Coming Soon: The 2014-15 State Budget Debate

December 18, 2013

Well, it’s that time of year again. The holidays? Of course. But here at the CBP, we’re also anticipating the release of the Governor’s proposed 2014-15 budget, which will be unveiled on or before January 10. This release will kick off what is likely to be a lively debate in 2014 over how to allocate the state’s tax revenues in the fiscal year that begins next July 1.

As we noted in a blog post yesterday, we’ve updated our Dollars and Democracy guide, which is designed to help Californians navigate the often murky state budget process. This guide provides answers to questions such as:

  • How is the budget bill different from other bills?
  • What happens if lawmakers fail to pass the budget by midnight on June 15, the constitutional deadline?
  • How many other states besides California require a supermajority vote of the Legislature to increase any state tax? (See map.)

As the budget debate unfolds in 2014, look to the CBP for timely and credible analyses of key budget and policy proposals — and their impact on low- and middle-income Californians.

— Scott Graves

Statement From Chris Hoene on the New LAO Forecast: “A Critical Opportunity”

November 20, 2013

In response to the Legislative Analyst’s Office (LAO) long-term fiscal forecast released today, Chris Hoene, executive director of the California Budget Project, released the following statement:

“The new forecast from the Legislative Analyst’s Office shows a vastly improved fiscal picture for California. And this is a critical opportunity.

“With so many Californians still reeling from the impact of the Great Recession, policymakers should strive to increase investment in people and communities. Fiscal prudence is important and should be a key element of any budget agreement. But it shouldn’t come at the expense of boosting support for local economies and for vital public services and systems, especially after the severe budget cuts of recent years. State policymakers should be careful about putting away too much for a rainy day when, for many Californians, it’s raining now.”

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