Summary

The 1998-99 budget, signed into law by Governor Wilson on August 18, 1998, authorizes total state spending of $72 billion, including $57.3 billion from the General Fund and $14.7 billion from special funds. As in the prior year, healthy state economic and revenue growth enabled the Governor and Legislature to provide funds for both significant tax relief and a number of new and expanded program initiatives.

 The new budget package includes a 25 percent reduction in the vehicle license fees beginning in January 1999, with potentially larger reductions in future years. It provides for significant spending increases for K-12 and higher education, including funds for a lengthened K-12 school year. The budget also provides for grant restorations and cost-of-living adjustments for major social services programs, as well as significant reforms to the Foster Care Program. Finally, it includes expansion of county fiscal relief for trial court costs.

 For the second year in a row, the Governor and Legislature reached agreement on several major issues in late August, following the enactment of the budget. These agreements included: funds for the acquisition of the Headwaters Forest Preserve and the management of Colorado River water, funds for the construction of new prison cells and various inmate-related programs, a $9.2 billion education bond measure (to be placed before the voters in November 1998), and enhanced State Teachers' Retirement System benefits.

Introduction and Overview

The 1998-99 Budget Act signed into law by Governor Wilson on August 18, 1998, together with related implementing legislation (trailer bills), comprise a 1998-99 budget package that authorizes total state spending of $72 billion. As indicated in Figure 1, this spending total includes $57.3 billion from the General Fund and $14.7 billion from special funds.

Figure 2 (see page 4) shows the estimated General Fund condition as reflected in the signed budget. As a result of stronger-than-expected revenues in the spring of 1998, the 1997-98 fiscal year closed with a reserve of $1.8 billion. In 1998-99, General Fund expenditures are expected to exceed revenues during the year, resulting in a decline in the 1998-99 year-end reserve to $1.3 billion. The expenditure totals in Figure 2 do not include the impact of post-budget legislation signed by the Governor. Overall, these measures will reduce the 1998-99 year-end reserve by about $241 million, to just over $1 billion.

Figure 2
1998-99 Budget Estimated General Fund Conditiona
1997-98 and 1998-99 (Dollars in Millions)
	1997-98	1998-99	Percent Change
Prior-year fund balance	$907	$2,227
Revenues and transfers	54,664	56,985	4.2%
Total resources available	$55,571	$59,212
Expenditures	$53,344	$57,262	7.3%
Ending fund balance	$2,227	$1,950
Encumbrances	$445	$445
Set-aside for education	--	250
Budget Reserve	$1,782	$1,255
Net impact of post-budget legislation	--	$241b
Adjusted Reserve	--	$1,014
aDetail may not total due to rounding.
bConsists largely of $490 million net increase in spending of which $250 million had been set-aside in the 1998-99 Budget Act for education.

 Figure 3 summarizes the major agreements that were reached between the Governor and Legislature during 1998 in the areas of tax relief, education, social services, criminal justice, and resources.

Figure 3
Major Budget and Related Actions
	Budget Provisions
	Initial 25 percent reduction in vehicle license fees, plus certain other tax relief measures.
	Increased funding for various programmatic changes in K-12 education.
	Large funding increases for higher education.
	Grant restorations and cost-of-living adjustments for social services programs.
	County fiscal relief for trial court funding.
	Post-Budget Actions
	Funding for Headwaters Forest preservation, Colorado River water management, and other resources projects.
	Added prison capacity and new inmate-related programs.
	Enhanced pension benefits for teachers.
	Reimbursement for local developers fees paid to school districts.
	Restored various K-12 education items vetoes in budget.
	Salary increases for four bargaining units.

Figure 4 provides programmatic detail of General Fund spending in 1996-97, 1997-98, and 1998-99 reflecting the budget as signed by the Governor. The budget plan includes above-average spending increases for higher education, trial court funding, and "all other" spending. The gain in the all other category partly reflects increased state subventions to local governments to offset the reduction in the vehicle license fee (VLF).

Figure 4
General Fund Spending by Major Program Area 1998-99 Budget Acta
1996-97 Through 1998-99 (Dollars in Millions)
	Actual 1996-97	Estimated 1997-98	Enacted 1998-99	Change From 1997-98
				Amount	Percent
K-12 Education	$19,893	$22,595	$23,847	$1,252	5.5%
Higher Education	6,180	6,657	7,561	904	13.6
CCC	1,872	2,114	2,340	226	10.7
UC	2,057	2,179	2,519	340	15.6
CSU	1,810	1,897	2,180	283	14.9
Other	441	467	522	55	11.8
Health and Welfare	14,848	14,664	15,342	678	4.6
Health Services	7,318	7,268	7,450	182	2.5
Social Services	6,247	5,993	6,208	215	3.6
Other	1,283	1,403	1,684	281	20.0
Corrections	3,805	4,202	4,443	241	5.7
Trial Court Funding	483	399	623	224	56.1
All Other	3,879	4,827	5,446	619	12.8
Totals	$49,088	$53,344	$57,262	$3,918	7.3%
a Expenditures in this figure may differ from those discussed in Chapter 3 for two reasons. First, the expenditures in this figure reflect the 1998-99 Budget Act and do not include post-budget legislation. Second, the expenditures in this figure are by agency whereas the expenditures discussed in Chapter 3 are by program area.

The figure also shows that health and welfare spending is projected to increase at a modest rate of 4.6 percent. This reflects slow growth in the Medi-Cal, the California Work Opportunity and Responsibility to Kids (CalWORKs), and Supplemental Security Income/State Supplementary Program (SSI/SSP) programs, partly offset by more rapid increases in such programs as In-Home Supportive Services, Foster Care, and Adult Protective Services.

In the remainder of this chapter, we (1) discuss the development of the 1998-99 spending plan, (2) provide a brief overview of the major provisions in the budget, and (3) discuss key post-budget legislation signed by the Governor. Chapter 2 discusses the tax provisions enacted in conjunction with the 1998-99 budget, while Chapter 3 discusses in more detail the major features of the new budget and subsequent enacted legislation.

The Revenue Picture

The third consecutive year of healthy economic growth and sharp increases in General Fund revenues enabled the Governor and the Legislature to provide tax relief and undertake a variety of new program initiatives, while at the same time maintaining a significant budget reserve. As indicated in Figure 5, underlying General Fund revenues (that is, revenues adjusted to eliminate the impacts of legislation) increased by over 12 percent in 1997-98 and were projected by the administration to grow an additional 6.5 percent in 1998-99. (Actual revenues are expected to increase at a slower rate, due to the impacts of tax reductions enacted in both 1997 and 1998.) These strong underlying revenue gains have primarily been due to major increases in personal income tax receipts, which in turn have been related to dramatic growth in capital gains realizations.

Development of the Budget

Governor's January Proposal

On January 9, 1998, the Governor introduced his budget proposal for the 1998-99 fiscal year. The budget included an estimated $55.4 billion in both General Fund revenues and expenditures, and a year-end reserve of $296 million. The initial budget contained significant funding to cover the 1998-99 fiscal impacts of agreements reached in September 1997 involving tax relief, financial restructuring of the trial courts, health care for children, and higher education student fee reductions. However, after taking into account the fiscal impact of these measures, relatively limited funds were available for new or expanded programs in the 1998-99 budget. As a result, the budget included moderate increases in Proposition 98 spending (in line with the constitutionally required minimum funding guarantee), and a variety of trade-offs in the non-Proposition 98 portion of the budget.

Proposition 98. Within Proposition 98, the budget allocated funds to lengthen the school year to 180 days. It also earmarked funds for instructional training and assessment.

Rest-of-Budget. In the non-Proposition 98 portion of the budget, the Governor proposed significant funding in higher education. However, the budget contained reductions relative to current law in the areas of CalWORKs and SSI/SSP, as well as various other programs. Specifically, it proposed to make permanent a 4.9 percent CalWORKs grant reduction that was scheduled to expire in 1998-99, and to eliminate cost-of-living adjustments (COLAs) for both CalWORKs and SSI/SSP grants. The budget also proposed elimination of the renters' credit (which had been suspended each year since 1993), and provided funds for the equivalent of a 3 percent employee compensation increase.

The May Revision

Major Upward Revision to Revenues. The budget outlook changed dramatically in the 1998 May Revision, due to an improved revenue outlook. Based on continued healthy economic growth and much stronger-than-expected final income tax receipts in April 1998, the administration raised its estimate of General Fund revenues by $1.8 billion for 1997-98 and $2.5 billion for 1998-99, for a two-year total of $4.2 billion (see Figure 6, page 8).

Figure 6
Changes in Projected Revenues During 1998-99
(In Millions)
	Department of Finance Projected Revenues
	1997-98	1998-99
January budget	$52,890	$55,383
May Revision	54,645	57,847
Change from January	$1,755	$2,464
Final budget	$54,664	$56,985
Change from May	$19	-$862a
a The decline between the May Revision and final budget reflects adoption of a tax relief package which includes an increase in the personal income tax dependent credit, an income-limited renters' credit, and targeted business tax relief.

In contrast to the past two years, when higher revenue estimates triggered a corresponding increase in the Proposition 98 minimum funding guarantee, the increased revenues this year were available for tax relief and expenditure increases among both Proposition 98 and non-Proposition 98 programs.

Key May Revision Proposals. The Governor proposed that the majority of the new revenues be used for tax relief, increased education funding, and a variety of one-time measures. Specifically, the May Revision proposed a two-step reduction in the VLF--a 50 percent reduction in the rate beginning January 1999, and an additional 25 percent reduction beginning January 2002. The measure would have reduced VLF receipts by $995 million in 1998-99 (a half-year effect), about $2 billion in 1999-00 (a full-year effect), and up to $3.6 billion when fully phased-in 2002-03.

Other May Revision proposals included: (1) an increase in K-12 school funding, which would be achieved by over-appropriating the Proposition 98 minimum funding guarantee by $500 million; (2) new one-time expenditures totaling $1.2 billion for such purposes as direct appropriations for capital outlays, spending on deferred maintenance, and subventions to local governments to eliminate funds owed for flood control projects; and (3) COLAs for SSI/SSP grants beginning in November 1998.

Finally, the May Revision proposed to increase the 1998-99 year-end budget reserve up to $1.6 billion. Part of this proposed reserve was earmarked by the administration to cover the costs of future reductions in the VLF.

Legislative Versions of the Budget

The versions of the budget that were passed by the Assembly and Senate in late May rejected the Governor's tax cut proposal and instead provided additional funds for education, health and welfare, local assistance, and a variety of other programs. For example, both houses provided additional funds for K-12 education, restored social services grants and COLAs, expanded food stamp benefits for legal noncitizens, and included funding for a restored renters' credit and additional funding for employee compensation.

The Assembly and Senate versions of the budget were sent to Conference Committee for reconciliation in early June. Following more than two months of negotiations, the Legislature passed a compromise budget and sent it to the Governor on August 11. This budget included a compromise tax relief package, major increases in education funding, COLAs and grant increases for social services programs, and additional funds for employee compensation.

Major Features of the 1998-99 Budget

In this section, we discuss the programmatic features of the budget as signed by the Governor in August 1998. The programmatic descriptions do not include the post-budget measures which were signed into law in September. (Descriptions of the key post-budget actions are provided in a subsequent section of this chapter.)

Taxes. The budget package includes approximately $1.4 billion in tax relief in 1998-99 and thereafter. The main provision is a 25 percent reduction in the VLF, potentially growing to a 67.5 percent reduction in future years if revenues significantly exceed current projections. Other tax provisions include a one-time increase in the personal income tax dependent credit, the restoration of a nonrefundable and income-limited renters' credit, an increase in senior citizens' tax relief, and various targeted business tax reductions.

K-12 Education. The budget provides for a significant increase in per-pupil spending in 1998-99. The budget passed by the Legislature included K-12 funding for general purpose apportionments (revenue limits) and enrollment increases. It also included about $750 million for new or expanded initiatives. These include a "buyout" of three staff development days for teachers ($195 million), funds for new textbooks ($250 million), and funds for library and science laboratory materials ($159 million). The budget also includes one-time funding for school district block grants, deferred maintenance, and school libraries.

Higher Education. The budget includes major funding increases for the University of California (UC), California State University (CSU), and California Community Colleges (CCC). Funding for both the UC and CSU systems includes monies for enrollment growth, faculty and nonfaculty salary increases, deferred maintenance, instructional equipment, and computer upgrades. The budget also includes funding for the CCC's "Partnership for Excellence" and economic development programs.

Health. With regard to the Medi-Cal program, the budget includes rate increases for various health care providers. The Legislature had included partial funding for the construction of three comprehensive health centers in Los Angeles County and funds to continue prenatal benefits to undocumented immigrants. However, the Governor deleted funds for these purposes. Finally, the budget reduces the state "takeout" of disproportionate share hospital payments. The lowered state takeout results in a corresponding increase in funds available to public hospitals operated by counties, the UC, and local hospital districts.

Social Services. With regard to the CalWORKs program, the budget includes funds for the restoration of a previously enacted 4.9 percent grant reduction. It also provides for a 2.84 percent COLA for grants, as well as significant spending increases for CalWORKs-related services. With regard to the SSI/SSP, the budget provides for a 2.84 percent COLA plus an additional 1 percent increase to grant levels in 1998-99. Other provisions include new funds for a foster care initiative, an expansion of the Adult Protective Services program, and funds for state-only SSI/SSP and food stamp benefits for certain legal noncitizens.

Youth and Adult Corrections. The budget provides funding for inmate and parole growth for corrections programs, although the budget assumes a slightly slower growth rate than the Governor assumed. The Legislature included funding augmentations targeted for female juvenile offenders, development of out-of-home placements for delinquents, as well as added funds for various inmate and parolee programs. The Governor deleted most of these funds before signing the budget. However, the Governor later signed legislation which included many of these reforms. The budget also includes funds for local juvenile detention facilities.

Trial Courts. Under legislation passed in 1997, the state assumed from counties the majority of financial support for trial courts. This budget package increases from 20 to 38 the number of counties for which the state pays all trial court costs and reduces the remaining counties' contributions, both beginning in 1999-00.

Infrastructure, Transportation, and Resources. The budget includes $50 million for the California Infrastructure Bank (which provides loans and grants for local technology and infrastructure projects). As regards transportation, the budget includes funds for about 2,000 additional personnel-years (PYs) to deliver highway projects, as well as funds to repay the Public Transportation Account for a loan it made to the General Fund. The budget contains a significant increase in resources-related spending, including funds for forestry and habitat acquisition; fire protection; and State Water Project design, construction, and maintenance. Before signing the budget, the Governor vetoed $132 million from various resource projects.

Employee Compensation. The budget passed by the Legislature had augmented the Governor's January proposal to include funding for a 6 percent pay increase effective July 1998 and an additional 3 percent effective January 1999. However, the Governor deleted the additional funds.

The Budget Trailer Bills

In addition to the 1998-99 Budget Act, the 1998-99 budget package includes several related measures enacted to implement and carry out the budget's provisions. Figure 7 (see pages 12-13) lists these budget trailer bills.

Before signing the budget, the Governor used his line-item veto authority to eliminate about $1.5 billion in 1998-99 spending, including nearly $1.4 billion from the General Fund and $160 million from special funds. (As discussed below, some of these vetoed amounts were later restored following agreements in late August between the Governor and the Legislature, primarily in the areas of criminal justice and education.)

Proposition 98 Programs. Of the General Fund vetoes, $408 million were in K-12 education, including funds for categorical program growth and various legislative augmentations. (About $218 million of the $408 million were restored in legislation signed by the Governor in September.) The Governor also vetoed $88 million in 1997-98 Proposition 98 "settle-up" spending. In addition, he vetoed $57 million in CCC funding.

Non-Proposition 98 Programs. The single largest reduction in this broad category involved employee compensation, where the Governor deleted about $320 million ($215 million General Fund) from the budget. Other areas of significant reductions included funds for prenatal services to undocumented immigrants, funds for the construction of comprehensive health centers in Los Angeles County, and monies for park acquisition and other resources-related purposes. The Governor also reduced various legislative augmentations in the areas of mental health, adult protective services, correctional inmate programs, and higher education facility maintenance.

Post-Budget Actions

In late August, the Governor and the Legislature reached agreement on a number of issues, primarily in the areas of Proposition 98 education, criminal justice, resources, and State Teachers' Retirement System (STRS) benefits. A listing of the key post-budget legislation signed and vetoed by the Governor is shown in Figure 8. The net impact of the measures signed by the Governor is a0 decrease in the 1998-99 General Fund year-end reserve of $241 million. Key agreements include:

Proposition 98 Education ($32 Million Savings Relative to Budget). The Governor signed measures providing $218 million for K-12 education programs. These include funds for COLAs and funding augmentations for various categorical programs. The 1998-99 Budget Act had included a $250 million set-aside for K-12 spending, so the net impact of these post-budget actions is a $32 million increase in the General Fund reserve.

Criminal Justice ($319 Million Cost). The Governor signed measures which will increase criminal justice spending above the 1998-99 Budget Act amount by $319 million. The measures increase prison capacity by authorizing 1,000 new high security cells at existing facilities and 2,000 beds in low security privatized facilities. The measure also expands drug treatment programs as well as other inmate and parolee programs. In addition, the measures provide funding for Juvenile Challenge Grants and additional local juvenile facilities.

Resources ($370 Million Cost Relative to the Budget). The Governor signed legislation providing about $500 million for various resources-related and flood control projects. Key expenditures include $230 million for the acquisition of the Headwaters Forest Preserve and $235 million for the management of Colorado River water. The budget had included $130 million for Headwaters Forest preservation, so the net impact of the legislation on the state's fiscal condition was a $370 million spending increase.

State Teachers' Retirement System Benefits ($577 Million Savings). The Governor signed legislation which refinances the state's payments toward STRS' existing unfunded liability. Prior to this change, the state's payment could have been over $650 million per year for the next three years. Under the legislation, the unfunded liability will be amortized over a 30-year period. The Governor also signed legislation providing enhanced retirement benefits for teachers beginning in 1999. These benefits will result in additional state costs of roughly $500 million per year beginning in 1999-00. The net effect of these actions is a one-time $577 million reduction in General Fund contributions in 1998-99, but additional pension costs in future years.

Developer Fee Reimbursements (Potential $120 Million Cost Relative to the Budget). In August, the Legislature passed a $9.2 billion education bond measure which will be placed before the voters in November 1998. The measure includes a $160 million appropriation from the General Fund to a special fund in 1998-99. Monies from the special fund would then be allocated during the next four years for housing assistance programs aimed at offsetting developer fees paid by builders of low-income and moderate-income housing. The programs would provide down payment assistance to home buyers and financial assistance to developers of rental housing units. Since the budget included $40 million for developer fee reimbursements, the net impact of this measure on the General Fund is a $120 million spending increase if the bond measure is approved by the voters.

Figure 8
Post-Budget Implementing Legislation
-- Chaptered a --
Bill Number	Chapter Number	Author	Subject
AB 496	545	Lempert	Education: Math initiative for teaching.
AB 1102	1006	Knox	Education: Teachers' retirement benefit increases.
AB 1150	966	Prenter	Education: Teachers' retirement benefit increases.
AB 1291	1024	Strom-Martin	General Government: State firefighters' memorandum of understanding.
AB 1292b	803	Migden	Education: Regional Partnership for Academic Achievement.
AB 1626	742	Wayne	Education: Pupil promotions.
AB 1639	743	Sweeney	Education: Remedial summer school.
AB 1812	1057	Machado	Resources: Stockton flood control area.
AB 1986	615	Migden	Resources: Headwaters Forest.
AB 2216	793	Escutia	Education: Advanced Placement Grant Program.
AB 2217	951	Villaraigosa	Arts: Simon Weisenthal Center.
AB 2321	526	Knox	Criminal Justice: Preventing Parolee Failure Program.
AB 2363	794	Honda	Education: International Baccalaureate Diploma Programs.
AB 2782	953	Keeley	General Government: Various state and local projects.
AB 2785	937	Richter	Resources: Claims against Lake Davis Northern Pike Eradication Project.
AB 2788	1017	Thomson and others	Trial Court Funding: Speed up of 1997-98 county MOE relief.
AB 2794a, b	1050	Assembly Committee on Budget	General Government: Various state and local projects.
AB 2796	499	R. Wright, Baca, Schiff	Criminal Justice: Local juvenile detention facilities and youth centers.
AB 2804	967	Assembly Public Employees	Education: Teacher retirement benefit increases.
SB 50	407	Greene and others	Education Bond Act: Developer fees reimbursement.
SB 491	500	Brulte, Vasconcellos	Criminal Justice: New correctional program and increased capacity.
SB 1370	942	Polanco	Education: Summer school funding and categorical COLAs.
a Some measures had appropriations reduced by Governor's item vetoes.
b The majority of funds eliminated by Governor's item vetoes.
Continued

-- Chaptered a --
Bill Number	Chapter Number	Author	Subject
SB 1528	968	Schiff	Education: Study on health insurance for active and retired teachers.
SB 1574b	1051	Senate Budget and Fiscal Review	General Government: Dredging, job training, transportation.
SB 1587	1007	Alpert, Baca	Social Services: Drug courts.
SB 1697	795	Hayden	Education: College preparation partnerships.
SB 1765	813	Peace	Resources: Lining of All-American canal.
SB 2108	508	Vasconcellos, Brulte	Criminal Justice: Appropriations for correctional treatment and county grant programs.
-- Vetoed --
Bill	Author	Subject
AB 1697	Torlakson	General Government: Affordable housing.
AB 2398	Ducheny	Education: Community College funding.
AB 2791	Thomson and others	Trial Court Funding: Speed up of county MOE relief to 1998-99.
SB 1477	Kopp	Transportation: Local roads and highways.
SB 1561	Leslie	Education: Low performing schools.
a Some measures had appropriations reduced by Governor's item vetoes.
b The majority of funds eliminated by Governor's item vetoes.