have updated the narrative to reflect Spending Plan to summarize the annual state actions taken later in the legislative session . In budget . This publication provides an overview of addition to this publication, we have released a the 2019‑20 Budget Act, then highlights major series of issue-specific, online posts (for example, features of the budget approved by the Legislature a post on Health and Human Services issues) that and signed by the Governor . All figures in this give more detail on the major actions in the budget publication reflect actions taken through July 16, package . BUDGET OVERVIEW Spending Budget Commits $21.5 Billion in Discretionary General Fund Spending. After accounting Figure 1 displays the administration’s July for constitutionally required spending (such 2019 estimates of total state and federal as Proposition 98 funding for K-14 education) spending in the 2019-20 budget package . As and added costs to maintain existing policies the figure shows, the budget assumed total state and programs, we estimate the Legislature spending of $208 .9 billion (excluding federal and had $21 .5 billion in discretionary General Fund bond funds in 2019-20), an increase of 2 percent resources to allocate in the 2019-20 budget . The over revised totals for 2018-19 . General Fund spending plan devotes this surplus to four major spending in 2019-20 is $147 .8 billion—an increase purposes (Figure 3, see next page) . These are: of $5 .1 billion, or 4 percent, over the revised (1) $9 billion to pay down some state debts and 2018-19 level . This increase is lower than it would liabilities, (2) $4 billion in new ongoing programmatic be otherwise because the budget attributes spending, (3) $6 .5 billion in one-time programmatic several billions of dollars in new expenditures spending, and (4) $2 .1 billion in optional reserves . to 2018-19 rather than 2019-20 . Special fund (Optional reserves include the $1 .4 billion ending spending is roughly flat from 2018-19 to 2019-20 . fund balance in the state’s discretionary reserve .) Proposition 98 Funding Rises Steadily. Ongoing Spending Grows to $6 Billion at Proposition 98 (1988) established a constitutional Full Implementation. The cost in 2019-20 of minimum annual funding requirement for new discretionary ongoing program spending K-14 education . The minimum funding amount is $4 billion . This is higher than the amount grows over time based upon various factors, other recent budgets allocated to new ongoing including changes in General Fund revenue, per spending from an available surplus . In particular, capita personal income, and student attendance . the 2016-17 budget allocated $300 million to The state meets the funding requirement using a combination Figure 1 of state General Fund and Total State and Federal Expenditures local property tax revenue . (Dollars in Millions) Total Proposition 98 funding for 2019-20 is $81 .1 billion, Revised Change From 2018‑19 Enacted an increase of $2 .9 billion 2017‑18 2018‑19 2019‑20 Amount Percent (3 .7 percent) from the revised General Fund $124,756 $142,693 $147,781 $5,087 4% 2018-19 level (Figure 2, see next Special funds 49,655 61,226 61,093 -134 — page) . For 2018-19 and 2019-20, Budget Totals $174,411 $203,920 $208,874 $4,954 2% the approved funding equals Bond funds $2,905 $7,399 $5,904 -$1,494 -20% the minimum requirement . For Federal funds 92,352 100,007 106,303 6,296 6 2017-18, funding is $117 million Note: Reflects administration estimates of budgetary actions through July 16, 2019. above the minimum requirement . www.lao.ca.gov 1 analysis full gutter 2019-20 BUDGET Figure 2 Proposition 98 Funding by Segment and Source (Dollars in Millions) Change From 2018‑19 2017‑18 2018‑19 2019‑20 Final Revised Enacted Amount Percent Funding by Segment K-12 education $66,839 $68,973 $71,243 $2,270 3.3% Community colleges 8,737 9,173 9,437 264 2.9 Proposition 98 reserve — — 377 377 — Totals $75,576 $78,146 $81,056 $2,910 3.7% Fund Source General Fund $52,951 $54,445 $55,891 $1,446 2.7% Local property tax 22,625 23,701 25,166 1,464 6.2 Note: Reflects estimates of budgetary actions through July 16, 2019. In other cases, the cost of an ongoing policy Figure 3 changes over time . For example, the spending How the 2019‑20 Budget Package plan reduces counties’ share of costs for In-Home Allocates a $21.5 Billion Surplus Supportive Services (IHSS), resulting in escalating costs to the state’s General Fund, which increase by hundreds of millions of dollars over the period . Reserves That said, included in this estimate of ongoing spending are a number of program expansions that are subject to suspension, as described in the next Ongoing One-Time Spending Debt-Related paragraph . If the program suspensions occur, new Spending ongoing spending in the budget package (in full implementation) is $4 .2 billion . One-Time Budget Makes Several Augmentations Programmatic Spending Subject to “Suspension.” The spending plan also makes a number of ongoing program augmentations subject to suspension on December 31, 2021 . In these cases, statute directs the Note: Reflects budgetary actions through July 16, 2019. Department of Finance (DOF) to calculate whether General Fund revenues will exceed General Fund expenditures—without suspensions—in 2021-22 new ongoing spending and the 2018-19 budget and 2022-23 . If DOF determines revenues will allocated $1 .3 billion . Further, our estimates suggest exceed expenditures, then the programs’ ongoing the full implementation cost of the new 2019-20 expenses will continue . Otherwise, the expenditures discretionary ongoing commitments is $5 .9 billion . are automatically suspended . Figure 4 summarizes Some of this increase results from the budget the 20 ongoing expenditures in the 2019‑20 Budget instituting new ongoing spending increases midway Act that are subject to this suspension language . through the fiscal year, such that the full-year cost Altogether, the full-year cost of these suspensions of the change occurs in 2020-21 . For example, the are $1 .7 billion . These budget items also include budget provides rate increases for most Department language that indicate the Legislature intends of Developmental Services (DDS) service providers to consider alternative solutions to restore the beginning on January 1, 2020 and funds additional program expansions if the suspension takes effect . full-day preschool slots beginning on April 1, 2020 . 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Revenues Figure 4 Figure 5 displays the Programs or Augmentations Subject to Suspension administration’s revenue (In Millions) projections as incorporated into Full‑Year General Fund the June 2019 budget package . Savings Resulting The budget package assumes Program or Augmentation From Suspension $143 .8 billion in General Fund Proposition 56 Medi-Cal provider payment increases $861 revenues and transfers in 2019-20, IHSS 7 percent service hour restoration 358 a 4 percent increase over revised DDS service provider rate increases (including DOR) 250 2018-19 estimates . All together, Medi-Cal optional benefits restoration 41 the state’s three largest General DDS uniform holiday schedule 30 Fund taxes—the personal income Family Urgent Response Team 30 tax (PIT), sales and use tax, and Senior nutrition 18 Funding for housing for foster youth 13 corporation tax—are projected to Emergency Child Care Bridge program 10 increase 3 percent . Extension of Medi-Cal coverage for post-partum mental health 9 The Condition of the Child Welfare public health nursing early intervention 8 Foster Family Agency rate increase 7 General Fund Student financial aid during the summer (CSU) 6 No Wrong Door Model 5 Figure 6 (see next page) STD prevention 5 summarizes the condition of the HIV prevention and control 5 General Fund under the revenue Hepatitis C virus prevention and control 5 and spending assumptions in the Student financial aid during the summer (UC) 4 June 2019 budget package, as Expansion of screening and intervention to drugs other than 3 estimated by DOF . alcohol Total $1,666 Total Reserves Are $19.2 Billion Under Spending IHSS = In-Home Supportive Services; DDS = Department of Developmental Services; and DOR = Department of Rehabilitation. Plan. As shown in Figure 6, the budget package assumed that 2019-20 will end with $19 .2 billion Figure 5 General Fund Revenue Estimates (Dollars in Millions) Revised Change From 2018‑19 Enacted 2017‑18 2018‑19 2019‑20 Amount Percent Personal income tax $93,776 $98,304 $102,413 $4,109 4% Sales and use tax 24,974 26,100 27,241 1,141 4 Corporation tax 12,313 13,774 13,133 -641 -5 Subtotals ($131,063) ($138,178) ($142,787) ($4,609) (3%) Insurance tax $2,569 $2,643 $2,868 $226 9% Other revenues 1,862 2,092 2,159 67 3 Transfer to BSA -4,094 -3,551 -2,158 1,393 -39 Other transfers and loans -284 -1,315 -1,851 -537 41 Totals, Revenues and Transfers $131,116 $138,046 $143,804 $5,758 4% BSA = Budget Stabilization Account. Note: Reflects administration estimates of budgetary actions through July 16, 2019. www.lao.ca.gov 3 analysis full gutter 2019-20 BUDGET on the state’s safety net programs like California Figure 6 Work Opportunity and Responsibility to Kids General Fund Condition Summary (CalWORKs); and (4) $377 million in the state’s (In Millions) school reserve . 2018‑19 2019‑20 The 2018‑19 Budget Act enacted a reserve level of $15 .9 billion . As such, the 2019-20 reserve Prior-year fund balance $11,419 $6,772 Revenues and transfers 138,046 143,804 level of $19 .2 billion represents an increase of Expenditures 142,693 147,781 about $3 .3 billion . The increase results from the Ending fund balance $6,772 $2,796 net effect of four factors: (1) required deposits of Encumbrances $1,385 $1,385 $2 .7 billion into the BSA under the constitutional SFEU balance $5,387 $1,411 rules of Proposition 2 (2014); (2) an optional Reserves deposit of $700 million into the safety net reserve; BSA balance $14,358 $16,516 (3) a first-ever deposit into the school reserve, SFEU balance 5,387 1,411 as described below; and (4) a reduction of Safety net reserve 900 900 $550 million, relative to the enacted 2018-19 level, School reserve — 377 in the state’s SFEU . Total $20,645 $19,204 State Makes First Ever Deposit Into School SFEU = Special Fund for Economic Uncertainties and BSA = Budget Stabilization Account. Reserve. In addition to changing the rules Note: Reflects administration estimates of budgetary actions through regarding deposits into the BSA, Proposition 2 also July 16, 2019. established a constitutional reserve account within Proposition 98 . The purpose of this reserve is to in total reserves . This consists of: (1) $16 .5 billion in set aside some Proposition 98 funding in relatively the Budget Stabilization Account (BSA), the state’s strong fiscal times to mitigate funding reductions constitutional reserve; (2) $1 .4 billion in the Special during economic downturns . The 2019-20 budget Fund for Economic Uncertainties (SFEU), which makes the first ever deposit into this account . The is available for any purpose including unexpected $377 million deposit is mainly the result of relatively costs related to disasters; (3) $900 million in the strong capital gains revenue and certain other safety net reserve, which is available for spending required conditions being met for the first time . EVOLUTION OF THE BUDGET Governor’s January Budget Proposal revenue growth over multiple years and lower-than-anticipated spending on some programs, On January 10, 2019, Governor Newsom most notably Medi-Cal . In January, the Governor presented his first state budget proposal to the proposed a total reserve level of $18 .5 billion . Legislature . Governor Allocated Most of the Surplus January Budget Proposal Reflected a Toward One-Time Debt and Spending Purposes. Significant Surplus. We estimate that—at the The Governor proposed allocating half of that time of the January budget—the Governor had surplus toward repaying state debts—including $20 .1 billion in discretionary resources available to pension liabilities and budgetary debts . The allocate in the 2019-20 budget process . (This surplus Governor also proposed spending an additional figure is lower than what we reflected in our report, $5 billion on one-time or temporary programmatic The 2019‑20 Budget: Overview of the Governor’s spending . These one-time proposals focused on Budget, due in part to an accounting error in the early education and child care, as well as housing Governor’s budget .) This remarkable surplus was the and homelessness . The January budget proposed result of a number of factors: higher-than-expected $2 .7 billion in new ongoing programmatic spending . 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET These increases focused on additional spending for with the program expansions, the Governor the universities, various human services programs— proposed to “sunset” three major categories of including CalWORKs and IHSS—and health . existing program expenditures . Expenditures made Governor Proposed Partial Tax Conformity temporary included provider payment increases in Package, Expanded EITC, and Did Not Extend Medi-Cal, a restoration of previously reduced IHSS MCO Tax Package. The Governor’s January service hours, and new supplemental rate increases budget proposal included a plan to make changes for developmental services providers . The Governor to the state tax code that would conform to continued not to propose reauthorizing the MCO some provisions of the federal tax code . Taken tax package in the May Revision . altogether, these changes would raise revenue . The June Budget Package administration also proposed expanding the state’s Earned Income Tax Credit (EITC), which would The Legislature passed the final budget package reduce revenue . The administration coupled these on June 13, 2019 . The Governor signed the proposals together—listing potential tax conformity 2019‑20 Budget Act and 15 other budget-related actions for the Legislature to consider and bills on June 27, 2019 . These bills—as well as expressing its intent that the state adopt enough other budget-related legislation passed later in of these provisions to cover the cost of the existing the legislative session—are listed in Figure 7 (see EITC program and the proposed expansion . next page) . The Governor vetoed $5 .3 million in Meanwhile, the Governor did not propose renewing General Fund appropriations in the 2019‑20 Budget the tax on managed care organizations (MCOs) . Act, including a $2 .8 million appropriation for the El Dorado County Courthouse and a $2 .5 million Governor’s May Revision augmentation for the Public Employment Relations May Revision Reflected Slightly Better Board . Budget Position. Despite the remarkable size Final Budget Reflected Partial Tax Conformity, of the estimated surplus available to allocate in EITC Expansion, and Intent for MCO Tax January, the May Revision reflected a slightly Package. In their respective packages, neither better budget picture with a surplus that was house adopted the Governor’s partial tax conformity larger by $800 million . This increase was the net plan but both houses planned a reauthorization result of a variety of factors, including somewhat of the MCO tax package . The final spending higher revenues (offset by higher constitutional plan includes most of the Governor’s partial tax requirements) and slightly lower baseline spending . conformity proposals and an expansion of the state Governor Allocated an Additional $1.3 Billion EITC, which is similar to the proposed version at in New Programmatic Spending in May Revision. the time of the May Revision . Finally, the spending In the May Revision, the Governor proposed plan (including actions taken later in the legislative reducing discretionary reserves and using new session) reauthorizes the MCO tax in 2019-20 . required Proposition 2 debt payments for a portion of Final Budget Includes Suspension Language, the Governor’s January discretionary debt proposal . Rather Than Sunset Provisions. Instead of the This reduction and shift in spending enabled the automatic sunset provisions proposed by the Governor to allocate a total of $1 .3 billion in new Governor in the May Revision, the 2019‑20 Budget programmatic spending in May . The Governor Act reflects a number of automatic suspensions, generally used this additional funding to expand which however would not occur if the General Fund one-time and ongoing programmatic commitments . condition is somewhat better than the administration Governor Proposed New Sunsets for Existing currently projects . (These suspensions were Programs in 2021-22. In putting together the May described in the “Budget Overview” section of Revision proposals, the administration identified this report .) The dollar value of these contingent a multiyear budget deficit under its own budget program suspensions is $1 .7 billion . estimates and proposals . Consequently, coupled www.lao.ca.gov 5 analysis full gutter 2019-20 BUDGET Figure 7 Budget‑Related Legislation Bill Number Chapter Subject Legislation Passed Before July 16, 2019 AB 74 23 The 2019‑20 Budget Act AB 101 159 Housing AB 110 80 Amendments to the 2019-20 Budget Act AB 111 81 Wildfire safety and insurance SB 75 51 Early education and K-12 education SB 76 52 Settle up and COLA (education finance) SB 77 53 Higher education SB 78 38 Health SB 79 26 Mental health SB 80 27 Human services SB 81 28 Developmental services SB 82 29 State government SB 83 24 Employment SB 84 30 Political Reform Act of 1974: Online filing system SB 85 31 Public resources SB 87 32 Transportation SB 90 33 Public Employees’ Retirement SB 92 34 Taxation SB 93 35 Amendments to the 2018-19 Budget Act SB 94 25 Public safety SB 95 36 Courts SB 96 54 Emergency telephone users surcharge SB 103 118 Employment SB 104 67 Health SB 105 37 Corrections facilities SB 106 55 Amendments to the 2019-20 Budget Act Legislation Passed After July 16, 2019 SB 109 363 Amendments to the 2019-20 Budget Act SB 112 364 State government SB 113 668 Housing AB 114 413 Education finance AB 115 348 Managed care organizations AB 118 859 Employment AB 121 414 Human services COLA = cost of living adjustment. Note: This figure includes budget and trailer bills identified in Section 39.00 of the 2019-20 Budget Act that were enacted into law. For this reason, it excludes AB 91 (Burke) which made changes to state income tax laws and SB 200 (Monning) that created the Safe and Affordable Drinking Water program. This list does include, however, SB 93, which amended the 2018-19 Budget Act. MAJOR FEATURES OF THE 2019‑20 SPENDING PLAN This section describes the major features of TAX AND OTHER REVENUE the 2019-20 spending plan . These are organized POLICY CHANGES into three areas: (1) tax and other revenue policy changes, (2) debt and liability payments, and Expands the EITC. The EITC is a PIT provision (3) programmatic spending changes . that is intended to reduce poverty among California’s poorest working families by increasing 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET their after-tax income . The 2019-20 budget go into effect on January 1, 2020 and expire on plan expands the state’s EITC in three ways: January 1, 2022 . The budget package requires our (1) increases the income eligibility limit to $30,000 office to submit reports reviewing the effectiveness for all filers, (2) provides a new additional credit of of these exemptions—based on criteria included in $1,000 for eligible filers with at least one dependent the statute—by January 1, 2021 . under age six, and (3) increases the credit amount Provides for Additional Future Affordable for filers with earnings toward the higher end of the Housing Tax Credits. The budget increases 2018 eligibility range . These changes are estimated by $500 million the state’s low-income housing to reduce General Fund revenue by about tax credit program which provides tax credits to $600 million per year . The budget also includes builders of rental housing affordable to low-income $10 million for grants to expand awareness of the households . Of this total, $200 million is set aside EITC . for developments that include affordable units for Makes Changes to Individual and Business both low- and lower-middle-income households . Tax Provisions (Partial Tax Conformity). The (Because these credits would not be claimed until budget package includes legislation that makes well after 2019-20, the General Fund condition 11 changes to state income tax laws that, in figures displayed in this report do not reflect the general, adopt—or “conform” to—recent changes costs of these expanded credits .) to similar federal tax laws . The most significant provisions affect businesses and certain kinds of business income . Figure 8 Some of the changes will reduce Individual and Business Tax Provision Changes state taxes for the affected (Partial Tax Conformity) filers while other changes will (In Millions) increase them . Figure 8 lists the Estimated Change in Revenue conformity provisions and their estimated revenue effects . In all, Tax Provision 2019‑20 2020‑21 these provisions are expected to Limits noncorporate business losses $1,300 $850 increase General Fund revenue by Eliminates like-kind exchanges of personal and 238 200 $1 .6 billion in the budget year . intangible property for single filers earning more than $250,000 ($500,000 for joint filers) Creates Sales Tax Exemptions Eliminates net operating loss carrybacks 200 190 for Menstrual Products and Limits deductions of Federal Deposit Insurance 65 55 Children’s Diapers. The budget Corporation premiums paid by banks package creates two new sales Eliminates differences between state and federal law 38 60 regarding the tax treatment of corporate mergers and tax exemptions: one for menstrual acquisitions (Section 338 election) products and another for children’s Eliminates the performance-based compensation 32 29 diapers . These exemptions apply exception from existing limits on business deductions to the full amount of the state and of executive pay local sales tax . The administration Repeals “technical termination” of partnerships 10 5 estimates that these exemptions Modifies rules regarding contributions to Achieving —a —a Better Life Experiences (ABLE) accounts will reduce state and local sales Allows individuals to convert an educational savings —a —a tax revenue by $76 million per year account (529 plan) to an ABLE account without ($35 million General Fund) . The incurring a penalty budget package includes annual Excludes the discharge of student loan debt in case of —a —a transfers from the General Fund to death or disability from taxable income Increases to $25 million the annual revenue threshold -280 -110 the Local Revenue Fund 2011 to for certain simplified tax accounting rules for small offset estimated revenue losses to businesses counties/cities resulting from the Net Change in Revenue $1,602 $1,278 new exemptions . These exemptions a Estimated revenue reduction of less than $1 million. www.lao.ca.gov 7 analysis full gutter 2019-20 BUDGET Creates a State Individual Health Insurance administered by CalPERS . The state and school Coverage Mandate. Beginning in 2020, districts each have full responsibility for their budget-related legislation creates an ongoing state respective CalPERS’ unfunded liabilities associated requirement—known as the “individual mandate”— with their own employees . In the case of CalSTRS, that most individuals maintain health insurance the state and school districts share responsibility for coverage or pay a penalty . The individual mandate the system’s total unfunded liability (about one-third is expected to result in additional individuals taking is the responsibility of the state and two-thirds of up health coverage . The mandate also generates the districts) . revenue, estimated at $317 million beginning in The spending plan allocates $5 .9 billion General 2020-21 and growing over time . Fund to pay down unfunded pension liabilities on behalf of both the state and school districts DEBT AND LIABILITY PAYMENTS (some of which is counted toward the state’s Proposition 2 debt payment requirements) . In A major feature of the spending plan is a particular, the spending plan dedicates: package of payments aimed at addressing the state’s outstanding debts and liabilities . Figure 9 • $3.6 Billion to Address State’s Unfunded summarizes this package . Liabilities. The spending plan uses $2 .5 billion in General Fund monies to pay Allocates $2.2 Billion in Constitutionally down the state’s CalPERS unfunded liability . Required Debt Payments. In addition to rules on The spending plan also devotes $1 .1 billion deposits into reserves, Proposition 2 requires the General Fund to reduce the state’s share state to make minimum annual payments to pay of the CalSTRS unfunded liability, as part down certain eligible debts and liabilities . These minimum requirements are based on a set of formulas . In general, Figure 9 requirements are higher when Debt and Liability Repayment Proposals in estimates of the upcoming year’s 2019‑20 Budget Package revenues—particularly those from (In Millions) capital gains—are higher . The total Proposition 2 debt payment Discretionary Proposition 2 Liability Type . . . Liability Owed by . . . Payments Debt Payments requirement was $2 .2 billion in the 2019-20 budget package . Retirement Liabilites In addition, the spending plan CalPERS State $2,500 — dedicates an additional $9 .1 billion CalSTRS State — $1,117 to repay state debts on a CalSTRS School districts 1,640 — CalPERS School districts 660 — discretionary basis (Figure 9) . OPEB State — 260 Makes $5.9 Billion in Additional UCRP Universities 25 — Unfunded Liability Payments. Subtotals ($4,825) ($1,377) State employee pension benefits Budgetary Debts are administered by the California Pension deferral State $707 — Public Employees’ Retirement Payroll deferral State 973 — System (CalPERS) . Teachers, Special fund loans State 1,283 — administrators, and other certified Weight fee loans State 886 — employees of school districts earn Settle up State 296 $391 CalPERS borrowing plan State — 390 pension benefits from the California Subtotals ($4,145) ($781) State Teachers’ Retirement System Totals $8,970 $2,158 (CalSTRS) . Other school district Note: This table excludes $850 million in pension-related budget relief for school districts, which employees, such as clerical we describe in the section on programmatic spending. staff, also earn pension benefits OPEB = other post-employment benefits and UCRP = University of California Retirement Plan. 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET of the state’s Proposition 2 debt payment fully repay the state’s outstanding “weight fee requirements . loans,” which are loans to the General Fund • $2.3 Billion to Address School Districts’ from a fund receiving transportation weight fee Unfunded Liabilities. The spending plan also revenues . Finally, the spending plan makes a devotes $1 .6 billion General Fund to reduce $687 million “settle up” payment related to meeting the school districts’ share of the CalSTRS Proposition 98 requirements in certain years prior unfunded liability and $660 million General to 2017-18 . (Upon making this payment, the state Fund to address the school districts’ CalPERS will have paid all outstanding settle-up .) With these unfunded liability . actions, the state has addressed nearly all of its remaining “Wall of Debt”—a term used by the prior Repays $4.9 Billion in Outstanding Budgetary administration to refer to the state’s outstanding Borrowing. Budgetary borrowing consists budgetary liabilities . The remaining items on the of debts the state has incurred in the past to Wall of Debt (as it was defined in the 2013‑14 address its budget shortfalls . The spending plan Governor’s Budget) include nearly $3 billion to undo uses $4 .9 billion ($781 million is counted toward all of the deferrals related to the Medi-Cal program Proposition 2) to fully repay most remaining and $1 .5 billion in outstanding mandate costs to budgetary borrowing, most of which falls into three local governments and school districts . categories: (1) deferrals, (2) loans, and (3) settle up . In particular, the spending plan uses $1 .7 billion PROGRAMMATIC SPENDING to undo two budgetary deferrals: one related to state employee payroll and one related to state The major General Fund and special pension payments . The spending plan also uses fund programmatic spending actions in the $2 .2 billion to repay all remaining outstanding 2019-20 budget package are shown in Figure 10 special fund loans, including $886 million to and briefly described below . We plan to discuss Figure 10 Major Programmatic Spending Actions in the 2019‑20 Budget Package Education Provides $2 billion (Proposition 98 General Fund) for LCFF. Provides $646 million (Proposition 98 General Fund) for various special education augmentations. Uses $850 million (General Fund) to cover a portion of districts’ CalPERS and CalSTRS pension payments in 2019-20 and 2020-21. Provides $1.3 billion (all funds) for early education programs ($469 million ongoing). Increases funding for CSU by $713 million General Fund ($392 million ongoing). Increases funding for UC by $416 million General Fund ($246 million ongoing). Health and Human Services Increases monthly CalWORKs grants ($332 million General Fund in 2019-20, $442 million General Fund ongoing). Increases most DDS service provider rates ($126 million General Fund in 2019-20, $253 million General Fund ongoing).a Expands health care coverage and increases affordability ($550 million General Fund in 2019-20). Housing and Homelessness Provides $1 billion to fund programs that facilitate the construction of affordable housing. Includes $650 million in one-time grants for a variety of programs that address homelessness. Provides $250 million in planning grants to local governments and other entities. Other Allocates $2.9 billion from the GGRF for various programs. Provides roughly $700 million for various disaster-related purposes. Establishes the Safe and Affordable Drinking Water Program ($100 million GGRF and $30 million General Fund). a Subject to suspension language. LCFF = Local Control Funding Formula; DDS = Department of Developmenal Services; and GGRF = Greenhouse Gas Reduction Fund. www.lao.ca.gov 9 analysis full gutter 2019-20 BUDGET these and other actions in more detail in a series of Early Education forthcoming publications this fall . Makes Significant Augmentation for Early K‑14 Education Education Programs, With Notable Increase in Non-CalWORKs Slots. The budget package Provides a Few Notable Ongoing provides an additional $963 million in state and Proposition 98 Augmentations. As described federal funds for early education programs, earlier, under the spending plan, Proposition 98 increasing spending 21 percent over the revised funding for 2019-20 increases $2 .9 billion 2018-19 level . About half of this additional (3 .7 percent) from the revised 2018-19 level . The spending is for ongoing purposes . Of the ongoing spending plan devotes the largest share of this spending increases, $301 million is for more increase—$2 billion—to school districts to cover non-CalWORKs slots . (All major child care and changes in student attendance and provide a preschool programs received an increase in slots, 3 .26 percent cost-of-living adjustment (COLA) including the State Preschool program, which for the Local Control Funding Formula (general received an expansion similar to the Governor’s purpose per-student funding) . The budget also proposal .) Within the $301 million is $50 million provides two augmentations related to special in one-time funding for additional General Child education: (1) $493 million for school districts Care slots, with the intent to replace this funding in based on the number of three- and four-year old the future with growth from cannabis tax revenue children identified with disabilities affecting their (Proposition 64 [2016]) . education and (2) $153 million for special education Increases CalWORKs Child Care Caseload agencies with average or below average per-pupil and Cost. The budget package provides funding rates . For community colleges, the $112 million ongoing for expected cost increases budget provides $255 million to cover enrollment in CalWORKs child care . The most notable of growth and provide a 3 .26 percent COLA for these cost increases are due to certain changes in apportionments (general purpose per-student the rules applying to CalWORKs Stage 1 families . funding) . Specifically, the budget package grants all Stage Pays a Portion of Districts’ Pension Costs 1 families full-time child care and verifies their for the Next Two Years. The spending plan also eligibility for care only once each year (rather than provides additional monies to school districts continually throughout the year) . The rest of the outside of the Proposition 98 funding requirement CalWORKs child care cost increase is due primarily by paying a portion of districts’ pension costs to the ramping up effect of changes the state made for the next two years . School districts’ pension to Stages 2 and 3 eligibility rules a few years ago . contribution rates for both CalPERS and CalSTRS Funds Various One-Time Early Education have been rising and are set to continue increasing Initiatives. The budget provides $493 million for for at least the next few years . For CalSTRS, one-time child care and preschool initiatives . The the budget provides $606 million for the state to budget package also provides $263 million to help pay a portion of districts’ costs (reducing district child care providers construct or renovate facilities contribution rates by about 1 percent of payroll and $195 million to improve and expand child care in 2019-20 and 2020-21) . Similarly, the budget and preschool workforce training . Both the facility provides $244 million for the state to cover a and workforce initiatives spread available funds portion of districts’ CalPERS costs (reducing district over the next four years . The remaining one-time rates by about 1 percent of payroll in 2019-20 spending is for various initiatives, including and 2020-21) . Although district pension rates will $20 million for data improvement efforts . (The continue to rise, the increases will be slower than budget also provides $300 million for additional previously projected . (As described earlier, the state facility grants to help convert part-day kindergarten also provides school districts with long-term relief to full-day programs .) by paying down unfunded CalSTRS and CalPERS pension liabilities .) 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Higher Education education programs and a pilot program to test new K-12 special education diagnostic services . Increases California State University (CSU) Funding Substantially. The budget increases Health and Human Services ongoing General Fund support for CSU by Reauthorizes the MCO Tax. From 2016-17 to $392 million (9 .9 percent) and provides $321 million 2018-19, the state imposed a tax on MCOs that for one-time initiatives . The budget plan assumes generated a net General Fund benefit (excluding no increase in student tuition charges, with core the effects of constitutional spending requirements) ongoing funding for CSU (General Fund and tuition of over $1 billion annually . The spending plan revenue combined) increasing 6 .2 percent . The reauthorizes the MCO tax—for three and one-half largest ongoing augmentation is for faculty and years—under a broadly similar structure as the staff compensation . The budget also funds a previous tax . As with the previous MCO tax, the 2 .6 percent enrollment growth (10,000 additional reauthorized tax is a tiered, per-member, per month full-time equivalent resident undergraduates tax on the Medi-Cal and commercial enrollment over estimated 2018-19 enrollment) . The of MCOs . Unlike the previous MCO tax package, largest one-time augmentation is for addressing the reauthorized MCO tax is not accompanied deferred maintenance at CSU campuses . The by reductions to other taxes paid by the health remaining one-time spending involves a dozen industry . Because the MCO tax is imposed on other initiatives, including additional student food Medicaid services, it must be approved by the and housing assistance as well as funding to federal government . Since federal approval is not study the need for and feasibility of building new certain, revenues from the reauthorized MCO tax CSU campuses in certain regions of the state remain unallocated in the spending plan . (specifically Chula Vista, Concord, Palm Desert, San Joaquin County, and San Mateo County) . Increases Monthly CalWORKs Grants. The spending plan includes $332 million General Fund Also Increases University of California (UC) in 2019-20 to increase the CalWORKs maximum Funding Substantially. The budget package grant levels, beginning October 1, 2019 . (This increases ongoing General Fund support for amount corresponds to three-quarters of the UC by $245 million (7 percent) and provides full-year cost of the increase .) This will increase $218 million for one-time initiatives . As with grants to between 47 percent and 50 percent of CSU, the budget plan assumes no increase the federal poverty level (FPL) for all CalWORKs in student tuition charges, with core ongoing families . In addition to the grant increase, the funding for UC increasing 4 percent . Nearly half spending plan includes $6 .8 million in 2019-20 to of UC’s ongoing General Fund augmentation raise the CalWORKs earned income disregard— is for covering operational cost increases, the amount a family may earn before their including negotiated salary increases for CalWORKs grant is reduced by 50 cents for each represented employees and health care cost additional $1 of income—from $225 to $500 . increases for active employees and retirees . The (Costs associated with this change are expected remainder of the ongoing augmentation is for to increase to nearly $100 million General Fund 2 .6 percent undergraduate enrollment growth annually in future years .) This change effectively (4,860 additional full-time equivalent students increases grants for families who earn more than in 2020-21 over the 2018-19 level), grants to $225 per month . physician residency programs, and expansion of various student services (including student food Increases DDS Service Provider Rates. The and housing assistance) . About two-thirds of the spending plan provides $126 million from the one-time augmentation is for addressing deferred General Fund ($208 million total funds) in 2019-20 maintenance at UC campuses . The remaining for rate increases for most DDS service providers . one-time funds are for numerous other initiatives, Specifically, these increases are provided to those including start-up funding for new extended identified as needing a rate increase in a recently completed study of the rate-setting system, www.lao.ca.gov 11 analysis full gutter 2019-20 BUDGET conducted per Chapter 3 of 2016 (AB 2X 1, builders of housing targeted at low- and Thurmond) . Rate increases are effective January 1, middle-income households . 2020 (and contingent on federal approval), thus, • Infrastructure Funding. The plan also 2019-20 costs represent half-year costs . The allocates $500 million to the Infill Infrastructure annualized cost is $253 million General Fund Grant program administered by the California ($416 million total funds) . Most rates will increase Department of Housing and Community by 8 .2 percent, while some rates will increase by a Development (HCD) . This program helps lower percentage . The rate increases are subject to to fund infrastructure needed to support the suspension language discussed earlier . higher-density housing built on infill sites— Expands Health Care Coverage and Increases that is, sites within already developed Affordability. The 2019-20 spending plan includes communities . several actions related to expanding health care Provides Funding to Address Homelessness. coverage and making it more affordable . First, The budget includes $650 million for one-time the spending plan provides new state subsidies grants to local governments to fund a variety of to reduce the cost of coverage purchased programs and services that address homelessness . through Covered California for households with This funding is divided among the state’s 13 most incomes up to 600 percent of the FPL, at a cost populous cities, counties, and Continuums of of $429 million (General Fund) in 2019-20 . These Care—local entities that administer housing subsidies will be available beginning in January assistance programs within a particular area, often 2020 and continue for three years—through the covering a county or group of counties . end of calendar year 2022—after which time they Provides Funding to Support Local Planning will sunset . (The spending plan offsets the costs for Housing. The budget provides $250 million for of these new state subsidies using increased planning grants to local governments and regional revenues from the new state individual mandate, as planning entities . These grants are to be used for described in the section on tax and other revenue planning for the sixth cycle regional housing need policy changes .) In addition, the spending plan assessment process and other planning activities includes several actions to expand enrollment that facilitate the development of housing . Funding in comprehensive, no-cost health coverage is made available through HCD by application . through Medi-Cal, the state’s largest health coverage program for low-income residents . Most Creates a New Process for Housing Element significantly, the spending plan includes $74 million Compliance. The budget package creates a new from the General Fund ($98 million total funds) judicial process by which cities and counties can in 2019-20 to expand comprehensive Medi-Cal be fined for failing to comply with housing element coverage to all income-eligible adults ages law . Moreover, the courts could appoint an agent of 19 through 25 regardless of immigration status . the court to bring the jurisdiction’s housing element into compliance . (As of this writing, this bill was still Housing and Homelessness awaiting signature from the Governor .) Provides Funding for Affordable Housing. Creates New Incentives for Adopting In addition to expanding the affordable housing “Pro-Housing” Policies. The budget package tax credit described earlier, the budget funds two creates new incentives for cities and counties to major programs that facilitate the construction of adopt pro-housing policies . Cities and counties that affordable housing: adopt these policies would receive additional points in the scoring of their applications for certain state • Mixed-Income Housing Loans. The spending grant programs . The budget package tasks HCD plan allocates $500 million to the California with creating criteria to identify pro-housing policies Housing Finance Agency’s Mixed-Income that reflect differences between rural, urban, and Loan Program, which provides loans to suburban jurisdictions . 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Criminal Justice those in disadvantaged communities—with grants, loans, contracts, or services to help them provide Implements an Integrated Substance Use safe and affordable drinking water . Allowable uses Disorder Treatment Program. The budget of the funds include providing replacement water provides $71 million General Fund for the California on a short-term basis, as well as the development, Department of Corrections and Rehabilitation implementation, maintenance, and operation of (CDCR) to implement an integrated substance permanent solutions such as water treatment use disorder treatment program within state systems and water system consolidations . prisons . Funding will be used to support various Beginning in 2020-21, this program will be activities, including (1) expanding the provision supported by 5 percent of the annual revenue into of medication-assisted treatment for opioid and the GGRF up to $130 million . Starting in 2023-24, alcohol use disorder statewide, (2) additional if GGRF revenues are not sufficient to generate resources for reentry planning, and (3) an overhaul $130 million for the program, the General Fund will of existing rehabilitation programs (such as be used to make up the difference . requiring contractors to use evidence-based Allocates Funding for Cap-and-Trade curricula) . Expenditure Plan. The spending plan allocates Provides the “Prison to Community Pipeline” a total of $2 .9 billion from the GGRF for various Package. The budget provides $50 million in programs . This plan includes (1) $1 .3 billion in ongoing General Fund resources to support various continuous appropriations, (2) about $221 million rehabilitation and reentry programs . This includes in other existing spending commitments, and $37 million to the Board of State and Community (3) $1 .4 billion in discretionary spending . The Corrections for grants to community-based major categories of discretionary spending organizations to provide rental assistance and include promoting low-carbon transportation other support services for individuals who were ($485 million), reducing air toxic and criteria previously incarcerated in state prison . (In 2019-20, pollutants ($275 million), and forestry-related $4 .1 million is set aside on a one-time basis for activities ($221 million) . Most of the discretionary grants to prepare inmates for parole hearings funding is allocated to programs that received using therapeutic counseling and to provide GGRF in prior years . However, some programs reentry services for individuals exonerated in would receive GGRF for the first time, including California .) The remaining $13 million is for CDCR $100 million for safe and affordable drinking water to create therapeutic support groups within state (discussed above), $35 million for workforce juvenile facilities ($8 million) and to provide grants development activities intended to transition the to nonprofit organizations to deliver in-prison state’s workforce to a low-carbon economy, and rehabilitation programs ($5 million) . $10 million to promote local fire prevention and Natural Resources and response activities in the wildland-urban interface . Climate Change Other Establishes the Safe and Affordable Drinking Provides Funding for Disaster Preparedness, Water (SADW) Program. The budget provides Response, and Recovery. The budget package $130 million—$100 million from the Greenhouse provides roughly $700 million in state funding— Gas Reduction Fund (GGRF) and $30 million from mostly from the General Fund and GGRF—for the General Fund—to establish a new SADW various disaster-related purposes . Most of this program, which will provide local assistance to funding supports (1) fire and other emergency communities and low-income households that are response improvements, including communications served by water systems that do not provide safe systems ($265 million); (2) implementation of a and affordable drinking water . The program will be recent package of legislation related to wildfires administered by the State Water Resources Control ($226 million); (3) assistance to local communities Board and provide water systems—particularly recovering from recent disasters ($80 million); www.lao.ca.gov 13 analysis full gutter 2019-20 BUDGET and (4) efforts to mitigate the effects of power Implements Improvements to Department of shutdowns conducted by investor-owned utilities Motor Vehicles (DMV) REAL ID Workload and ($75 million) . Operations. The budget includes $260 million Extends Paid Family Leave Program From Six from the Motor Vehicle Account for DMV to to Eight Weeks. The spending plan lengthens the process driver licenses and ID cards that comply duration of the state’s Paid Family Leave program with federal standards—commonly referred from six weeks to eight weeks . (Leave benefits to as “REAL IDs”—and to implement various are funded by a 1 percent payroll tax, paid by operational improvements . (This amount includes employees, and can be used to bond with a new $18 million in savings related to passing on child or care for a seriously ill family member .) In credit card fees to customers .) Specifically, addition to lengthening the duration of leave, the the budget includes: (1) $196 million for REAL spending plan reduces the required reserve level ID workload, (2) $29 .5 million for operational in the Disability Insurance Fund—which disburses improvements (such as purchasing self-service paid family leave benefits—from 45 percent to terminals), (3) $17 .7 million for customer service 30 percent of annual disbursements . Lowering improvements (such as implementing a live chat the reserve requirement will have the effect of customer service system), and (4) $17 million for temporarily reducing the contributions needed to technology improvements . Additionally, the budget fund the state’s paid family leave program . On net, authorizes the Director of Finance to augment relative to making no changes, the administration the level of funding provided to DMV—following a estimates that lengthening the duration of leave by 30-day notification to the Joint Legislative Budget two weeks will result in a 0 .1 percent increase in Committee—in order to further reduce customer the payroll tax rate beginning in 2022 . wait times at DMV field offices or to prevent these wait times from increasing . 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET www.lao.ca.gov 15 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. 16 LEGISLATIVE ANALYST’S OFFICE