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Legislative Analyst's Office
The 2003-04 Budget Bill:
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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 2003-04 Budget Bill.
The Governor's budget appropriates $44.1 billion in Proposition 98 funding for 2003-04. This is $182 million, or 0.4 percent, higher than the Governor's revised current-year amount. The proposed 2003-04 appropriation exceeds the constitutionally required minimum level by $104 million. In contrast, the Governor's 2002-03 mid-year revisions would reduce current-year Proposition 98 appropriations from the enacted level of $46.5 billion to the revised minimum guarantee of $43.9 billion. Below, we discuss the K-12 Proposition 98 proposal.
Proposition 98 allocations to K-12 schools (which include local property tax revenues) are proposed at $40 billion in 2003-04. This represents an increase of $624 million, or 1.6 percent, over the Governor's current-year estimate. The current-year estimate includes significant spending reductions proposed by the Governor in December and January. As of this writing, the Legislature had passed AB 8x (Oropeza), which would reduce the K-12 Proposition 98 spending by $2 billion. Relative to the level of funding approved in the 2002-03 Budget Act, the proposed spending level for 2003-04 represents a decrease of $1.6 billion, or 3.9 percent.
The budget proposes Proposition 98 resources of $6,723 per pupil for 2003-04. This represents an increase of 0.6 percent relative to the revised current-year estimate, but a 5.1 percent decrease relative to the 2002-03 Budget Act amount.
The major 2003-04 budget proposals include:
- $931 million freed-up from one-time costs of deferrals from 2001-02 to 2002-03.
- $648 million in 2002-03 program costs deferred to 2003-04.
- Building $648 million in programs back into the 2003-04 base.
Permanent Reductions Needed Because Education Credit Card is Maxed Out. Assuming adoption of AB 8x (Oropeza) as amended on February 4, 2003, which would reduce 2002-03 K-12 funding by $2 billion, the state would enter the 2003-04 fiscal year with almost $2.8 billion in K-12 education deferrals. For the last two years, the state has deferred state reimbursable mandates, categorical programs, and revenue limit fund ing in order to avoid real program reductions. We believe that the state has reached a critical point which requires permanent program funding reductions. The Governor has proposed $1.6 billion in program reductions, most of which are accomplished through a $1.5 billion across-the-board reduction. We support the level of program reductions proposed by the Governor, although we suggest some alternative reductions. We believe that a $1.5 billion across-the-board reduction is reasonable if combined with categorical program consolidation discussed below. However, if the Legislature rejects the categorical program consolidation, we would suggest targeted reductions, and provide a list of budget options in "Part V" of this document.
Need for Greater Local Flexibility—Categorical Reform. We believe that now more than ever, the Legislature needs to provide school districts with greater fiscal and programmatic flexibility to absorb funding reductions while minimizing the impact on students. The Governor's proposal to combine 58 categorical programs into a K-12 Categorical Block Grant would have many advantages for school districts over current law. It also would create significant problems. Most importantly, the proposed block grant does not adequately address the negative local incentives that led to the initial creation of many categorical programs. As we discuss in detail in the 2003-04 Analysis, we recommend the Legislature consolidate 62 programs into five block grants. Districts would report to the state key fiscal and outcome data on each grant. We believe our proposal would increase district fiscal and program flexibility while increasing district accountability for providing needed services to students
Restoring Funding for High Priority Programs. We have identified approximately $427 million of additional Proposition 98 costs for 2003-04 because either (1) the Governor's budget under-funded specific programs, or (2) the Legislature increased 2003-04 obligations because of actions taken in the first extraordinary session. As we discuss in detail in the 2003-04 Analysis, we recommend that the Legislature fund these priority needs, and have identified savings from other proposals to stay within the Governor's Proposition 98 funding level. Specifically, we recommend: (1) setting aside funding for the special education deferral ($214 million), (2) paying off ongoing mandate costs ($100 million), and (3) fully funding state intervention and sanction programs ($50 million).
Higher Proposition 98 Minimum Guarantee Would Allow State to Reduce Debts. We forecast a $372 million higher Proposition 98 minimum guarantee for 2003-04 than the Governor. Our fiscal forecast projects an economic recovery starting in the latter part of 2003, resulting in higher General Fund revenues than assumed in the Governor's budget. In order to begin to reduce the amount of education deferrals discussed above, we recommend the use of additional Proposition 98 funding to reduce the outstanding deferrals.
Child Care Realignment Merits Consideration. The Governor's budget proposes a major "realignment" of state and county program funding responsibilities. Under this proposal, the state would shift responsibility for most child care programs administered by the State Department of Education to counties. As we discuss in detail in the "Education" chapter of the Analysis, the state's existing child care system creates significant problems for families and local providers. For example, the system (1) requires local providers to comply with cumbersome rules regarding allowable expenditures, attendance accounting, eligibility, and reimbursement rates; and (2) treats families with similar incomes differently, depending on whether they have received assistance through the California Work Opportunity and Responsibility to Kids (CalWORKs) program. In view of these problems, we believe the Governor's child care realignment proposal merits legislative consideration. Realignment would give counties the flexibility to use child care funds as part of an integrated county strategy to serve low-income families and to tailor their child care programs to meet the needs of their communities' working poor. It would also reduce administrative complexity in the system by allowing counties to provide child care under their own set of program rules.
The Governor proposes Proposition 98 funding of $4.1 billion for 2003-04. This represents a decrease of $527 million, or 11.5 percent, from the Governor's current-year estimate. The current-year estimate includes about $327 million in targeted and across-the-board reductions proposed by the Governor in December and January. Among these reductions is $80 million in base apportionment funding that the administration believes was inappropriately added in recent years for concurrently enrolled high school students.
For 2003-04 the budget proposes the first fee increase in a decade for community college students, from $11 to $24 per unit. The budget assumes that the fee increase will cause enrollment attrition of 5.7 percent. In anticipation of this enrollment decline, as well as the receipt of additional student fee revenue, the budget reduces apportionment funding by $365 million. It also makes $215 million in targeted reductions to categorical programs. When all resources—including General Fund support, student fees, property taxes, and other funds—are considered, CCC's budget would decline by $383 million, or 6 percent, from the revised cur rent-year level. This compares with overall increases of 1 percent to 4 percent at the other higher education segments.
In the Analysis we assess the proposed changes in student fees and student enrollment. While we believe that it is reasonable to increase student fees and to reduce enrollment funding, we find the following:
Governor's Fee Proposal Misses Opportunity to Help Needy Students. We find that the proposed fee increase to $24 per unit is reasonable. However, we note that if the fee were raised $1 higher, needy students would each become eligible for up to $108 dollars in additional federal financial aid. We therefore recommend that the Legislature approve a $25 fee, which would still be the lowest fee in the nation.
Additional Enrollment Funding May Be Warranted. We find that some decline in student enrollment at CCC is appropriate. However, we believe that the projected decline of about 62,000 full-time equivalent students (or 5.7 percent of total enrollment) may be unnecessarily high. To the extent that additional Proposition 98 resources are available, we recommend that the Legislature consider increasing enrollment funding by up to $100 million. This additional funding would support an additional 25,000 students.
Besides CCC, the state's higher education agencies include the University of California (UC), the California State University (CSU), Hastings College of the Law, the California Student Aid Commission, and the California Postsecondary Education Commission. None of these agencies is subject to Proposition 98. The 2003-04 budget proposal would provide $6.3 billion in General Fund support for these programs. This is $183 million, or 2.8 percent, less than the revised current-year level.
The budget includes a number of General Fund reductions in higher education. These include targeted and across-the-board reductions to various programs. Further reductions are made possible by offsetting General Fund support with revenue generated by increased student fees. The budget includes no funding for COLAs, nor does it include any major new initiatives. However, it does fund enrollment growth of about 7 percent at UC and CSU. It also significantly expands various financial aid programs operated by the Student Aid Commission, UC, and CSU.
The budget assumes that student fees at UC and CSU would increase about 25 percent (for resident undergraduates) in the budget year. When the new revenue generated from these fees, as well as all other fund sources, are considered, the UC and CSU budgets would increase by 4.1 percent and 1.2 percent, respectively, in the budget year.
In the Analysis we recommend an alternative to the Governor's budget proposal concerning fees, enrollment growth, and financial aid. Our alternative would achieve the same level of General Fund savings as proposed by the Governor, while at the same time improving student access and avoiding additional reductions to instructional programs. Specifically, we recommend:
Under the Governor's budget proposal, state General Fund expenditures for health and social services programs would total $15.1 billion in 2003-04, about 24 percent of proposed General Fund spending for all purposes. Besides the Governor's realignment proposal, which is discussed in "Part V" of this volume, the budget's most significant impact on health and social services programs involves various program reductions affecting program beneficiaries.
The budget proposes $2.9 billion in major reductions affecting current beneficiaries of cash assistance, social services, and health programs. Figure 9 summarizes these reductions compared to current law service levels. About $1.5 billion of the proposed savings is in the form of COLA suspensions and grant reductions for social services, and about $1.3 billion relates to reductions in health services.
In addressing California's budget shortfall, the Legislature faces many difficult choices, perhaps none more difficult than determining the level of income support and health services to be provided by the state to low-income individuals (often aged or disabled persons or children). Below we present several factors that the Legislature may consider in evaluating these and other proposed reductions for health and social services programs.
What Is the Impact on Federal Funds? Many health and social services programs have federal matching funds. A reduction in such matching funds, in our view, should not constitute justification for rejecting a budget reduction proposal. Given the magnitude of state's fiscal problems, and the many cases in which state General Fund savings can be achieved only with a further loss of federal funds, such an approach would make it much more difficult for the state to achieve a budget solution.
Moreover, such a criterion may not fully take into account the Legislature's own judgments about which services and programs meet the most critical needs of Californians, and thus merit preservation, versus those which, while perhaps worthwhile services, are of secondary importance.
Nevertheless, in choosing reductions among programs deemed by the Legislature to be of equal value to beneficiaries, budget reduction proposals that do not result in reduced federal funding, or that take advantage of the availability of federal funding to "leverage" state dollars, may be preferable to proposals that result in the loss of federal funds. For example, the Department of Developmental Services budget includes a proposal to expand the number of Regional Center clients eligible for partial federal support under the Medicaid waiver program (Medi-Cal in California) that we believe could be modified to result in an even greater savings to the state for the cost for these services.
Availability of Other Support. In considering the Governor's proposals, the Legislature should evaluate whether other services or supports will be available to affected beneficiaries. For example, about 40 percent of the 6.2 percent reduction in CalWORKs grants would automatically be offset by an increase in federal Food Stamps coupons. With respect to health programs, some beneficiaries who might become ineligible for Medi-Cal benefits might become eligible for coverage under the Healthy Families Program or might be able to receive some of the same medical services through county indigent care programs or through the charity of private medical institutions.
Suspension Versus Elimination of Services or Programs. For most of the proposed reductions, the Legislature has the option of making the changes temporary (for example, for one or two fiscal years) to achieve state savings rather than permanent reductions. For example, the administration's proposal to reduce Medi-Cal provider rates by 15 percent is limited to a three-year period (through 2005-06).
In cases in which the Legislature may be unwilling to consider a permanent program reduction, it might nonetheless wish to consider a temporary reduction in that same program. For example, suspension of dental services for a year for adult beneficiaries would be less harmful to most beneficiaries than the permanent elimination of such services.
We caution that this approach would not be wise in all situations. For example, it may be difficult or unduly expensive to reestablish the delivery system for a health or social services program that has been suspended. Moreover, adopting temporary suspensions of programs on a large scale would only postpone the hard choices needed to balance the state's budget, and would potentially result in the return of fiscal problems once the budget reductions expire.
Selectively adopting some temporary reductions in programs might make sense, however, to the extent the Legislature also adopted significant long-term programmatic reforms of programs that took some time to achieve their full savings potential for the state.
The budget proposes about $7.3 billion from the General Fund for judiciary and criminal justice programs in the budget year, a decrease of 4.7 percent below estimated current-year spending. The California Department of Corrections (CDC) accounts for the largest share of this funding, $5.1 billion. The CDC's budget is proposed to increase about 1 percent above the current-year amount. The budget does not include proposals that would reduce the inmate or parole populations. Instead, it proposes to reduce funding for inmate academic and vocational programs. In addition, as we recommended in our 2002-03 Analysis, the budget proposes to close the Northern California Women's Facility in Stockton.
The Trial Court Funding program represents the next largest share of expenditures in this area of the budget at $2.2 billion. The budget proposes General Fund spending of $791 million, about 28 percent below the revised current-year amount. This reduction is achieved by shifting partial General Fund support for the courts to new sales tax (as part of the realignment proposal) and fee revenue. In addition, the budget proposes significant unallocated reductions to the court budget.
Cost Reduction Measures Needed in Corrections. The CDC is the largest state corrections agency in the nation. With over 45,000 employees and a total budget of about $5.3 billion, the CDC manages over 160,000 prison inmates, and more than 119,000 parolees. During the past ten years, the average annual growth rate of CDC expenditures has been about 8 percent. Given the magnitude of the state's fiscal problem, the Legislature may wish to consider ways to reduce the inmate and parole populations. Because the CDC is a caseload-driven budget, it will not be possible to significantly reduce expenditures for the department without taking action to reduce the inmate and parole population.
In considering reductions to the inmate and parole populations, the Legislature should focus on two target groups: nonviolent offenders and short-term offenders. The state prison system has a significant number of inmates who are serving time for nonviolent offenses such as property and drug offenses. Similarly, there is a sizeable number of offenders with short prison terms, some with terms as short as six months or less. The state incurs significant costs to process and house these inmates. Targeting reductions on these two groups makes the most sense both from a fiscal and public safety standpoint.
It should also be noted that maintaining an offender in the community under supervision is significantly less costly than incarceration in prison. For example, inmates who are released early from prison to parole could be placed in the community with intensive supervision. For example, electronic monitoring devices could be used to ensure that individuals remain within a confined area. This could work particularly well for nonviolent, chronically ill, and elderly inmates.
Other Criminal Justice Issues. In addition, there is potential for reductions in other areas of the criminal justice budget. For example, the state could close several of its Youth Authority facilities, and shift Office of Criminal Justice Planning (OCJP) programs to other departments with similar missions and programs. These are discussed below.
Trial Courts Funding Shift to Special Funds. For the first time in a number of years, fee revenues are proposed to exceed the General Fund share of the Trial Court Funding budget. These special funds have grown from 19.5 percent of court funding in 2001-02 to an estimated 42.6 percent in 2003-04. This growth is the result of fee and penalty increases included in the 2002-03 Budget Act, as well as proposed budget year increases in fees. For the budget year, the Governor proposes to increase the existing trial motion fee from $23 to $33, establish a new court security fee, and transfer certain "undesignated fees" from the counties to the courts to offset General Fund reductions. In addition, the Governor proposes to shift $300 million in court security costs from the General Fund to newly proposed realignment sales tax revenues. Our review of the new court security fee and undesignated fee proposals indicates that the level of projected revenue from these fees is uncertain, and potentially puts the state at risk to make further unallocated reductions to the court budget, or backfill the shortfall with General Fund monies.
In 2000, the Legislature enacted the Traffic Congestion Relief Program (TCRP), which established a six-year funding plan for state and local transportation needs, covering the period from 2000-01 through 2005-06. The plan was later extended to eight years, through 2007-08. The program is funded from two sources:
TCRF Monies Loaned to General Fund. As the state's financial situation worsened in recent years, about $1.3 billion from TCRF has been loaned to the General Fund. Current law requires that this money be repaid to TCRF in time to prevent any delay to TCRP projects, or in any case no later than June 30, 2006.
Budget Proposes Further Redirection of TCRF and TIF Money. The Governor proposes to shift about $1.7 billion from TCRF and TIF to the General Fund. Specifically, the budget proposes the following actions:
These actions would permanently redirect about $1.3 billion designated for TCRP projects and $400 million from the other transportation purposes funded by TIF to the General Fund. The proposal would leave no money for TCRP projects in 2003-04 and about $300 million in TCRF monies for the current year to pay for expenditures that have already occurred and to close out existing contracts.
Proposal Would Delay TCRP Projects and Raises Substantial Uncertainties Regarding TCRP Status. At a minimum, the Governor's proposal would delay many TCRP projects until 2004-05, when TIF money would again be available. In the interim, only projects that have access to other funding sources may be able to continue. In response to the Governor's proposal and other transportation funding pressures, the California Transportation Commission (CTC) stopped all new allocations for TCRP projects in December 2002 in order to avoid increasing the amount it has committed to pay for these projects. It is uncertain at this point whether any project would be permanently cancelled. The status of the program's future is also uncertain, as the administration's intent regarding TCRP funding beyond 2003-04 is unknown. This creates doubt about whether project sponsors need only find temporary funding to keep projects going in the budget year, or whether they will need to find permanent replacements for lost TCRP funding.
In considering the Governor's proposal, the Legislature should address two issues related to the funding of TCRP. Addressing these issues in a timely manner would significantly reduce the uncertainties regarding the program's status.
Should Near-Term "Bridge" Funding Be Provided? While the budget leaves no funding in 2003-04 and only $300 million to cover TCRP expenditures in the rest of the current year, some TCRP projects will continue to incur expenditures in the budget year unless outstanding contracts are terminated. The administration has developed rough estimates of the amounts of funds that would be needed in 2003-04 to move projects through different stages. For example, the administration estimates that about $200 million would be needed in the budget year to continue work on projects that are currently under construction, and about $310 million would be needed to continue work on all projects that are currently under contract. However, CTC has begun collecting more up-to-date information on project status and near-term funding needs.
We believe that the information being collected by CTC is essential in order for the Legislature to determine whether to provide any funding for TCRP projects in 2003-04. Accordingly, we recommend that CTC provide to the Legislature by mid-March detailed information on the status of each TCRP project, including projected expenditures to close out all contracts, to continue construction contracts through the budget year, and to continue all contracts through the budget year.
What Is the Ultimate Fate of TCRP? The Legislature has a number of options in considering the ultimate status of TCRP. The Legislature could adopt the Governor's proposal as a one-time action, making clear that total funding for the program is reduced by $1.3 billion. In adopting this option, the Legislature should also determine how to allocate the reduction among the TCRP projects.
Other options range from terminating any future funding for the program to making a full funding commitment to the program. We discuss these options below.
Legislature Should Act Soon to Minimize Uncertainty. The Governor's proposal to remove $1.3 billion from TCRP projects creates uncertainty about the ultimate fate of these projects. This uncertainty affects the decisions that project sponsors must make regarding the priorities of these projects relative to other transportation projects. In order to assist these parties in making informed decisions regarding the priorities of their transportation projects and to avoid having to revisit TCRP funding on an annual basis, the Legislature should act as quickly as possible to determine its level of commitment to the TCRP and to ensure that funds are available to match this level of commitment.
Funding for Resources and Environmental Protection Programs. While the Governor's budget proposes several fee increases in order to reduce General Fund expenditures in this area, General Fund support still remains substantial for 2003-04.
Bond Expenditure Proposals. The budget proposes about $2.2 billion of bond funds for various resources and environmental protection programs. A number of these proposals are to implement a new program, or to substantially expand an existing one. These bond expenditure proposals include:
Funding for Resources and Environmental Protection Programs. We identify a number of opportunities to shift General Fund costs to fees, beyond those proposed in the Governor's budget. Adopting our recommendations would result in General Fund savings totaling $214 million. Fees are an appropriate funding source in these cases, either because the state is (1) providing a service that directly benefits an identifiable person or business (such as fire protection services) or (2) administering a pollution control program that could reasonably be funded on a "polluter pays" basis. Under the polluter pays principle, private parties that benefit from using public resources are responsible for paying the costs imposed on society to regulate such activities.
The specific opportunities for General Fund savings are:
Bond Expenditure Proposals. There are a number of issues for legislative consideration when evaluating the Governor's budget proposals to expend resources bond funds:
Employee Compensation. The Governor's budget proposes $22 billion in salary, wage, and benefit compensation for 325,000 authorized personnel-years in state government. Under current contracts, most state employees are scheduled to receive a 5 percent salary increase on July 1, 2003. Both highway patrol and corrections employees have long-term contracts—with the first of four annual pay raises also scheduled to begin on July 1, 2003 (6 percent and 3.5 percent, respectively). In total, the budget-year costs of these pay raises are estimated to be $532 million. More than half of these costs are attributable to the General Fund.
Retirement Contributions. The state makes annual contributions to the Public Employees' Retirement System (PERS) and the State Teachers' Retirement System (STRS) to fund retirement benefits for state employees and teachers that will be paid out in the future. In 2003-04, the estimated state contribution to PERS is $2.1 billion. Of that amount, the General Fund would contribute $1.1 billion. The General Fund provides the entire contribution to STRS, which is estimated at $448 million in the budget year.
Employee Compensation Reduction. The budget does not include the $532 million for the scheduled employee salary increases. Instead, the Governor proposes an $855 million ($470 million General Fund) reduction in employee compensation expenditures. The $855 million in savings is roughly equivalent to an across-the-board 8 percent salary reduction. The savings, however, could be achieved through any combination of pay cuts, reduced benefits, or other actions like furloughs or layoffs. The administration proposes to achieve these savings through the collective bargaining process with the employee unions.
Financing Retirement Contributions. The Governor's budget proposes not to make the standard retirement contributions to PERS and STRS. Instead, the budget proposes two alternatives: (1) issue pension obligation bonds or (2) borrow the necessary funds from the systems. The alternatives would save the state up to $2.5 billion ($1.5 billion General Fund) in 2003-04. These alternatives instead would have the state finance these retirement operating costs over a number of years.
Options for Exercising Control Over Compensation Reductions. The Governor's proposal has the administration leading the determination of employee compensation reductions. Given the state's fiscal condition, we believe it is appropriate to consider reductions in employment costs. But the Legislature need not defer to the administration in determining or allocating the negotiated reductions. Specifically, the Legislature could choose to exercise some control over the proposed reductions—such as determining the desired level of cuts, establishing parameters for negotiations, and ensuring adequate time for review of any reductions.
Retirement Proposal. We have two major concerns with the Governor's retirement proposal: