LAO 2005-06 Budget Analysis: General Government

Analysis of the 2005-06 Budget Bill

Legislative Analyst's Office
February 2005


General Fund spending for health and social services programs is proposed to increase by 4.6 percent to $26.7 billion in 2005-06. This net increase in spending is due primarily to a variety of caseload and cost increases that are partially offset by grant savings in certain social services programs and shifts of some health program funding to federal support.

Expenditure Proposal and Trends

Budget Year. The budget proposes General Fund expenditures of $26.7 billion for health and social services programs in 2005-06, which is 31 percent of total proposed General Fund expenditures. Figure 1  shows health and social services spending from 1998-99 through 2005-06. The proposed General Fund budget for 2005-06 is $1.2 billion (4.6 percent) above estimated spending for 2004-05. Special funds spending for health and social services is proposed to remain fairly level at about $5.6 billion.

Historical Trends. Figure 1 shows that General Fund expenditures (current dollars) for health and social services programs are projected to increase by $10.6 billion, or 66 percent, from 1998-99 through 2005-06. This represents an average annual increase of 7.5 percent. Similarly, combined General Fund and special funds expenditures are projected to increase by about $12.8 billion (66 percent) from 1998-99 through 2005-06, also at an average annual growth rate of 7.5 percent.

Adjusting for Inflation. Figure 1 also displays the spending for these programs adjusted for inflation (constant dollars). On this basis, General Fund expenditures are estimated to increase by 45 percent from 1998-99 through 2005-06, an average annual rate of 5.4 percent. Combined General Fund and special funds expenditures are estimated to increase by 45 percent during this same period, also at an average annual increase of 5.4 percent.

Caseload Trends

Caseload trends are one important factor driving health and social services expenditures. Figures 2 and 3 illustrate the budget's projected caseload trends for the largest health and social services programs. Figure 2 shows Medi-Cal caseload trends over the last decade, divided into four groups: (1) families and children (primarily recipients of California Work Opportunity and Responsibility to Kids [CalWORKs]); (2) refugees and undocumented persons; (3) disabled beneficiaries; and (4) aged persons (who are primarily recipients of Supplemental Security In come/State Supplementary Program [SSI/SSP]). Figure 3 shows the caseloads for CalWORKs and SSI/SSP.

Medi-Cal Caseloads. As shown in Figure 2, the Governor's budget plan assumes that a modest increase in caseload will occur during the budget year in the Medi-Cal program. Specifically, the overall caseload is expected to increase by about 171,000 average monthly eligibles (2.6 percent). This would continue a growth trend, although generally at a slightly slower pace than seen in prior years.

The caseload projections for 2005-06 take into account the following budget proposals and assumptions: (1) an increase in caseload from the continued transfer of children from the Child Health and Disability Prevention (CHDP) program into more comprehensive Medi-Cal coverage; (2) caseload reductions resulting from the requirement that certain adult beneficiaries confirm their eligibility for Medi-Cal twice annually; and (3) continued growth in several eligibility categories, especially nonwelfare families.

Healthy Families Caseload. The Governor's budget plan assumes that the caseload for the Healthy Families Program will continue to grow at a significant rate. The budget plan assumes that the current-year enrollment will fall short by about 60,000 of the number assumed in the 2004-05 Budget Act. However, the spending plan further assumes that the implementation of various program outreach activities, the continued effects of the CHDP program changes discussed above, and a prior decision to shift children from the state's Access to Infants and Mothers (AIM) program to the Healthy Families Program will have the combined effect of increasing enrollment by more than 75,000 children (10.6 percent) by the end of the budget year (June 2006). At that point, the total estimated caseload is projected to be almost 790,000.

The CalWORKs and SSI/SSP Caseloads. Figure 3 shows the caseload trend for CalWORKs and SSI/SSP. While the number of cases in SSI/SSP is greater than in the CalWORKs program, both programs serve about 1.2 million persons. (The SSI/SSP cases are reported as individual persons, while CalWORKs cases are primarily families.)

As Figure 3 shows, the CalWORKs caseload declined steadily since 1995-96, essentially bottoming out in 2002-03. For 2004-05, the budget projects a slight increase in caseload due to the expiration of extended unemployment benefits and the recent migration of refugees. In 2005-06, the budget forecasts a slight decline of 0.8 percent, with an additional decline due to the grant reduction proposals' effects on eligibility.

As discussed in our annual California's Fiscal Outlook report, the CalWORKs caseload decline shown in Figure 3 was due to various factors, including the improving economy, lower birth rates for young women, a decline in legal immigration to California, and, since 1999-00, the impact of CalWORKs program interventions (including additional employment services). The recent flattening of the caseload may be attributable to the composition of the remaining caseload, part of which includes adults who face substantial barriers to employment.

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 (increasing at about 1.5 percent per year). This component accounts for about 30 percent of the total caseload. The larger component—the disabled caseload—grew rapidly in the early 1990s, but more recently has experienced steady moderate growth of about 2.5 percent since 1997-98.

In the mid-to-late 1990s, the total SSI/SSP caseload leveled off and actually declined in 1997-98, in part because of federal changes that restricted eligibility. Since March 1998, however, the caseload has been growing moderately, between 2 percent and 2.5 percent each year.

Spending by Major Program

Figure 4 shows expenditures for the major health and social services programs in 2003-04 and 2004-05, and as proposed for 2005-06. As shown in the figure, three major benefit payment programs—Medi-Cal, CalWORKs, and SSI/SSP—account for a large share (about 77 percent) of total spending in the health and social services area.

Figure 4

Major Health and Social Services Programs
Budget Summarya

(Dollars in Millions)





From 2004-05









  General Fund






  All funds












  General Fund






  All funds






Foster Care






  General Fund






  All funds












  General Fund






  All funds






In-Home Supportive Services






  General Fund






  All funds






Regional Centers/Community Services






  General Fund






  All funds






Developmental Centers






  General Fund






  All funds






Healthy Families Program






  General Fund






  All funds






Child Welfare Services






  General Fund






  All funds






Children and Families Commission






  General Fund

  All funds






Child Support Services






  General Fund






  All funds






a    Excludes departmental support.

As Figure 4 shows, General Fund spending is proposed to increase in most health programs, while several large social services programs (CalWORKs, In-Home Supportive Services [IHSS], Foster Care, and the Children and Families Commission) would experience budget reductions. The proposed 77 percent General Fund increase provided for Child Support Services is almost entirely due to the deferral of the federal child support automation penalty from 2004-05 to 2005-06.

In general, social services programs would face larger programmatic impacts under the budget plan than health programs. While the decrease in social services programs between 2004-05 and 2005-06 in nominal dollar terms is about $100 million, the reduction amounts to $1.1 billion compared to the requirements of current law for these programs. Moreover, an additional General Fund savings of $260 million is achieved in other social services departments through the substitution of federal funds. In total, social services accounts for almost $1.4 billion, or 15 percent, of the proposed solution to the $9.1 billion budget problem identified by the Governor.

Major Budget Changes

Figures 5 and 6  illustrate the major budget changes proposed for health and social services programs in 2005-06. (We include the federal Temporary Assistance for Needy Families [TANF] funds for CalWORKs because, as a block grant, they are essentially interchangeable with state funds within the program.) Most of the major changes can be grouped into five categories: (1) funding most caseload changes, (2) suspending or deleting cost-of-living adjustments (COLAs),(3) grant reductions,(4) shifts of funding and programs so that they are no longer supported from the General Fund, and (5) other policy changes.

Figure 5

Health Services Programs
Proposed Major Changes for 2005‑06
General Fund




$12.9 billion





$1 billion




+     $381 million from increases in caseload, costs, and utilization of services by the aged, blind, and disabled beneficiaries



+     $302 million from one-time savings from delaying checkwrites to Medi-Cal providers that will not carry forward into 2005-06



+     $259 million for rate increases for nursing homes (these costs are offset by “quality improvement fee” revenues)



+     $170 million for rate increases for managed care plans (more than offset by “quality improvement fee” revenues)



+     $156 million from recent rate increases in Medicare premiums



+     $93 million from increases in caseload, costs, and utilization of services for families and children






     $191 million from a shift of prenatal care costs in Medi-Cal from the General Fund to federal funds



     $100 million from a one-time gain from implementation of the new Medicare drug benefit for beneficiaries also enrolled in Medi-Cal



     $25 million from imposition of $1,000 annual limit on adult dental services as part of the Medi-Cal reform package



Department of Developmental Services


$2.3 billion





$130 million




+     $117 million for Regional Center increases in caseload, costs, and utilization






     $60 million from transfer of federal funds from the Department of Social Services



Figure 6

Social Services Programs
Proposed Major Changes for 2005‑06
General Fund




$1.9 billion





-$205 million




+     $317 million for TANF transfers to achieve General Fund savings in other departments



+     $90 million for increased child care costs due to work participation reforms enacted in 2004-05






     $212 million from proposed 6.5 percent grant reduction



     $82 million from reducing the earned income disregard



     $201 million from increasing maintenance-of-effort countable child care expenditures by the State Department of Education



     $63 million from proposed child care reforms





$3.5 billion





$79 million




+     $79 million for caseload increase



+     $78 million for annualizing the costs of the April 2005 state COLA






     $85 million from not “passing through” the January 2006 federal COLA



In-Home Supportive Services


$1 billion





-$160 million




+     $108 million for caseload increase






     $195 million from limiting state participation in provider wages to the minimum wage, rather than $10.10 per hour



     $54 million from annualizing savings from the quality assurance reforms enacted in 2004-05


Caseload Changes. The budget funds caseload changes in the major health and social services programs. For example, the Medi-Cal budget would be adjusted for significant growth in the baseline costs and utilization of services by various groups of eligibles. General Fund support for community services at Regional Centers would continue to grow due mainly to rapid and ongoing caseload, costs, and utilization increases in these services.

COLA and Grant Reductions. Specifically, the budget proposes to (1) delete the statutory COLA for CalWORKs, (2) suspend the COLA for SSI/SSP, and (3) not provide the discretionary COLA for Foster Care and related programs. Also, the budget proposes to capture General Fund savings equal to the amount of the federal SSI COLA, sometimes referred to as "no pass through" of the federal COLA. In addition, the budget proposes no inflation adjustment for county administration of CalWORKs, Foster Care, Food Stamps, and Child Welfare Services. Finally, the budget achieves significant savings from a 6.5 percent CalWORKs grant reduction.

Funding and Program Shifts. The budget plan includes state savings (as well as some partially offsetting costs) from a shift in responsibility for prescription drug costs now borne by the Medi-Cal Program to the federal Medicare Program. The budget plan also reduces Medi-Cal costs by shifting part of the state cost of coverage of prenatal care services for some beneficiaries to federal funding. The budget plan also shows a net financial gain to the state from collecting so-called "quality improvement fees" from nursing homes and certain other Medi-Cal providers, even after part of the proceeds are used for rate increases for these same providers.

Other health programs would experience significant funding shifts. More Proposition 99 dollars would be used to support state mental hospitals, certain community clinics, breast and cervical cancer screenings, and Medi-Cal nonemergency medical services in order to reduce General Fund expenditures. Meanwhile, support for the AIM Program would be shifted away from Proposition 99 toward support from the General Fund and federal funds.

Finally, the budget would achieve substantial savings for social services programs by transferring TANF federal funds into the Title XX Social Services Block Grant and using these funds to offset General Fund costs in Foster Care and Developmental Services. The budget also achieves savings by replacing General Fund support for juvenile probation with TANF federal funds.

Other Policy Changes

Medi-Cal. The administration is proposing a series of changes to the structure of the Medi-Cal Program. These include: (1) expansion of managed care for families and children as well as the aged and disabled, (2) new premiums (generally ranging from $4 to $10 per month per person) for certain beneficiaries with higher incomes, (3) imposition of a cap on adult dental services of $1,000 per year, (4) restructuring of hospital revenue streams, (5) expedited processing of children's applications for health coverage through the so-called "single point of entry" contractor at the state level instead of sending Medi-Cal applications on to counties, and (6) stronger state monitoring of county administration of program eligibility. The budget also is increased in recognition that one-time savings to be achieved in 2004-05 from delaying checkwrites to Medi-Cal providers will not carry forward into 2005-06.

Other Health Programs. The budget plan provides new state funding for a series of health policy initiatives to reduce the incidence of obesity; establish a "California Rx" program by which an estimated five million low- and moderate-income Californians could gain access to discounts on prescription drugs at pharmacies, and to establish a fee-supported program to expand screening of newborns for various genetic diseases. In addition, the budget plan proposes to restore state funding for various outreach activities to assist persons in applying for benefits and proposes additional steps to promote the enrollment of children in the state's Medi-Cal and Healthy Families programs as well as county-supported initiatives for health coverage.

Developmental Services. Additional funds are provided to help patients at Agnews Developmental Center transfer to the community before the closure of the facility in 2007. Some new cost-containment proposals also are assumed to produce some savings in the budget year.

IHSS. The Governor proposes to limit state participation in provider wages to the minimum wage (that is $6.75, rather than the $10.10 per hour currently authorized). Under current law, state participation would have increased to $11.10 per hour in 2005-06.

CalWORKs. The Governor proposes to reduce the earned income disregard for working CalWORKs families. For example, a family earning $1,000 per month would have their monthly grant reduced by $93 under this policy. To improve work participation, the Governor proposes to make allocation of a portion of county block grant funds contingent upon meeting specified performance measures.

Child Care. The budget proposes a series of child care reforms similar to last year's proposal. Key features of the proposal include: (1) phasing in a one-year time limit for Stage 3 child care for former CalWORKs recipients, (2) tying reimbursement rates to child care quality, (3) waiting list reforms, and (4) basing income eligibility on the percentage of federal poverty rather than state median income.

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