The 2026-27 Budget: County Administration and H.r. 1 Implementation

analysis full 2026-27 BUDGET The 2026-27 Budget: County Administration and H.R. 1 Implementation GABRIEL PETEK | LEGISLATIVE ANALYST | MARCH 2026 SUMMARY H.R. 1 Notably Impacts Medi-Cal and CalFresh Eligibility Administration. Medi-Cal and CalFresh are overseen by the state but are administered locally by counties, with a focus on eligibility determination. H.R. 1 makes major changes to Medi-Cal and CalFresh that largely will result in lower enrollment in the programs. One significant area of change under H.R. 1 is the expansion and creation of community engagement requirements (generally, work requirements). These new requirements—along with other changes—have significant impacts for counties’ administration of the programs. Governor’s Budget Proposes Some Adjustments Related to H.R. 1 Implementation. In Medi-Cal, the Governor’s budget maintains the existing level of funding for county administration, making no adjustments to account for H.R. 1 implementation. The administration has indicated that it is working with counties to better understand H.R. 1 impacts on Medi-Cal administration so that county administrative funding can be revisited at the May Revision. In CalFresh, the Governor’s budget reflects the higher state and county share of costs imposed by H.R. 1 and provides some additional funding for counties to implement expanded work requirements, but this is more than offset by funding reductions tied to anticipated disenrollment. Counties Are Key to Addressing Error Rates… The state faces significant increased CalFresh costs related to payment error rates as early as October 2027. Potential future financial penalties related to Medi-Cal payment errors are less certain and would not take effect until October 2029 at the earliest but could be significant. County implementation of H.R. 1 and efforts to reduce payment error rates will be affected by state policy, but also by strategies and resource allocation in individual counties. We recommend that the Legislature direct the administration and counties to report on what are the major drivers of payment error rates and plans to manage them. …And Avoiding Disenrollment Due to Administrative Burden. Automating verification processes and relying on all available data sources is a key strategy to mitigate the risk of disenrollment due to administrative burden. The Legislature could consider the trade-offs of providing additional funding for county administration to allow counties to spend more time carefully working with enrollees to further limit disenrollment. If additional funding is provided, we recommend that the augmentation be temporary until the level of ongoing workload related to H.R. 1 is better understood. Baseline Medi-Cal Administration Budgeting Approach Has Shortcomings. The current approach to budgeting Medi-Cal county administration funding lacks a clear link to workload, making it challenging for the Legislature to assess the adequacy of funding. We expect the Governor’s May Revision to include additional funding proposals related to Medi-Cal county administration and H.R. 1 implementation, which may address some of the shortcomings we identify. If they do not, we recommend that the Legislature update statute to require a revised methodology by a certain date in the future. www.lao.ca.gov 1 analysis full 2026-27 BUDGET BACKGROUND Medi-Cal and CalFresh Are Among the County Administrative Responsibility Largest Health and Human Services (HHS) Focused on Determining Eligibility. Eligibility Programs. Medi-Cal is California’s version determination involves assessing whether of the federal Medicaid program. It provides individuals applying for assistance in Medi-Cal, health coverage to over 14 million low-income CalFresh, or other HHS programs meet eligibility people, or more than one-third of all Californians. requirements such as those related to income, Total Medi-Cal spending in 2024-25 is estimated age, disability status, citizenship or immigration to have been $179 billion, including $37 billion status, or family and household structure. Counties from the General Fund. Of this amount, are also responsible for ensuring that only those $2.4 billion ($629 million) was estimated to who continue to meet eligibility requirements be for administration. CalFresh is California’s remain enrolled. This requires processing periodic version of the federal Supplemental Nutrition renewals for each enrollee. Many individuals qualify Assistance Program. It provided federally funded for and enroll in more than one HHS program at food assistance to about 5.5 million low-income a time. For example, an estimated 90 percent of Californians in 2024-25 with total benefits of over CalFresh enrollees are also enrolled in Medi-Cal. $12.5 billion. The state also provides state-funded In recognition of this, eligibility determination and food assistance benefits that are the same as renewal processes are, to an extent, integrated CalFresh to about 60,000 additional low-income across HHS programs. For example, there is a legally present noncitizens who do not qualify for consolidated application form that can be used to federal CalFresh benefits through the California apply to become enrolled in Medi-Cal, CalFresh, Food Assistance Program (CFAP). CFAP benefits in and CalWORKs. 2024-25 were $135 million. Hereafter, we consider Federal, State, and County Governments CFAP as a state-funded component of CalFresh. Share Fiscal Responsibility for County Administrative costs for CalFresh (and CFAP) in Administration. Significant funding is allocated 2024-25 are estimated to have been $2.5 billion to support county administration of Medi-Cal, ($925 million General Fund). CalFresh, and other major HHS programs. Figure 1 shows the distribution of fiscal responsibility Counties Administer across federal, state, and county governments State HHS Programs for administration of key HHS programs. Today, Counties Play Key Administrative Role for among the major HHS programs, counties only Medi-Cal, CalFresh, and Other HHS Programs. have a share of cost for administration in CalFresh At the state level, Medi-Cal is overseen by the (although they may incur expenditures for costs Department of Health Care Services (DHCS) and beyond the state funds appropriated in the budget). CalFresh is overseen by the Department of Social State Spending on Administration Is Services (DSS). Counties, however, are responsible Limited by Appropriation… The state budget for ground-level program administration. limits the amount of state funds available for In addition to Medi-Cal and CalFresh, counties county administration of major HHS programs. are also responsible for administration of other This limit is proposed as part of the Governor’s HHS programs, including California Work budget. The Governor’s budget uses a variety Opportunity and Responsibility to Kids (known of methodologies (each program has its own as CalWORKs), which provides cash assistance methodology) to estimate the amount of state and supportive services to low-income families funding that will be made available for county with children, and In-Home Supportive Services administration in each program. The amount of (IHSS), which provides personal care and domestic federal funding included in the Governor’s budget services to elderly or disabled low-income for each program is determined based on the individuals to help them remain safely in their own proposed amount of state funds and in accordance homes and communities, among others. 2 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET Figure 1 Funding Responsibility for Major HHS Program Administration Estimated 2025-26 Administration Funding (All Funds, In Millions) Federal Share State Share County Sharea Medi-Cal $2,378 Up to 75 percent Remaining costs No share CalFreshb 2,641 50 percentc 35 percent 15 percent CalWORKs 453 Variesd Remaining costs No sharee IHSSf 959 50 percent 50 percent No share a Counties may incur additional costs if expenditures exceed funding identified for administration in the annual state budget. b Estimated 2025-26 funding includes $17.5 million for CFAP administration. CFAP administration is 100 percent state funded, with no federal or county shares. The shares shown in this row are for federal CalFresh administration only. c H.R. 1 reduces the federal share of cost beginning October 2026. d CalWORKS administration is partially funded with the state’s allocation from the federal TANF block grant. The state’s annual allocation is fixed and the portion of available grant funding spent on administration varies from year to year. e Counties are required to spend a minimum combined MOE amount on CalFresh and CalWORKs administration. In practice this requirement is met with CalFresh administration spending. f For many years, counties had a 30 percent share of nonfederal costs for IHSS administration. Beginning in 2012-13, counties have had an MOE requirement that requires the state to appropriate state funds for the nonfederal share of costs for IHSS administration. The federal share is 50 percent for individuals eligible for federal funding. Costs for certain individuals ineligible for federal funding are covered by state funds. HHS = Health and Human Services; IHSS = In-Home Supportive Services; CFAP = California Food Assistance Program; TANF = Temporary Assistance for Needy Families; and MOE = maintenance of effort. with the sharing ratios and funding rules for each in CalFresh and IHSS and has been available program. In the case of CalFresh, the Governor’s in Medi-Cal in the past, although not in recent budget assumes that counties provide funding years. For example, county spending on CalFresh in an amount sufficient to access the full state administration is currently 15 percent of the total, appropriation and associated federal funds. In until the state funds appropriation has been fully practice, however, total spending in CalFresh is used. Thereafter, any additional county spending driven by spending from county funds—to the will be 50 percent of the total, with federal funds extent that counties put up less county funding making up the remaining 50 percent. (Counties may than the amount identified in the state budget, spend above the amounts identified in the budget spending from state and federal funds will be act for CalWORKs, but because federal funding for reduced by a proportional amount, consistent with CalWORKs is fixed, there are no additional federal funding shares. funds to match county expenditures.) …But Counties May Spend Above Budget Counties Receive Realignment Revenues Amounts and Access Additional Federal Funds. to Support Local Fiscal Responsibility. As On the other hand, counties may spend above described in the box on the next page, some state the amounts assumed in the state budget. While sales tax and vehicle license fee revenue (hereafter state funds for county administration are limited “realignment revenues”) are deposited into a special by the state budget, counties in some cases may fund dedicated to supporting responsibilities access additional federal funds beyond those that realigned from the state to counties. Some of this are matched by state dollars. They can do this funding is used to support counties’ share of cost by using county funds to draw down additional for CalFresh administration, among other county federal funds according to established sharing fiscal responsibilities such as providing basic ratios (subject to federal approval), after state funds health care for low-income, uninsured individuals or have been exhausted. This practice, sometimes covering a portion of benefit costs in IHSS. referred to as county “overmatch,” is possible www.lao.ca.gov 3 analysis full 2026-27 BUDGET What Is Realignment? Realignments Typically Shift Responsibility, and Funding, From the State to the Counties. Realignment refers to changes in program responsibility, both administrative and fiscal, between the state and counties. Typically, realignments have shifted administrative responsibility and resources from the state to counties. 1991 Realignment Adjusted County Responsibility for Health and Human Services (HHS) Program Administration and Benefits… In 1991, the state enacted a major realignment package that, among other things, increased counties’ share of cost in some programs, while also reducing counties’ share of cost for administering major HHS programs, including CalFresh, the California Work Opportunity and Responsibility to Kids (CalWORKs) program, and In-Home Supportive Services (IHSS). Counties were also given an increased share of state revenues to cover the net increase in costs. …Subject to Later Changes. Over time, the state has modified the arrangement established through 1991 realignment. When CalWORKs was established in 1996 in response to federal welfare reform legislation, the state replaced a percentage share of cost for administration with a maintenance of effort (MOE) requirement that counties can meet with combined spending on CalFresh and CalWORKs administration. Beginning in 2012-13, the state replaced a percentage share of cost for IHSS benefits and administration with an MOE requirement that grows over time. (In practice, the county MOE in IHSS is met with spending on benefits costs.) Today, CalFresh is the only remaining major HHS program for which counties have a percentage-based share of cost through 1991 realignment. H.R. 1 Notably Impacts Medi-Cal and After accounting for exemptions, an estimated CalFresh Eligibility Administration 845,000 people are expected to become subject to the expanded CalFresh work requirement beginning H.R. 1 was passed by Congress and signed in June 2026. (An unknown, but likely significant, by the President in July 2025. H.R. 1 introduces share of individuals subject to the CalFresh work multiple significant changes to Medi-Cal and requirement will also be subject to the Medi-Cal CalFresh. Many of these changes, as described work requirement.) Expanded work requirements below, directly impact county administration in create the need for counties to determine which these programs. Changes will phase in over time, enrollees are subject to the requirement and as shown in Figure 2. which are exempt, track the participation status Expanded Work Requirements. H.R. 1 imposes of nonexempt individuals, and take action on their a new work requirement in Medi-Cal and expands enrollment in accordance with that status. an existing work requirement in CalFresh (although More Restrictive Eligibility Rules for until recently the state has had a waiver from the Noncitizens. H.R. 1 disqualifies certain noncitizen CalFresh requirement for several years). While the groups—including asylees, refugees, and details of how these changes affect each program others—from being eligible for federally funded, vary, at a high level they require able-bodied, full-scope Medi-Cal and CalFresh assistance. working-age adults without young dependent This change will take effect in October 2026 in children to work or participate in other qualifying Medi-Cal. The change in CalFresh was effective activities on a part-time basis (approximately 20 upon enactment of H.R. 1 but, due to the timing of hours per week). After accounting for potential federal guidance and the need to implement system exemptions, an estimated 3.5 million people changes and train county staff, is expected to be are expected to become subject to the work implemented in California in April 2026. requirement in Medi-Cal beginning in January 2027. 4 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET Figure 2 Time Line of Major H.R. 1 Changes Impacting Medi-Cal and CalFresh Administration MMeeddii--CCaall Expanded Work CCaallFFrreesshh Requirements Medi-Cal More Restrictive Eligibility CalFresh Rules for Noncitizens Medi-Cal Enhanced Financial Penalties CalFresh for Payment Errors Medi-Cal More Frequent Eligibility Checks Increased State and County CalFresh Share of Administration Costs Restrictions on Use of CalFresh Standard Utility Allowance Nov Apr JunOct Jan Oct Oct 2025 2026 2027 2028 2029 An estimated 200,000 individuals are expected Beginning October 2029, H.R. 1 expands the types to lose Medi-Cal and an estimated 72,000 are of eligibility errors that are subject to penalties expected to lose CalFresh assistance due to and restricts the good faith waiver. This increases this change. the risk that California will be subject to penalties Enhanced Financial Penalties for Payment in Medi-Cal in the future. Depending on the Errors. As part of its oversight role, the federal scope of such errors and forthcoming federal government measures the extent to which guidance influencing how the H.R. 1 penalties are payments for benefits and services in Medi-Cal implemented, they could potentially reach hundreds and CalFresh are provided only to eligible of millions or billions of dollars in a year. individuals and in amounts consistent with In CalFresh, H.R. 1 shifts a portion of federally program rules. When payments are made in funded SNAP benefit costs to states with an error amounts that are inconsistent with program rate of 6 percent or higher, beginning October 2027. rules, it is considered to be a payment error. As shown in Figure 3 on the next page, states More details on payment error rates in Medi-Cal with higher error rates have a higher share of cost. and CalFresh are provided in a box on the next If California’s payment error rate remains at its page. Before H.R. 1, federal law imposed financial most recently measured level of 11 percent, the penalties on states when certain eligibility-related state would be liable for 15 percent of CalFresh payment errors in Medicaid exceeded a 3 percent benefits, resulting in about $2 billion in annual threshold but also gave the federal oversight General Fund costs. agency discretion to waive penalties when states made good-faith efforts to reduce the error rate. www.lao.ca.gov 5 analysis full 2026-27 BUDGET Figure 3 State Shares of CalFresh Benefit Costs for Different Payment Error Rates State Share of Benefit Approximate Annual Payment Error Rate Costs California Cost Less than 6% — — From 6% to less than 8% 5% $650 million From 8% to less than 10% 10 1.3 billion 10% or greater 15 2 billion Payment Error Rate Oversight in Medi-Cal and CalFresh Overview of Medicaid Payment Error Rate Measurement (PERM) Process. In Medicaid, the federal government undertakes triennial PERM reviews in each state that assess whether payments were made consistent with program requirements. The reviews look at errors in three main areas: • Fee-for-Service (FFS). These errors relate to direct payments to health care providers. The most common reason for FFS errors is missing or inaccurate provider enrollment information. • Managed Care. These errors relate to payments to managed care health plans. Among the three types of errors assessed in PERM, managed care errors make up a very small share. • Eligibility. These errors relate to whether an individual was eligible to receive services. The most common reason for eligibility errors is that documentation was not collected or maintained to fully determine whether the individual was eligible at the time of the audit. California’s most recent PERM review was in 2023. This review estimated an overall payment error rate in California of about 8 percent, of which about 70 percent was due to eligibility errors, with the rest attributable to FFS errors. Counties, in their role of administering Medi-Cal eligibility determination, play a key role in eligibility errors but generally are not involved with FFS errors. For comparison, the average error rate for all states reviewed in 2023 was 6 percent. Overview of Supplemental Nutrition Assistance Program (SNAP) Payment Error Rate (PER) Process. In SNAP, the federal government reviews a sample of cases each year to determine whether benefits provided were higher or lower than they should have been given the cases’ circumstances and from this calculates the error rate. The most common reasons for payment errors in California include unreported household income changes, inaccurate information on shelter costs, and delays in administrators acting on information that affects enrollees’ eligibility. California’s most recently measured PER was about 11 percent for federal fiscal year 2024. For comparison, the national average PER was also about 11 percent. Payment Errors Do Not Necessarily Indicate Fraud. Fraud, or improperly obtaining or providing benefits through willful misrepresentation, is a type of improper payment. However, most instances of improper payment result from administrative errors or inadvertent omissions of needed information and are not fraud. These types of errors are driven, in part, by the significant complexity of Medi-Cal and CalFresh for administrators and enrollees. 6 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET More Frequent Eligibility Checks in Medi-Cal. Restrictions on Use of Standard Utility Medi-Cal enrollees are currently subject to Allowance (SUA) in CalFresh. The SUA is an annual eligibility redeterminations. Beginning option used in the CalFresh benefit determination January 2027, H.R. 1 requires that the state perform that simplifies the benefit calculation and twice annual redeterminations for one group of sometimes results in a household receiving a Medi-Cal enrollees—those who gained coverage larger monthly CalFresh benefit than they would through the Patient Protection and Affordable otherwise receive. One way to qualify to use the Care Act (ACA) expansion in 2014, commonly SUA is to receive a state-funded utility assistance referred to as “childless adults.” (This is the same payment of at least $20.01 annually. Prior to group to which H.R. 1 applies the new Medi-Cal H.R. 1, California provided such a utility payment work requirement.) Doubling the frequency of to maximize household CalFresh benefits. redeterminations for this group, which includes an Effective November 2025, H.R. 1 restricts the use of estimated 4.9 million individuals 2025-26, increases state-funded utility assistance payments in this way county administration workload. to households with elderly or disabled members. Increased State and County Share of This means that fewer households will be able to CalFresh Administration Costs. Beginning use the SUA, leading to reduced monthly benefits. October 2026, H.R. 1 reduces federal support for 525,000 individuals are estimated to eventually administrative costs from 50 percent to 25 percent. have their CalFresh monthly benefits reduced by an State law requires counties to cover 30 percent estimated average of $39 from this change. of the nonfederal share, meaning that the county 2025-26 Spending Plan Provided Funding share will increase to 22.5 percent and the state to Begin to Address H.R. 1 Implementation. share will increase to 52.5 percent, as shown in Funding includes: Figure 4. This change is expected to result in • $39.9 million ($20.1 million General Fund) for ongoing annual costs of about $480 million for the DSS to pursue data and technology changes state and $190 million for counties. and outreach to CalFresh beneficiaries to reduce the payment error rate and limit Figure 4 increased state costs for CalFresh benefits. • Upon approval of the Department of Finance CalFresh Administration Funding (DOF), up to $15 million General Fund for Responsibilities DSS to implement federal guidance on H.R. 1 Current Beginning October 2026 implementation as it is released and up to Federal 50.0% 25.0% $20 million to support county implementation State 35.0 52.5 of changes to the work requirement. These Counties 15.0 22.5 items have not yet been approved for release by DOF. www.lao.ca.gov 7 analysis full 2026-27 BUDGET GOVERNOR’S PROPOSAL The Governor’s budget proposes $2.4 billion has indicated that it is working with counties to ($644 million General Fund) for Medi-Cal county better understand H.R. 1 impacts on Medi-Cal administration and $2.7 billion ($1.3 billion General administration so that county administrative funding Fund) for CalFresh administration in 2026-27. can be revisited at the May Revision. For Now, Maintains Current Level of Support Reflects Higher State and County Share of for Medi-Cal County Administration. The Cost for CalFresh Administration. To account Governor’s proposed funding amount for Medi-Cal for the lower federal share of cost for CalFresh administration is the same amount provided in administration under H.R. 1, the Governor’s budget 2024-25 and 2025-26. This is generally consistent reflects a $502 million reduction in federal funds, with the state’s recent approach to funding offset by a $359 million increase from the General Medi-Cal administration since 2018-19. In 2018-19, Fund and $143 million increase from county funds. the state began rolling forward the prior year’s Provides Some Additional Funding for budgeted amount for Medi-Cal administration Expanded CalFresh Work Requirement… after applying a cost-of-living adjustment (COLA) As shown in Figure 5, the Governor’s budget based on projected inflation, with no adjustment provides additional funding—$8.4 million in 2025-26 for projected workload or enrollment. As a budget and $78.4 million in 2026-27—for counties related solution, the 2024-25 spending plan suspended to implementing the expanded CalFresh work the COLA from 2024-25 through 2027-28. Since requirement. This funding is related to automation; proposed administration funding is unchanged, training county workers; and to account for county the Governor’s budget makes no adjustment workers needing to engage with enrollees to to account for the administrative impacts of assess whether they qualify for an exemption and, implementing H.R. 1 requirements in Medi-Cal in if not, whether they are meeting the requirement. 2026-27, including the work requirement and the Based on DSS assumptions about the hourly cost more frequent redeterminations. The administration of eligibility workers, we estimate that funding Figure 5 Estimated H.R. 1 Impacts on CalFresh and CFAP Administration (In Millions) 2025-26 2026-27 General General Total Federal Fund County Total Federal Fund County ABAWD Work Requirement New administration and automation costsa $8.4 $4.2 $3.0 $1.2 $78.4 $24.3 $38.0 $16.1 Caseload impact — — — — -78.6 -24.4 -38.1 -16.1 Subtotals ($8.4) ($4.2) ($3.0) ($1.2) (-$0.2) (-$0.1) (-$0.1) (—b) Noncitizen Eligibility Change — — — — -$12.1 -$2.5 -$7.9 -$1.7 SUAS Restriction -$5.5 -$2.7 -$2.0 -$0.8 -$15.6 -$4.8 -$7.6 -$3.2 Total Administrative Cost Changes $2.9 $1.5 $1.0 $0.4 -$27.9 -$7.4 -$15.6 -$4.9 Increased State and County Share of — — — — — -$502 $359 $143 Costc a Includes costs for training, automation, confirmation of work hours engagement, and processed discontinuances. Does not include funding for oral notice of work rules. b Less than $500,000. c Estimated H.R. 1 administrative impacts related to the ABAWD work requirement, noncitizen eligibility change, and SUAS restriction already reflect the increased state and county share of cost. Those impacts are also reflected in this line, resulting in minor overlap. CFAP = California Food Assistance Program; ABAWD = able-bodied adult without dependents; and SUAS = State Utility Assistance Subsidy. 8 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET provided in 2026-27 to engage individuals subject …Offset by Reductions Accounting for to the work requirement is equivalent to a little over Reduced Caseload. The state’s typical practice a one-half hour per person initially subject to the is to adjust CalFresh administrative funding by requirement and about the same amount of time projected changes in enrollment, in recognition to engage again with those who are about to be that higher or lower enrollment will result in higher discontinued due to not meeting the requirement. or lower administrative costs. The Governor’s Under the administration’s budgeting methodology, budget reduces funding for CalFresh administration we expect funding for these activities would likely to account for the various H.R. 1 policies that decline after initial implementation as automation are anticipated to result in reduced CalFresh and training are completed and changes to enrollment. Taken together, these assumed enrollment are completed over 12 months. caseload savings more than offset additional funding provided to implement the expanded work requirement. LAO ASSESSMENT Supporting County Administration Is a Avoiding Disenrollment of Eligible Individuals. Research on the impacts of the Key Fiscal Priority SNAP work requirement indicate that it results As front-line administrators of Medi-Cal in increased disenrollment, in part driven by and CalFresh, counties are critical to efforts otherwise eligible enrollees not complying with to implement H.R. 1. paperwork or tracking requirements (commonly Minimizing Error Rates and Related Fiscal referred to as “administrative burden”). Based Penalties. Given the significant fiscal impacts on this, it is likely that some individuals who involved, avoiding penalties for error rates is a are in compliance with new requirements high priority for the state, particularly in CalFresh. nevertheless will be disenrolled due to the Potential penalties in Medi-Cal are less certain and additional administrative burden. Implementation immediate but taking steps to limit payment errors of state work requirements in Medicaid programs in Medi-Cal is also warranted. In carrying out their nationwide has been limited to date, but we administrative responsibility, counties are required expect disenrollment due to administrative to follow state policy set by the Legislature and burden in Medi-Cal as in CalFresh. In particular, administratively by DHCS and DSS. DHCS and processes that require manual verification or DSS policymaking activities underway now will direct interaction with enrollees present risks that accordingly shape counties’ H.R. 1 implementation. steps will be missed or information falls through At the same time, individual county implementation the cracks. Automating verification processes will depend on strategies and resource allocation and connecting with all available data sources to priorities of individual counties. To support the extent possible is a key strategy to mitigating successfully mitigating risks of payment error the risk that eligible individuals are disenrolled. In penalties, the Legislature will need to understand addition to automation, additional funding support what changes to state and county processes will be for counties to allow more time to be spent with required to address the largest contributors to error affected enrollees could also help mitigate incorrect rates. DSS is currently engaged with counties in disenrollments. To some extent, the benefit of an in-depth analysis of the root causes of the high additional funding will depend on how automation CalFresh error rate. Preliminarily, income reporting proceeds. As a result, it will be necessary to appears to be a key focus. reevaluate any additional support provided over time as implementation proceeds. www.lao.ca.gov 9 analysis full 2026-27 BUDGET Baseline Medi-Cal Administration a revised CalFresh administration budgeting Budgeting Approach Has Shortcomings methodology, implemented starting in 2023-24, that relies on estimates of unit costs Current Medi-Cal Administration Budgeting for various mandated eligibility administration Methodology Lacks Clear Link to Workload. activities, based on a county survey. This While there is no clear indication that the current approach creates a framework within which Medi-Cal administration funding level is significantly the Legislature can assess how best to adjust out of alignment with costs, the current practice funding for county administration to respond of holding funding flat year over year lacks an to changing CalFresh program requirements, analytical basis that would allow the Legislature including H.R. 1 changes. As noted below, some assurance that funding is appropriately tied to unit costs require updating from time to time workload. Without a methodology that links funding to reflect changing operational conditions to workload, funding could become insufficient policy changes. or exceed what is required for efficient operations • Project Enrollment and Workload. without a clear way of assessing what adjustments Administrative budgeting methodologies are needed. used for CalFresh, IHSS, and CalWORKs all Legislatively Required Update Not Yet feature adjustments for changes in caseload. Completed. In 2013, the Legislature enacted This feature is important because caseload statute requiring DHCS to develop a new generally is the most significant driver of methodology for budgeting Medi-Cal administrative changes in administrative workload. Other costs that would take into account significant features of caseload adjustments in other changes in eligibility processes and much higher programs may also be useful in Medi-Cal. enrollment related to implementing the ACA in 2014. For example, the CalWORKs methodology This new methodology was to be implemented no puts some limits on the magnitude of sooner than 2015-16. Although efforts began to year-to-year, caseload-driven adjustments to develop a revised methodology, none has been administrative funding to minimize volatility implemented to date. This is largely due to other that can be disruptive to counties. Another competing policy priorities—for example ACA feature in the CalFresh administrative implementation and COVID-19 response efforts. budgeting methodology relies on workload H.R. 1 will likely continue to strain the department’s projections for different mandated activities ability to develop a revised methodology in the (such as applications and recertifications). near term. This allows for consideration of trends in Other HHS Administration Budgeting eligibility activities that may not follow the Methodologies Include Useful Features. Despite overall caseload trend. the ongoing challenges the state and counties • Require That Assumptions Be Updated face in administering Medi-Cal, it is important Periodically. One common challenge with to consider steps toward developing a more HHS administration budgeting methodologies rational budgeting methodology. The budgeting is that estimated unit costs and other methodologies used for other major HHS programs assumptions can become outdated because are not perfect, but they do contain features that we of inflation or changes in processes or believe would be valuable to consider applying to program requirements. In some cases, the Medi-Cal context. this can lead to counties making additional • Estimating Unit Costs Based on Actual expenditures to cover costs above what can Operations. The budgeting methodologies be covered with state funding approved in used for CalFresh and IHSS administration the budget act. To try to address this, the are both based on estimates of the average Legislature has taken steps to require that the cost of performing typical eligibility tasks for administrative budgeting methodologies for each enrollee. In particular, DSS developed both CalFresh and IHSS are reevaluated every 10 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET three years, with a report to the Legislature require difficult trade-offs. Backfilling lost federal on potential changes. (The most recent benefits under H.R. 1 would require billions of reevaluation of the IHSS methodology was dollars in additional budget solutions. for 2025-26. We note however, that although …While Counties Face Multiple Cost the reevaluations were conducted, neither Pressures. H.R. 1 also puts strain on county the Governor’s May Revision nor the 2025-26 finances. As counties take on an estimated spending plan adopted any associated $190 million in new annual CalFresh administrative administrative changes identified in the DSS costs due to H.R. 1, state revenues provided reassessment report.) COLAs can be another to counties through 1991 realignment do not useful feature to mitigate the risk of budgeting automatically adjust upward to account for methodologies falling out of alignment these additional costs, beyond normal growth in with costs. revenues. This means that counties will need to reprioritize among other responsibilities. At the H.R. 1 Puts Strain on same time, counties face other cost pressures State and County Budgets outside of HHS program administration and more related to direct services. H.R. 1 policies that result State Faces Structural Deficit… Even before in disenrollment from Medi-Cal will put pressure considering H.R. 1, our office and the administration on county responsibility for indigent health. estimate that the state faces significant structural The Governor’s budget separately proposes to budget deficits starting in 2027-28. H.R. 1 adds increase county responsibility for growth in IHSS to this structural budget problem. The impact on benefit costs (in 2027-28). Taken together, these the state budget of higher administrative costs cost pressures will make it challenging for counties and a potential future benefit share in CalFresh is to balance ongoing program operations and significant. The value of lost eligibility and benefits H.R. 1 implementation. to Medi-Cal and CalFresh enrollees is larger still. Addressing the structural budget problem will RECOMMENDATIONS Direct Administration and Counties to rate requirements? What steps is DHCS taking Report on Drivers of Payment Error Rates and to reduce the Medi-Cal payment error rate in Plans to Manage Them. We recommend that advance of H.R. 1 changes? the Legislature direct both the administration and • What share of error rates is attributable to counties to report at budget hearings on the major not having sufficient documentation versus drivers of payment error rates and steps currently incorrectly applying program rules to available underway and future efforts to manage them in information? both Medi-Cal and CalFresh. Some questions • What role do state policy decisions about the Legislature may wish to consider asking the eligibility processes play in affecting the administration and counties to report on include: complexity of operations and increasing or • The impacts of changes to the Medicaid reducing the error rate in each program? Are payment error rate in H.R. 1 are less certain there changes in state policy the state could and take effect later, relative to changes consider that would reduce errors? related to SNAP payment error rates. As a • What role do county policies and processes result, less information is available on the and the design and operation of automation current status of the state’s compliance. and data systems play in determining the What has been the state’s recent record of state’s error rates in each program? Do some compliance with the Medicaid payment error counties have significantly higher or lower www.lao.ca.gov 11 analysis full 2026-27 BUDGET error rates than others and are there practices provided, we recommend that the augmentation or other circumstances that contribute to be temporary until the level of ongoing workload this variation? related to H.R. 1 is better understood following early • How might recent and upcoming policy implementation and can be reflected in ongoing changes, including the recent discontinuation funding methodologies. As part of its deliberations, of eligibility flexibilities in Medi-Cal in the Legislature may wish to ask the administration July 2025, upcoming implementation of work to report on its plans for the $20 million made requirements in CalFresh and Medi-Cal, and available to support county implementation of work more frequent redeterminations in Medi-Cal requirements in CalFresh as part of the 2025-26 affect error rates in each program? spending plan. • To what extent are realignment funds used to Modify Statute to Establish a Deadline for support CalFresh administration today versus a Revised Medi-Cal County Administration other county funds? How will increased county Budgeting Methodology. We expect the costs for CalFresh administration under H.R. 1 Governor’s May Revision to include additional affect efforts to reduce payment error rates? funding proposals related to Medi-Cal county administration and H.R. 1 implementation. Weigh Trade-Offs Between Additional These proposals may address some of the Funding to Avoid Disenrollments Versus Other shortcomings we identify in the underlying Priorities. Given the important role that counties budgeting methodology. If these shortcomings play in implementing H.R. 1, the Legislature could are not addressed in a May Revision proposal, we consider providing additional funding for CalFresh recommend that the Legislature update statute administration, to allow counties to spend additional to require a revised methodology by a certain time working with enrollees to avoid disenrollment date in the future. The new date should take into of eligible individuals. Similar additional funding account that it may take time to fully understand could also be considered for Medi-Cal after and incorporate the impacts of HR 1 into an reviewing any changes the administration puts administrative funding methodology. Additionally, forward as part of the May Revision. In considering in taking this task on, the administration will be potential additional funding, the Legislature will adding to the many competing priorities that are need to weigh the benefit of any additional funding underway. This means that temporary funding may in terms of retained enrollment versus its other need to be in place until ongoing methodologies priorities and the need to address the state’s can be established. structural budget problem. If additional funding is LAO PUBLICATIONS This report was prepared by Ryan Woolsey, and reviewed by Ginni Bella Navarre, Mark C. Newton, and Carolyn Chu. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, California 95814. 12 LEGISLATIVE ANALYST’S OFFICE