HomeMy WebLinkAboutMINUTES - 01172012 - D.2RECOMMENDATION(S):
ACCEPT report from the County Administrator on potential local impacts to the Governor's
Proposed State Budget.
FISCAL IMPACT:
No specific impact from this report. Fiscal impact on the County is supplied in the body
and attachment to this report.
BACKGROUND:
On January 5, 2012 Governor Brown released his proposed Budget for FY 2012-13. In the
Governor's message he stated that when he came into office, California was facing an
immediate $26.6 billion budget gap and future budget deficits of $20 billion a year. In
January of 2011, he proposed a budget that combined deep cuts with a temporary extension
of some existing taxes. It was - he believed - a balanced approach that would have finally
closed the State budget gap. However taxes were not extended and massive cuts — totaling
$16 billion — were enacted. The 2011 budget did, however, begin to lay the foundation for
fiscal stability. It cut the annual budget shortfall by three-quarters — from $20 billion to $5
APPROVE OTHER
RECOMMENDATION OF CNTY
ADMINISTRATOR
RECOMMENDATION OF BOARD
COMMITTEE
Action of Board On: 01/17/2012 APPROVED AS RECOMMENDED OTHER
Clerks Notes:
VOTE OF SUPERVISORS
Contact: Lisa Driscoll, County
Finance Director (925) 335-1023
I hereby certify that this is a true and correct copy of an action taken and
entered on the minutes of the Board of Supervisors on the date shown.
ATTESTED: January 17, 2012
David Twa, County Administrator and Clerk of the
Board of Supervisors
By: , Deputy
cc: Robert Campbell, County Auditor-Controller
D.2
To:Board of Supervisors
From:David Twa, County Administrator
Date:January 17, 2012
Contra
Costa
County
Subject:Governor's Proposed Budget - Potential Impacts
billion. It shrunk state government, reduced borrowing costs and gave local governments
more authority to make decisions. The FY 2012-13 proposed budget submitted keeps the
cuts made last year and adds new ones.
The Governor ended his message by asking voters to approve a temporary tax increase on
the wealthy, a modest and temporary increase in the sales tax and to guarantee that the new
revenues be spent only on education. He asked that the voters guarantee ongoing funding for
local public safety programs. This ballot measure will not solve all of the fiscal problems,
but it will stop further cuts to education and public safety and halt the trend of double-digit
tuition increases. His budget plan also includes reforms. It improves government efficiency
and pays down debt. It reorganizes state government to make it more efficient and saves tax
dollars by consolidating or eliminating functions. It restructures social service programs to
better support working families. It gives substantially more flexibility and decision-making
to local school districts. The plan also calls for bold investments in the future: to assure a
reliable water supply, build high speed rail and reduce greenhouse gas emissions.
BACKGROUND: (CONT'D)
2011 Public Safety Realignment
The Governor’s 2012/13 Proposed Budget provides increased local government funding
for 2011 realigned programs, reflecting 12 months of realignment in FY 2012/13 as
compared to 9 months of realignment in FY 2011/12, and recognizing that state prison
services for lower level offenders are winding down while county services for these same
offenders are ramping up.
Two efforts are proceeding simultaneously to help protect and guarantee an adequate
revenue stream to support county delivery of realigned programs. One effort is to secure
the source of funding or the overall state pot of funds dedicated to realignment. The
Governor is sponsoring an initiative to provide Constitutional protection of this revenue
for counties and against related future costs and mandates imposed upon counties.
The other effort is to ensure that the pot of funds is shared equitably among counties so
that each county has the best opportunity to successfully integrate this population into
local custody and supervision. As part of the implementation of 2011 Realignment (AB
109), the Department of Finance developed a funding model based on assumptions about
costs of activities for these offenders at the local level. The 2011/12 county funding
allocation for realignment was developed by the California State Association of Counties,
working with county executive officers, using three factors— the estimates of the number
of offenders who would be under the jurisdiction of each county (ADP), each county’s
population between the ages of 18 to 64, and a county’s success under the felony
probation program initiated under Chapter 608, Statutes of 2009 (SB 678). Because
Contra Costa County’s ADP has been historically low, our County was disadvantaged by
this formula. The state has reiterated that the allocation formula for the community
corrections programs was for 2011/12 only in order to gain more program experience
before determination of a permanent allocation. A Realignment Allocation Committee
composed of nine County Administrators (three from urban, three from suburban, and
three from rural counties) has begun meeting to discuss future AB 109 allocations, with a
tentative deadline to submit a proposal to the State by March 2012. Contra Costa County
will provide input to this process through the urban county representatives, which include
the Alameda County Administrator.
The County’s Community Corrections Partnership (CCP) Executive Committee has been
meeting monthly to monitor implementation of the County’s realignment plan, staffing
needs, and expenditures to date. The Sheriff and Probation Departments report higher
numbers of parolees and community supervision offenders than projected by the State.
The State has since admitted that it failed to correctly estimate the actual number of
post-release community supervision offenders impacting our county by approximately
50%. The higher populations have required the Sheriff and Probation to accelerate the
program ramp up and hiring of staff. The CCP and CAO continue to monitor this
situation closely.
Juvenile Justice Reform
One bright spot in the Governor’s Proposed Budget is the placement of a temporary
safety catch on the revenue trigger that would have levied millions of dollars of fees on
our county for the placement of serious and high-risk juvenile offenders in state juvenile
detention facilities. We had previously estimated an annual cost increase to our County of
$5.5 million. The Governor appears to recognize that a complete realignment of juvenile
offenders must be done thoughtfully and carefully to provide the best placement and
treatment options for these youth. The Proposed Budget proposes to stop the intake of
new juvenile offenders to the Division of Juvenile Justice (DJJ) effective January 1,
2013. Recognizing that counties will need resources and support to secure appropriate
placements and treatment options for additional offenders, many of whom need mental
health and substance abuse treatment, the Budget proposes $10 million General Fund in
2011/12 for counties to begin planning for this population. To help with the transition and
prevent the disinvestment of funds in juvenile justice at the local level, the state will
delay collection of trigger fees for those wards housed in the DJJ. The Probation
Department has begun to research the facility improvements that would be required to
ready one of the units in the old Juvenile Hall in the event we must develop a local
alternative to DJJ.
For Contra Costa County, the Governor's proposals appear to hit the Employment and
Human Services Department the hardest. Attached are the California State Association of
Counties Budget Action Bulletin, the Legislative Analyst's Office Budget Overview, the
Urban Counties Caucus Budget Summary, and preliminary impacts for Contra Costa
County by department.
CONSEQUENCE OF NEGATIVE ACTION:
None - this report is informational.
CHILDREN'S IMPACT STATEMENT:
None.
CLERK'S ADDENDUM
CONTINUED to January 24, 2012.
ATTACHMENTS
CSAC Budget Action Bulletin
LAO Budget Overview
UCC Budget Summary
Local Impacts
Highlights of the Governor’s Proposed 2012-13 State Budget
Week of January 2, 2012
January 5, 2012
TO: CSAC Board of Directors
County Administrative Officers
CSAC Corporate Associates
FROM: Paul McIntosh, CSAC Executive Director
Jim Wiltshire, CSAC Deputy Executive Director
Jean Kinney Hurst, Legislative Representative
RE: Summary of the Governor’s 2012-13 Budget Proposal
In an unanticipated turn of events, Governor Jerry Brown released his proposed 2012‐13
state budget a few days early. (Apparently, the budget document was inadvertently
posted on the Internet, requiring an early announcement from the Governor.) The
budget is an austere one, proposing significant program reductions in addition to the
new revenues proposed by the Governor in his sponsored November 2012 ballot
measure. The Governor continues to focus on moving government closer to the people,
improving government efficiency, and paying down the state’s “wall of debt.”
The slow economic recovery continues to plague the state and hamper the ability to
fund core services. Baseline General Fund revenues are projected to total $89 billion in
2012‐13, and are not expected to return to their 2007‐08 levels until 2014‐15. Further,
there remain significant risks and uncertainty to the state’s fiscal health, including
ongoing debt obligations, pension liabilities, and uncertainties associated with the
continuing debate on addressing the federal budget deficit.
The budget deficit for 2012‐13 is estimated to be $9.2 billion, including a current year
deficit of $4.1 billion. The current year fiscal problem was exacerbated by court
challenges, delays in federal approvals, and lower‐than‐anticipated economic
performance. To address the deficit, the Governor is proposing a combination of
spending reductions and temporary taxes (via ballot initiative) totaling $10.3 billion to
both balance the budget and establish a $1.1 billion reserve. The Governor also
proposes a new round of trigger cuts slated to take effect if his ballot initiative fails;
these cuts are detailed in the sections that follow.
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The Governor also proposes a reorganization of state government, including the
elimination and consolidation of 48 boards, commissions, programs, and departments.
For more details on the Governor’s reorganization plans, please see the “Making
Government More Efficient” chapter of the Governor’s budget summary, starting on
page 23.
With an entire chapter devoted to 2011 realignment, the Governor also reiterated his
commitment to constitutional protections and ongoing dialogue with counties during
implementation of realignment.
This Budget Action Bulletin summarizes the components of the Governor’s proposed
2012‐13 budget as we understand them at this late hour. Please note that additional
details and information will be forthcoming from CSAC as they become available. Do
not hesitate to contact CSAC staff with your questions and we will do our best to assist
you.
BUDGET SUMMARY CHARTS
2012‐13 Governor’s Budget
General Fund Budget Summary
($ in millions)
Defining the Problem With Solutions
2011‐12 2012‐13 2011‐12 2012‐13
Prior Year Balance ‐$3,079 ‐$3,416 ‐$3,079 ‐$985
Revenues and Transfers $86,309 $89,221 $88,606 $95,389
Total Resources Available $83,230 $85,805 $85,527 $94,404
Non Proposition 98 Expenditures $53,846 $58,905 $53,883 $55,035
Proposition 98 Expenditures $32,800 $35,348 $32,629 $37,518
Total Expenditures $86,646 $94,253 $86,512 $92,553
Fund Balance ‐$3,416 ‐$8,448 ‐$985 $1,851
Reserve for Liquidation of Encumbrances $719 $719 $719 $719
Special Fund for Economic Uncertainties ‐$4,135 ‐$9,167 ‐$1,704 $1,132
Budget Stabilization Account ‐‐‐ ‐
Total Available Reserve ‐$4,135 ‐$9,167 ‐$1,704 $1,132
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General Fund Revenue Sources
($ in millions)
Change from 2011‐12
2011‐12 2012‐13 $ Change % Change
Personal Income Tax $54,186 $59,552 $5,366 9.9%
Sales and Use Tax 18,777 20,769 1,992 10.6%
Corporation Tax 9,479 9,342 ‐137 ‐1.4%
Motor Vehicle Fees 103 30 ‐73 ‐70.9%
Insurance Tax 2,042 2,179 137 6.7%
Estate Taxes ‐45 45 ‐
Liquor Tax 323 329 6 1.9%
Tobacco Taxes 93 90 ‐3 ‐3.2%
Other 3,603 3,053 ‐550 ‐15.3%
Total $88,606 $95,389 $6,783 7.7%
General Fund Expenditures by Agency
($ in millions)
Change from 2011‐12
2011‐12 2012‐13 $ Change % Change
Legislative, Judicial, Executive $2,540 $2,600 $60 2.4%
State and Consumer Services 619 689 70 11.3%
Business, Transportation &
Housing
679 558 ‐121 ‐17.8%
Natural Resources 1,935 1,896 ‐39 ‐2.0%
Environmental Protection 51 47 ‐4 ‐7.8%
Health and Human Services 26,668 26,414 ‐254 ‐1.0%
Corrections and Rehabilitation 7,849 8,744 895 11.4%
K‐12 Education 34,162 38,179 4,017 11.8%
Higher Education 9,821 9,377 ‐444 ‐4.5%
Labor and Workforce
Development
354 448 94 26.6%
General Government:
Non‐Agency Departments 450 514 64 14.2%
Tax Relief/Local Government 544 2,534 1,990 365.8%
Statewide Expenditures 840 553 ‐287 ‐34.2
Total $88,606 $95,389 $6,783 7.7%
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Budget Balancing Proposals
($ in millions)
Expenditure Reductions
Health and Human Services
CalWORKs $946.2
Medi‐Cal 842.3
In‐Home Supportive Services 163.8
Other HHS Programs 86.9
Education
Proposition 98 544.4
Child Care 446.9
Cal Grant Program 301.7
Other Education 28.0
All Other Reductions
State Mandates 828.3
Other Reductions 27.3
Total Expenditure Reductions $4,215.8
Revenues
General Fund Revenues
Temporary Taxes $4,400.8
Other General Fund Revenues 88.8
Special Fund Revenues
Gross Premiums Insurance Tax on Medi‐Cal Managed Care Plans 161.8
Total Revenues $4,651.4
Other
Loan Repayment Extensions $630.5
Unemployment Insurance Interest Payment 417.0
Additional Weight Fee Revenues 349.5
Suspend County Share of Child Support Collections 34.5
Total Other $1,431.5
Total Solutions $10,298.7
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Outstanding Budgetary Borrowing
($ in billions)
Deferred payments to schools and community colleges $10.4
Economic Recovery Bonds 6.3
Loans from special funds 3.4
Unpaid costs to local governments, schools, and
community colleges for state mandates
4.5
Underfunding of Proposition 98 3.4
Borrowing from local government (Proposition 1A) 2.1
Deferred Medi‐Cal costs 1.3
Deferral of state payroll costs from June to July 0.8
Deferred payments to CalPERS 0.5
Borrowing from transportation funds (Proposition 42) 0.3
Total $33.0
Trigger Cuts
The Governor’s proposed budget assumes the passage of a November 2012 initiative
that would protect counties’ realignment revenues and also temporarily raise the sales
tax rate and personal income tax rates on higher income earners. However, the state
needs to borrow money at the beginning of the fiscal year to cover expenses until the
bulk of the revenue comes later in the year.
Money lenders would not trust the state to repay this intra‐year debt with such
uncertainty, so the Governor proposes significant trigger cuts effective January 1, 2013
should the ballot measure fail.
These trigger cuts total $5.4 billion. $4.8 billion (89 percent) of those cuts are reductions
to schools and community colleges. Half of that reduction results from the decrease to
the Proposition 98 guarantee. The other half results from shifting K‐14 bond debt
service costs into Proposition 98, thereby reducing money going to schools. Cuts at this
level equal about three weeks of instruction. Another $400 million in cuts target the UC
and CSU systems.
The rest of the cuts are to the courts ($125 million, equivalent to three days of closures
per month), Cal FIRE ($15 million, about 10 percent of its budget), and small cuts to
various other state protection agencies. These small cuts would, among other things,
eliminate lifeguards from state beaches and reduce the number of park rangers and
game wardens by 20 percent.
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Ballot Trigger Reductions
Effective January 1, 2013
($ in millions)
Proposition 98 $4,836.9
University of California /1 200.0
California State University /1 200.0
Courts 125.0
Department of Forestry and Fire Protection 15.0
Flood Control 6.6
Fish and Game: Non‐Warden Programs 2.5
Fish and Game: Wardens 1.0
Park Rangers 1.0
Park Lifeguards 1.0
Department of Justice 1.0
Total Ballot Trigger Reductions $5,390.0
/1 This level of savings may be offset by Cal Grant increases if the universities raise
tuition.
2011 Realignment
The Governor’s proposed 2012‐13 state budget includes discussion about moving
forward with 2011 realignment in terms of constitutional protections, allocation of
funds and funding structure, and other programmatic changes. As previously reported,
the Governor is sponsoring a ballot measure that provides constitutional protections for
the revenue dedicated to 2011 realignment, as well as protections against new costs
associated with future changes to realigned programs.
Recall that two additional programs are slated for realignment in 2012 (and
incorporated into the funding model for 2011 realignment): mental health managed
care and the Early Periodic Screening, Diagnosis, and Treatment (EPSDT) program.
These programs will be fully funded by 2011 realignment revenues on an ongoing basis.
2011 Realignment Funding
The budget assumes funding for 2011 realignment from two state sources – a state
special fund sales tax of 1.0625 percent totaling $5.1 billion and $462.1 million in
Vehicle License Fees (VLF) for 2011‐12. These two figures represent revised estimates
by the Department of Finance (DOF) after the enactment of the final 2011‐12 budget
last June. These funds are deposited in the Local Revenue Fund 2011 and are
continuously appropriated and allocated to counties for the purposes of 2011
realignment.
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2011 Realignment Funding
($ in millions)
Program 2011‐12 2012‐13 2013‐14 2014‐15
Court Security $496.4 $496.4 $496.4 $496.4
Local Public Safety Programs 489.9 489.9 489.9 489.9
Local Jurisdiction for Lower‐level
Offenders and Parole Violators
Local Costs 239.9 581.1 759.0 762.2
Reimbursement of State
Costs
957.0 ‐‐ ‐
Realign Adult Parole
Local Costs 127.1 276.4 257.0 187.7
Reimbursement of State
Costs
262.6 ‐‐ ‐
Mental Health Services
EPSDT ‐544.0 544.0 544.0
Mental Health Managed Care ‐188.8 188.8 188.8
Existing Community Mental
Health Programs
1,104.8 1,164.4 1,164.4 1,164.4
Substance Abuse Treatment 179.7 179.7 179.7 179.7
Foster Care and Child Welfare
Services
1,562.1 1,562.1 1,562.1 1,562.1
Adult Protective Services 54.6 54.6 54.6 54.6
Existing Juvenile Justice
Realignment
95.0 98.8 100.4 101.3
Program Cost Growth ‐180.1 443.6 988.8
Total $5,569.1 $5,816.3 $6,239.9 $6,719.9
Vehicle License Fee Funds 462.1 496.3 491.9 491.9
1.0625% Sales Tax 5,107.0 5,320.1 5,748.0 6,228.0
Total Revenues $5,569.1 $5,816.3 $6,239.9 $6,719.9
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Funding Structure for 2011 Realignment
Counties will recall discussions over the last months regarding a permanent funding
structure for 2011 realignment. While we had originally anticipated requiring such a
structure prior to the Legislature’s adjournment, these efforts were postponed to allow
for additional conversations with stakeholders. After ongoing conversations between
CSAC, our county partners, and DOF, the Administration is proposing a permanent
funding structure for realignment with the goal of providing a reliable and stable
funding source that allows for local flexibility. That structure is depicted in the chart
below.
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Base Funding
Base funding in each subaccount should not experience a year‐over‐year decrease. A
statutory mechanism should be in place to deal with the possibility of a year’s base
being short due to significantly reduced revenues.
The timing of the programs’ inclusion in 2011 realignment and the implementation
scheduled should affect base funding for each program. The base should be a rolling
base for each subaccount, meaning that a year’s base funding plus growth becomes the
subsequent year’s base.
The 1991 Mental Health programs should continue to receive revenue based on its 1991
formula.
Growth Funding
Funding for program growth should be distributed on a roughly proportional basis, first
among accounts, then by subaccounts.
Within each subaccount, federally required programs should receive priority for funding
if warranted by caseload and costs.
Growth funding for the Child Welfare Services (CWS) program is a priority once base
programs have been established. Over time, CWS should receive an additional $200
million.
Transferability
To provide flexibility, counties should have the ability to transfer a maximum of 10
percent of the lesser subaccount between the subaccounts within the Support Services
Account.
Beginning in 2015‐16, there should be a local option to transfer a portion of the growth
among subaccounts within the Law Enforcement Services Account.Transfers should be
for one year only and not increase the base of any program.
Reserve Account
To provide some cushion for fluctuations in future revenue, a Reserve Account should
be established when Sales and Use Tax revenues exceed a specified threshold.
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Public Safety Realignment (AB 109)
The Governor’s budget discusses counties’ efforts at implementing public safety
realignment. Given only three months of experience managing the new adult offender
populations, the Governor notes that there is insufficient information available to assess
whether the state’s estimates of 2011 Realignment impacts are tracking counties’ actual
new workload. The budget also discusses the operational impacts to the state’s
corrections system associated with the implementation of public safety realignment,
noting that:
The state prison population is declining, as expected, which greatly aids the state
in complying with the federal court’s order to reduce prison population over the
next two years. State prison population is expected to decline from just over
150,000 inmates in 2011‐12 to approximately 132,000 in 2012‐13 (a 12 percent
drop).
The state’s facility needs will change as a result of population reductions. For
example, the proportion of female inmates is decreasing more quickly than
males, meaning the state now plans to convert the Valley State Prison for
Women to a male facility in 2013. Other operational changes related to
reception centers and other beds are also expected.
The Governor’s budget narrative also discusses the AB 109 allocation formula, noting
that the county‐by‐county distribution for the first nine months of operation applies
only to 2011‐12, given counties’ expressed need to have programmatic experience
before settling on a more permanent funding methodology.
As discussed previously, the Governor’s budget makes an ongoing commitment of
funding to support the transferred criminal justice responsibilities. (See 2011
Realignment Funding table above.) Ongoing and regular discussions continue among
counties, public safety stakeholders, and the Administration to identify and monitor
realignment implementation. The Governor’s budget makes clear his ongoing
commitment to address systemic issues that arise. The budget notes, for example, the
Administration’s intent to work with counties to explore and develop treatment and
housing options for in‐custody offenders who are in need of mental health treatment.
In recognition of the significance of the shift in new offender populations, the
Governor’s budget proposes a second year of training to support statewide AB 109
training efforts ($1 million) and grants to local Community Corrections Partnerships
(CCP) ($7.9 million). The CCP planning funds are intended to support counties’ efforts in
reviewing and amending AB 109 implementation plans.
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Ongoing Realignment Efforts
The Administration is committed to a continued partnership with county officials for the
successful implementation of 2011 realignment, including:
State Operations Reductions. The Administration is committed to a 25‐percent
reduction in the state operations of program areas that have been realigned.
Both the Departments of Alcohol and Drug Programs and Mental Health have
reduced their program components by that amount before transferring
functions to the Department of Health Care Services (DHCS). The new Division of
Mental Health and Substance Use Disorder Services within the DHCS will provide
appropriate state oversight and assistance for programs realigned to the
counties. The Department of Social Services will develop its 25‐percent reduction
plan upon county decisions regarding workload within realigned programs and
based upon federal requirements.
County Flexibility. The Administration continues to support efforts to increase
the flexibility of counties in administering programs.
Juvenile Justice Reform
The Governor’s budget outlines a revised juvenile justice reform proposal whereby the
state would stop intake of juvenile offenders to the Division of Juvenile Justice (DJJ)
facilities on January 1, 2013. After this date, all new commitments of youthful offenders
to DJJ would cease. DJJ would continue to house those juvenile offenders who were
placed with the state on or before January 1, 2013, but facilities would shut over time as
the population phases out. In order to prepare counties for this shift in responsibility,
the budget proposes to provide $10 million in planning funds to counties in the current
year. The purpose of this funding is to give counties both the time and resources to
develop appropriate placement and treatment options for this additional juvenile
population. The funds would be distributed to counties under an as‐yet undetermined
methodology. The Administration will work with stakeholders to determine how to
distribute the planning funds to the 58 counties. As the result of this proposal, the state
plans to delay collection of the increased fees for DJJ placements that became effective
on January 1, 2012 as a result of the 2011‐12 trigger cuts.
Phase 2 Realignment
The Governor’s budget discusses his continued intention to pursue Phase 2 Realignment
in the future. These efforts would be linked to ongoing conversations regarding
California’s implementation of federal healthcare reform. Structuring Phase 2 will take
into account the movement of a significant number of people now served by county
indigent programs (about 2 million) to the Medi‐Cal program and the Administration’s
desire to rebalance county responsibility for additional programs in the future. More
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information and further exploration of potential changes in state/local program
responsibility in Phase 2 are needed.
ADMINISTRATION OF JUSTICE
In addition to the Governor’s ongoing commitment to the success of realignment as
stated in the introduction, the Governor’s proposed budget contains other public safety
elements that may be of interest to counties. These elements are briefly described
below.
California Department of Corrections and Rehabilitation (CDCR). The budget proposes
various operational changes for CDCR, including the following:
Expanding the Alternative Custody for Female Offenders Program – This program
was created in 2010, pursuant to SB 1266 by Senator Carol Liu. It allows non‐
violent and non‐serious female offenders to participate in an alternative custody
program in the community, which includes substance abuse counseling and
vocational education. The Governor’s budget proposes to expand eligibility of
this program to include female offenders who have a prior offense that is serious
and/or violent, as many of these offenders have been deemed low‐risk.
Review of Prison Facilities Plans – CDCR has reduced its use of non‐traditional
prison beds by over 4,000 beds. The State is reevaluating its need for infill and
reentry construction projects proposed to be funded through the state’s portion
of AB 900 (2007) given that it has significantly reduced its use of gymnasiums
and dayrooms to detain prison inmates.
Board of State and Community Corrections. The budget contains $109.1 million in
funding to support the creation of the Board of State and Community Corrections (BSCC)
beginning July 1, 2012, as enacted in the 2011‐12 state budget. Under the structure, the
BSCC will assume the duties of the existing Corrections Standards Authority and certain
public safety grant‐related responsibilities of the California Emergency Management
Agency (CalEMA). Further, the BSCC is designed as an independent entity that will
provide statewide leadership and coordination on statewide public safety policies –
including realignment.
Judicial Branch. The Governor’s budget contemplates a $50 million augmentation to the
Trial Court Trust Fund based on a proposed civil court fee increase. The augmentation is
intended to offset the ongoing impacts of permanent budget reductions the courts have
experienced in past years.
2012‐13 Trigger Cuts in Courts/Public Safety. The Governor is proposing trigger cuts
should his November 2012 ballot initiative fail. These trigger cuts total $5.3 billion, of
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which $126 million will be to the courts and the Department of Justice. Please see below
for a brief explanation of these cuts:
Judicial Branch – The courts would be reduced an additional $125 million, an
amount equal to three court closures a month.
Department of Justice (DOJ) – The trigger cuts would apply a $1 million
unallocated reduction.
AGRICULTURE AND NATURAL RESOURCES
Reorganization of State Government. The Governor’s proposed budget eliminates,
consolidates and restructures a number of agencies and departments under the
Agriculture & Natural Resources area. Specifically, the budget proposes to eliminate
CalEMA and would make it an office reporting directly to the Governor. The proposed
budget would transfer the Department of Resources, Recycling and Recovery (Cal
Recycle) to the California Environmental Protection Agency (CalEPA). The budget
summary indicates that hazardous waste, electronic waste and landfill permits are more
appropriately regulated by CalEPA and not the Natural Resources Agency. The proposed
budget also eliminates the State Geology and Mining Board, transferring its
responsibilities to the Office of Administrative Hearings for regulatory appeals functions,
with the balance of the Board’s responsibilities going to the Office of Mine Reclamation
within the Department of Conservation. Finally, the Governor’s budget would reduce
the number of Regional Water Quality Control Boards from nine to eight, consolidating
the Colorado River Basin Water Board into neighboring regions, and reduce the number
of members on the boards from nine to seven.
Department of Forestry and Fire Protection. The proposed budget assumes $9.3 million
in revenues for 2012‐13 to be generated by the proposed State Responsibility Area
(SRA) fee, currently under consideration by the Board of Forestry. As you may recall,
ABX1 29 (2011) established an (up to) $150 fee on each structure on a parcel located
within the SRA. The budget also indicates that the Board of Equalization will assess the
fee, including an increase of $6.4 million to their budget and an addition of 57 positions
to do so, and that the Administration is continuing to evaluate the long‐term structure
of the fee, leaving the door open for supplementing the fee with an additional per‐acre
charge.
State Water Resources Control Board. The budget proposes to increase water quality
grants by $11 million through the State Water Pollution Control Revolving Small
Community Fund. These grants are for small and severely disadvantaged communities
to address wastewater system needs.
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Delta. The proposed budget includes an increase of $25.4 million and 135 positions to
DWR for preliminary engineering work to support the Delta Habitat Conservation and
Conveyance Program (DHCCP). This funding will support the Bay Delta Conservation
Plan’s Environmental Impact Report, to be conducted by DHCCP.
Climate Change. The California Air Resources Board (CARB) will begin to auction
greenhouse gas (GHG) emissions allowances through the AB 32 Cap and Trade Program
in 2012‐13. Revenue estimates for the program are expected to be approximately $1
billion in the first year. The proposed budget includes a framework for how to expend
the proceeds of the Cap and Trade Program, noting that only activities that further the
purposes of AB 32 are eligible for funding. The framework lists clean and efficient
energy, low‐carbon transportation, natural resource protection and sustainable
infrastructure development as priority areas for funding. Of particular note, under the
heading of natural resource protection, the Governor lists natural resource conservation
and management and sustainable agriculture as areas eligible for funding.
GOVERNMENT FINANCE AND OPERATIONS
Mandates
The Governor’s budget plan proposes to reduce state spending on local government and
school mandates, saving the General Fund $828 million.
The bulk of this savings results from his proposal to dramatically change the state’s
mandate relationship with schools. Under the plan, the state would eliminate almost
half of all current K‐14 mandates, and replacing the rest with incentives to comply with
those that remain. Instead of funding actual costs, the Governor proposes a school
mandates block grant.
Furthermore, the Governor proposes to repeal dozens of the roughly 50 mandates that
have been suspended at least two years.
The Governor also proposes that the Commission on State Mandates redetermine
mandates related to sexually violent predators. The state originally mandates certain
activities in 1995 and reimburses local agencies for their related costs, but voters
approved Proposition 83 (Jessica’s Law) in 2006, and the state is not required to
reimburse locals for mandates passed by voters.
Lastly, the Governor proposes to again defer the state’s payment for pre‐2004 state
mandates, saving the General Fund (and costing local agencies) $99.5 million.
15
Counties with 100 Percent Basic Aid Education Entities
The Governor’s proposed budget provides $4.4 million to the counties of Amador and
Mono and the cities therein for shortfalls in 2010‐11 associated with their Sales and Use
Tax and Vehicle License Fee Adjustment Amounts. In these counties, all education
entities are considered “basic aid” and, as a result, there is no statutory mechanism by
which the counties and cities can receive reimbursement for revenues losses associated
with the Triple Flip and VLF Swap of 2004. CSAC is joining these counties and the
Regional Council of Rural Counties (RCRC) in sponsoring AB 1191 (Huber) to provide a
permanent mechanism to achieve this reimbursement.
EMPLOYEE RELATIONS
The Governor’s proposed budget includes the elimination or consolidation of several
employment‐related boards and commissions. Specifically, it:
Creates the Government Operations Agency, which will include duties of the
departments of General Services, Human Resources, Technology, Office of
Administrative Law, the Public Employees’ Retirement System, the State
Teachers Retirement System and the State Personnel Board.
Eliminates the Occupational Safety and Health Administration Board and gives its
functions to the Employee Development Department.
Consolidates EDD’s tax collection functions with the Franchise Tax Board into a
new department called the Department of Revenue.
Additionally, the Governor’s budget proposes to eliminate 15,000 state positions and
have DOF conduct a department‐by‐department review to identify other positions for
elimination.
Unemployment Insurance Program. Counties will recall that due to a structural
imbalance between revenues and benefit payments, the Unemployment Insurance (UI)
Fund has been making benefit payments with borrowed federal funds since 2009. The
UI Fund deficit was $9.8 billion at the end of 2011, and is projected to be $11.7 billion at
the end of 2012. Required annual interest payments were waived under the American
Recovery and Reinvestment Act for 2010. Interest in the amount of $303.5 million was
paid in September 2011 through a loan from the state’s Unemployment Compensation
Disability Fund. The Governor’s budget proposes to continue to borrow from the
Disability Fund to pay the 2012‐13 interest expense of $417 million.
The budget also proposes a surcharge on employers to generate $472.6 million to fund
future interest payments and repay borrowed funds, and increases the minimum
16
monetary eligibility requirements to qualify for UI benefits to account for increases in
employee wages that have occurred since the requirements were last adjusted in 1992.
Workforce Investment Act (WIA) Funding. The budget reflects a decrease of $39.5
million in federal funds for the Governor’s discretionary WIA funding, a reduction from
15 percent to 5 percent in the discretionary funds provided by the federal government.
HEALTH AND HUMAN SERVICES
Governor Brown has proposed significant cuts and changes to the CalWORKs, Medi‐Cal,
In Home Support Services (IHSS), and Child Care programs in his 2012‐13 budget
proposal. Please note that each of the reductions and proposals outlined below are
permanent and ongoing, and would take effect regardless of whether the Governor’s
proposed tax initiative passes in November.
CalWORKs. The Governor is proposing to restructure the existing CalWORKs program by
creating a two‐tier system that supposedly focuses on work participation for adult
recipients. All proposals below will affect both current and future CalWORKs recipients,
and are estimated to save the state up to $1.1 billion in the current year.
The Governor would create two tracks for CalWORKs recipients:
CalWORKs Basic would serve as the entry‐point for the welfare‐to‐work program
and would be operational by October of this year. The eligibility time limit for
this phase would be 24 months, with an assessment of the recipients’ progress
after 12 months. For six months following the October 2012 implementation of
the CalWORKs Basic program, all currently aided eligible adults will be eligible for
welfare‐to‐work services and child care. The budget has increased the county
single allocation by $35.6 million to provide some of these services. Additionally,
families who are sanctioned for more than three months would be disenrolled
from the program.
If a CalWORKs Basic participant maintains unsubsidized employment at specified
levels (30 hours for adults and 20 hours for those with children under age six),
they would move to the CalWORKs Plus program. This program would become
operational in April of 2013 and reward participants with a higher grant level by
allowing them to utilize a higher income disregard (first $200 earned and 50
percent of subsequent income). Participants would be eligible for this program
for up to 48 months, and if they reach the time limit but continue to work
specified amounts, they would retain the higher earned income disregard.
The income support program of child only grants will continue under the name of Child
Maintenance Program, but grants will be cut by 27 percent, or about $70 a month,
beginning in October of this year. Also, families on the Child Maintenance Program will
17
be subject to annual eligibility determinations and required to have children in the
program seen annually by a doctor.
Furthermore, under the restructuring, low‐income families who are CalFresh recipients
or child care subsidies – but not on CalWORKs – and meet work participation
requirements may receive $50 bonus payments.
Child Care. The Governor proposes shifting eligibility determinations and payment
functions for approximately 142,000 children in subsidized child care programs to
counties in 2013‐14. Once fully implemented, the new structure would replace the
three‐stage CalWORKs child care system for current and former CalWORKs recipients
and programs already serving low‐income parents with a “work‐based” subsidized child
care system administered by county welfare departments.
In this model, counties would apply federal income eligibility rules and welfare‐to‐work
participation requirements to those seeking subsidized child care support. Recipients
would also be subject to welfare‐to‐work employment requirements, and the
Administration estimates that this change in eligibility will eliminate about 46,300 child
care slots statewide.
Additionally, the state seeks to save $43.9 million by switching eligibility determinations
from a measure of state median income to 200 percent of the Federal Poverty Level.
The state estimates this will remove 15,700 child care slots.
The proposal also removes the statutory Cost of Living Increase Adjustment for capped
non‐CalWORKs child care programs to save $29.9 million..
Governor Brown also proposes to reduce the child care reimbursement rate ceiling for
voucher‐based programs from the 85th percentile of the private pay market to the 50th
percentile (based on the 2009 Market Rate Survey). This would save the state $11.8
million. Please note that rates for license‐exempt providers will be unaffected, but they
will have to meet certain health and safety standards in order to continue to receive
reimbursement. Also, direct‐contracted Title 5 centers will see a 10 percent
reimbursement rate reduction.
Furthermore, beginning in 2013‐14, families who meet federal work requirements
under the new structure will receive a $50 monthly work bonus to be issued by county
welfare departments.
Priority for voucher‐based programs will be given to families who participate in the Child
Welfare System or are at risk for being abused, neglected, or exploited. Cash‐aid families
would continue to receive subsidized child care services.
18
The Governor will also introduce legislation to require counties to identify and collect
subsidized child care overpayments, and would levy sanctions on agencies that do not
reduce the incidence of overpayments.
Overall, the child care cuts would save over $500 million.
In‐Home Support Services. The budget includes a number of reductions to the In Home
Support Services (IHSS) program as well as significant restructuring for those who are
dually eligible for Medi‐Cal and Medicare. Please see the Medi‐Cal section for more
information on that specific proposal.
The Governor proposes to eliminate domestic and related services for IHSS consumers
living with other adults who are not participants in the IHSS program, unless those
adults are found to be unable to perform such services. This reduction in domestic
services also applies to children in the IHSS program who reside with their parents, and
the state assumes budget savings of $164 million in the current year if implemented by
July 1 of this year. This proposal would affect 254,000 IHSS recipients.
The budget assumes that the 20‐percent across‐the‐board trigger cut to IHSS would be
implemented April 1, 2012. However, a court injunction has precluded implementation.
The budget also includes a set‐aside to fully fund the IHSS program in the event the
court permanently upholds the injunction.
Medi‐Cal.
Care Coordination for Dual Eligible Individuals. The Administration proposes to
improve care coordination for seniors and persons with disabilities. The term “dual
eligible beneficiary” refers to persons eligible for both Medi‐Cal and Medicare.
Current law authorizes a dual eligible beneficiary pilot in four counties to begin January
1, 2013. The budget proposes a three‐year phase‐in of the pilots and an expansion of
the number of pilots to 10 counties. In the first year, dual eligible beneficiaries will
transition to managed care for Medi‐Cal benefits. The benefits will become a more
integrated plan responsibility over the subsequent two years. Under a separate
proposal, the Administration is also proposing to expand Medi‐Cal managed care
statewide starting in June 2013. Currently, 30 counties have Medi‐Cal managed care
plans.
The pilots will provide managed care plans with a blended payment consisting of
federal, state and county funds and responsibility for the full array of health and social
services to dual eligible beneficiaries. Making long‐term care services a managed care
benefit is intended to increase access to home and community‐based medical and social
services. The larger goal is to allow beneficiaries to remain in their homes and out of
19
institutions. Behavioral health services will generally be provided by counties. In year
one, IHSS, other home and community‐based services and nursing home care funded by
Medi‐Cal will become managed care benefits. The IHSS program will essentially operate
as it does today, except all authorized IHSS benefits will be included in the managed
care plan rates. Over time, managed care plans would take on more responsibility for
home and community‐based services, including IHSS.
The Governor’s budget document acknowledges a number of issues that will need to be
worked on, including consumer protections, development of a uniform assessment tool,
and consumer choice and protection.
The Administration views the dual eligible beneficiary pilots as part of its effort to
implement health reform and establish the state as the level of government primarily
responsible for delivering health care services. The Administration identifies the state‐
county relationship in financing and delivering services – including collective bargaining
structure for IHSS providers and the long‐term county financial responsibility and other
health programs.
The Administration will be working with counties, consumers and other stakeholders to
address these outstanding issues through development of legislation necessary to
implement the proposal.
The Administration is projecting savings from the pilots related to a reduction in hospital
and nursing home costs. To accelerate savings into 2012‐13, the Administration is
proposing a payment deferral (one payment for all providers) and alignment of payment
policies for all managed care counties. This proposal will save $678.8 million in 2012‐13
and $1 billion in 2013‐14.
Managed Care Expansion. The Governor proposes expanding Medi‐Cal Managed Care
into all counties statewide and enrolling all current Medi‐Cal beneficiaries, including
IHSS recipients and those in the Institutional Long‐Term Care program, in the managed
care model. The state would begin this transition in the 28 fee‐for‐service counties in
June of this year, and estimates savings of $2.7 million in 2012‐13 and $8.8 million in
2013‐14.
The Governor also proposes an annual open enrollment period for Medi‐Cal
beneficiaries to save up to $3.6 million in 2012‐13 and $6 million in 2013‐14. Currently,
beneficiaries may change plans up to 12 times a year.
Operational Flexibilities. The Governor introduces his desire to streamline the
regulatory process to allow the Medi‐Cal program to change more quickly. Examples
20
include reducing laboratory rates, eliminating funding for avoidable hospital admissions,
and no longer paying for services of “limited value.” He proposes a stakeholder process
to examine changes in benefit design and estimates that the state can save
approximately $75 million in 2012‐13.
Medical Therapy Program. The Governor proposes to impose an income test for the
Medical Therapy Program that mirrors the California Children’s Services (CCS) program.
Only families with annual incomes of less than $40,000 or with annual CCS‐related
medical expenses exceeding 20 percent of their annual income would qualify for the
Medical Therapy Program.
Revenue for the Medi‐Cal Program. The Governor proposes a one‐time redirection of
private and non‐designated hospital stabilization funds for fiscal years 2005‐06 through
2009‐10 to the state General Fund for a savings of $42.9 million. He also wants to
continue indefinitely the Gross Premium Tax on Medi‐Cal Managed Care Plans to save
up to $161.8 million in 2012‐13 and $259.1 million in 2013‐14.
Healthy Families Program. The Administration is proposing to reduce Healthy Families
managed care rates by 25.7 percent effective October 1, 2012 for a savings of $64.4
million in 2012‐13 and $91.5 million in 2013‐14. The budget again proposes to shift the
875,000 children in the Healthy Families Program to the Medi‐Cal program with a nine‐
month phase in starting October 2012.
The budget also proposes to eliminate the Managed Risk Medical Insurance Board by
July 1, 2013.
Child Support. Governor Brown proposes to suspend the county share of child support
collections ($34.5 million in 2012‐13) and redirect it to the state’s General Fund.
Public Health
AIDS Drug Assistance Program. The Governor proposes to increase the client share of
cost for the AIDS Drug Assistance Program (ADAP) for $14.5 million in state savings in
2012‐13. This proposal would implement the federal share of cost maximum amounts,
resulting in average monthly copayments of between $28 and $385, depending on the
client’s income. The state estimates that this proposal will generate administrative costs
of $2 million due to the amount of paperwork involved, and that cost is included in the
$14.5 million savings estimate.
New Office of Health Equity. The proposed budget creates a new Office of Health
Equity in the Department of Public Health and transfers the Office of Women’s Health,
Office of Multicultural Health, Health in All Policies Task Force, the Health Places Team,
and the Office of Multicultural Services to the new structure.
21
Department of State Hospitals. The budget establishes a new Department of State
Hospitals that will oversee the state’s mental hospitals. In addition to the new
department, the Administration is proposing a number of changes to the mental
hospitals to address a $180 million shortfall. Of interest to counties, the Administration
is proposing to increase the bed rate charges to counties for civil commitments by $20
million.
Departments of Mental Health and Alcohol and Drug Programs. The Administration is
proposing to eliminate the Departments of Mental Health and Alcohol and Drug
Programs. The Department of Health Care Services will assume responsibility for the
administration of Mental Health Services Act programs and financial oversight of funds,
administration of federal Substance Abuse and Mental Health Services Administration
discretionary and block grants, Projects for Assistance in Transition from Homelessness
grants, Substance Abuse Prevention and Treatment block grants, the Parolee Services
Network, veterans mental health programs, and the mental health components of the
California Health Interview Survey.
The Department of Public Health will assume the duties of the Office of Multicultural
Services, the administration of counselor certification, narcotic treatment, driving under
the influence, and problem gambling functions.
The Department of Social Services will be responsible for licensing and quality
improvement functions.
The California Department of Education will administer the Early Mental Health
Initiative grants.
The Office of Statewide Health Planning and Development will now include the Mental
Health Workforce Education and Training program.
The Mental Health Services Oversight and Accountability Commission will be
responsible for Mental Health Services Act training, technical assistance and program
evaluation.
HOUSING, LAND USE AND TRANSPORTATION
Transportation Funding. The Governor’s proposed budget reports that gasoline
consumption was down 0.5‐percent in 2010‐11 from the prior fiscal year. While it is
anticipated to decrease another 0.6‐percent in 2011‐12, the proposed budget projects
that consumption will rise 1.9 percent in 2012‐13. Under the 2010 transportation tax
22
swap, whereby the state eliminated the sales tax on gasoline and replaced it with an
equivalent amount of new gasoline excise tax which is adjusted annually to reflect what
the sales tax would have otherwise generated in a given year, DOF is projecting that the
new 2012‐13 excise tax rate will be reduced from the current 35.7‐cents to 35‐cents.
The proposed budget fully funds transportation as agreed to in the transportation tax
swap of 2010. Recall that after the state backfills the State Highway Account for truck
weight fee revenues dedicated to transportation bond debt service, the remaining
revenues are divided among the state and local streets and roads in the following
manner:
44 percent for the State Transportation Improvement Program
44 percent for Local Streets and Roads
12 percent for the State Highway Operation and Protection Program
CSAC is waiting for more information, specifically for the Board of Equalization to adjust
the new excise tax rate as required by statute, before we provide counties with
estimated revenues for 2012‐13.
It is also important to note that the Governor borrows $349.5 million in truck weight
fees over and above what is necessary to pay budget year bond debt service payments.
However, this was anticipated given that bond debt service fluctuates from year to year.
In order to maximize the transportation tax swap and truck weight fee agreements from
2010 and 2011, the Governor will take all eligible weight fee revenues each year and
bank the funds to use to offset the bond debt costs in the future.
Transportation Bond Sales. The Governor does not propose new transportation bond
appropriations in his proposed budget and is putting this off until spring 2012 when
more information on project cash flow needs is available.
High‐Speed Rail. The Governor’s proposed budget includes funding for the basic
functions for the High‐Speed Rail Authority. However, the document is silent on funding
the initial train segment. The High‐Speed Rail Authority’s Business Plan is currently
under review with DOF and the Governor will await its analysis before proposing a plan
for funding the first segment. Additionally, the Legislature has indicated that they, too,
will be holding hearings on the project and could potentially take action in the 2012
legislative year that will affect the project, for good or bad.
Consolidation/Elimination of State Agencies. Continuing his mission to “reorganize
state government”, the Governor proposes to reduce the number of state agencies from
12 to 10 and eliminate another 39 state entities and 9 programs. Among this
reorganization is:
23
The consolidation of the California Department of Transportation (Caltrans) with
the Department of Motor Vehicles, the High‐Speed Rail Authority, the Highway
Patrol, the California Transportation Commission, and the Board of Pilot
Commissioners into the new Transportation Agency.
Changes to the budget process including requiring some departments, such as
Caltrans, to perform a detailed review and analysis of all of their programs to
evaluate whether the functions need to exist and the level of resources needed
to accomplish them.
Transfer of the functions of the California Housing Finance Authority (CalHFA) to
the Housing and Community Development Department (HCD). Since both CalHFA
and HCD are concerned with the development and financing of affordable
housing, the goal is to obtain administrative efficiencies by combining the efforts
under one department. It should also be noted that the new HCD will be moved
from the former Business, Transportation, and Housing Agency to a new agency
– the Business and Consumer Services Agency.
STAY TUNED FOR THE NEXT BUDGET ACTION BULLETIN!
If you would like to receive the Budget Action Bulletin electronically, please e‐mail
Amanda Yang, CSAC Legislative Assistant, at ayang@counties.org. We’re happy to
accommodate you!
January 11, 2012
mac Taylor
Legislative Analyst
The 2012-13 Budget:
Overview of the
Governor’s Budget
2012-13 BUDGET
2 Legislative Analyst’s Office www.lao.ca.gov
2012-13 BUDGET
www.lao.ca.gov Legislative Analyst’s Office 3
ExEcutivE Summary
Governor’s Proposal
Proposed Tax Initiative Is Cornerstone of Governor’s Budget Proposal. The administration
estimates that the Legislature and the Governor must address a budget problem of $9.2 billion
between now and the start of the 2012-13 fiscal year. The cornerstone of the Governor’s 2012-13
budget plan is its assumption that voters will approve a temporary increase in income and sales
taxes through an initiative that the Governor has proposed be on the November 2012 ballot. The
administration estimates the initiative would increase state revenues by $6.9 billion by the end
of 2012-13, and generate billions of dollars per year until its taxes expire at the end of 2016. The
taxes would be deposited to the General Fund to pay for the state’s Proposition 98 school funding
obligations, as increased by the initiative, and to help balance the budget by paying for other state
programs. The Governor also proposes significant reductions to social services and child care
programs and additional state borrowing.
Administration Estimates Plan Would Return State Budget to Balance. The administration
estimates the Governor’s plan would leave the state with a $1.1 billion reserve at the end of 2012-13
and balanced annual budgets for the next few years. The Governor also proposes that the state take
steps to reduce outstanding state budgetary obligations (which he calls a “wall of debt”) during the
next several years.
Proposed Trigger Cuts if Voters Reject Governor’s Tax Initiative. The Governor’s proposal
requests that the Legislature approve $5.4 billion of “trigger cuts” to take effect on January 1, 2013,
if voters do not approve the Governor’s tax initiative. Proposition 98 funding for schools and
community colleges would bear the brunt of these trigger cuts: $4.8 billion (90 percent) of the total.
LaO comments
Governor’s Plan Would Continue State’s Efforts to Restore Budgetary Balance. In 2011, the
Legislature and the Governor took significant steps—through ongoing budgetary actions—to begin
to restore the state budget to balance. To finish this job, the Legislature still faces a very difficult task
for 2012, as the Governor’s proposal shows. The Governor’s plan envisions multiyear tax increases
and significant reductions in social services and subsidized child care programs. As an alternative,
if his tax plan is rejected he proposes much larger cuts, aimed largely at schools. If the state chooses
either of the Governor’s two paths, the state budget would be moved much closer to balance over the
next several years.
Revenue Estimates Bigger Question Mark Than Usual. Our revenue estimates—including
estimates of state revenue gains from the Governor’s proposed initiative—currently are lower than
the administration’s. Already, California’s budget is dependent on volatile income tax payments by
the state’s wealthiest individuals, and the Governor proposes that these Californians pay more for
the next few years. As has become evident in recent years, differing fortunes for these upper-income
taxpayers can create or eliminate billions of dollars of projected state revenues. If our current
2012-13 BUDGET
4 Legislative Analyst’s Office www.lao.ca.gov
revenue estimates are closer to the target than the administration’s, the Legislature will have to
pursue billions of dollars more in budget-balancing solutions.
Restructuring Proposals in Education Merit Serious Consideration. The Governor’s plan
contains major restructuring of the school finance system, community college categorical funding,
and education mandates. We think the Governor’s restructuring proposals in all these areas would
overcome most widely recognized shortcomings of these current systems and institute lasting
improvements.
Social Services and Child Care Proposals Have Merit, But Involve Drawbacks. The Governor
proposes to reduce General Fund support for California Work Opportunity and Responsibility to
Kids (CalWORKs) and subsidized child care—the state’s primary sources of cash assistance and
work support for low-income families—by a total of about $1.4 billion. His proposal would focus
reforms in the CalWORKs program on achieving the goal of emphasizing work. The Legislature
may wish to consider whether the proposed reductions to families most in need of support to
achieve self-sufficiency are too severe, as well as the Governor’s proposal to restrict eligibility criteria
and time lines for subsidized child care. Focusing these programs on a different set of objectives and
priorities than the Governor would not necessarily eliminate opportunities for budgetary savings,
but the savings potential under such alternatives could be less.
Trigger Cut Framework Needs to Be Considered Carefully. Though the Governor’s tax initiative
would improve the financial outlook of public education over the next several years, his trigger plan
would create significant uncertainty for schools, community colleges, and universities in 2012-13.
This uncertainty is likely to be particularly problematic for schools, as most will feel compelled to
build their 2012-13 budgets assuming the trigger cuts will be implemented. This means schools in
2012-13 likely will implement most, if not all, of the reductions that many hope to avoid. Given this
possibility, the Legislature needs to be very deliberate in structuring a workable trigger package. In
particular, the Legislature will need to be careful in setting the size of the trigger reduction; deter-
mining the specific education reductions to impose; and designing tools to help schools, community
colleges, and universities respond to the trigger cuts.
2012-13 BUDGET
www.lao.ca.gov Legislative Analyst’s Office 5
OvErviEw
called the baseline, or workload, budget forecast.
For 2012-13, the administration projects that
baseline General Fund revenues are $89.2 billion,
while baseline General Fund spending is
$94.3 billion. In addition to this prospective annual
budget shortfall of over $5 billion for 2012-13, the
administration estimates that 2011-12 will end
with a General Fund deficit of over $4.1 billion.
Combined, the state faces an estimated budget
problem of $9.2 billion to address between now and
the start of the new fiscal year.
Several Major Differences From LAO’s
November 2011 Forecast. In our November 2011
publication, California’s Fiscal Outlook, our office
estimated that the baseline budget problem for the
state’s General Fund would total $12.8 billion for
2012-13. This is about $3.6 billion more than the
estimated budget problem reflected in the 2012-13
Governor’s Budget. The administration’s definition
of the 2012-13 budget problem differs from ours in
several ways:
Figure 1
Governor’s Budget
General Fund Condition
(Dollars in Millions)
Proposed for 2012-13
Actual
2010-11
Proposed
2011-12 Amount
Percent
Change
Prior-year fund balance -$5,019 -$3,079 -$986
Revenues and transfers 93,489 88,606 95,389 7.7%
Total resources available $88,470 $85,527 $94,404
Expenditures $91,549 $86,513 $92,553 7.0%
Ending fund balance -$3,079 -$986 $1,850
Encumbrances $719 $719 $719
Reservea -$3,797 -$1,704 $1,132
a Reflects the administration’s projection of the balance in the special fund for economic uncertainties.
(The 2012-13 Governor’s Budget proposes to continue suspending transfers to the Budget Stabilization
Account.)
The Governor’s BudGeT ProPosal
On January 5, 2012, the Governor proposed
a 2012-13 state spending plan with $92.6 billion
of General Fund expenditures, $39.8 billion of
spending from state special funds, and $5.0 billion
of bond fund expenditures. In addition, the budget
assumes that $73 billion of federal funds flow
through state accounts in 2012-13.
The cornerstone of the plan is its assumption
that voters will approve the Governor’s proposed
tax initiative in November 2012. These taxes would
be deposited to the General Fund to pay for the
state’s Proposition 98 school funding obligations,
as increased by the initiative, and to help balance
the budget by paying for other state programs.
Under the administration’s estimates, as shown
in Figure 1, the state would end 2012-13 with a
$1.1 billion General Fund reserve. The budget plan
also contains trigger cuts that would take effect if
voters reject the Governor’s tax proposal.
$9.2 Billion Budget
Problem Projected
for 2012-13
Consists of
$4 Billion 2011-12
Deficit, Plus $5 Billion
Shortfall for 2012-13.
Each year, in assem-
bling the Governor’s
proposed budget,
the administration
estimates what
revenues and expendi-
tures would be under
current tax and expen-
diture policies. This is
2012-13 BUDGET
6 Legislative Analyst’s Office www.lao.ca.gov
• Administration’s Revenue Forecast. The
administration forecasts that baseline
General Fund revenues and transfers will
be $4.7 billion higher over 2011-12 and
2012-13 combined than indicated in our
November 2011 forecast. This is partially
offset by the administration’s estimate
of $803 million less in revenues and
transfers than we estimated for the prior
year, 2010-11. For the three fiscal years
combined, therefore, the Governor’s budget
forecasts baseline revenues that are over
$3.9 billion higher than those forecast by
our office in November. The vast majority
of our differences during this period
are related to our respective forecasts of
personal income tax (PIT) revenues.
• Proposition 98 Estimates. The administra-
tion’s baseline figures are different from
those in our November forecast for state
General Fund spending for Proposition 98.
Specifically, for the 2011-12 and 2012-13
fiscal years combined, the administration’s
baseline General Fund Proposition 98
estimates are about $1.1 billion lower
than our estimates. A number of reasons
account for these differences, including
the treatment of the realignment revenues,
redevelopment revenues, the gas tax swap,
and 2011-12 trigger cuts.
• Non-Proposition 98 Spending. Compared
to our November forecast, the adminis-
tration’s workload budget estimates for
2011-12 and 2012-13 include a net amount
of about $1.4 billion more in non-Propo-
sition 98 General Fund spending. There
appear to be a variety of reasons for these
differences, such as the administration’s
estimates of several hundred million
dollars of higher General Fund expenses
for some health and social services
programs and debt service. Contrary to
our past practices in developing workload
budgets, the administration also includes
over $700 million of General Fund
expenses to reimburse local governments
for the prior-year costs of currently inactive
mandates. In addition, we understand
that budget proposals to augment some
programs are included in the administra-
tion’s workload budget estimates, such
as a proposed $90 million increase to the
University of California (UC) budget.
Finally, the administration also assumes
in its workload budget $500 million of
savings from using revenues from the
Air Resources Board’s (ARB’s) auction of
“cap-and-trade” greenhouse gas emission
allowances to offset unspecified General
Fund costs. The Legislature, however, has
never explicitly adopted such a policy for
the use of cap-and-trade auction revenues,
and accordingly, we regard the revenues as
a budgetary solution (not as a change in the
definition of the problem).
Governor’s Budget Proposals
Proposes Over $10 Billion of Budget-
Balancing Actions. The Governor proposes over
$10 billion of budget-balancing actions to address
the administration’s estimated $9.2 billion budget
problem—leaving the state with a reserve of
$1.1 billion at the end of 2012-13. Figure 2 summa-
rizes the administration’s estimates of savings or
revenue related to the Governor’s major proposals.
(We list the administration’s estimates in every case
but two—the cap-and-trade and mandate issues
noted above.)
Key Proposals. The budget plan rests predomi-
nantly on proposals in three areas, all of which are
discussed in greater detail in the sections that follow:
2012-13 BUDGET
www.lao.ca.gov Legislative Analyst’s Office 7
• Plan Assumes Voters Approve Governor’s
Tax Initiative. The centerpiece of the
Governor’s budget plan is its assumption
that voters approve his initiative proposal
to temporarily increase PIT on upper-
income filers and sales and use taxes (SUT)
for the next several years. The admin-
istration estimates that this plan would
generate $6.9 billion of revenues to benefit
the 2012-13 General Fund budget plan.
• Proposition 98 Proposals. As always,
Proposition 98 funding for schools and
community colleges is the single largest
spending priority in the proposed budget.
For 2012-13, the Governor proposes
state and local Proposition 98 funding
of $52.5 billion—the administration’s
estimate of the Proposition 98 minimum
guarantee. The guarantee reflects the
additional revenue assumed to be raised
by the Governor’s tax initiative. The
year-to-year funding increase under the
Governor’s budget proposal is dedicated
largely to reducing the size of existing
K-14 payment deferrals. The budget also
Figure 2
Budget-Balancing Actions Proposed by the Governor
2011-12 and 2012-13 General Fund Benefit (In Millions)
Revenue Actions
Increase personal income and sales and use taxes through voter initiative $6,935
Make permanent the existing tax on Medi-Cal managed care plans 162
Implement changes to unclaimed property program 70
Implement other revenue actions (net)19
Subtotal ($7,186)
Increased Proposition 98 Costs Due to Proposed Tax Increases -$2,534
Expenditure Actions
Restructure and reduce CalWORKs and subsidized child care program costs $1,393
Defer payments to Medi-Cal providers and other related actions 682
Make various Proposition 98 adjustments 544
Use part of cap-and-trade program auction revenues to offset unspecified General Fund costsa 500
Change Cal Grant awards and eligibility requirements 302
Eliminate domestic and related services for certain In-Home Supportive Services recipients 164
Reduce Medi-Cal costs through program efficiencies and other changes 160
Defer payment on pre-2004 local mandate obligationsb 100
Reduce Healthy Families Program managed care rates 64
Reduce various other program costs 49
Implement other fund shifts 28
Subtotalc ($3,987)
Other Actions
Delay loan payments to special funds $631
Borrow from disability insurance fund to pay costs of federal unemployment insurance loans 417
Use weight fee revenues to offset General Fund costs 350
Suspend county share of child support collections on one-time basis 35
Subtotal ($1,432)
Total $10,070
a Although the administration’s workload budget includes those funds, we characterize those funds as a budget-balancing proposal.
b Contrary to the Governor’s approach, does not include as a solution $729 million related to past-year costs of suspended mandates.
c The administration characterizes the Governor’s proposed expenditure actions as totaling $4.2 billion. Our estimate is $229 million lower due to
the differences described in footnotes a and b above.
2012-13 BUDGET
8 Legislative Analyst’s Office www.lao.ca.gov
includes proposals that would dramatically
change how the state provides general
purpose, categorical, and mandate funding
to schools.
• Significant Changes for CalWORKs
and Child Care Funding. The Governor
proposes to reduce General Fund support
for the CalWORKs program and subsi-
dized child care, the state’s primary sources
of cash assistance and work support for
low-income families, for total savings
of about $1.4 billion. The savings would
be achieved primarily by reducing cash
grants to a significant portion of current
CalWORKs recipients, further limiting
eligibility for subsidized child care and
CalWORKs employment services, and
reducing payments to child care providers.
Borrowing From State Special Funds. Typical
of budgets in recent years, the administration
proposes further delays to specified General Fund
loan repayments to state special funds. Many
special funds are fee-driven accounts eligible to
be used for specific public programs. The budget
plan assumes $631 million of such loan repayment
delays. Examples of these delays include deferrals of
General Fund repayments
to the Off-Highway Vehicle
Trust Fund ($90 million)
and the Electronic Waste
Recovery and Recycling
Fund ($80 million). The
budget also proposes to
borrow again from the
disability insurance fund
($417 million) to pay the
state’s interest costs to the
federal government on its
unemployment insurance
loan.
trigger cuts
Over $5 Billion of Additional Cuts if Voters
Reject Tax Measure. The Governor proposes
$5.4 billion of trigger cuts to take effect in January
2013 if voters reject his proposed tax measure
this November. These trigger cut proposals are
summarized in Figure 3. Proposition 98 funding
for schools and community colleges would bear the
brunt of such reductions: $4.8 billion (90 percent)
of the $5.4 billion in total trigger cuts. University
and judicial branch appropriations, among others,
would see significant reductions in this scenario
under the Governor’s plan.
impact on Future years
Smaller Shortfalls Projected. Using its
estimates of workload revenues and expendi-
tures, the administration estimates that the state
currently faces a future annual budget shortfall of
$4.7 billion in 2013-14, $2.9 billion in 2014-15, and
$1.9 billion in 2015-16—much reduced from the
outyear budget shortfalls projected one year ago.
Higher revenue collections and the results of last
year’s ongoing budgetary actions are responsible for
this improvement in the state’s fiscal health.
Shortfalls Estimated to Be Eliminated. The
administration estimates that the Governor’s
Figure 3
Proposed “Trigger” Reductions
If Voters Reject Proposed Tax Initiative
2012-13 General Fund Benefit (In Millions)
Proposition 98 funding for schools and community colleges $4,837
University of California 200
California State University 200
Judicial branch 125
CalFire 15
Department of Water Resources flood control programs 7
Department of Fish and Game 4
Department of Parks and Recreation 2
Department of Justice law enforcement programs 1
Total $5,390
2012-13 BUDGET
www.lao.ca.gov Legislative Analyst’s Office 9
2012-13 budget plan would continue last year’s
progress in returning the state budget to balance.
Specifically, the administration’s calculations
indicate the Governor’s plan would “eliminate
future budget problems throughout the forecast
period under current projections.” (The adminis-
tration’s forecast period runs through 2015-16.)
Reducing State Budgetary Obligations. In
addition to providing funding for support of
existing General Fund program commitments,
the Governor proposes to use tax revenues over
the next several years to pay down what the
administration characterizes as a $33 billion wall
of debt. This consists of budgetary obligations such
as deferred payments to schools and community
colleges, the Economic Recovery Bonds that were
used to refinance the state’s early-2000s deficit,
unpaid local government mandate reimbursements,
and loans from state special funds. The 2012-13
Governor’s Budget Summary states the Governor’s
plan would “pay off” this $33 billion by 2015-16.
lao CommenTs
Governor’s Plan Would Continue State’s
Efforts to Restore Budgetary Balance. In 2011,
the Legislature and the Governor took significant
steps—through ongoing budgetary actions—to
begin to restore California’s state budget to balance.
To finish this job, the Legislature still faces a very
difficult task in 2012, as the Governor’s proposal
shows. The administration’s major proposed
budgetary actions this year are significant—
multiyear income and sales tax increases coupled
with significant reductions in social services and
subsidized child care. As an alternative, if the
voters choose not to approve the proposed tax
increases, the Governor proposes much larger cuts,
aimed largely at schools. If the state chooses either
of the Governor’s two paths, the state budget would
be moved much closer to balance over the next
several years.
Revenue Estimates Are a Bigger Question
Mark Than Usual. As we discuss later in this
report, our revenue estimates for 2011-12, 2012-13,
and subsequent years currently are lower than the
administration’s, and we estimate the revenue gain
from the Governor’s proposed tax initiative would
also be significantly lower. The administration
has made a good-faith effort in its revenue and
economic forecasting despite the huge uncertainties
involved in projecting the state’s recovery from an
unprecedented economic downturn. Nevertheless,
our differences with the administration’s estimates
for high-income tax filers mean we now project
billions of dollars less in state revenues. We will
continue to review incoming revenue and economic
data and update the Legislature during the next few
months.
Already, California’s budget is dependent
on volatile income tax payments by the state’s
wealthiest individuals. The top 1 percent of PIT
filers pay around 40 percent of state income taxes,
the General Fund’s dominant funding source.
Because the Governor’s budget proposal is centered
on his idea for these wealthy tax filers to pay more,
the state would become more dependent on this
uncertain revenue source. For this reason, revenue
estimates are an even bigger question mark than
usual for the Legislature this year. As we have
learned in past years, differing fortunes for upper-
income taxpayers can quickly create or eliminate
billions of dollars of projected state revenues. If our
current revenue estimates are closer to the target
than the administration’s, the Legislature will
have to pursue billions of dollars more in budget-
balancing solutions.
Restructuring Proposals in Education Merit
Serious Consideration. The Governor’s package
also contains major restructuring of the K-12
finance system, community college categorical
funding model, and education mandate system.
In all three cases, the state’s existing systems
2012-13 BUDGET
10 Legislative Analyst’s Office www.lao.ca.gov
are widely recognized as having longstanding,
fundamental shortcomings. We think the
Governor’s restructuring proposals in all three
areas would overcome most of these shortcomings
and institute lasting improvements. As such, we
recommend the Legislature adopt the Governor’s
basic restructuring approaches. The Legislature,
however, might want to make some modifications
to specific proposals. For example, the Legislature
might want to change the amount of mandate
block grant funding provided or the specific mix
of mandated programs that are eliminated versus
made discretionary.
Now Not the Time for Major New Programs or
Program Expansions. We agree with the Governor’s
assessment that now is not the time to initiate major
new programs or authorizing program expan-
sions. The Governor’s plan contains associated
proposals that together would help lower costs by
$300 million. Of greatest magnitude, we recommend
the Legislature adopt the Governor’s proposal not
to initiate the transitional kindergarten program set
to go into effect beginning in 2012-13. Not initiating
this program yields $224 million in associated
revenue limit savings. We also recommend the
Legislature adopt the Governor’s proposals to halt
the Cal Grant expansions that would otherwise
come about through loosened transfer entitlement
rules and cohort default rate limits beginning in
2012-13. These two proposals would result in state
savings of more than $70 million.
Social Services and Child Care Proposals Have
Merit, But Involve Trade-Offs. The Governor’s
budget proposes to reduce General Fund support
for CalWORKs and subsidized child care—the
state’s primary sources of cash assistance and work
support for California’s low-income families—by a
total of about $1.4 billion. The Governor’s proposal
recognizes that, given current funding constraints,
it is difficult to fully achieve existing goals of the
CalWORKs program. Accordingly, his proposal
would focus reforms in the CalWORKs program on
achieving the goal of emphasizing work.
Although we find the Governor’s CalWORKs
and child care proposals have some advantages,
they also involve potential trade-offs. Most
clearly, the reductions proposed by the Governor
would have significant negative impacts on many
of California’s low-income families. Regarding
CalWORKs, the Legislature may wish to consider
whether reductions made to families most in need
of support to achieve self-sufficiency would be
too severe. Similarly, the Legislature may want
to consider whether the Governor’s proposal
too severely restricts eligibility criteria and time
lines for subsidized child care. More generally,
the Legislature should consider whether focusing
CalWORKs and subsidized child care primarily
on supporting efforts of low-income families to
obtain employment is consistent with its priorities
or whether other objectives are also important.
Focusing these programs on a different set of objec-
tives and priorities than the Governor would not
necessarily eliminate opportunities for budgetary
savings; however, the potential for savings could be
less and there could be trade-offs in other areas of
the budget.
Legislature Needs to Carefully Consider Any
Trigger Framework. Though the Governor’s tax
initiative would improve the financial outlook of
public education over the next several years, his
trigger plan would create significant uncertainty
for schools, community colleges, and universities in
2012-13. This uncertainty is likely to be particularly
problematic for schools, with most schools feeling
compelled to build their 2012-13 budgets assuming
the trigger cuts are implemented (that is, assuming
only the state revenue that they are assured of
receiving). This means schools in 2012-13 out of
necessity likely will be implementing most, if not
all, of the reductions that many would be hoping
to avoid. Given this is the case, the Legislature
2012-13 BUDGET
www.lao.ca.gov Legislative Analyst’s Office 11
needs to be very deliberate in structuring a trigger
package. In particular, the Legislature should be
careful in setting the size of the trigger reduction;
determining the specific education reductions
to impose; and designing tools to help schools,
community colleges, and universities respond to
the triggers. The Legislature also needs to assess
whether specific trigger plans are workable. One
major consideration, for example, is how the state
treats realignment sales tax revenues in calculating
the Proposition 98 minimum guarantee.
EcOnOmicS and rEvE nuES
Economic Forecast
Summer’s Economic Slowdown Apparently
Temporary. The administration’s 2012 forecast
reflects an economy that has rebounded from its
generally disappointing performance this past
summer. Economic weakness during the summer
months was primarily due to the reaction of
financial markets to the European debt crisis
and congressional deadlock over the federal debt
ceiling. Employment and other economic news
improved during the fall and early winter months.
We agree with the administration that a return
of the U.S. economy to recession is unlikely now.
The U.S. and California economies are poised to
continue slow recoveries.
Administration’s Forecast for 2012. As shown
in Figure 4 (see next page), the administration’s
new economic forecast is similar to, but slightly
more pessimistic than, our November 2011
economic forecast. Both forecasts are based on
the assumption that Congress extends the partial
employee payroll tax holiday and emergency
unemployment insurance benefits beyond their
current expiration dates next month. Absent
these extensions, economic performance in the
immediate future probably would be weaker than
shown in Figure 4.
Modest Strengthening in 2013 Expected.
The administration’s economic forecast projects
cautious, but steadily expanding, growth in 2013.
More robust growth is being held back by lingering
foreclosure activity and continued price declines in
the California housing market, as well as relatively
weak growth in real incomes. The administration,
however, expects the economy to begin expanding
more rapidly in 2013, which is consistent with our
recent forecast.
The administration observes that the California
economy is being pulled along, in part, by healthy
wage and salary growth in high-income labor
markets—most notably the technology sector
in the Silicon Valley and other areas of the
state. Consumer spending also has picked up in
California, as individuals and firms return to
more normal consumption behavior fueled, in
part, by pent-up demand. The Governor’s forecast
of taxable sales aligns closely with our November
forecast. Although we do not project consumption
to weaken, there is some risk to the administra-
tion’s and our office’s taxable sales forecasts because
consumers and businesses are contending with
low credit availability and weak, albeit improving,
consumer confidence.
Uncertainty About Federal Policies in 2012
and Beyond. A number of federal policy changes
scheduled—or assumed—to take place in 2012 and
2013 could alter the trajectory of economic growth
projected by the administration and our office. As
noted above, the administration’s forecast assumes
Congress will extend the payroll tax holiday and
unemployment benefits through 2012. In addition,
various tax reductions enacted under the prior
federal administration (and extended under the
2012-13 BUDGET
12 Legislative Analyst’s Office www.lao.ca.gov
current administration) are scheduled to expire
at the end of 2012, and both of our economic
forecasts now anticipate these tax cuts will be
extended. Automatic congressional spending cuts,
known as sequestration, also are set to occur in
early 2013, and the President recently announced a
broad proposal to shrink the size of the Army, the
Marine Corps, and other parts of the U.S. military,
which could ripple through the national economy.
The U.S. Postal Service—a major governmental
employer—also must implement large spending
reductions in the coming years.
Most economic forecasts—including our own
and the administration’s—assume that Congress and
the executive branch agree to compromises in the
coming months to mitigate some of the near-term
negative economic effects of these changes. Failure of
Congress and the President to agree to such policies
could, therefore, negatively affect the economy
during the next few years. Over the longer term, the
federal government’s deep fiscal imbalances will
require significant changes to federal programs and
taxation that could affect large segments of both the
U.S. and California economies.
Economic and Fiscal Forecasting Especially
Challenging Now. There is considerable uncertainty
in the administration’s forecast—as well as our
November 2011 forecast—regarding the short- and
medium-term path for the economy. In addition to
the difficulty in predicting federal policies, there
is also significant uncertainty due to the nature
of the historically deep recession from which
California and the nation are recovering. There
is limited precedent with which to make sound
judgments about how the economy will proceed
in the coming years. Particularly significant in
the context of California budgetary forecasting is
the difficulty in projecting the income prospects
of high-income tax filers, who experienced a
disproportionately large drop in income—relative
to other groups of taxpayers—during the recession.
These Californians are in the state’s top marginal
income tax brackets and pay a very large share of
state tax revenues. Largely because their income—
dominated by sales of stocks, bond, and other
assets—is volatile, state income tax collections are
volatile too.
Figure 4
Comparing the Administration’s Economic Projections With
LAO’s November 2011 Forecast
2012 2013
LAO Forecast—
November 2011
Governor’s Budget
Forecast—
January 2012
LAO Forecast—
November 2011
Governor’s Budget
Forecast—
January 2012
United States
Percent change in:
Real gross domestic product 2.1%1.7%2.8%2.5%
Wage and salary employment 1.0 0.9 1.7 1.4
California
Percent change in:
Personal income 4.1%3.8%4.5%4.1%
Wage and salary employment 1.3 1.3 2.1 1.8
Housing permits (thousands)61 52 77 80
Taxable sales (billions)$537 $538 $579 $573
2012-13 BUDGET
www.lao.ca.gov Legislative Analyst’s Office 13
revenue Forecast
As shown in Figure 5, the administration’s new
revenue forecast projects that the General Fund
will record $88.6 billion of revenues in 2011-12 and
$95.4 billion in 2012-13, including revenue from
the Governor’s tax initiative proposal. The admin-
istration expects that the Governor’s tax proposal,
if approved by voters, would generate $2.2 billion of
revenues attributable to 2011-12 and $4.7 billion in
2012-13. Most of those revenues result from the PIT
part of the Governor’s tax proposal.
Administration Forecasts Higher Revenues
Than Our Office Did in November. Figure 6
compares the administration’s baseline revenue
forecast (that is, the current-law revenue forecast
excluding revenue from the Governor’s tax and
other revenue proposals) with our November 2011
current-law forecast. For 2010-11, the administra-
tion’s more up-to-date information on revenue
accruals and transfers and loans shows that the
General Fund received $803 million less than we
assumed in November. For 2011-12 and 2012-13,
however, the administration forecasts significantly
higher baseline revenues than we did two months
ago. In 2011-12, the administration’s baseline
forecast is higher than ours by $1.5 billion, and
in 2012-13, its forecast is higher than ours by
$3.2 billion. Over the three fiscal years combined,
the administration forecasts $3.9 billion more in
baseline General Fund revenues than we did.
Sizable PIT Forecasting Differences,
Particularly for High-Income Taxpayers. Of the
$3.9 billion difference in our baseline revenue
Figure 5
Governor’s Budget
General Fund Revenue Forecast
(Including Revenue Proposals)
(In Billions)
2011-12 2012-13
Personal income tax $54,186 $59,552
Sales and use tax 18,777 20,769
Corporation tax 9,479 9,342
Subtotals, “Big Three” Taxes ($82,442)($89,663)
Other revenues $4,751 $4,885
Net transfers and loans 1,413 841
Total Revenues and
Transfers
$88,606 $95,389
Figure 6
Administration’s Baseline Revenue Forecasts Differ From LAO’sa
General Fund (In Billions)
2010-11 2011-12 2012-13
LAO
November
Forecast
Governor’s
Budget
Forecast
LAO
November
Forecast
Governor’s
Budget
Forecast
LAO
November
Forecast
Governor’s
Budget
Forecast
Personal income taxb $49,779 $49,491 $50,812 $51,937 $53,134 $56,025
Sales and use tax 26,983 26,983 18,531 18,777 19,980 19,595
Corporation tax 9,838 9,614 9,483 9,479 9,432 9,342
Subtotals, “Big Three” Taxes ($86,600)($86,088)($78,826)($80,193)($82,546)($84,962)
Other revenues $5,795 $5,913 $4,486 $4,730 $4,540 $4,788
Net transfers and loans 1,897 1,488 1,451 1,386 -1,048 -529
Total Revenues and Transfers $94,292 $93,489 $84,764 $86,309 $86,038 $89,221
Difference—Governor’s Budget
Minus LAO November Forecast
-$803 $1,545 $3,183
a Baseline revenues are revenues excluding the effect of any proposed law or policy changes. For example, revenues that would result from the
Governor’s proposed November 2012 tax initiative are excluded from these figures.b Differences in federal tax policy assumptions explain a portion of the administration’s higher personal income tax estimates.
2012-13 BUDGET
14 Legislative Analyst’s Office www.lao.ca.gov
projections, $3.7 billion can be attributed to our
different PIT forecasts. In recent weeks, since
the Department of Finance (DOF) announced
its updated 2011-12 “trigger” forecast, we have
devoted significant time to analyzing these differ-
ences. While our respective forecasting models
differ—making it difficult to assess the reasons
for all of our differences—it seems clear that our
office’s forecasting models currently assume that
high-income tax filers will receive significantly less
income than that assumed in DOF’s models. Our
differences seem particularly significant beginning
in tax year 2012, which affects General Fund PIT
revenue forecasts for both 2011-12 and 2012-13. It
appears that our differences most likely include
those in various categories of income for wealthier
filers, including wages and salaries, business-related
income, retirement income, and the exceptionally
volatile income category of capital gains.
Concerns About the Administration’s Capital
Gains Forecast. In its new forecast, DOF projects
capital gains realized
by California tax filers
to rise to $96 billion
in 2012. By contrast,
our office’s November
forecast assumed
$62 billion of 2012 capital
gains. This $34 billion
difference accounts for
about $3 billion of our
organizations’ differing
PIT baseline forecasts
in 2011-12 and 2012-13
combined. A part of
this $3 billion revenue
difference results from
our differing assumptions
concerning federal tax
policy. In contrast to our
forecast, DOF’s revenue
forecast assumes that the 2001 cuts in federal tax
rates will be allowed to expire as scheduled at the
end of 2012. This expiration then is assumed to
cause investors to accelerate realization of capital
gains that they otherwise would take in 2013,
thereby “shifting” a portion of capital gains income
forward from 2013 to 2012. In this forecast, for the
first time, DOF also has shifted an additional part
of 2013 capital gains to 2012 based on assumed
investor behavior to shield income from higher
Medicare taxes scheduled to take effect next year.
These various shifts tend to reduce projected state
revenues for 2013-14 and increase them in earlier
years.
We are concerned that the administration’s
current method of forecasting high-income
filers’ income—especially capital gains—tends
to overestimate state revenue growth from the
PIT over the next few years, including revenue
growth that would result from the Governor’s tax
initiative. Figure 7 shows historical net capital gains
Administration Forecasts Much Higher Capital Gains
Net Capital Gains (In Billions)
Figure 7
Note: Figures are adjusted to eliminate assumed accelerations of capital gains realizations due to changes
in federal tax policy. The figures are not adjusted for inflation.
20
40
60
80
100
120
$140
1995 2000 2005 2010 2015
Governor’s Budget
LAO
(November 2011)
2012-13 BUDGET
www.lao.ca.gov Legislative Analyst’s Office 15
of California resident tax filers, as well as both
our office’s November 2011 estimates and DOF’s
current estimates. In this figure, we have adjusted
both sets of estimates to eliminate the federal
tax-related shifts described above in order to show
our underlying forecasting differences. With these
adjustments, DOF forecasts roughly $20 billion
more of capital gains than our office in each year
beginning in 2012. This results in DOF forecasting
roughly $2 billion more in annual baseline
revenues than we do going forward. Over time,
DOF assumes capital gains begin to approach levels
only experienced during previous stock market and
real estate “bubbles.” We advise the Legislature to
regard these estimates with some caution.
As we discussed in our November report,
California’s Fiscal Outlook, Franchise Tax Board
(FTB) data on the state income tax base lags by one
to two years, such that preliminary data on 2010
income tax returns only recently has emerged.
Since publication of our report, FTB preliminary
data for 2010 suggests that our November 2011
forecast of capital gains for that tax year was
too high. This, in turn, may have resulted in our
forecast of capital gains for subsequent years
being somewhat too high. We expect to adjust for
these differences—as well as other differences that
may offset the downwardly revised capital gains
estimates—in our next revenue forecast (slated for
release in late February).
Forecasting capital gains and other income of
wealthier Californians is extremely difficult. These
forecasts can change rapidly during the course
of any given year due to abrupt changes in asset
markets and the overall economy, which, as we have
seen in recent years, are not all that rare. Yet, both
DOF and our office utilize similar assumptions for
future stock market and home price growth in our
models, and our office has found that movements
in these asset prices, combined with simple time
trends, have explained more than 80 percent of the
annual variation in the major categories of capital
gains over the last two decades. We will continue
to examine economic and tax collection data in the
coming months to try to reconcile our forecasting
differences with DOF.
December 2011 Income Taxes Lagged
Estimates. Using data from FTB and the
Employment Development Department (EDD),
which administers PIT withholding, our office and
DOF track PIT and corporation tax (CT) agency
cash receipts daily. December and January are
significant months for collections of PIT estimated
payments, which are paid largely by high-income
filers. December 2011 was a disappointing month
for PIT collections (as well as CT collections).
Preliminary FTB data show that estimated PIT
payments and PIT withholding lagged prior-year
collections for the same month. They also lagged
the amount of expected revenues for December
2011 assumed in DOF’s June 2011 budget forecast
of monthly receipts. (The DOF’s new revenue
forecast has the effect of increasing the average
projected PIT and CT receipts for the rest of
2011-12 above the levels in the June 2011 forecast.
This makes it all the more notable that December
PIT and CT revenues were over $900 million lower
than the June forecast.)
It is too early to make definitive judgments
about what these most recent PIT collection
trends mean. In particular, receipts over the next
two weeks will be an important early indication
as to whether our office’s or DOF’s high-income
taxpayer forecast is closer to target. Additional data
will emerge in the coming months, particularly
during the all-important revenue collection month
of April. Negative trends like those we have seen
recently can reverse themselves quickly.
The Facebook Effect. Facebook Inc., a privately
held company headquartered in Palo Alto, may
proceed with an initial public offering (IPO) of its
stock in 2012. Facebook reportedly is considering
2012-13 BUDGET
16 Legislative Analyst’s Office www.lao.ca.gov
issuing $10 billion of stock in an IPO that would
value the company at over $100 billion. Other
companies also are considering IPOs in the coming
years.
In the coming months, the state’s revenue
forecasts will need to be adjusted somewhat to
account for the possibility of hundreds of millions
of dollars of additional revenues related to the
Facebook IPO. These revenues could affect the
budgetary outlook beginning in 2012-13. We
caution that it will be impossible to forecast
IPO-related state revenues with any precision,
and it is likely that little information about the
state revenue gain from the Facebook IPO will be
available before investors file tax returns in April
2013. (Even then, due to the confidentiality of
individual taxpayer information, we are unlikely to
know precisely how much state revenues increased
due to Facebook’s IPO.)
In considering the size of the Facebook IPO
effect in the coming months, revenue forecasters
will have a difficult task. Our office’s income
models are based on historical trends and,
therefore, already assume that some level of IPO
activity occurs for California companies each year.
Moreover, in our recent forecasts, our office has
deliberately built in “extra” capital gains (above
those generated by our model) in 2010, 2011, and
2012 to try to account for a variety of factors,
including the surprisingly strong PIT receipts in
some recent months. Finally, Facebook-related
capital gains likely will prove to be a relatively
small percentage of California’s overall capital
gains in 2012. If the stock market as a whole has
an unusually strong or weak year, that fact could
change forecasted capital gains up or down by
much more than the positive Facebook effect.
revenue Proposals
Governor’s Tax Initiative Proposal. The
Governor’s 2012-13 budget plan assumes passage of
his initiative proposal for temporary PIT and SUT
increases. Specifically, the Governor proposes to
increase PIT rates for upper-income Californians
for five years (2012 through 2016) and a 0.5 percent
increase in the statewide SUT for four years (2013
through 2016). The administration forecasts that this
measure would generate $6.9 billion that would be
available for the Legislature’s consideration during
the 2012-13 budget process—$2.2 billion in 2011-12
revenues and $4.7 billion of 2012-13 revenues. All of
the 2011-12 revenue and $3.5 billion of the 2012-13
revenue would result from the higher PIT rates.
As we discussed in our recent analysis of the
Governor’s initiative proposal, our current estimates
of the revenue impact of his initiative proposal
are lower than the administration’s. Currently, we
forecast that the proposal would generate $4.8 billion
for the 2012-13 budget process, or $2.1 billion less
than the administration’s estimate. Our estimates of
the initiative’s revenue increases in later years also
are lower than the administration’s. The reasons
for our lower estimates are essentially the same as
the reasons for our differences in baseline revenues
described above.
Both our office and the administration agree
that the initiative revenues will likely prove to be
volatile, given that a large portion of them will relate
to upper-income tax filers’ capital gains and other
nonwage income.
Accrual Proposal. The administration proposes
that the budget include a control section authorizing
a new method of accruing revenues for tax policy
changes enacted in 2012. This proposed change,
similar to the administration’s rejected accrual
change proposal from last year, would apply to the
Governor’s tax initiative proposals but not other tax
revenues.
We discussed last year’s proposal in our
January 2011 publication, The 2011-12 Budget:
The Administration’s Revenue Accrual Approach.
Similar to what we described in that report,
2012-13 BUDGET
www.lao.ca.gov Legislative Analyst’s Office 17
the accrual of a portion of the initiative tax
revenues to 2011-12 would tend to decrease
the state’s 2012-13 Proposition 98 minimum
school funding guarantee. While we find some
merit in the administration’s proposed accrual
approach, we continue to have concerns that it is
not being applied uniformly across all revenues.
We recommend that the Legislature pass a law
requiring DOF to develop and regularly update a
clear, transparent summary of the state’s accrual
methodologies, and we recommend that the state
move toward consistent application of accepted
accrual techniques across all tax revenues and
spending.
tax administration
Proposed Department of Revenue. The 2012-13
Governor’s Budget Summary mentions that the
Governor will propose merging FTB and the tax
administration components of EDD into a new
Department of Revenue (DOR). Based on the
potential benefits for the state and taxpayers from
having a single tax administration entity, our office
has long advocated some sort of tax agency merger. In
our view, a successful merger would require detailed
preparatory work by the tax agencies involved and
a significant amount of time to implement merger-
related efficiencies gradually.
In addition to merging FTB and the tax admin-
istration sections of EDD, we urge the Legislature
to consider merging the bulk of the State Board of
Equalization’s (BOE) tax administration efforts into
the proposed DOR. The State Constitution mandates
that certain limited tax administration functions
remain with the elected BOE, but legislative action
could allow most of BOE’s functions to be transferred
to the proposed DOR. We believe that long-term
efficiencies are possible from a carefully planned
merger of this type. In addition, taxpayers could
benefit from having one, coordinated tax agency with
which to interact. Other departments with revenue
collection functions also could be considered for
inclusion in DOR in the future.
PrOPOSitiOn 98
Proposition 98 funds K-12 education, the
California Community Colleges (CCC), preschool,
and various other state education programs. The
Governor’s budget increases total Proposition 98
funding by $4.9 billion, or 10 percent between the
current year and the budget year. As shown in
Figure 8 (see next page), the year-over-year increases
in Proposition 98 General Fund for schools and
community colleges are larger—15 percent and
14 percent, respectively, with local property tax
revenues estimated to be virtually flat. The funding
levels reflected in Figure 8 assume voters approve
the Governor’s November 2012 ballot measure to
raise sales and income tax rates temporarily, with a
portion of the associated revenue increase benefiting
K-14 education.
Makes Various Adjustments to Minimum
Guarantee. For 2012-13, the Governor funds at
the minimum guarantee ($52.5 billion) assuming
approval of his tax measure (which accounts
for more than $2 billion of the increase in the
guarantee). To arrive at this guarantee, the
Governor adjusts or “rebenches” the guarantee
in three notable ways. Of greatest magnitude, the
Governor permanently rebenches the minimum
guarantee to account for a shift in property tax
revenues (of approximately $1 billion annually)
from redevelopment agencies to school districts and
community colleges. By rebenching the guarantee
for this shift, the state achieves associated General
Fund savings. In addition, the Governor proposes
to eliminate existing provisions that require the
2012-13 BUDGET
18 Legislative Analyst’s Office www.lao.ca.gov
state to rebench for the “gas tax swap” adopted by
the Legislature in 2011. The gas tax swap eliminated
the sales tax on gasoline (previously included
in the Proposition 98 calculation) and replaced
it with an increase in the excise tax on gasoline
(excluded from the Proposition 98 calculation).
With the rebenching, the minimum guarantee
was unaffected by the gas tax swap. Without the
rebenching, the minimum guarantee drops by
$544 million. Thirdly, the Governor proposes
to recalculate last year’s rebenchings using the
“1986-87 methodology.” This change (which
applies to child care, student mental health, and
redevelopment revenues) increases the 2012-13
guarantee by $217 million.
Makes Two Additional Adjustments to
Minimum Guarantee Under Back-Up Plan. If the
Governor’s tax measure is not adopted, the Governor
has a back-up plan that contains $4.8 billion in
spending reductions to schools and community
colleges, including $2.4 billion in programmatic
reductions. These programmatic reductions are
linked with the Governor’s proposal to include
K-14 general obligation bond debt-service payments
within the Proposition 98 minimum guarantee.
To account for this shift, the Governor proposes a
rebenching of the minimum guarantee, resulting
in an increase of $200 million. Since the cost of
debt-service payments ($2.6 billion) far exceeds
the increase in the minimum guarantee from the
rebenching, the Governor proposes $2.4 billion
in programmatic Proposition 98 reductions to
maintain spending at the guarantee. His estimate of
the guarantee also excludes the realignment-related
sales tax revenue. How the state should treat these
revenues is currently being litigated.
major Proposals
As shown in Figure 9, the year-to-year funding
increase under the Governor’s basic plan would
be dedicated primarily to backfilling one-time
solutions from last year, covering a slight increase
in the K-12 student population (estimated to be
0.35 percent) for a few select K-12 programs, and
paying down existing K-14 deferrals. The plan
provides no cost-of-living adjustment for any
K-14 education program. (Providing the projected
3.17 percent COLA for K-14 programs would cost
Figure 8
Proposition 98 Funding
(Dollars in Millions)
2011 -12
Revised
2012 -13
Proposed
Change From 2011-12
Amount Percent
K-12 Education
General Fund $29,329 $33,755 $4,426 15%
Local property tax revenue 12,891 12,908 17 —
Subtotals ($42,220)($46,663)($4,443)(11%)
California Community Colleges
General Fund $3,217 $3,683 $465 14%
Local property tax revenue 2,107 2,101 -6 —
Subtotals ($5,324)($5,784)($459)(9%)
Other Agencies $83 $80 -$2 -3%
Totals, Proposition 98 $47,627 $52,527 $4,900 10%
General Fund $32,629 $37,518 $4,889 15%
Local property tax revenue 14,998 15,009 11 —
2012-13 BUDGET
www.lao.ca.gov Legislative Analyst’s Office 19
$1.8 billion.) It also provides no enrollment growth
funding for CCC. Moreover, it contains essentially
no programmatic augmentations while containing
a few notable programmatic reductions. The
Governor’s plan also contains a set of proposals
to restructure the state’s K-12 and CCC funding
models. Below, we highlight the Governor’s major
Proposition 98 spending proposals as well as his
major restructuring proposals. (The Governor also
proposes significant reductions for the California
Department of Education [CDE]-administered
child care programs, described in the next section
of this report.)
Dedicates Funding Increase to Paying Down
Deferrals. The largest component of the Governor’s
plan is to pay down $2.4 billion in existing K-14
deferrals ($2.2 billion for school districts and
$218 million for CCC apportionments). This
funding would reduce the need for school districts
and community colleges to borrow to support
operations while awaiting the state’s late payments.
From both a state and a
local perspective, paying
down deferrals helps to
realign funding with
expenses. The proposal
would reduce the state’s
outstanding deferrals
from $10.4 billion to
$8 billion. Because
this funding would
not be intended to
increase programmatic
activities, K-12 per-pupil
programmatic funding
under the Governor’s
basic plan is roughly flat
year over year.
Suspends K-12
Categorical Program
Requirements, Phases
In Weighted Student Formula Over Five Years.
To assist with local budget constraints, the state
has temporarily suspended requirements for about
40 categorical programs. The Governor proposes
to suspend requirements for up to ten additional
programs—essentially phasing out most existing
categorical programs beginning in 2012-13. (A few
categorical programs—including special education,
child nutrition, and the After School Education
and Safety program—would remain.) In lieu of
the current revenue limit and categorical program
model, the Governor proposes that all districts
and charter schools receive an equal base per-pupil
amount, plus additional general purpose funding
intended to serve their disadvantaged students.
Specifically, for every dollar districts/charter
schools receive for a student, they would get an
additional 37 cents if the student were poor and/or
an English Learner. Districts/charter schools with
large proportions of these disadvantaged student
populations also would receive supplemental
Figure 9
2012-13 Proposition 98 Spending Changes
(In Millions)
Technical
Backfill one-time actions $2,440
Make revenue limit technical adjustments 162
Fund revenue limit growth 158
Backfill Proposition 63 mental health funding 99
Backfill CCC fee revenue decline 97
Make other technical adjustments -182
Subtotal ($2,775)
Policy
Pay down K-12 deferrals $2,151
Pay down CCC deferrals 218
Create K-12 mandate block grant 98
Create CCC mandate block grant 12
Do not initiate Transitional Kindergarten program -224
Reduce preschool funding -58
Swap one-time funds -57
Eliminate Early Mental Health Initiative -15
Subtotal ($2,125)
Total $4,900
2012-13 BUDGET
20 Legislative Analyst’s Office www.lao.ca.gov
“concentration” funding. Perhaps as soon as
2013-14, the administration plans to add a
performance component to the weighted student
formula, which would provide fiscal incentives
for districts to improve or sustain high academic
performance. Districts would have local discretion
as to how to spend weighted student formula
funding. The Governor proposes to transition
to the new formula over a five year period, with
implementation beginning in 2012-13.
Proposes More Flexibility for CCC Categorical
Programs. Under current law, 11 of community
colleges’ 21 categorical programs are included
in a “flex item.” Through 2014-15, districts are
permitted to transfer funds from categorical
programs in the flex item to any other categorical
purpose. As part of his emphasis on flexibility,
the Governor adds seven currently protected
categorical programs to the flex item. Under the
Governor’s proposal, funding for the remaining
three CCC categorical programs (Disabled Students
Program, Foster Care Education Program, and
Telecommunications and Technology Services)
would remain restricted.
Replaces Existing K-14 Mandate System
With New Block Grant. The Governor proposes a
number of K-14 mandate-related changes. Under
the Governor’s package of changes, the existing
mandate system essentially would be replaced with
a discretionary block grant.
• Eliminates More Than Half of Existing
Mandates. The Governor proposes to
eliminate 31 of 57 existing education
mandates. The mandates proposed for
elimination include two of the costliest
mandates—one relating to high school
science graduation requirements and one
relating to behavioral intervention plans for
special education students.
• Suspends Remaining Mandates. The
remaining 26 education mandates would
be suspended. (Though suspended, school
districts and community colleges still
would need to undertake these activities
if they wanted to access the block grant
funding described below.)
• Creates Block Grant. The Governor
proposes to create a new, discretionary
“mandate block grant.” His budget
provides $200 million ($178 million for
school districts, $22 million for community
colleges) for the block grant. School
districts and community colleges that
choose to receive block grant funding
would receive a per-student allocation. As a
condition of receiving block grant funding,
recipients would be required to complete
the 26 sets of activities still deemed to
be high priorities. The administration
indicates it will establish some auditing
and/or compliance monitoring process
to ensure grant recipients undertake the
required activities.
Does Not Initiate Transitional Kindergarten
Program. In response to concerns that California
was encouraging children to start attending
school before they were developmentally ready, the
Legislature recently passed legislation prohibiting
children under five years of age from enrolling
in kindergarten (unless a parental waiver was
obtained). The change is phased in, moving
the birthday cutoff back from December 1 to
September 1, by one month at a time over three
years, beginning with the shift to November 1 in
2012-13. This change reduces the kindergarten
population by about 125,000 students and yields
estimated revenue limit savings of $224 million in
2012-13 BUDGET
www.lao.ca.gov Legislative Analyst’s Office 21
2012-13. The Legislature, however, redirected these
savings to fund a new Transitional Kindergarten
program, which is to offer an additional year of
public school to the children who will just miss
the new kindergarten cutoff. This program also
is phased in over three years, beginning 2012-13
for those children turning age five between
November 1 and December 1. By proposing not to
initiate this new program, the Governor achieves
$224 million in 2012-13 savings, growing to
roughly $675 million in annual savings (by 2014-15,
when the program otherwise would have been fully
implemented).
Includes 2012-13 Midyear Trigger Reductions.
The Governor’s back-up plan includes $4.8 billion
in trigger reductions if his ballot measure is rejected
by voters. The Governor proposes to implement
these reductions by rescinding the $2.4 billion K-14
deferral pay-down and reducing general purpose
funding for schools and community colleges by
$2.4 billion. Paying down existing deferrals is
intended to have no associated programmatic
effect but the reduction in general purpose funding
would reflect a base cut. Under this scenario, K-12
per-pupil programmatic funding would decline
6 percent from the current-year level.
Several components merit
Serious consideration
The Governor’s plan addresses several of the
longstanding, fundamental, widely recognized
problems with the state’s K-12 and community
college funding systems. Though the Legislature
might find ways to improve upon the Governor’s
specific restructuring plans, we recommend
the Legislature adopt the Governor’s basic
restructuring approaches (regardless of the
state’s revenue situation). In this fiscal climate,
particularly with so many existing outstanding
Proposition 98 obligations, we also recommend
the Legislature adopt the Governor’s proposal to
avoid initiating a major new program beginning in
2012-13. We discuss these particular aspects of the
Governor’s plan in more detail below.
More K-12 Categorical Flexibility, New
Funding Model Moving in Right Direction. Most
experts and advocates at both the state and local
levels agree that the state’s current school funding
system is overly complex, inequitable, inefficient,
and highly centralized. Consequently, the
Governor’s proposal to simplify and streamline the
existing methods for allocating funding deserves
both credit and serious consideration. We believe
several components of the proposal are particularly
sound, including immediate increases in categorical
flexibility, a moderate phase-in period for the new
formula, and additional funding “weights” for
disadvantaged students. The Legislature could use
this basic structure but make some modifications to
ensure its important policy priorities are preserved.
For example, the state could maintain some general
requirements to ensure additional funds actually
are spent on disadvantaged students. Alternatively,
rather than one general purpose weighted formula,
the Legislature could consolidate all K-12 funding
into a few thematic block grants.
Proposal to Expand CCC Categorical Program
Flexibility Has Promise, But More Detail Is
Needed. The Governor’s plan to expand the number
of categorical programs in the CCC flex item also
appears to be consistent with recommendations
we have made in the past. By placing additional
programs in the flex item, districts likely would
have more freedom to decide for themselves how
best to allocate funds to targeted purposes. This
could help districts operate their services more
efficiently and effectively, such as by consolidating
various separately administered student counseling
2012-13 BUDGET
22 Legislative Analyst’s Office www.lao.ca.gov
programs into one comprehensive program. The
Governor’s full proposal, however, is not yet clear.
Specifically, the administration has indicated that
it intends to introduce provisional language that
will attach certain conditions to how districts
spend such funds. The Legislature will need to have
this language before deciding on the merits of the
Governor’s proposal.
Mandate Approach Has Several Strong Points.
As with the state’s existing K-12 categorical funding
system, the state’s existing K-14 mandate system
also is widely recognized as having fundamental
problems. A broadly representative mandate work
group that the Legislature asked our office to
convene last year identified nine serious flaws with
the state’s existing system, including significant
administrative burden for districts, wide variation
in reimbursement rates for completing the same
sets of activities, reimbursement regardless of
outcomes, and very high disallowance rates of
audited claims. The Governor’s restructuring
approach addresses many of these problems. It
provides upfront, standardized per-student funding
for all districts using a relatively simple allocation
process that does not involve extensive paperwork.
Also, by first eliminating all nonessential activities,
the state is able to reduce associated costs, thereby
freeing up resources that can be used to fund
districts that do not participate in the existing
process (one of the main factors that drives up the
cost of most restructuring proposals). Though the
Legislature might want to make some changes to
the Governor’s proposal (for example, eliminating/
suspending a different set of mandates and/
or adjusting the amount of block grant funding
provided), we recommend the Legislature adopt the
Governor’s restructuring approach.
Adopt Kindergarten Proposal, Prioritize
Access to Preschool for Low-Income Children.
Given the major funding and programmatic
reductions districts have experienced in recent
years—and the potential for additional reductions
if the November election does not result in new
state revenue—we agree with the Governor’s
assessment that now is not the time to initiate
major new programs. As such, we recommend
the Legislature adopt the proposal to not initiate
the Transitional Kindergarten program, for the
associated revenue limit savings of $224 million.
The Legislature could consider prioritizing state
preschool slots for low-income children specifically
affected by the change in kindergarten start date.
Moreover, in the context of this change—and the
significant reductions proposed for the state’s
child care programs—the Legislature may want
to modify or reject the Governor’s proposed
$58 million cut to the state preschool program.
concerns with Governor’s Overarching
Proposition 98 approach
The Governor’s Proposition 98 proposal builds
one budget plan that is based upon revenues that
would not materialize until midyear and then has a
relatively severe back-up plan in case the revenues
ultimately do not materialize. Such an approach
generates significant uncertainty for school
districts, as discussed below.
Governor Proposes Relatively Severe
Back-Up Plan for Schools. Given his back-up plan
would cut schools and community colleges by
$4.8 billion (including $2.4 billion in programmatic
reductions), schools and community colleges
would bear most of the midyear trigger reductions.
Schools have difficulty, however, in downsizing
operations midyear given students already have
been assigned to classes, teachers are working
on year-long contracts, and the number of
instructional days already has been decided.
Most Districts Likely to Build 2012-13 Budgets
Based Upon Governor’s Back-Up Plan. Because
2012-13 BUDGET
www.lao.ca.gov Legislative Analyst’s Office 23
the Governor’s basic plan relies on revenues that
have not yet materialized and ultimately might not
materialize, and because large midyear reductions
are so disruptive, most districts likely would feel
compelled to adopt budgets assuming the Governor’s
back-up plan. Under this scenario, districts
would adopt 2012-13 budgets that already contain
$2.4 billion in programmatic reductions statewide.
That is, they already would make the reductions some
would be hoping to avoid. If revenues ultimately
did materialize, these districts likely would restore
reserve levels immediately but not make major
programmatic adjustments until the following school
year (2013-14). While districts could make relatively
minor programmatic adjustments midyear (such as
hiring additional instructional aides), more significant
programmatic changes (such as reducing class size
and hiring additional teachers) likely would not be
undertaken. This is because even these enhancements
can be disruptive if implemented midyear, resulting
in the shuffling of students among classes and
corresponding changes in students’ teachers.
Districts That Budget More Optimistically Could
Face Very Difficult Midyear Situations. By contrast,
districts that feel compelled to be more optimistic
and build their budgets assuming the tax measure
is adopted could face very difficult midyear fiscal
situations. Under this scenario, districts would have
few options for making $2.4 billion in programmatic
reductions midyear. Given current statutory
restrictions, districts cannot lay off teachers midyear.
They also typically negotiate changes in the length
of the work year with affected unions, with districts
needing to follow certain typically lengthy legal
procedures if they wish to declare impasse and impose
changes to the teacher contract. Moreover, districts
with reserve levels at the state-allowed minimums
would not have sufficient reserves to cover a reduction
as large as the one proposed under the Governor’s
back-up plan. As a result of all these factors, some of
these districts could run out of cash the last part of the
school year, be unable to make payroll, and require an
emergency state loan (for which the district pays all
associated costs and loses local control for a period up
to 20 years). Though the administration indicates it
is willing to work with districts to ameliorate some of
these issues, reaching agreement is likely to be difficult
and most of the modifications likely to be considered
(such as a new layoff window after the election) still
would be disruptive.
Consider Unintended Consequences of
Trigger Approach. Though the 2012-13 budget
situation under the Governor’s plan is awkward for
school districts, his plan would improve notably
the outlook for schools over the subsequent four
years. Nonetheless, the Governor’s trigger approach
has significant consequences for school districts
in 2012-13. As detailed above, for 2012-13, most
school districts will feel compelled to make the
programmatic reductions imposed by the triggers.
Given this is the case, the Legislature needs to be
very deliberate in structuring a trigger package, as it
in essence would determine the size and quality of
California’s 2012-13 K-14 education program. The
Legislature should be especially careful in setting the
size of the trigger reduction, determining the specific
K-14 reductions to impose, and designing tools to
help districts respond given all the constraints they
face in making midyear adjustments. Alternatively,
given the potentially unintended consequences of
the trigger as well as the major disruptions caused by
midyear reductions, the Legislature could consider
building a budget without midyear cuts. In this case,
the Legislature could focus on a funding level it could
afford despite the revenue uncertainties and then use
any ballot-measure revenue as one-time investments
in 2012-13 to pay down existing Proposition 98
obligations.
2012-13 BUDGET
24 Legislative Analyst’s Office www.lao.ca.gov
HEaLtH and Human SErvicES
CalWorKs and suBsidized Child Care
The Governor’s budget proposes to reduce
General Fund support for CalWORKs and
subsidized child care—the state’s primary
sources of cash assistance and work support for
California’s low-income families—by a total of
about $1.4 billion. These savings would be achieved
primarily by: (1) reducing cash grants received
by a significant portion of current CalWORKs
recipients, (2) further limiting eligibility for
subsidized child care and CalWORKs employment
services, and (3) reducing the maximum amount
the state pays child care providers. To manage
these significant reductions, the Governor
proposes to prioritize funding in these programs
on efforts to increase work participation and
support for families that are most likely to achieve
self-sufficiency through employment.
major Proposals
Restructuring the CalWORKs Program.
Currently, the CalWORKs program provides
48 months of cash assistance, employment services,
and child care to support efforts of low-income
families to achieve self-sufficiency through a variety
of welfare-to-work activities (such as employment,
education, training, and other activities to remove
barriers to work). In addition, the current program
provides non-time-limited cash assistance—on
behalf of children—to families not participating in
welfare-to-work activities. In 2011-12, a combined
total of $5.4 billion in federal, state, and local funds
support these activities.
Under the Governor’s proposal, the current
CalWORKs program would be replaced by a
three-part system, consisting of two CalWORKs
subprograms—CalWORKs Basic and CalWORKs
Plus—and a new Child Maintenance program.
The CalWORKs Basic program would effectively
continue the current CalWORKs program,
including current cash assistance levels and
employment services, for eligible adults for up to
24 months. After 24 months in CalWORKs Basic,
families working a sufficient amount of hours
(30 hours for single-parent families, 35 hours
for two-parent families, and 20 hours for single-
parent families with a child under the age of six)
in unsubsidized employment would be eligible
for an additional 24 months (48 months total) of
cash assistance, employment services, and child
care through the CalWORKs Plus program.
Families who fail to meet these work participation
requirements—for various reasons—would be
transferred to the Child Maintenance program.
In addition, all families with parents who are not
work-eligible (such as those with undocumented
immigrant parents) would be placed in the new
Child Maintenance program rather than the
CalWORKs program. Families in the Child
Maintenance program would receive reduced cash
assistance (27 percent below current CalWORKs
levels) and no employment services or child care.
Participation in the Child Maintenance program
would not be time limited. Time limits in both the
CalWORKs Basic (24 months) and the CalWORKs
Plus (an additional 24 months) would be applied
retroactively to all CalWORKs recipients,
including those exempted from work participation
requirements or in sanction status.
Although these three programs would
continue to serve the same population as the
current CalWORKs program, a majority of current
recipients would face a reduced cash grant and all
recipients would face more restrictive limitation
on receipt of employment services and child care.
Altogether, the Governor’s proposed restructuring
would reduce General Fund expenditures for
2012-13 BUDGET
www.lao.ca.gov Legislative Analyst’s Office 25
CalWORKs by an estimated $942 million. The
Governor’s budget also proposes to transfer
$736 million in federal Temporary Assistance
for Needy Families (TANF) block grant funds
(the primary source of federal funding for the
CalWORKs program), made available by the
CalWORKs restructure, to the Student Aid
Commission to fund Cal Grants. This transfer
is necessary to fully realize the General Fund
savings from the reduced CalWORKs expenditures
described above, while continuing to satisfy
requirements for state maintenance-of-effort in
programs which fulfill the goals of the TANF
program.
Tightening Work Participation Requirements.
The Governor’s proposal would narrow the scope
of work activities which allow a family to meet
its CalWORKs work participation requirement.
The first way the proposal would do this is by
limiting countable activities to a more restrictive
list of federal requirements. More specifically,
the Governor’s proposal would eliminate the
opportunity for CalWORKs recipients to pursue
higher education beyond 12 months of vocational
training or receive mental health or substance
abuse treatment as part of welfare-to-work
activities. Additionally, the proposal would allow
recipients to participate only in unsubsidized
employment (as opposed to subsidized employment
or education) after 24 months of cash assistance.
This narrowed employment eligibility definition
would also apply to all subsidized child care
programs, limiting eligibility for subsidized
child care to those families who meet the work
requirements described above for the CalWORKs
Plus program.
Reducing Funding for Subsidized Child Care.
The 2011-12 budget provides about $1.6 billion
in state and federal funds to CDE to administer
subsidized child care programs. These include
specific programs targeted at three populations:
(1) current CalWORKs recipients, (2) former
CalWORKs recipients, and (3) other low-income
working families not receiving CalWORKs
cash assistance. The Governor proposes to
reduce funding for these programs by roughly
$450 million, or almost 30 percent. The bulk of
this reduction (about $300 million) results from
limiting eligibility for receiving child care services
to families that meet the work participation
requirements described above. Additionally, the
proposal would reduce the maximum amount
the state pays child care providers (saving about
$80 million) and reduce family income eligibility
thresholds from 70 percent of state median
income (SMI) to 200 percent of the federal poverty
level, which equates to 62 percent of SMI (saving
about $45 million). These policy changes would
also apply to and result in some savings for the
CalWORKs Stage 1 child care program, reflected
in the CalWORKs budget item. The administration
estimates that its package of child care-related
reductions would eliminate about 62,000 slots from
a current total of about 293,000 slots.
Restructuring the State’s Subsidized Child
Care System. Additionally, the Governor’s
proposal would begin consolidating funding and
administration for several child care programs in
2012-13 with a goal of shifting administration from
CDE and local contractors to the Department of
Social Services and county welfare departments
in 2013-14. This consolidation means that there
would no longer be a dedicated funding stream
for low-income working families that have never
received CalWORKs cash assistance. Depending
on local priorities and funding availability, county
welfare departments could choose to continue
offering services to these families. By eliminating
subsidized child care for all families who are
not working sufficient hours in unsubsidized
employment, as well as ultimately transferring the
responsibility for the state’s subsidized child care
2012-13 BUDGET
26 Legislative Analyst’s Office www.lao.ca.gov
system to DSS and county welfare departments,
the Governor’s proposal would focus the intent
of these programs on supporting low-income
families’ ability to find and retain unsubsidized
employment.
LaO comments
Governor’s Proposal Has Some Strengths.
Currently, the CalWORKs program is focused
on two primary goals: (1) supporting the efforts
of low-income families to find work and become
self-sufficient and (2) ensuring a basic level of
subsistence for all families in the state. In an
environment of limited resources, these goals often
compete with one another for funding support.
The Governor’s proposal recognizes that, given
current funding constraints, it is difficult to fully
achieve both goals of the CalWORKs program.
Accordingly, the proposal would focus reforms in
the CalWORKs program on achieving the goal of
emphasizing work.
In general, we find that the reforms proposed
by the Governor are consistent with his stated
priorities for the program. Evaluating the merit
of supporting work over providing subsistence is
largely a matter of legislative priorities; however,
this approach does have budgetary advantages.
First, by targeting resources to a specific, smaller
portion of low-income families, the Governor is
more likely to achieve his objective with limited
resources. Second, the Governor’s focus on
work would improve the state’s ability to meet
overall program work participation requirements
established by the TANF program—which the
state is currently failing to do. Failing to meet these
requirements could result in significant federal
sanctions and reductions to the state’s federal
TANF block grant. We similarly find that the
Governor’s attempt to consolidate, streamline, and
prioritize the state’s overly complicated child care
delivery system has some merit. Specifically, the
proposal would replace multiple state programs—
and multiple reimbursement rates, contract
administrators, and eligibility criteria—with one
uniform approach.
Potential Trade-Offs of the Governor’s
Proposal. Although we find the Governor’s
proposal has some advantages, it also has
potential drawbacks. Most clearly, the reductions
proposed by the Governor would have significant
negative impacts on many of California’s
low-income families. Regarding CalWORKs,
the Legislature may wish to consider whether
reductions made to families most in need of
support to achieve self-sufficiency would be too
severe. Similarly, the Legislature may want to
consider whether the Governor’s proposal too
significantly restricts eligibility criteria and time
lines for subsidized child care. More generally,
the Legislature should consider whether focusing
CalWORKs and subsidized child care primarily
on supporting efforts of low-income families to
obtain employment is consistent with its priorities
or whether other objectives are also important.
Focusing these programs on a different set of
objectives and priorities than the Governor
would not necessarily eliminate opportunities
for budgetary savings; however, the potential for
savings could be less.
The direction in which the Legislature elects
to focus these programs will likely dictate specific
reforms and help to determine such matters
as which state and local entities would be best
positioned to administer a streamlined child care
system. We therefore encourage the Legislature,
before evaluating or taking action on any specific
reform proposals, to carefully consider its primary
goals for these programs, with recognition that
pursuit of specific goals likely involves trade-offs.
2012-13 BUDGET
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medi-Cal
Governor’s dual Eligibles Proposal
The Governor’s budget proposes to shift certain
Medi-Cal beneficiaries who are also eligible for
Medicare, known as “dual eligibles,” from fee-for-
service to managed care plans. (Under managed
care, a health plan is responsible for providing
certain medical services to enrollees who prepay a
fixed amount.) Dual eligibles tend to be low-income
senior and persons with disabilities with multiple
chronic conditions. They represent some of the
state’s most expensive and medically complicated
health cases and are among the state’s highest
users of long-term care services, including costly
nursing home care. Under the Governor’s proposal,
managed care plans would cover long-term services
for dual eligible beneficiaries, including In-Home
Supportive Services (IHSS), Community-Based
Adult Services, and nursing home care. The shift
of dual eligibles to managed care would begin on
January 1, 2013 in eight to ten counties that would
be most likely to have capacity to coordinate care
for these beneficiaries. The enrollment of dual
eligibles into managed care throughout the rest of
the state would be completed over the following
few years. The administration projects the proposal
will achieve ongoing savings of $1 billion General
Fund beginning in 2013-14, mainly due to: (1) the
Medicare program sharing its savings with the state
and (2) lower utilization of high-cost Medi-Cal
long-term care services such as nursing home care.
The Governor’s budget assumes net savings of
$679 million General Fund in 2012-13, mainly due
to a payment deferral to all Medi-Cal providers.
Payments would be delayed by one or two weeks,
thereby shifting them into the next fiscal year.
The Governor’s proposal links the payment delay
with the shift of dual eligibles into managed care.
However, it is unclear whether it is necessary to
implement the shift of dual eligibles in order to
implement the payment deferral.
LaO comments
Proposal Has Merit, but More Information
Needed. The Governor’s proposal has merit
because it could reduce costs and improve the
coordination of care for dual eligibles. However,
more information is needed to assess how the
proposal would affect the medical care provided to
these beneficiaries and the proposal’s fiscal impact
to the state. The proposed shift of dual eligibles
to managed care is an expansion of a four-county
demonstration program that was authorized by
the Legislature in 2010-11 but has not yet been
implemented. Since the results of the pilot will not
be available for the Legislature to evaluate before the
budget is due to be enacted, useful data that could
assist the Legislature in assessing the merits of this
proposal and whether the proposed savings are
achievable will not be available. Before considering
the Governor’s proposal, the Legislature will need
more information, including details on the proposed
design and financing of managed care benefits
for dual eligibles, as well as on the assumptions
underlying the savings estimates associated with the
Governor’s proposal. For example, it is uncertain
how the provision of non-medical services, such as
IHSS, would be authorized and financed in the new
managed care arrangement.
healThy Families ProGram
Proposal
The Healthy Families Program (HFP)—
currently administered by the Managed Risk
Medical Insurance Board (MRMIB)—provides
health, dental, and vision benefits through
participating managed care health plans for
children who are not eligible for Medi-Cal.
The Governor’s budget proposes to achieve
$64 million in net General Fund savings in 2012-13
by taking a number of actions related to HFP.
This estimate reflects the savings generated by the
proposal to reduce the rates paid to HFP managed
2012-13 BUDGET
28 Legislative Analyst’s Office www.lao.ca.gov
care providers by 25.7 percent, on average, effective
October 1, 2012—bringing these rates to Medi-Cal
levels. In addition, the Governor proposes to
gradually transition HFP enrollees—approximately
878,000 children—to the Medi-Cal Program
administered by the Department of Health Care
Services (DHCS) by June 30, 2013. General Fund
support would shift from MRMIB to DHCS. The
transition of HFP enrollees would happen in three
phases over a nine month period, as follows:
• Phase 1 (October Through December
2012). Beginning October 1, 2012, about
411,000 HFP enrollees who are enrolled in
a managed care plan that directly contracts
with Medi-Cal would stay in the same plan
and transition to Medi-Cal.
• Phase 2 (January Through March 2013).
Beginning January 1, 2013, the remaining
424,000 HFP enrollees who live in a county
with an existing Medi-Cal managed care
plan would transition into those plans.
For example, HFP enrollees would shift
from one commercial managed care plan
to another commercial managed care plan
operated by a different corporation.
• Phase 3 (January Through June 2013).
Beginning January 1, 2013, the remaining
43,000 HFP enrollees who live in a county
without an existing Medi-Cal managed
care plan would be transitioned into
fee-for-service Medi-Cal. (Under a fee-for-
service arrangement, providers are paid for
each good or service they provide.)
The Governor’s budget also proposes to
eliminate MRMIB by July 1, 2013. The other four
programs that MRMIB administers would be
transferred to DHCS at that time.
LaO comments
Proposal Has Merit, but Key Details Are
Lacking. The Governor’s proposal has merit
because it could reduce state costs while continuing
to provide managed care to most HFP enrollees.
The administration, however, has not provided
details on several key issues related to the shift
of HFP enrollees into Medi-Cal that would
enable legislative evaluation of this proposal.
For example, the administration should provide
more information about how continuity of care
would be maintained for enrollees who move
from managed care into fee-for-service Medi-Cal.
The administration should also provide more
information about how eligibility determinations
and enrollment functions would work under the
new arrangement.
OtHEr ExPEnditurE iSSuES
Cal GranTs
Proposal
Citing dramatic increases in Cal Grant costs
since adoption of the entitlement programs in
2001, the Governor’s budget proposes several new
restrictions in Cal Grant eligibility and award
amounts. The Governor estimates these new
restrictions would result in $302 million of General
Funds savings. The major proposals are to:
• Increase the minimum required grade point
average (GPA) for students to qualify for
Cal Grants. The GPA requirements for high
school entitlement awards would increase
from 3.0 to 3.25 for Cal Grant A and from
2.0 to 2.75 for Cal Grant B (which serves
lower-income students). The Community
College transfer entitlement requirement
would increase from 2.4 to 2.75.
2012-13 BUDGET
www.lao.ca.gov Legislative Analyst’s Office 29
• Reverse the California Student Aid
Commission’s (CSAC’s) recent decision
to expand access to transfer entitlement
awards. Currently students must begin
university studies in the academic term
immediately following community college
enrollment to qualify for the transfer
award. The CSAC decision would allow
an interruption in studies prior to trans-
ferring. By reversing this decision, the
administration estimates it will avoid $70
million in new General Fund costs.
• Halt the planned increase in allowable
student loan default rates at Cal Grant-
eligible institutions. The default limit is
currently 24.6 percent but is scheduled
to increase to 30 percent for 2012-13. The
Governor’s proposal would retain the
current limit, which prevents institu-
tions with higher rates (primarily private
for-profit colleges) from participating in
the Cal Grant program.
• Lower the current annual grant cap of
$9,708 for students attending private
colleges and universities. The new cap
would be $5,472 for students attending
private non-profit institutions and $4,000
for those attending private for-profit
institutions.
Major Financial Aid Fund Shifts. The
Governor’s proposal would shift $736 million in
Cal Grant costs from the General Fund to federal
TANF funds. This fund swap would have no net
effect on total funding for Cal Grants. As discussed
earlier in this report, the Governor’s proposal
would cut CalWORKs services in order to free up
TANF funding for Cal Grants.
LaO comments
Of the Governor’s financial aid proposals,
we believe two merit serious consideration, one
should be modified, and one is problematic given
its potential to increase state costs. We also are
concerned that the Governor’s plan does not take
into account potential increases in Cal Grant costs
that the state would incur if the universities raised
their tuition/fee levels.
Governor’s Proposals to Avoid Two Program
Expansions Make Sense in This Environment. We
believe the Legislature should seriously consider the
Governor’s proposals to reverse CSAC’s decision to
expand access to transfer entitlement awards and
maintain the current default limit at 25 percent. In
the current fiscal environment, we think foregoing
program expansions that could necessitate further
program reductions in other areas makes sense.
In the future when the state fiscal condition
has improved the Legislature could consider
whether these are areas it would prioritize for new
investments.
Some Increases in GPA Requirements Appear
Warranted but Legislature Should Deliberate on
Where to Draw the Line. Students with very low
GPAs are unlikely to be prepared for postsecondary
education. Awarding Cal Grants to these students,
who have very low academic persistence and
completion rates, provides little long-term benefit
to the students or the state. Raising the GPA
requirement at the low end of the scale (such as
the 2.0 requirement for Cal Grant B) would better
target state resources to students who can benefit
from postsecondary education. In contrast, the
Governor’s proposal to raise the Cal Grant A
minimum GPA above 3.0 could affect a large
number of academically well-qualified students
with financial need. Where to draw the line in each
case is a policy decision that will require balancing
concerns about cost effectiveness and college
access.
2012-13 BUDGET
30 Legislative Analyst’s Office www.lao.ca.gov
Proposal to Reduce Grant Amounts Could
Result in Higher State Costs. The Governor’s
proposal recognizes the need to constrain costs
in the fast-growing Cal Grant programs. We are
concerned that the proposal to reduce awards for
students at private colleges could reduce access
for needy students while actually increasing state
costs after the first year. The state subsidy for
financially needy students at private institutions
(from Cal Grants) is substantially lower than the
total subsidy provided to similar students at UC
and the California State University (CSU). The state
could incur greater costs if enrollment shifts from
private to public institutions. If the Legislature
wishes to limit maximum award amounts, it will be
important to consider longer-term impacts on state
costs and student choices. If, on the other hand,
the Legislature’s goal is to limit the use of state
resources at colleges with poor outcomes, we would
recommend an approach based more directly on
institutional outcomes instead of institution type.
Does Not Take Into Account Potential
Increases in Cal Grant Costs. By statute, Cal Grant
award amounts keep pace with tuition at UC and
CSU. As a result, the university governing boards
can unilaterally increase state Cal Grant costs
by raising tuition. (For example, the universities’
most recent tuition increases resulted in additional
Cal Grant costs of about $90 million above the
budgeted level.) Thus, if the universities raise
tuition for 2012-13, Cal Grant costs would increase
beyond the level anticipated in the Governor’s
budget.
unemPloymenT insuranCe Fund insolvenCy
In 2008, historically high demand for
unemployment insurance (UI) benefits began to
push the cost of providing UI benefits beyond the
state’s available resources. As a result, in 2009 the
state’s UI fund (the Unemployment Fund) became
insolvent. Since that time, California has borrowed
from the federal government to continue payment
of UI benefits. Currently, California’s outstanding
federal loan is about $10 billion. California is
required to make annual interest payments on this
loan. The first payment ($303 million) was made
in September 2011 and the second (an estimated
$417 million) is due September 2012. As interest
payments must be made from state funds, the cost
of future payments is likely to fall on the General
Fund. Below, we discuss the Governor’s approach to
addressing the UI insolvency issue in 2012-13.
Proposal
Funding Source for Interest Payments on
the Loan to the UI Fund. Similar to 2011-12,
the Governor proposes to avoid General Fund
interest costs in 2012-13 by: (1) making an interest
payment of $417 million from the General Fund
and (2) immediately covering the cost to the
General Fund with a loan from the state’s disability
insurance (DI) fund. In addition, the Governor is
proposing to institute a new employer surcharge,
payable to the Employment Training Fund, which
would be used to pay the state’s federal interest
payment in 2013-14 and subsequent years, as well
as General Fund payments over the next few years
to repay the DI fund loans made in 2011-12 and
2012-13. The surcharge would not be used to pay
down the principal on the state’s federal loan. The
amount of the surcharge in each year would be
based on EDD’s projections of interest costs in the
following year. The EDD estimates that the annual
increased cost to employers will be between $40
and $61 dollars per employee over the next few
years, gradually declining as the federal loan is paid
off.
Increase the Minimum Monetary Eligibility
Requirement. The Governor’s budget also
proposes to increase the earnings threshold an
unemployed worker must satisfy to receive UI
benefits. Presently, to qualify for UI benefits, an
2012-13 BUDGET
www.lao.ca.gov Legislative Analyst’s Office 31
unemployed worker must have earned at least $900
in the highest quarter or $1,300 in any one quarter
of his/her 12-month base period. These thresholds
have not been adjusted for changes in wage levels
since 1992. Under the Governor’s proposal, these
limits would be increased to $1,920 and $3,200
respectively. The EDD estimates that this change
would reduce annual UI benefit payments by
$30 million (less than one percent of total annual
benefit payments).
LaO comments
Governor’s Proposal Does Little to Address UI
Fund’s Long-Term Insolvency. As the funds raised
by the Governor’s proposed employer surcharge
would be limited to repayment of interest on
loans to keep the UI fund solvent, the proposal
does little to address either the insolvency of the
UI fund or the long-term structural imbalance
between UI fund revenues and expenditures.
Continuing to carry a balance on the loan to the
UI fund poses several problems for California
that necessitate corrective action. We provide an
in-depth discussion of the UI fund insolvency
issue in a number of recent policy reports,
including California’s Other Budget Deficit: The
Unemployment Fund Insolvency and Managing
California’s Insolvency: The Impact of Federal
Proposals on Unemployment Insurance.
It is important to note that inaction with regard
to the insolvency will result in automatic and
gradually increasing federal employer UI-related
tax increases which pay down the principal on
the federal loan to the state’s UI fund. The first
increment of this tax increase will be implemented
in 2012, and will result in increased employer taxes
of around $300 million annually. Altogether, the
potential drawbacks of the Governor’s proposal
are that it: (1) would take longer to repay the
federal loan (resulting in higher interest costs) than
otherwise would be the case, (2) concentrates the
impact of repaying the federal loan almost entirely
on employer costs, and (3) does not address the
structural imbalance in the UI fund. To address
these issues, as discussed in our policy reports
mentioned above, the Legislature could consider
a more comprehensive plan—one which makes
more significant increases to employer taxes and/
or decreases to benefit payments—to address the
structural imbalance in the UI program and allow
for more timely repayment of the federal loan.
CaP-and-Trade revenues
Proposal
As part of its plan to address climate change,
the state will begin implementing a cap-and-
trade program in 2012-13. The program places a
“cap” or limit on the sources of greenhouse gases
responsible for 85 percent of the state’s emissions.
The ARB will issue carbon allowances that these
sources will, in turn, be able to “trade” (buy
and sell) in a newly created carbon market. The
Governor’s budget assumes that cap-and-trade
auctions will generate $1 billion in state revenues
in 2012-13. Under the administration’s plan,
these revenues would be invested in (1) clean and
efficient energy, (2) low-carbon transportation, (3)
natural resource protection, and (4) sustainable
infrastructure development. The budget also
assumes that $500 million of the revenues will
be used to offset General Fund costs of existing
programs. According to the administration, since
actual cap-and-trade revenues will not be known
until late in 2012-13, the planned expenditures are
not specified by program in the proposed budget.
Rather, the administration plans to submit an
expenditure plan to the Legislature after the first
cap-and-trade auction—which would be after the
2012-13 budget is enacted—and allocate funds to
specific programs not sooner than 30 days after
submitting this plan.
2012-13 BUDGET
32 Legislative Analyst’s Office www.lao.ca.gov
LaO comments
The Governor’s proposal raises several issues
for legislative consideration. For example, since
there are legal constraints associated with the use
of cap-and-trade revenues, it will be important for
the Legislature to consider any potential legal risks
with the proposal. Moreover, the administration’s
approach provides the Legislature with no
opportunity to develop a detailed plan on the use of
the revenues as part of the budget process in order
to ensure that the plan is aligned with legislative
priorities. We would also note that because the
auction rules developed by ARB include both floor
and ceiling prices for allowances, actual cap-and-
trade revenues for 2012-13 could range from
roughly $1 billion to almost $3 billion.
Juvenile JusTiCe realiGnmenT
Proposal
Currently, counties initially oversee all
juveniles entering the criminal justice system and
are responsible for almost all juveniles determined
to be offenders. The state, on the other hand, houses
the most serious offenders in facilities run by the
Division of Juvenile Facilities (DJF). The Governor
proposes to shift full responsibility for all juvenile
offenders to counties. Specifically, DJF would stop
receiving new juvenile wards on January 1, 2013.
However, DJF would continue to house individuals
admitted to state facilities prior to this date until
the completion of their terms. According to the
administration, the state would provide counties
with an unspecified amount of ongoing funding
beginning in 2013-14 for costs incurred during
the prior fiscal year. As a result of the proposed
changes, the budget reflects (1) a one-time
$10 million General Fund augmentation in 2011-12
to help counties prepare for the transition and
(2) $11.2 million in General Fund savings in DJF
operations in 2012-13. In addition, the Governor’s
budget delays implementation of the current-year
trigger reduction related to charging counties for
wards in DJF.
LaO comments
We have recommended in the past that
counties be given full responsibility for juvenile
wards to encourage the development of efficient and
effective local policies to reduce delinquency. While
the administration’s proposal merits consideration,
there are a number of issues the Legislature should
examine in reviewing this proposal. These include
(1) creating a funding formula for the payments
to counties, (2) identifying whether counties
have or could develop sufficient capacity to house
additional serious juvenile offenders, (3) developing
incentives for increased efficiency and improved
outcomes (such as reduced recidivism of these
juvenile offenders), and (4) assessing potential
unintended consequences of this proposal (such as
a possible increase in the number of juveniles tried
as adults and sentenced to state prison).
2012-13 BUDGET
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2012-13 BUDGET
34 Legislative Analyst’s Office www.lao.ca.gov
2012-13 BUDGET
www.lao.ca.gov Legislative Analyst’s Office 35
An LAO REpORT
36 Legislative Analyst’s Office www.lao.ca.gov
LAO Publications
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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.
1
1100 “K” Street, Suite 101/Sacramento, CA 95814/ (916) 327 -7531 FAX (916) 491-4182/UCC@UrbanCounties.com
UCC Summary
Governor’s Proposed Budget 2012-13
January 5, 2012
Due to a technical glitch, the Budget was posted on a public website, so the Governor decided to release his
budget today, which was a surprise.
The Governor’s Budget proposes a total of $10.3 billion in cuts and revenues to balance and to rebuild a
$1.1 billion reserve. This includes significant cuts to CalWORKs of $1.4 billion, Medi-Cal ($842 million) and
IHSS ($164 million). Similar to last year, the Budget assumes that a portion of its proposals will be adopted
by the Legislature by March 1, 2012.
The Governor’s Budget assumes the passage of the Governor’s proposed initiative at the November
election. This measure temporarily increases the personal income tax on the state’s wealthiest taxpayers
and temporarily increases the sales tax by one -half percent. The measure guarantees these new revenues
to schools and constitutionally protects the 2011 Realignment funds for local public safety. This measure
would generate an estimated $6.9 billion through 2012 -13.
As noted below, if the Governor’s Initiative fails to pass, trigger cuts would be enacted in 2013. The
Governor continues to propose his pension 12-point pension plan in the budget as another way to provide
savings.
Realignment
Funding Structure
The Governor’s Budget notes that the revenue stream for the 2011 Realignment is on -going, but the
program allocations were for the 2011-12 fiscal year only.
The Governor’s Budget proposes a permanent funding structure for 2011 Realignment following discussions
with CSAC. (See Attachment for the complete chart ). This proposed funding structure is very similar to the
super structure that was proposed through the CSAC Realignment Implementation Planning Group last year.
The proposed funding structure is designed to provide local entities with a known, reliable funding source
for the realigned programs. Within each Subaccount, counties will have the flexibility to meet their highest
priorities.
Base Funding
The Governor’s Budget provides for base funding in each subaccount, and the base in each subaccount
should not experience a year-over-year decrease. A statutory mechanism should be in place to deal with
the possibility of a year’s base being short due to significantly reduced revenues.
URBAN
COUNTIES
CAUCUS
Chair
Supervisor Liz Kniss
Executive Director
Jolena L. Voorhis
2
The base should be a rolling base for each Subaccount and the 1991 Mental Health program should continue
to receive revenue based on its 199 1 formula.
Growth Funding
The Governor’s Budget also provides that growth in realignment funds should be distributed on a roughly
proportional basis, first among Account, and then by Subaccounts. Within each Subaccount, federally
required programs should receive priority for funding if warranted by caseload and costs.
The Governor’s Budget also provides that growth funding for the Child Welfare Services (CWS) program is a
priority once base programs have been established. Over time, CWS should receive a n additional $200
million.
Transferability
The Governor’s Budget provides the following on transferability in the realignment funding:
Counties should have the ability to transfer a maximum of 10 percent of the lesser subaccount
between the Subaccounts within the Support Services Account.
Beginning in 2015-16, there should be a local option to transfer a portion of the growth among
Subaccounts within the Law Enforcement Services Account.
Transfers should be for one-year only and not increase the base of an y program.
Realignment Implementation
The Governor’s Budget also notes the following areas that need to be worked on for implementation:
Refocus State Efforts. The Governor is committed to a 25 -percent reduction in the state operations
of program areas that have been realigned. The Budget notes that the Department of Social Services
will develop its 25-percent reduction plan upon county decisions regarding workload within realigned
programs and based on federal programs. The Governor’s Budget also stat es that in 2012-13 state
correctional costs will be reduced by $1.1 billion to reflect the smaller prison population.
County Flexibility. The Administration continues to support efforts to increase the flexibility of
counties in administering programs.
Ongoing Training for AB 109. The Budget proposes $8.9 million for a second year of training efforts
related to the implementation of AB 109 programs. Of this amount $1 million if for statewide
training efforts. The rest of the allocation is for the Comm unity Corrections Partnerships that have
been established in each county.
Other Efforts. The Administration does note that other issues may come up and that they will
continue to work with counties on any implementation issues.
Juvenile Justice Reform (See also Public Safety)
The Governor’s Budget proposes to stop the intake of new juvenile offenders to the Division of Juvenile
Justice (DJJ) effective January 1, 2013. The DJJ’s population will gradually diminish through attrition.
Recognizing that counties will need resources and support to secure appropriate placements and treatment
options for additional offenders, the Budget proposes $10 million General Fund in 2011 -12 for counties to
begin planning for this population. To help with this transition , the state will delay collection of the recently
imposed fees (DJJ Trigger Cuts).
Phase 2 Realignment
The Governor’s budget notes that several proposals in the Budget lay the foundation for further
realignment. The implementation of Phase 2 of Realignment is linked to the ongoing discussion of how
California will implement federal health care reform. Under health care reform, counties will have a
3
significant role in Medi-Cal eligibility determinations. The Governor’s Budget notes that the focus of Phase 2
realignment discussion with counties and others in the coming months will revolve around the appropriate
relationships between the state and counties in the funding and delivery of health care as about two million
people will shift from county indigent programs to the Medi-Cal caseload. The discussion will also involve
what additional programs the counties should be responsible for when the state assumes the majority of
costs of healthcare.
Trigger Cuts for 2012-13
If the Governor’s proposed initiative fails to pass in November 2012, the following trigger cuts would be
pulled in January 2013:
Funding for schools and community colleges would be reduced by $4.8 billion. A reduction of this
magnitude would result in a funding decrease equivalent to more than the cost of three weeks of
instruction. It would also continue to provide 20 percent of program funds a year in arrears.
The University of California and California State University would each be reduced by $200 million.
The courts would be reduced b y $125 million, the equivalent of court closures of three days per
month.
The number of the state’s public safety officers in the departments of Parks and Recreation (park
rangers) and Fish and Game (wardens) would be reduced, and the state would no longer staff its
beaches with lifeguards.
The Department of Forestry and Fire Protection’s firefighting capabilities would be reduced
substantially. The emergency air response program would be reduced, and fire stations would be
closed.
Flood control programs in the Department of Water Resources would be cut, which would reduce
channel and levee maintenance and floodplain mapping.
The Department of Justice’s law enforcement programs would be reduced.
Revenues
The Governor’s budget assumes the passage of the Gove rnor’s initiative at the November election. This
measure temporarily increases the personal income tax on the state’s wealthiest taxpayers and temporarily
increases the sales tax by one-half percent. This will generate $6.9 billion. The Governor’s Budget notes
that this measure will prevent deeper cuts to schools, protect local public safety funding, and assist in
balancing the budget. This will also allow the state to pay off the $33 billion in outstanding budgetary
borrowing and deferrals by 2015-16.
Health and Human Services
The Budget transfers a number of Department of Mental Health and Department of Alcohol and Drug
Programs to other state departments to better align the program’s mission with that of the department.
These transfers include: licensing functions to the Department of Public health (DPH) and DSS; mental
health workforce development programs to the Office of Statewide Health Planning and Development; the
Early Mental Health Initiative to the Department of Education; problem gambling, driving under the
influence, and licensing of narcotic treatment programs to DPH; and Mental Health Services Act technical
assistance and training to the Mental Health Services Oversight and Accountability Commission.
Transfer of the following medical services programs from DPH to DHCS effective July 1, 2012: (1) Every
Woman Counts, (2) Prostate Cancer Treatment, and (3) Family Planning Access Care and Treatment. The
transfer of these programs is consistent with the Administration’s goal of placing direc t health care service
programs with the DHCS to improve service delivery.
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Child Support
The Governor’s Budget proposes to suspend the county share of child support collections in 201 2-13. Under
this proposal, the entire non -federal portion of child support collections would benefit the General Fund.
This would not reduce the revenue stabilization funding of $18.7 million counties receive to maintain
caseworker staffing levels in order to stabilize child support collections.
CalWORKS
The Governor’s Budget proposes major changes to the CalWORKS program including restructuring the program into
two components: CalWORKs Basic and CalWORKs Plus. Below is a description of the changes to CalWORKs.
CalWORKs Basic Program. The CalWORKs Basic program will provide up to 24 months of welfare-to-
work services, including job search, employment training, child care, and barrier removal services to
families. Effective October 2012, clients not participating in sufficient hours of unsubsidized
employment after an initial job search will be placed in the CalWORKs Basic program and will be
required to participate in welfare-to-work activities. After the first 12 months, the adult will again
participate in job search. If, during the second 12 months, the adult remain s unable to find
unsubsidized employment, the adult will continue to participate in welfare -to-work activities,
including subsidized job placements. Clients unable to meet federal work participation requirements
after 24 months, or cases in sanction status for more than three months will be disenrolled from
CalWORKs.
CalWORKs Plus Program. The CalWORKs Plus program will serve those clients working sufficient
hours in unsubsidized employment to meet federal work participation requirements, generally 30
hours per week. Effective April 2013, this program will reward clients who meet federal work
participation requirements with a higher grant level by allowing them to retain more of their earned
income through a higher income disregard (first $200 earned and 50 percent of subsequent income
disregarded for purposes of computing the monthly grant level). This equates to an average increase
of $44 per month. These clients will also have full access to supportive services and child care.
These benefits will continue for up to 48 months as long as clients continue to meet work
participation requirements through unsubsidized employment. After 48 months, the adult will no
longer be aided, but the higher earned income disregard will remain available if the employm ent
continues.
Transition to Success. To assist families in obtaining employment sufficient to meet federal work
participation requirements, all currently aided eligible adults will be eligible for up to six months of
welfare-to-work services and child care following the October 2012 implementation of the CalWORKs
Basic Program. Prior to this transition, $35.6 million will be provided to counties to serve these
families.
Providing Additional Work Supports. The Administration proposes to align eligib ility and need
criteria for low-income working family child care services with federal TANF rules for work
participation requirements. Over time, the three-stage child care system for current and former
CalWORKs recipients and programs serving low-income working parents will be replaced with a work -
based child care system administered by county welfare departments. In addition, the
Administration proposes to create a state benefit to increase support for low -income working
families. Beginning July 1, 2013, the state will provide working families receiving CalFresh benefits or
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child care, but who are not in the CalWORKs program, with a $50 per month supplemental work
bonus.
Child Maintenance Program. Beginning in October 2012, the state will create a ne w Child
Maintenance program to provide for child well -being through basic support to children whose
parents are not eligible for aid under the restructured CalWORKs program. Income and resource
eligibility criteria for the Child Maintenance program will b e the same as for CalWORKs families, but
the Child Maintenance program grant will be less than the current amounts available for child -only
cases. This will decrease the average monthly grant for child-only cases from $463 to $392.
Healthy Families
The Governor’s Budget provides the following changes to the Healthy Families Program:
Healthy Families Program Rate Reduction. The Budget proposes to reduce Healthy Families managed
care rates by 25.7 percent effective October 1, 2012. This rate reduction will achieve General Fund
savings of approximately $64.4 million in 2012-13 and $91.5 million in 2013-14.
Transition of Children from the Healthy Families Program to Medi -Cal. The Budget proposes
transferring approximately 875,000 Healthy Families Progr am beneficiaries to Medi-Cal over a nine-
month period beginning in October 2012. This transition will create benefits for children, families,
health plans, and providers, by simplifying eligibility and coverage for children and families;
improving coverage through retroactive benefits, increasing access to vaccines, and expanded
mental health coverage; and eliminating premiums for lower -income beneficiaries.
Transition of Other Programs. In preparation for California’s implementation of federal health ca re
reform, the Budget proposes to eliminate the Major Risk Medical Insurance Program (MRMIP) by July
1, 2013. The two programs that provide insurance to individuals with pre -existing conditions,
MRMIP and PCIP, will be eliminated in January 2014 because these individuals will be able to
purchase health insurance through the California Health Benefits Exchange as part of federal health
care reform implementation.
IHSS
The Governor’s Budget proposes $1.4 billion General Fund for the IHSS program in 2012 -13, a decrease of
$292.3 million General Fund from the revised 2011-12 IHSS budget. Specifically, General Fund costs of $231
million result from a six-month delay in extending the state sales tax to IHSS providers, a two -month delay in
implementing the Community First Choice Option for enhanced federal funding, a two -month delay in
eliminating services for recipients without health care certification, and from not implementing the
medication dispensing machines proposal. Additionally, an increase of $130 million accounts for savings
from program integrity efforts already being captured in the caseload projections.
Here are the proposals:
Eliminate Domestic and Related Services for Certain Recipients. Domestic and related services
include housework, whopping for food, meal preparation and cleanup, laundry, and other shopping
and errands. Under this proposal, IHSS beneficiaries residing in a shared living arrangement will not
be eligible for domestic and related services that can be met in common with other household
members. In addition, IHSS beneficiaries who have a need for domestic and/or related services that
cannot be met in common because of a medically verified condition of other members of the shared
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living arrangement can be authorized hours for a ny of these services that meet the need assessment
metrics. Similarly, when minor recipients are living with their parent(s), the need is being met in
common; hence, the authorization of domestic and related service hours will no longer be allowed.
Since minors would not be expected to be able to perform these services independently, the parent
will be presumed available to perform these tasks unless the parent can provide medical verification
of his/her inability to do so.
Coordinated Care for Dual Eligible Beneficiaries. The Governor’s Budget also proposes to better
coordinate IHSS, other home and community-based services, and institutional long-term care. All
individuals receiving both Medi-Cal and Medicare benefits will be required to enroll in manag ed care
health plans for their Medi-Cal benefits.
20-Percent Reduction in Service Hours. A 20-percent across the board reduction in IHSS hours was
to be implemented on January 1, 2012. Because of a court injunction, the state currently is
prevented from implementing this reduction. However, the Budget assumes this reduction will be
implemented April 1, 2012. To be prudent, the Budget also includes a set -aside to fully fund the IHSS
program in the event of an adverse court ruling.
Medi-Cal
Care Coordination
The Governor’s Budget continues his proposal to improve care coordination for dual eligible beneficiaries.
This will be phased in over a three-year period beginning January 1, 2013. The transition to managed care
for Medi-Cal benefits will occur in the first year, with the benefits becoming a more integrated plan
responsibility over the subsequent two years. The transition of Medicare benefits to managed care will
occur over a three-year period starting first with eight to ten counties that alrea dy have the capacity to
coordinate care for these individuals. Beneficiaries in counties in which Medi-Cal managed Care plans may
not yet have the capacity to take on additional beneficiaries will begin to transition six or twelve months
later. The Budget separately proposes to expand Medi-Cal managed care statewide starting in June 2013.
Beneficiaries in these managed care expansion counties will transition in 2014 -15.
The Governor’s proposals are as follows:
● Promote Coordinated Care – Managed care done properly results in high-quality care. This initiative
provides managed care plans with a blended payment consisting of federal, state, and county funds
and responsibility for delivering the full array of health and social services to dual eligible
beneficiaries.
Enhance the Quality of Home and Community-Based Services – Within an expanded system of
coordinated care, it is critical to better coordinate medical services with the full continuum of long -
term services, including In-Home Supportive services, Community-Based Adult Services, and nursing
home services.
In year one, IHSS, other home and community-based services, and nursing home care funded by Medi-Cal
will become managed care benefits. The IHSS program will essentially operate as it does today , except all
authorized IHSS benefits will be included in managed care plan rates. Beneficiaries in the eight to ten
selected counties will also receive their Medicare benefits and long -term services and supports through
their Medi-Cal plan. This represents about 800,000 of the 1.2 million dual eligible beneficiaries currently in
California. These changes will be phased-in over a 12-month period starting January 1, 2013. Over time,
managed care plans will take an increasing responsibility for home and co mmunity-based services, including
IHSS.
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The Governor’s Budget does note that delivering these services through Medi -Cal raises important issues
including consumer protections, consumer choice, and development of a uniform assessment tool.
Additional issues to consider related to the sate-county relationship and financing and delivering services
include determining the collective bargaining structure for IHSS providers, and the long -term county
financial responsibility for IHSS and other health care program s. The Administration will work with counties
and stakeholders to address these overarching issues through the development of legislation that will be
necessary to implement this Budget proposal.
Annual Open Enrollment.
Current law authorizes Medi-Cal beneficiaries to change plans once per month or up to 12 times in a year.
The Governor’s Budget proposes an annual open enrollment period for beneficiaries to select their Medi -Cal
health plan and receive care through that health plan for the entire year.
Medical Therapy Program Eligibility.
The Governor’s Budget proposes to align income eligibility requirements for the Medical Therapy Program
with the broader California Children’s Services (CCS) Program. Currently, there is no financial test for
eligibility. Under the proposed eligibility standards, families with annual income less than $40,000 or with
annual CCS-related medical expenses exceeding 20 percent of their annual income will continue to be
eligible for the Medical Therapy Program.
Stabilization Funds.
The Governor’s Budget proposes a one-time redirection of private and non-designated public hospital
stabilization funding that has not yet been paid for fiscal years 2005 -06 through 2009-10 to provide General
Fund savings and avoid direct service reductions. This proposal will achieve one-time savings of $42.9 million
General Fund.
Gross Premium Tax.
The Governor’s Budget proposes to eliminate the sunset date of the Gross Premiums Tax on Medi -Cal
managed care plans. Continuing the tax, coupled wit h increased managed care utilization, will generate
General Fund savings of $161.8 million in 2012 -13 and $259.1 million in 2013-14.
Public Health
The Governor’s Budget reflects a decrease of $14.5 million in 2012 -13 as a result of increasing client share of
cost in the ADAP to the maximum percentages allowable under federal law. This proposal will result in
General Fund savings of $16.5 million, which will be offset by program administrative costs of $2 million for
a net General Fund savings of $14.5 million. Average monthly copayments will range between $28 and
$385, depending upon the client’s income.
State Hospitals
The Governor’s Budget proposes a major reorganization of state hospitals w ith the creation of a new
Department of State Hospitals (DSH). Among the many changes listed in the proposal is an impact to
counties by increasing bed rates charged to counties for civil commitments to more accurately reflect actual
patient cost of care.
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Local Government/General Government
Suspend and Repeal Mandates. The Budget proposes to suspend various mandates except for
mandates related to law enforcement or property taxes. The Budget proposes to repeal dozens of
the approximately 50 mandates that have been suspended for the past two years or more. This
proposal will result in a decrease of $728.8 million in 2012 -13.
Mandate Deferral. A one-time reduction of $94 million by deferring the 2012-13 payment of
mandates obligation for costs incurred prior to 2004 -05. These costs are required to be completely
paid by 2020-21.
Public Safety
DJJ Trigger Cuts
As previously reported, the Governor’s Budget proposes to assess but not collect the DJJ trigger cut which
would charge counties for placements to DJJ. However, it is also proposing to transfer the responsibility for
managing all youthful offenders to local jurisdictions. The Budget proposes to stop intake of new juvenile
offenders effective January 1, 2013 and also proposes $10 million General Fund to support local
governments in planning for this transition.
Redevelopment
The Governor’s budget notes the recent Supreme Court case which eliminated redevelopment and states
that as a result redevelopment agencies will be dissolved on February 1, 2012. Revenues that would have
been directed to the RDAs will be distributed to make pass through payments to local agencies that they
would have received under prior law, and to successor agencies for retirement of the RDAs’ debts for limited
administrative costs. The remaining revenues will be distr ibuted as property taxes to cities, counties, school
and community college districts and special districts under existing law. The Governor’s Budget reflects an
estimate that approximately $1.05 billion in additional property tax revenue s will be received by K-14
schools in 2011-12 which will offset the state’s Proposition 98 General Fund obligation. Additional property
tax revenues are estimated at $340 million for counties, $220 million for cities, and $170 million for special
districts. These amounts are expected to grow as property values increase and debts are retired. Additional
revenues will be distributed in the next several years as RDA assets are monetized.
During the press conference on the Budget, the Governor was asked about the possibility of providing an
extension on some of the deadlines for eliminating the RDAs, and he stated that the Supreme Court ruling
stands. While he stated he is open to talking to stakeholders about a possible extension, he believed they
should be eliminated due t o the budget crisis. If there is a proposal to reinstate he indicated that it would
have to include a revenue source due to the budget deficit.
State Government – Reorganization
The Governor’s Budget also proposes to reduce the number of state agencies from 12 to 10, eliminate 39
state entities and eliminate 9 programs. The proposal to reduce agencies includes eliminating the California
Volunteer Agency, the California Emergency Management Agency, and the California Technology Agency.
The Governor’s Budget notes that more than 15,000 positions were eliminated in 2011 -12 and DOF will
conduct a department-by-department review to identify additional positions for elimination.
Some other major proposals for reorganization include:
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Transfer Housing Finance Agency into Department of Housing and Community Development.
Eliminate the Fair Employment and Housing Commission and Transfer its functions to the
Department of Fair Employment and Housing.
Eliminate the Commission on the Status of Women.
Eliminate the Managed Risk Medical Insurance Board and Transfer its functions to the Department of
Health Care Services.
Transfer CalRecycle to the California Environmental Protection Agency.
Reduce the Number of Regional Water Boards.
Consolidate the Colorado River Board within the Natural Resources Agency.
The full list is available at www.ebudgets.ca.gov
Various County Departments
The Budget proposes to suspend various mandates except for most mandates related to law enforcement or
property taxes. Consistent with the Governor’s focus on streamlining government and providing local flexibility,
the Budget proposes to repeal dozens of the approximately 50 mandates that have been suspended for the past
two years or more. Many of the activities required by these mandates have become common practice and
should not be mandated by the state. The Governor’s proposed budget will not have any direct impacts on
most County Departments. Functions that support or provide service to other county departments may be
impacted by cuts to Employment and Human Services Department – but these impacts are difficult to quantify
at this point.
Public Works/General Services
Transportation – No impacts to the gas tax. The reorganization of the Transportation Departments into one
Transportation Agency instead of the current organization under Business Transportation and Housing should
bring more focus to the State’s Transportation Program which should be positive. This may have some impacts
on local grant programs, depending on implementation.
Flood Control/Water Resources – We do not receive direct funding from the State for Flood Control Programs –
however interesting to note that the Department of Water Resources budget includes an increase of $25.4
million California Water Resources Development Bond Fund and 135 positions for preliminary engineering work
to support the Delta Habitat Conservation and Conveyance Program. Also – under the ballot trigger reductions ‐
the Department of Water Resource’s flood control programs would be reduced by 20 percent, or approximately
$6.6 million, if the Governor’s tax proposal is not approved in November. These programs include floodplain
mapping and risk awareness. Again, we get no direct funding – but if this cut goes through, grant programs could
be cut.
The elimination of Redevelopment agencies will affect our work load in design and construction in delivering
Redevelopment Projects. However, this will not have an impact on staffing levels as we have a backlog of capital
projects, including some large federally funded bridges to replace the work lost from RDA.
Health Services
The Governor’s proposed budget includes the following proposals for changes to the health care delivery
system:
The Governor’s Budget requires the State Department of Health Care Services to expand the four‐county
dual pilot program to eight to ten counties and enroll 800,000 individuals with dual eligibility into
managed care starting January 1, 2013. State Savings: $678 million in 2012‐13; $1 billion in 2013‐14.
The Budget also proposes to expand Medi‐Cal Managed Care to all counties starting June 2013. All dual
eligible individuals will be enrolled on a rolling basis as the counties transfer from fee‐for‐service to
managed care. They also propose an open enrollment period for all Medi‐Cal managed care
beneficiaries, instead of allowing the month‐to‐month enrollment changes under the current program.
Federally Qualified Health Centers with Medi‐Cal managed care contracts will be funded under a
performance, risk‐based payment model instead of the current prospective payment system.
The Healthy Families program (CHIP) will be moved into Medi‐Cal and the rates will be decreased by
25.7 percent effective October 1, 2012.
There is an extension of the hospital fee ($255 million GF in 2011‐12; $472 million in 2012‐13) and gross
premium tax on Medi‐Cal managed care plans ($161.8 million in 2012‐13 and $259.1 million in 2013‐14).
Nursing homes will have their 10% provider rate reduction restored ($171.2 million GF) and
supplemental payments totaling $245.6 million GF.
There will be a new Department of State Hospitals to operate the long‐term care facilities for the
mentally ill and sexually violent predators. All other functions of the Department of Mental Health and
Department of Alcohol and Drug will be absorbed by the Department of Health Care Services.
At this time, the Health Services Department is unable to determine what the local impact of the above
proposals will be on Contra Costa County until additional information becomes available. The Department will
continue to monitor these proposals and their impacts on the County throughout the State budget process as
additional information becomes available.
Employment & Human Services
In‐Home Supportive Services
Across‐the‐Board Service Reductions
Governor’s Proposal:
The proposed FY 12‐13 budget adjusts projected savings from the delayed implementation of the 20
percent across‐the‐board reduction scheduled for January 1, 2012 but was delayed due to the court
injunction. The adjusted budget savings assumes implementation of the 20 percent cut on April 1, 2012.
Resulting in a $39.4 million GF savings in the current year and $179 million in the 12‐13 budget years.
The budget also includes a set‐aside to fully fund the program in the event that the court rules in favor
of the plaintiffs and against the state.
Contra Costa County Impact:
A 20% reduction in IHSS authorized hours will result in the loss of approximately 1.4 million hours.
Many providers will be forced to leave their jobs and find employment elsewhere leaving the consumers
at risk of out of home placement. For some providers who have minor children and are only to
contracted for a few hours will be forced to apply for Food Stamps (Cal Fresh), Medi‐Cal or some other
form of assistance. Some providers may apply for GA if their income drops low enough. GA costs would
then be borne by the county in total.
Medication Dispensing Pilot and IHSS Trigger
Governor’s Proposal:
The proposed FY 12‐13 budget repeals statute implementing automated medication dispensing
machines pilot program for IHSS recipients. This may result in an additional across‐the‐board cut in IHSS
effective October 1, 2012. The cuts will further reduced hours to IHSS clients if the pilot failed to achieve
a net GF savings of $140 million. The pilot was authorized for the current budget year but was never
implemented.
Contra Costa County Impact:
Pilot was not implemented. If the pilot is implemented it could result in additional cuts to client hours
due to lack of state funding. County share could be increased if the state does not participate.
Elimination of Domestic and Related Services to Certain Recipients
Governor’s Proposal:
The proposed FY 12‐13 budget eliminates domestic and related services to recipients who are living with
others in a shared‐housing situation effective July 1, 2012. An exception is provided for households
consisting entirely of IHSS recipients, and IHSS recipients whose need cannot be met by a household
member due to a medically‐verified condition. Domestic and related services would no longer be
allowed, under any circumstance, for children receiving IHSS benefits and living with their parent(s).
This cut was proposed in previous budget proposals and, as in the past, raises significant legal questions
since in many cases there is no legal obligation for other individuals who happen to be living with the
IHSS recipient to provide care. This proposal is expected to impact 254,000 recipients, and will cut IHSS
services by $461.5 million ($163.8 million GF).
Contra Costa County Impact:
The County provides funding to 4,581 eligible recipients with shared living arrangement. The Governor’s
proposal would eliminate services to this population and this would reduce the County share by
$236,600
Program Integrity Funding and Projected Savings
Governor’s Proposal:
The proposed FY 12‐13 budget includes a $10 million GF reduction for county program integrity efforts
resulting from the trigger cut implemented as a result of the 2011‐12 budget agreement. The reduction
was effective January 1, 2012 and the FY 12‐13 budget proposes to make it permanent. The FY 12‐13
budget also projects $469.7 million ($151.6 million GF) savings as a result of existing county program
integrity efforts.
Contra Costa County Impact:
The elimination of the additional Program Integrity Funding will severely limit the ability for the County
to investigate and prosecute IHSS Fraud. Revenue loss will be approximately $537,879. County may save
$97,236.
Additional Budget Adjustments in IHSS
Governor’s Proposal:
The proposed FY 12‐13 budget includes decreased savings as a result of delayed implementation of the
IHSS Provider Fee (by six months), the Community First Choice Option (CFCO) (by two months), and
Health Certification Form (by two months). The combined erosion of savings (including Medication
Dispensing pilot elimination) equal $231 million GF. The CFCO, savings is projected to be $108.5 million
GF in the current year and $145.1 million GF in 2012‐13, and county savings is estimated to be $68.9
million.
Contra Costa County Impact:
Additional reductions in client hours will result from delays in implementation of these in programs and
limit state participation.
Governor’s Proposal:
The proposed FY 12‐13 budget reduces county administration by $27.4 million to $284.6 million ($100.3
million GF). The budget attributes this to lower caseload in the program.
The budget year projects new administrative costs associated with implementation of the following
activities:
• Domestic and Related Services proposal, $9.5 million ($3.3 million GF)
• Adult Day Health Care transition to Community Based Adult Services (CBAS) effective March 1,
2012, $1.0 million ($354,000 GF)
Contra Costa County Impact:
The IHSS Caseload has steadily decreased over the last two years. Impact may be minimal due to
staffing vacancies and lower caseload.
Integration of IHSS into Managed Care
Governor’s Proposal:
During calendar year 2013 (which includes the full budget year 2012‐13 and six months of budget year
2013‐14), the budget proposes that County IHSS programs continue perform existing functions that
include intakes, assessments, and authorization of services. Starting January 1, 2014, managed care
plans will either contract with the county to administer IHSS services or may take over this function from
the county. The budget notes additional work will be necessary to design a program that incorporates:
1. Consumer protections for acute, long‐term care, and a home and community‐based services
within managed care;
2. Uniform assessment tool for home and community‐based services; and
3. Consumer choice and protection when selecting their IHSS provider.
Contra Costa County Impact:
Impacts unknown until details are determined.
Adult Protective Services
Continuation of 10% cut
Governor’s Proposal:
The proposed FY 12‐13 budget continues the consolidation and reallocation of funding to counties
through realignment. Total funding is proposed at $136.3 million ($54.6 million GF) for the budget year
which incorporates the County Services Block Grant and continues to reflect the ten percent reduction
of $13 million ($6.1 million GF).
Contra Costa County Impact:
The county will continue to lose $157 thousand.
CalWORKs
Time Limit
Governor’s Proposal:
The proposed FY 12‐13 budget restructures the CalWORKs program into two components, CalWORKs
Basic and CalWORKs Plus. CalWORKs Basic, which takes effect October 2012, reduces the time‐a
recipient is eligible for benefits from 48 months to 24 months. This provision applies to all recipients not
fully meeting the federal work participation requirements (WPR) through unsubsidized employment.
The determination of the 24 months of aid will be determined on a retroactive basis. Recipients meeting
the federal WPR through unsubsidized employment will be eligible for the CalWORKs Plus component.
These recipients will continue to receive 48‐months of aid and services. All currently aided eligible
CalWORKS adults not fully meeting the federal WPR through unsubsidized employment will continue to
be eligible for up to six months (or through March 2013) for welfare‐to‐work and child care services
following the October 2012 implementation of CalWORKs Basic. The Single Allocation will be increased
by $35.6 million to provide services to these individuals.
Contra Costa County Impact:
An estimated total of 1,005 families (or 19.6% of the total CalWORKs Welfare‐to‐Work caseload of
5,154) may reach their 24‐month time limit and will lose their maximum CalWORKs benefits by the end
of FY12‐13.
Child Only Grant Reduction
Governor’s Proposal:
The proposed FY 12‐13 budget includes a new Child Maintenance Program which incorporates a 27%
reduction in child‐only grants. This program will replace the current child‐only component of CalWORKs
including the safety net. There will be an annual reporting requirement as well as an annual well child
exam to remain eligible for aid in the Child Maintenance Program.
Contra Costa County Impact:
An estimated 10,250 children will be adversely impacted with this proposed grant reduction. The
average child‐only cash aid grant will change from $463 to $392, a $71 reduction. This reduction will
have a considerable adverse impact on the basic living and security needs (housing, food, etc.) of these
families and children who are already living in poverty
Disenrollment of sanctioned CalWORKs recipients.
Governor’s Proposal:
The proposed FY 12‐13 budget dis‐enrolls, from CalWORKs, clients who are in “sanction status” for three
cumulative months in any twelve (12) month period.
Contra Costa County Impact:
As of July 1, 2012, approximately 900 CalWORKs recipients will be dis‐enrolled as a result of this
provision. This action will cause their case to go into Child Maintenance.
Increased income disregard for select CalWORKs recipients
Governor’s Proposal:
The proposed FY 12‐13 budget increase the “earned income disregard” for recipients in CalWORKs Plus
component, effective April 2013. The higher “earned income disregard ($200)” will remain in effect for
recipients in the safety net as long as they continue to meet federal WPR.
Contra Costa County Impact:
Less than 1% of the Welfare‐to‐Work population is expected to be fully engaged through unsubsidized
employment. As a result, only 175 recipients may receive the proposed higher earned income disregard.
This will allow those participants to continue receiving CalWORKs benefits during a time when they
otherwise would have lost their benefits due to earnings.
$50 supplemental work bonus
Governor’s Proposal:
The proposed FY 12‐13 budget includes a new $50 per month supplemental work bonus to working
families receiving CalFresh benefits or child care, but who are not in the CalWORKs program, effective
July 1, 2012.
Contra Costa County Impact:
An estimated 7,604 families may be eligible for the proposed work bonus.
CalWORKs – Child Care
Subsidized Child Care Eligibility Change
Governor’s Proposal:
The proposed FY 12‐13 budget provides subsidized child care (i.e., general child care outside of
CalWORKs) only to those individuals who meet federal CalWORKs work participation requirements,
whether or not the family ever participates in CalWORKs, for savings of $293.6 million GF and
elimination of about 46,300 child care slots.
Contra Costa County Impact:
Impact is unknown at this time.
Administrative Restructuring of Child Care
Governor’s Proposal:
The proposed FY 12‐13 budget shifts child care eligibility and payment functions from alternative
payment programs and Title 5 centers to the counties. Counties may contract with these agencies to
provide the payment function. All eligible families would receive a voucher for payment to a provider of
their own choice. This will shift responsibility for services for approximately 142,000 children from the
California Department of Education (CDE) to the counties. The CDE would continue to administer
preschool programs.
Contra Costa County Impact:
Impact is unknown at this time. The Community Services Bureau’s part‐day and full‐day programs are
included in one contract.
Reduce Income Eligibility Ceiling
Governor’s Proposal:
The proposed FY 12‐13 budget includes $43.9 million in GF savings and $24.1 million in Proposition 98
savings resulting from reduce income eligibility ceiling. The income eligibility ceiling is reduced from 70
percent of the state median income (SMI) to 61.5 percent of the SMI for a family size of three. This
reduction will eliminate about 15,700 slots. .
Contra Costa County Impact:
Approximately 72 children/67 families will be impacted by this reduction.
Reduce Reimbursement Rate Ceiling
Governor’s Proposal:
The proposed FY 12‐13 budget includes $17.1 million GF savings resulting from a reduction of the
reimbursement rate ceilings for voucher‐based programs. The reimbursement rate is to be reduced
from the 85th percentile of the private pay market based on 2005 market survey data to the 50th
percentile based on 2009 survey data.
Contra Costa County Impact:
Impact is unknown at this time.
New Licensed‐Exempt Provider Requirement
Governor’s Proposal:
The proposed FY 12‐13 budget requires licensed‐exempt providers to meet certain health and safety
requirements to be eligible for reimbursement.
Contra Costa County Impact:
Impact is unknown at this time.
CalFresh
Governor’s Proposal:
The proposed FY 12‐13 budget adjusts county funding for CalFresh Administration for 2012‐13 to reflect
actual expenditure patterns over the past few years, resulting in a reduction to county administration.
Contra Costa County Impact:
Impact is unknown at this time.
Child Welfare Services and Foster Care
Administration
Governor’s Proposal:
The proposed FY 12‐13 budget anticipates Foster Care administrative costs to be $51.1 million ($17.6
million GF) in the current year, $48.7 million (17.5 million GF) in the budget year. Administrative costs
for Child Welfare Basic are estimated at $824.7 million ($278.5 million GF) in 2011‐12, and $794.1
million ($295.7 million GF) in 2012‐13, reflecting lower direct and emergency shelter costs
Contra Costa County Impact:
Foster Care and Child Welfare Services Admin are funded via 2011 Realignment and, therefore, will
receive the State portion via sales tax revenues, not via these estimates
AB 12 Administration
Governor’s Proposal:
The proposed FY 12‐13 budget increases funding in the budget year to reflect continued implementation
of AB 12. In FY 2012‐13, administrative costs are proposed to increase by $5.9 million $2.9 million GF),
to $6.8 million ($3.3 million GF).
Contra Costa County Impact:
Impact is unknown at this time.
Continuation of Suspension of Child Support Pass‐thru to Counties
Governor’s Proposal:
The proposed FY 12‐13 budget continues the suspension of Child Support collections previously used to
offset federal, state and county shares of assistance costs for child support cases.
Contra Costa County Impact:
The suspension of child support collections will result in an increased cost to EHSD of $600K in FY 12/13.
Community Services – Child Care
Reduction in the standard reimbursement rate
Governor’s Proposal:
The proposed FY 12‐13 budget reduces the standard reimbursement rate by 10% for California
Department of Education contractors.
Contra Costa County Impact:
The decreased funding of $1,084,590 will result in a loss of 132 childcare slots and 19.8 Child Care
provider FTEs.
Medi‐Cal Administration
Shift of Healthy Families into Medi‐Cal
Governor’s Proposal:
The proposed FY 12‐13 budget shifts children currently in Healthy Families to Medi‐Cal. with an
anticipated 7.9% caseload increase. State spending in the Medi‐Cal program is expected to drop from
$15.4 billion in the current year to $15.1 billion in the FY 12‐13, as a result of various savings proposals.
Without these proposals, costs would grow by approximately 3.4 percent, to $15.9 billion GF.
Proposed Shift of Healthy Families into Medi‐Cal – Similar to last year’s May Revision proposal, the
Administration is proposing to move all children currently enrolled in Healthy Families to the Medi‐Cal
program. This would affect about 875,000 children and be phased in over a nine‐month period, starting
in October 2012. This shift would coincide with movement of other programs currently administered by
the Managed Risk Medical Insurance Board over to the Department of Health Care Services, and the
ultimate elimination of the board by July 1, 2013.
Contra Costa County Impact:
Healthy Families recipients will shift into Medi‐Cal, this will increase EHSD's Medi‐Cal caseload. EHSD
will work with Health Services on this transition. Fiscal and program impact cannot be determined at
this time.
Managed Care Expansion and Annual Enrollment
Governor’s Proposal:
The proposed FY 12‐13 budget expands managed care to all 58 counties starting in June 2012, resulting
in GF savings of $2.7 million in 2012‐13 and $8.8 million in 2013‐14. This proposal is coupled with a
proposal to change from the current structure, in which beneficiaries can change managed care plans
once per month or up to 12 times per year, to a more private‐sector like system providing for annual
open enrollment periods that require individuals to receive care for the entire year from their chosen
plan. The annual enrollment period proposal appears to require federal approval.
Contra Costa County Impact:
Impact is unknown at this time.
Phase 2 Realignment
Base Funding
Governor’s Proposal:
The proposed FY 12‐13 budget base realignment funding in each subaccount should not experience a
year‐over‐year decrease. A statutory mechanism should be in place to deal with the possibility of a
year’s base being short due to significantly reduced revenues. The timing of the programs’ inclusion in
2011 realignment and the implementation scheduled should affect base funding for each program. The
base should be a rolling base for each subaccount, meaning that a year’s base funding plus growth
becomes the subsequent year’s base. The 1991 Mental Health programs should continue to receive
revenue based on its 1991 formula.
Contra Costa County Impact:
Waiting for CWDA staff analysis. It appears this would protect each Subaccount, year‐to‐year.
Growth Funding
Governor’s Proposal:
The proposed FY 12‐13 budget realignment funding for program growth should be distributed on a
roughly proportional basis, first among accounts, then by subaccounts. Within each subaccount,
federally required programs should receive priority for funding if warranted by caseload and costs.
Growth funding for the Child Welfare Services (CWS) program is a priority once base programs have
been established. Over time, CWS should receive an additional $200 million.
Contra Costa County Impact:
Waiting for CWDA staff analysis. It appears It appears this would allocate growth to the Account &
subaccounts levels and give priority to federal mandated programs and also establish CWS as a priority
once base funding is achieved in all other Subaccounts.
Transferability
Governor’s Proposal:
The proposed FY 12‐13 budget provides flexibility with realignment; counties may have the ability to
transfer a maximum of 10 percent of the lesser subaccount between the subaccounts within the
Support Services Account. Beginning in 2015‐16, there should be a local option to transfer a portion of
the growth among subaccounts within the Law Enforcement Services Account. Transfers should be for
one year only and not increase the base of any program.
Contra Costa County Impact:
Waiting for CWDA staff analysis. It appears this could benefit certain Children & Family Services Sub
Accounts (e.g. Foster Care Admin) that have been chronically underfunded.
Reserve Account
Governor’s Proposal:
The proposed FY 12‐13 budget provides some cushion for fluctuations in future revenue, a Reserve
Account should be established when Sales and Use Tax revenues exceed a specified threshold.
Contra Costa County Impact:
Waiting for CWDA staff analysis.