Legislative Analyst's Office, November 20, 1997

California's Fiscal Forecast
The LAO's Economic and Revenue Projections 1997-98 Through 1999-00

Chapter 4: Expenditure Projections

In this chapter, we present and discuss our General Fund expenditure projections for 1997-98 through 1999-00, both in the aggregate and by individual program areas.

Methodology and Assumptions

Our projections are based on the following methodology and underlying assumptions:


Figure 1 presents our General Fund spending projections, both in the aggregate and by major program area. As shown, projected total General Fund spending grows from $48.9 billion in 1996-97 to $52.7 billion in 1997-98, $55.7 billion in 1998-99, and $58.9 billion in 1999-00. This amounts to an annual average growth rate between 1996-97 and 1999-00 of 6.4 percent.

Figure 1
Projected General Fund Spending for Major Programsa
(Dollars in Millions)
Projected ProjectedAnnual Growth
1996-97 1997-98 1998-99 1999-00
Education programs
Proposition 98/ K-14 education $20,153 $22,266 $23,905 $25,079 7.6%
Higher education--UC/CSU 3,687 3,930 4,194 4,354 5.7
Health and Welfare programs
Medi-Cal benefits 6,380 6,312 6,372 6,663 1.5
CalWORKs 2,842 2,485 2,610 3,028 2.1
SSI/SSP 2,021 2,029 2,090 2,172 2.4
Selected other programs 2,048 2,380 2,724 3,058 14.3
Department of Corrections 3,284 3,471 3,692 3,926 6.1
Debt serviceb 2,315 2,285 2,516 2,750 5.9
Other programs/costs 6,143 7,556 7,599 7,857 8.5
Totals $48,873 $52,714 $55,702 $58,887 6.4%
aDetail may not add to totals due to rounding.
bIncludes both general obligation and lease-payment bonds.

Spending by Program Area

Figure 2 shows the current distribution of General Fund spending, by major program area. It indicates that slightly less than three-fourths of total 1997-98 General Fund spending is devoted to education, health, and social services, with education alone accounting for nearly half. Given this, spending trends in these three major program areas have significant implications for overall General Fund spending levels.

Faster-Growing Program Areas

Proposition 98. Almost half of the total General Fund spending increase we project over the forecast period is for Proposition 98 K-14 education. This is the largest single category of General Fund spending, accounting in 1997-98 for 42 percent of the total. Figure 1 shows that the amount of state funding required to meet the Proposition 98 minimum guarantee grows relatively rapidly during the forecast period--an average annual growth of 7.6 percent--reflecting a large increase in 1997-98, and more moderate gains in future years. In addition to Proposition 98 spending, other areas of above-average growth include:

Program Areas With Slow or No Growth

Figure 1 indicates that program areas with below-average projected spending growth include:

We next discuss in greater detail our projections for spending in major program areas.



Federal welfare reform legislation replaced the AFDC program with the Temporary Assistance for Needy Families (TANF) program. Assembly Bill 1542 (Ducheny, Ashburn, Thompson, and Maddy) created the CalWORKs program, which is California's version of the TANF program. The CalWORKs program provides cash grants and welfare-to-work services to low-income families with children. (For a description of the program, please see our October 1997 report California Spending Plan 1997-98.)

The Spending Forecast. General Fund spending in 1997-98 for the CalWORKs program (including child care within the Department of Social Services [DSS]) is estimated to be $2.5 billion, a reduction of 13 percent from the prior year. General Fund spending is projected to increase by 5 percent in 1998-99 and 16 percent in 1999-00. These increases will occur, despite continued caseload declines, because of increased costs for welfare-to-work services and the restoration of the 4.9 percent statewide grant reduction and the statutory COLA in November 1998. In comparison, expenditures increased by about 3 percent in 1994-95 and decreased by about 1 percent in 1995-96.

Key Forecast Factors. Federal welfare reform and the CalWORKs program made extensive changes in California's welfare system for families with children. As with any new program, multi-year expenditure projections for CalWORKs are potentially subject to a significant margin of error. This is because of uncertainty surrounding the program--for example, the pace at which counties will implement it, how certain program provisions (such as county fiscal incentive payments for meeting performance standards) will be implemented, and the behavioral impact of the policy changes on recipients.

For 1997-98, General Fund expenditures are down 13 percent from 1996-97 primarily due to savings from (1) a declining caseload, (2) the full-year impact of the statewide and regional 4.9 percent grant reductions, and (3) modifications to the income disregard system for determining grant levels. These savings were partially offset by increased costs for welfare-to-work services and child care.

Even with this decline in General Fund expenditures, we project that combined federal and General Fund monies are over-budgeted in the current year because counties appear to be implementing the program more slowly than assumed in the budget. Nevertheless, General Fund spending is likely to remain at the budget act appropriation level in order to satisfy the federal maintenance-of-effort spending floor. This can be achieved by spending General Fund monies ahead of federal funds and rolling over any unspent federal funds into subsequent years. (We note that funding for welfare-to-work services was provided to the counties in the form of a block grant, and any unexpended funds may be rolled over until July 1, 2000.)

For 1998-99, we project that even though caseloads will continue to decline, General Fund spending will increase by $125 million. Increased costs include welfare-to-work services and child care ($900 million), restoration of the 4.9 percent grant reduction ($132 million), and resumption of the statutory COLA ($75 million). State savings include an estimated $223 million in federal TANF funds that are carried over from 1997-98 and offset General Fund costs. Other savings include a caseload reduction ($277 million) and the full-year impact of modifications to the income disregard system ($135 million).

In 1999-00, we project that spending will increase by $418 million because costs for employment services, county fiscal incentive payments, and the full-year impact of the 4.9 percent grant restoration and COLA will exceed projected grant savings from declining caseloads and increased earnings by CalWORKs recipients.

All of these spending projections exclude any potential federal penalties under the federal Welfare Reform Act.

Caseload Trends and Projections. Following a period of rapid increase in the early 1990s, the caseload peaked at 921,000 in 1994-95 and has since declined by 2 percent in 1995-96 and 6.7 percent in 1996-97. About two-thirds of the recent decline in welfare caseloads can be explained by demographic trends and the current economic expansion. Other factors that may explain the balance of the sharp caseload decline include (1) an "announcement effect" of federal and state welfare reform that affects behavior prior to policy implementation, and (2) a labor market effect whereby welfare recipients benefit more as the economy approaches full employment (where the supply of labor is more scarce) compared to the early stages of economic recovery.

Figure 3 shows our caseload projections for 1997-98 through 1999-00. The figure shows that the caseload will decline by 11 percent in 1997-98, 6.1 percent in 1998-99, and 6.7 percent in 1999-00. These projections are based on (1) a trend analysis of caseloads, birth rates, and unemployment rates; (2) an assumption that other contributing factors to the caseload decline will continue (but at a reduced rate); and (3) an estimate of the impact of additional welfare-to-work services.

Potential Availability of Proposition 98 Funds for Child Care. In 1998-99 and 1999-00, we project that net annual General Fund costs for child care will exceed $600 million in the DSS budget. This assumes that less than $100 million per year in Proposition 98 funds will be used to pay for child care for TANF recipients (in the State Department of Education [SDE] budget). Assuming the Legislature elects to fund child care for all welfare recipients who need it in order to work or meet their participation mandate, there would be three basic funding options: (1) provide new non-Proposition 98 General Fund monies (as our projections assume); (2) spend some, or all, new Proposition 98 revenues for child care; and/or (3) allocate some funds in the SDE child care programs for welfare recipients only, rather than for anyone who meets the income criteria.

AFDC-Foster Care

The AFDC-Foster Care (AFDC-FC) program provides cash grants for children if they are living with a foster care provider under a court order or a voluntary agreement between the child's parent and a county welfare or probation department.

The Spending Forecast. We estimate that General Fund expenditures in the AFDC-FC program will increase from $387 million in 1997-98 to $464 million in 1998-99 and $546 million in 1999-00. This represents a 20 percent increase in 1998-99, and an 18 percent increase in 1999-00. In comparison, expenditures increased by 14 percent in 1996-97 and 16 percent in 1997-98.

Key Forecast Factors. The projected increases are due to: (1) caseload growth (about 7.5 percent annually); (2) an increase in the proportion of children placed in group homes (which are more expensive than other placements), reflecting a continuation of recent trends (about 6 percent annually); (3) statutory COLAs for group homes and rate increases for foster family homes; and (4) placement in group homes of a higher proportion of children requiring a higher level of service, pursuant to current law.

Child Support Enforcement--Potential Federal Penalties

Federal law requires that states operate statewide automated child support data processing and information retrieval systems by October 1, 1997. Because California has not implemented the Statewide Automated Child Support System, the state risks decertification of its child support enforcement (Title IV-D) program. Under current federal law, decertification would result in suspension of federal Title IV-D payments (approximately $425 million in 1997-98). Under state law, most of the burden of the loss of federal funds would be borne by the counties. We note that only 17 states are operating federally certified automated child support systems.

It should be noted that if California's child support enforcement program were decertified, the state risks subsequent decertification of its TANF plan. Without an approved TANF plan, California would no longer be an "eligible state" and would not be entitled to its federal TANF block grant ($3.7 billion per year). In 1998, Congress is likely to consider changes to current law that may substantially reduce this potential loss of federal funds.

Supplemental Security Income/State Supplementary Program

The SSI/SSP provides cash assistance to eligible aged, blind, and disabled persons. The SSI component is federally funded and the SSP component is state funded.
The Spending Forecast. General Fund spending for the SSP is projected to be $2 billion in 1997-98, essentially unchanged from the prior year. General Fund spending is estimated to increase 3 percent in 1998-99 and 4 percent in 1999-00. In comparison, spending in 1996-97 increased by less than 1 percent; and in the three fiscal years prior to that, spending declined, ranging from 3.6 percent to 9.9 percent annually.

Key Forecast Factors. For 1997-98, we estimate that spending will exceed the budget act appropriation only slightly ($7 million). This increase is due primarily to the net effect of (1) costs associated with the inability to implement the 4.9 percent statewide grant cut during October 1997 and an increase in the federal administrative fee, largely offset by (2) savings from fewer disabled noncitizens joining the caseload than had been budgeted.

We project that spending will increase by $61 million in 1998-99 because of (1) restoration of the statutory state COLA ($27 million) in January 1999, (2) an additional increase in the federal administrative fee ($17 million), and (3) additional disabled noncitizens joining the caseload ($17 million).

Our projections call for spending to increase by $82 million in 1999-00 due to (1) the statutory state COLA ($58 million), (2) a modest scheduled increase in the federal administrative fee ($6 million), and (3) more disabled noncitizens becoming eligible for the program ($18 million).

Caseload Trends and Projections. Figure 4 shows historical and projected changes in the components of the SSI/SSP caseload.

From 1981-82 through 1996-97, the state's SSI/SSP caseload grew by 340,000 cases, or 49 percent over the 15-year period. Most of the growth was in the disabled category, increasing by 303,000 cases. More recently, the growth in the disabled SSI/SSP cases has moderated from 7.7 percent annually in 1991-92 to 0.1 percent in 1996-97. The high rate of growth in the number of disabled cases in the early 1990s can be attributed to factors such as AIDS-related disabilities, federal expansion of eligibility, and outreach programs.
The recent experience of essentially no growth in caseload is partially attributable to federal policy changes that (1) eliminated drug or alcohol addiction as a qualifying disability and (2) made aged noncitizens in the U.S. prior to August 1996 (but not yet on SSI/SSP) ineligible for assistance. (The federal Balanced Budget Act of 1997 reversed an earlier federal policy and retained eligibility for all noncitizens receiving aid as of August 1996.)

The recent federal changes have essentially moved the caseload into a state of equilibrium, whereby the number of new cases each year is approximately equal to the number of cases leaving the rolls. For 1998-99 and 1999-00, we project annual increases in the caseload of less than 1 percent. Most of this increase is attributable to the federal requirement to provide grants to disabled noncitizens (who were U.S. residents prior to August 1996, but were not receiving aid).

In-Home Supportive Services

The In-Home Supportive Services (IHSS) program provides various services to eligible aged, blind, and disabled persons who are unable to remain safely in their own homes without such assistance.

The Spending Forecast. General Fund expenditures in the IHSS program are estimated to be $386 million in 1997-98, $431 million in 1998-99, and $451 million in 1999-00. This represents an increase of 12 percent in 1998-99 and 4.6 percent in 1999-00.

Key Forecast Factors. The increase in expenditures is primarily due to caseload growth (3.9 percent annually) and increases in the minimum wage, pursuant to federal and state law. (Most IHSS providers are paid the minimum wage.) The rate of growth is higher in 1998-99 than 1999-00 due to the minimum wage increase.

Department of Developmental Services--Regional Centers

The Department of Developmental Services (DDS) contracts with 21 nonprofit regional centers to coordinate services for persons with developmental disabilities. A developmental disability is defined as a disability, related to certain mental or neurological impairments, that originates before a person's 18th birthday, constitutes a substantial handicap, and is expected to continue indefinitely. In addition to providing some services directly, such as diagnosis and case management, regional centers purchase a variety of services from providers in the community.

The Spending Forecast. We estimate that General Fund expenditures in the DDS program will increase from $485 million in 1997-98, to $514 million in 1998-99, and $543 million in 1999-00. This represents about a 6 percent increase each year.

Key Forecast Factors. The projected increases are primarily due to: (1) estimated basic caseload growth of 5 percent annually; (2) increases in the minimum wage, pursuant to federal and state law; and (3) an increased average cost per client, due to factors such as the Coffelt court settlement concerning the provision of services to former developmental center residents being placed in the community. Under this 1994 settlement agreement, the DDS must find or develop appropriate community living arrangements for at least 2,000 developmental center residents over a five-year period. More than 2,300 residents have moved into community placements since the agreement was reached. This population generally requires a higher level of services compared to the average regional center client, leading to increased costs for the centers.


The Medi-Cal Program (the federal Medicaid Program in California), provides health care services to recipients of CalWORKs and SSI/SSP grants, and to other low-income persons who meet the program's eligibility criteria (primarily families with children and the elderly, blind, or disabled). The state and the federal governments share most of the costs of the program on a roughly equal basis.

The Spending Forecast. We estimate that General Fund spending for Medi-Cal benefits (excluding administrative costs) will be $6.3 billion in 1997-98, which is $281 million less than the estimate when the budget was enacted. The primary reason for the savings is that our estimate of the 1997-98 caseload (the number of persons eligible for services) is lower than the May Revision estimate by 4.3 percent (226,000 eligibles). The cost of benefits per eligible also has grown less rapidly than anticipated in budget estimates. After the current year, however, the caseload stabilizes while benefit costs increase in line with medical price inflation. As a result, our forecast indicates that General Fund benefit costs will grow slightly in 1998-99--by $60 million (1 percent)--and moderately in 1999-00--by $290 million (4.6 percent).

Key Forecast Factors. As shown in the inset box in Figure 5 (see next page), the total Medi-Cal caseload peaked in 1994-95 and then declined slightly in 1995-96 and 1996-97. The forecast indicates that this caseload reduction will accelerate in the current year--the average Medi-Cal caseload in 1997-98 will drop by 5.1 percent compared with 1996-97 and 7.4 percent less than the 1994-95 peak caseload. Figure 5 also shows that both the rapid growth of the Medi-Cal caseload in the early 1990s and the current caseload decline primarily reflect changes in the number of families and children on Medi-Cal, rather than changes in the elderly and disabled components of the caseload. The earlier growth reflected eligibility expansions (particularly for children, pregnant women, and immigrants) and increased welfare caseloads due to the recession. The recent caseload declines result from a significant reduction in the CalWORKs welfare caseload (which comprises half of the total Medi-Cal caseload).

For 1997-98, the number of CalWORKs recipients on Medi-Cal declines by 273,000 (9.7 percent) and by an additional 210,000 over the following two years through 1999-00, in line with our overall forecast of CalWORKs caseload. However, increases in the number of nonwelfare children on Medi-Cal offset more than a quarter of the reduction in the CalWORKs Medi-Cal caseload over this period. This increase is due to recently enacted state legislation to ease eligibility requirements and expand outreach to parents of uninsured children.

Our forecast includes the effect of an increased federal share of Medi-Cal benefit costs, which rises from 50.23 percent to 51.55 percent over the forecast period, under the federal formula. The increased federal match results in a cumulative General Fund savings of $453 million over the forecast period, including savings already reflected in the current-year budget act.

"Crossover" Savings at Risk. The forecast includes a total of $345 million of savings through 1999-00 from implementing "crossover" limits on payments for services to Medi-Cal eligibles who also are Medicare beneficiaries. Under the crossover limits, Medi-Cal will only pay deductibles and copayments for Medicare-covered services to the extent necessary to meet the Medi-Cal payment rate, which generally is less than providers charge other Medicare patients. Federal legislation recently authorized such crossover limits, and the savings were included in the enacted 1997-98 state budget. However, implementation of the inpatient portion of the limits has been enjoined by a federal court. If the state's appeal of that decision is not successful, almost $150 million of the assumed crossover savings could be lost.

New Healthy Families Program

The federal Balanced Budget Act of 1997 created the State Children's Health Insurance Program. The program will provide California with federal funds on approximately a two-to-one matching basis to provide health care coverage for children in families with incomes that are less than 200 percent of the federal poverty level (FPL)-- $32,100 for a family of four--but are too high to qualify for Medi-Cal. Subsequent to enactment of the state budget, the Legislature and Governor approved legislation to implement the program in California. The new program, to be administered by the Managed Risk Medical Insurance Board (MRMIB), will help low-income families purchase health coverage for their children.

To qualify for coverage, a family's income must be between 133 percent and 200 percent of FPL for children ages 1 through 5, and between 100 percent and 200 percent of FPL for children ages 6 through 18. Currently, children at the lower income levels (and infants up to 200 percent of FPL) are eligible for Medi-Cal coverage. Children currently or recently covered by employer-sponsored insurance are not eligible.

Families will purchase coverage directly through MRMIB or receive purchasing credits from MRMIB to participate in employer-sponsored coverage, if available. Coverage will be equivalent to state employee health benefits. Monthly premiums paid by families for the lowest cost plan will be $7 per child (up to 150 percent of FPL) or $9 per child (up to 200 percent of FPL), with family maximums of $14 and $27, respectively.

The Spending Forecast. Because the new insurance program is not planned to operate until 1998-99, General Fund costs in 1997-98 will only be about $2 million for start-up activities. On a full-year basis, the administration estimates that the new insurance program will cost a total of $485 million ($170 million General Fund) at current costs to cover all currently eligible uninsured children. Our forecast uses this estimate and phases in participation from July 1998 to July 1999.

Key Forecast Factors. The administration's estimate assumes coverage of all currently uninsured children in qualifying families. While this assumption of 100 percent participation is unlikely to occur, the estimate does not allow for any "crowd-out"--a shift from employer-based coverage to the new subsidized program. Our forecast assumes that crowd-out costs will offset any savings from lower participation by the uninsured. Actual General Fund costs will depend on the net effect of these two factors, the speed of program implementation, and the extent to which the cost of this program is offset by savings in other existing children's health programs.


This section reviews our estimates of state Proposition 98 costs for K-14 education (K-12 schools and community colleges).

Proposition 98 sets the minimum amount that the state must provide for California's public K-12 education system and the California Community Colleges. About 85 percent of total funding for these school programs is from the state General Fund and local property taxes. Public K-12 education in California is provided to about 5.6 million students--ranging from infants to adults--through about 1,060 locally governed school districts and county offices of education. The California Community Colleges provide instruction to about 1.4 million adults at 107 colleges operated by 71 locally governed districts.
The Spending Forecast. We estimate that annual growth in total Proposition 98 spending (General Fund and local property taxes) for K-14 education will be 6.5 percent in 1998-99 and 5 percent in 1999-00. This is lower than the 8.8 percent increase in 1996-97 and the projected increase of 8.2 percent for the current year. This forecast reflects the reduction in taxes approved by the Legislature during the 1997 session and our moderate revenue forecast.
Key Forecast Factors. General Fund expenditures for Proposition 98 depend on the following factors: General Fund revenues, state population, K-12 average daily attendance (ADA), per-capita personal income, and local property taxes. Figure 6 summarizes our assumptions for these factors. Our economic forecast assumes state tax revenues will grow by about 5 percent in 1998-99 and 1999-00. We also assume that growth in local property tax revenues will continue to recover from the relatively low rates of the past few years.

Figure 6
LAO Proposition 98 Education Forecast

Annual Percent Change

1997-98 1998-99 1999-00
State population 1.7% 1.8% 1.8%
Per-capita personal income 4.7 5.0 4.5
Local property taxes 3.5 4.6 5.3
K-12 average daily attendance (ADA) 2.5 2.0 1.6
Proposition 98 guarantee (General Fund and local property taxes) 8.2 6.5 5.0

Higher 1996-97 and 1997-98 Estimates. We estimate higher Proposition 98 funding levels for 1996-97 and 1997-98 than anticipated in the 1997-98 Budget Act. Specifically, we estimate spending increases of $63 million and $220 million, respectively, above the amounts assumed in the 1997-98 Budget Act. These higher estimates stem from our revised estimates of General Fund revenues in the two fiscal years.

K-12 Funding Projections. Any increase in Proposition 98 is shared between K-12 education and the California Community Colleges. Figure 7 displays our projected K-12 per-pupil spending from 1994-95 through 1999-00 (in both "current" and inflation-adjusted dollars). These estimates, which are derived from our Proposition 98 forecast, reflect real per-pupil increases of about 2 percent each in 1998-99 and 1999-00. This funding level would permit continued support for existing programs--including class-size reduction.

In addition, there would be available about $500 million in 1998-99 and an additional $200 million in 1999-00 for program increases and new school improvement activities. As discussed in the "Health and Welfare" section of this chapter, we estimate that child care costs associated with welfare reform will increase by almost $400 million in 1998-99 (rising to $620 million). This estimate assumes full funding of all eligible child care services identified in the new state welfare program. One of the major issues for the 1998-99 budget is whether these costs should be funded with Proposition 98 funds, non-Proposition 98 General Fund monies, or whether a major portion of these costs can be addressed by redirecting existing child care services to welfare recipients. If Proposition 98 funds are used to support all or a major share of the new costs, it will severely limit the scope of any new program or school improvement activities.

Community College Funding Projections. Based on our Proposition 98 projections, we estimate total community college funding will increase by between 5 percent and 6 percent each year in 1998-99 and 1999-00. After adjusting for enrollment growth and inflation, this would provide a 1 percent to 2 percent increase for additional enrollment and/or program improvements. This assumes no change in the proportion of Proposition 98 funds going to community colleges.


In addition to community colleges, the state's public higher education systems include the University of California (UC) and the California State University (CSU). The UC consists of eight general campuses, one health science campus, and numerous special research facilities. The UC awards bachelor's, master's, and doctoral degrees, as well as various professional degrees. The UC has primary jurisdiction over research. The CSU consists of 22 campuses and several off-campus centers. The CSU grants bachelor's and master's degrees and may award doctoral degrees jointly with the UC or a private university.

The Spending Forecast. We estimate that spending for UC and CSU (excluding funding for debt service) will increase from $3.9 billion in 1997-98 to $4.2 billion in 1998-99, or by 6.7 percent (the percentage increases at UC and CSU are similar). For 1999-00, we estimate that spending for UC and CSU (excluding funding for debt service) will increase to almost $4.4 billion or by 3.8 percent compared to 1998-99.

Key Cost Factors. For the 1998-99 fiscal year we assume that UC and CSU will receive "base" budget increases of 4 percent, as contemplated under the Governor's four-year "compact" with the systems. This assumption is broadly consistent with actions taken by the Legislature and Governor in the last three annual budget acts. For the 1999-00 fiscal year, when the Governor's present "compact" will no longer be in effect, we assume that UC and CSU budgets will grow by (1) the rate of inflation and (2) the marginal cost associated with 1.4 percent enrollment growth (a level consistent with recent budgeted levels). To the extent that faculty salaries are increased above the inflation rate, state expenditures would increase further, potentially by tens of millions of dollars.

General Fund Replacement of Foregone Fee Revenues. Chapter 853 Statutes of 1997 (AB 1318, Ducheny), reduces UC and CSU systemwide fees for resident undergraduates by 5 percent for 1998-99 and "freezes" those fees at the reduced level for 1999-00. Chapter 853 appropriated $41.9 million from the General Fund for the 1998-99 fiscal year to compensate UC and CSU for reduced fee revenues. Our projection for 1998-99 includes an additional $66 million to "buy out" a 10 percent fee increase. This assumption is consistent with similar actions taken by the Legislature and Governor in the last three annual budget acts.


The major state judiciary and criminal justice programs include support for four agencies in the executive branch--the Departments of Corrections, the Youth Authority, Justice, and the Office of Criminal Justice Planning--as well as expenditures for local trial courts and state appellate courts. The largest expenditure programs--the Department of Corrections and the Trial Court Funding Program--are discussed in more detail below.

Department of Corrections

The California Department of Corrections (CDC) is responsible for the incarceration, training, education, and care of adult felons and nonfelon narcotics addicts at 33 state prisons. The CDC also supervises and provides services to parolees released to the community.

The Spending Forecast. The department's General Fund support budget is forecast to grow between 1996-97 and 1999-00 at an average annual rate of 6.1 percent, exceeding $3.9 billion at the end of that period. (This does not include General Fund support for capital outlay or lease-payment bonds, which are accounted for elsewhere in our projections.) The department's General Fund costs will be partially offset by the federal government to reimburse the state for the costs of housing undocumented immigrants convicted of felonies in California. After adjusting for receipt of these federal funds, the annual General Fund growth is projected to be 9 percent because the federal funds are expected to steadily decrease during this period.

Federal support is expected to drop from $441 million in 1996-97 to $244 million in 1999-00 for two reasons. First, we note that the anticipated reimbursements for 1996-97 and 1997-98 ($323 million) are artificially high. As regards 1996-97, this is because the state received two federal fiscal year appropriations within that single state fiscal year. As regards 1997-98, the state took advantage of federal legislation permitting grants for prison construction to be used on a one-time basis to offset the costs of holding undocumented immigrants in state prison. Second, the state's federal funding is likely to decline because federal law permits local governments throughout the nation to claim reimbursement for the costs of housing undocumented felons in local jails, thereby spreading the available federal appropriation to more agencies.

The projected growth in adult correctional expenditures continues a trend of steadily larger CDC budgets that has existed since the early 1980s.

Key Forecast Factors. The significant increases projected in General Fund support for the CDC reflect major growth in the prison inmate population expected during the forecast period. Our estimates through 1999-00 are based on the CDC's projections of the inmate population, which we believe are reasonable. The CDC anticipates that the prison population will exceed 180,000 by June 2000. This is a slightly greater increase than previously forecast by the CDC. The new, higher projection means that the CDC inmate population will jump by more than 40,000 or almost 30 percent over the four-year period ending June 30, 2000. (The projections are shown graphically in Figure 4 in Chapter 5.)

The increase in prison population is largely the result of tougher sentencing measures approved by the Legislature, Governor, and the voters, including the "Three Strikes and You're Out" law enacted in 1994. Also, demographic shifts, in particular the growth in the state's 18-to-24 age group, can increase the prison population. On the other hand, the state of the economy and the availability of jobs to persons who might otherwise commit financial crimes can work to reduce the growth in the inmate population. Local law enforcement practices also have an effect on the numbers of persons arrested and convicted of crimes. The most recent increase in CDC projections appears due largely to a new Board of Prison Terms policy that has resulted in the revocation of parole for a large number of additional parolees who tested positive for illegal drug use.

Meanwhile, the number of parolees under the supervision of CDC parole agents is also expected to increase, reflecting the overall growth in the state's population of criminal offenders. The CDC projects that the parolee population will grow by almost 19,000, or almost 20 percent, over the four-year period ending June 30, 2000. We discuss the long-term fiscal considerations of the prison population growth in Chapter 5.

Trial Court Funding

The Trial Court Funding Program pays for a portion of the salaries and operating expenses of superior and municipal courts (the counties pay the remainder). Recent legislation--Chapter 850, Statutes of 1997 (AB 233, Escutia and Pringle)--restructured the program and significantly increased the state's fiscal obligation for support of the courts, beginning in 1998-99. Specifically, the measure reduced and capped each county's financial obligation, and increased the state's obligation by providing that the state will be responsible for supporting future cost increases for the trial courts.

The Spending Forecast. Total General Fund expenditures for support of the courts, excluding fine revenues, which will be transferred from the General Fund to a special fund as a result of Chapter 850, will increase from $193 million in 1996-97 to $686 million in 1999-00--more than a three-fold increase.

Key Forecast Features. Most of this increase will occur in 1998-99 when the state takes over primary responsibility for the support of the trial courts. We assume that the costs will increase by $450 million in that year over state expenditures in 1996-97. This is due to several factors. First, Chapter 850 requires the state to assume some specific new costs, including $274 million to provide minimum levels of state support to courts in all counties, thereby resulting in a corresponding reduction in county costs. In addition, consistent with assumptions made by the legislative leadership and the Governor at the time Chapter 850 was enacted, we assume that projected growth in trial court operating costs and funding to promote court improvements and efficiencies will result in additional costs of $100 million in 1998-99. Even if these growth assumptions and the agreement on funding for improvements do not hold, the requirements for additional state funding pursuant to the provisions of Chapter 850 will probably increase costs by at least $350 million in 1998-99. Costs for 1999-00 are based on assumptions regarding workload growth and inflation. We discuss the long-term fiscal considerations of trial court funding in Chapter 5.


Debt Payments. As shown in Figure 8, we estimate that General Fund debt-service costs (for general obligation and lease-payment bonds) will increase to about $2.8 billion in 1999-00. This forecast assumes that about $5.5 billion in currently authorized bonds will be sold by 1999-00. The figure also shows that debt payments for lease-payment bonds is an increasing share of total debt service costs.

Debt Ratio. The state's debt ratio (debt service payments as a percentage of General Fund revenues) increased from 2.5 percent in 1990-91 to a high of 5.1 percent in 1994-95. We expect that General Fund revenues will increase at a faster rate than the increase in debt payments as currently authorized bonds are sold. As a result, our forecast indicates that the state's debt ratio will decline to 4.4 percent in the current year, increase to 4.8 percent in 1999-00, and then decline thereafter. Voter approval of additional general obligation bonds or legislative authorization of new lease-payment bonds would, of course, increase the debt ratio.


Renters' Credit

The Renters' Tax Credit provides a refundable tax credit of $60 to single renters and $120 to married couples and heads of households. The credit has been suspended for the past five years, from 1993 through 1997. The program is scheduled to be reinstated January 1, 1998 and will result in an estimated cost of $530 million in 1998-99 and $540 million in 1999-00.

Retirement Programs

Payment of Deferred PERS Obligations. In May, the California Supreme Court refused to hear an appeals court ruling which had found the deferral of General Fund contributions to the Public Employees' Retirement Fund in the early 1990s unconstitutional. As a result, the state was ordered to repay $1.2 billion in principal plus interest. Under a continuous appropriation provision in existing law, the administration made the $1.2 billion principal payment to the Public Employees' Retirement System (PERS). The PERS has filed a claim with the State Board of Control for $308 million in interest charges. We have assumed that legislation will be enacted in 1998-99 appropriating this $308 million.

General Fund Savings in Contributions to the State Teachers' Retirement System (STRS). In settlement of the state's claim on federal lands in the Elk Hills Naval Petroleum Reserve (in Kern County), the state is to receive about 9 percent of the sale proceeds when the federal government sells the property. The property is expected to be sold early in 1998 and the state's share is expected to be at least $300 million. In anticipation of this transaction, the Legislature enacted and the Governor signed Chapter 939, Statutes of 1997 (SB 1026, Schiff). This measure provides for (1) an increase in the level of purchasing power protection for the State Teachers' Retirement Fund benefits and (2) the reduction of the 1998-99 General Fund contribution to the STRS for purchasing power protection by the amount the state receives from the sale of the reserve. As the state's contribution to STRS for purchasing power protection would otherwise exceed $300 million in 1998-99, there should be a General Fund savings of at least $300 million in 1998-99 as a result of the lands sale.

State Employee Compensation

Late in the legislative session, the Governor committed to negotiate in good faith with employee organizations for a pay raise. We have included $150 million in our estimated expenditures for 1998-99 and another $150 million for 1999-00 for pay increases. These amount to a compensation package equivalent to an average of about a 3 percent pay increase in each year.

Information Technology Projects

The state has undertaken a number of major information technology projects which could have significant General Fund fiscal implications during the forecast period. The three largest projects are (1) the efforts to modify state computer programs to accommodate the Year 2000; (2) the Statewide Automated Welfare System (SAWS), designed to improve the information technology capability of county welfare departments; and (3) the Statewide Automated Child Support System (SACSS), intended to provide a statewide child support enforcement tracking and monitoring capability.

We estimate that the General Fund costs of these projects will increase from $87 million in 1997-98 to $135 million in 1999-00 (the projects will also be supported by substantial amounts of federal and special funds). These estimates contain a high degree of uncertainty because of such factors as when the costs will occur, the impact of changes to the projects that are currently under consideration, and the amount of federal financial participation that may be forthcoming. Because of such uncertainties, the costs could be tens of millions to hundreds of millions of dollars higher than estimated during the period.

Continue to Chapter 5: Long-Term Considerations

Return to California's Fiscal Outlook Table of Contents

Return to LAO Home Page