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California's Fiscal OutlookLAO Projections2000-01 Through 2005-06 |
The Medi-Cal Program (the federal Medicaid program in California) provides health care services to recipients of California Work Opportunity and Responsibility to Kids (CalWORKs) or SSI/SSP grants, or other low-income persons who meet the program's eligibility criteria (primarily families with children and the elderly, blind, or disabled). The Department of Health Services (DHS) has overall responsibility for the program. The state and 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 $8.7 billion in 2000-01, essentially the same as the amount appropriated in the budget act. The caseload appears to be slightly below budget estimates, but caseload savings are more than offset by additional unbudgeted costs, including higher hospital and outpatient rates for Los Angeles County associated with the extension of its Medicaid waiver program.
We project that by the end of the forecast period in 2005-06, General Fund spending for Medi-Cal benefits will reach $13.2 billion, an average annual increase of 9.7 percent over the projection period. Spending growth in 2001-02 is especially large (11.9 percent) due to (1) the phase-in of eligibility expansions and simplifications that begin in the current year and (2) the full-year effect of provider rate increases implemented during the current year. The annual rate of spending growth is projected to be lower during the remaining years of the forecast period--an average of 7.9 percent.
Key Forecast Factors. Three factors play a significant role in our forecast:
Our projected health care costs are subject to considerable uncertainty, and small changes in the rate of growth could have significant fiscal effects, as shown in Figure 6. For example, cumulative total General Fund costs under a higher growth rate scenario (8 percent annual rate of cost growth) would be $4.3 billion more than we project over the forecast period, while a low growth rate scenario (4 percent annual rate of cost growth) results in costs that would be $2.6 billion lower than our forecast.
Our forecast also takes into account some significant additional Medi-Cal eligibility simplifications and expansions that were enacted as part of the 2000-01 Budget Act that will affect caseload. For example, families will only need to file annual, rather than quarterly, reports to maintain their enrollment or that of their children. In addition, the maximum allowable income for the elderly, blind, and disabled was increased, and administrative changes were enacted to facilitate the continued Medi-Cal enrollment of families leaving CalWORKs or other recipients whose eligibility category changes. The fiscal effects of these actions are subject to significant uncertainty because these changes will not take effect until January 1, 2001, and may not be fully implemented for several months thereafter.
The Healthy Families Program implements the federal State Children's Health Insurance Program (SCHIP), which was enacted in 1997. Funding generally is on a two-to-one federal/state matching basis. Families pay a relatively low monthly premium and can choose from a selection of managed care plans for their children. Coverage is similar to that offered to state employees and includes dental and vision benefits. The program began enrolling children in July 1998.
The Spending Forecast. We estimate that General Fund spending for the Healthy Families Program will be $157 million in 2000-01, consistent with the amount appropriated in the 2000-01 Budget Act. General Fund spending will increase by almost 34 percent during 2001-02. In subsequent years, we estimate that General Fund costs will grow in accordance with demographic factors and increased medical costs, resulting in an annual General Fund cost of $270 million in 2005-06.
Key Forecast Factors. The General Fund expenditure growth during 2001-02 is due primarily to significant caseload expansion during the prior fiscal year. Specifically, we expect program enrollment to expand during 2000-01 to 80 percent of the estimated eligible population, with little further enrollment growth during 2001-02. The full annual cost impact of the 2000-01 caseload growth will not be felt, however, until 2001-02.
Another factor increasing program costs is projected growth in the caseload of legal immigrants. While the federal government pays for about two-thirds of the cost of enrollees who are citizens, legal immigrant enrollees who entered the United States after August 22, 1996, are funded solely by the General Fund. We estimate that the General Fund cost of maintaining coverage for this population will grow by 59 percent during 2001-02 primarily due to the full-year cost of serving this group.
Unexpended Federal Funds. Along with 40 other states, California has not exhausted its first SCHIP allotment over a three-year period. Pending congressional action may allow the state to retain part of the $590 million of these funds that the state has not spent. In future years, any unexpended SCHIP funds may be used to administer an SCHIP waiver program, as we discuss below.
Pursuant to Chapter 946, Statutes of 2000 (AB 1015, Gallegos), California will submit an application to the federal government to extend health coverage to the parents of all children enrolled in the Healthy Families and Medi-Cal Programs. (Currently, only a portion of the parents with children in Medi-Cal are covered.)
In July 2000, the federal government announced that it will consider proposals to use states' excess SCHIP funds to help finance demonstration projects to expand health coverage and services, specifically for (1) coverage of parents of SCHIP enrollees and (2) public health initiatives designed to address or supplement targeted health needs of children. Implementation of parental coverage would begin once the state has submitted its waiver proposal to the federal government, the proposal is approved, and funds are appropriated by the Legislature.
The Spending Forecast. Our spending forecast assumes that the state will receive an SCHIP waiver to extend health coverage to the parents of all children enrolled in Healthy Families or Medi-Cal effective July 1, 2001, with the resulting additional enrollment phasing in over the ensuing 18 months. Our five-year forecast estimates a General Fund cost of $76 million in 2001-02, growing to $375 million in 2005-06.
Key Forecast Factors. Because Chapter 946 does not specify the details of the new adult health coverage program, our forecast assumes the implementation of a model similar to the one described in our June 1999 report, A Model for Health Coverage of Low-Income Families, with updated cost and demographic factors. However, our forecast has somewhat greater state costs than our model program because it (1) does not assume actions we had proposed to reduce county costs for Medi-Cal administration and (2) does not include all of the provisions to minimize crowd-out of private coverage that were incorporated into our model. We excluded these components because they were not included in Chapter 946.
Finally, our estimate reflects General Fund cost increases later in the projection period because, as the state depletes its SCHIP allotments, we assume that the state will rely on the normal Medicaid matching funds to maintain the program.
In response to federal welfare reform legislation, the Legislature created the CalWORKs program in 1997. This program, which replaced the Aid to Families with Dependent Children program, provides cash grants and welfare-to-work services to families with children whose incomes are not adequate to meet their basic needs.
The Spending Forecast. General Fund spending in 2000-01 for the CalWORKs program is estimated to be $2.1 billion, an increase of 2.9 percent over the prior year. General Fund spending is projected to remain essentially stable through 2004-05. We project General Fund expenditures to increase by 13 percent in 2005-06, reaching $2.4 billion.
Key Forecast Factors. Our long-term CalWORKs spending projection depends on a number of factors, including caseload changes, the federal maintenance-of-effort (MOE) requirement, discretionary spending on county performance incentives, the impact of time limits, and the Temporary Assistance for Needy Families (TANF) block grant reauthorization. We discuss these factors below.
General Fund spending for CalWORKs is largely determined by (1) the federal MOE requirement and (2) available TANF block grant carryover funds. Under
federal law, California must expend $2.7 billion to meet the MOE requirement and about $2.1 billion of this spending is satisfied with spending in the
Department of Social Services. In
2001-02, sufficient federal carryover funds are available to enable the state to pay for anticipated program cost increases without going over the MOE floor. As
carryover funds are exhausted over the following years, General Fund spending exceeds the MOE floor, especially in 2005-06, when the caseload begins to
grow.
The 2000-01 Social Services trailer bill, in contrast to prior years, subjects all future county performance incentives to an annual appropriation. Therefore, our forecast assumes that performance incentives are discretionary and paid when federal funds are available through 2001-02.
Beginning in 2002-03, our forecast also assumes some savings due to adult recipients reaching their statutory five-year time limit on cash assistance. These savings, however, are offset by higher state costs due to the expiration of federal funds for the Welfare-to-Work program, increasing costs for child care and other support services, and in 2005-06, the first caseload increase since 1994-95. Finally, we note that each year of our forecast assumes that the TANF block grant will be reauthorized at its current $3.7 billion level for California.
Caseload Trends and Projections. Following a rapid increase in the early 1990s, the caseload peaked at 921,000 in 1994-95 and has declined by 37 percent since that time. The caseload reduction was 10 percent in 1999-00 and is projected to be 8 percent in 2000-01. We project that the caseload will decline by 7 percent in 2001-02, after which the reduction will slow to 3 percent in 2002-03 and 2 percent in 2003-04 and 2004-05. We project the caseload to then increase by 2 percent in 2005-06. This gradual end to the caseload decline is shown in Figure 7. Our projections are based on a trend analysis of caseloads, birth rates, grant levels, and unemployment rates.
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 SSP is projected to be about $2.6 billion in 2000-01, an increase of 4.6 percent over the prior year. For 2001-02, we project an increase of 6.1 percent, raising total expenditures to $2.8 billion. We project that from 2002-03 through the end of the forecast period, spending for SSP will increase by an average of 6.7 percent per year, eventually reaching a total of $3.6 billion.
Key Forecast Factors. The two main components of projected cost increases in SSI/SSP are (1) caseload growth and (2) providing the statutory COLA. As discussed below, the caseload is expected to increase at an average annual rate of about 2.5 percent during the forecast period. In 2001-02, spending is projected to increase by $160 million. This increase is primarily due to the statutory COLA ($96 million) and caseload growth ($64 million). From 2002-03 through 2005-06, these factors together will result in annual spending increases of about $200 million.
Caseload Trends and Projections. During the late 1980s and early 1990s the caseload grew rapidly, with most of the growth in the disabled component of the caseload (see Figure 8). In the mid-to-late 1990s, the caseload leveled off and actually declined in 1997-98, in part because of federal policy changes which restricted eligibility. Since March 1998, the caseload has been growing. In the long run, we expect the aged component of the caseload to mirror the growth of the overall population over age 65. For the disabled, we anticipate caseload growth will be similar to the past year. In total, we project that annual caseload growth will increase gradually from 2.4 percent in 2001-02 to 2.7 percent in 2005-06.
The 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 spending for IHSS is projected to be $786 million in 2000-01, an increase of 24 percent over the prior year. For 2001-02, we project that costs will increase by an additional 6 percent, raising total expenditures to $830 million. For the next four fiscal years, we project that IHSS spending will increase by an average of 15 percent each year, eventually reaching a total of about $1.5 billion.
Key Forecast Factors. Our forecast assumes annual caseload growth of 5.5 percent and a 2 percent annual increase in the monthly hours of service provided to each client. In addition, recent legislation authorizing state participation in health benefits and wage increases for certain IHSS workers will result in substantial costs over the next five years. Specifically, we estimate that this legislation will increase state costs by roughly 7.5 percent each year compared to prior law.
The major state judiciary and criminal justice programs include support for four agencies in the executive branch--the California Department of Corrections (CDC), Department of the Youth Authority, the Department of Justice, and the Office of Criminal Justice Planning--as well as expenditures for local trial courts and state appellate courts. The largest expenditure program--the CDC--is discussed in more detail below.
The 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 by about $298 million from 1999-00 to 2001-02, reaching about $4.3 billion at the end of that period. Expenditures for CDC are forecast at about $5.1 billion by 2005-06. (This includes adjustments for employee compensation increases, but does not include General Fund support for capital outlay and debt service, which are accounted for elsewhere in our projections.)
The projected growth in adult correctional expenditures continues a trend of steadily larger CDC budgets that has existed since the early 1980s. However, in a change from past projections, the CDC budget now appears likely to grow significantly more slowly than in the past. Under our new projections, the CDC support budget would grow at an average annual rate of about 4.2 percent through 2005-06, compared with substantially higher prior annual growth rates that sometimes exceeded 10 percent. Throughout the projection period, the CDC General Fund support budget is forecast to be about 5.4 percent of total General Fund expenditures, the lowest share it has been of the General Fund since the early 1990s.
The department's General Fund costs will be partially offset by reimbursements from the federal government for a portion of the state's costs of housing undocumented immigrants convicted of felonies in California. We expect this federal support to drop only slightly, from $178 million in 1999-00 to $171 million by 2005-06. The reason for the slight decline is that the FFY 2001 appropriation to reimburse states ($565 million nationwide), recently enacted by Congress, is slightly lower than the amount provided in the previous three years. (At the time this report was completed, the President had not acted on the appropriation.) We assume that Congress will continue to provide the FFY 2001 level in the future. Even if Congress increases funding to the pre-FFY 2001 level, it is likely that California's share will decline somewhat as other states and local governments become more sophisticated at tracking and claiming their costs for incarcerating undocumented felons.
Key Forecast Factors. The projected increases in General Fund support for CDC reflect the continued growth in the prison inmate population that is expected during the forecast period. The inmate population is projected to exceed 176,000 by June 2006. That represents an increase of close to 13,000 inmates, or about 8 percent, over the six-year projection period. As Figure 9 shows, the inmate population is still growing, but at a slower rate than prior years.
The projected changes in the inmate population are largely driven by three voter-approved initiatives. Two of these initiatives will increase the population and one will decrease it. Specifically, the "Three Strikes and You're Out" law, enacted in 1994 in Proposition 184, has increased the population because of the significantly longer prison sentences imposed upon offenders convicted under the law. The more recent Proposition 21, the Gang Violence and Juvenile Crime Prevention Act, which was passed by the voters on March 7, 2000, is expected to have a significant impact in the coming years. This law is expected to increase the prison population as it expands the definition of serious or violent offenses, potentially resulting in more "strikes" and increased penalties under the "Three Strikes" law. It also increases the penalties and enhancements for persons convicted of various felonies in association with criminal street gangs, resulting in additional time in prison.
Proposition 36, the Substance Abuse and Crime Prevention Act, which was passed by the voters on November 7, 2000, is expected to slow the growth in the prison population because it requires that persons convicted of nonviolent drug possession offenses be placed on probation and receive drug treatment, rather than be incarcerated in state prison. Similarly, the measure will redirect parole violators who commit nonviolent drug possession offenses into treatment rather than returning them to prison.
The VLF is an annual fee on the ownership of registered vehicles in California. It is levied in place of taxing vehicles as personal property, and the revenues are distributed to cities and counties. The Legislature reduced the fee--which was set at 2 percent of the depreciated value of a vehicle--by 25 percent in calendar year 1999 and 35 percent in 2000. For 2001 and thereafter, taxpayers will receive a 67.5 percent reduction in the fee, resulting in a tax rate of 0.65 percent. Under the provisions of these reductions, cities and counties continue to receive the same amount of revenues as under prior law, with the reduced VLF amounts replaced by General Fund spending. The fiscal effect of the 2001 tax reduction is spread over two fiscal years--resulting in total reimbursements to local governments of about $2.5 billion in 2000-01 and more than $3.6 billion in 2001-02.
Debt Payments. As shown in Figure 10, we estimate that General Fund debt costs (for general obligation and lease-payment bonds) will increase from about $2.5 billion in 1999-00 to about $3.5 billion in 2005-06. Our forecast assumes that $18 billion (an average of around $2.5 billion each year) in bonds will be sold over the forecast period. As a percent of total debt, lease-payment bond debt remains at about 20 percent throughout the forecast period based on currently authorized lease-payment bonds.
Debt Ratio. The state's debt ratio (debt payments as a percent of General Fund revenues) increased from 2.5 percent in 1990-91 to a high of 5.1 percent in 1994-95. In recent years, General Fund revenues have increased at a faster rate than the increase in debt payment. Thus, since 1994-95 the debt ratio has declined steadily, reaching 3.6 percent in 2000-01. We estimate that with the sale of bonds assumed in our forecast, the debt ratio will stay around this level through 2002-03 and decline gradually thereafter.