State Spending Plan
October 18, 2017

The 2017-18 Budget

California Spending Plan

(Final Version)

Major Features of the 2017-18 Spending Plan

The major features of the 2017‑18 budget package are shown in Figure 4 and briefly described below. We discuss these and other actions in more detail in “Chapter 2.”

Figure 4

Major Features of the 2017-18 Spending Plan

Major General Fund and Special Fund Spending Actions

  • Allocates $3.1 billion in higher Proposition 98 funding for schools and community colleges.
  • Allocates $2.8 billion in new transportation revenues.
  • Dedicates $546 million in Proposition 56 revenues to Medi-Cal provider rates and reimbursements.
  • Allocates $2.6 billion in cap-and-trade revenues.
  • Provides $400 million to counties through new In-Home Supportive Services cost sharing agreement.
  • Increases on-going General Fund spending for universities and student financial aid by $493 million.
  • Increases child care and preschool spending by $301 million.

Major General Fund Revenue Changes

  • Expands the EITC program to include self-employed and taxpayers with incomes up to $22,300.

Other Major Changes

  • Makes $6 billion supplemental payment to CalPERS using a loan from state cash balances.
  • Replaces pay-as-you-go funding for state office buildings with lease revenue bond financing.

EITC = earned income tax credit.

Allocates New Proposition 98 Funding Primarily for Discretionary Activities. In 2015‑16 and 2016‑17, the Proposition 98 minimum guarantees have dropped from June 2016 estimates due to lower‑than‑expected General Fund revenue. The budget plan funds above the revised estimates of the minimum guarantees in both years, not reducing funding for any school or community college programs from the June 2016 levels. The 2017‑18 guarantee, which builds upon the higher levels of funding provided in the two previous years, is $3.1 billion (4.4 percent) above the revised 2016‑17 funding level. The budget plan funds at this estimate of the minimum guarantee in 2017‑18. Of the year‑over‑year increase, $2.1 billion is covered by state General Fund and $991 million is covered by local property tax revenue. For K‑12 education, the budget provides a Proposition 98 funding increase of $1.4 billion for the Local Control Funding Formula as well as $887 million in one‑time discretionary grants. For community colleges, the budget provides a $340 million Proposition 98 increase for apportionments. In addition to these general purpose augmentations, the budget includes various other targeted Proposition 98‑funded initiatives, including ones designed to improve student outcomes, increase student financial aid, and address maintenance backlogs.

Allocates $2.8 Billion in New Transportation Revenues. Chapter 5 of 2017 (SB 1, Beall) increases existing fuel taxes and creates two new vehicle charges to support existing and new transportation programs. It also repays monies loaned in the past to the General Fund from various transportation accounts. Consistent with the provisions of SB 1, the budget allocates the bulk of the new revenues to highway maintenance and rehabilitation ($846 million), local streets and roads ($646 million), transit ($635 million), congested and trade corridors ($450 million), and bicycle and pedestrian projects ($100 million).

Uses a Portion of Proposition 56 Revenues to Increase Medi‑Cal Provider Rates and Reimbursements. The spending plan allocates to Medi‑Cal around $1.3 billion in revenues related to Proposition 56 (2016), which raised state taxes on tobacco products. In 2017‑18, the spending plan dedicates $546 million of these revenues to fund increases in physician, dental, and other healthcare provider payments. The remaining $711 million supports anticipated spending increases from growth in the Medi‑Cal program between 2016‑17 and 2017‑18. The budget package also provides up to $800 million in these revenues for increases in provider payments in 2018‑19, but these future amounts may be adjusted by the Department of Finance based on the state’s fiscal condition.

Allocates $2.6 Billion in Cap‑and‑Trade Revenues. The budget allocates an estimated $2.6 billion in cap‑and‑trade revenues. Consistent with current law, about $1 billion is estimated to be continuously appropriated to certain transportation and housing programs, although this amount depends on revenue collected in 2017‑18. The budget plan allocates an additional $1.6 billion to various programs, including programs intended to reduce emissions from vehicles and heavy duty equipment, forestry and fire prevention activities, and projects to reduce emissions from agricultural activities.

Makes $6 Billion Supplemental Payment to CalPERS Loan. The budget package makes a one‑time $6 billion supplemental payment to CalPERS to reduce the state’s unfunded liabilities associated with pension benefits earned by current and past state employees. This should reduce annual state pension costs. To make this payment, the budget uses a loan from the state’s cash balances in the Pooled Money Investment Account (PMIA), which is essentially the state’s checking account. The budget also makes an initial repayment of $146 million toward the loan, which is counted toward annual required debt payments under Proposition 2 (2014).

Establishes New In‑Home Supportive Services Program (IHSS) Cost Sharing Agreement. The budget creates a new maintenance‑of‑effort (MOE) for counties’ share of IHSS costs. The new MOE significantly increases counties’ IHSS costs in 2017‑18 relative to 2016‑17. The budget provides ongoing state General Fund support and additional realignment revenue (which consists of sales taxes and vehicle license fee revenue) to partially offset this increase. Specifically, the 2017‑18 budget includes $400 million from the General Fund to assist counties in meeting their share of IHSS costs. Over the next five years, the General Fund support is expected to gradually decline to $150 million. In addition, the budget makes a number of changes to realignment revenue streams, including the temporary redirection of health and mental health realignment revenues to pay for counties’ IHSS costs.

Expands the State EITC Program. The 2017‑18 budget expands the state Earned Income Tax Credit to taxpayers with self‑employment income and to include taxpayers with incomes up to $22,300, significantly increasing the number of taxpayers eligible to claim the tax credit. The administration estimates the increase in EITC claims will reduce revenues by $140 million in 2017‑18.

Increases Ongoing General Fund for Universities and Student Financial Aid by $475 Million. The budget provides $331 million is for the universities and $144 million is for financial aid programs administered by the California Student Aid Commission. The key budget components for the California State University ($243 million) and University of California ($88 million) are general purpose base increases and funding for enrollment growth. The key financial aid budget components are (1) funding for cost and caseload increases in the Cal Grant program and (2) funding to fully implement the Middle Class Scholarship program. (The final budget package rejects the Governor’s January proposal to phase out the Middle Class Scholarship program.) In addition to funding increases, the budget sets numerous expectations for the universities, such as improving budget transparency and oversight of the University of California’s Office of the President and providing students greater access to their nearby California State University campuses.

Increases Child Care and Preschool Spending Above Multiyear Budget Agreement. The budget increases child care and preschool programs by $310 million from the revised 2016‑17 level. This increase is largely due to implementing the second year of a four‑year budget agreement. As part of this agreement, the 2017‑18 budget contains substantial increases in reimbursement rates and funds an additional 2,959 full‑day State Preschool slots at local education agencies. In addition to implementing the budget agreement, the 2017‑18 budget includes funding to update the income eligibility threshold to use the most recent State Median Income (SMI) instead of the SMI used in 2007‑08.

Replaces Pay‑As‑You‑Go Funding for State Office Buildings With Bond Funds. The 2016‑17 budget package established the State Project Infrastructure Fund (SPIF) and provided $1 billion from the General Fund to the SPIF in 2016‑17—as well as an additional $300 million in 2017‑18—with the intent that the funding be used to construct two new office buildings in the Sacramento area and to renovate or replace the State Capitol Annex. The 2017‑18 budget transfers $851 million from the SPIF to the General Fund. To replace the transferred funding, the budget authorizes the use of $851 million of lease revenue bonds to finance the construction of the two new state office buildings. The budget also eliminates the transfer of $300 million from the General Fund to the SPIF that was slated to occur in 2017‑18.