Figure 5

Major Child Care and Development Spending Changes

(In Millions)

Higher Education

The enacted budget provides a total of $10.1 billion in General Fund support for higher education in 2011–12 (see Figure 6). This reflects a decrease of $1.4 billion, or 12 percent, from the 2010–11 amount. Thus, the 2011–12 budget more than eliminates the $911 million General Fund increase higher education received the previous year. As a result, higher education's share of state General Fund spending declines from 12.6 percent to 11.8 percent.

Tuition Partly Backfills Cuts. All three public higher education segments will receive additional tuition and fee revenue as a result of approved increases. After diverting a portion of this new revenue to institutional financial aid programs, the segments will receive from these increases about $675 million, which effectively backfills an equal amount of their General Fund reductions. As explained below, this continues a recent trend whereby students pay an increasing share of the cost of their education.

When all core sources of revenue (including General Fund, local property taxes, federal stimulus funds, and net fees/tuition) are considered, higher education's programmatic support is now about 7 percent lower than it was in 2010–11 (see Figure 7). Compared to 2007–08—generally considered to be the last "normal" funding year before the current recession necessitated spending reductions—higher education's programmatic support has declined about 2 percent.

UC and CSU

Overall Funding. As shown in Figure 6, the 2011–12 budget provides $2.4 billion in General Fund support to the University of California (UC), and $2.1 billion to the California State University (CSU). For both university systems, these amounts reflect net reductions of 18 percent. Specifically, each segment received a General Fund reduction of $650 million, a General Fund augmentation of $106 million to replace one–time federal stimulus funds in the 2010–11 budget, and a variety of other technical adjustments. Approved tuition increases (net of amounts set aside for student financial aid) will backfill about $266 million and $300 million, respectively, of UC and CSU's General Fund reductions. As a result, the decline in total programmatic funding for each system is about 11 percent.

Potential for Further General Fund Reductions. The UC and CSU budgets each reflect a $500 million reduction originally proposed in the Governor's January budget, as well as an additional $150 million reduction included in the final budget agreement. As described in "Chapter 1", the enacted budget makes provision for an additional $100 million General Fund reduction to each university system in the event that anticipated state revenues are not realized. If the Director of Finance determines that revenues are projected to fall more than $1 billion short, the Director must reduce UC and CSU's General Fund appropriations by up to $100 million each.

Enrollment Targets. The 2011–12 budget sets state–supported enrollment targets of 209,977 full–time equivalent (FTE) students at UC and 331,716 FTE students at CSU. The target for UC is the same as the 2010–11 target, while the CSU target is about 8,000 FTE students lower than in 2010–11. The CSU's enrollment fell short of its target in 2010–11, and a provision in that year's budget caused $75 million in General Fund support associated with that enrollment shortfall to be reverted from CSU's budget. In a departure from past practice, the 2011–12 budget provides for no reversion of funding if either university system falls short of its enrollment target.

Student Tuition. Both UC and CSU have approved the following tuition increases for the 2011–12 academic year:

• The UC Regents initially adopted an 8 percent increase at their November 2010 meeting. In July 2011, following adoption of the 2011–12 Budget Act, they approved an additional 9.6 percent increase. Together, those actions bring 2011–12 mandatory systemwide charges to $12,192—an overall increase of 18.3 percent. Including mandatory campus fees, undergraduate students will pay an average of about $13,218 at UC campuses.
• The CSU Trustees initially adopted a 10 percent tuition increase for 2011–12 in November 2010, and approved an additional 12 percent increase in July, for an overall increase of 23.2 percent. Mandatory systemwide charges for CSU undergraduates will be $5,472, with campus fees (some of which may increase) adding another $1,000 on average.

The 2011–12 tuition increases are expected to generate about $415 million at UC and $450 million at CSU in additional revenues. Both segments plan to increase financial aid expenditures by about one–third of this amount. In addition, Cal Grant recipients will receive larger grants to cover the tuition increases.

Other Provisions. The budget includes several new requirements for the universities. One provision requires UC to allocate $3 million of its General Fund appropriation for scheduled salary increases for its service employees. Other provisions provide guidance as to how the universities allocate their budget reductions, prohibiting disproportionate cuts in academic preparation and outreach programs at both segments, and in certain math, science, and nursing education programs at UC. The Budget Act makes explicit a longstanding prohibition on the use of General Fund appropriations to support auxiliary enterprises or intercollegiate athletic programs at UC. Trailer bill language strengthens requirements for CSU's annual systemwide audit and removes a requirement for individual campus audits.

Capital Outlay. The budget includes appropriations for six UC projects—$45.3 million in lease–revenue bond funding for two new projects, and $9.3 million in general obligation bond funding for the equipment phase of four projects. It also includes appropriations for seven CSU projects—$201 million in lease–revenue bond funding for five new projects, and $2.8 million in general obligation bond funding for the equipment phase of two projects.

California Community Colleges

Like K–12 education, community colleges' local property tax revenue and most of their General Fund support is included within Proposition 98's funding formulas. Figure 2 (in the "Proposition 98" section of this chapter) shows that the 2011–12 budget package provides the CCC system with $5.4 billion in Proposition 98 funding, which is 11.1 percent of total state Proposition 98 spending. This reflects a reduction of $419 million (7 percent) from the revised 2010–11 spending level.

Budget Defers More Funding to Later Years. As noted earlier in the "Proposition 98" section, the 2011–12 budget defers an additional $129 million to 2012–13, thereby creating a total ongoing deferral of $961 million. This represents about 17 percent of Proposition 98 funding for CCC.

Base Apportionment Cuts Coupled With Workload–Reduction Provision. The budget includes a $400 million base reduction in Proposition 98 General Fund support for CCC apportionments (general–purpose monies), offset by an increase of $110 million in fee revenue. The budget includes a provision that permits community colleges to reduce the number of students they serve in 2011–12 in proportion to the net reduction in base apportionment funding ($290 million). The provision expresses the Legislature's intent that any resulting workload reductions be limited as much as possible to "courses and programs outside of those needed by students to achieve their basic skills, workforce training, or transfer goals."

Higher Student Fees to Mitigate Budget Cuts. The budget package increases enrollment fees from $26 per unit to $36 per unit beginning in the fall 2011 term. The budget assumes that these higher fees will generate $110 million in additional revenue for CCC, thereby mitigating the impact of reduced Proposition 98 General Fund support for apportionments.

Categorical–Program Flexibility Extended. As discussed in our 2009–10 California Spending Plan (page 34), the 2009–10 budget created a "flex item" so that, between 2009–10 and 2012–13, community colleges could transfer funds from about a dozen categorical programs to any other categorical spending purpose. The 2011–12 budget package extends this flexibility until the end of 2014–15.

Mandates. The budget provides $9.5 million in Proposition 98 monies for CCC mandates, and suspends 7 of CCC's 21 mandates. Two of these seven mandates were added in the 2011–12 budget (Student Records and Sexual Assault Response Procedures).

Trigger Cuts. As noted in the "Proposition 98" section, if projected 2011–12 state revenues fall short by at least $1 billion, CCC's apportionment funding would be reduced by an additional $30 million. In addition, enrollment fees would be increased from $36 per unit to $46 per unit beginning in January 2012, which would likely generate enough revenues to backfill the $30 million cut. If projected 2011–12 state revenues fall short by more than $2 billion, CCC apportionments would be further reduced by $72 million.

Capital Outlay. The 2011–12 budget package appropriates $48.6 million in general obligation bond funding for three continuing projects (at City College of San Francisco, College of the Canyons, and Orange Coast College).

California Postsecondary Education Commission (CPEC)

The Governor's May Revision proposed to reduce CPEC's General Fund support roughly by half, and eliminate the commission as of January 1, 2012. Most of CPEC's functions would disappear, with the exception of a federal teacher grant program that would be transferred from CPEC to CDE. The Legislature rejected the Governor's proposal, and restored full funding for CPEC. The Legislature also adopted supplemental report language directing LAO to recommend structures and duties for a statewide higher education coordinating body. The report is to be submitted to the Legislature by January 1, 2012.

The Governor vetoed all funding for CPEC, and in his veto message requested that the three segments and other higher education stakeholders explore alternatives for coordinating higher education.

California Student Aid Commission (CSAC)

The budget provides $1.5 billion for CSAC, including $1.4 billion in General Fund support, $62.3 million in one–time funds from the Student Loan Operating Fund (SLOF), and $15 million in federal funds for Cal Grants and other financial aid programs. This reflects an increase of about $145 million from the 2010–11 level, primarily to offset tuition increases at UC and CSU. However, given that UC and CSU raised tuition further after passage of the budget act, actual Cal Grant costs are likely to be at least $100 million higher than the amount appropriated for this purpose.

The budget act and related legislation make two significant changes to the operation of Cal Grants programs:

• Tighter Eligibility Criteria for Renewals. Previously, Cal Grant recipients only had to meet certain eligibility criteria when they first applied for a Cal Grant (and not when they renewed the grant in subsequent years). Changes enacted with the budget package now require Cal Grant recipients applying for renewals to meet several of those requirements. For example, a renewal applicant's family income and assets must fall below specified levels (see Figure 8). Applying these requirements to renewals will disqualify an estimated 12,920 recipients who would otherwise be eligible for awards, reducing Cal Grant expenditures by about $100 million. To mitigate the impact on students, CSAC will use the higher of the limits in place at the time of a student's initial award and those in place at the time of renewal.
• New Restrictions on Student Loan Default Rates. A second change enacted by the budget package removes some higher education institutions from eligibility to participate in Cal Grant programs. Specifically, institutions may not participate if a high proportion of their former students default on federal student loans. For 2011–12, the threshold is set at 24.6 percent of an institution's students defaulting within three years of loan repayment, as defined and calculated by the federal government. For subsequent years, the ceiling is 30 percent. These ceilings apply only to institutions with 40 percent or more of undergraduates borrowing federal student loans. For 2011–12, about 76 institutions are affected, and most of these are career and technical colleges. There is a limited exception for continuing students at institutions that become ineligible. These students may qualify for renewal awards reduced by 20 percent.

Federal Loan Program. In November 2010, the U.S. Department of Education transferred federal student loans guaranteed by CSAC (and serviced by its auxiliary, EdFund) to Education Credit Management Corporation (ECMC), ending California's role in administering federally guaranteed loans. As part of the transition, ECMC has entered into a two–year agreement to provide CSAC with technical and operational support previously offered by EdFund. In addition to providing some services, ECMC has also agreed to continue sharing proceeds from SLOF to offset Cal Grant costs. The Governor's budget assumed a $30 million General Fund offset from this source, and subsequent actions by the ECMC Board raised the available amount to $62.25 million. The SLOF contributions are expected to continue beyond the two–year service agreement, with available amounts to be determined annually by the ECMC Board.

Realignment

As part of the 2011–12 budget package, the Legislature made a number of changes to realign certain state program responsibilities and revenues to local governments (primarily counties). Figure 3 in "Chapter 1" identifies the budget–related bills including those related to the realignment package. In total, the realignment plan provides $6.3 billion in 2011–12 to local governments to fund various criminal justice, mental health, and social service programs. The plan adopted by the Legislature is largely similar to the one proposed by the Governor, as modified in the May Revision, with respect to the programs realigned and the amount of revenue provided to local governments. However, the adopted realignment package differs in two important respects from the administration's proposal. First, the Legislature's plan relies on a shift of existing state and local tax revenues rather than the extension of expiring tax rates as proposed by the Governor. Second, the adopted budget legislation does not include the Governor's proposal for a constitutional amendment to, among other things, make the funding allocations to local governments permanent and protect the state from potential mandate claims. We discuss the details of the adopted realignment package in more detail below.

Architecture of 2011 Realignment

2011–12 Expenditures

The realignment package includes $6.3 billion in 2011–12 for court security, corrections and public safety, mental health services, substance abuse treatment, child welfare programs, adult protective services, and CalWORKs. Figure 9 displays the amounts dedicated to each of the realigned programs in 2011–12.

Shift of Existing State and Local Revenues

Unlike the Governor's realignment proposal, the realignment package adopted by the Legislature does not extend the sales and vehicle license fee (VLF) tax rate increases that expired at the end of 2010–11. Instead, the budget reallocates $5.6 billion of state sales tax and state and local VLF revenues for purposes of realignment in 2011–12. Specifically, the Legislature approved the diversion of 1.0625 cents of the state's sales and use tax rate to counties. This is projected to generate $5.1 billion in 2011–12, growing to $6.4 billion in 2014–15 (see Figure 10,). In addition, the realignment plan redirects an estimated $453 million from the base 0.65 percent VLF rate for local law enforcement grant programs. Under prior law, these VLF revenues were allocated to the Department of Motor Vehicles (DMV) ($300 million) for administrative purposes and to cities and Orange County ($153 million) for general purposes. The budget increases the motor vehicle registration fee by $12 per automobile to offset the lost revenue to DMV. The budget also shifts $763 million on a one–time basis in 2011–12 from the Mental Health Services Fund (established with voter approval of Proposition 63 in November 2004) for support of the Early and Periodic Screening, Diagnosis, and Treatment (EPSDT) and Mental Health Managed Care programs.

Realignment Account Structure

The revenues provided for realignment are deposited into a new fund, the Local Revenue Fund 2011. The budget package creates 8 separate accounts and 12 subaccounts within this fund to pay for the realigned programs. One of the accounts, the Mental Health Account, is somewhat different than the other accounts because its funds support the CalWORKs program and interact with accounts created in 1991 under the state–local realignment plan adopted at that time. Another account created in the Local Revenue Fund 2011 is the Reserve Account, where revenues in excess of the amount projected for each account are deposited. The budget legislation requires revenue deposited into the Reserve Account to be used to reimburse counties for programs paid from the Foster Care, Drug Medi–Cal, and Adoption Assistance Program Subaccounts. In addition, for 2011–12, the budget assumes that about $1.2 billion of the funds deposited into the Local Revenue Fund 2011 will be used to reimburse the state for costs associated with incarcerating and supervising inmates and parolees who were convicted prior to the implementation of realignment.

The budget legislation establishes various formulas to determine how much revenue is deposited into each account and subaccount. Several of these accounts and subaccounts have annual caps on how much funding each can receive. The budget package limits the use of funds deposited into each account and subaccount to the specific programmatic purpose of the account or subaccount. The budget does not contain any provisions allowing cities or counties flexibility to shift funds among these programs. The budget legislation also contains some formulas and general direction to determine how the funding would be allocated among counties. The budget legislation does not specify program allocations among the various accounts and subaccounts, or among counties, for 2012–13 and beyond (except for the CalWORKs/mental health transfer which appears to be ongoing). Despite uncertainty surrounding these ongoing allocations, the revenues being deposited into the Local Revenue Fund 2011 for purposes of realignment are expected to be ongoing.

Legislative Intent for Future Actions. The budget package also includes legislative intent language that (1) new allocation formulas be developed for 2012–13 and subsequent fiscal years, and (2) sufficient protections be in place to provide ongoing funding and mandate protection for the state and local governments.

Most of State Fiscal Benefit From Proposition 98 Savings

The budget assumes that, by depositing the sales tax revenue into a special fund for use by local governments for realignment, these funds are not available for the Legislature to spend for education purposes and thus are not counted as state revenue for purposes of calculating the Proposition 98 minimum funding guarantee. As discussed more fully in our education section of this report, this action reduced the Proposition 98 minimum funding guarantee by $2.1 billion. The exclusion of these revenues, however, is contingent upon the approval of a ballot measure providing additional funding for K–12 school districts and community colleges. If no ballot measure is adopted satisfying these requirements, the funds would not be excluded from the guarantee moving forward and the state would need to repay K–14 education for the loss of $2.1 billion for the 2011–12 year.

In addition to the Proposition 98 savings, the realignment plan achieves state General Fund savings in two other ways. First, using VLF revenue to fund local law enforcement grant programs reduces the state's costs for these programs by $453 million. Second, the budget assumes about $86 million in savings to the state associated with corrections realignment. Offsetting these savings, however, is $34 million provided in the budget to support local government hiring, training, and other transition costs associated with implementing the corrections realignment in 2011–12.

Description of Realignment Changes

We describe each of the major programs included in the realignment package below.

Adult Offenders and Parolees

As part of the 2011–12 budget package, the Legislature shifted the responsibility for certain lower–level offenders, parole violators, and parolees from the state to the counties on a prospective basis effective October 1, 2011. Under the realignment plan, the shifted offenders who previously would have been sentenced to state prison will now serve their sentence in a county jail and/or under local community supervision. In addition, certain offenders released from prison will now be supervised in the community by county agencies (such as county probation) instead of by state parole agents. When locally supervised offenders violate the terms and conditions of their supervision, the courts, rather than the Board of Parole Hearings, will preside over revocation hearings to determine if they should be revoked to county jail. According to the administration, the above changes are projected to reduce the state inmate population by about 14,000 inmates in 2011–12 and nearly 40,000 inmates (roughly one–fourth of the total inmate population) upon full implementation in 2014–15. The state parolee population is projected to decline by about 25,000 parolees in 2011–12 and by 77,000 parolees (roughly three–fourths of the total parole population) in 2014–15. The budget assumes that the reduction in the inmate and parolee populations will result in state savings of about $453 million in 2011–12, growing to $1.5 billion upon full implementation.

The realignment plan assumes a total of $1.6 billion from the Local Revenue Fund 2011 to support the realignment of adult offenders and parolees in 2011. Of this total, $354 million will be transferred to the newly established Local Community Corrections Account to support the local incarceration and supervision of the realigned offenders. In addition, the plan estimates that about $13 million will be transferred into the District Attorney and Public Defender Account to support the involvement of district attorneys and public defenders in parole revocation proceedings. The funds in these two accounts will be distributed in 2011–12 to counties based on a formula that takes into account various factors, such as the proportion of the state prison population that is from a particular county. The realignment plan also assumes that the Local Revenue Fund 2011 will reimburse the state about $1.2 billion for costs that the state incurs in 2011–12 for lower–level offenders in state prison who were sentenced prior to October 1, 2011 (when the realignment is implemented).

Local Public Safety Grant Programs

Under the realignment plan, funding for various local public safety grant programs (such as the Citizens' Option for Public Safety Program, juvenile justice grant programs, and booking fees) will be shifted directly to local governments for the same purposes as specified in existing statutes.

Under the plan, a total of about $490 million will be transferred to the newly established Local Law Enforcement Services Account—an estimated $453 million from the redirection of existing VLF revenue and $37 million from the Local Revenue Fund 2011—to support the realigned public safety grant programs. For 2011–12, the funds in this account will be allocated to local governments by the State Controller's Office generally based on the level of funding received for each grant program in recent years. The realignment plan requires that, if there are insufficient revenues to fully fund this account, the Director of Finance shall allocate the funds necessary from the Local Revenue Fund 2011 to provide the full allocation.

Court Security

Current law generally requires trial courts to contract with their local sheriff's offices for court security. Under the realignment plan, the sheriffs would continue to be responsible for providing court security. However, funding to pay for the security will now be provided directly to the sheriffs rather than being appropriated in the annual state budget to the trial courts. Existing statutes related to court security (such as the requirement that each trial court negotiate a memorandum of understanding with the sheriff specifying the level of security to be provided) are unchanged.

The realignment plan estimates that $496 million from the Local Revenue Fund 2011 will be transferred to the newly established Trial Court Security Account for allocation to county sheriffs for the provision of court security. Under the terms of the realignment legislation, the Department of Finance (DOF) will determine how much money is allocated to each county sheriff for these purposes in 2011–12. According to DOF, the allocation of funds in 2011–12 will generally be determined based on the amount of state funding a given sheriff's office received in 2010–11 for court security.

Existing Juvenile Justice Realignment

Under recent statutory changes, only certain juvenile offenders who are violent, serious, or sex offenders may be committed to youth correctional facilities operated by the state. Counties are responsible for the housing and supervision of all other juvenile offenders, as well as for the community supervision of all offenders upon their release from state youth correctional facilities, including some who previously were state responsibility. Counties receive state funding from two grants to support these responsibilities—the Youthful Offender Block Grant Program and the Juvenile Reentry Grant. Under the realignment plan, funding for these grants will be shifted directly to counties for the same purposes as specified in existing statutes.

The realignment plan estimates that $97 million from the Local Revenue Fund 2011 will be transferred to the Juvenile Justice Account in support of the above grants—$93.4 million for the Youthful Offender Block Grant Program and $3.7 million for the Juvenile Reentry Grant. The allocation of these grants among the 58 counties is unchanged in 2011–12.

Mental Health Managed Care (MHMC)

County Mental Health Plans administer MHMC and are responsible for ensuring that Medi–Cal beneficiaries receive specialty mental health services. Under a federal waiver, specialty mental health services are "carved out" of the Medi–Cal program administered by the Department of Health Care Services (DHCS), which provides physical health care. County mental health plans generally have responsibility for authorization and payment of Medi–Cal covered psychiatric inpatient hospital services and outpatient specialty mental health services. In November 2004, the state's voters approved Proposition 63, an initiative that allocated additional state revenues generated through a surcharge on income taxpayers earning more than $1 million annually for various specified community mental health programs.

Under realignment, in 2011–12 about $184 million of Proposition 63 (Mental Health Services Act) funds will be redirected and used in lieu of General Fund on a one–time basis to support MHMC. Proposition 63 revenues are not deposited into the Local Revenue Fund 2011. Although the final budget package did not specify ongoing realignment allocations, the administration's plan was for realignment revenues to substitute for the Proposition 63 funds on an ongoing basis beginning in 2012–13.

Early and Periodic Screening, Diagnosis, and Treatment

The EPSDT is a federally mandated program that requires the state to provide Medi–Cal beneficiaries under age 21 with any physical and mental health services that are deemed medically necessary to correct or ameliorate a defect, physical or mental illness, including services not otherwise included in the state's Medicaid plan. Periodic health screening, vision, dental, and hearing services are provided under EPSDT. So are some mental health services, including crisis intervention and medication monitoring. County mental health plans generally have responsibility for authorization and payment of mental health services provided through EPSDT.

Under realignment, in 2011–12, about $580 million of Proposition 63 funds will be redirected and used in lieu of General Fund on a one–time basis to support EPSDT. Proposition 63 funds are not deposited into the Local Revenue Fund 2011. Although the final budget package did not specify ongoing realignment allocations, the administration's plan was for realignment revenues to substitute for the Proposition 63 funds on an ongoing basis beginning in 2012–13.

Drug and Alcohol Programs—Substance Abuse Treatment

The budget plan realigns several substance abuse treatment programs that were previously funded through the Department of Alcohol and Drug Programs (DADP). While DADP in the past provided funding and state oversight of these programs, the provision of services has long been administered primarily at the county level. The major substance abuse treatment programs that have been realigned are:

• Regular and Perinatal Drug Medi–Cal. The Drug Medi–Cal program provides drug and alcohol–related treatment services to Medi–Cal beneficiaries. These include outpatient drug free services, narcotic replacement therapy, day care rehabilitative services, and residential services for pregnant and parenting women.
• Regular and Perinatal Non Drug Medi–Cal. The Non Drug Medi–Cal program provides treatment services generally to individuals who do not qualify for Medi–Cal. This includes the Women and Children's Residential Treatment Services Program.
• Drug Courts. Drug courts link supervision and treatment of drug users with ongoing judicial monitoring and oversight.

The budget plan realigns a total of about $184 million of DADP programs (Regular and Perinatal Drug Medi–Cal, $131 million; Regular and Perinatal Non Drug–Medi–Cal, $26 million; and Drug Courts, $27 million) to the counties. Under the realignment plan, funding for these programs are deposited into three separate subaccounts within the newly created Health and Human Services Account of the Local Revenue Fund 2011. Under realignment, some programs would be supported with a combination of realignment funds and federal matching funds, while other programs would be supported mainly by realignment funds.

Foster Care and Child Welfare Services (CWS)

California's child welfare system was created to prevent, identify, and respond to allegations of child abuse and neglect. Under prior law, the state and counties shared the nonfederal costs of the child welfare system. Pursuant to the realignment legislation of 2011, counties will now bear 100 percent of the costs for nearly the entire child welfare system, including CWS, Foster Care, Adoptions, Adoptions Assistance, and Child Abuse Prevention. (The state will continue to oversee the CWS Case Management System, social worker training, state–tribal agreements, and some adoptions services.) The realignment legislation does not change the major programmatic functions of the child welfare system. Counties, which were already responsible for ensuring the safety of children within their communities, will continue to make the decision of whether or not to remove a child from a home due to allegations of abuse or neglect. Meanwhile, the state will continue to oversee the child welfare system.

The budget legislation creates five child welfare system program subaccounts within the Health and Human Services Account of the Local Revenue Fund 2011. Under this arrangement, total funding for the child welfare system is estimated to be about $1.6 billion in 2011–12. The allocations for each subaccount are designed to be equal to what the programs would have received in General Fund support absent realignment. Funding in the CWS subaccount will be distributed among counties based on the 2010–11 allocation structure. Funding in the other subaccounts will be distributed to counties based on an allocation provided by DOF.

Adult Protective Services (APS)

County APS agencies investigate reports of abuse and neglect of elders and dependent adults who live in private settings. Upon investigating these reports, APS social workers may arrange for services such as counseling, money management, or out–of–home placement for the abused or neglected adult. Although there is no federal requirement to operate an APS program, state law currently requires that APS be available in all 58 counties.

The 2011–12 realignment legislation establishes the APS Subaccount within the Health and Human Services Account for the support of the APS program. The APS Subaccount will be allocated 3 percent of the funds available in the Health and Human Services Account, which is estimated to be $55 million in 2011–12. The funds from the APS Subaccount will be allocated to the local APS programs, to the extent possible, in the same way they were in 2010–11.

CalWORKs/Mental Health Transfer

The CalWORKs program provides cash grants and welfare–to–work services (such as child care, training, or job readiness) to families whose incomes are insufficient to meet their basic needs. The program is administered by the counties, but the state and federal governments provide the vast majority of funding. Although each county must provide grants and services consistent with state law, counties have significant control over how services are provided and when to sanction clients for noncompliance. With respect to funding, counties have a fixed maintenance–of–effort level for administration and welfare–to–work services, and a 2.5 percent share of grant costs. The 2011 realignment legislation provides counties with revenue from the Local Revenue Fund 2011 for mental health programs, which then frees up existing county mental health funding to pay for a higher share of CalWORKs grant costs. This process is described in more detail below.

In 1991, the Legislature adopted realignment legislation that, among other changes, established several local funding streams for various mental health and other programs. This included creation of a mental health subaccount and a social services subaccount. The 1991 social services subaccount is available to fund several programs including CalWORKs. The 2011 realignment legislation provides $1,084 million in funding for a new Mental Health Account in the Local Revenue Fund 2011. From this account, the 2011 legislation allocates to each county new mental health funding equal to what it would have received in its mental health subaccount under the 1991 realignment formula. Because the new funding is now available to pay mental health obligations, the 2011 legislation shifts the preexisting 1991 mental health funding to the social services subaccount with no detrimental effect on support for county mental health programs. The 2011 realignment legislation also increases each county's individual share of CalWORKs grant costs so that it exactly equals the amount of its new mental health realignment funds. Essentially, the additional mental health funding for 2011 pays for an increased county share of CalWORKs grants. On average this new county share for CalWORKs grants will be about 34 percent, but the exact amount will vary by county and be directly tied to what the county would have received under the 1991 formula for distribution of funding for mental health services. The amounts provided to counties will be recalculated each year to equal whatever they would otherwise have been under the 1991 formula.

Health

The 2011–12 spending plan provides $19.7 billion from the General Fund for health programs. This is an increase of $2.2 billion, or 12.5 percent, compared to the revised prior–year spending level, as shown in Figure 11. The net increase largely reflects the following: (1) increases in caseload and utilization of services, (2) the expiration of federal economic stimulus funds used to temporarily offset state General Fund costs, (3) the adoption of significant health program reductions and cost–containment measures, and (4) shifts in the funding sources used to support various health programs. The major program–specific changes and cost–containment measures are summarized in Figure 12 (see next page) and discussed in more detail below.

Expiration of Enhanced Federal Funding. The ARRA, the 2009 federal economic stimulus law, and subsequent federal legislation extended fiscal relief to the states. California benefited from an enhanced federal medical assistance percentage (FMAP), which is the federal share of Medicaid costs, from October 2008 through June 2011. Normally the state pays 50 percent of costs for most Medi–Cal services and the federal government pays the balance. The ARRA temporarily increased the federal matching share to 61.59 percent. Subsequent federal legislation extended the enhanced FMAP for an additional six months, but reduced the level of federal funding available during this phase–out period in comparison to ARRA. The budget adjusts for the loss of about $3.8 billion in federal funding due to the expiration of the enhanced FMAP that the state received in 2010–11, thereby increasing state General Fund costs in the budget year. While the expiration of enhanced federal funding mainly affects General Fund expenditure levels for Medi–Cal benefits provided by DHCS, it also affects components of the Medi–Cal Program administered by other state departments that administer health programs.

Federal Waiver Helps State Achieve Savings. The budget assumes $400 million in General Fund savings related to Medi–Cal's 1115 demonstration waiver renewal. Under the waiver, the state may claim up to $400 million in federal funds to offset costs in designated state health programs that are generally supported only with state funds. The waiver savings are reflected in the budget as follows: (1) $219 million in Medi–Cal local assistance, (2) $74 million in AIDS Drug Assistance Program (ADAP) savings, and (3) $106 million in savings for DHCS Family Health Programs.

Administration States Intent to Eliminate Departments. As part of its 2011–12 budget proposal, the administration stated its intent to eventually eliminate the Department of Mental Health (DMH) and DADP. Responsibility for the programs administered by DMH and DADP would be transferred to other departments, agencies, and government entities. The administration indicates that as part of its 2012–13 budget proposal, it will submit a detailed plan to eliminate these two departments.

Department of Health Care Services (Medi–Cal)

The spending plan provides $14.7 billion from the General Fund for Medi–Cal local assistance expenditures administered by DHCS. This is an increase of almost $2.3 billion, or 18 percent, in General Fund support for Medi–Cal local assistance compared to the revised prior–year spending level. In addition to growth in caseload and utilization, several major factors contributed to this net increase:

• Expiration of FMAP. General Fund support was needed to offset the loss of $3.2 billion due to the expiration of the enhanced FMAP.
• Acceleration of Provider Payments. The administration took advantage of the enhanced FMAP before it expired by making payments to Medi–Cal providers and some managed care plans earlier than previously scheduled to achieve General Fund savings of $144 million. The accelerated payments resulted in a prior year cost of $691 million and reduced costs of $835 million in 2011–12.
• Hospital Quality Assurance Fee. The revised prior–year spending level reflected an estimated $770 million in hospital fee revenue from the imposition of a quality insurance fee used to offset General Fund costs. As we discuss below, pending legislation would again impose a quality assurance fee on hospitals that could generate an estimated $320 million in General Fund relief in 2011–12.
• Other Changes. The spending plan includes program reductions, fund shifts, and cost–containment measures that reduce program costs as shown in Figure 12.

We discuss the most significant spending changes that were adopted in the Medi–Cal Program budget in more detail below.

Provider Payment Reductions of Up to 10 Percent. The budget assumes $623 million in General Fund savings from reducing Medi–Cal provider payments by up to 10 percent for physicians, pharmacies, clinics, medical transportation, home health, family health programs, and other providers. The budget authorizes the director of DHCS to adjust these payment reductions based on studies of whether such reductions meet certain federal requirements. Implementation of this action requires federal approval.

Mandatory Copayments. The budget assumes $511 million in General Fund savings by imposing mandatory copayments on physician and clinic visits ($5), dental visits ($5), prescriptions ($3 for preferred drugs, $5 for non–preferred drugs), emergency and nonemergency use of emergency rooms ($50), and hospital inpatient visits ($100 per day, $200 maximum per admission). The copayments apply to all Medi–Cal enrollees and providers may deny the service if the enrollee does not make the copayment. Implementation of this action requires federal approval.

Unallocated Reduction. The spending plan includes a $345 million unallocated reduction to the Medi–Cal Program. A large portion of the unallocated savings may be achieved through the passage of pending legislation discussed above which would impose a quality assurance fee on hospitals potentially generating $320 million in General Fund relief.

Elimination of Adult Day Health Care Benefit. The spending plan assumes elimination of Adult Day Health Care (ADHC) as an optional Medi–Cal benefit for savings of about $170 million to the General Fund. The spending plan also provides up to $85 million from the General Fund to assist ADHC beneficiaries in transitioning to other services in order to minimize the risk of institutionalization. However, the Governor vetoed legislation that would have created a new type of ADHC program, to be called the Keeping Adults Free from Institutions Program, to provide services to eligible Medi–Cal beneficiaries who are at high risk of institutionalization. The Governor instead proposed to continue efforts to transition beneficiaries who previously received ADHC into other existing home and community–based services.

Fund Shifts and One–Time Funding Sources. The budget assumes one–time fund shifts and other one–time funding sources totaling $128 million to offset General Fund spending in the Medi–Cal Program. These funds include: (1) a $45.2 million shift from the Inpatient Payment Adjustment Fund, (2) a $32.7 million shift from Private Hospital Supplemental Fund, and (3) $50.1 million from a court settlement with Quest Diagnostics Inc. to reflect the repayment of alleged overcharges for testing services. The budget does not assume that a shift of $1 billion in Proposition 10 funds approved in a March 2011 budget action will be used to support Medi–Cal as had initially been proposed.

Managed Care Drug Rebates. The budget assumes savings of a benefit of $64 million to the General Fund from new authority to collect rebates from drug manufacturers for medications provided through Medi–Cal managed care plans.

"Soft Cap" on Physician and Clinic Visits. The budget assumes $41 million in General Fund savings through a soft cap on physician and clinic visits for adults. This utilization limit of seven annual visits can be waived through a physician certification that additional visits are medically necessary.

Other Utilization Limits and Benefit Eliminations. The budget assumes about $16 million in General Fund savings by limiting or eliminating some other Medi–Cal benefits. These changes include: (1) limiting enteral nutrition to tube feeding only for savings of almost $14 million, (2) eliminating Medi–Cal coverage for over–the–counter cold and cough products for savings of about $2 million, and (3) limiting annual hearing aid expenditures to $1,510 per person for savings of $229,000.

State Share of Intergovernmental Transfers. Counties and district hospitals may voluntarily transfer funds to DHCS under what are known as Intergovernmental Transfers (IGTs) for the purpose of providing increases in the rates paid to Medi–Cal managed care plans. The monies that counties and district hospitals transfer to the state draw down matching federal Medicaid monies, thus generating additional funding for managed care plans that ultimately is used to increase compensation for certain county– and district hospital–operated providers. Under the budget plan, entities that choose to submit these IGTs will pay a processing fee to the state equal to 20 percent of the IGTs. The estimated $34 million in fee revenues generated from this proposal will be used to offset General Fund costs in Medi–Cal.

Department of Mental Health

The budget plan provides about $4.6 billion from all fund sources for DMH programs. This is a decrease of about $310 million, or 6.3 percent, compared to the revised prior–year spending level. Between 2010–11 and 2011–12, General Fund spending will decrease from about $1.8 billion to $1.3 billion, or about 29 percent.

This year–over–year decrease in General Fund support is mainly due to the one–time use of $862 million in Proposition 63 (Mental Health Services Act) funds in lieu of General Fund monies to support three community mental health programs—EPSDT, MHMC, and so–called "AB 3632" mental health care for special education students. Another major factor affecting net General Fund expenditures for DMH programs was the expiration of the enhanced FMAP provided under ARRA and subsequent federal legislation which provided about $167 million in General Fund relief to mental health programs in 2010–11. We discuss below the most significant spending changes included in the DMH budget.

Administration States Intent to Eliminate DMH and Create State Hospitals Department. In presenting its budget plan, the administration stated its intent to eventually eliminate DMH based on its rationale that this would achieve administrative efficiencies and provide more focused leadership for behavioral health services. Part of the administration's plan is to create a new Department of State Hospitals, again based on its rationale that this would improve fiscal accountability, create safer hospitals, and achieve other benefits. The administration indicated it will provide its plan to accomplish these objectives along with its 2012–13 budget proposal.

Shift of Some Mental Health Programs to DHCS. Consistent with the administration's plan to eventually eliminate DMH, the budget plan transfers administrative responsibility for EPSDT and MHMC to DHCS by June 30, 2012. The DOF must notify the Legislature regarding various aspects of the shifts, including the number and classification of the positions to be transferred and any potential fiscal effects on the programs from which resources are being transferred. Furthermore, the administration is required to provide a transition plan to the Legislature by October 1, 2011. We note that EPSDT and MHMC are included in realignment. We discuss the details of realignment elsewhere in this report.

Proposition 63 Funds Used to Support Services for Special Education Students. The budget plan uses $99 million of Proposition 63 funds on a one–time basis to pay for mental health services for special education students. In the past, these services were supported in part with a General Fund appropriation in the DMH budget. Responsibility for providing these services is being shifted from the counties to the school districts as part of realignment. We discuss this shift in more detail earlier in this chapter.

Department of Developmental Services (DDS)

The 2011–12 budget provides $4.6 billion in total funds for DDS programs. This is a decrease of $113 million, or 2.3 percent, compared to the revised prior–year spending level. Between 2010–11 and 2011–12, General Fund spending will increase from about $2.5 billion to $2.6 billion, or about 7 percent. This net year–over–year increase in General Fund support is partly due to increases in caseload and utilization of services. Another major factor affecting net General Fund expenditures for DDS programs was the expiration of the enhanced FMAP provided under ARRA and subsequent legislation, which had provided about $386 million in fiscal relief in 2010–11. Below, we discuss the most significant spending changes that were adopted in the DDS budget.

Measures to Contain Costs and Improve Transparency and Accountability. The budget plan achieves $284 million in savings through a combination of measures to contain costs and improve transparency and accountability. For example, costs will be contained by implementing an annual family program fee for families with incomes above 400 percent of the federal poverty level (about $89,000 for a family of four in 2011). The budget plan also reflects about $110 million in savings from various measures to improve the transparency and accountability of the community services program.

Extension of Regional Center Provider Payment Reduction. The budget plan extends a 4.25 percent provider payment reduction that has been imposed in recent years in order to achieve $92 million in savings in 2011–12.

Assumption of Additional Federal Funds. The budget plan assumes $78 million in additional federal funds resulting from the following initiatives: (1) modifications to the state's Home and Community–Based Services program of community services for persons with disabilities ($60 million); (2) certification of Porterville Developmental Center to obtain federal Medicaid reimbursement for care provided to certain patients ($13 million), and (3) an increase in Money Follows the Person grants intended to help promote the shift of disabled persons from institutions to the community ($5 million).

Reduction in Funding for Developmental Centers (DCs). The budget plan includes several reductions to the DCs for a total of $28 million in savings. These reductions reflect the consolidation of residences and programs, reductions in funding for operations, and the elimination of funding for some DC staff.

Trigger Reductions. As noted earlier, the final 2011–12 budget included several reductions that would only be triggered if state General Fund revenue estimates are later determined to be too high. Effective January 2012, these trigger reductions include up to $100 million in unspecified savings in services for persons with developmental disabilities.

Department of Public Health (DPH)

The budget provides $3.5 billion from all fund sources for DPH programs. This is an increase of $188 million or about 5.6 percent compared to the revised prior–year spending level. Of this total, the spending plan provides $226 million from the General Fund for DPH, an increase of $40 million or 22 percent. This year–over–year increase is largely the result of increased General Fund support for ADAP.

Various Savings Measures. The budget plan includes several reductions to achieve a total of $8.3 million in General Fund savings in various public health programs. Funding reductions to Licensing and Certification, the Laboratory Field Division, the County Health Services Section, and operating expenses and equipment achieve combined savings of $4.5 million. Federal funds held in reserve for maternal and child health programs were redirected to offset $1.7 million in General Fund costs, and $1 million of General Fund support for a contract to support Valley Fever research was eliminated. The budget plan also reduces funding for the California Health Information Survey by $572,000 and for health care surge standby costs by $506,000.

Healthy Families Program (HFP)

The budget plan provides $286 million from the General Fund for HFP, which is administered by MRMIB. This is a General Fund increase of $160 million, or 127 percent, compared to the revised prior–year spending level. The major factors contributing to the year–over–year increase in General Fund support are: (1) an $81 million reduction in contributions from the First 5 California Children and Families Commission used to offset General Fund costs, (2) a $64 million reduction in the availability of revenues from a tax imposed on managed care organizations (MCOs) used to offset General Fund costs in 2010–11, and (3) increased costs of $34 million associated with implementing a new type of payment system for Federally Qualified Health Centers and Rural Health Centers that serve program beneficiaries. The spending plan also reflects several measures to reduce General Fund costs in HFP below:

• Increase in Monthly Premiums Paid by Families ($22 Million Savings). The amount of the monthly premium increases vary depending on family income levels.
• Increase in Copayments ($6 Million). The annual copayments for each family would be limited, as under prior program rules, to $250. The copayments established for HFP generally parallel those adopted in the budget plan for the Medi–Cal Program for emergency department visits and inpatient hospital stays.
• Reduction in the Scope of Vision Benefit ($3 Million). The budget plan eliminates support for the vision benefit provided to children enrolled in HFP, in lieu of an administration proposal to entirely eliminate the vision benefit.

Unallocated Reduction. The spending plan includes a $103 million unallocated reduction to HFP. A proposed extension of the MCO tax described above, still under consideration by the Legislature, would provide an equivalent amount of money for the support of HFP in 2011–12.

Shift of Programs From MRMIB to DHCS. The budget plan authorizes DOF to transfer expenditure authority from MRMIB to DHCS to consolidate administrative functions for the operation of HFP and Access for Infants and Mothers Program. The DOF must notify the Legislature regarding various aspects of the shift, including the number and classification of the positions to be transferred and any potential fiscal effects on the programs from which resources are being transferred. The administration is required to provide a plan for the transfer of state administrative functions no later than December 1, 2011.

Department of Alcohol and Drug Programs

The budget provides $631 million from all fund sources for DADP programs. This is an increase of $25 million, or about 4 percent, compared to the revised prior–year spending level. Of this total, the budget package provides $222 million from the General Fund for DADP, an increase of $33 million, or 18 percent. The General Fund increase is due, in part, to the expiration of the enhanced FMAP provided under ARRA, which provided about $17 million in fiscal relief in 2010–11. The General Fund spending level for DADP identified above for 2011–12 does not take into account the realignment of most state–supported substance abuse treatment programs to the counties. Doing so would have the effect of reducing the 2011–12 General Fund spending level by $184 million. (The realignment package is discussed in more detail earlier in this chapter.) As part of the budget plan, the administration stated its intent to eventually eliminate DADP, citing what it views as a potential for greater administrative efficiencies and more focused leadership for behavioral health services.

Drug Medi–Cal Program Will Shift to DHCS. Consistent with the administration's plan to eventually eliminate DADP, administrative responsibility for the Drug Medi–Cal Program will be shifted to DHCS in 2011–12. The DOF must notify the Legislature regarding various aspects of the shift. Furthermore, the administration is required to provide a transition plan to the Legislature by October 1, 2011. We note that Drug Medi–Cal and some other programs administered by DADP are included in the realignment.

California Medical Assistance Commission (CMAC)

The budget plan requires CMAC to be dissolved after June 30, 2012. All of CMAC's powers, duties, and responsibilities would be transferred to the Director of DHCS along with CMAC executive and staff positions.

Social Services

Overview of Total Spending Excluding Realignment. General Fund support for social services programs in 2011–12 totals $9.1 billion, an increase of about $80 million, or 0.9 percent, compared to the revised prior–year level. This modest increase is due to higher costs in county administration and automation and the child welfare system, partially offset by reductions in Supplemental Security Income/State Supplementary Program (SSI/SSP) grants. Figure 13 shows the change in General Fund spending in each major social services program and department, excluding the impact of realignment.

The Impact of Social Services Realignment on General Fund Spending. Budget legislation realigns 100 percent of most child welfare system costs, 100 percent of APS costs and about 34 percent of CalWORKs costs to counties. Under this realignment, General Fund support for these programs will be replaced by 2011 realignment special fund spending. After accounting for realignment, General Fund spending for social services programs in 2011–12 is reduced by about $2.7 billion, almost 30 percent below the revised spending level for 2010–11. The 2011 realignment plan is discussed in more detail earlier in this chapter.

Summary of Major Changes. Figure 14 shows the major General Fund changes adopted by the Legislature for social services programs. Most of the budget reductions were in the CalWORKs, In–Home Supportive Services (IHSS), and SSI/SSP programs. Absent the changes shown in the figure, total General Fund spending for social services programs in 2011–12 would have been almost $1.5 billion higher. Below, we discuss the major changes in each program area.

CalWORKs

The budget provides $2.1 billion for the CalWORKs program in 2011–12, which is unchanged from the revised level of spending in the prior year. This amount does not include the impact of the 2011 realignment legislation, which shifts about $1.1 billion in CalWORKs grant costs to the counties. Absent the major policy changes described below, CalWORKs spending would have increased by over $800 million.

Extension of County Block Grant Reduction and Exemptions for One Year. For 2009–10 and 2010–11, the Legislature reduced the county block grants for welfare–to–work services and child care by approximately $375 million each year. These reductions were accompanied by additional exemptions of CalWORKs recipients from work participation requirements which allowed counties to manage the reduction by not providing services to the exempted families. The budget extends the block grant reduction and the exemptions for one additional year. After accounting for certain grant costs associated with the exemptions, this extension results in one–time savings of almost $370 million.

Eight Percent Grant Reduction. Effective July 1, 2011, budget legislation reduces maximum monthly grants by 8 percent, resulting in ongoing annual General Fund savings of about $314 million. Figure 15 shows the maximum monthly grant and CalFresh (formerly known as Food Stamps) benefits for a family of three in both high– and low–cost counties. As the figure shows, the net decrease in total monthly benefits is about $40. Recipients in high–cost counties will receive total benefits equal to 72 percent of the federal poverty guideline. For low–cost counties, the total benefits are at 71 percent of the guideline.

Reduced Time Limit for Aided Adults. Budget legislation reduces from 60 to 48 the number of months that an adult may receive cash benefits. Although adults will be removed from the calculation of the family's grant, children will continue to receive aid in a program informally known as the "safety net." The shorter time limit results in combined grant and county block grant savings of $103 million each year. Budget legislation also repealed prior laws which would have instituted shorter time limits and deeper sanctions in July 2011. This repeal results in foregone savings of about $135 million.

Reduction in Earned Income Disregard. Under prior law, California "disregarded" (did not count) the first $225 of monthly income and 50 percent of each dollar earned beyond $225 when calculating a family's monthly grant. This policy provides a work incentive for families. Budget legislation modifies the grant calculation so that only the first $112 of earned income and 50 percent of each dollar earned above that amount will be disregarded. This change in the disregard policy results in ongoing savings of about $83 million annually.

One–Year Suspension of Cal–Learn Program. The Cal–Learn program provides intensive case management to about 12,000 teen parents who remain in school. Depending on school performance, the teens may earn bonuses and sanctions. Budget legislation suspends the case management component of the program for one year, resulting in General Fund savings of $44 million.

Reduction in Child Care Reimbursements. Under prior law, the state would reimburse license–exempt child care providers up to 80 percent of the regional market rate (RMR) ceiling. Effective July 1, 2011, the maximum reimbursement rate is reduced to 60 percent of the RMR. This results in CalWORKs child care savings of $31 million and additional savings within CDE's child care budget.

Other Reductions. The budget eliminated $20 million provided to DPH for the Community Challenge Grant project. This program aimed to reduce adolescent and unwed pregnancies while encouraging father–child involvement. The budget also reduced funding for substance abuse/mental health treatment and welfare automation by a total of $10 million.

In–Home Supportive Services

The 2011–12 budget provides about $1.4 billion from the General Fund for support of the IHSS program. This represents an increase of 2.8 percent for the program in 2011–12 over the revised prior–year level of spending. Funding for IHSS has experienced relatively slower growth than in the past due to reductions in the program. Below, we describe the major changes included in the 2011–12 budget for IHSS.

Community First Choice Option. The 2011–12 budget assumes that the state will qualify for additional federal funding available to states under the federal Affordable Care Act, also known as the federal health care reform legislation. This additional federal funding would be used to offset the General Fund costs for IHSS. Specifically, if California meets federal regulations still under development, the Community First Choice option could increase the federal share of costs of the IHSS program by 6 percentage points. (Until now, the federal government has generally paid 50 percent of program costs.) It is estimated that implementing this option would save $128 million in the budget year. Future savings would depend on the overall spending in the program and the extent to which California can draw down these new federal funds.

Elimination of IHSS for Recipients Without a Health Certificate. Effective August 2011, the budget eliminates IHSS services for recipients lacking certification that indicates that, without IHSS, they would be at risk of out–of–home placement. The certificate must be signed by a licensed health care professional such as a physician, physician assistant, or public health nurse. The budget assumes that 10 percent of current and future recipients will not obtain the health certificate, and will therefore lose IHSS eligibility. After accounting for administrative implementation costs, this eligibility change is estimated to save $67 million in the budget year and over $120 million when fully implemented.

Medication Compliance and Budget Cut Trigger. As part of the 2011–12 budget, the Legislature implemented a medication dispensing pilot program. By providing automated medication dispensing machines, the program is intended to improve medication compliance for Medicaid recipients who are at high risk of nursing home placement, hospital admission, and emergency room usage. Based on anticipated improvement in medication compliance, the budget plan assumes that the state will avoid $140 million in health care costs at skilled nursing facilities, hospitals, and emergency rooms in 2011–12. Since the savings are expected to reduce health care costs, they would occur in the Medi–Cal budget rather than the Department of Social Services (DSS) budget.

Beginning October 1, 2011, budget legislation requires DHCS to provide quarterly reports to DOF on the implementation of these activities. If the DOF determines that the medication pilot project will not achieve $140 million in annual savings, it must notify the Legislature of its conclusion by April 10, 2012. The Legislature then has until July 1, 2012 to enact legislation to modify the pilot project or to implement other options to achieve the ongoing savings beginning in 2012–13. If, after July 1, 2012, the DOF determines that the Legislature's additional actions will still not achieve $140 million in savings, budget legislation authorizes an across–the–board reduction in IHSS hours for 2012–13 sufficient to ensure that the savings, coupled with any savings from the pilot project, reach $140 million. We note that the across–the–board reduction has certain exemptions and processes in place for hour restorations for recipients who find that the reduction will put them at risk of out–of–home placement.

Slower–Than–Anticipated Caseload Growth. The budget reflects estimated savings of $54 million in 2011–12 based on more recent data which show lower than estimated caseload growth.

Funding for Public Authorities and County Administration. The 2011–12 budget includes $7.1 million in funding to hold county and public authority administrative allocations to the levels provided as of March 2011. Absent this legislative action, funding for counties and public authorities would have declined by an equivalent amount. Additionally, the Legislature adopted uncodified budget legislation requiring the department to work with the public authorities to develop a new rate–setting methodology for public authorities.

Trigger Reductions. As noted earlier, the final 2011–12 budget included several reductions that would only be triggered if certain revenue estimates are later determined to be incorrect. Effective January 2012, these trigger reductions include (1) up to $100 million in savings from a 20 percent across–the–board reduction to IHSS hours and (2) the elimination of up to $10 million in funding for local antifraud activities. Similar to the medication compliance across–the–board reduction, budget legislation allows for certain exemptions and processes for hour restorations if recipients find that the across–the–board reduction puts them at risk of out–of–home placement.

Supplemental Security Income/State Supplementary Program

The budget provides $2.8 billion from the General Fund for SSI/SSP. This is an overall decrease of $109 million, or 4 percent, in funding compared to the revised 2010–11 spending level. This decrease is primarily due to grant reductions for individuals receiving SSI/SSP. These savings are partially offset by an increase in the program caseload.

Grant Reduction. Effective July 2011, the budget reduces SSI/SSP grants for individuals to the minimum amount allowable under federal law. The SSI/SSP grants for couples were reduced to the federal minimum as part of the 2009–10 Budget Act. The savings from this new reduction are estimated to be $183.4 million in 2011–12. As seen in Figure 16, this action reduces maximum monthly grants for individuals by $15 (1.7 percent).

Foster Care and Child Welfare Services

The budget includes about $1.6 billion from the General Fund for children's programs, an increase of 5.3 percent from revised 2010–11 spending levels. This increase is primarily due to backfilling for the phase–out of federal ARRA funds, a technical shift of certain costs from CalWORKs to Foster Care, and a rate increase (described below). These budget totals do not reflect the impact of realigning 100 percent of most child welfare costs to the counties. The realignment proposal is discussed in more detail earlier in this chapter.

Court–Ordered Foster Family Home (FFH) Rate Increase. In May 2011, the U.S. District Court ordered DSS to immediately increase FFH rates based on a new rate methodology developed by DSS at the direction of the court. The new methodology results in an average rate increase of 31 percent for current FFH cases and for future cases in the Adoption Assistance Program (AAP), Kinship Guardianship Assistance Payment (Kin–GAP), federal Kin–GAP, and Non–Related Legal Guardian programs. The court also ordered that rates be increased each year in accordance with the California Necessities Index (CNI). The 2011–12 budget reflects all of the above changes, including a 1.92 percent CNI COLA for all current and future cases effective July 1, 2011. The General Fund cost of these changes is $17 million. Figure 17 displays the new FFH rates implemented in May and the 2011–12 rates, including the CNI COLA.

Repeal of AB 3632 Mandate for Seriously Emotionally Disturbed (SED) Children. Budget legislation repeals the mandate requiring DSS and county welfare departments to provide board and care for so–called AB 3632 SED children. Local school districts are instead responsible for their out–of–home placement. This change results in a decrease of $68 million in DSS board and care and administration costs, with a comparable cost increase in Proposition 98 funding. The education section of this report provides a further discussion of these actions.

County Welfare Automation Projects

Suspension of Child Welfare Services Project. The Child Welfare Services/Case Management System Web (CWS/Web) project would build a modern, web–based system to replace the current system, which is based on outdated technology and does not fully comply with federal system requirements. Project staff planned to select a vendor and begin development work by late 2012–13 at a cost of about $70 million (all funds) annually for several years. Because the federal government is revising its requirements for such systems and escalating project costs, the Legislature suspended development of the CWS/Web project and canceled the current procurement. General Fund support for the project in the 2011–12 was reduced by $3 million, leaving $1 million for shutdown activities. In addition, trailer bill language directs DSSand the Office of Systems Integration, after consulting with stakeholders, to report by January 10, 2012 to the Legislature on (1) the current system's ability to support CWS practice, (2) the best approach to address missing functionality in the system, and (3) any next steps for implementing this approach, among other issues.

Los Angeles Project Delay. The Los Angeles Eligibility, Automated Determination, Evaluation and Reporting (LEADER) replacement system is one of three county–led consortia that make up the statewide automated welfare system. The LEADER system is nearing the end of its useful life and procurement of a replacement system has been under way for several years. The consortium recently selected a vendor to build the new system at an estimated total cost of $485 million over the next four years. The administration proposed to indefinitely suspend the replacement project due to its high cost and indications that the federal government would not participate in funding its development until a long–term strategic plan for its three automated welfare systems was submitted and approved. Rather than indefinitely suspend development, the Legislature delayed the replacement project and reduced General Fund support by $14 million in 2010–11 and $13 million in 2011–12.

Department of Child Support Services

Suspension of County Share of Collections. Typically, when Local Child Support Agencies collect child support on behalf of families receiving CalWORKs, the county retains a portion (2.5 percent) of the collections. Most counties use these funds for the support of their CalWORKs programs. The 2011–12 budget package suspends the county share of collections for one year, which results in an increase in General Fund revenue of about $24 million in the budget year.

Department of Aging

The budget provides $33 million from the General Fund for the Department of Aging, a l percent decrease in funding compared to the revised 2010–11 funding level. Savings from a reduction in the Multipurpose Senior Services Program are largely offset by expiration of federal ARRA funding, which had previously been used to offset General Fund costs.

Reduction for Multipurpose Senior Services Program. In January, the Governor proposed the elimination of the Multipurpose Senior Services Program (MSSP). The Legislature instead reduced General Fund support for MSSP by $2.5 million (about 13 percent) in 2011–12. Additionally, the Legislature adopted budget bill language requiring the Department of Aging to work with the federal government to reduce MSSP administration costs to help limit reductions in the number of recipients served by the program.

California Children and Families Commission

Fund Sweep Not Reflected in Budget. Chapter 4, Statutes of 2011 (AB 99, Committee on Budget), redirected $1 billion in funding from the California Children and Families Commission—also known as the First 5 Commission, originally established by Proposition 10 in 1998—to offset General Fund–supported Medi–Cal costs for children up to age five. Chapter 4 requires local county commissions to transfer $950 million and the state commission to contribute the remaining $50 million. Several local First 5 commissions have challenged the legality of the fund sweep in court. The 2011–12 Medi–Cal budget does not assume any offset of costs with First 5 funding. However, the administration has indicated that it will defend the legal challenge in court.

Judiciary and Criminal Justice

The 2011–12 budget provides $12.3 billion from the General Fund for judicial and criminal justice programs, including support for ongoing programs and capital outlay projects (see Figure 18). This is an increase of $286 million, or 2.4 percent, above the revised 2010–11 General Fund spending level. As discussed in the "Realignment" section of this chapter, the realignment of various criminal justice responsibilities from the state to local governments is estimated to reduce General Fund costs for criminal justice programs by almost $1.5 billion, thereby bringing the adjusted total for General Fund expenditures for these purposes in 2011–12 to about $10.8 billion. Figure 19 summarizes the major General Fund changes adopted by the Legislature in the criminal justice area, which we discuss in more detail below.

Judicial Branch

The budget provides about $4 billion for support of the judicial branch—a decrease of $59 million, or 1.5 percent, from the revised 2010–11 level. This amount includes $1.7 billion from the General Fund and $499 million from the counties, with most of the remaining balance of about $1.8 billion derived from fine, penalty, and court fee revenues. The General Fund amount is a net increase of about $53 million, or 3.2 percent, from the revised 2010–11 amount. (The $1.2 billion figure does not reflect the estimated General Fund savings from the realignment of court security to county sheriffs.) Funding for trial court operations is the single largest component of the judicial branch budget, accounting for over 80 percent of total spending.

Court Operations. The budget package includes a $403 million General Fund augmentation to the budget of the judicial branch. This is primarily to replace redevelopment funds that were used on a one–time basis in 2010–11 to offset General Fund costs for trial courts, as well as to support increased employee compensation costs. However, a significant portion of this increase is offset by a largely unallocated reduction of $350 million to the judicial branch. Under the budget plan, part of the reduction will be accommodated in 2011–12 through the one–time redirection of $170 million from various special funds (such as court construction funds).

Courts Capital Outlay. The budget also reflects a one–time transfer of $310 million from the Immediate and Critical Needs Account (ICNA) to the General Fund. (In accordance to Chapter 311, Statutes of 2008 [SB 1407, Perata], the ICNA receives revenue from certain court fee and fine increases to support 40 court construction projects.) As a result of this transfer to the General Fund, most of the planned court construction projects that would be supported by ICNA will be delayed by about a year.

Corrections and Rehabilitation

The budget contains $9.8 billion from the General Fund for support of the California Department of Corrections and Rehabilitation (CDCR). This is a net increase of $342 million, or 3.6 percent, above the revised 2010–11 level of spending. (This figure does not reflect the estimated General Fund savings from the realignment of certain lower–level offenders, parole violators, and parolees to local governments.) As discussed earlier in this report, if state General Fund revenues are forecast to fall $1 billion below the level assumed in the 2011–12 Budget Act, various General Fund expenditure reductions would be triggered, including a $20 million unallocated reduction to CDCR's budget. Under these circumstances, counties would also be required to pay $125,000 per year to the state for each juvenile offender committed to the Division of Juvenile Facilities (DJF), resulting in an assumed savings of $72 million in the General Fund cost of operating state youth correctional facilities.

Adult Correctional Population. Figure 20 shows the recent changes and projected declines in the inmate and parolee populations. As shown in the figure, these populations are expected to decline significantly starting in 2011–12 due largely to the effect of the realignment plan, such as the shift of responsibility for certain adult offenders to counties. For example, the realignment plan is expected to reduce the inmate population by about 14,000 inmates in 2011–12. (Please see the "Realignment" section of this report for a more detailed discussion of that plan.)

Additional Funding to Address CDCR Budget Shortfalls. The budget includes an additional $380 million in General Fund support for CDCR for ongoing annual operating costs that the department indicates have exceeded its budget authority in previous years. For example, correctional officer, sergeant, and lieutenant positions have traditionally been budgeted based on the middle step of each position's salary range. However, CDCR reports that the average officer in these positions actually earns closer to the top step of the salary range. Of the $380 million total augmentation, $267 million was provided to make such adjustments related to the costs for the department's security staff. The remainder of the augmentation is in response to increased costs for medical guarding and transportation, correctional officer overtime, legal expenses, and inmate housing.

Inmate Health Care Services. The budget includes a total General Fund augmentation of $28 million for compliance with federal court orders and settlements, such as medical services under the Plata case and mental health services under the Coleman case. This amount includes $12 million for about 211 additional nursing positions to distribute medication to inmates, and $15 million for the planning and activation of various new health care facilities. However, the budget also reflects $81 million in General Fund savings from an unallocated reduction of about 5 percent in the federal Receiver's inmate medical services program. The Receiver intends to achieve these savings by seeking federal reimbursement for inpatient health care delivered to inmates in community hospitals who are eligible for Medi–Cal and carrying out other unspecified operational and policy changes. In addition, the budget includes a $46 million decrease to reflect a reduction in projected pharmaceutical expenditures.

CDCR "Workforce Cap" Savings. The budget plan assumes $195 million in savings as a result of an unallocated reduction to CDCR's personnel budget. The department plans to achieve these savings through various measures, such as reducing headquarters positions, closing one DJF facility, reducing security staffing at the prisons, and increasing the number of parolees each parole agent supervises.

Adult Correctional Rehabilitation and Other Programs. The budget includes a one–time reduction of $101 million to inmate and parolee rehabilitation programs. The department plans to achieve these savings primarily by delaying implementation of new contracts for sex offender treatment programs and female offender programs, reducing operating expenses and equipment for education programs, and reducing substance abuse treatment capacity for inmates and parolees. In addition, the budget includes $89 million to provide community corrections performance incentive grants to county probation departments that successfully send fewer probationers to state prison. In accordance with Chapter 608, Statutes of 2010 (SB 678, Leno), this funding reflects a portion of the state savings from having a reduced prison population.

Corrections Standards Authority (CSA). The budget package eliminates the CSA and assigns its former duties to a new 12–member Board of State and Community Corrections. Unlike CSA, this new board will be independent of CDCR. The primary goals of the new board will be to assist other state and local government agencies in implementing the criminal justice realignment plan discussed above, provide leadership in the area of criminal justice policy, and to develop data and information related to the implementation of outcome–based measures and evidence–based practices in community corrections efforts.

Department of Justice (DOJ)

The budget includes $233 million from the General Fund for support of DOJ, a net reduction of about $59 million, or 20 percent, from the revised 2010–11 level. The budget shifts $50 million from DOJ to various state agencies in order to implement a "billable–services" model for the legal services that these agencies receive from DOJ. Under this new model, state agencies will reimburse DOJ for its services. The budget also reflects $37 million in savings from a reduction in state support for DOJ's Division of Law Enforcement. These reductions are partially offset by increased funding for state forensic laboratories ($14 million) and employee compensation costs ($13 million).

Office of the Inspector General (OIG)

The budget includes about $21 million from the General Fund to support OIG, a reduction of $3.8 million, or 15.5 percent, from the revised 2010–11 level. This reflects savings expected from policy changes specified in budget trailer legislation that reduce the duties and responsibilities of the OIG.

Resources and Environmental Protection

The 2011–12 budget provides about $7.3 billion from various fund sources for programs administered by the Natural Resources and Environmental Protection Agencies. This is a decrease of $3.8 billion, or 34 percent, when compared to revised 2010–11 expenditures. Most of this decrease reflects lower bond expenditures in 2011–12, although the budget still includes a major infusion (around $1.4 billion) of available bond funds from various resources–related measures. The budgets also include a combined $2 billion from the General Fund.

Figures 21 and 22 compare expenditure totals for resources and environmental protection programs in 2009–10, 2010–11, and 2011–12. As the figures show, General Fund expenditures are somewhat lower in 2011–12. This reduction reflects (1) a partial shift in funding from the General Fund to fees for wildland fire prevention ($50 million) and for water quality and water rights activities ($24 million), (2) a $44 million reduction in CalFire's fire protection program, (3) a partial shift in funding of $16 million from the General Fund to bond funds for flood management, and (4) an $11 million reduction in state park operations. Debt service on general obligation bonds continues to be the largest single General Fund expenditure in the resources and environmental protection areas—totaling $942 million in 2011–12. The significant decrease in local assistance and capital outlay for resources and environmental protection programs is largely due to reduced bond expenditures.

Resources and Environmental Protection Expenditures

Bond Expenditure Summary. The budget includes about $1.4 billion from a number of bond funds (mainly Propositions 50, 84, 1B, and 1E) for various resources and environmental protection programs. The largest set of bond expenditures in 2011–12 are for state and local parks (primarily local parks).

Delta–Related Expenditures. The budget provides a total of $272 million in state funds (mainly bond funds) across nine state agencies to address a number of interrelated water problems in the Sacramento–San Joaquin Delta region. These expenditures are coordinated and overseen by the relatively new Delta Stewardship Council, which was established pursuant to Chapter 5, Statutes of 2009 (SBX7 1, Simitian), to manage the state's interests in the Delta. The largest program expenditures are for improvements to the existing conveyance system ($98 million) and ecosystem restoration ($80 million).

Climate Change. The budget includes $37 million from special funds across eight state agencies for implementation of the California Global Warming Solutions Act of 2006 (Chapter 488, Statutes of 2006 [AB 32, Núñez]), to reduce the state's emission of greenhouse gases (GHGs) to 1990 levels by 2020. Figure 23 lists the expenditures, number of positions, funding sources, and activities funded on an agency–by–agency basis for the implementation of AB 32 in 2011–12. These expenditures include about $9 million for the Air Resources Board (ARB) to finish developing and begin implementation of its cap–and–trade regulation. The balance of the expenditures is to be used mainly to develop and implement other measures to reduce GHG emissions, as well as for programmatic oversight and interdepartmental coordination. As shown in the figure, the primary funding source for AB 32 implementation is the "AB 32 fee" that the ARB began assessing in 2010–11 on major GHG emitters subject to state regulation. Over the next several years, revenues from this new fee will also be used to repay loans made from various special funds that were the major means of support for AB 32 implementation from 2007–08 through 2009–10. Although not reflected in the figure, there are also expenditures in other departments that, while not funded by the AB 32 fee, nonetheless serve to help meet the state's AB 32 goals. These include expenditures of the California Public Utilities Commission and the California Energy Commission to implement the state's Renewables Portfolio Standard and various energy efficiency programs.

Assembly Bill 118–Funded Programs. The budget includes (1) $106 million for financial incentives administered by the Energy Commission to advance alternative and renewable fuel vehicle technologies and (2) $44 million for the ARB to provide grants and loans to owners of heavy–duty diesel vehicles to retrofit vehicles to achieve early compliance with regulations requiring reductions in emissions of air pollutants and GHGs. These expenditures are funded from various charges (smog abatement, vehicle registration, and vessel registration) raised pursuant to Chapter 750, Statutes of 2007 (AB 118, Núñez).

CalFire. The budget includes $121 million in a General Fund budget item that is designated specifically for emergency fire protection. The Director of Finance can augment this amount to pay for additional fire protection expenses, as needed. The budget also includes $524 million for separate budget items to support CalFire operations. This total reflects $44 million in General Fund savings from program reductions, of which $31 million results from changing staffing levels back to the pre–2003 level of three firefighters per engine instead of four. The budget also establishes a wildland firefighting working group to discuss future funding, realignment, and possible changes to the state's management of wildland firefighting.

The General Fund total also reflects the revenues raised from a new fire prevention fee to be assessed on property owners residing in State Responsibility Areas (SRAs)—mostly privately owned rangelands, timberlands, and watershed areas for which the state is responsible for providing wildland fire protection. The fee—to be assessed at up to $150 per inhabitable structure within an SRA—is projected to realize $50 million in General Fund savings in 2011–12 and $200 million in ongoing General Fund savings beginning in 2012–13.

State Parks General Fund Support. The budget provides $119 million from the General Fund for state park operations—reflecting an $11 million reduction in the Department of Parks and Recreation's (DPR's) base level of General Fund support. (The budget plan reflects an additional $11 million ongoing reduction beginning in 2012–13.) This programmatic reduction will be met through immediate service reductions and, beginning July 2012, the closure of up to 70 state parks. The Legislature directed DPR to select parks for closure based on several factors, including: rate of visitation, net savings from closure, existence of (or potential for) partnerships for the support of a park unit, relative statewide significance of a unit identified in department documents, significant and costly infrastructure deficiencies, and feasibility of physical closure of a park unit.

Williamson Act Subventions. The budget does not provide financial relief to counties for implementing Williamson Act contracts in 2011–12. This state subvention program allows counties to partially defray the loss of property tax revenues they incur by entering into open space contracts with landowners. The Legislature also approved the Governor's proposal to reverse a $10 million appropriation provided for 2010–11 for the Williamson Act subvention program.

Energy Expenditures

Use of Gas Consumption Surcharge Monies. The budget provides $453 million for various natural gas–related energy programs, funded from the Gas Consumption Surcharge, which is assessed on natural gas ratepayers. While the budget reflects $612 million in available resources from the Gas Consumption Surcharge in 2011–12, the Legislature made a programmatic cut of $155 million to the non–low income energy efficiency activities funded by the surcharge (leaving $20 million for this purpose), facilitating a one–time transfer of $155 million to the General Fund. Funding for discounts for low–income natural gas customers, low–income energy efficiency programs, and natural gas energy research was maintained at budgeted levels.

Energy Research and Renewable Energy Incentives. The budget includes $67 million for energy–related research and development (electricity and natural gas) that was funded through the Energy Commission's Public Interest Energy Research (PIER) Program. This expenditure amount reflects partial–year funding for this program, as the authority to collect the "public goods charge" (a surcharge on utility ratepayer bills) which funds the electricity portion of the program will sunset in January 2012 unless extended through legislative action.

The spending plan also provides about $71 million for incentives for energy producers and rebates to purchasers of renewable energy systems (like solar panels) under the Energy Commission's Renewable Energy Program. As with the PIER Program, this expenditure amount also reflects partial–year funding, as this program receives its funding support from the public goods charge that is scheduled to sunset in January 2012.

Transportation

The 2011–12 spending plan provides $17.2 billion from various fund sources for transportation programs. This is an increase of $2.2 billion, or 15 percent, when compared to the revised level of spending in the prior year, as shown in Figure 24.

Department of Transportation

The 2011–12 budget plan includes total expenditures of $13.3 billion from various fund sources for the Department of Transportation (Caltrans). This level of expenditures is greater than in 2010–11 by about $1.5 billion (or 13 percent) mainly due to the timing of the expenditure of certain one–time funds. Specifically, Proposition 1B bond funds and federal stimulus funds were not spent at the rate assumed in the 2010–11 Budget Act, with the result that 2010–11 expenses were lower and 2011–12 spending was higher. The 2011–12 budget provides approximately $5.9 billion for transportation capital outlay, $2.2 billion for local assistance, $1.9 billion for capital outlay support, and $1.8 billion for highway maintenance and operations. The budget also provides $1.2 billion for Caltrans' mass transportation and rail programs and $184 million for transportation planning. The balance of funding goes for program development, legal services, and other purposes.

Fuel Tax Swap. In March 2010, the Legislature and Governor enacted what became known as the "fuel tax swap" legislation as part of the 2010–11 budget plan. The tax swap eliminated the state's sales tax on gasoline and replaced the lost revenue with an additional excise tax on gasoline, among other changes, to increase the Legislature's flexibility over the use of transportation funds. At the time, these actions were estimated to result in about $2.3 billion in benefit to the General Fund over 2010–11 and 2011–12, with an ongoing benefit of about $1 billion per year thereafter.

New legislative action was required for the 2011–12 budget, however, to reenact portions of the fuel tax swap package because of conflicts with two initiative measures approved by voters in November 2010, Proposition 22 and Proposition 26. Proposition 22, among other provisions, restricted the state's ability to pay for transportation debt service using fuel excise tax revenues and prohibited the borrowing of fuel excise tax revenues as well as certain other transportation funds. Proposition 26 potentially repealed certain tax and fee increase measures, including the additional excise tax on gasoline, unless they were reenacted by a two–thirds vote of the Legislature.

The new version of the fuel tax swap, which was reenacted by a two–thirds vote of the Legislature in March 2011, relies on vehicle weight fees, rather than fuel excise tax revenues, to benefit the General Fund, thus addressing potential conflicts with both of the propositions. For a detailed description of the 2011 fuel tax swap and the use of weight fees to benefit the General Fund, please see our January 2011 publication, The 2011–12 Budget: Achieving General Fund Relief From Transportation Funds.

The original and reenacted fuel tax swap, along with provisions in the 2011–12 budget package, provide a total of $2.7 billion in relief to the General Fund.

• Debt Service. Before conflicts arose with the 2010 ballot measures, $362 million in transportation funds were used under the prior tax swap legislation to offset General Fund debt–service costs in 2010–11. The reenactment of the fuel tax swap allows the resumption of the use of transportation funds to pay these debt–service costs to achieve additional General Fund savings of $353 million in 2010–11 and $778 million in 2011–12.
• Loans to the General Fund. Before conflicts arose with the 2010 ballot measures, $437 million in transportation funds were loaned to the General Fund under the prior tax swap legislation. The reenactment of the fuel tax swap made possible $551 million in additional loans to the General Fund during 2010–11 and $210 million in 2011–12.

Continued Appropriations of Proposition 1B Funds. Proposition 1B, a ballot measure approved by voters in November 2006, authorized the issuance of $20 billion in general obligation bonds for state and local transportation improvements. All Proposition 1B funds are subject to appropriation by the Legislature. The 2011–12 budget appropriates a total of $3.5 billion for various programs, mainly for capital outlay and local assistance purposes.

Special Transportation Programs

Significant Funds Available to Local Operators for Public Transportation. The 2011–12 budget package provides an estimated $330 million for the State Transit Assistance program to support transit operations. In contrast to past years, the 2011–12 budget package provides no Proposition 1B funding to local transit operators for capital projects. However, the administration estimates $500 million will be available to local operators for these purposes from unspent allocations that were made in previous years.

High–Speed Rail Authority

Federal Funds Supplement State Bond Funding. The 2011–12 budget plan appropriates $155 million to the California High–Speed Rail Authority (HSRA), including $89 million in state bond funds from Proposition 1A of 2008 and $66 million in federal funds, for the following uses:

• Preparation for Right–of–Way Acquisition. About $71 million will be spent for contract services to prepare to purchase rights–of–way or the land upon which the train will eventually operate. This includes $38 million in state bond funds and $33 million in federal funding. In order to provide for additional legislative review of the high–speed rail project, statutory language in the 2011–12 Budget Act generally forbids the purchase of rights–of–way prior to January 1, 2012. However, HSRA may proceed with a right–of–way purchase if it provides at least 60 days before the date of purchase an explanation of the critical need to purchase the land.
• Project–Level Planning and Design. About $9 million will be spent for contract services to perform preliminary design and environmental review for the nine segments of the rail system. This includes $5 million in state bond funds and $4 million in federal funding.
• Contract Services and State Administrative Costs. About $52 million will be spent for contract services for overall program management, as well as roughly $14 million for various other contracts, including communications and financial consulting services. An additional $9 million is authorized for state administrative costs and support of the authority.

The budget plan makes one–half of the funds appropriated to HSRA available only after it has met certain reporting requirements, such as providing an analysis of the revenue that would be contributed to the project from a private operator and an update of the financial plan for the project that includes alternative funding scenarios.

Proposition 1A Funds for Some Connector Rail Projects Vetoed. The Governor vetoed $235 million in Proposition 1A bond funds that the Legislature had budgeted for intercity rail and local rail projects that would provide connectivity to the high–speed rail system. This action leaves about $28 billion in Proposition 1A funds for safety projects on various local rail and intercity rail corridors in the 2011–12 budget plan.

California Highway Patrol and Department of Motor Vehicles

The 2011–12 budget provides $1.9 billion to fund California Highway Patrol operations, or roughly the same amount as was provided in 2010–11. The funding includes support for the department's ongoing programs ($1.8 billion), the cost of various capital outlay projects ($72 million), the full–year cost of the 180 patrol officers that were added in 2010–11 ($16 million), and the cost of a new computer–aided dispatch system ($7 million). For DMV, the budget provides $928 million for departmental operations, about $20 million (2 percent) more than in 2010–11, mostly due to increased costs resulting from the expiration of furloughs and the personal leave program.

Increased Vehicle Registration Fee and Funding Shifts. The DMV receives funding to support its operations from a variety of sources, including registration fees and VLF. State law requires DMV to charge a registration fee on vehicles and trailers registered in the state (with certain exceptions). The VLF, which is also paid to the DMV at the time of vehicle registration, is an annual fee on the ownership of a registered vehicle in California. It is levied in place of taxing vehicles as personal property. The bulk of VLF revenue is distributed to cities and counties, but the DMV retains a portion to pay for its collection costs. The 2011–12 budget plan contains changes that affect both sources of revenues for the DMV.

First, the 2011–12 budget plan increases the vehicle registration fee from $31 to $43. This change is assumed to generate $300 million in additional revenues that will be used to offset DMV costs. Second, the budget shifts $300 million in VLF revenues that previously were used for the support of DMV instead to local law enforcement programs. This funding shift is one component of a realignment of public safety programs discussed in more detail earlier in this chapter.

Motor Vehicle Account (MVA). To help address the General Fund condition, the 2011–12 budget provides a one–time transfer of $72 million from the MVA to the General Fund. Unlike other MVA revenues, these funds are not restricted by Article XIX of the State Constitution and thus are available for general state purposes. The 2010–11 Budget Act provided a loan of up to $180 million to the General Fund, which must be repaid to the MVA within three years. The 2011–12 budget plan provides a partial repayment of the loan in the amount of $19.5 million, leaving $160.5 million to be repaid over the next two years.

Other Major Provisions

Redevelopment Agencies

The budget package includes two bills related to redevelopment agencies designed to generate $1.7 billion in 2011–12 and about $400 million annually in out–years. The first bill eliminates the statutory authority for redevelopment agencies to exist. Under this bill, successor agencies are established for the purpose of paying off any existing redevelopment debt with revenues that otherwise would have gone to the redevelopment agencies. Any revenue in excess of what is required to pay off these debts is distributed to schools and other local governments (cities, counties, and special districts) pursuant to existing property tax allocation laws.

The second bill permits a city or county that has a redevelopment agency to prevent that agency's elimination by making a remittance payment to the K–12 schools, fire protection districts, and transit districts that overlap with the redevelopment agency's project areas. Each city or county's remittance payment is calculated as its proportionate share of $1.7 billion in 2011–12 and $400 million in out–years. This calculation takes into account each redevelopment agency's 2008–09 tax increment revenues, debt payments, and pass–through payments. On a one–time basis in 2011–12, the bill exempts redevelopment agencies from the requirement to set aside funds (usually 20 percent of their tax increment revenues) for low– and moderate–income housing projects.

The second bill also has provisions that adjust cities' and counties' out–year annual remittance payments primarily based on growth in tax increment revenues and new debt issued by redevelopment agencies (excluding debt issued for affordable housing programs). The bill also states the intent of the Legislature to enact legislation to establish a reduced schedule of payments for new redevelopment debt related to projects designed to achieve statewide environmental, transportation, or community development goals.

Effect on State Education Spending. These bills provide additional funds to K–12 schools—either increased property revenues (in cases where the redevelopment agency is eliminated) or remittance payments (in cases where a city or county elects to make these payments). In both cases, the additional funds offset state–required education spending for one year: 2011–12. Specifically, the additional funds are counted as local property tax revenues in 2011–12 and included in the calculation of the Proposition 98 minimum guarantee. Beginning in 2012–13, however, the property tax revenues and remittance payments are excluded from the Proposition 98 calculation and do not offset state–required education spending.

State–Mandated Local Programs (Non–Education)

The 2011–12 budget approved by the Legislature provides $47.8 million (General Fund) for 13 mandates. The budget bill suspended 60 non–education mandates, including a series of mandates requiring counties to provide absentee ballots. When the Legislature suspends a mandate, for one year (1) local governments are not required to implement its requirements and (2) the state may postpone its obligations to pay the accumulated mandates bills. The budget took no action regarding the Open Meeting Act mandate. Because the budget did not suspend, repeal, or fund this mandate, it is not clear whether local governments are required to implement its requirements during the budget year.

The budget package deferred payment for two labor relations mandates (Peace Officer Procedural Bill of Rights and Local Government Employment Relations), as well as a scheduled payment (about $100 million) towards retiring the state's accumulated non–education mandate debt. Finally, as we discuss more fully in our "K–12 Education" section of this report, the budget transferred responsibility to provide mental health services to special education students (the AB 3632 mandate) from counties to schools.

Employee Compensation

Savings From Collective Bargaining. The state's rank–and–file employees are organized into 21 collective bargaining units. During the course of 2010–11, the Legislature ratified contracts with each of these units. While managers and supervisors are not included in the collective bargaining process, the state extended some of the provisions from the new contracts to them. In total, the budget assumes $135 million in net savings (General Fund) from these new employee compensation policies:

• Unpaid Leave. Nearly all state employees will experience reduced wages during the first 12 months of their contract as a result of the Personal Leave Program (PLP). The PLP—typically eight hours of unpaid leave every month—does not affect employees' benefits or pension calculations.
• Employee Contributions for Pensions. Most state employees will make larger contributions to their retirement, generally about 2 percent to 5 percent of pay more than they previously contributed. The increased employee contributions offset the state's contribution to employee retirement.
• New Pension Formula. Future state employees will be enrolled in a new pension formula that generally reduces pension benefits to pre–1999 levels.
• Health Care. The state's employee health care costs will increase for all bargaining units.
• Pay Increase. The top step of state employee salary ranges will increase by 2 percent to 5 percent. The pay increases will occur in either 2012 or 2013 and generally be equal to the employees' increased pension contribution.

Health Benefits Program. The budget assumes that the California Public Employees' Retirement System (CalPERS) will achieve one–time savings of $80 million (General Fund) in its Health Benefits Program in 2011–12. In future years, the budget specifies that CalPERS will achieve an equivalent level of ongoing savings from the adoption of a core health care plan (a new health plan that provides somewhat less coverage at a lower premium cost) or other measures.

Labor Programs

Disability Insurance Fund Loan. California's Unemployment Insurance (UI) fund has been insolvent since 2009 due to an imbalance between revenues collected from employers and benefits paid to claimants. To continue payment of UI benefits, the state obtained a loan from the federal government, with a current outstanding balance of over $10 billion. As of January 2011, the state began to accrue interest on this federal loan and will be required to make an interest payment of approximately $320 million in September 2011. The 2011–12 budget authorizes this interest payment from the General Fund. To offset this cost, the budget plan provides a loan equal to the amount of the interest payment from the Disability Insurance Fund to the General Fund. The loan is to be repaid over the next four years at an annual cost of about $80 million.

Additional Federal Funds Used to Support Ongoing Implementation of an Alternate Base Period. In 2009, the Legislature authorized the Employment Development Department (EDD) to make automation and programmatic changes in order to incorporate an Alternate Base Period (ABP) into the UI program. An ABP allows some unemployed workers to qualify for UI benefits sooner than would have been the case under prior law. In May 2011, EDD made sufficient progress on ABP development to certify to the U.S. Department of Labor that it would fully implement an ABP in September 2012, allowing the state to receive $839 million in additional federal funds. The 2011–12 budget appropriates $48 million of these federal funds to cover the cost of implementing ABP through 2014–15 and the remaining $791 million to repay the state's outstanding UI loan balance.

Reduction in Federal Workforce Investment Act (WIA) Funds. A 2011 federal law reduced the federal funding provided to California in 2011–12 for WIA programs by roughly $50 million or 10 percent. In addition, the act altered the allocation of WIA job training funds within California by reducing the portion available for statewide discretionary projects, probably by $16 million to $41 million. This reduction in state discretionary funding could significantly limit or eliminate several statewide workforce development programs in 2011–12. Budget bill language requires DOF and EDD to present the Legislature with a detailed expenditure plan reflecting these federal actions prior to the expenditure of any WIA state discretionary funds.

Department of Food and Agriculture

The 2011–12 budget plan provides $336 million to fund the Department of Food and Agriculture (CDFA), which is a reduction of $31 million (8 percent) compared to its 2010–11 funding level. The reduction in spending is mainly due to the elimination of $32 million in General Fund support for local fairs and expositions.

The 2011–12 budget plan also includes a $19 million reduction in General Fund support for various CDFA agricultural programs. For some programs, General Fund monies will be replaced with revenues from new assessments on the agriculture industry and other fees will be increased for five years. For example, the industry will be charged on a fee–for–service basis to use the department's Animal Health and Food Safety Laboratory and to participate in the meat and poultry inspection program. In addition, the licensing fee for a new or previously unlicensed meat processing or poultry plant will increase from $50 to $500.

General Government Automation

Financial Information System for California (FI$Cal) Project. The Governor's January budget proposal included $71 million to continue the FI$Cal project to build an integrated financial system for the state. Due to cost reductions and schedule shifts, the approved budget provides $38 million for the project for 2011–12.

State Operations

Savings and Consolidations. The budget assumes that the state will save $250 million (General Fund) through various unallocated efficiencies and cost–reduction measures. The budget also assumes that the state will save $19 million General Fund through consolidations, eliminations, and improved operational efficiencies in 17 state boards, commissions, and departments.

Debt Service on Bonds

The budget assumes $5.5 billion (General Fund) in debt–service payments on general obligation bonds and lease–revenue bonds, an increase of $66 million, or 1.2 percent, from the 2010–11 spending level. This is a modest increase compared with the growth of debt–service obligations in previous years. The slowing growth in debt service is partly due to the administration's decision not to issue bonds in spring 2011 and the budget plan's assumption of a small bond sale ($1.2 billion) in fall 2011. (In recent years, the state sold between $5 billion and $20 billion of bonds annually, usually in the spring and fall.) Additionally, the budget plan offsets some General Fund debt–service costs in transportation by using weight fees (see "Transportation" section for more information).