The 2021-22 Budget: The Governor’s Suspension Proposal

analysis full gutter The 2021-22 Budget: The Governor’s Suspension Proposal JANUARY 2021 Background The 2019-20 Budget Made Several Programs’ the programs’ ongoing expenses continue on an Costs or Augmentations Subject to Suspension. ongoing basis. If not, expenditures across nearly In the 2019-20 May Revision, the administration a dozen different programs are automatically anticipated an operating deficit would emerge— suspended (with no explicit provision for absent further actions—under its multiyear reinstatement). For the purposes of the calculation, projections. In response, the final budget act we understand DOF would include the entering made some program spending amounts subject fund balance (the carry-in from the previous year’s to potential suspension. Under this budget bill budget) in revenues. language, if certain conditions persisted, these How Are Governor’s Budget Proposals program costs would be suspended—resulting in Treated in the Calculation? A key question for General Fund savings—on December 31, 2021. the implementation of the language under current This language was included in both the 2019-20 law is whether DOF should include or exclude the and 2020-21 budget acts. Governor’s budget proposals from General Fund How the Suspensions Work. Current law expenditures in the calculation. If they are included empowers the Department of Finance (DOF) to in expenditures, it would mean higher expenditures administer the suspension calculation. The formula and lower entering fund balances in 2021-22 and is shown in Figure 1. Under the formula, DOF 2022-23. If they are excluded from expenditures, compares estimates of General Fund revenues to the opposite would be true. The suspensions are General Fund expenditures—without suspensions— much more likely to be operative if the Governor’s in 2021-22 and 2022-23. If DOF determines budget proposals are included in the calculation. projected revenues will exceed expenditures, then Figure 1 How the Suspension Calculation Works Projected Revenues Including Entering Fund Balances Estimated Expenditures Suspensions If the sum of these expenditures is less than revenues, program is not suspended. Implementation question of how DOF would treat baseline expenditures. Are the Governor’s budget proposals included or excluded? DOF = Department of Finance. 2021-22 LAO Budget Series 1 analysis full gutter Governor’s Proposal Under Current Law, Programs Would No …But Governor Proposes Maintaining Longer Be Subject to Suspension… Under Suspension Calculation. Rather than executing current law, the suspension calculation would the suspension calculation this May, the Governor’s occur once: at the 2021 May Revision. If, at that budget proposes a new suspension calculation time, DOF finds revenues exceed expenditures in 2022. Specifically, the Governor proposes that for both 2021-22 and 2022-23, the suspensions the Legislature enact new suspension language would not become operative and the costs that would give DOF the authority to make this would continue on an ongoing basis. Because calculation again at the time of the May Revision in the state has a significant windfall in 2021-22, 2022. In this case, the calculation would apply to as long as Governor’s proposals are excluded 2022-23 and 2023-24. Suspensions would occur, from expenditures in the calculation, then DOF under the Governor’s proposal, on December would find that revenues are sufficient to fund 31, 2022 if revenues were not sufficient to cover expenditures including the suspensions. As a result, expenditures. spending on those programs would continue. Spending Subject to Suspension Figure 2 shows the list of program items to those enacted in the 2019-20 and 2020-21 that would be subject to suspension under the Budget acts. Governor’s budget and how this list compares Figure 2 Programs or Augmentations Subject to Suspension and Proposed in Governor’s Budget 2021 2019 2020 Governor’s Program Funding Subject to Suspension Budget Act Budget Act Budget Medi-Cal Use of Proposition 56 revenues for provider payment increases X X X IHSS Continued restoration of 7 percent service hour reduction X X X DDS/DOR Supplemental provider payment increases X X X Medi-Cal Extension of coverage for postpartum mental health X X X Medi-Cal Restoration of optional benefits X X X DDS Non-enforcement of uniform holiday schedule policy X X X Child welfare Funding for Family Urgent Response System X X X Senior nutrition Augmentation for Senior Nutrition Program X X X UC and CSU Student financial aid during the summer term X X X Aging Aging and Disability Resource Connections X X X Child welfare Emergency Child Care Bridge program supplement X X X Child welfare Public health nursing early intervention pilot program in Los Angeles County X X X HCD All Transitional Housing Program grants to counties for former foster youth X X X Child welfare Foster Family Agency social worker rate increase X X X DPH STD prevention X DPH HIV prevention and control X DPH Hepatitis C virus prevention and control X Medi-Cal Expansion of screening and intervention to drugs other than alcohola X X a This benefit is now federally required. IHSS = In-Home Supportive Services; DDS = Department of Developmental Services; DOR = Department of Rehabilitation; HCD = California Department of Housing and Community Development; DPH = Department of Public Health; and STD = sexually transmitted disease. 2021-22 LAO Budget Series 2 analysis full gutter Some Suspension Items Provide Direct hours, but the Legislature reversed this Funding for Core Government Services. A reduction in every year since 2015-16. If the number of the suspension amounts, especially current law suspensions went into effect, the those with larger dollar amounts, provide direct state would reinstate a 7 percent reduction funding for longstanding or core government to service hours. The nearby box describes services. For example, some major items that are some potential legal challenges that could subject to suspension are: arise if this occurred. • Supplemental Rate Increases for • Using Proposition 56 (2016) Funding for Developmental Services Providers. The Provider Payment Increases in Medi-Cal. 2019-20 and 2020-21 budgets enacted Recent budgets have used funding from supplemental rate increases for certain Proposition 56, which established a higher developmental services providers. If the tax on tobacco products, to increase provider current law suspensions went into effect, the payments in Medi-Cal. If the suspensions state would return to rates provided before went into effect, most of these payment these supplemental increases took effect. increases would cease. Proposition 56 would instead cover cost growth in Medi-Cal, Other Items Provide Funding for Newer providing General Fund savings. (Under State Programs. Not all suspensions directly fund current law, these payment increases are longstanding government programs. For example, subject to suspension on July 1, 2021 rather the funding for California State University and than December 31, 2021.) University of California summer financial aid and • Restoration of In-Home Supportive some child welfare programs, like the family urgent Services (IHSS) Service Hours. During the response system and Los Angeles County public last recession, the state reduced IHSS service health nurse pilot, were created in recent years. Legal Risks Associated With In-Home Supportive Services (IHSS) Reduction Proposals Proposals to reduce or eliminate IHSS services generally are vulnerable to litigation asserting that the change violates federal Medicaid rules and/or puts recipients at risk of institutional placement, which could violate the United States Americans with Disabilities Act (ADA). In the past, courts have issued temporary injunctions preventing the state from making reductions to Medicaid personal care services programs, including IHSS, due to possible violation of federal Medicaid and ADA rules. It is possible that future state proposals to eliminate or reduce IHSS services could face the similar legal challenges. 2021-22 LAO Budget Series 3 analysis full gutter Multiyear Savings of Governor’s Proposal State Faces Multiyear Operating Deficit grow from $7.6 billion in 2022-23 to $11.3 billion in Under Governor’s Budget. An operating deficit 2024-25. occurs when baseline expenditure growth outpaces Rejecting Governor’s Proposal Would anticipated revenue growth. Both our office and Result in Higher State Costs. If the Legislature the administration anticipate an operating deficit is rejected the Governor’s proposal to maintain the quite likely to emerge in the coming years. In our suspensions, without taking any other actions, November Fiscal Outlook, we found the state faces the size of the operating deficit would increase by large and growing multiyear operating deficits over $1.3 billion in 2022-23. Figure 3 shows the costs the outlook period. Under its own revenue forecast, of rejecting the Governor’s proposal in 2022-23 and assuming the suspensions were operative, the 2023-24. administration estimates operating deficits would Figure 3 General Fund Cost of Rejecting Governor’s Proposal (In Millions) Program Funding Subject to Suspension 2022‑23 2023‑24 Medi-Cal Use of Proposition 56 revenues for provider payment increases $760 $840 IHSS Continued restoration of 7 percent service hour reduction 243 540 DDS/DOR Supplemental provider payment increases 139 284 Medi-Cal Extension of coverage for post-partum mental health 29 57 Medi-Cal Restoration of optional benefits 23 47 DDS Nonenforcement of uniform holiday schedule policy 20 41 Child welfare Funding for Family Urgent Response System 15 30 Senior nutrition Augmentation for Senior Nutrition Program 9 18 UC and CSU Student financial aid during the summer term 5 10 Aging Aging and Disability Resource Connections 5 10 Child welfare Emergency Child Care Bridge program supplement 5 10 Child welfare Public health nursing early intervention pilot program in LA County 4 8 HCD All Transitional Housing Program grants to counties for former foster youth 4 8 Child welfare Foster Family Agency social worker rate increase 3 7 $1,263 $1,909 IHSS = In-Home Supportive Services; DDS = Department of Developmental Services; DOR = Department of Rehabilitation; and HCD = California Department of Housing and Community Development. 2021-22 LAO Budget Series 4 analysis full gutter Comments Maintaining Suspensions Treats Ongoing and recipients of these services. The potential Programs as Temporary. The suspension suspension of supplemental rate increases for language treats policies that are fundamentally developmental services providers makes staffing ongoing in nature as temporary. For example, and planning more difficult. For example, hiring health and developmental services-related spending permanent staff to work directly with program amounts subject to suspension generally support consumers is more challenging when the funding core programmatic funding intended to improve is uncertain. Similarly, retaining staff may be more consumer access to an entitlement program. Some difficult if a provider cannot assure employees reductions—such as the IHSS 7 percent service that any pay increase will remain intact. More staff hour reduction—also could present legal risks in turnover means less stability for consumers. In addition to being a reduction to a core service. some cases, this uncertainty can work against the Treating ongoing program costs as temporary Legislature’s objectives for the spending. fundamentally understates the true ongoing cost of Suspensions Were Not Originally Proposed as the state’s policy commitments. an Annual Calculation. The suspension language Suspending Core Government Services enacted into law in 2019-20 was framed as a Poses Programmatic Issues. Many of the one-time determination made in May 2021. By suspension items, particularly the larger ones, proposing a new suspension calculation, however, are related to core government services. The the administration appears to intend to make this suspension language creates uncertainty in these calculation ongoing. This is not consistent with our programs, which can pose problems for providers understanding of what the Legislature envisioned. Recommendations Recommend Legislature Reject Suspension language simply papers over a portion of a larger Language… We recommend the Legislature reject structural problem. the Governor’s proposal to create new budget bill …But Evaluate the Merits of Some suspension language. Considering that most of the Suspension Items. Some of the suspension costs of the suspension items directly fund core items are recently created programs. As part state services, including those costs in multiyear of the broader effort to address the ongoing fiscal projections is appropriate. Given the state’s budget problem, evaluating whether these newer multiyear deficits, however, the state likely will need programs are achieving their intended goals to make changes to its budget within the next few would be worthwhile. To this end, the Legislature years. As it stands, the state probably cannot afford could take a look at reporting and oversight to existing programs, avoid the suspensions, and fund ensure programmatic design aligns with its policy the Governor’s proposals over the next few years. objectives and that the programs are resulting in The Governor’s proposal to include new suspension the intended outcomes. LAO Publications This report was prepared by Ann Hollingshead, 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. 2021-22 LAO Budget Series 5