Legislative Analyst's Office, November 14, 2001


California's Fiscal Outlook

LAO Projections, 2001-02 Through 2006-07


Chapter 4

Expenditure Projections

In this chapter, we discuss our General Fund expenditure projections for 2001-02 through 2006-07. We first look at general budget trends during the forecast period. We then discuss in more detail our expenditure projections for each of the major program areas.

General Fund Budget Trends

Distribution of General Fund Spending

Figure 1 shows how General Fund spending is distributed among major programs in
2001-02. Education programs dominate state spending, accounting for just less than half of General Fund spending. Of this total, 37 percent is for K-12 Proposition 98 funding and 11 percent is for higher education (including community colleges' Proposition 98 funding). Just over one-fourth of the budget is for health and social services and about 6 percent is for corrections. The remainder is for state operations, debt service, various local subventions (including the vehicle license fee [VLF] backfill), and other purposes.

Spending Trends Over the Forecast Period

Total General Fund Spending. Figure 2 (see next page) presents our General Fund spending forecast by major program area through 2006-07. Total spending is estimated to decline from $80.1 billion in 2000-01 to $78.7 billion in 2001-02. This decline is the first year-over-year expenditure reduction since 1993-94. Over the entire period, General Fund expenditures are forecast to increase at an average annual rate of
4.7 percent, increasing to $105 billion by 2006-07.

Projections by Program Area. The overall 4.7 percent average annual increase in state spending reflects moderating growth in most program areas. As indicated in Figure 2:


Figure 2

Projected General Fund Spending for Major Programsa

(Dollars in Millions)





Annual Growth









Education programs

K-12—Proposition 98b









Community Colleges—Proposition 98



























Health and Social Services









Medi-Cal benefits




































Other major programs









Department of Corrections









Vehicle License Fee subventions









Debt servicec









Other programs/costs



















a     Detail may not total due to rounding.

b     Projections for K-12 and community college Proposition 98 funding have been apportioned by the same percentages as actual funding in the 2001‑02 Budget Act.

c   Includes both general obligation and lease-payment bonds for all departments.

Proposition 98—K-14 Education

State spending for K-14 education (K-12 schools and community colleges) is determined largely by Proposition 98, passed by the voters in 1988. Proposition 98 sets the minimum amount that the state must provide for California's public K-12 education system and the California Community Colleges (CCC). About 80 percent of operations funding for these school programs is from the state General Fund and local property taxes, pursuant to Proposition 98. Public K-12 education is provided to about 6 million students—ranging from infants to adults—through over 1,000 locally governed school districts and county offices of education. The CCC provide instruction to about 1.6 million adults at 107 colleges operated by 72 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 average over 5 percent for the 2001-02 through 2006-07 period. This is lower than the 7.8 percent increase in 2000-01 and the projected increase of 5.9 percent for the current year. Proposition 98 spending in these two years reflects appropriations above the minimum guarantee ($415 million in 2000-01 and nearly $4 billion in the current year). Our forecast reflects our moderate revenue forecast and future spending at the minimum guarantee level. It also includes a slowing rate of growth in K-12 average daily attendance (ADA), a principal factor in setting the minimum guarantee level.

We estimate that Proposition 98 will require the Legislature to allocate approximately $1.5 billion, or 3.2 percent, more to Proposition 98 programs in 2002-03 than in 2001-02. Since we estimate that almost $1 billion of additional property tax revenue will be allocated to school and community college districts in 2002-03, the General Fund increase would be $500 million (a 1.6 percent increase).

Given the uncertainty surrounding the economy and per capita personal income in the coming year, however, the increase in the Proposition 98 guarantee in the budget year could easily range between $500 million and $2 billion. Assuming the same growth in local property tax revenues, the required appropriations from the General Fund in 2002-03 could range from a decrease of $500 million from the current-year General Fund appropriations to an increase of $1 billion.

"Freed-Up" Proposition 98 Funds. Within the amounts that we have forecast for Proposition 98 is a total of $600 million that will be available for reallocation to other K-14 education purposes on an ongoing basis beginning in 2002-03. This amount includes $350 million that is currently allocated to a loan repayment relating to the CTA v. Gould lawsuit. Another $250 million will become available due to the sunset of the Schiff-Bustamante Instructional Materials Program (Chapter 312, Statutes of 1998 [AB 2041, Bustamante]).

This $600 million of freed up funds represents an additional potential resource for meeting enrollment growth and COLA needs of existing K-14 education programs. We estimate that these enrollment growth and COLA needs will total about $1.5 billion in 2002-03. Our estimate of growth in the total Proposition 98 guarantee ($1.5 billion) would just meet these needs. However, if growth in the minimum guarantee level for 2002-03 falls in the low range of our estimates ($500 million) then even the availability of the $600 million of freed up funds would not permit the Legislature to fully meet enrollment growth and COLA needs within the Proposition 98 guarantee.

Key Forecast Factors. General Fund expenditures for Proposition 98 depend on the following factors: state population, K-12 ADA, per capita personal income, per capita General Fund revenues, and local property taxes. Figure 3 summarizes our assumptions for these factors and the annual changes in the guarantee which result.


Figure 3

The LAO Proposition 98 Forecast








Proposition 98 (in billions)a








  Community Colleges














Proposition 98 “Test”







Annual Percentage Change

  State population 







  K-12 average daily attendance







  Per capita personal  income







  Total guarantee







   General Fund







   Local property taxes








a  Includes local property tax revenues.

b  Includes restoration of $1.5 billion of "maintenance factor."


K-12 Funding Projections. We project that K-12 Proposition 98 funding after 2002-03 will increase by an average of 5.7 percent per year over the forecast period. Figure 4 (see page 28) displays our projected K-12 per-pupil spending from 2001-02 through 2006-07 (in both "current" and inflation-adjusted dollars). These estimates, which are derived from our Proposition 98 forecast, reflect real (that is, inflation adjusted) per-pupil increases averaging 1.6 percent each year from 2001-02 through 2006-07. These additional resources—averaging over $800 million each year after 2002-03—would permit expansion of existing programs and/or funding for some new programs.

Slowing K-12 Enrollment Growth. K-12 ADA is projected to increase by just over 1 percent in 2002-03, bringing total K-12 ADA to over 5.8 million students. As Figure 5 shows, over the next seven years the rate of K-12 enrollment growth is expected to slow, then actually turn negative by 2008-09. This period of slow growth and eventual enrollment decline will ease somewhat the fiscal challenges the Legislature faces in meeting overall state needs.

Community College Funding Projections. Based on our Proposition 98 projections, we estimate total CCC funding would increase by about 5 percent per year over the forecast period. (This assumes no change in the proportion of Proposition 98 funds going to the CCC.) These increases would cover inflation and projected enrollment growth, with only a small amount available for new programs or program augmentations.

UC and CSU

In addition to community colleges, the state's public higher education system includes the UC and the CSU. The UC consists of eight general campuses, one health science campus, numerous special research facilities, and a planned tenth campus in Merced. 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, several off-campus centers, and a planned campus at Camarillo. The CSU grants bachelor's and master's degrees and may award doctoral degrees jointly with UC or a private university.

The Spending Forecast. We estimate that spending for UC and CSU (excluding funding for capital outlay and debt service) will increase from $5.8 billion in 2001-02 to $6 billion in 2002-03, or by 2.4 percent. By 2006-07, we estimate that spending for UC and CSU will increase to $7.5 billion, reflecting annual increases of about 5.4 percent.

Key Forecast Factors. For 2002-03 and subsequent fiscal years, we assume that UC and CSU will receive "base" budget increases equivalent to the growth in inflation and enrollments. Over the forecast period, inflation is projected to average about 3.1 percent annually. With regard to enrollment growth, CSU's will vary between 2.6 percent and 3.1 percent over the period, with UC's growth being somewhat less each year.

In his "partnership" with CSU and UC, the Governor committed to annual General Fund base adjustments of 5 percent plus funding for enrollment growth. The Legislature has not endorsed such automatic funding increases. In fact, it is unclear what exactly the partnership means at this time, as the Governor proposed a 2 percent base increase (rather than 5 percent) in his May Revision of the 2001-02 budget. Our projections for the CSU and UC budgets are somewhat lower than would occur under the partnership.

Cal Grant Increases. Chapter 403, Statutes of 2000 (SB 1644, Ortiz), made Cal Grant awards an entitlement for every qualified graduating high school senior. There is much uncertainty as to the fiscal impact of the new entitlement program. This is because it is unclear how students and their families will respond to the changes in Cal Grant policies. Based on information from the Student Aid Commission, however, we project that Cal Grant expenditures could approach $1 billion by 2006-07.

Health and social services


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

The Spending Forecast. We estimate that the General Fund spending for Medi-Cal benefits (excluding administrative costs) will be nearly $9 billion in 2001-02, essentially the same amount appropriated in the budget act. We project that by the end of the forecast period in 2006-07, General Fund spending for Medi-Cal benefits will reach $13 billion, an average annual increase of 8 percent over the projection period.

Key Forecast Factors. Three factors play a significant role in our forecast:

Healthy Families Program

The Healthy Families Program implements the federal State Children's Health Insurance Program, enacted in 1997. Funding generally is on a two-to-one federal/state matching basis. The program offers health insurance to eligible children in families with income below 250 percent of the federal poverty level. Families pay a relatively low monthly premium and are offered coverage similar to that available to state employees.

The Secretary for the California Health and Human Services Agency has submitted a waiver request to federal authorities to expand Healthy Families coverage to eligible parents of children enrolled in the Medi-Cal and Healthy Families Programs. At the time these projections were prepared, California's waiver request was pending with federal authorities. The way the state pays for its share of the cost of the Healthy Families Program has changed recently. Previously all state costs were borne by the General Fund. This year, however, the costs of the proposed expansion of coverage to parents, as well as recent expansions of coverage to certain groups of children, have been shifted to a new special fund, the Tobacco Settlement Fund (TSF), which we discuss later in this section. The cost of coverage for most children continues to be funded from the General Fund.

The Spending Forecast. We estimate that overall state spending for the Healthy Families Program will exceed $200 million in 2001-02, about $37 million less than the amount of state funds appropriated for the program in the budget act. We further estimate that overall state spending for the program will increase 90 percent during 2002-03 to about $384 million, and that by 2006-07 the program will have an annual state cost of more than $650 million.

As we noted earlier, part of the state cost discussed above will be supported from the TSF and part from the General Fund. We estimate that General Fund support for Healthy Families will be $134 million in 2001-02, or $24 million less than appropriated in the 2000-01 Budget Act. We estimate that General Fund spending for the program will increase 30 percent in 2002-03 to $174 million, and that by 2006-07 the program will have an annual General Fund cost of about $227 million.

Key Forecast Factors. General Fund spending is expected to decrease in 2001-02 compared to the previous fiscal year because some program costs that were previously supported by the General Fund were shifted to the TSF. Subsequent increases in General Fund spending are primarily the result of medical inflation and demographic factors. Our projection assumes that program enrollment will peak at 80 percent and 88 percent, respectively, for eligible children and adults in 2002-03.

Our projections assume that the enrollment of parents in the program, which has been delayed beyond the October 2001 date assumed in the budget, will actually commence in April 2002. Phasing-in of the parent caseload accounts for a significant part of the projected 90 percent increase in state expenditures for the Healthy Families Program in
2002-03. Future enrollment growth and demographic factors are expected to increase the cost of coverage for parents so that it accounts for almost half the cost of the Healthy Families Program by 2006-07.

Tobacco Settlement Fund

The 2001-02 budget plan established a new special fund, the TSF, which is made up of revenues received by the state from the settlement of tobacco-related litigation. State law specifies that about $402 million be deposited in the TSF in 2001-02 for various health care programs, with the remainder (approximately $73 million) deposited in the General Fund. In 2002-03 and subsequent years all settlement payments are to be deposited in the TSF for various appropriations for health programs.

Our projections indicate that as much as $56 million of the money allocated to the TSF for the
2001-02 fiscal year will probably go unspent, primarily because the planned expansion of the Healthy Families coverage for parents is occurring more slowly than anticipated. Assuming these unspent funds were carried over into the next fiscal year, it appears that a sufficient amount of money—about $500 million—would be available to support the programs now funded from the TSF in 2002-03.

However, our projections further indicate that the combined cost of these programs would begin to substantially exceed the amount of funding available from the TSF in 2003-04. By 2006-07, the cost of these programs could exceed the amount available from the TSF by more than $380 million, with these costs being borne by the General Fund.


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 2001-02 for the CalWORKs program is estimated to be $2 billion, an increase of 5 percent over the prior year. In 2002-03, spending is projected to increase by 2.5 percent, to $2.1 billion. Through the remainder of the forecast period, spending is projected to remain essentially stable, decreasing 1 percent by 2006-07.

Key Forecast Factors. Our CalWORKs spending projection is primarily based on assumptions about the federal maintenance-of-effort (MOE) requirement and the Temporary Assistance for Needy Families (TANF) block grant reauthorization. Our spending forecast assumes that the TANF block grant will be reauthorized at its current $3.7 billion annual level for California, resulting in essentially stable total program funding throughout the forecast period.

In order to receive the TANF block grant, California must meet a $2.7 billion annual MOE requirement, approximately $2 billion of which is satisfied with spending on the CalWORKs program. The remaining $700 million is spent on other MOE-eligible programs. Since CalWORKs was enacted, the Legislature has taken steps to maintain General Fund spending at the MOE floor. Our spending projection assumes this practice will continue.

The combination of statutory COLAs and projected caseload increases (discussed below) will result in greater cost pressures in the CalWORKs program during the projection period. These pressures, will be partially offset by some savings due to adult recipients reaching their statutory five-year time limit on cash assistance. Given that grants are entitlements and that child care has essentially been treated as such, these cost pressures may result in potential underfunding of employment services compared to current levels. This shortfall would be compounded once the federal Welfare-to-Work funds, which have been a separate source of CalWORKs employment services funding, have been fully expended, most likely by the end of 2002-03.

Counties may use their performance incentive funds to address the potential employment services shortfall. As of July, counties had spent approximately 13 percent of the $1.1 billion in awarded incentives. Thus, depending on what service level counties elect to provide, as well as the extent to which they have already obligated their performance incentives, in aggregate counties could maintain the present level of employment services in the budget year and perhaps into later years. This may not be the case in certain counties that have already expended substantial sums of their incentive funds.

Caseload Trends and Projections. Following a rapid increase in the early 1990s, the caseload peaked at 921,000 in 1994-95, and then declined by 42 percent through 2000-01. The budget act forecast assumed an end to the decline in 2001-02, with modest caseload growth beginning midyear. We believe caseloads will be higher-than-budgeted due to the recent economic downturn, increasing by 3 percent in 2001-02, and by 4 percent in 2002-03. Following an economic recovery, we project a 2 percent caseload decline in 2003-04. We then project the caseload to remain essentially stable through
2006-07, as shown in Figure 7. Our projections are based on a trend analysis of caseloads, birth rates, grant levels, and unemployment rates, and our best judgment about the impact of a mild recession on single parent cases.


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 about $2.9 billion in 2001-02, an increase of 11 percent over the prior year. For 2002-03, we project an increase of 8.9 percent, raising total expenditures to $3.1 billion. We project that from 2003-04 through the end of the forecast period, spending for the SSP will increase by an average of 5.6 percent per year, eventually reaching a total of $3.9 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 2.2 percent during the forecast period. In 2002-03, spending is projected to increase by about $250 million. This increase is primarily due to the statutory COLA ($175million) and caseload growth ($63 million). From 2003-04 through 2006-07, 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. 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 future, 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 caseload growth will be about 2.2 percent each year

In-Home Supportive Services

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 $915 million in 2001-02, an increase of 26 percent over the prior year. For 2002-03, we project that costs will increase by an additional 16 percent. This rate of spending growth is expected to continue for the next two fiscal years then fall to about 12 percent in the final two years of our forecast, resulting in total expenditures of $1.8 billion in 2006-07.

Key Forecast Factors. Our forecast assumes that costs will increase 7 percent each year due to caseload growth and increases in the hours of service provided to recipients. Further, recent legislation authorizing state participation in health benefits and wage increases for certain IHSS workers will increase costs by about an additional 7 percent each year through 2004-05.

Judiciary and Criminal Justice

The major state judiciary and criminal justice programs include support for four departments 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.

California Department of Corrections

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. General Fund support for CDC is forecast to grow by about $157 million from 2000-01 to 2002-03, reaching about $4.4 billion at the end of that period. Expenditures for CDC are forecast at about $5.4 billion by 2006-07. (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 increasing CDC budgets that has existed since the early 1980s. However, in a change from past growth trends, the CDC budget now appears likely to grow significantly more slowly. Under our new projections, the CDC budget would grow at an average annual rate of about 4 percent through 2006-07, 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 percent of total General Fund expenditures.

The department's General Fund costs will be partially offset by $158 million in annual reimbursements from the federal government for a portion of the state's costs of housing undocumented immigrants convicted of felonies in California. We assume that Congress will continue to provide the federal fiscal year 2002 level in the future.

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 164,000 by June 2007. That represents an increase of about 8,200 inmates, or about 1 percent, over the six-year projection period. As Figure 8 shows, the inmate population will decrease by 4,100 by the end of 2001-02, which is the largest population decrease since 1991-92. The inmate population will continue to stabilize at this lower level through 2002-03. Beginning in 2003-04, the population will increase at an average annual rate of about 2 percent, reaching a slightly higher level than the 2000-01 population by June 2007.

The projected 2001-02 population decrease is due primarily to Proposition 36—the Substance Abuse and Crime Prevention Act—which went into effect on July 1, 2001. This law 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. This initiative is expected to reduce the prison population by about 7,700 inmates by 2006-07.

The projected 2 percent annual increase in the population, beginning in 2003-04, is due primarily to existing inmates serving longer sentences and new inmates being sentenced under two voter-approved initiatives. Specifically, the "Three Strikes and You're Out" law, enacted in 1994 in Proposition 184, is expected to increase the population because of the significantly longer prison sentences imposed upon offenders with prior serious felony offenses. In addition, Proposition 21—the Gang Violence and Juvenile Crime Prevention Act—which was passed by the voters on March 7, 2000, is expected to increase the population by expanding the definition of serious or violent offenses, potentially resulting in more "strikes" and increasing penalties under the Three Strikes law. Currently, about 57,000 inmates have been sentenced under these laws. During the projection period, the increases attributable to the sentencing laws are projected to fully offset the decrease resulting from the implementation of Proposition 36.

The projected increase in the CDC General Fund support budget also reflects increases in prison health care expenditures. Increases in the overall cost of providing health care have caused health care expenditures to increase at a higher rate than other prison support costs. In addition, during the last decade, class action lawsuits brought by inmates against the state have resulted in settlement agreements mandating major prison health care reforms that have increased health care expenditures.

Other Programs

Vehicle License Fee Backfill

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, 35 percent in 2000, and 67.5 percent in 2001 and thereafter. 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. In the current year, local governments will receive about $3.5 billion from the General Fund backfill. Of this amount, $1.2 billion was appropriated in the prior year. For 2002-03, General Fund expenditures for the backfill will total $3.8 billion. We project that expenditures will grow to $4.8 billion by 2006-07, primarily due to increases in new car sales and car prices.

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