State Spending Plan for 1996-97
Chapter 3, Part II

Major Features of the 1996-97 Budget Plan

Health and Social Services

In this section, we describe the major features of health and social services funding in the budget package. Based on the enacted budget, General Fund support for health and welfare programs in 1996-97 totals $14.5 billion, an increase of less than 1 percent over the prior year. Partly due to California's economic recovery, the budget anticipates only a modest amount of caseload growth for health and welfare programs overalland a slight decline for Aid to Families with Dependent Children (AFDC) caseload in 1996-97. The low growth in spending also reflects a variety of savings actions adopted as part of the 1996-97 budget plan, as well as the anticipated receipt of additional federal funds.

Figure 6 describes the major General Fund changes enacted in the 1996 Budget Act and related legislation. As the figure shows, the largest savings result from continuing grant reductions previously enacted on a temporary basis in the Supplemental Security Income/State Supplementary Program (SSI/SSP) ($487 million) and in the AFDC Program ($199 million).

Federal Welfare Reform

On August 22, 1996, the President signed into law H.R. 3734 -- The Personal Responsibility and Work Opportunity Reconciliation Act of 1996. This measure repeals and amends several major public assistance programs. Major changes include replacing the existing Aid to Families with Dependent Children (AFDC) program with a block grant for Temporary Assistance for Needy Families (TANF) and restricting welfare benefits for noncitizens. We estimate that H.R. 3734 will result in a net reduction of $6.8 billion in federal funds for California over the first six years of implementation. The potential impact on state spending depends on a number of factors including:

Potential major impacts on state spending in 1996-97 include:

Medi-Cal Program

The California Medical Assistance (Medi-Cal) Program provides health care services to welfare recipients and other qualified low-income persons (primarily families with children and the aged, blind, or disabled). The Department of Health Services (DHS) administers the program. The federal government provides $9.5 billion, and the budget appropriates $6.5 billion in matching funds, from the state General Fund in 1996-97. This represents an increase of 4.3 percent over estimated General Fund expenditures in 1995-96.

Federal Funds for Services to Illegal Immigrants. The budget assumes receipt of $216 million in federal funds to partially offset state costs for emergency health services provided to illegal immigrants. Funding for this purpose is authorized by federal immigration reform legislation, but was not appropriated in the 1997 budget measure.

Prenatal and Long-Term Care for Illegal Immigrants. The budget assumed adoption of the Governor's proposal to eliminate prenatal benefits and long-term care (new applicants only) for illegal immigrants, beginning January 1, 1997, for a General Fund savings of $34.7 million and $856,000, respectively. However, implementing state legislation was not enacted, and consequently these savings are not reflected in the estimated budget spending totals for 1996-97. The recently enacted federal welfare reform legislation, however, includes a provision that prohibits states from providing most types of benefits to illegal immigrants unless state legislation is enacted subsequent to the federal law. This federal legislation also may be a factor in the court's consideration of the case dealing with the state's implementation of restrictions on benefits for illegal immigrants in Proposition 187. (This measure was approved in 1994 but currently is enjoined by the courts.) For these reasons, the status of these programs and any potential savings from their elimination are uncertain at this time.

Supplemental Drug Rebates and Drug Contracting. Budget-related legislation (AB 3483, Friedman) extends the Supplemental Drug Rebate program for six monthsthrough December 31, 1996for a General Fund savings of $17.3 million. This program requires drug manufacturers to provide a 10 percent rebate to the Medi-Cal Program for drugs that may be prescribed without prior approval by the state. The budget legislation also extends, for two years, the authority for the department to negotiate drug rebates with individual pharmaceutical manufacturers. The budget assumes savings of $7 million in 1996-97 due to the extension of this program.

Disproportionate Share Hospital (DSH) Payments. The budget includes a $10 million General Fund augmentation to backfill for a reduction in the amount of DSH funds retained by the state to help finance the Medi-Cal Program. Pursuant to budget legislation
(AB 3484, Friedman and Granlund) this change will result in an equivalent increase in DSH payments to county and other public hospitals. The DSH payments are a means of allocating supplemental federal Medicaid funds to hospitals that care for a relatively large number of low-income persons.

Family Planning Program. The budget includes a $20.2 million General Fund augmentation to support the Governor's proposal to expand family planning services. Beginning January 1, 1997, budget legislation (AB 3483, Friedman) consolidates the existing non-Medi-Cal family planning program with the Medi-Cal Program to create a new entitlement program for persons with family incomes at or below 200 percent of the federal poverty level. The new program sunsets July 1, 2000, and if not extended, the previous program will be reinstated.

Public Health

The DHS administers a broad range of public health programs, including (1) programs that complement and support the activities of local health agencies controlling environmental hazards, preventing and controlling disease, and providing health services to populations with special needs, and (2) state-operated programs, such as those which license health facilities and certain types of technical personnel.

Proposition 99. Proposition 99, approved in 1988, established a surtax on cigarettes and tobacco products and allocates the surtax revenues to six accounts for a variety of purposes, including tobacco-related education and research, indigent health care, and habitat conservation. Some of these Proposition 99 funds help to finance programs that also receive General Fund support. The Legislature adopted the Governor's proposal for 1995-96, which allocated revenues to the various accounts in accordance with the percentages specified in Proposition 99. This resulted in General Fund savings of $32.4 million.

For 1996-97, however, the Legislature rejected the Governor's proposal to change the distribution of Proposition 99 revenues among the six accounts, which would have required a four-fifths vote of the Legislature. Instead, the budget and related implementing legislation (AB 3487, Katz and Pringle) provides for distributing the revenues consistent with the provisions of Proposition 99.

Under the budget plan for 1996-97, spending will increase significantly for (1) health education programs administered through the Departments of Education and Health Services, including $5 million earmarked for smoking cessation classes, and (2) smoking- and tobacco-related research by the UC. Compared with the Governor's proposal, the budget plan increases General Fund costs by
$35.4 million in 1996-97.

Teen Pregnancy Prevention and Teen Parenting. Budget legislation (AB 3483, Friedman) enacted, in part, the Gov ernor's proposal to expand teen pregnancy prevention programs. The budget provides $7.5 million to expand the media campaign and $20 million to establish a new Challenge Grants program to fund local teen pregnancy prevention projects. The budget also appropriates
$10 million to expand the Adolescent Family Life Program, which provides case management and other support services for pregnant and parenting teens.

Mental Health/Developmental Services

Camarillo State Hospital and Developmental Center. The budget appropriates $5.2 million from the General Fund (includ ing the state share of Medi-Cal reimbursements from the DHS) to close the Camarillo facility. This closure is prompted by a decline in the populations in the state developmental centers and mental hospitals, primarily due to a shift of clients to community settings or local facilities.

AFDC Program

The AFDC Family Group and Unemployed Parent Programs provide cash grants to low-income families with children. The AFDC Foster Care program provides grants to pay for the care of children placed in foster family homes or group homes. The budget plan provides $2.5 billion from the General Fund for the AFDC program in 1996-97. This represents a decrease of 8.4 percent from estimated 1995-96 expenditures.

Grant Reductions. Budget legislation (SB 1780, Committee on Budget and Fiscal Review) extends through October 1997 the 4.9 percent statewide grant reduction of 1995-96 and makes permanent the
5.8 percent grant reduction of 1992-93. This results in combined General Fund cost avoidance and savings of $199 million in 1996-97. Implementation of the 4.9 percent statewide grant reduction in 1996-97 depends on early state implementation of the new federal TANF block grant, which will replace AFDC under recent federal welfare reform legislation, or on federal approval of a pending waiver request submitted under the AFDC program. (These conditions also apply to an additional 4.9 percent grant reduction in low-rental-cost counties, enacted on a permanent basis in 1995-96.) The budget anticipates that the maximum monthly grant for a family of three will be reduced from $594 to $565 in high-cost counties and to $538 in low-cost counties (see Figure 7).

Cost-of-Living Adjustment. The budget extends the suspension of the COLAs for AFDC grants, and AFDC Foster Care group home rates, through October 1997. This results in General Fund savings of $10.1 million in AFDC grants and $0.6 million in Foster Care payments.

Pregnancy Benefits. Budget legislation (SB 1780) limits eligibility for state-only AFDC pregnancy benefits to recipients who are eligible for the Cal Learn Program (teen parents who have not graduated from high school). This results in General Fund savings of
$11 million in 1996-97.


The SSI/SSP is a state- and federally-funded program that provides grants to low-income aged, blind, and disabled persons. The budget appropriates $1.8 billion from the General Fund for the program in 1996-97, which is a decrease of 11 percent from estimated 1995-96 expenditures.

Grant Reductions. Budget legislation (SB 1780) extends through October 1997 the 4.9 percent statewide grant reduction of 1995-96 and makes permanent the 5.8 percent grant reduction of 1992-93. This results in combined General Fund cost avoidance and savings of $487 million in 1996-97. The maximum monthly grant for aged and disabled individuals (the largest category of recipients) would be reduced, in November 1996, from $626 to $596 in high-cost counties and to $568 in low-cost counties. Subsequently, recipients will receive a federal COLA in January 1997, amounting to $16 for individuals (see Figure 7).

Implementation of the statewide 4.9 percent grant reduction
($208 million savings) is contingent upon federal legislation. Federal legislation also is necessary to implement an additional 4.9 percent grant reduction in low-rental-cost counties, which was enacted on a permanent basis in 1995-96. Together, these grant reductions account for $268 million of net budgeted savings in 1996-97. The budget assumed that federal welfare reform legislation would authorize these reductions, but this provision was not included in the recently enacted federal welfare reform legislation. As a result, these savings are at risk.

State COLA. Budget legislation extends the suspension of the state COLA for one year. Prior law would have resumed the state COLA, whichbecause of the interaction with the federal COLAwould have resulted in a state savings. Thus, by not providing the state COLA, the budget legislation results in a General Fund cost of $75.5 million, compared to prior law. As noted above, however, recipients will receive the full federal SSI COLA on their grants.

Adoptions Program

Adoptions Initiative. The Budget Act appropriates $6.9 million from the General Fund for the Governor's Adoptions Initiative. These funds will be used to support (1) additional county caseworkers to increase the number of adoptions and (2) additional state staff to develop and implement proposals to facilitate the adoption of children in foster care.

Savings That Depend on Federal Action

As indicated above, several savings provisions in the budget require action at the federal level (or the early implementation of the new federal TANF program by the state) in order to achieve the budgeted savings. Figure 8 lists these provisions.

Judiciary and Criminal Justice

In this section, we describe the major features of the budget package as they relate to judicial and criminal justice programs (courts, adult and youth corrections, and other justice-related programs). The 1996-97 budget for these programs totals $5.1 billion, including $4.5 billion from the General Fund and $655 million from state special funds. This is an increase of $260 million, or about 5.3 percent, over 1995-96 expenditures. This increase is primarily due to increases in spending to accommodate the projected growth in the state's prison inmate and parole populations.

The total amount is about $186 million below the Governor's January Budget. The principal reason for the change is revised downward estimates of the prison inmate population contained in the May Revision.

The major changes in the 1996 Budget Act relative to the Governor's Budget are discussed below and summarized in Figure 9.

Trial Court Funding

The 1996 Budget Act includes $1.6 billion for support of the trial courts in 1996-97 and assumes enactment of the Governor's proposal to consolidate and restructure the Trial Court Funding Program (TCF). The changes to accomplish the Governor's proposal were included in AB 2553 (Isenberg), which failed passage in the Legislature.

The measure would have generated about $91 million in additional revenues from court-related fees, which were appropriated in the Budget Act. As a result of the failure of AB 2553, however, this additional revenue will not be available for expenditure (presumably the counties, which provide the bulk of financial support for trial courts, will have to make up the difference, or the trial courts will have to reduce their budgets). In addition, the failure to enact AB 2553 will result in the need for follow-up legislation to make technical adjustments to the Budget Act appropriation for trial court funding.

The budget includes $2 million to support 21 new trial court judgeships beginning in the last quarter of 1996-97. The new judgeships were established pursuant to Ch 262/96 (AB 1818, Baca).

Department of Corrections

The budget provides a total of $3.5 billion from the General Fund for support of the California Department of Corrections (CDC). This represents an increase of about 8 percent above the 1995-96 level and is primarily due to projected increases in inmate and parole populations.

The budget reflects a reduction of about $57.8 million below the January request as a result of caseload changes contained in the May Revision. The most significant changes made by the Legislature were an additional reduction in funds requested for inmate population changes to reflect more recent trends ($22 million), elimination of funds for inflation adjustments ($22 million), and reduction in funds requested for travel ($12 million).

Inmate Caseloads. The Legislature considered a number of changes that would have saved money by reducing the number or length of stay of offenders in prison and on parole. None of these changes were included in the final budget, however. The budget assumes that the prison inmate population will reach about 156,000 inmates by June 30, 1997, an increase of approximately 9.5 percent over 1995-96.

Federal Funds for Incarceration and Supervision of Undocumented Felons. The budget assumes a total of about $514 million in federal funds to offset the state's costs of supervising undocumented inmates and wards in state prison and the Department of the Youth Authority in 1995-96 and 1996-97. This amount is about $87 million less than the amount assumed in the Governor's January budget proposal for the two-year period and is consistent with estimates of California's share of existing federal appropriations and authorizations.

Department of the Youth Authority

The budget provides $402 million ($394 million from the General Fund and $8.2 million from special and bond funds) for support of the Youth Authority.

Delay in Implementation of New County Fees. The amount included in the Budget Act for the Youth Authority is about $24 million more than the level requested in the Governor's January budget proposal. The principal reason for this increase is that the January budget assumed that legislation would be enacted and take effect on February 1, 1996, to increase the fees that counties pay the state for commitment of juvenile offenders to the Youth Authority; however, the new fees will not take effect until January 1, 1997. Thus, the Legislature augmented the budget for the Youth Authority to account for the state receiving less fee revenues than originally anticipated from counties.

"M Case" Transfer. In addition, the budget anticipates transferring from the Youth Authority to the CDC custody of "M cases" who are 18 years of age or older, pursuant to a budget trailer bill (Ch 195/96 [AB 3369, Bordonaro and Wright]). ("M cases" are offenders who are sentenced to the CDC, but who are transferred to the Youth Authority to serve all or part of their incarceration time.) Because the costs of housing offenders in the CDC is less than the costs of the Youth Authority, the budget anticipates net savings of $2.1 million in 1996-97.

New Local Law Enforcement Programs

The budget includes $150 million for two new local law enforcement programs.

Assistance for Direct Law Enforcement. In his January budget, the Governor proposed $150 million of state funds for local law enforcement under the Citizens' Option for Public Safety (COPS) program. Specifically, the Governor proposed to modify the state's personal income tax forms to allow taxpayers to decide whether 1 percent of their income tax liability should be subvened to local agencies to augment police, sheriff, and prosecution programs. (The administration estimated that this "check-off" program would generate $150 million annually to local agencies.)

The Legislature rejected the COPS program, but approved $100 million from the General Fund for subvention to local governments for law enforcement, pursuant to a budget trailer billCh 134/96
(AB 3229, Brulte and Lockyer). Of this amount, $75 million would be distributed to cities and counties for police and sheriffs' patrol services. The remaining $25 million would be distributed to counties for district attorneys ($12.5 million) and jail services provided by sheriffs ($12.5 million). The funds would be distributed based on the population of the jurisdiction.

Juvenile Justice Grant Program. The budget also includes $50 million for a new Juvenile Crime Enforcement and Accountability Challenge Grant Program, pursuant to a budget trailer bill
Ch 133/96 (SB 1760, Lockyer and Goldsmith). This money, which is appropriated to the Board of Corrections, would be awarded on a competitive basis to counties that develop and implement a comprehensive plan to provide a continuum of responses to juvenile crime and delinquency, including prevention, intervention, suppression, and incapacitation programs.


The 1996 budget provides about $4 billion for the Department of Transportation (Caltrans). However, this does not include funds from the Seismic Retrofit Bond Act of 1996 (Proposition 192) which was approved by voters at the March 1996 election. This act authorizes the sale of $2 billion in general obligation bonds in order to fund seismic retrofit of state highway bridges and toll bridges. However, Proposition 192 funds, which would be spent over a number of years, are not appropriated in the annual Budget Act. Thus, Caltrans' total funding for 1996-97 is actually larger than it appears to be in the budget.

Support. The 1996 budget provides about $1.6 billion for support of Caltrans roughly the same amount as in 1995-96. It should be noted that the budget:

Capital Outlay Highways and Rail. The budget also provides $1.6 billion for transportation capital outlay projects. In addition, the budget anticipates that Caltrans will use $1.1 billion of Proposition 192 funds for seismic retrofit, including:

Local Assistance. The budget provides $879 million for a variety of local assistance programs, primarily reflecting a pass-through of federal funds for highway and transit purposes and state funds for the State-Local Transportation Partnership Program. This amount is 4 percent less than in 1995-96. Assistance to transit authorities includes $76 million for operating assistance (through the State Transit Assistance Program) and $25 million for capital acquisition (through the Transit Capital Improvement Program). In addition, the budget provides $8.3 million to fund local transportation demand management (primarily carpool matching) programs in 1996-97.


The 1996 budget provides a total of about $1 billion for resources programs, including about $860 million for state operations of various resources agencies and conservancies, and $181 million for local assistance and capital outlay. Significant features of the budget include:

Environmental Protection

The 1996 budget provides about $660 million for environmental protection programs, including about $596 million for various environmental protection agencies and $64 million for local assistance. This amount is about $22 million (3 percent) more than 1995-96 expenditures reflecting the following major changes:

Capital Outlay

The budget includes a total of $760 million for capital outlay, as shown in Figure 10. Of this amount, however, $54 million (for the CDC and the Youth Authority) was dependent on a proposed general obligation bond measure that was not approved by the Legislature. The 1996 Budget Act includes no funds for planning or construction of new prison facilities.

About 80 percent of the capital outlay budget is financed from general obligation bonds. The remaining funding is from the General Fund ($71 million), various special funds ($64 million), and federal funds ($9 million). Almost 60 percent of the total capital outlay funding is for the three segments of higher education and comes principally from bonds that were approved by the voters in March 1996.

Other Legislation. In addition to the Budget Act appropriations for capital outlay, the Legislature passed the following legislation authorizing $278 million in lease-payment bonds:

Local Government

The Legislature did not approve any general purpose local fiscal relief program in this year's budget. (The Legislature did send legislation to the Governor that would have provided general purpose fiscal relief beginning in the 1997-98 fiscal year. However, this legislation was vetoed.) The major new program affecting local government in 1996-97 is the addition of $150 million for local law enforcement and prevention of juvenile crime (see previous discussion in the Criminal Justice section of this chapter).

Tax Relief

The Renters' Tax Credit provides a refundable tax credit of $60 to single renters and $120 to married couples and heads of households. Due to severe budget problems, the credit was suspended in 1993, 1994, and 1995. The credit was scheduled to be reinstated this year but was suspended for an additional year, for a General Fund savings of $520 million.


Tax Legislation

As noted previously, the two main tax-related measures passed by the Legislature and signed by the Governor are a bank and corporation tax rate cut (AB 3499) and a package of targeted tax cuts partially offset by various federal conformity provisions (SB 38).

Assembly Bill 3499 provides for a 5 percent reduction in the bank and corporation tax rate (from 9.3 percent to 8.84 percent). The measure is in lieu of the Governor's proposal for a 15 percent across-the-board reduction in personal and corporation income tax rates. It applies to corporations with income years beginning on or after January 1, 1997, and will reduce revenues by $85 million in 1996-97, by $230 million in 1997-98, and by $290 million in 1998-99.

Senate Bill 38 includes several targeted tax-relief provisions as well as several revenue raising provisions which conform California tax law to federal tax law. Tax relief provisions include: (1) an increase in the research and development basic research credit and the university research credit, (2) an increase in the amount of business personal property purchased by small business that can be deducted in a single year (rather than depreciated over several years), and (3) a modification to the way in which foreign dividend deductions are computed.

Revenue-raising federal conformity provisions include: (1) limits on moving expense deductions, (2) a requirement that corporations compute their quarterly estimated payments based upon 100 percent of their prior year tax liability, and (3) a requirement that securities dealers value the securities held in their inventory based on current market prices (so-called "mark-to-market" provisions).

Overall, the net impact of SB 38 is a projected revenue reduction of $10 million in 1996-97, and a cumulative reduction of $80 million during the three-year period from 1996-97 though 1998-99.

Other Factors Affecting the Revenue Totals

Trial Court Funding. The Budget Act revenue amounts assume implementation of the Governor's proposal to restructure the TCF Program. The proposal included a provision which redirects from the General Fund to the Trial Court Trust Fund fines and penalties imposed by the trial courts. This would result in a $311 million reduction in revenues (and expenditures) from the General Fund beginning in 1996-97. Legislation implementing these changes has not been passed.

Federal Internal Revenue Service Tax Offset Provision. The 1996-97 revenue forecast assumes that federal legislation will be enacted requiring the U.S. Internal Revenue Service to collect delinquent state taxes out of federal refunds owed to California taxpayers. (The state currently provides a similar service for the federal government.) This legislation would have increased state tax revenues by an estimated $85 million annually beginning in 1996-97. However, the federal legislation was not enacted before Congress adjourned.

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