Six Years Later, State Spending Remains Below the Pre-Recession Level

July 24, 2013

The 2013-14 budget signed by Governor Brown in June includes state spending of $138.3 billion — $96.3 billion from General Fund revenues (the primary source of funding for state services) and $42.0 billion from special fund revenues (taxes, licenses, and fees designated by law for specific purposes). These state tax dollars support a range of public systems and services, from education and health care to transportation and environmental protection. (The 2013-14 budget also includes $7.0 billion in spending from bond funds, but we exclude these dollars from the analysis below because bond funds — which come from long-term loans — are provided by investors, not the state’s taxpayers.)

Thanks in large part to voter approval of two tax measures last November — Propositions 30 and 39 — policymakers this year were able to balance California’s budget while avoiding additional major spending reductions and taking small steps toward reinvesting in key state services that were cut deeply in recent years due to the impact of the Great Recession. But despite the positive elements of this year’s budget — and there were many — looking at a single year’s spending plan tells only part of the story. Taking a broader view reveals the following:

  • State spending is down by nearly 4 percent since 2007-08, the year the Great Recession began. State spending — General Fund plus special funds — in 2013-14 is projected to be $5.3 billion (3.7 percent) below what it was in 2007-08, after accounting for inflation.

  • State spending per California resident is down by nearly 8 percent since 2007-08. State spending per capita has fallen from $3,929 in 2007-08 to $3,628 in 2013-14 — a drop of $301 (7.7 percent), after adjusting for inflation. This drop reflects a smaller state budget as well as the continued growth of California’s population. The number of Californians has increased by more than 1.5 million since 2007-08, rising from 36.6 million on July 1, 2007, to an estimated 38.1 million on July 1, 2013. In other words, state spending is lower today than in 2007-08 despite the fact that California has added well over 1 million new residents during this period.
  • State spending is substantially below the level it likely would have reached if the Great Recession had not occurred. As we explained in a blog post last week, if California’s economy hadn’t hit a steep downward slide in 2008, total state revenues — General Fund plus special funds — likely would have increased to more than $160 billion in 2013-14. State spending probably would have grown more or less in tandem, in which case it likely would have exceeded this year’s budgeted spending level ($138.3 billion) by more than $20 billion. That $20 billion-plus spending gap represents dollars that are not available to support state investments in education, child care, job training, and other public systems and services vital to California’s future.

— Scott Graves

Medi-Cal Expansion by the Numbers

July 11, 2013

Medi-Cal — the state’s Medicaid Program — provides health coverage to more than 8 million low-income Californians. This number is expected to climb sharply beginning this coming January due to a major program expansion adopted by state policymakers as part of the 2013-14 budget agreement. As authorized by federal health care reform, California will extend Medi-Cal coverage to more than 1 million parents and childless adults who are currently excluded from the program and whose incomes do not exceed 138 percent of the federal poverty line ($15,856 for an individual in 2013). The budget agreement also redirects — to the state — much of the funding that counties now use to provide health care to low-income, uninsured (“medically indigent”) residents. (Governor Brown insisted on linking this fund shift to the Medi-Cal expansion.)

We’ll be updating our Medi-Cal chartbook to reflect the framework of the expansion as agreed to by lawmakers and the Governor. For now, here are some numbers that help to put the Medi-Cal expansion into perspective:

  • 1/1/14 — the date that the Medi-Cal expansion is scheduled to begin.
  • 1.4 million — the number of Californians estimated to be newly eligible for Medi-Cal in 2014 under the expansion.
  • 635,000 — the number of newly eligible Californians expected to enroll in Medi-Cal during the first six months of 2014, according to recent state estimates. This figure includes 490,000 Californians who will transfer from the temporary Low Income Health Program (LIHP) on January 1, 2014. LIHP — which was created as a “bridge” to health care reform and expires at the end of 2013 — uses federal and county dollars to serve low-income adults who do not qualify for Medi-Cal under current rules. The vast majority of Californians enrolled in LIHP will be eligible for Medi-Cal in 2014, while the remainder will be eligible for coverage through Covered California, the state’s new health insurance exchange. The state’s estimate of the number of LIHP enrollees who will shift to Medi-Cal appears to be low. For example, in April 2013 LIHP enrolled about 575,000 Californians who will qualify for Medi-Cal under the expansion, or over 80,000 more people than the state estimates will move from LIHP to Medi-Cal. Moreover, LIHP enrollment could increase in the coming months to the extent that counties boost their outreach efforts. Therefore, the number of Californians who enroll in Medi-Cal under the expansion during the first half of 2014 could substantially exceed the state’s total estimate of 635,000.
  • 100% — the share of Medi-Cal expansion costs covered by the federal government from 2014 through 2016. The federal share will gradually phase down to a still-high 90% by 2020.
  • $1.5 billion — the amount of federal funding that California is expected to receive in 2013-14 to pay for the expansion. Federal funding is projected to increase substantially in later years. Using “moderate-cost assumptions,” the Legislative Analyst’s Office projects that California will receive $3.5 billion in federal funding for the expansion in 2014-15, rising to $6.2 billion by 2022-23.
  • $3.8 billion — the total amount of funding that is projected to be shifted from counties to the state over the next four years under the budget agreement ($0.3 billion in 2013-14, $0.9 billion in 2014-15, and $1.3 billion in each of 2015-16 and 2016-17). Counties use these dollars — which they receive as part of the 1991 state-to-county realignment of services — to provide health care to medically indigent residents. The budget deal assumes that counties will no longer need all of their 1991 realignment health care dollars as many medically indigent adults newly enroll in Medi-Cal under the expansion. The funds redirected to the state will be used to pay for CalWORKs grant costs that would otherwise be funded with General Fund dollars, and thus will generate substantial ongoing state savings. At this point, it’s not clear whether the amount of funding that remains with counties will be sufficient to provide health care for the millions of Californians who are projected to lack health coverage even after full implementation of health care reform.

— Scott Graves

Phasing Out Enterprise Zones as We Know Them

July 9, 2013

The CBP has been following and informing the debate over California’s controversial Enterprise Zone (EZ) Program for several years, and has published a number of reports and blog posts that highlight the escalating costs and serious shortcomings of the EZ Program as well as opportunities for reform. This past Wednesday, AB 93 and SB 90 — budget trailer bills that phase out the EZ Program and replace it with a new package of economic development incentives — were transmitted to Governor Brown and await his signature. [Update: On Thursday, July 11, the Governor signed AB 93 and SB 90.] As a result, our analysis of the 2013-14 budget agreement has been updated with a detailed review of the changes to EZs and the state’s tax system.

Specifically, the budget agreement:

  • Retains current EZ designations but modifies them to more effectively target the most economically distressed areas of the state. Current EZ designations will remain intact for the 40 existing EZs, plus two recently expired zones — Antelope Valley and Watsonville — but incentives will also be available for use in census tracts throughout the state that rank in the top 25 percent in both unemployment and poverty rate. Further, census tracts with low unemployment and low poverty rates will be removed from the existing EZs, ensuring that the hiring tax credit truly is targeted to businesses located in the state’s most economically distressed areas. Lastly, the seven existing Local Area Military Base Recovery Areas (LAMBRAs) will be preserved and eligible for incentives as well.
  • Alters key elements of the EZ hiring credit to create and retain jobs for disadvantaged individuals. The budget agreement makes major changes to the hiring tax credit to improve performance. These changes include:
    • Requiring businesses to create new jobs — not just make new hires — as a condition of claiming hiring credits.
    • Discontinuing retroactive vouchering, whereby credits are awarded for hires made in past years.
    • Maintaining the credit for a particular employee at a constant level over a five-year period, instead of having the credit decrease over time. This change removes the incentive and reward for employers that “churn” their workforces.
    • Ensuring that companies that take the hiring credit pay employees a living wage. Specifically, the budget agreement increases the amount of qualified wages from up to 150 percent of minimum wage — currently $12 per hour — to between 150 percent and 350 percent of minimum wage. This currently is between $12 and $28 per hour. The credit is only available for qualified wages paid to employees who work an average of at least 35 hours per week. In five pilot areas that would be designated by the Governor’s Office of Business and Economic Development (GO-Biz), qualified wages will be set between $10 an hour and 350 percent of minimum wage to reflect working conditions in areas with average wages less than the statewide average.
    • Targeting the hiring tax credit to five categories of individuals, which is much narrower than the 10 groups included in current eligibility requirements. The targeted groups will include individuals who have been previously unemployed for six months, recipients of the Earned Income Tax Credit, recipients of CalWORKs or General Assistance, unemployed veterans, and ex-offenders.
  • Creates a manufacturing equipment sales and use tax (SUT) exemption. The SUT exemption will eliminate the California portion of sales and use tax for basic manufacturing and research and development (R&D) purchases for use within manufacturing and biotech industries. This exemption will be available statewide — rather than just within certain geographic areas. The maximum amount of purchases eligible for the SUT exemption statewide is not to exceed $200 million annually.
  • Establishes a business incentive fund to retain and attract businesses to California. The budget agreement establishes a new fund that will be administered by GO-Biz for the purpose of negotiating business tax credits in exchange for investments and employment expansion in California. The budget agreement also creates the California Competes Tax Credit Committee — consisting of representatives from the Treasurer’s Office, Department of Finance, and GO-Biz, and an appointee from both the Senate and Assembly — which will provide final approval for GO-Biz’s allocation of tax incentives. The fund will be limited to $30 million in 2013-14, increasing to $200 million annually in 2015-16 through 2018-19.

The budget agreement includes a number of provisions intended to ensure that the new economic development package is effective, transparent, and available to small businesses. First, the hiring tax credit, the SUT exemption, and the GO-Biz fund require annual evaluations to ensure that program administrators, policymakers, and the public are able to track program usage, and they each contain provisions that require businesses to return money to the state if certain terms are not met. Second, the budget agreement creates clear benchmarks to ensure that small businesses — defined as having less than $2 million in gross receipts in the previous year — benefit from the economic development package. Specifically, 25 percent of the hiring tax credit will be reserved for small businesses, and industry restrictions on the hiring tax credit will be lifted for small businesses as well. In addition, 25 percent of the funds allocated to GO-Biz will also be reserved for small businesses. Lastly, the budget agreement includes sunset dates for the programs, a provision that does not exist within the current EZ Program.

— Kristin Schumacher

Enterprise Zone Reform at a Critical Juncture

June 25, 2013

Deliberations over the future of the Enterprise Zone (EZ) Program — California’s controversial economic development program — are entering a pivotal stage. Assembly Bill 93, which would substantially reform the program, passed out of the Senate Committee on Budget and Fiscal Review yesterday and is scheduled to be heard on the Senate floor this afternoon.

Earlier this month, we released a report detailing the escalating costs and serious shortcomings of the EZ Program. This report included a set of policy recommendations for improving the EZ Program and making it more cost-effective, with a focus on how EZ hiring tax credits are awarded. AB 93 would move California in the right direction on enterprise zones and economic development by improving the tax credit in ways that could eliminate the most severe program inefficiencies.

Specifically, AB 93 would restructure the hiring tax credit in five crucial ways:

  • Discontinuing retroactive hiring credits, whereby credits are awarded for hires made in past years.
  • Requiring businesses to create new jobs — not just make new hires — as a condition of claiming hiring credits.
  • Eliminating residency in a Targeted Employment Area as a qualifying criterion for the tax credit and specifically targeting the tax credit for three categories of individuals: those that have been previously unemployed for six months, recipients of the Earned Income Tax Credit, and veterans.
  • Changing the credit formula to remain the same over a five-year period, instead of decreasing over time — thereby removing the incentive and reward for employers that “churn” their workforces.
  • Ensuring that companies that take the credit pay employees a living wage by increasing the amount of qualified wages from up to $12 per hour to between $12 and $28 per hour for employees.

AB 93 also would address the EZ Program’s current inability to target areas of the state that are most in need of job growth, new businesses, and assistance with economic development. While the current EZ designations would remain intact, the new hiring tax credit would also be available in census tracts throughout the state that rank in the top 25 percent in both unemployment and poverty rate. Further, census tracts with low unemployment would be removed from the eligible areas, ensuring that the hiring tax credit truly is targeted to businesses located in the state’s most economically distressed areas.

In addition to making major improvements in how the EZ hiring credits are targeted and awarded, AB 93 would create a manufacturing equipment sales tax exemption. This sales and use tax exemption would eliminate the California portion of sales tax for basic manufacturing and biotech equipment purchases, and will be offered statewide — rather than within certain geographic areas. Currently, California is among only a very few states that do not offer this type of exemption. AB 93 also would establish the California Competes Tax Credit Committee, administered by the Governor’s Office, with the purpose of negotiating business tax credits in exchange for investments and employment expansion in California. While we have voiced skepticism in the past concerning the efficacy of state tax credits in creating jobs and growing the economy, AB 93’s strong provisions in two key areas of the program — transparency and performance evaluation — would enable program administrators, policymakers, and the public to track these credits’ impact and their return on investment.

The reforms contained in AB 93 represent major improvements to California’s EZ Program and are designed to address the worst abuses and inefficiencies within the program. These reforms are a significant step forward for the state in fostering positive economic development and long-term fiscal health. Stay tuned as AB 93 is taken up today in the Senate.

—  Kristin Schumacher

Governor Delays Controversial Plan to Restructure Adult Education, Yet Concerns Remain

June 6, 2013

California’s adult education system is a vital resource for millions of low- and middle-income individuals, helping them obtain the basic knowledge and skills necessary to advance in their careers and participate in civic life. This system helps Californians achieve educational goals such as learning to speak English; passing citizenship exams; earning a high school diploma; boosting their job skills; and obtaining the proficiency needed in reading, writing, and math to succeed in postsecondary education.

For the past several years, California’s adult education system has operated with a significantly decreased level of funding, due to the combination of severe budget cuts and a policy change that has made previously dedicated funding more flexible. In 2007-08, the year before the economy hit bottom and the Great Recession deepened, adult education received more than $700 million in dedicated funding. Due to declining revenues, the state implemented two consecutive years of double-digit cuts to adult education beginning in 2008-09. Also in 2008-09, legislators gave school districts the flexibility to shift funding specifically dedicated to adult education to other educational uses as they saw fit, magnifying the impact of the spending cuts. Subsequently, many districts redirected either significant portions or all of their adult education funding into other program areas. In fact, the Legislative Analyst’s Office (LAO) estimates that as little as 40 percent — roughly $250 million — of the money currently allocated to adult education is actually being spent for that purpose, a decline of well over 50 percent from the 2007-08 level.

In January, Governor Brown called for a restructuring of the state’s adult education system. This plan would have shifted significant responsibility and funding for adult education away from K-12 school districts, where adult schools have traditionally resided, to community colleges, which often have little experience providing courses similar to those offered at adult schools. The Governor’s January proposal also included $300 million in dedicated adult education funding for community colleges in 2013-14, roughly in line with the LAO’s estimate of current adult education spending but still less than half the 2007-08 level.

Faced with significant criticism from advocates and educators regarding the adult education restructuring in his January proposal, and a rejection of the plan by a key Assembly budget subcommittee in March, the Governor issued a re-worked proposal for adult education in his May Revision. The revised proposal would essentially put the restructuring plan on hold for two years, during which time the Governor proposes to allocate $30 million to help transition to a new regional partnership program composed of community colleges, school districts, and other adult education providers. Yet while the proposal promises $500 million of dedicated funding in 2015-16, the May Revision includes no dedicated program funding during the two-year transition. As an incentive for school districts to continue funding adult education programs during this transitional period, the Governor proposes that 70 percent of the $500 million promised in 2015-16 — or $350 million — would go to current providers, as long as they maintain their current spending levels for the next two fiscal years.

As the budget deliberations in the Legislature move forward, two key questions will shape the policy debate around adult education in California:

  • Would the Governor’s incentive for school districts to maintain adult education funding be enough to stem further program cuts and closures? While some districts have already acted to restore some adult education funding in response to the Governor’s May Revision, others have not, and — in the climate of cutbacks to adult education in recent years — there is no guarantee that adult education spending and programs would be maintained during the two-year transition period.
  • Who would have ultimate responsibility and accountability under the new adult education regional partnership structure envisioned by the Governor? While many of these details would likely be worked out during the two-year transition period, some in the adult education arena have raised initial concerns about community colleges being designated as the fiscal agents, with promised future adult education funding flowing through community colleges to K-12 districts and other providers.

The debate on the future of adult education comes at a time when the need for adult education remains high. Nearly one in five adults in California have yet to earn a high school diploma or pass the GED exam. Additionally, nearly 25 percent of California’s adult population is functionally illiterate, lacking basic skills necessary to accomplish ordinary tasks such as filling out job applications or understanding and accessing public services. Furthermore, federal immigration reform could result in millions more California residents seeking help from adult education programs, such as basic skills, civic education, and English-as-a-second-language (ESL) courses .

Adult education is a critical but often overlooked part of our state’s system of education and career preparation, especially for low-and middle-income Californians. A strong adult education system that meets the needs of these residents would benefit all Californians and contribute to a better-trained workforce and a stronger economy.

— Phaelen Parker

One Step Forward, One Step Back in Addressing School Funding Inequities?

June 5, 2013

Political momentum is building toward a fundamental restructuring of California’s K-12 school finance system — yet significant details remain unresolved. The question confronting policymakers is not how much funding to provide schools, but how to allocate state dollars. Governor Brown’s proposed Local Control Funding Formula (LCFF), the subject of a recently released CBP chartbook, would increase base-level funding for the vast majority of school districts while also providing additional resources to districts that have students with greater needs. Although alternative LCFF proposals offered by the Legislature would likely increase the base-level funding for all districts, this might be done by reducing state support for higher-need school districts.

The LCFF would streamline state education funding and establish a target general purpose base grant — on a per student basis — for all school districts. The Governor’s proposal would set this target base grant at a level equal to the 2007-08 statewide average for school district general purpose funding. This means that once the LCFF is fully implemented, it would restore reductions made to general purpose funding since the Great Recession for the vast majority of schools. However, the LCFF would not restore cuts made since 2007-08 to the approximately 10 percent of school districts whose 2012-13 funding is already higher than the target base (i.e., the 2007-08 statewide average). Representatives of these districts have raised objections to the Governor’s proposal because they would not receive as much funding from LCFF grants as they might under current formulas.

Legislative proposals that would alter the LCFF – in part to address these districts’ concerns — have been taken up as part of this week’s Budget Conference Committee. Senate Bill 69, supported by Senate leadership, would eliminate the LCFF “concentration grants” — the dollars allocated to districts with high concentrations of disadvantaged students — and shift some of the freed-up dollars to increase the base grants for all school districts. In the Assembly, the Budget Committee has approved a set of LCFF principles that contain “Economic Recovery Targets” (ERTs). ERTs would restore 2007-08 funding levels, plus foregone cost-of-living adjustments, for all school districts not restored under the LCFF. To achieve this goal, however, policymakers likely would have to reduce the amount of funding allocated for disadvantaged students under the LCFF, extend the amount of time it would take to fully implement the formula, or both. Moreover, establishing ERTs would create a complex, two-tiered finance system that would undermine the LCFF’s efforts to make school finance in California both more transparent and more equitable.

Legislators have voiced reasonable concerns about establishing an LCFF target base grant that does not reflect the cost of adequately educating all students. Increasing the LCFF target base grant is a worthy goal. However, raising the base grant either by reducing the funding proposed for disadvantaged students or by lengthening the time it would take to fully implement the LCFF would water down school finance reform and — even worse — could perpetuate current funding inequities.

Critics of the LCFF argue that it unfairly creates “winners” and “losers.” However, unless the LCFF provides school districts the resources needed to help disadvantaged students reach the state’s high academic standards, California could end up continuing to shortchange those who are “losers” in the state’s current system.

— Jonathan Kaplan

After Years of Deep Cuts, an Increase in the CalWORKs Grant Deserves Serious Consideration

June 3, 2013

Today, members of the California Legislature will meet in Budget Conference Committee to continue resolving differences between the Senate and Assembly’s versions of the 2013-14 state budget. One important item up for discussion is the size of monthly grants for families in the CalWORKs Program, which provides cash assistance to low-income families along with welfare-to-work services to help parents find jobs and overcome barriers to employment.

The Senate and the Brown Administration have proposed keeping the CalWORKs grant frozen at its current level, while the Assembly has proposed a phased-in increase that would raise the maximum grant to 50 percent of the federal poverty line over a five-year period, starting with a 12 percent increase January 1, 2014.

After years of steady decline in the purchasing power of the CalWORKs grant, followed by sharp cuts to the grant in recent years, the $638 maximum aid payment for a family of three is currently equal to about 39 percent of the poverty line, well below the “deep poverty” cutoff of 50 percent. To put things in perspective, today’s cash grant is roughly the same, in actual dollars, as the maximum grant in 1987. The critical difference is that back then, the value of that dollar amount was equal to about 80 percent of the poverty line — or double the percentage today.

The Assembly proposal to increase the CalWORKs grant acknowledges the fact that California is facing a serious poverty problem. This problem came into sharp focus last year when the Census Bureau released state rankings under the new Supplemental Poverty Measure, which compares families’ resources to the cost of housing and other necessities. California was perched at the top of the list, with 23.5 percent of residents living in poverty. Even under the official poverty measure — the basis for the federal poverty line — about one in six Californians, and nearly one in four California children, are living in poverty. (For a family of three, this means an annual income below $19,530.)

The fact that so many of the state’s children experience this daily hardship is deeply troubling in and of itself. But child poverty’s effects extend far beyond individual households. Since children who grow up in poverty are likely to have lower earnings, less education, and poorer health as adults, poverty affects all Californians who care about a strong workforce and a robust tax base for the state.

Augmenting the CalWORKs grant would help address poverty in California by lifting the household income of CalWORKs participants, who make up a large share of the state’s low-income families. Such an increase would directly benefit the more than 1 million children in CalWORKs households. Depending on how the change is implemented, the 12 percent increase in the CalWORKs grant that the Assembly proposes for 2013-14 could bring the maximum grant for a family of three from its current $638 level up to about $714 a month — still below where it was 10 years ago. This change, though modest, would be a step in the right direction after years of repeated cuts to the CalWORKs grant.

— Hope Richardson