• Major Issues
• Overview
• Expenditure Proposal and Trends
• Caseload Trends
• Spending by Major Programs
• Major Budget Changes

Major Issues

• $2 Billion in State Savings Depends on Federal Action. Many of the Governor's proposals for health and welfare savings-- amounting to $2 billion--depend on federal action. Federal legislation which would accomplish these savings is being considered as part of the negotiations on the budget and welfare reform. To the extent these actions are delayed or not taken, there will be a budgetary hole in these programs. (See page C-14.)
• Budget Proposes to Make Temporary Grant Reductions and Cost-of-Living Adjustment Suspensions Permanent. The budget proposes to make permanent the AFDC and SSI/SSP grant reductions adopted in 1992-93 (5.8 percent) and 1995-96 (4.9 percent statewide), and the cost-of living adjustment suspension that was implemented in 1991-92, which are scheduled to be restored in 1996-97. This proposal would result in a General Fund cost avoidance of $1.1 billion. (See pages C-100 and C-125.)
• Budget Proposes a 4.5 Percent AFDC Grant Reduction. This proposal would result in General Fund savings of $111 million in 1996-97. We discuss the potential impact of the proposed AFDC grant reductions on families. (See page C-102.)
• Governor Proposes to Redesign the AFDC Program in 1997-98. The Governor proposes major changes in the AFDC Program, including revised eligibility criteria, a flat grant for all families regardless of size, time limits on eligibility, and the implementation of four programs that would offer different types of assistance (including cash and vouchers) based on certain characteristics of the recipients. We present criteria for evaluating the Governor's proposal. (See page C-105.)
• Child Welfare Services Program Needs Improvement. We review the performance of the Child Welfare Services Program and conclude that improvements are needed in how the state addresses the problem of child abuse and neglect. (See page C-134.)
• Budget Proposes Elimination of State-Only Medi-Cal Program for Prenatal Services for Undocumented Women. Congress is currently considering welfare reform legislation that would prohibit a state from providing benefits to undocumented persons unless the state chooses to reauthorize these benefits after enactment of the federal law. The budget does not propose reauthorization of the prenatal program, and assumes elimination of the benefits effective March 1996, for a General Fund savings of $22 million in 1995-96 and $65 million in 1996-97. (See pages C-30 and C-37.)
• Proposals to Eliminate Medi-Cal Optional Benefits Could Result in Cost Shifting. The budget proposes to eliminate eight of the 29 optional benefits, for a net General Fund savings of $34 million in 1996-97. We note that these actions could result in increased costs for county indigent health programs. (See page C-38.)
• Budget Proposes Augmentations for Teen Pregnancy Prevention and Family Planning Programs. The budget proposes $46 million from the General Fund for teen pregnancy prevention activities in order to expand the media campaign, expand a program for the prosecution of statutory rape, establish a new grant program, and develop school curricula. The budget also proposes $20 million from the General Fund to consolidate and expand family planning programs. We provide an assessment of these proposals. (See pages C-48 and C-60.)

Overview

General Fund expenditures for health and social services programs are proposed to decrease by about 3 percent in the budget year. Most of this reduction is due to welfare grant reductions and eligibility restrictions, and shifting state costs to the federal government.

Expenditure Proposal and Trends

The budget proposes General Fund expenditures of $13.5 billion for health and social services programs in 1996-97, which is 30 percent of total proposed General Fund expenditures. The budget proposal represents a reduction of $424 million, or 3 percent, from estimated expenditures in the current year.

Figure 1 (see next page) shows that General Fund expenditures for health and social services programs are projected to increase by $1.1 billion, or 8.5 percent, between 1989-90 and 1996-97. This represents an average annual increase of 1.2 percent.

General Fund expenditures increased significantly until 1991-92, when realign ment legislation shifted $2 billion of health and social services program costs from the General Fund to the Local Revenue Fund, which is funded through state sales taxes and vehicle license fees. This shift in funding accounts for the significant increase in special funds starting in 1991-92, as shown in Figure 1. General Fund spending declined in 1992-93, due to various program reductions (the largest being welfare grant reduc tions). As discussed below, the budget proposes additional General Fund reductions in 1996-97.

Combined General Fund and special funds spending is projected to increase by 25 percent between 1989-90 and 1996-97. This represents an average annual increase of 3.2 percent.

Figure 1 also displays the spending for these programs adjusted for inflation. On this basis, General Fund expenditures are estimated to decrease by 12 percent between 1989-90 and 1996-97. Combined General Fund and special funds expenditures are estimated to increase by 1.5 percent during the same period, on a constant dollar basis. This is an average annual increase of less than 1 percent.

As noted previously, the 1991 realignment legislation significantly altered the financing of health and social services programs by transferring funding for all or part of several mental health, public health, and social services programs to the counties. The sales tax and vehicle license fee revenues dedicated to realignment amounted to $2 billion in 1991-92, which was $239 million short of the amount that was initially estimated. The budget estimates that realignment revenues will be $2.5 billion in 1996-97.

Caseload Trends

Figures 2 and 3 (see next page) illustrate the caseload trends for the largest health and welfare programs. In both programs, significant increases coincide with the onset of the recession in 1990. Figure 2 shows the Medi-Cal caseload growth, broken out by "traditional" eligibility categories--primarily Aid to Families with Dependent Children (AFDC) and Supplemental Security Income (SSI)/State Supplementary Program (SSP) recipients--and "nontraditional" eligibles--groups recently made eligible by state and federal law, including newly legalized immigrants, undocumented persons, and pregnant women.

Figure 2 shows there was a significant upswing in the rate of increase in the Medi-Cal caseload, beginning in 1989-90. This occurred primarily because of rapid growth in both the AFDC Program and in the nontraditional categories of Medi-Cal recipients. (For a more detailed discussion of this caseload growth, please refer to our Analysis of the 1992-93 Budget Bill, page V-90.)

Figure 3 shows the caseload trend for the AFDC (Family Group and Unemployed Parent[FG&U]) and SSI/SSP Programs. While the number of casesin the SSI/SSP Program is greater than in the AFDC Program, there are more personsin the AFDC Program--about 2.7 million compared to about 1 million for SSI/SSP. (SSI/SSP cases are reported as individual persons, while AFDC cases are primarily families.)

Caseload growth in these two programs is due, in large part, to the growth of the eligible target populations. The increase in the rate of growth in the AFDC caseloads in 1990-91 and 1991-92 was partly due to the effect of the recession. Subsequently, the caseload continued to increase but at a slower rate of growth. This slowdown, according to the Department of Finance, was due partly to (1) certain population changes, including lower migration from other states, and (2) a lower rate of increase in "child-only" cases (including citizen children of undocumented and newly legalized persons), which was the fastest growing segment of the caseload until 1993-94. (For a discussion of other factors affecting the AFDC caseload, please see our report on the program in The 1991-92 Budget: Perspectives and Issues, page 189.)

Figures 2 and 3 also reflect the budget's projections that AFDC and Medi-Cal caseloads will begin to decline slightly in the current year. As we discuss in our report, California's Fiscal Outlook(November 1995), we believe that these trends are due largely to various factors affecting welfare caseloads, including the improving economy, lower birth rates for young women, and a decline in legal immigration to California.

The SSI/SSP caseload can be divided into two major components: the aged and the disabled. The aged caseload generally increases in proportion to increases in the eligible population--age 65 or older. This component of the caseload accounts for about one-third of the total. The larger component--the disabled caseload--has been growing faster than the rate of increase in the eligible population group (primarily ages 18 to 64). This is due to several factors, including (1) the increasing incidence of AIDS-related disabilities, (2) changes in federal policy that liberalized the criteria for establishing a disability, (3) a decline in the rate at which recipients leave the program (perhaps due to increases in life expectancy), and (4) expanded state and federal outreach efforts in the program.

Spending by Major Programs

Figure 4 (see page 10) shows expenditures for the major health and social services programs in 1994-95 and 1995-96, and as proposed for 1996-97. As shown in the figure, the three major benefit payment programs--Medi-Cal, AFDC, and SSI/SSP--account for a large share of total spending in the health and social services area.

Major Budget Changes

Figure 4 Major Health and Welfare Programs Budget Summarya 1994-95 Through 1996-97 (Dollars in Millions)
	Actual 1994-95	Estimated 1995-96	Proposed 1996-97	Change From 1995-96
				Amount	Percent
Medi-Cal
General Fund	$6,036.8	$6,074.2	$6,247.3	$173.1	2.8%
All funds	14,904.3	14,929.5	15,342.2	412.7	2.8
AFDC (FG&U)
General Fund	$2,814.9	$2,602.9	$2,073.0	$-529.9	-20.4%
All funds	5,851.6	5,557.5	4,893.1	-664.4	-12.0
AFDC (FC)
General Fund	$272.4	$319.7	$332.5	$12.8	4.0%
All funds	1,138.8	1,253.8	1,300.7	46.9	3.7
SSI/SSP
General Fund	$2,017.7	$1,952.6	$1,577.8	$-374.8	-19.2%
All funds	5,321.7	5,452.0	5,084.6	-367.4	-6.7
County welfare administration
General Fund	$423.3	$473.8	$496.9	$23.1	4.9%
All funds	1,682.2	1,870.7	1,912.4	41.7	2.2
In-Home Supportive Services
General Fund	$226.8	$232.3	$301.7	$69.4	29.9%
All funds	881.0	927.9	972.2	44.3	4.8
Regional centers
General Fund	$539.0	$410.4	$460.7	$50.3	12.3%
All funds	839.8	946.3	1,037.9	91.6	9.7
Developmental centers
General Fund	$33.1	$33.0	$30.5	$-2.5	-7.6%
All funds	581.6	570.5	526.2	-44.3	-7.8
Child welfare services
General Fund	$178.0	$283.8	$354.6	$70.8	24.9%
All funds	785.3	936.0	1,025.8	89.8	9.6
State hospitals
General Fund	$160.4	$209.6	$238.6	$29.0	13.8%
All funds	405.1	474.3	484.6	10.3	2.2
a Excludes departmental support.

Figure 5 Health Services Programs Proposed Major Changes for 1996-97 General Fund
Medi-Cal			Requested:	$6.2 billion
			Increase:	$173 million	(+2.8%)
		$126 million for caseload increase
		$188 million due to higher utilization of services and other cost increases
		$70 million (and $37 million in 1995-96) for Medicare inpatient deductibles and copayments for persons also enrolled in Medi-Cal $20 million (and $23 million redirected from the Office of Family Planning) to expand family planning services
		$303 million (and $216 million in 1995-96) by assuming federal reimbursement for emergency services for undocumented persons
		$65 million (and $22 million in 1995-96) by eliminating the state- only program for prenatal care for undocumented persons
		$34 million (net) by eliminating eight optional benefits
		$26 million by reducing rates for "distinct part" skilled nursing facilities
		$23 million by implementing copayments for certain services
Public Health			Requested>	$313 million
			Increase:	$4.1 million	(+1.3%)
		$46 million to expand the teen pregnancy prevention program

Figure 6 Social Services Programs Proposed Major Changes for 1996-97 General Fund
AFDC (FG&U)			Requested:	$2.1 billion
			Decrease:	$530 million	(-20%)
		$299 million (and $82 million savings in 1995-96) by assuming a gain in federal funds under a block grant (also assuming adoption of proposed grant reductions)
		$201 million (cost avoidance) by not restoring the 1992-93 grant reduction and not resuming the Cost of Living Adjustment (COLA)
		$129 million by making permanent the current-year statewide 4.9 percent grant reduction
		$111 million due to a 4.5 percent grant reduction
		$28 million (net) by barring sponsored aliens from receiving grants for five years
SSI/SSP			Requested>	$1.6 billion
			Decrease:	$375 million	(-19%)
		$52 million for caseload increase
		$442 million (cost avoidance) by not restoring the 1992-93 grant reductions and not resuming the state COLA
		$335 million by making permanent the current-year statewide 4.9 percent grant reduction
		$90 million net savings (and $1 million in 1995-96) by assuming federal legislation to eliminate grants for noncitizens
Child Welfare Services			Requested>	$355 million
			Increase:	$71 million	(+25%)
		$32 million cost ($5 million savings in 1995-96) by assuming a loss of federal funds under a block grant
		$19 million for increased caseload

Figures 5 and 6 (see pages 11, 12) illustrate the major budget changes proposed forhealth and social services programs in 1996-97. Generally, the major changes can be grouped into the following categories:

1. The Budget Proposes to Fund Caseload Changes.This includes funding for: a projected caseload increase of 1.8 percent in the Medi-Cal Program (subsequently revised by the Department of Health Services to 0.7 percent); a decrease of 0.3 percent in the AFDC Program; and an increase of 2.5 percent in the SSI/SSP Program.
2. The Budget Proposes to Shift a Significant Amount of State Costs to the Federal Government.This would be accomplished by the following actions:
   • Assume enactment of legislation appropriating federal funds to reimburse the state's costs of providing emergency health care services to undocumented immigrants ($216 million in 1995-96 and $303 million in 1996-97).
   • Assume federal welfare reform legislation is enacted establishing block grants, resulting in an estimated net gain in federal funds to the state for AFDC and child welfare services ($87 million in 1995-96 and $267 million in 1996-97). (These amounts are based on what the state would receive, assuming adoption of the Governor's proposed AFDC grant reductions.)

3. The Budget Proposes Major Program Reductions in the Medi-Cal, AFDC, and SSI/SSP Programs:
   • Eliminate eight optional Medi-Cal benefits (net state savings of $34 million, after accounting for offsetting costs to maintain these benefits for developmentally disabled persons served by the regional centers).
   • Eliminate the state-only Medi-Cal program for prenatal care for undocumented persons, effective March 1, 1996 (savings of $22 million in 1995-96 and $65 million in 1996-97).
   • Implement a 4.5 percent grant reduction in the AFDC Program (state savings of $111 million).
   • Assume enactment of federal legislation to deny SSI/SSP grants and nonemergency Medi-Cal benefits to noncitizens ($91 million net state savings).

4. The Budget Proposes to Make Permanent Certain Grant Reductions and Cost of Living Adjustment (COLA) Suspensions in the AFDC and SSI/SSP Programs:
   • Make permanent the 4.9 percent statewide grant reductions in AFDC and SSI/SSP enacted in the current year ($464 million cost avoidance).
   • Make permanent (1) the 5.8 percent grant reductions enacted in 1992-93 and (2) the suspension of the statutory COLAs ($643 million cost avoidance, or $841 million if the proposed federal block grant is enacted).

5. The Budget Proposes to Expand Services for Family Planning and Teenage Pregnancy Prevention.This would be accomplished by the following actions:
   • Expand family planning by establishing a state-only Medi-Cal program to provide contraceptive services to low-income women, effective January 1997 ($20 million cost).
   • Expand the teenage pregnancy prevention program ($46 million cost).

Savings Would Require Federal Action

The budget proposes numerous changes in the health and social services area that depend on federal legislation or federal waiver of regulations. As Figure 7 shows, these proposals, in conjunction with previous budget actions requiring federal approval, amount to state savings of $495 million in 1995-96 and $1.5 billion in 1996-97. Federal legislation which would accomplish these savings is being considered in Washington, D.C.

We discuss the federal legislation to reform the welfare and Medicaid programs later in this Analysis.

Governor's Proposal to Redesign AFDC

The Governor proposes legislation to redesign the welfare system, effective July 1997. Under the proposal, the AFDC Program would be replaced by four separate programs. The major features of the proposal are as follows:

Eligibility.As is currently the case, families would have to include a child under age 18 and would have to be low-income, based on a yet unspecified income and asset test. Eligibility would generally be based on "fairness and equity with low-income working families," and using this guideline a "work equivalency benchmark" (analogous to the current "need standard") would be established. Also, the existing restrictions on the eligibility of two-parent families would be eliminated. (Currently, to be eligible for the AFDC-U Program, the principal wage earner must be unemployed when applying for aid and must have had a work history, based on specified criteria.)

Grants.The current grant structure, which increases with family size, would be replaced by a flat grant (the amount has not yet been specified). Actual grant amounts would essentially be based on the work equivalency benchmark, less recipients' income (employment earnings, for example), up to the maximum flat grant amount. Thus, recipients who work could, in effect, keep their earnings to the extent that the amount of earnings plus the grant do not exceed the work equivalency benchmark.

New Programs.The four proposed programs are:

• The Ready-to-Work Program. This program would include those adults with a work history or who are currently working. Recipients would receive a flat grant, which would be reduced after six months and again at twelve months, with a total time limit of two years. The program would provide short-term employment services, child care, work-related expenses, and a voluntary program of support services for 18- and 19-year old teen parents who have a work history.

• Family Transition Assistance Program. This program would serve families in which the parent has never worked, teen parents under age 18, and teen parents who have never worked. In addition, families could be referred from the Ready-to-Work Program if significant barriers to employment are identified. Instead of a cash grant, the program would provide noncash aid, including vouchers for services such as housing, transportation, and child care. The program would also provide intensive employment services. Teen parents would be required to participate in a support service program that focuses on in-home counseling. The duration of benefits would be limited to five years.
• The Disabled Family Assistance Program.This program would assist families in which either a parent or child is disabled and receiving SSI/SSP, In Home Supportive Services (IHSS), or disability benefits. Recipients would receive a cash grant for as long as the disability continues. Those who are able to work would receive employment services, child care, and work-related expenses.
• The Child-Only Assistance Program. This program would include (1) children living with parents (primarily undocumented persons) who are not eligible for aid and (2) children living with adult relatives acting as the child's caretaker. Recipients would receive a cash grant, which would be less than the flat grant established for families in the Ready-to-Work Program. Grants for those children in the first category would be subject to a five-year time limit, and no support services would be included. Grants for those in the second category would not be time-limited, and child care would also be provided if needed.

We will discuss the Governor's proposal in more depth in our analysis of the AFDC Program.

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