The 2020-21 Budget: Overview of the Governor's Budget

The 2020-21 Budget: Overview of the Governor’s Budget How the Governor Allocates the Surplus Among His Spending Proposals Criminal Justice Disasters and Emergencies Human Education Housing and Services Homelessness Natural Resources and Environment Other Health GABRIEL PETEK LEGISLATIVE ANALYST JANUARY 2020 analysis full gutter 2020-21 BUDGET LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Executive Summary On January 10, 2020, Governor Newsom presented his proposed state budget to the Legislature. Under the administration’s budget estimates and proposals, General Fund revenues would total $151.6 billion in 2020-21 and spending would total $153 billion. Overall school and community college spending would total $84 billion in 2020-21 (of which nearly 70 percent is funded by the General Fund). Total Reserves Would Reach $20.5 Billion. Under the Governor’s proposed budget, the state would end 2020-21 with $20.5 billion in total reserves. (This represents an increase of $1.7 billion from the 2019-20 enacted reserve level as required by the State Constitution.) Reserves are the most important tool the state has to insulate programs from the adverse effects of budget shortfalls. Over recent years, the Legislature prudently dedicated a sizeable portion of available surpluses to building more discretionary reserves. The Governor’s budget does not continue this practice. As the Legislature begins to craft the 2020-21 budget, we urge first considering the overall budget structure, including a target level of reserves. In particular, we encourage the Legislature to determine whether it is satisfied with the level of reserves proposed by the Governor or whether it would like to aim for a higher level. Governor Proposes Allocating a Surplus of $6 Billion. We estimate the Governor had a $6 billion surplus to allocate in the 2020-21 budget process. Of this total, the Governor allocates $2.6 billion to one-time spending, $1.6 billion to maintain the state’s discretionary reserve, and $1.6 billion to ongoing spending (other nonspending changes account for the remaining $300 million). The figure shows how the one-time and ongoing spending proposals—totaling $4.1 billion and roughly 140 proposals—are distributed by program area. While these proposals include some larger amounts, 95 percent How the Governor Allocates $4.1 Billion in of them—accounting New Spending Across Various Program Areas for half of the proposed (In Billions) spending—cost less than $100 million in 2020-21. Other Put simply, the Governor’s One Time 2020-21 budget includes a large Education Ongoing 2020-21 array of proposals, across many priorities, with Criminal Justice relatively small dollar amounts. We recommend Health the Legislature consider Natural Resources, whether to take this Environment, and Emergencies approach or to dedicate Human Services, Housing, larger amounts to a and Homelessness smaller number of 0.2 0.4 0.6 0.8 1.0 $1.2 priorities. www.lao.ca.gov 1 analysis full gutter 2020-21 BUDGET Budget Condition Is Positive, but Subject to Heightened Risk. California continues to enjoy a healthy fiscal situation. Despite its positive near-term picture, the budget’s multiyear outlook is subject to considerable uncertainty. In particular, the state’s fiscal situation in the coming years is sensitive to federal decisions around healthcare financing. Moreover, while a broader economic slowdown is not necessarily imminent, there are several signals that the economy could be cooling. Either of these factors could weaken the budget’s condition by billions of dollars. Consider Larger Operating Surplus. In addition to reserves, another key tool to insulate the budget from shortfalls is the state’s operating surplus—when revenues exceed expenditures on an ongoing basis. Under the administration’s projections, however, the state would have small operating surpluses in the out years. Given the Governor does not allocate the surplus to increasing discretionary reserves, the maturity of this economic expansion, and federal policy uncertainty, eliminating the operating surplus is risky. As the Legislature begins shaping the budget for the upcoming year, we encourage aiming to preserve this tool by maintaining a positive operating balance in its own multiyear budget plans. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET On January 10, 2020 Governor Newsom The objective of this report is to summarize presented his proposed state budget to the the Governor’s budget structure and major Legislature. In this report, we provide a brief proposals for the Legislature, including any themes summary of the proposed budget based on that emerged as we conducted our preliminary our initial review. In the coming weeks, we will review. We also provide our initial assessment analyze the plan in more detail and release several of the structure of the budget and raise issues additional budget reports. for legislative consideration on the major budget proposals. BUDGET CONDITION Budget Condition for 2020-21 community colleges is determined mainly by a set of constitutional formulas outlined This section summarizes the overall condition in Proposition 98 (1988). Reflecting the of the state budget in the near term under the administration’s revised revenue estimates, Governor’s proposals. Figure 1 shows the General the Governor’s budget proposal provides Fund condition assuming the Legislature adopted an additional $575 million General Fund to those proposals using the administration’s schools and community colleges (relative estimates and assumptions. Over the three year to June 2019) for 2018-19 and 2019-20. period, revenues (including transfers) grow from Between 2019-20 and 2020-21, General a revised level of $139.4 billion in 2018-19 to Fund spending on schools and community $151.6 billion in 2020-21. Spending also grows colleges increases by $1.2 billion, from $141.9 billion in 2018-19 to $153 billion in consistent with growing revenues. The box 2020-21. (Because recent budgets have benefited on page 4 provides more information on from upward revisions to prior year revenues, Proposition 98 and the overall changes in spending has exceeded revenues within fiscal years school and community college spending. as the state has allocated those surpluses.) Figure 1 Constitutional General Fund Requirements. California has General Fund Condition Under two key constitutional formulas Administration’s Estimates which require the state to allocate (In Millions) minimum amounts each year 2018-19 2019-20 2020-21 to (1) schools and community Revised Revised Proposed colleges and (2) certain eligible Prior-year fund balance $10,979 $8,497 $5,234 debts and reserves. These Revenues and transfers 139,379 146,486 151,635 formulas generally require more Expenditures 141,861 149,749 153,083 spending as General Fund tax Ending fund balance $8,497 $5,234 $3,785 revenues increase. Under the Encumbrances 2,145 2,145 2,145 Governor’s estimates, the state is SFEU balance 6,352 3,089 1,640 required to spend: Reserves BSA $13,968 $16,018 $17,977 • $1.7 Billion General SFEU 6,352 3,089 1,640 Fund Increase for Safety net 900 900 900 Schools and Community Total Reserves $21,220 $20,007 $20,517 Colleges. General Fund SFEU = Special Fund for Economic Uncertainties (discretionary reserve) and spending on schools and BSA = Budget Stabilization Account (rainy day fund). www.lao.ca.gov 3 analysis full gutter 2020-21 BUDGET • $2 Billion in Additional Payments on Debts would end 2020-21 with $20.5 billion in total and Liabilities. In addition, under the rules reserves. This represents an increase of $1.7 billion of Proposition 2 (2014), the Governor’s from the 2019-20 enacted reserve level of budget includes $2 billion General Fund in $18.8 billion. Total reserves has three components: constitutionally required debt payments. • $18 Billion in the BSA. Under the Governor’s The Governor allocates this amount among estimates and the constitutional rules of three uses: (1) continuing to implement the Proposition 2, the state is required to make a state’s plan to prefund retiree health benefits, nearly $2 billion deposit into its constitutional (2) repaying a 2017-18 loan from the state’s reserve, the BSA. The reserve would reach a cash resources that supported a supplemental balance of $18 billion at the end of 2020-21. pension payment in that year, and (3) a (Under the complicated constitutional rules supplemental pension payment to the state’s under Proposition 2, the state must also draw teacher retirement system. Although the down the balance of the BSA for 2018-19 overall amount of these payments are required and 2019-20 due to lower estimated capital under the state’s constitutional rules, the gains revenues. The net effect is a $1.5 billion Legislature has the discretion to change the increase in BSA relative to the enacted allocation of these funds to different eligible 2019-20 amount.) purposes. • $1.6 Billion in the Special Fund for • $2 Billion in Reserve Deposit. As discussed Economic Uncertainties (SFEU). The state’s in more detail below, the rules of Proposition 2 other general purpose reserve account is the also require a $2 billion deposit into the SFEU. Unlike the BSA, which has restrictions Budget Stabilization Account (BSA)—the on its use of funds, the Legislature has state’s primary rainy day fund—in 2020-21. discretion to use the funds in the SFEU at Total Reserves Reach $20.5 Billion. Figure 1 any time and can set the balance of this fund displays revised 2018-19 and 2019-20 budget to any amount above zero. The Governor estimates as well as proposed estimates for proposes a 2020-21 year-end balance in the 2020-21. At the bottom of the figure, we display the SFEU of $1.6 billion, which is $230 million total reserves planned for the end of 2020-21 under more than the enacted level of the fund for the the administration’s estimates and assumptions. end of 2019-20. Under the Governor’s proposed budget, the state Estimates of the Proposition 98 Minimum Guarantee Under the Governor’s Budget The minimum guarantee is the constitutionally required funding level for schools and community colleges. The state meets the guarantee through a combination of state General Fund and local property tax revenue. As part of each budget cycle, the state revises its estimate of the minimum guarantee for the prior, current, and upcoming fiscal years. Under the Governor’s budget, the minimum guarantee is up $302 million in 2018-19 and $517 million in 2019-20 compared to the estimates from the 2019-20 budget package. For 2020-21, the administration estimates the minimum guarantee is $84 billion, an increase of $2.5 billion (3 percent) over the revised 2019-20 level. Higher property tax revenue and higher General Fund revenue each account for about half of the increase in the 2020-21 guarantee. The constitution also requires the state to make deposits into a Proposition 98 reserve when a series of conditions are met. Under the administration’s estimates, the balance of the Proposition 98 reserve would reach $487 million at the end of 2020-21. 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET • $900 Million in Safety Net Reserve. The surplus is very close to the one our office estimated 2018-19 budget package created the Safety would be available in our November Fiscal Outlook. Net Reserve to save money specifically for How the Governor Allocates the Available California Work Opportunity and Responsibility Surplus. Figure 2 (see next page) shows how the to Kids (CalWORKs) and Medi-Cal. (During Governor proposes to allocate the $6 billion in a recession, these programs typically have discretionary resources. The Governor allocates: increased expenditures as caseload increases.) • $2.6 Billion to One-Time or Temporary The Governor proposes no additional Programmatic Spending. The Governor deposits into the reserve so it remains at its proposes spending nearly half of discretionary 2019 enacted level of $900 million under this resources, or $2.6 billion, on a one-time or budget proposal. temporary basis for a variety of programmatic Governor Has a $6 Billion Surplus to Allocate. expansions. Across a variety of program We estimate the Governor had a $6 billion surplus areas, one-time spending includes nearly to allocate in the 2020-21 budget process. (The $500 million for infrastructure-related box below gives more information on how we construction and maintenance. use the term “surplus” in the Overview of the • $1.6 Billion to Maintain the State’s Governor’s Budget.) This estimate does not assume Discretionary Reserve Balance. As the state’s reauthorized managed care organization mentioned earlier, the Governor proposes a (MCO) tax is approved by the federal government year-end balance in the SFEU of $1.6 billion. in 2020-21 (although the administration’s multiyear This represents a $230 million increase relative estimates do assume it is ultimately approved to to the enacted level of the fund for the end of take effect in 2021-22, as we discuss later). After 2019-20. While the Legislature could set this adjusting for a variety of accounting changes, this fund balance to any amount greater than zero, since 2015-16 the state has enacted balances What Do We Mean by “Surplus” in This Report? The Governor’s January budget is the starting point for legislative deliberation. Ultimately, the Legislature will make its own determination about how to allocate funds available in the upcoming budget process. One of the goals of this report is to estimate for the Legislature how much capacity the budget has to make those allocations under the Governor’s estimates of revenues. Assuming the proposed budget is balanced, we answer this question by assessing which of the Governor’s proposals are “discretionary.” We define discretionary spending to mean spending not authorized under current law. We also include the full amount of the proposed balance in the Special Fund for Economic Uncertainties (SFEU) as discretionary. The sum of these amounts is the surplus allocated in the Governor’s budget. Importantly, these calculations are subject to some caveats. First, there are a number of proposals that could be viewed as more or less discretionary. For example, we categorize the full amount the administration sets aside for state employee compensation increases as discretionary. We take this approach to reflect the Legislature’s authority to approve memorandums of understanding with state bargaining units and allocate the necessary funds. While the Legislature typically provides funds for these purposes, we do not assume the Legislature will make the same choices as the administration. Second, although the Legislature does have the authority to set the level of the SFEU at any amount above zero, setting this amount too low is inadvisable. Consequently, the total surplus—$6 billion—is larger than what ultimately will be available for new programs or expanded programs. www.lao.ca.gov 5 analysis full gutter 2020-21 BUDGET in the SFEU of around Figure 2 $1.5 billion. How the Governor Allocates a $6 Billion • $1.6 Billion in Ongoing Surplus in the 2020-21 Proposed Budget Spending. The Governor’s spending proposals also include $1.6 billion in ongoing spending, representing roughly a quarter of resources available. Because some of Ongoing Spending these ongoing proposals are phased in over a multiyear period, we estimate the One-Time Spending cost at full implementation of these proposals is $1.9 billion annually. SFEU Balance • $300 Million in Other. In addition, the Governor allocates $50 million to new tax reductions for small Othera businesses and $235 million to accelerate a CalPERS supplemental pension a Includes a revenue- and debt-related proposal. payment. SFEU = Special Fund for Economic Uncertainties. Governor Allocates Most One-Time Spending to Figure 3 Homelessness, While Most Ongoing Spending Is for How the Governor Allocates $4.1 Billion in New Spending Across Various Program Areas Health and Education. Figure 3 (In Billions) shows how the $4.1 billion in one-time or temporary and Other ongoing spending proposals are One Time 2020-21 distributed across program areas. Education Ongoing 2020-21 The largest one-time spending proposals include $750 million Criminal Justice to reduce homelessness (in the California Access to Housing and Health Services Fund) and $250 million Natural Resources, to establish a new loan program Environment, and Emergencies for private environmental projects Human Services, Housing, (the Climate Catalyst Revolving and Homelessness Loan Fund). Ongoing amounts are focused on the universities, 0.2 0.4 0.6 0.8 1.0 $1.2 which receive $417 million in discretionary increases, and health programs. In health, the largest single ongoing spending 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET proposals include nearly $200 million in 2020-21 administration’s estimates suggest the proposed for the Medi-Cal Healthier California for All proposal budget is in structural balance with operating (there also are one-time or temporary components surpluses near zero in most years of the period. of this proposal). Other ongoing spending includes Governor Proposes Delaying Suspensions to employee compensation increases. 2023-24. The 2019-20 budget package made a number of ongoing program augmentations subject Budget Condition Over the Multiyear to suspension on December 31, 2021 if the budget In this section we describe the administration’s did not collect sufficient revenues to fund them. Our estimates of the condition of the General Fund office estimated the full-year savings—in 2022-23— budget over the longer term under the Governor’s of suspending these expenditures was $1.7 billion. 2020-21 budget proposal. The augmentations subject to suspensions were BSA Reaches Maximum Threshold in 2021-22. in a variety of state programs, including In-Home Under Proposition 2, the state must make deposits Supportive Services, developmental services, and into the BSA until its balance reaches a threshold Medi-Cal. The administration proposes delaying of 10 percent of General Fund taxes. Under the the planned suspensions by eighteen months—to administration’s estimates, the state reaches this July 1, 2023. (The Governor’s budget makes a threshold in 2021-22. Each year that General Fund tax revenues Figure 4 grow, this 10 percent threshold also grows. As such, in each of Operating Surpluses Are Close to Zero Under Governor's Budget Proposals and Estimates these years, the state is required to make deposits into the BSA (In Billions) to bring the fund to the revised estimate of 10 percent of General $2.5 Fund taxes. These amounts are shown in light blue in Figure 4. BSA Deposit 2.0 Small Operating Surpluses Operating Surplus Under Governor’s Plan and Estimates. In the previous section 1.5 we used the term surplus to describe the amount available to 1.0 allocate in the budget year. When examining a budget’s multiyear condition, the “operating surplus” 0.5 is an important marker of budget health. An operating surplus is the amount of additional resources 2020-21a 2021-22 2022-23 2023-24 available annually—or the yearly amount by which revenue estimates exceed expenditures. Key Assumptions Figure 4 shows the operating Economy continues to grow. surpluses under the administration MCO tax is approved by federal government starting in 2021-22. estimates in the Governor’s Automatic suspensions take effect in 2023-24. proposed budget. (Importantly this figure shows the administration’s a Budget has an operating deficit in this year as the Governor proposes spending unanticipated own assessment of its proposals, prior year revenues. not our independent estimates.) BSA = Budget Stabilization Account and MCO = Managed Care Organization. As the figure shows, the www.lao.ca.gov 7 analysis full gutter 2020-21 BUDGET couple of newly proposed augmentations subject Revenue Estimates Nonetheless Have to the same suspension language—together Considerable Downside Risk. While the representing $71 million in costs in 2020-21—but administration’s revenue estimates generally are makes no other changes to the programs subject reasonable, multiple factors create a risk that to the suspensions.) revenues will come in lower than anticipated. Two Operating Deficit Emerges Assuming key factors are: Suspensions Do Not Take Effect. As shown • Slowing Economic Growth. There are several in Figure 4, the operating surplus under the signals that the economy may be cooling. Governor’s budget is roughly $400 million in For example, housing markets have been 2023-24. This assumes, however, that the stagnant, job growth is down, and trade suspensions take effect, reducing General Fund activity is slowing. This does not necessarily spending by $2.2 billion in that year. Absent the mean a broader economic slowdown is suspensions, the budget would face an operating imminent. Nonetheless, there likely is greater deficit in 2023-24 of nearly $2 billion risk in the economic outlook for 2020-21 than Large Operating Deficits Could Emerge in previous budget cycles. Depending on Recently Proposed Federal • Uncertain Behavioral Assumptions. Regulations. In late 2019, the federal government Recently, corporation tax collections have released draft regulations with significant grown faster than anticipated while personal implications for state General Fund costs related to income tax collections have grown somewhat the Medi-Cal program. If adopted in their current slower. The administration assumes that form, these regulations would limit the state’s this pattern will continue. This is because ability to continue certain Medi-Cal financing they attribute the pattern to partnerships, mechanisms, such as the MCO tax. The Governor’s which are taxed under the personal income budget assumes that the federal government tax, changing to corporations in response to ultimately approves the state’s MCO tax, resulting 2017 federal tax changes. This assumption in a General Fund benefit beginning in 2021-22. If is plausible, but there currently is limited this does not occur, however, the state would lose evidence to support it. There are other between $1.2 billion and $2 billion annually over the reasonable explanations for this pattern multiyear period. The draft regulations also likely which would suggest that the recent uptick in would affect a number of other Medi-Cal financing corporation tax receipts will not necessarily mechanisms, potentially resulting in additional state persist. Should such an alternative explanation General Fund costs—and large operating deficits— prove to be true, corporation tax collections in the billions of dollars annually. The Governor’s could be weaker than expected in the budget budget, however, does not assume any fiscal year. impact from these draft regulations overall. Budget Condition LAO COMMENTS Small Operating Surpluses. The administration projects the budget would be roughly balanced— Economy and Revenues with operating surpluses near zero—under its Administration’s Revenues Estimates Are proposed budget. While our office’s most recent Reasonable. The administration’s revenue revenue estimates are somewhat higher in the out assumptions are very close to our November 2019 years than the administration’s current estimates, Fiscal Outlook revenue estimates in the near term. under both sets of revenue estimates the state Across 2018-19 to 2020-21, the administration’s would face operating deficits under two conditions. estimates of revenue from the state’s three largest First, if new draft federal policy changes take taxes are $34 million (less than 0.01 percent of total effect and result in significant General Fund collections) above our Fiscal Outlook estimates. cost increases for the state’s Medi-Cal program. 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Second, if the Legislature chose not to suspend Recommend Legislature Consider Overall the program expenditures described earlier. Given Targets for Reserves and Operating Surplus. As the budgetary risks posed by economic uncertainty the Legislature begins to craft the 2020-21 budget, and federal policy changes, maintaining positive we urge first considering the overall budget operating surpluses would put the budget on better structure before evaluating individual budget footing. proposals. This includes determining a target level Without an Operating Surplus, Responding to of reserves and how much to commit to ongoing a Recession More Challenging. In our November spending. Given the maturity of the economic Fiscal Outlook, we found the state has sufficient expansion, revenues may not grow as quickly as reserves to cover operating deficits in the event of past years. Consequently, in our November Fiscal a typical post-World War II recession. This finding Outlook, we recommended the Legislature commit was based on two important assumptions. First, no more than $1 billion to ongoing purposes in we assumed the state built reserves of $23 billion 2020-21. Under our revenue estimates, this allows in 2020-21. Second, we assumed the state the state to maintain a positive operating surplus maintained operating surpluses of a few billion so that risks to the bottom line, such as revenue dollars each year under its baseline plan. While reductions and changes in federal policy, are reserves are the most important tool the state less likely to result in budget deficits. While the has to respond to a budget shortfall, maintaining Governor commits a good portion of the surplus a positive operating surplus also provides the to one-time purposes, he proposes spending budget with an important first line of defense $1.6 billion on ongoing purposes—growing to as revenues decline or spending unexpectedly $1.9 billion over time. This effectively would increases. Smaller operating surpluses mean that eliminate the budget’s operating surplus under his the budget has less “cushion” to absorb these proposals and estimates. In a still-growing but now changes, resulting in the need for more reserves. mature economic expansion, continuing to build By proposing a budget with very small operating reserves or to otherwise supplement the state’s surpluses, the Governor eliminates a key tool of fiscal resilience by preserving a larger operating recession preparedness. surplus would be prudent. BUDGET PROPOSALS This section describes the major General Fund Schools and Community Colleges budget proposals included in the Governor’s After Providing Cost-of-Living Adjustment January budget, including both discretionary and (COLA), Package Dedicates Most Available nondiscretionary spending amounts. While the Funding to One-Time Purposes. Most of Governor’s discretionary proposals include some the ongoing school and community college larger items, the vast majority of the Governor’s augmentations are to cover a 2.29 percent COLA proposals are smaller. To summarize the numerous and enrollment changes. For K-12 education, the smaller proposals, we provide figures in the budget includes $1.2 billion for the Local Control Appendix that itemize the Governor’s proposals Funding Formula, which reflects funding for the by policy area. The remainder of this section COLA offset by a 0.3 percent attendance decline. describes those higher cost proposals and those For community colleges, the Governor’s largest with important policy implications. Where feasible, ongoing proposal is $199 million to cover the COLA we also provide our initial assessment of these and 0.5 percent enrollment growth. After covering proposals and issues for legislative consideration. these costs, the Governor’s budget has $1.3 billion in Proposition 98 funding available for new commitments in 2020-21. The Governor proposes www.lao.ca.gov 9 analysis full gutter 2020-21 BUDGET to use the bulk of these funds ($1.1 billion) for Universities one-time purposes. This approach provides the Governor Proposes Discretionary Base state with a cushion to more easily accommodate Increases for the Universities. The Governor’s a drop in the minimum guarantee without making budget includes various General Fund increases cuts to ongoing programs. for the California State University (CSU) and the Though the Governor Is Focusing on Issues University of California (UC). The largest ongoing of Legislative Concern, One-Time Funding proposal for each segment is a 5 percent General Might Not Have Much Impact. The Governor’s Fund base increase ($199 million for CSU and budget includes $1.9 billion in total one-time $169 million for UC). Unlike the Governor’s and the Proposition 98 spending—the $1.1 billion from Legislature’s approach last year, which connected 2020-21, plus an additional $819 million attributed every CSU and UC funding augmentation with to the prior and current fiscal years. The one-time a specific purpose, the Governor’s approach in funds are primarily used for two purposes. Most 2020-21 gives the segments flexibility in allocating notably, the Governor provides a combined their base increases. The administration, however, $900 million for six programs aimed at improving expects each segment to focus on college school employee training, recruitment, and affordability, access, timely degree completion, retention. The budget also provides $600 million and the narrowing of student achievement gaps. for two new grant programs: (1) $300 million for The administration, however, is silent on the grants to help low-performing schools and districts specific issue of whether the segments are to improve their performance and (2) $300 million for increase student tuition levels. Regarding access, schools that implement the community schools the administration sets no specific enrollment model—which typically integrates health, mental targets for either segment but makes general intent health, and other services for students and families statements. The administration expects UC to and provides these services directly on school further increase resident undergraduate enrollment campuses. Although these initiatives are broadly in 2020-21 and 2021-22. It expects CSU to consistent with the priorities of the Legislature, support additional enrollment at its most impacted many key details on how the programs would campuses and programs. operate are not yet available. Moreover, many Recommend Linking Base Increases With of these proposals provide one-time funding for Clear, Explicit Expectations. By failing to link staffing and achievement issues that have been base funding increases to clear, specific state ongoing for many years and may require ongoing spending priorities, the administration effectively funding to address. relinquishes important budget responsibilities. One-Time Funding Could Be Used to Provide Rather than make key budget trade-offs directly— Districts Long-Term Fiscal Relief. Most of the for example, between enrolling more students one-time proposals in the Governor’s budget would and raising employee salaries—the Governor require districts to implement new programs or allows the segments to make these choices. This expand existing services as a condition of receiving budget approach leaves the Legislature without funding. The Legislature might want to consider a clear understanding as to how the segments repurposing some of the one-time funding to will use their funding increases, and it raises the instead help school and community college districts potential for some allocation decisions made by address their unfunded liabilities. Districts currently the segments to be poorly aligned with broader have a number of such obligations, including legislative priorities. We recommend the Legislature growing pension costs and unfunded retiree health take a different approach and retain its budget liabilities. Such an approach would provide districts authority to make key, high-level decisions. with long-term relief that would make balancing Specifically, we recommend the Legislature set their budgets easier to do on a sustained basis. enrollment expectations for each segment, decide 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET how much to provide for graduation and other core Fund? Would funds be used interchangeably student support initiatives, and determine how regardless of source? much to provide for compensation increases and • How will the administration select regional other operating costs. Our recent report, Analyzing administrators? UC and CSU Cost Pressures, is intended to help • What oversight will the state exercise over the Legislature as it begins thinking through these regional administrators? How will the state issues. evaluate progress and assess outcomes? Homelessness • Why is the Governor requesting early action by the Legislature on the CAAHS Fund? Does the Governor Proposes $750 Million to Reduce early action obligate the Legislature to funding Homelessness. The Governor proposes in 2020-21? Given the downside risk to $750 million General Fund in one-time funding to revenues and the smaller operating surpluses establish the California Access to Housing and under the Governor’s proposed budget, taking Services (CAAHS) Fund within the Department of early action to obligate funding would be risky. Social Services (DSS). The funds would be provided • In recent years, the state has built substantial through contracts with regional administrators infrastructure to address homelessness, to help finance the development of affordable particularly within the Business, Consumer housing, provide rental subsidies to people facing Services, and Housing Agency. Why has homelessness, and provide subsidies to operators the administration decided to establish the of board and care facilities. The administration CAAHS Fund within DSS? How will the envisions that the state funding would be coupled CAAHS Fund, other components of the with other government and private funds to expand 2020-21 homelessness package, and existing the potential effect of this initiative. The Governor programs work collaboratively to address requests the Legislature take early action on this homelessness? component of the budget so that the administration can expedite its implementation. The Governor’s Medi-Cal Healthier California for All efforts to address homelessness also include reforms to Medi-Cal, the state’s behavioral health Funds “Medi-Cal Healthier California for All” system, and state hospitals. (We provide additional Proposal. In October 2019, the administration information about some of these proposals in the announced a series of proposed Medi-Cal reforms next section.) In addition, a recently issued Executive that are now collectively referred to as Medi-Cal Order directs the administration to inventory state Healthier California for All. Under the proposal, properties that could be used for shelters. for example, the state aims to (1) encourage Questions to Ask the Administration About contracted managed care plans to provide New Approach to Homelessness. Below, we additional non-health care services, such as highlight some initial questions the Legislature intensive care management and temporary housing might want to ask the administration as it considers services, intended to more comprehensively the merits of the requests. address the needs of Medi-Cal enrollees with the most complex and costly conditions (such as the • Why is the administration taking a new homeless); (2) simplify state administration and approach to address homelessness? The past service delivery in the Medi-Cal program; and two budgets primarily allocated funds directly (3) shift further toward models of paying for health to local governments. What data or other care services that reward quality over volume. information about these allocations made the The Governor’s budget includes $695 million total administration suggest changing course? funds ($347.5 million General Fund) to implement • What incentives are there for the federal key components of the proposal for a half year government, local governments, and private in 2020-21, increasing to $1.4 billion total funds entities to contribute funding to the CAAHS ($695 million General Fund) in 2021-22. www.lao.ca.gov 11 analysis full gutter 2020-21 BUDGET Legislative Considerations for Making Issues for Legislative Consideration. As Potentially Complex and Far-Reaching Changes it considers the merits of these departmental to Medi-Cal. The Medi-Cal Healthier California organizational changes, there are a number of key for All proposal is complex and far-reaching. questions the Legislature might wish to ask the We raise three issues for consideration as the administration: Legislature reviews the details of the proposal • Would the reorganization make programs in the coming months. First, Medi-Cal Healthier more effective? Would the public receive California for All would implement on a statewide better services as a result? basis strategies that are either entirely new or have • Would the reorganization improve efficiency? been only recently piloted in parts of the state. Do existing programs exhibit duplication or a We recommend that the Legislature ensure that lack of coordination? processes are in place to robustly evaluate the impact of any adopted components of the proposal, • Would the new structure improve both on achievement of the proposal’s objectives accountability? and on Medi-Cal spending. Second, Medi-Cal • How would the reorganization affect public has significant interactions and interdependencies understanding of government? Is the with other state policy and planning initiatives. proposed rebranding aligned with the nature We recommend that the Legislature ask the of the work done by the department or administration to lay out how Medi-Cal Healthier agency? California for All affects other programs and • How does the administration intend to planning initiatives, such as the Governor’s Master effectuate the reorganization—through Plan for Aging and efforts related to homelessness. budget trailer legislation or the executive Third, many of these changes would require federal branch reorganization process established approval. Given the new approach taken in this in statute? The executive reorganization proposal, approval is uncertain. process not only is relatively expedient (it can be completed in 90 days) but also includes a Government Operations framework designed to increase the likelihood Governor Proposes Various Changes that a reorganization would be effective and Intended to Improve Government Operations. smoothly implemented. Across several issue areas, the Governor’s budget makes changes aimed at improving the Other Policy Proposals organization or function of government operations. Expands the State Housing Tax Credit In many of these cases, the Governor proposes Program. The Governor proposes $500 million creating a new department or reorganizing General Fund for an ongoing extension of the an existing department. Among others, the state’s housing tax credit program, authorized on administration proposes creating: the Department a one-time basis, in the 2019-20 budget. Of this of Early Childhood Development, the Department amount, $300 million would be allocated to the of Better Jobs and Higher Wages, and the Office state’s low-income housing tax credit program, of Health Care Affordability. In some cases the which provides funding to builders of low-income administration’s proposed change reorganizes affordable housing. The remaining $200 million existing state functions into a new entity, but in would target mixed-income projects. Both the other cases the administration appears to intend to 2020-21 budget and the administration’s multiyear begin providing new state services. For example, plan assume no reduction in revenues due to the the proposed changes to the existing Department tax credit already authorized in 2019-20 or from the of Business Oversight—which the administration newly proposed expansion. As a result, out-year renames the Department of Financial Protection revenues would be lower if these tax credits are and Innovation—appears to include new functions claimed in the next few years. to be added to the department’s existing mission. 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Revolving Loan Fund for Private Reforms Aimed at Improving Health Care Environmental Projects. The Governor’s budget Affordability. The Governor’s budget proposes includes $250 million General Fund in 2020-21— a number of reforms—currently in conceptual with a plan to allocate an additional $750 million form—aimed at improving the affordability of in future years—to establish a new loan program health care in California. These reforms include at the California Infrastructure and Economic two major initiatives. The first is to establish an Development Bank (I-Bank). I-Bank provides Office of Health Care Affordability responsible for financial assistance to local governmental entities increasing price transparency and developing cost by lending funds at below-market rates. The new containment strategies and targets for the health Climate Catalyst Revolving Loan Fund would lend care industry. The second is to build on last year’s money to private sector organizations for projects efforts to control drug spending. Most significantly, determined to advance the state’s environmental the Governor proposes to: (1) to establish a uniform goals, along with other priorities—such as creating statewide schedule of prices at which drugs would high-quality jobs. The climate-related projects have to be sold and (2) have the state contract would be selected based on criteria developed with drug manufacturers to create its own brand of in consultation with the Strategic Growth generic drugs that would be available for purchase Council and Labor and Workforce Development statewide. Agency. Eventually, the administration intends Emergency Response and Preparedness. for the Climate Catalyst lending program to be The budget provides General Fund augmentations self-sustaining from fees and interest earnings. for various programs to improve the state’s Two Ballot-Related Proposals. The Governor’s emergency preparedness and response. Major budget includes two ballot-related proposals. First, proposals include: (1) $120 million (growing the Governor proposes putting a $4.8 billion bond to $150 million annually) for an increase of before voters in November 2020 to fund a variety 677 positions and equipment replacements for of activities intended to help the state mitigate and the California Department of Forestry and Fire prepare for the effects of climate change. Once Protection; (2) $80 million on a one-time basis for issued, the bonds would generate annual debt the California Natural Resources Agency to collect service costs, which are included in the Governor’s data and create maps of the state using light multiyear General Fund expenditure estimates. detection and ranging analysis (commonly known Second, the Governor has expressed interest in as LiDAR); and (3) $50 million on a one-time basis reforming Proposition 63 (2004), also known as to the Governor’s Office of Emergency Services the Mental Health Services Act (MHSA), to change for community power resiliency to mitigate the the use of MHSA revenues to address different impact of power outages, such as those related to priorities. These include early intervention for youth, disasters or preventing wildfires. services for people experiencing homelessness, and services for people involved in the criminal LAO COMMENTS justice system. Trade-Off Between Addressing More Small Medi-Cal Expansion. The Governor’s budget Proposals Versus Fewer Large Proposals. In proposes expanding comprehensive Medi-Cal this budget, the Governor proposed the state take coverage to income-eligible seniors aged 65 and on a wide variety of activities across a number of older, regardless of immigration status, beginning program areas. In our initial review, we itemized no sooner than January 1, 2021. The budget roughly 140 distinct proposals in the estimated assumes 27,000 seniors will gain comprehensive $4.1 billion in new discretionary spending for coverage at a half-year cost of $64 million General 2020-21. (These estimates aggregate some Fund in 2020-21 and an annual ongoing cost of individual proposals into groups based on topic $320 million General Fund at full implementation. area and excludes some smaller proposals [less These costs include those in both the Medi-Cal and than $5 million].) While these proposals include In-Home Supportive Services programs. www.lao.ca.gov 13 analysis full gutter 2020-21 BUDGET some larger amounts, 95 percent of them— the Governor’s budget spends $1.6 billion accounting for half of proposed spending—cost on ongoing purposes in 2020-21, growing to less than $100 million in 2020-21. Put simply, $1.9 billion over time. In some cases, whether by the Governor’s budget aims to address a large expanding state government into a new area—for array of proposals, across many issue areas, with example, new responsibilities around prescription relatively small dollar amounts. We recommend the drugs—or expanding the scope of the mission Legislature consider whether this approach aligns of a state department, the Governor’s budget with its own priorities. Alternatively, the Legislature proposal could put more pressure on the budget’s could identify a smaller number of priorities and ongoing costs than is reflected in these estimates. dedicate a larger amount of funds to each to Similarly, the Governor’s budget focuses some new ensure the proposals have a significant impact. resources on a particular region—like the Fresno Some Budget Proposals Could Create Drive initiative—which could create expectations Pressure to Continue Expansions. We estimate that these types of resources should be provided to other regions of the state facing similar challenges. CONCLUSION As has been the case for several years, discretionary reserve), the state maintains a key California’s budget condition continues to be tool for responding to a potential recession. positive. With an estimated surplus of $6 billion Nonetheless, changes to the Governor’s budget and a proposed reserve level of nearly $21 billion, could improve its structural balance. In particular, the state is still enjoying a stable and healthy fiscal our office recently recommended the Legislature situation. Despite this positive near-term picture, commit no more than $1 billion to ongoing the multiyear outlook is subject to considerable purposes in 2020-21, a level that we think would uncertainty. In particular, federal decisions around allow the state to maintain a positive operating healthcare financing could have significant surplus. Maintaining an operating surplus makes implications for the state’s fiscal situation. responding to revenue declines or unexpected cost The Governor’s proposed 2020-21 budget has increases easier. Moreover, given the maturity of some laudable features. The Governor’s budget this economic expansion, eliminating the operating dedicates funding to a number of new and existing surplus is particularly risky. As the Legislature priorities that align with recent legislative action and begins shaping the budget for the upcoming year, initiatives. In addition, by focusing three-quarters we encourage aiming to preserve this tool and of the estimated surplus to one-time commitments maintain a positive operating balance in its own (including maintaining the balance of the state’s multiyear budget plans. 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET APPENDIX Appendix Figure 1 Criminal Justice: Discretionary Spending Proposals in the 2020-21 Governor’s Budget (In Millions) General Fund Cost in 2020-21 One-Time or Infrastructure- Proposal Temporary Ongoing Total Related Board of State and Community Corrections Funding for post release community supervision population $13.8 — $13.8 Indigent Defense Pilot Program 10.0 — 10.0 California Victim Compensation Board Backfill of Restitution Fund 23.5 — 23.5 California Deparment of Corrections and Rehabilitation CIM: 50-Bed Mental Health Crisis Facility 91.0 — 91.0 X Adult probation reform 60.0 $11.0 71.0 Medication Distribution Improvements—Phase II 31.7 — 31.7 X Technology for inmates/academic programs 8.9 18.0 26.9 Fire suppression system 22.5 — 22.5 X Video Surveillance and Drug Interdiction Project 19.5 2.1 21.6 Officer training initiatives 1.6 19.8 21.4 Medical guarding and transportation — 14.8 14.8 CHCF—Legionella remediation 9.7 4.4 14.1 X CIM Air Cooling Facility A 11.3 — 11.3 X Other CDCR proposals 32.9 33.0 65.9 Department of Justice Bureau of Forensic Services backfill and equipment refresh 22.0 7.3 29.3 Other Department of Justice proposals 14.5 — 14.5 Judicial Branch Unallocated trial court operations augmentation — 61.7 61.7 Increase funding equity among trial courts — 45.9 45.9 Information technology modernization projects 7.4 2.8 10.3 Other Judicial Branch proposals 8.8 17.7 26.5 State Public Defender Indigent criminal defense attorney assistance 0.5 3.5 4.0 Totals $398.6 $242.1 $631.7 Note: Generally excludes proposals less than $5 million. One time or temporary defined as three years or fewer. Ongoing defined as four years or more. Some ongoing proposals increase in cost after 2020-21. CIM = California Institution for Men; CHCF = California Health Care Facility; and CDCR = California Department of Corrections and Rehabilitation. www.lao.ca.gov 15 analysis full gutter 2020-21 BUDGET Appendix Figure 2 Education: Discretionary Spending Proposals in the 2020-21 Governor’s Budget (In Millions) General Fund Cost in 2020-21 One-Time or Infrastructure- Proposal Temporary Ongoing Total Related California State Library Various proposals $2.0 $0.6 $2.6 California State University (CSU) General Fund base increase (5 percent) — 199.0 199.0 CSU extended education 6.0 — 6.0 California Student Aid Commission Student loan outreach initiative 5.0 — 5.0 Child Care and Preschool 10,000 full-day State Preschool slots starting April 1, 2021 — 32.0 32.0 California Department of Food and Agriculture Fresno-Merced Food Innovation Corridor 33.0 — 33.0 Hastings College of the Law General Fund base increase (5 percent) — 1.4 1.4 Office of Planning and Research Fresno Integrated K-16 Education Collaborative 17.0 — 17.0 University of California (UC) General Fund base increase (5 percent) — 169.2 169.2 UC Davis animal shelter grant program 50.0 — 50.0 UC Riverside medical school operations — 25.0 25.0 UC San Francisco Fresno branch campus operations — 15.0 15.0 Other UC proposals 6.0 8.6 14.6 Totals $119.0 $450.8 $569.8 Note: Generally excludes proposals less than $5 million. One time or temporary defined as three years or fewer. Ongoing defined as four years or more. Some ongoing proposals increase in cost after 2020-21. 16 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Appendix Figure 3 Health: Discretionary Spending Proposals in the 2020-21 Governor’s Budget (In Millions) General Fund Cost in 2020-21 One-Time or Infrastructure- Proposal Temporary Ongoing Total Related Department of Health Care Services Behavioral Health Quality Improvement Program $45.1 — $45.1 Department of State Hospitals (DSH) Roof repairs 49.3 — 49.3 X Mission-Based Review—treatment team and primary care 32.0 — 32.0 Community Care Collaborative Pilot Program — $24.6 24.6 Napa State Hospital repairs 18.4 — 18.4 X Other DSH proposals 16.0 41.5 57.5 Medi-Cal Local assistance funding for Medi-Cal Healthier California for All proposal 150.0 197.5 347.5 Reauthorize skilled nursing facility reimbursement methodology — 62.2 62.2 Full-scope coverage expansion for undocumented seniors — 58.3 58.3 340B entity supplemental payments — 26.3 26.3 Cost-of-living adjustment for county Medi-Cal administrative costs — 23.7 23.7 Placeholder state operations funding for MHCA proposal — 20.0 20.0 Hearing aids for children grant program — 5.0 5.0 Net savings: Medi-Cal pharmacy services carve out — -69.5 -69.5 Secretary for Health and Human Services Agency Office of the Surgeon General: trauma-informed training and public awareness 10.0 — 10.0 Establishing Department of Early Childhood Development 8.5 — 8.5 Totals $329.3 $389.6 $718.9 a Attributable to 2019-20 Note: Generally excludes proposals less than $5 million. One time or temporary defined as three years or fewer. Ongoing defined as four years or more. Some ongoing proposals increase in cost after 2020-21. MHCA = Medi-Cal Healthier California for All. www.lao.ca.gov 17 analysis full gutter 2020-21 BUDGET Appendix Figure 4 Human Services, Housing, and Homelessness: Discretionary Spending Proposals in the 2020-21 Governor’s Budget (In Millions) General Fund Cost in 2020-21 One-Time or Infrastructure- Proposal Temporary Ongoing Total Related Department of Social Services (DSS) Access to Housing and Services Initiative $750.0 — $750.0 Hold CalFresh county administrative funding harmless for decreased caseload 26.9 — 26.9 while new methodology is developed Support CalFresh online application tool — $5.0 5.0 Child Welfare workforce development — 5.6 5.6 IHSS impact of full-scope coverage expansion for undocumented seniors — 5.9 5.9 Increase assistance to food banks 20.0 — 20.0 Other DSS proposals — 3.2 3.2 Department of Youth and Community Restoration Transition of the Division of Juvenile Justice — 25.4 25.4 Department of Aging Department of Aging headquarter relocation — 2.3 2.3 Department of Developmental Services (DDS) Performance Incentive Program 60.0 — 60.0 Enhanced caseload ratios for young children — 11.2 11.2 Supplemental rate increases for additional service codes 10.8 — 10.8 Other DDS proposals 16.4 — 16.4 Department of Veterans Affairs Veterans Home, Yountville: Steam Distribution System Renovation 7.8 — 7.8 X Mental health services in veterans homes — 2.3 2.3 Housing and Community Development Technical assistance for local governments on housing 10.0 — 10.0 Totals $901.9 $60.9 $962.8 Note: Generally excludes proposals less than $5 million. One time or temporary defined as three years or fewer. Ongoing defined as four years or more. Some ongoing proposals increase in cost after 2020-21. IHSS = In-Home Supportive Services and CalWORKs = California Work Opportunity and Responsibility to Kids. 18 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Appendix Figure 5 Natural Resources, Environment and Emergencies: Discretionary Spending Proposals in the 2020-21 Governor’s Budget (In Millions) General Fund Cost in 2020-21 One-Time or Infrastructure- Proposal Temporary Ongoing Total Related California Department of Forestry and Fire Protection Fire protection enhancements: multiple BCPs — $120.0 $120.0 Various capital outlay $27.0 — 27.0 X Air attack bases capital outlay 13.6 — 13.6 X Wildland Firefighting Research Grant 5.0 — 5.0 California Department of Food and Agriculture State Water Efficiency and Enhancement Program 20.0 — 20.0 Needles Border Protection Station 10.4 — 10.4 X Farm to School Program 8.5 1.5 10.0 California Natural Resources Agency (CNRA) Innovation and improving technology: LiDAR 80.0 — 80.0 CNRA new facility relocation 9.6 — 9.6 Department of Fish and Wildlife Advance biodiversity protection 20.0 — 20.0 Department of General Services Electric vehicle assessments and infrastructure 15.0 — 15.0 Department of Water Resources American River Common Features project 46.0 — 46.0 X Sustainable groundwater management 30.0 9.6 39.6 Tijuana River project 35.0 — 35.0 New River improvement project 18.0 — 18.0 Hydrometeorology and surface water observations — 6.0 6.0 Office of Emergency Services Community Power Resiliency 50.0 — 50.0 California Disaster Assistance Act adjustment 16.7 — 16.7 Disaster planning and preparedness — 9.2 9.2 Governor’s Office of Business and Economic Development Climate Catalyst Fund 250.0 — 250.0 Office of Environmental Health Hazard Assessment Evaluating unassessed chemicals 5.0 1.0 6.0 Department of Parks and Recreation Equitable access: new state park 20.0 — 20.0 X State Lands Commission Oil and gas well decommissioning studies 5.0 — 5.0 Various Departments California Cybersecurity Integration Center — 11.1 11.1 Totals $684.8 $158.3 $843.1 Note: Generally excludes proposals less than $5 million. One time or temporary defined as three years or fewer. Ongoing defined as four years or more. Some ongoing proposals increase in cost after 2020-21. BCPs = budget change proposals and LiDAR = Light Detection and Ranging. www.lao.ca.gov 19 analysis full gutter 2020-21 BUDGET Appendix Figure 6 Other: Discretionary Spending Proposals in the 2020-21 Governor’s Budget (In Millions) General Fund Cost in 2020-21 One-Time or Infrastructure- Proposal Temporary Ongoing Total Related Department of General Services Elevator deferred maintenance $56.4 — $56.4 X Fire alarm system deferred maintenance 23.6 — 23.6 X Employment Development Department Benefit Systems Modernization information technology project 23.0 — 23.0 California Department of Technology Security Operations Center and Audit Program funding — $15.1 15.1 Various Other Proposals 25.6 238.8 264.4 Totals $128.6 $253.9 $382.5 Note: Generally excludes proposals less than $5 million. One time or temporary defined as three years or fewer. Ongoing defined as four years or more. Some ongoing proposals increase in cost after 2020-21. 20 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET www.lao.ca.gov 21 analysis full gutter 2020-21 BUDGET LAO PUBLICATIONS This report was prepared by Ann Hollingshead, with contributions from other staff in the office, and reviewed by Carolyn Chu and Anthony Simbol. 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. 22 LEGISLATIVE ANALYST’S OFFICE