Legislative Analyst's Office
February 1995

Major Expenditure Proposals in The 1995-96 Budget 

In this section, we discuss several of the most significant spending proposals in the budget. For more information on these spending proposals and our findings and recommendations concerning them, please see our analysis of the appropriate department or program in the Analysis of the 1995-96 Budget Bill.

Major Spending Changes Focus On Welfare and Health Programs

As discussed in Part One, the Governor's Budget proposal relies on major reductions in welfare grants and savings in health programs for $1.1billion of savings in 1995-96. Other major budget savings are due to the assumption of additional federal funds and a shift of state costs to counties. Outside the health and welfare area, the budget itself does not present the Legislature with many major proposals to change spending priorities or existing levels of program support. The budget's plan for restructuring state and county responsibilities for social services and welfare (which we discuss in detail in Part Five) would make revisions in the division of responsibilities between the state and the counties. Although it results in $241million of net state savings, it does not change existing program spending priorities. --

Proposals that Require Legislation or Federal Action

Figure7 lists the major budget-balancing proposals in the budget and indicates whether legislation or federal action is needed to implement them, as well as the timing of these actions assumed by the budget. --

Federal Immigrant Funding

Immigration policy and enforcement is the responsibility of the federal government. The federal government also determines the eligibility of immigrants for health and welfare benefits under programs such as Medicaid (Medi-Cal in California), AFDC, and SSI/SSP, which are supported jointly by state and federal funds. In addition, the U.S. Supreme Court has determined that the U.S. Constitution entitles immigrant children to public education, regardless of their legal status. Although Proposition 187, approved by the voters in November 1994, prohibits the state and local entities from providing undocumented persons with most education, health and social services, the courts have enjoined these restrictions while they consider legal challenges to the measure.

The budget includes a total of $835million of federal funds for services related to illegal immigrants ($732million) and refugees ($103million). Of this amount, approximately $245million currently has been appropriated or authorized by the federal government.

Incarceration Costs. The budget assumes that the state will receive $422million in federal funds for the cost of incarcerating and supervising the parole of illegal immigrants who have been convicted of a felony in California. The 1994 federal Crime Bill provides a portion of these funds. California will receive $45million from an existing appropriation, and the state's share of additional funds authorized by the Crime Bill is about $200million. The President's 1996 budget requests an appropriation to fully fund this authorization. However, there is no federal authorization for the remaining $177million of incarceration funds assumed in the Governor's Budget.

Medi-Cal Costs of Emergency Care. The budget includes $310million of federal funds for the state costs of providing emergency medical care (including labor and delivery services for pregnant women) to illegal immigrants in 1995-96. The federal Omnibus Budget Reconciliation Act (OBRA) of 1986 requires states to provide emergency medical services to illegal immigrants who, aside from their legal status, would otherwise qualify for the Medicaid (Medi-Cal) program. The additional federal funds assumed by the Governor's Budget would replace the state's share of these costs, so that the federal government would cover 100percent of these Medi-Cal expenses. President Clinton's 1996 budget proposes $150million nationwide for this purpose, which also will require a change in federal law.

Services to Refugees. The federal Refugee Act of 1980 entitles refugees to a full range of health and welfare services. The budget assumes that the federal government will provide $103million to fund 100percent of these AFDC, SSI/SSP and Medi-Cal services during the first 36 months of residence by refugees, as required by the Act. Federal funding for this purpose has been declining since 1986 and the state received no funds for this purpose in 1994-95.

Welfare Grant Reductions and Reforms

The state's two primary welfare programs are known as Aid to Families with Dependent Children (AFDC) and the Supplemental Security Income/State Supplementary Program (SSI/SSP). Both the state and federal governments contribute to funding these programs. In the current year, the budget estimates that the General Fund cost of these programs will be $3.1billion for AFDC and $2.1billion for SSI/SSP.

The AFDC program provides cash grants to qualifying families with children whose incomes are not sufficient to provide for their basic needs. The largest component of the AFDC caseload is the AFDC-Family Group (AFDC-FG), in which a family's financial need is related to the death, incapacity, or continued absence of one or both parents. Other program components provide for unemployed families with children (AFDC-U) and for children in foster care (AFDC-FC). The federal government funds half of the cost of AFDC grants, and the state provides 45percent of the cost. Counties, which administer these grants, fund the remaining 5percent of the cost. The Governor's state-county realignment proposal would divide the nonfederal share of the AFDC-FG and AFDC-U programs equally between the state and the counties; the budget proposes that the counties assume 100percent of the nonfederal share of costs for the AFDC-FC program.

The SSI/SSP program provides cash assistance to low-income persons who are elderly, blind or disabled, with the disabled being the largest group of recipients. The federal Social Security Administration administers the program and pays the cost of the SSI grant. California has chosen to supplement the federal payment by providing a state-funded SSP grant. Although the provision of an SSP grant originally was optional, the state now is subject to federal maintenance-of-effort requirements that restrict the state's ability to reduce or eliminate its SSP grant.

AFDC Proposals

The Governor's package of AFDC grant reductions and reforms is similar to previous proposals made by the administration. The budget estimates that the package would result in General Fund savings of $254million (net of administrative costs) in 1995-96. The major proposals are summarized below:

The budget also includes savings of $27million that would be achieved by excluding legal immigrants from aid during their first five years in the country if they have financial sponsors who are able to provide support. Although state law (Ch 148/94--AB 836, Pringle and Goldsmith) enacted such an exclusion last year, it cannot be implemented until Congress changes federal law.

Issues for Legislative Consideration

The Governor's AFDC proposals would result in significant savings to the state in 1995-96, with the amount increasing substantially in future years when the full-year impact of the grant reductions and two-year time limit on aid occurs. The grant reductions could be fully offset (without penalty) by increases in earnings from employment. Thus, one effect of the proposals would be to increase the financial incentive for recipients to work. The proposals raise a number of significant issues.

Impact on Families. To the extent that recipients do not or cannot offset the grant reductions with additional income from other sources, the total income available to families would be reduced substantially. Under current law, the combined maximum grant and food stamps benefit is equal to about 81percent of the federal poverty guideline. Those subject to both the 7.7percent and additional 15percent reductions in grants would have their resources reduced to about 70percent of the guideline to the extent that these reductions are not offset by income from other sources such as employment.

Availability of Training. Many AFDC recipients have relatively low levels of education and work experience. To address this problem, California's GAIN Program provides training and basic education specifically for AFDC recipients. The program, however, currently is not funded at a level sufficient to accommodate all recipients who are required to, or wish to, participate. Under the Governor's proposal, persons facing the expiration of their two-year time limit would have a priority for receiving GAIN services.

Availability of Jobs. Some recipients may not be able to find employment. Job growth in California remains weaker than in past economic recoveries and the number of jobs will not reach its pre-recession peak until the latter half of 1996, according to the budget's economic projections.

Reductions for Persons in County Work Assignments. Chapter 148 also requires AFDC recipients in the GAIN program to work in county-provided assignments if they have not found regular employment within two years, as specified. Recipients who refuse county work assignments would have their grants reduced. However, it is not clear how many of these work assignments, if any, counties will make available. The Governor's proposed two-year time limit on aid would reduce the grants of families with able-bodied adults (eliminate the portion of the grant associated with the adult) after two years on aid. The proposal differs from existing law by not allowing for continuation of the full grant if the recipient participates in a county work preparation assignment.

Potential for Cost-Shifting. The reduction in families' incomes may, to some extent, increase the use of other public services such as health and foster care. Thus, to the extent that such shifting occurs, some of the savings in the AFDC Program will be offset by unknown costs, to the federal, state, and county governments in other programs.

SSI/SSP Proposals

The Governor's SSI/SSP proposals assume that Congress will enact federal legislation allowing the proposed changes by October 1, 1995. The budget estimates that the package would result in General Fund savings of $530million in 1995-96. The major proposals are summarized below.

Issues for Legislative Consideration

The Governor's proposals raise several significant issues.

Impact on Individuals' and Couples' Grant Levels. The SSI/SSP grant reductions would, if authorized by Congress and adopted by the Legislature, result in a loss of income to recipients. Many SSI/SSP recipients do not have the option of offsetting this loss through earnings.

Other than the federal poverty level, which serves only as a general guideline, there is little empirical data to determine what constitutes an “adequate” amount of support. The SSI/SSP grant for an aged or disabled individual was above the federal poverty level until 1994, when the monthly SSI/SSP grant for an individual fell to 98percent of the poverty level. The budget proposal would reduce the grant level for those individuals to 92percent of the poverty level. The grant for aged or disabled couples has exceeded the poverty level by a greater amount and would continue to exceed the poverty level after the Governor's proposed reduction.

The Governor's Budget indicates that the grant for couples would be reduced by a larger percentage than the grant for individuals in order to achieve a more reasonable relationship between the two groups. California is the only state where the SSI/SSP grant for couples exceeds 1.5 times the grant for individuals. The Governor's proposal would reduce the ratio from 1.79 to 1.75.

Cost Shifting. The proposal to eliminate eligibility based on substance abuse could result in shifting costs to treat or care for these individuals to other state and locally funded programs.

Availability of Treatment. The budget treats services offered to AFDC and SSI/SSP recipients differently. The Governor's two-year time limit proposed in the AFDC Program gives priority for the GAIN Program to AFDC recipients who are facing a grant reduction. However, the SSI/SSP proposal does not give a similar priority for treatment to substance abusers who would no longer be eligible for benefits but may seek publicly funded treatment to overcome their addictions.


The California Medical Assistance Program is a joint federal-state program that provides necessary health services to public assistance recipients and to other individuals who cannot afford to pay for these services themselves. Federal laws establish a set of minimum eligibility criteria and the basic scope of the benefits to be provided. The states may provide for additional optional categories of eligibility and benefits. Funding for most services provided under California's program is split equally between the state and the federal governments. The budget estimates that the General Fund cost of the Medi-Cal program will be $5.7billion in the current year.


The budget makes several major proposals for program reductions in Medi-Cal.

Elimination of Medi-Cal Optional Benefits. The budget assumes enactment of legislation to eliminate 9 of the 28 optional service categories in the Medi-Cal Program, for a net General Fund savings of $143million in 1995-96.

The services that would be eliminated are adult dental, nonemergency transportation, medical supplies (excluding incontinence supplies), speech and audiology, psychology, acupuncture, podiatry, chiropractic, and independent rehabilitation centers. The budget proposes to continue these services for children under age 21, persons in long-term care facilities, and developmentally disabled clients.

Eliminate Prenatal Care for Undocumented Women. The budget proposes to eliminate the existing “state-only” program that provides prenatal care for undocumented immigrant women. Federal law does not require or fund this program, which is financed entirely from the General Fund. Undocumented immigrants would remain eligible for delivery services and emergency treatment, which are required by federal law and partially funded by the federal government. The budget estimates savings of $79million in 1995-96 from eliminating this program. Proposition 187, approved by the voters in November 1994, also would eliminate this program. However, the courts have enjoined enforcement of Proposition 187 while they consider legal challenges to the measure.

Changes in Nursing Facility Reimbursement Rates. The budget estimates savings of $76million from three major changes in the reimbursement levels for nursing facility services. Specifically, the budget proposes to: (1) lower the minimum requirement for nursing hours per patient, if the nursing facility industry agrees to the change ($20 million); (2) impose a 20percent rate reduction for nursing facilities that are a “distinct part” of a hospital ($26million); and (3) establish a higher reimbursement rate category for nursing facilities in certain cases, in order to shift patients to these facilities who would otherwise remain in hospitals at a higher cost ($30million).

Issues for Legislative Consideration

Potential for Cost-Shifting. In some cases, eliminating one type of optional medical service could result in increased costs for other services provided by the Medi-Cal program or other health programs. The budget has attempted to account for this with respect to the proposed elimination of optional benefits; however, its savings assumptions may still be optimistic. For example, elimination of van transportation as an optional benefit does not relieve the state of its responsibility under federal law to provide “necessary transportation” for Medi-Cal beneficiaries who cannot otherwise access medical care. Thus, it is likely that most, if not all, of the savings from eliminating this service will be offset by other transportation costs, such as the increased use of ambulances. Similarly, eliminating prenatal care for undocumented immigrant women could result in poorer birth outcomes, which would increase long-term Medi-Cal costs. The Legislature will need to evaluate the net savings potential of these proposals, in particular, if it wishes to achieve General Fund savings in the Medi-Cal Program.

Nursing Facility Rate Proposals. The budget proposal raises issues regarding: (1) the likelihood of the freestanding nursing facility industry's willingness to agree to the department's proposal to reduce minimum nursing hours in those facilities; (2) the potentially adverse effects on quality of care associated with that proposal; and (3) for the distinct part proposal, potential conflicts with federal law, which requires these facilities to be reimbursed at actual cost.

In our analysis of the Medi-Cal budget, we recommend that the Legislature avoid these potential problems and uncertainties by implementing a contracting program for nursing facilities in order to achieve savings. This contracting program would be similar to the existing program for hospital inpatient services (wherein the California Medical Assistance Commission negotiates reimbursement rates with these facilities).

Reaching Early Access for Children's Health (REACH) Program

Under current law, the state and counties provide health care services for low-income children through a variety of programs. For example, the Medi-Cal Program and the Child Health and Disability Prevention (CHDP) Program provide health screening services (assessments). Medi-Cal also provides comprehensive health care. Families on welfare receive Medi-Cal services at no cost. Other low-income families receive Medi-Cal services on a “share-of-cost” basis, in which families must pay for medical expenses by “spending down” their incomes to 133percent of the June 1991 AFDC payment level ($694 per month for a family of three). County health departments provide outpatient treatment based on CHDP screens. The counties also provide other, or “episodic,” outpatient treatment and inpatient care for emergencies to persons who are not eligible for Medi-Cal and cannot afford to pay for these services. The scope of treatment varies among the counties.


The budget proposes a General Fund augmentation of $56.1million to establish the REACH Program in 1995-96. The new program would provide free health care coverage for children, from birth through age five, who are in families with incomes between 133percent and 200percent of the federal poverty level. Currently, these families have to pay a share-of-cost or rely on the counties or private providers for services to these children. (Program participants would have to be citizens or legal residents of the U.S.) Thus, the program would, in effect, shift some costs from the counties to the state.

Beginning in 1996-97, the program would expand to include children who are in families with incomes up to 300percent of the poverty level, provided the family was enrolled in the Access for Infants and Mothers (AIM) Program when the child was born. The AIM Program provides subsidized health insurance for pregnant women, and their infants up to age two, with incomes between 200 and 250percent of the poverty level. (The budget proposes to extend AIM eligibility to 300percent of the poverty level, and reduce the age limit of the child's participation to one year.)

In addition to the $56.1million in new General Fund monies, funding for REACH would include $43.8million in redirected state funds from the CHDP Program ($22.2million General Fund and $21.6million Cigarette and Tobacco Surtax Fund) to match $100million in federal funds, which will require federal legislation. In addition, $6.3million of federal funds would be redirected from the CHDP Program. Funding would be capped by the appropriation. In other words, the program would not be an entitlement.

Issues for Legislative Consideration

The REACH proposal raises a number of issues concerning its programmatic and budgetary impacts.

Impact on Children's Health Care is Uncertain. The administration has not provided information to assess the extent to which REACH would increase the level of health care provided to children, as opposed to merely shifting funding sources and responsibilities for furnishing the services.

Cost Shift from Counties to State. As indicated above, the proposal would make services available to eligible children who, under current law, would receive these services from county health departments. The amount of this potential shift of costs is unknown but could account for a significant part of the total program costs.

Funding in Question. The $100million in federal matching funds would require enactment of legislation by the Congress in response to the state's request to demonstrate an alternative to expanding Medi-Cal. Thus, there is no assurance that the funds will be provided. In addition, $21.6million of proposed funding is in jeopardy due to a recent Superior Court ruling that restricts the use of Cigarette and Tobacco Surtax Fund monies for such purposes.

Proposition 98

Proposition 98 establishes a minimum funding level that the state must provide for public schools and community colleges (K-14 education) in each year. Generally, this is determined based on one of three so-called “tests.” Specifically, the minimum funding level is equal to the greater of:

During the current year, Test 2 applies. Test 3 would apply in 1995-96 under the budget proposal.

The Legislature, by a two-thirds vote, may suspend the minimum funding level requirement and appropriate a lesser amount. Proposition 98, however, requires the state to calculate a “long-term” restoration level each year based on Test 1 or Test 2, as appropriate. If the Legislature suspends the funding minimum or if Test 3 is used to calculate the minimum level, Proposition 98 establishes a “maintenance factor,” which requires funding increases in future years to eventually restore spending to the long-term level. Thus, the guarantee mechanism works in such a way that any reductions in K-14 funding levels below the Test1 or Test2 levels are designed to be temporary.

Cash” Spending. In evaluating the effect of budget proposals, it is important to determine the amount actually available for K-14 programs (“cash” spending from state, local, and student fee sources) as well as the Proposition 98 funding provided in a given fiscal year. Cash spending differs from Proposition 98 funding due to a variety of adjustments involving funding sources that are not reflected on the state's books or appear as state spending in a different fiscal year than the year when the schools receive the funds. For example, revenues from community college fees are not included in state spending. Another example of this difference is the case of Proposition 98 loans. The state provided these loan funds to districts during 1992-93 and 1993-94 (that is, they were cash to schools in those years), but the funding is not reflected as a state expenditure until the year the loans are “repaid.”

For a more complete discussion of Proposition 98 provisions and additional background on Proposition 98 funding levels, please see the “Overview of K-12 Education” in the Analysis of the 1995-96 Budget Bill.


The Governor's budget funds the Proposition 98 minimum guarantee in the current and budget years. These funding levels increase K-12 funding on a per-pupil basis in both years, and also include set-asides totaling $514million over the two years to partially repay Proposition 98 loans.

Current Year. The budget proposes a total of $24.9billion in 1994-95 Proposition 98 cash spending, or $9million less than estimated in the 1994 Budget Act. This small change is the net result of faster-than-expected growth in state tax revenues, partially offset by slower-than-anticipated growth in K-12 enrollments. While schools would have slightly less total cash than assumed in the Budget Act, per-pupil spending actually increases from $4,198 to $4,231 per pupil. These changes reduce general-purpose funding, which varies with enrollment, and increase funding for categorical programs. The additional categorical funds are proposed to be spent on a variety of one-time activities including deferred maintenance, education technology and instructional materials.-- The budget also proposes to set aside $135million within the 1994-95 minimum funding requirement as partial repayment of off-budget loans provided to K-14 programs in previous years. These funds, while recognized as state spending in 1994-95 for budgetary purposes, were already provided to K-14 programs in previous years. Under existing statute, these deductions for loan repayments occur if the Proposition 98 minimum spending requirement increases the per-student funding level above that in the previous year. Under the statute, half of any “excess” funding above the previous year's level is set aside to repay the Proposition 98 loans. The other half of the “excess” funding is provided as cash to K-14 programs.

While the total amount of cash available to schools under Proposition 98 in 1994-95 is projected to stay about the same as estimated when the 1994 Budget Act was enacted, the budget now estimates that the General Fund share has increased by $520million. This increase is caused by two factors. First, $376million is needed to backfill a shortfall in local property tax revenue for schools and community colleges. An additional $144million is due to an increase in the Proposition 98 minimum funding guarantee. Of this total amount, however, $135million is set aside as a loan repayment.

Budget Year. The budget proposes to provide $25.9billion in total Proposition 98 funding on a cash basis in 1995-96. This is an increase of $1billion above cash funding proposed in the current year, allocated as follows:

The 1995-96 budget also includes a Proposition 98 loan repayment of $379million, consistent with the existing repayment formula. As with the current-year repayment, this amount would count as a current Proposition 98 expenditure but would not be available for K-14 spending.-- The budget estimates that meeting the 1995-96 Proposition 98 requirement for state funding will require a General Fund increase of $968million. This estimate includes the impact of the proposed tax cut in reducing the Proposition 98 funding requirement.

Issues for Legislative Consideration

We have identified several issues raised by the budget proposal.

Governor's Tax Cut Affects Proposition 98. The Governor's Budget proposal to reduce income taxes over three years would significantly reduce the minimum funding guarantee under Proposition 98 below the level it otherwise would reach. In 1995-96, based on budget estimates, the tax cut would lower Proposition 98 funding by $136million. By 1998-99, when the proposal would be fully phased in, we estimate that the annual reduction could grow to $1.8billion, assuming moderate economic growth. Based on this projection, the tax cut would reduce the annual growth of per-pupil funding under Proposition 98 during this period from about 4percent to about 2.4percent. Consequently, if inflation averages 3percent annually, as anticipated, then the proposed tax cut would result in a continued decline in K-14 purchasing power per student through the late 1990s.

Proposition 98 Loan Repayment. The budget proposes to deduct $514million ($135million in 1994-95 and $379million in 1995-96) from funds provided to K-14 programs in order to begin repaying Proposition 98 loans made in 1992-93 and 1993-94. While a lawsuit (CTA v Gould) clouds the issue of whether the state can require these repayments under Proposition 98, an initial negative judgment against the state has been stayed pending appeal. As a result, the loan repayments continue to be required under current law. Accordingly, we recommend approval of the budget proposal. Making the loan repayments improves the state's cash position, which is crucial to the state's ability to finance the budget. Also, by improving the state's cash position, the loan repayments reduce the likelihood of potential “trigger” cuts that would be required to remedy any cash shortfall.

Governor Proposes Partial COLA. The budget proposes to appropriate $444million in 1995-96 for a 2.2percent COLA for K-12 general purpose and special education funding. To provide the full statutory COLA of 3.35percent, an additional $254million would be needed. The Legislature has expressed its desire to provide a full COLA in 1995-96. Intent language adopted as part of trailer legislation to the 1994 Budget Act commits the Legislature to providing a full COLA if (1) sufficient funding is available under Proposition 98 and (2) providing a full COLA does not result in a reduction in funding to other K-12 programs. Our review indicates that, if the Legislature approves the Proposition 98 loan repayment discussed above, providing a full COLA is not a realistic option. Instead, we recommend that the Legislature increase the COLA funds by redirecting funds from other K-12 program augmentations. Our alternative plan would provide an additional $93million for cost-of-living increases in education.

School Safety. The budget proposes to spend $12.3million to increase support for three school safety programs in 1995-96. Specifically, the additional funding would (1) increase by $1.1million support for the Gang Risk Intervention Program, (2) expand by $1.2million the School/Law Enforcement Partnership Program, and (3) provide $10million in support for county office of education alternative programs to reflect enactment of proposed legislation that would result in an increased number of mandatory expulsions. These proposals raise two issues. First, should expulsion policies be set by the state or by local school districts? Second, under what circumstances should county offices of education--rather than school districts--be responsible for students who cannot be served in a regular classroom? We recommend an alternative approach that stresses (1) local discretion over disciplinary outcomes and (2) additional funding for school district alternatives.

Higher Education

California's system of public higher education is the largest in the nation, serving approximately 2million students. This system consists of three distinct segments--the University of California (UC) with 9 campuses, the California State University (CSU) with 21 campuses, and the California Community Colleges (CCC) with 107 campuses. The UC awards bachelor's degrees and a full range of graduate and professional degrees. The CSU awards bachelor's and master's degrees and accepts students from the upper third of high school graduates. The CCC offers a variety of academic and occupational programs, as well as basic skills and citizenship instruction. It is basically open to all persons 18 years or older.


The UC and the CSU. The budget proposes General Fund support for the UC and the CSU of $3.5billion in 1995-96, an increase of 3.1percent compared with estimated current-year expenditures. The budget anticipates that fees will increase by at least 10percent for each segment, and provides an additional $11.5million in the Student Aid Commission budget for the related Cal Grants costs. For the third year in a row, the administration does not propose budget-year enrollment levels for the UC and the CSU.

The proposed budget increase will fund a 2percent increase in general-purpose expenditures at each segment as well as debt costs on previously authorized lease-payment bonds. The budget also authorizes the UC to obtain a $25million loan for deferred maintenance in 1995-96. Debt payments on the loan would be made from future annual General Fund appropriations to the UC.

Community Colleges. The budget proposes $1.2billion in General Fund local assistance for the community colleges in 1995-96. This entire amount counts towards the state's K-14 minimum funding guarantee under Proposition 98. The 1995-96 General Fund request represents an increase of $61million, or 5.3percent, from the amount of estimated General Fund expenditures in the current year.

The budget also proposes to raise fees from $13 per credit unit to $15 per credit unit. The combined increase proposed from the General Fund, local property tax revenues, and net student fee revenues (after accounting for financial aid) is $92million, which represents a 3.4 percent increase in combined funding.

The budget provides $55million to fund a 2.2percent COLA for general-purpose spending, $25million to fund statutory enrollment growth, and $22million to backfill fee revenue shortfalls (primarily from the current year). The budget also recognizes savings of $15 million related to enrollment declines among bachelor's degree holders in prior years. For the first time in recent years, the budget proposes to backfill current-year property tax shortfalls ($47million) in the current year, instead of waiting until the budget year.

Longer-Term Higher Education Budget Plan. The budget proposes a “four-year compact” with the UC and CSU which includes a commitment to provide General Fund operating budget increases averaging 4percent for the three fiscal years beginning in 1996-97. Among other things, the plan also calls for enrollment growth averaging about one percent annually, increases in faculty salaries and capital outlay funding, “productivity improvements,” and reductions in students' time to obtain an undergraduate degree.

Issues for Legislative Consideration

Again this year, the administration has not offered its views on a variety of major issues affecting the higher education segments. The budget does not specify enrollments at the UC and CSU. The administration's proposal also would leave to the UC and CSU the decisions concerning the allocation of funds among competing needs, such as salary increases, other costs of continuing existing programs, and addressing critical long-term needs, such as deferred maintenance.

Budget-Year Issues. As in past years, the Legislature faces the difficult task of determining--within significant budget constraints--how to achieve the twin goals of providing open access to higher education and maintaining high-quality programs.

In its deliberations on the higher education budget, we believe the Legislature should:

In our Analysis of the 1995-96 Budget Bill, we offer alternative budget proposals for the UC and the CSU and make various recommendations for the CCC that address these issues. As a starting point, our proposals would provide about the same level of funding as allotted to higher education by the Governor's Budget. We will revise our recommended budget actions, as necessary, to reflect additional enrollment and other information that will become available in the spring.

Longer-Term Issues. The administration's proposed UC and CSU budget “compact” would absorb $1.1billion on a cumulative basis over the four-year period beginning in 1995-96. To the extent that the Legislature provides a cumulative increase of this magnitude for higher education, its ability to address priorities in other areas of the budget will be limited accordingly. Thus, we believe the Legislature should review the proposed higher education compact in the context of its overall priorities for funding various programs, including higher education.

With regard to the programmatic aspects of the proposed compact, we note that in adopting the 1994-95 budget, the Legislature has already established some program goals and priorities over the longer term. In particular, the Legislature has acted to (1) allocate funding for specific enrollment increases, (2) require specific increases in productivity, and (3) ensure that four-year-degree pledge programs and other programs designed to shorten students' time to attain a degree are established at all UC and CSU campuses. The Legislature needs to consider whether it wishes to guarantee a portion of the budget at a specified rate of growth over a time period when the state's fiscal condition will be tight.

Department of Corrections

The California Department of Corrections (CDC) is responsible for the incarceration, training, education, and care of adult felons and nonfelon narcotic addicts. It also supervises and treats parolees released to the community, as part of their prescribed terms.

Currently, the department operates 29 institutions, including a treatment center for narcotic addicts under civil law commitment. The department also operates 38 fire and conservation camps. The department will open two new prisons before the end of the current year and another two new prisons during the budget year. The Community Correctional Program includes parole supervision, operation of community correctional centers and facilities, outpatient psychiatric services for parolees, and narcotic testing.


The Governor's Budget requests $3.3billion from the General Fund for support of the CDC in 1995-96, an increase of $374million, or 13percent, over the current year. This amount provides full funding for projected growth in the number of prison inmates and parolees under current law, as well as several program changes. It also includes funds to offset the effects of inflation--the CDC is the only state department to receive a specific inflation adjustment to its non-salary costs. The budget does not propose any policy or program changes to reduce the inmate or parolee populations.

The budget's total spending figures assume that the state will receive $422 in federal funds to offset the state's costs of incarcerating, and supervising on parole, illegal immigrant adults and juveniles who have been convicted of a felony in California.

Issues for Legislative Consideration

Over the past 10 years, the CDC has been one of the state's fastest growing budgets, increasing at an average annual rate of 13percent. Given projected increases in the state's prison population, in part due to enactment of the recent “Three Strikes and You're Out” law, the budget will likely continue to increase substantially. We estimate that the state will need to construct 21 new prisons in the next five years just to maintain the existing levels of prison overcrowding, and that annual support costs of the CDC will likely exceed $5billion by the end of the decade.

Given the long-term implications of the CDC's projected growth on the state's budget, the Legislature may wish to consider various options for addressing these increases. These considerations could take two forms: (1) reductions in the costs of constructing new prisons and managing the existing and projected prison population and (2) reductions in caseloads themselves.

First, the Legislature will have a unique opportunity this year to consider ways to reduce the costs of managing the prison population as it considers requests by the administration for funding to construct new prisons. We recommend that the Legislature consider all options to accommodate the prison population in alternative ways that may be less costly. For example, the Legislature could direct the CDC to construct facilities that are less costly due to design features that require less staff.

Second, because the CDC is a caseload-driven budget, significant expenditure reductions require controlling inmate and parole population growth. Because most options would require changes in sentencing law, savings would not be immediate, but would primarily accrue in future years. For example, the Legislature could target parole supervision to violent offenders or those with a history of violence. Additionally, the Legislature could make greater use of enhanced community supervision for offenders who would be redirected from the prison system.

Trial Court Funding

The Supreme Court, the courts of appeal, and the superior and municipal courts make up the components of the California judicial system. The Supreme Court and the courts of appeal are entirely state-supported. The state and the counties share the costs of supporting the trial (superior and municipal) courts. Currently, state expenditures for trial court operations are partially offset by a portion of the fines, fees, and forfeitures collected by the courts. Pursuant to existing law, most fines, fees, and forfeitures transferred to the state are deposited into the General Fund, while other fees (mostly civil case filing fees) are allocated by the state back to the counties.--


The Governor's Budget proposes total expenditures of $1.3billion for support of trial courts in 1995-96. This amount is $631million above estimated current-year expenditures, or roughly a twofold increase. This major increase is part of the financing mechanism for the Governor's state-county restructuring plan, which proposes to shift program and funding responsibilities for some social services from the state to counties. Another element of the restructuring plan proposes that counties retain fine, fee, and forfeiture revenues that they currently transmit to the General Fund (estimated to be $311million in the budget year). The administration estimates that the entire restructuring proposal will result in net costs to counties (and savings to the state) of $241million in 1995-96.

Issues for Legislative Consideration

There are a number of policy issues for the Legislature to consider regarding the budget proposal for trial court funding.

State Has Strong Interest in Trial Courts. We find much programmatic merit to the Governor's plan to move toward state financial assumption of the majority of trial court functions because of the compelling statewide interest in promoting the uniform application of justice, and because trial court operations are governed almost exclusively by state statutes and regulations. It will be important, however, for the Legislature to consider this change in the context of the entire restructuring plan and to determine whether the plan in its entirety is in the best interest of the state (for a full discussion of the restructuring proposal, please see Part Five of this volume).

Need for Cost Controls. The Governor's Budget indicates that the proposed expenditure level will support 70percent of trial court costs. This level of support is consistent with legislative intent as expressed in Ch 90/91 (AB 1297, Isenberg). The Governor's restructuring plan does not make clear, however, the state's ultimate objective for the funding and operation of the trial courts. This question has important implications for the Legislature to consider. Specifically, increased state funding for the trial courts, without greater state involvement and control over trial court expenditures, will create a potential new source of uncontrolled costs in the state budget. Although many courts have implemented efficiencies and cost savings measures, wide cost disparities still exist among courts. Thus, we believe that if the Legislature decides to finance an increased share of trial court costs, it will be important to exercise greater control over the costs of trial court operations. -- Coordination Efforts Should Be Encouraged. Recently some courts have retreated from efforts to coordinate activities of superior and municipal courts in the same jurisdictions. To the extent that courts abandon coordination efforts, costs for support of trial courts are likely to increase, thus increasing state costs. The Judicial Council is currently moving to enhance coordination efforts at the local level. We believe that the Legislature will need to do so as well by distributing state funds for trial courts based on the coordination efforts and success of individual courts.

Incentives to Collect Court Revenues. Permitting counties to retain fines, fees, and forfeitures that they currently transmit to the state is likely to increase collections because of changes in counties' incentives to collect these revenues. This could mitigate, to some extent, the net cost of the restructuring proposal to counties. Should the Legislature decide to allow counties to retain these revenues, however, it should reduce expenditures in the trial court funding budget that are proposed to support local revenue collection enhancement programs (about $35million in 1995-96), since retaining these revenues should provide sufficient incentive for the counties to collect them.

Caltrans Staff Reduction

The Department of Transportation (Caltrans) is responsible for planning, coordinating, and implementing the development and operation of the state's transportation system. Most of Caltrans' expenditures are for the design, construction, and maintenance of the state highway system. In addition, Caltrans operates programs for mass transportation, aeronautics and transportation planning.

In the current-year, the budget estimates that Caltrans will spend a total of almost $6.2billion (including state, federal, local, and bond funds) and that the department's staffing will total 18,866 personnel-years (PYs)--16,635 for the highway transportation program, with the remainder for the department's other programs.


The budget proposes a staffing level of 17,640 PYs for Caltrans in 1995-96. This is a reduction of 1,226 PYs (6.5percent) from the current-year level. The reduction has three primary components:

These three reductions total 1,188 PYs. The remaining 38 PYs included in the total reduction of 1,226 PYs are from miscellaneous adjustments and proposals.

Issues for Legislative Consideration

Long-Term Staffing Decline. The reduction in Caltrans' staffing makes more funds available for capital outlay projects. However, the reduction also signals a long-term trend towards a smaller Caltrans. For several years, Caltrans has been staffed at a level sufficient to design all projects that are scheduled in the State Transportation Improvement Program (STIP), even though transportation revenues were not sufficient to construct those projects as scheduled. The proposed staff reductions in the 1995-96 budget take a step towards shrinking Caltrans staff to a size that more closely corresponds to available transportation revenues.

This reduction assumes that in future years the size of the state's transportation improvement program will be determined by the level of revenue that is produced by existing transportation taxes, rather than by the number of projects in the STIP or by a determination of overall transportation needs. Should the Legislature later increase the size of the state's transportation program, it will likely take several years for Caltrans to hire and train new employees. The Legislature would, however, have other options at its disposal to implement a future increase in the transportation program. For example, contracting out could be used to accommodate workload increases (although this approach may require a Constitutional amendment), or the Legislature could transfer funds and project development responsibility to local and regional transportation agencies.


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