Legislative Analyst's Office
February 1995

An Overview of State Expenditures

Proposed Current- and Budget-Year Spending

The Governor's Budget proposes spending $55.5billion from the General Fund and state special funds in 1995-96, as shown in Figure 1 (see next page). This expenditure level is about $1.5billion, or 2.7percent, more than estimated current-year spending of $54billion. Spending from special funds accounts for almost all of this increase. General Fund expenditures remain essentially flat at $41.7billion from 1994-95 to 1995-96.

Realignment Distorts Spending Comparisons. The lack of General Fund spending growth in the budget primarily reflects a proposed change in program financing arrangements. The Governor's Budget contains a state-county realignment proposal which shifts a variety of social services programs and funding responsibilities from the state to the counties along with existing General Fund revenues to help finance those costs. As a result, budgeted General Fund spending in 1995-96 excludes some existing costs that will continue to be financed with General Fund revenues which will be provided to counties directly or through a special fund. Adjusting the budget amounts for the realignment proposal makes 1995-96 spending totals more comparable with those in the current year. On this basis, General Fund spending grows by 2.5percent and spending from special funds grows by 6percent in 1995-96. A detailed discussion of this proposal is contained in Part Five.

Spending Adjustments to Budget Figures. Figure 1 also includes two adjustments that we have made to the spending totals shown in the budget in order to better reflect actual state spending levels and to make year-to-year spending comparisons more meaningful. The first adjustment deducts Proposition 98 loan “repayments” from the spending totals. These repayment amounts are deducted from the funds actually provided to schools. They represent a portion of past off-budget spending that the state provided to schools as a loan against their future Proposition 98 entitlements. Thus, the loan repayments represent past spending rather than current spending.

The second adjustment adds spending from the Local Public Safety Fund (LPSF) established by Proposition 172, approved in November 1993. Proposition 172 made permanent a temporary half-cent increase in the state sales tax and dedicated the revenue to the LPSF for allocation to cities and counties. These LPSF allocations, in effect, offset some of the local revenue loss from property taxes that were shifted to schools in order to reduce state obligations for school funding. The budget treats the LPSF as a trust fund and excludes it from spending totals. However, we include LPSF expenditures in spending from special funds because the LPSF consists of state tax revenues expended for public purposes. As such, it is not fundamentally different from other dedicated state funds, such as the Motor Vehicle License Fee Account (also constitutionally dedicated to local government) that the budget does include in spending totals.-- These adjustments add approximately $1.4billion to the budget spending totals in 1994-95 and $1.2billion in 1995-96 on a net basis, raising them to $55.4billion and $56.7billion, respectively. We use these adjusted figures in our discussions below.

Spending from Federal Funds and Bond Proceeds

In addition to the $56.7billion of proposed spending from the General Fund and state special funds discussed above, the budget also proposes almost $34billion of spending from federal funds and from the proceeds of general obligation bonds.

Federal Funds. The budget proposes to spend a total of $33billion of federal funds in 1995-96. Most of this spending is for federal contributions to health and welfare programs ($21.3billion), education ($6.6billion), and transportation ($2.3billion). Compared with the current year, total proposed spending from federal funds in 1995-96 increases by $1.1billion, or 3.3percent. Federal funding assumed in the budget for the costs of illegal immigrants and refugees ($835million) accounts for most of this net increase. Excluding this immigrant and refugee funding, spending from federal funds would remain virtually flat (an increase of 0.7percent).

Bond Proceeds. Figure 1 includes expenditures for capital outlay, debt service on general obligation bonds, and debt service on lease-payment bonds. However, spending from bond proceeds (funds derived from the sale of bonds) has not been included in these figures.

The budget estimates that the state will spend $810million of general obligation bond proceeds in 1995-96. Almost half of these bond expenditures ($367million) are for rail projects funded by the California Transportation Commission. Other major bond expenditures will be for seismic safety improvements to state facilities ($166million) and for the construction of local jails and state prisons ($105million). Expenditures of general obligation bond proceeds have declined sharply since 1992-93, when they totaled $3.9billion, primarily because voters have approved few new bond measures in recent elections.

In addition to general obligation bonds, the state also uses lease-payment bonds (supported almost entirely from the General Fund) to finance the construction and renovation of facilities--particularly for higher education institutions and the prison system. The budget proposes $525million in new authorizations of lease-payment bonds in the Budget Bill. In addition to these proposals, the Governor is also proposing another $3.1billion in lease-payment bond authorizations for the following purposes:--

State Spending Trends

Figure 2 illustrates the trend in state General Fund and special fund expenditures from 1984-85 through 1995-96 (as proposed). The figure shows expenditures in both “current dollars” (amounts as they appear in the budget) and “constant dollars” (current dollars removing the effect of inflation). Using constant dollars allows comparisons of the purchasing power of state spending over time. --

Recession Still Constraining Spending Growth

Spending grew at an average annual rate of almost 9percent between 1984-85 and 1991-92, when it peaked at $54.4billion (a one-time accounting change in Medi-Cal exaggerates this spending peak by $1 billion). After adjusting for inflation, spending still grew at an annual rate of 4.8percent, which was more than twice the rate of population growth. However, spending fell in 1992-93 and remained essentially flat in 1993-94, as the state's prolonged and deep recession constrained revenues. In the current year, total spending will increase by 4.6 percent, according to budget estimates, and proposed spending for 1995-96 would increase by 2.4percent over the current-year amount.

As Figure 2 shows, spending increases in the current and budget years will only be sufficient to offset the effects of inflation. In constant dollars, the purchasing power of proposed spending in 1995-96 is essentially the same as in 1992-93. On a per-capita basis, constant-dollar spending will decline by 5.2percent compared with 1992-93 and by 13percent compared with the peak year of 1991-92.

Funding Shifts Increase the Role of Special Funds

Special funds account for a growing share of total state spending, as shown in Figure 2. Figure 3 (see next page) compares annual growth in spending from special funds with the growth in General Fund spending since 1989-90. Between 1990-91 and 1994-95, the portion of state spending financed by special funds has increased from 17percent to 25percent. The Governor's budget proposal would increase the special fund share of spending to 27percent. Over the period shown in Figure 3, the percentage increase in spending from special funds has exceeded that of General Fund spending in every year except one (the current year)--usually by a substantial margin.

Recent Growth of Earmarked Funds Reflects Restructuring of State and Local Programs. Prior to 1991-92, rapid growth in special fund spending primarily reflected increases in revenues earmarked for programs that had not been traditional General Fund responsibilities. Major examples of this trend were the approval of Proposition99 in 1988 (which imposed additional cigarette and tobacco taxes) and Proposition111 in 1990 (which authorized phased increases in the gasoline tax and other transportation revenues).

Since 1991-92, special fund spending growth largely reflects restructuring within the budget, involving shifts of General Fund costs to counties along with shifts of state special fund revenues to counties to offset those costs. The realignment of state and county health and welfare responsibilities enacted in 1991-92 placed revenue from a half-cent increase in the state sales tax, traditionally a General Fund revenue source, into a special fund to help counties offset a portion of the General Fund costs that were shifted to them. This realignment also provided counties with additional special fund revenues from increased vehicle license fees to offset the remainder of the costs that were shifted to them. Furthermore, Proposition 172, approved in November 1993, dedicated an additional half-cent of the state sales tax to the Local Public Safety Fund for allocation to local governments to partially offset the loss of property tax revenues shifted to schools and community colleges in order to reduce state General Fund spending. -- 1995-96 Realignment Proposal Continues Trend. The Governor's proposed 1995-96 realignment of social services programs would continue the trend of shifting General Fund spending to special funds. This proposal shifts $710million of existing General Fund sales tax revenue to the Local Revenue Fund, which provides realignment funds to counties, in order to offset some of the costs that counties would take over from the state. Additional financing for the proposal is provided by allowing counties to retain current General Fund revenues from trial court fines and forfeitures ($311million). The combined effect of these two funding rearrangements is to increase special fund spending and to reduce General Fund spending by an even larger amount. As a-- result, special funds' share of total spending increases to 27percent in the proposed 1995-96 budget, versus 25percent in the current year.

Major Special Fund Expenditure Programs. Two categories of spending account for three-fourths of the total $15.4billion in projected spending from special funds in 1995-96. Local government allocations from sales tax and vehicle license fees total $6.8billion, and transportation-related spending (including local transportation subventions) totals $4.9billion. A wide variety of special funds financed by special fees and taxes make up the remainder of special fund spending sources. Among the largest of these are California State University student fees and income ($575million), Proposition 99 cigarette and tobacco surtax funds ($331million), and the Beverage Container Recycling Fund ($321 million).

Proposed Spending by Program Area

Figure 4 (see next page) shows the distribution of the proposed $56.7billion of state spending in 1995-96 among the major state program areas. The figure includes both General Fund and special fund expenditures in order to provide a meaningful comparison of program areas that have different mixes of General Fund and special fund support.

As Figure 4 shows, education receives the largest share of state spending--a total of 38percent (28percent for K-12 education and 10percent for higher education). Education's share of General Fund spending is much greater--51percent. Health and social services programs account for 27percent of proposed total spending (including state-county realignment funds).

1995-96 Program Funding Changes

Although the Governor's Budget increases total spending by 2.4percent in 1995-96, spending changes for individual program areas vary widely. Figure 5 (see next page) shows the percentage increase or decrease in budgeted spending proposed for major program areas. It shows, for instance, that proposed transportation spending would increase almost 15percent, while health and social services expenditures would decline by almost 24percent.---- Program Support Levels. The figure also shows what the 1995-96 spending changes would be if calculated on the basis of what we call "program support levels." These levels are a measure of the total funding provided to a program through state actions, not just the amount of state funding shown in the budget. Program support levels include support provided through funding shifts to local governments, the federal government, or to the future (using loans), and treat the total as a package.

Cost shifts and program restructuring changes proposed in the budget mean that spending changes from one year to the next do not necessarily translate into similar changes in program support levels. For example, Figure 5 shows that budgeted state spending for corrections programs increases by only 1percent in 1995-96. However, the budget also assumes receipt of $422million of federal funds that will offset the state's costs of incarcerating illegal immigrants. Taking these additional federal funds into account results in an increase of 12percent in the program support level for corrections in 1995-96. (For a more detailed discussion of the program support level concept please see The 1994-95 Budget: Perspectives and Issues, pp. 77-83.)

Program Support Levels Increase More than Budgeted Spending

Figure 5 shows that the budget results in an increase of 4.4percent in total program support levels in 1995-96, almost twice the 2.4percent increase in total budgeted spending. The explanation for this difference is that program support levels include $1.1billion of resources in excess of budgeted spending in 1995-96. This amount consists of $835million of federal immigrant funding that offsets General Fund costs, and $311million of state trial court revenues that the counties would retain instead to help finance the realignment proposal.

The largest difference between the change in program support levels and the change in budgeted spending occurs for social services programs. Spending for social services declines sharply in 1995-96, reflecting the Governor's proposed welfare grant reductions. However, the budgeted spending drop of 24percent ($1.7billion) overstates the impact on program support levels for social services. This is because state spending for social services does not include $916million of additional funds that counties will receive to offset costs shifted to them under the Governor's realignment proposal. These funds consist of increased Trial Court Funding grants and revenues from fines and forfeitures. After including these additional resources and federal refugee funding assumed in the budget to offset state costs, the resulting reduction in social services program support levels would be 10percent--a substantial cut, but less than half of the reduction in budgeted social services funds..

Program Support Trends Over Time

Figure 6 compares proposed changes in support for major program areas in 1995-96 with the average annual growth rates of program support over the past decade. Total program support has grown at an annual rate of 6.3percent over the past 10 years, compared with the 4.4percent increase in overall support proposed for 1995-96. Consequently, the proposed rate of growth is below the average over the past decade. Furthermore, the growth rate in 1995-96 is lower than the average over the past decade for every major program area except transportation and the “all other category,” although the magnitude of the difference varies considerably. -- Most of the slowdown in program support growth cannot be attributed to lower rates of inflation and population growth compared with the last decade. From 1984-85 to 1994-95, program support grew faster than the combined annual rate of inflation and population growth--6.3percent versus 5.7percent. For 1995-96, the budget projects combined inflation and population growth of 5.1percent. Since program support levels will grow by only 4.4percent in 1995-96, they will not keep pace with inflation and population growth based on the budget proposal.

Transportation and Corrections Programs Grow Rapidly

The budget increases funding for transportation programs and corrections programs in 1995-96 by 15percent and 12percent, respectively, in terms of program support levels. Budgeted federal funds for incarceration of illegal immigrants provide most of the increased support for corrections--state funding increases by only 1percent.

The high rate of growth of corrections support is driven by the continuing growth in the inmate population--estimated at 13percent in the budget year. As Figure 6 shows, the proposed rate of growth in support for corrections programs is similar to the average growth rate of corrections support over the last decade (13percent).

Proposed spending for transportation programs in 1995-96 grows at twice its average rate of growth during the past ten years. The budget proposes increasing transportation spending by more than $700million in 1995-96. Much of this increase is to pay for projects started prior to 1995-96, projects started in the budget year, and seismic retrofit. In order to fund this increase, Caltrans plans to “borrow” from its future state and federal funds.

Significant Reduction in Social Services Support

As discussed above, support for social services programs (including realignment funds and new federal refugee funding) declines by 10percent, or about $700million, in 1995-96. The funding decline reflects significant reductions in welfare grants proposed by the Governor. Caseload growth in the major welfare programs has moderated, but the budget estimates that caseload in Aid to Families with Dependent Children (AFDC) still will grow by 3.5percent in 1995-96, even after accounting for the impact of the proposed grant reductions and restrictions. The budget estimates that proposed grant reductions and eligibility restrictions will keep caseload flat in the state's other major welfare program--Supplemental Security Income/State Supplementary Payment (SSI/SSP)--which provides benefits for the aged, blind and disabled. The proposed funding decline contrasts sharply with support trends over the last decade, during which funding for social services grew at an average annual rate of 7.7percent.

Health Funding Growth Slows Considerably

Support for health programs (including new federal immigrant funds) would grow by 1.7percent in 1995-96, based on the budget proposal, compared with an annual growth rate of 8.7percent over the past decade that reflected high rates of caseload growth and increases in the cost of medical care. Although the budget estimates that caseload in the state's largest health program--Medi-Cal--will grow by 4.5 percent in 1995-96, program support grows by less than half that amount due to the proposed elimination of a number of “optional benefits” currently provided by Medi-Cal, and a variety of new cost-containment measures.

Education Funding Grows Modestly

Support for K-12 education (including funding provided through property tax shifts enacted in 1992-93 and 1993-94) grows by 4.1 percent, based on the budget, compared with average annual growth of 5.9percent over the past ten years. The budget projects K-12 enrollment growth of 2.6percent in 1995-96. General Fund Proposition 98 spending grows by 4.9percent after adjusting to exclude loan repayments, as discussed earlier. However, school revenues from the property tax shifts grow by only 1.9percent in 1995-96. This relatively small increase in 1995-96 reflects the fact that school property tax revenues are abnormally high in the current year because they include one-time allocations to make up for past shortfalls.

Special Factors Increase Spending for Other Programs

Support for all other programs increases by 16percent in 1995-96, compared with an annual growth rate of only 2.3percent during the past decade. However, most of this large increase does not represent any actual growth in programs. Instead, it primarily reflects two spending increases needed to replace one-time savings or to pay for costs deferred in the current year. First, General Fund borrowing costs increase by $417million in 1995-96, mainly because interest payments on the $4billion of revenue anticipation warrants sold in the current year do not come due until the budget year. Second, the cost of state employee retirement contributions increases by $302million in 1995-96 in order to replace one-time savings in the current year that were achieved by using balances in special retirement fund accounts to offset state contributions. Excluding these two special factors (which affect all programs), support for the “all other” programs category increases by 3.9percent in 1995-96.


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