Revenue and the Governor’s Proposed 2015-16 Budget: The Administration Has Underestimated State Revenues by Billions of Dollars in Each of the Past Three Years

January 21, 2015

The debate around the 2015-16 state budget is just gearing up, and — as always — the question of how much money is available will be critical to decisions about funding crucial public services and systems. For each of the three prior years, the Governor’s May revenue projections, which have been similar to his initial projections in January, underestimated revenues by several billion dollars compared to the final figures for the fiscal year. Meanwhile, as we noted a couple weeks ago, many of the public services that help working families climb the economic ladder remain undersupported even as the state’s revenues have surpassed their pre-recession levels and at a time when many Californians are still struggling to get by.

As the chart below shows, the Governor’s May projections were $4.2 billion below actual General Fund revenues for 2012-13 and $5.4 billion below the mark for 2013-14, according to data from the Department of Finance (DOF). Now halfway through 2014-15, the Governor’s projections from last May are $2.7 billion below the DOF’s latest revenue estimate for the current budget year.
Revenue Projections - DOF vs LAO

Of course, it’s reasonable to be cautious in projecting available resources, in case we hit a sudden economic downturn. However, being overly cautious when the economy is growing means potentially hobbling our own recovery by failing to commit sufficient resources to invest in California’s people and communities. This is like sitting on extra cash when you could be using it to learn new skills or pay for a much needed visit to the doctor’s office.

The Legislative Analyst’s Office (LAO), which makes its own revenue projections each May, similarly has erred on the side of caution. Yet, over the past three years, the LAO has gotten progressively closer to the mark while the Administration’s projections have remained more pessimistic. By the end of 2014-15, the Administration’s May 2014 projection may be even further off the mark than it appears to be now. As the LAO pointed out in its response to the Governor’s proposed 2015-16 budget, tax revenues for 2014-15 will likely be higher than the Administration’s January 2015 estimate by $1 billion to $2 billion, and possibly even more, thanks to a strengthening economic recovery and a surge in revenue collections in December.

To put these revenue figures in context, the University of California, which is in an open dispute with the Governor about its level of funding, asserts that state funding for educating students is still $460 million below its 2007-08 level despite increasing enrollment. In addition, annual funding for subsidized child care and preschool is more than $600 million lower — with nearly 97,000 fewer “slots” — than in 2007-08.

Both the LAO and the Administration note that for 2014-15, higher-than-expected revenues would go to schools and community colleges under Proposition 98, the state’s constitutional minimum funding guarantee for K-14 education. However, given the complexity of Proposition 98 and how it interacts with changing economic circumstances, 2015-16 could well bring a different outcome, with General Fund revenues in the coming budget year freed up for other state priorities. For example, the amount of money coming from higher local property tax collections would make a difference for the state’s General Fund Proposition 98 spending in 2015-16.

It’s not expected that state agencies nail their projections on the head. As Neils Bohr purportedly said, “Prediction is difficult, especially about the future.” But if there is reason to believe that state policymakers have room to do more to help Californians who the economic recovery has yet to reach, they should be doing that now.

— William Chen


The CBP Examines the Governor’s Proposed 2015-16 State Budget

January 14, 2015

A new report from the California Budget Project (CBP) examines the 2015-16 state budget proposal released by Governor Brown last Friday. The top-level report summary is provided in this post, and the full analysis is available on the CBP’s website. Stay tuned to this blog for additional analysis and commentary on the Governor’s proposal and this year’s budget deliberations.

— Steven Bliss


FirstLook CoverOn January 9, Governor Jerry Brown released his proposed 2015-16 state budget. The Governor proposes to spend $113.3 billion from the state’s General Fund in 2015-16, an increase of $1.6 billion (1.4 percent) over the estimated spending level for the current fiscal year (2014-15). Yet, even with increased revenues and a continuing economic recovery that has yet to reach many Californians, the Governor prioritizes fiscal austerity over investing in broadly shared prosperity. While the Governor’s proposed budget includes long-term plans for paying down budgetary debt and saving for a rainy day, it lacks a similar vision for reinvesting in people and communities and ensuring that all Californians share in the state’s economic gains.

The Governor’s proposed 2015-16 budget is heavily focused on implementing policy changes approved in prior years. As required by voter approval of Proposition 2 this past November, his proposal sets aside a portion of revenues — $2.4 billion — with half deposited in the state’s rainy day fund and half used to pay down budgetary debt. The Governor’s proposal also reflects the ongoing implementation of federal health care reform and includes $4 billion for the state’s new K-12 school finance system, which is designed to direct additional resources to disadvantaged students. A sizable boost in funding for schools and community colleges is the result of the tax increases of Proposition 30 passed in 2012 and a growing economy.

While these initiatives move the state forward in important ways, the Governor’s proposed budget fails to lay out a plan to tackle California’s biggest challenges: high levels of unemployment and poverty, widening income inequality, and a safety net severely weakened by years of funding cuts. An improving fiscal outlook provides an opportunity for policymakers to rebuild essential public services and systems — such as by continuing to reinvest in child care and preschool programs, strengthening employment services, helping students and families afford a college education, and increasing assistance for low-income seniors and people with disabilities. Failing to reinvest means that many Californians could be left out of the state’s economic future and puts that future at risk.


Economic Context of the 2015-16 Budget: A Recovery That Is Leaving Many Californians Behind

January 7, 2015

California’s state budget is a primary funding source for many public services and systems that support working families and help them climb the economic ladder. Unfortunately, many of these areas of public investment remain underfunded and undersupported today. One example is California’s subsidized child care system, which helps parents work more hours by giving them affordable child care options. Funding for child care and preschool programs remains nearly one-third below the pre-recession level.  Other areas, such as assistance for low-income seniors and people with disabilities (SSI/SSP) and the state’s system of public higher education, also are undersupported even as the state’s revenues surpass where they were before the budget shortfalls caused by the Great Recession.

Providing support for economic security and opportunity is especially important given that so many in California are still struggling in the current recovery. While California’s economy has improved markedly since the worst years of the Great Recession, many regions are still coping with high rates of poverty and joblessness. For these parts of the state, it still feels like California is in a recession.

The latest county-level Census figures on poverty drive home this point. These figures combine poverty estimates from the American Community Survey with other administrative data to generate estimates of poverty for smaller geographic areas. (This process results in statewide poverty rates that differ from those published last fall.) The new data show that 16.8 percent of all Californians, and 23.5 percent of all California children, lived in poverty in 2013. In other words, nearly one in four California children lived in households with incomes below the federal poverty line ($23,624 for a family of four with two children in 2013). Within California there are large disparities among regions (see table). While counties in the San Francisco Bay Area all had poverty rates that were lower than the state average, counties in the San Joaquin Valley all had above-average rates of poverty and child poverty. Fresno County had the highest rates of poverty in 2013, with 28.6 percent of all people living in poverty and 42.0 percent of all children living in poverty.

[Click table to view at full size]
Econ-Indicators-1.7.14

Unemployment also remains worryingly high in regions throughout California. In the third quarter of 2014 (the last full quarter for which data are available), 11 counties had unemployment rates in the double digits, and more than half of these counties were in the San Joaquin Valley. The county with the highest unemployment rate was Imperial County in the southern part of the state, where more than one in four workers (26.9 percent) were unemployed.

Poverty and unemployment are just two measures of an economy’s health, yet other measures of economic well-being — such as income or food insecurity — also show that California’s recovery is not leading to economic gains for many families. Again, such measures show a large regional disparity and a California that is deeply segmented not just along income levels, but by geographic area as well.

When Governor Brown releases his proposed 2015-16 budget this week, there is likely to be a large focus on an “either/or” choice between responsible budgeting and committing more state dollars to underfunded programs. This is a false choice given the economic realities faced by many Californians today. The 2015-16 budget that is eventually enacted must start to address on-the-ground economic conditions in much of California. This means that the state budget must take on issues of poverty and joblessness and help boost an economy that is leaving many Californians behind.

— Luke Reidenbach


Issues to Watch in 2015: Expanding Health Care Coverage to Undocumented Immigrants in California

January 6, 2015

More than 2 million undocumented immigrants live in California. They make significant contributions to our state, comprising nearly one-tenth of the workforce and paying well over $2 billion in state and local taxes each year. But when it comes to health care, these Californians face a substantial hurdle: federal law prevents them from accessing coverage under the Affordable Care Act (ACA), either through Medicaid (Medi-Cal in California) or through the new health insurance marketplace set up under the ACA (Covered California). While undocumented residents may get health care coverage through an employer, most do not. Those who lack coverage may have no regular source of health care and may face huge out-of-pocket costs for any care they do receive.

Expanding health care coverage to undocumented immigrants in California will be a key policy issue in 2015. This post highlights four key facets of the state and federal policy landscape that will help determine whether California makes significant progress toward achieving this goal in the near future. These are: (1) state Senator Ricardo Lara’s Senate Bill 4, (2) President Obama’s recent executive actions on immigration, (3) California’s current policy regarding Medi-Cal coverage for undocumented immigrants, and (4) the anticipated renewal of California’s “Section 1115” Medicaid waiver, the current version of which expires in late 2015.

Senate Bill 4: A Framework for Expanding Health Care Coverage to California’s Undocumented Residents

Last year, Democratic state Senator Ricardo Lara introduced SB 1005, starting a conversation about expanding health care coverage to all of the state’s undocumented residents. While that initial effort stalled, Senator Lara’s new bill — SB 4 — will rekindle the debate in 2015. SB 4 is intended to provide health care coverage to undocumented residents by allowing those with low incomes to enroll in Medi-Cal and those with somewhat higher incomes to buy coverage — with state financial assistance — through a new, state-run health insurance marketplace that would mirror Covered California.

SB 4 would advance a worthy policy goal. But by expanding the state’s role in providing health care coverage to undocumented immigrants, this legislation would also result in new state costs. These costs will be estimated and scrutinized as part of the legislative hearing process that will get under way in early 2015. Senator Lara has been working to identify revenues that could offset some or all of the new state costs, thereby minimizing the impact of this policy change on the state budget.

President Obama’s Recent Executive Actions on Immigration

Senator Lara introduced SB 4 in the wake of a significant change in federal policy regarding undocumented immigrants. In November, President Obama announced a new federal policy allowing several million undocumented immigrants to apply to temporarily remain in the US — and work legally — without fear of deportation. The President’s order will primarily benefit an estimated 4 million parents who have lived in the US for more than five years and whose children are US citizens or lawful permanent residents. In addition, a few hundred thousand undocumented immigrants who came to the US as children will benefit from the expansion of the Deferred Action for Childhood Arrivals (DACA) program, which the President created in 2012.

In short, due to the President’s recent actions, well over 4 million people throughout the US will soon be able to apply to the federal government for “deferred action.” Those who qualify would be considered lawfully present in the US for a three-year period. It’s not known how many undocumented immigrants living in California will be eligible to apply for deferred action. The number could be substantial, possibly in the range of 1 million. However, it’s unlikely that all of the immigrants who are eligible to apply would do so, or that all of those who do apply would in fact be granted deferred action status.

The President’s Actions Provide a Pathway to State-Funded Medi-Cal Coverage for Some Undocumented Immigrants

The President’s recent actions on immigration — combined with the state’s current policy on Medi-Cal coverage for undocumented immigrants — will help to move California closer to the goal of providing affordable health care coverage to undocumented residents.

Here’s how:

California allows certain undocumented immigrants — including those who qualify for deferred action under federal immigration rules — to sign up for Medi-Cal so long as they otherwise meet the program’s income eligibility guidelines. For adults, this means their income can’t be higher than 138 percent of the federal poverty line (just over $16,000 per year for an individual). Because of this state policy, low-income residents who qualify for deferred action under the President’s original DACA program – the one created back in 2012 — are already eligible for Medi-Cal. By extension, low-income Californians who qualify for work permits and temporary relief from deportation under the President’s new initiatives should also be eligible for Medi-Cal. In other words, even if SB 4 never becomes law, a large number of undocumented immigrants — those who qualify for deferred action under the new federal rules — could soon begin enrolling in Medi-Cal based solely on current state policy.

Yet, while California’s policy is unambiguous, it’s not clear how state policymakers will respond in the wake of the President’s actions. A top aide to Governor Brown recently said that the Governor is evaluating the impact of the new federal immigration rules. This same aide noted that expanding Medi-Cal coverage to undocumented residents who qualify for deferred action under these new federal policies would “cost money.” This is true. In fact, California pays the full cost of Medi-Cal coverage for such immigrants because federal dollars can’t be used for this purpose. Federal Medicaid funds may be used only to provide emergency and pregnancy-related services (i.e., limited and episodic care) to this population.

Clearly, California has a compelling fiscal incentive for encouraging the federal government to rethink its restrictive approach to funding health care for undocumented immigrants. A favorable outcome — from the state’s perspective — would reduce California’s costs for expanding health care coverage to undocumented residents as well as help to move the state closer to achieving the coverage goals envisioned in SB 4.

State Officials Should Explore Whether Federal Funds Could Be Used to Cover a Larger Number of Undocumented Immigrants Under a “Section 1115” Waiver

The impending expiration — in October 2015 — of California’s Section 1115 Medicaid waiver provides an opportunity for state officials to engage their federal counterparts on the issue of health care coverage for undocumented immigrants. (Section 1115 waivers allow states, with federal permission and for a limited time, to “test new approaches in Medicaid that differ from federal program rules.”) The Governor wants a new waiver and plans to submit a formal proposal to the Obama Administration in early 2015, kicking off what’s likely to be several months of negotiations. State officials have floated a number of ideas for the waiver that focus largely on changing how health care services are delivered and paid for through Medi-Cal, with the goals of improving health outcomes and controlling costs.

So far, undocumented immigrants don’t figure into the state’s Section 1115 waiver ideas. But they should. After all, what could be more critical to transforming how health care is delivered and funded than rethinking the fragmented and incomplete “system” through which undocumented immigrants currently access health care services in California? As noted above, the federal government already shares — with the state — the cost of providing limited and episodic health care to some undocumented residents through Medi-Cal, including services delivered in costly emergency rooms. Without a doubt, these federal dollars could be used more efficiently and effectively if they instead supported coordinated care that emphasized prevention and the appropriate management of chronic health conditions.

This is where the Section 1115 waiver comes in. In theory, current federal policies that prevent federal dollars from being used to support health care coverage for undocumented immigrants could potentially be modified as part of a waiver agreement, at least for the duration of a new waiver (typically five years). If this occurred, California’s cost of providing Medi-Cal coverage to undocumented residents would drop substantially. This is because the federal government would begin sharing costs that the state would otherwise pay for on its own. (Under this scenario, federal costs for undocumented immigrants would not increase compared to current law. Instead, federal Medicaid dollars that support limited and episodic care for undocumented immigrants would be redirected to fund health care coverage.) Moreover, expanding health care coverage for undocumented immigrants with federal financial assistance would help move California closer to meeting Governor Brown’s goals for a new Section 1115 waiver: improving health outcomes and controlling costs.

Conclusion

Lawmakers and advocates will pursue multiple options in 2015 to advance — and pay for — a worthy goal: extending health care coverage to undocumented residents who work, pay taxes, and put down roots in the Golden State. In light of the President’s recent actions on immigration, the anticipated renewal of the state’s Section 1115 Medicaid waiver provides a key opportunity to help move California closer to creating a health care system that works for everyone.

— Scott Graves


Issues to Watch in 2015: Higher Education

December 30, 2014

As University of California (UC) students and their families enjoyed the holidays together, many of them were likely fretting over the prospect that their tuition may increase for the upcoming 2015-16 school year. Under a plan adopted by the UC Board of Regents last month, UC tuition for California residents could increase by up to 5 percent annually for the next five years. That means that tuition could rise to nearly $13,500 by 2019-20, after adjusting for projected inflation, a significant increase from the current level of $12,192 (see chart).

December2014-blog_UC_tuition

 

UC’s new plan runs counter to a separate plan set forth by the Governor in 2013 to give the UC and the California State University (CSU) annual state funding increases for four consecutive years in exchange for freezing tuition for California residents through 2016-17 at 2011-12 levels. This year’s budget agreement, signed in June, continued that plan and included modest funding increases of about $140 million each for CSU and UC in 2014-15. In early 2014, the Governor proposed 4 percent state funding increases for both CSU and UC in 2015-16 and 2016-17, the third and fourth years in the plan. However, UC President Janet Napolitano insists that it is not enough and that tuition will have to go up unless the state provides additional funds. CSU has also signaled it needs additional state funding by recently reducing enrollment targets for 2015-16 and raising the possibility of reducing freshman admissions this coming fall unless additional funds are provided.

For both CSU and UC, two sources of revenue — state funding and tuition — make up the vast majority of their core funding, which are dollars that support activities related to their primary education functions. As detailed in our report earlier this year, From State to Student, state disinvestment in higher education in recent decades has resulted in steep tuition increases at both institutions and has shifted a larger share of higher education costs from the state to students and families. Since 1990-91, tuition and fees have more than tripled at CSU and more than quadrupled at UC, after adjusting for inflation. Direct General Fund spending on a per student basis at both CSU and UC has generally been on the decline during this period and, in recent years, has been at or near the lowest point in more than three decades, after adjusting for inflation.

When state funding for CSU and UC gets cut or does not keep up with increasing enrollment, as California’s population grows and its economy changes, these institutions have very few options available to them. One is to raise tuition rates. Another is to reduce enrollment growth, as UC and CSU have each proposed to do in 2015-16, unless they receive additional state funding.

This is an issue that we, and surely many students and families, will be watching closely as we approach the release of the Governor’s proposed 2015-16 budget in January. Stay tuned for more CBP analysis on this topic.

— Phaelen Parker