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Other Budget Issues

Last Updated: 5/15/2014
Budget Issue: Proposal to pay down state mandates backlog
Program: Commission on State Mandates
Finding or Recommendation: Approve the Governor's proposal to appropriate $100 million to pay pre-2004 local government mandate claims.
Further Detail


State Reimbursement Required for Mandates on Local Governments. Proposition 4 (1979) requires the state to reimburse local governments (cities, counties, special districts, schools, and community colleges) for new programs or services that the state requires them to provide (known as “state mandates”).

State Law Prescribes a Process to Identify Reimbursable Mandates. State law establishes the mandate determination process, which has three phases. In the first phase, a local government files a test claim with the Commission on State Mandates (CSM) alleging that a new state law or regulation creates a reimbursable mandate and the CSM holds hearings to determine whether or not a reimbursable state mandate exists. If the CSM determines that a reimbursable state mandate exists, the process moves into the second phase, in which the CSM—with input from the local government claimant, Department of Finance (DOF), and other interested parties—adopts a methodology for local governments to follow in claiming state reimbursement. During the final phase, which occurs at least six months after completion of the second, local governments submit initial claims for reimbursement. Because this process, typically takes several years to complete, mandate claims usually include costs for multiple years, beginning with the fiscal year preceding the filing date of the initial test claim. These claims serve as the basis for the statewide cost estimate that the CSM reports to the Legislature.

Payment Plan Established for Mandate Claims Predating 2004-05. In the early 2000s, the state deferred mandate reimbursements to cities, counties, and special districts due to budget problems and, by 2004, owed these local governments about $1 billion. Proposition 1A (2004) requires the state to either (1) pay these local governments the costs of all outstanding claims for a mandate in the annual state budget or (2) suspend or repeal the mandate. (This prompt repayment requirement does not apply to certain employee relations mandates, obligations incurred before 2004, or to school and community college mandates.) Proposition 1A also allowed the state to establish a multiyear plan to pay all outstanding mandate claims incurred prior to 2004-05 (known as pre-2004 mandate claims). Pursuant to this authority the Legislature enacted a “15-year payment plan,” which pays pre-2004 mandate claims over a 15-year period, beginning in 2006-07 and ending in 2020-21. The Legislature appropriated funding for the plan during its first years, but has not appropriated funding for it since 2007-08. The state currently owes about $900 million for pre-2004 mandate claims.

No Plan to Address Mandate Claims After 2004-05. Since 2004, the state has suspended and repealed many mandates to avoid paying reimbursements. Despite these suspensions and repeals, the state currently owes about $1 billion for post-2004 mandate claims. The magnitude of this liability reflects two factors related to the timing of mandate reimbursements. First, the state reimburses local government mandate costs two years after the costs are incurred. As a result, local governments continue to submit claims for two years after a mandate is suspended or repealed. Second, as discussed above, it often takes a test claim multiple years to go through the CSM process. During this time, local governments must comply with the mandate. Consequently, when the Legislature makes the initial decision to fund, suspend, or repeal a mandate, local governments often have already incurred costs for multiple years for which the state owes reimbursement. No plan has been established to pay this $1 billion for post-2004 mandate claims.

Governor’s Proposal

The May Revision includes $100 million to pay pre-2004 mandate claims in 2014-15. This funding would be allocated to cities, counties, and special districts based on their share of total pre-2004 mandate claims, pursuant to a schedule developed by DOF. Counties would receive $73.1 million, cities would receive $24.6 million, and special districts would receive $2.2 million. The May Revision does not propose funding for the post-2004 mandate backlog.

LAO Recommendation

We recommend the Legislature adopt the Governor’s proposal to appropriate $100 million for pre-2004 mandate claims.