PUBLIC POLICY PERSPECTIVES

California State Budget Update:
Analysis of the Final Budget Bills
For Fiscal Year 2011-12  

July 11, 2011                       Volume 3 No. 6 

The legislature passes and governor brown signs the fy 2011-12 budget bill and trailer bills by a majority vote without any republican votes that provides limited new revenue increases and no authorization for voter approval of the temporary taxes that expired june 30^th 

Summary: After months of bipartisan bickering and the refusal of the Members of the Assembly and Senate Republican Caucus to agree to Governor’s Brown’s proposal to offset budget cuts with a plan for voter approval of temporary taxes, the Governor finally signed the main budget bill and the trailer bills beginning July 1st (i.e. some of the trailer bills, including ones to resolve technical issues were still in play as of the date of the writing of this report). Republicans had proven to be a moving target in terms of their negotiation demands and insistence that the state budget deficit could be eliminated by program cuts alone. At various times they insisted upon various tradeoffs constituting major “reforms” in state employee pension benefits, placing a permanent cap on state spending, and a roll back on state regulations they portray as “job killers.” 

Facing a looming threat of a state spending shutdown after the expiration of the then-current fiscal year, Democrats used the authority granted to them by a 2010 voter initiative, Proposition 25, which allowed them to pass the budget bills by a majority bill. Earlier they had passed another budget bill by majority vote, and reluctantly took action in putting together another package of budget bills after the Governor vetoed the previous one.  

Advocates for poor and low-income families, children, seniors, and people with disabilities were dismayed that the failure of the Republicans to agree to allow a vote on a proposed 5-year extension on certain temporary taxes that expired June 30th means that devastating cuts in programs and services for these communities cannot be offset with additional revenues. The loss of those potential revenues not only forced the previously passed cuts in health and human services programs to remain in effect, but they will certain contribute to yet another state budget deficit for FY 2011-12. Perhaps more importantly, it is more apparent than ever before that the Democrats and Republicans are at polar ideological opposites and are ill prepared to agree to permanent structural reforms in the state revenue collection streams that would aid economic recovery.

Despite his laudable effort to propose balancing budget cuts with revenue increases and a promise to stop using the ”smoke and mirrors” temporary accounting fixes to balance the budget that were a central component of past budget agreements, neither side came out with anything resembling a “victory.” In the final analysis, the Republicans allowed their performance to be judged by blocking any taxes, irrespective of the consequences. In one publicity stunt, they gathered at a Downtown Sacramento car dealership and stated that they were celebrating at that site to highlight the fact that because of their efforts new cars became more affordable overnight because they blocked the tax extensions. 

Unfortunately, the budget package did not include any meaningful new taxes because the California Constitution still retains the 2/3 supermajority vote requirement for appropriations, tax increases, and constitutional amendments, so the deficit was closed through a combination of spending cuts (including those enacted in March in health and human services programs), some accounting shifts in education funding, cuts to courts and other programs, and additional savings resulting from the proposed realignment of public safety programs. 

Fifty-three percent of the deficit was closed through spending reductions, including deep reductions in health and human services programs and higher education. The budget agreement also assumes that there will be $1.73 billion in state savings from limits on local redevelopment activities and $200 million from requiring certain out-of-state online retailers such as Amazon to collect state use taxes that consumers would otherwise pay for in “brick and mortar” stores. 

In a later section, this analysis will also go into more detail about the “trigger” mechanisms that were employed to balance the budget. Basically, the agreement assumed some very optimistic revenue assumptions in FY 2011-12 and offers a built-in statutory safeguard to create this balanced budget by including hundreds of millions of dollars of unspecified additional spending reductions that will take effect automatically if, in fact, the revenues fall short of those projections. Among others, the additional cuts would be made in IHSS, Developmental Services, and Medi-Cal managed care health plan rates.

Political Ramifications of the Republican “No Taxes, Ever, Ever, Ever” Stance: In the aftermath of the signing of this budget agreement, Republicans are publicly celebrating how they were able to dismantle the Governor’s proposed budget plan. Since the proposal was released in January, one of their objectives was to halt his post-election momentum of and what the public perceived as true statesmanship in addressing future budget deficits. 

Their key strategy was to refuse to allow a special election to be called to seek voter approval for a 5-year extension of the temporary taxes to offset budget cuts. As the deadlines for calling the special elections expired, the prospects for a bipartisan agreement made it no longer feasible to call a special election before the fall. As a result, the state will lose uncalculated millions of dollars in revenue from the temporary taxes.

Political pundits largely agree that the Republicans emerged from the budget battle with the label of a “One-Issue Party.” Others believe that they misplayed the opportunity to reduce state pensions, impose a stronger state spending cap, and deregulation and may find themselves without an equivalent bargaining position in the foreseeable future.

The public will soon be painfully aware of the implications of the loss of the revenues from the tax extensions in their daily lives. The governing boards of the state institutions of higher education have already set into place the foundation for approving even higher tuition rate hikes. K-12 schools and the courts will also seen additional cuts that will disrupt school instruction and the operations of the court system. The remaining question is whether the public will admire them for their ideological commitment or see them as non-players in the governance of the state who refused to allow the voters to make their own decision on the tax extension. 

As time for a quick and decisive agreement went on, the polls indicated that while the majority of likely voters supported the tax extensions if they would offset additional cuts, the gap narrowed after it was clear that a June Special Election could not be called. A fall Special Election would have labeled the taxes as “new” taxes since the June 30^th expiration date would no longer allow them to be characterized as tax extensions. The voters were generally opposed to any new taxes, so some supporters of the tax extension urged to Governor to abandon his call for the election.

The Republican leadership issued public statements that the final budget will be viewed by voters as the Democrats’ budget and theirs alone. They believes that, at a minimum, their supporters will understand the reasons why they set the priorities and made the hard-line decisions that will cut government spending. They point out that their strategy was to promote an agenda to put money back in the pockets of taxpayers and that this is the message that will be remembered in upcoming elections. 

However, many of the Republicans’ business allies were not satisfied about their failure to compromise on the final budget. When the negotiations were still alive, the California Chamber of Commerce was urging support for a bipartisan compromise that would have included governance reforms and broad-based taxes. Allan Zaremberg, President and CEO of the chamber, reportedly announced that since the compromise failed he would be working with other business groups to place such a compromise package on the ballot.

These business interest constituencies were also concerned about lost opportunities to fund essential programs that would have created more fiscal certainty for potential investors. They doubted that these investors be content with having a stable state tax environment if the alternative they face is that fees that are associated as a part of doing business in California will be continually increasing in future years.

Senate President Pro Tem Darrell Steinberg told the media in characterizing the Republican strategy that “They missed a chance for reforms. They don’t just sit on their hands. They sit on their pledges. I feel sad for them. I feel sad for California. There’s so much more we could do together.”

Has the Legislature Become so Partisan and Embattled That Voter Initiatives may be the Only Solution to Increased Revenue Sources?: The two parties and the Governor will likely find themselves negotiating once again next spring in addressing another projected budget deficit.  Democrats still want to put tax measures on the November 2012 ballot. However, some analysts believe that the Democrats may have more negotiation leverage next year because some of the unions will back circulating petitions for tax initiatives to hold Republicans accountable for not participating in good faith in the budget process. 

The Governor has also given indications that he also may sponsor a tax initiative. At a minimum, his central budget and policy objective for realigning many programs from the state to local government and giving counties more responsibility for housing criminal serving short sentences in county jails will depend on the outcome of a statewide vote and will require up to $5.5 billion in tax revenues.

Moreover, the nonprofit organization California Forward that is funded by civic-minded philanthropists is also thinking about tax initiatives, as is Think Long, a group funded by billionaire Nicolas Berggruen. Think Long has proposed a preliminary plan to fixing state government through the initiative process and it is likely that more specific details may be available in early October. 

A Think Long spokesperson characterized it as “rebooting” state government and installing “new civic software.” One possibility is to significantly reduce income taxes and extend the state sales taxes to various professional services. Another would be to impose sales taxes to products such as food and medicine that are not currently subject to any sales taxes. It is estimated that the two proposals could generate as much a $20 billion in new revenue that would be made available to local government and schools.

The underlying theory behind this approach is that California would benefit from more reliable source of revenues that would come from these so-called “consumption taxes.” Some economists report that these taxes reduce volatility and increase the competitiveness of California companies relative to that of other states and countries.

Of course, conservatives and others would strongly resist any movement in this new direction, particularly the proposal to extend sales taxes to services. Lobbyists representing lawyers, accountants, and architects would likely spend a lot of money to defeat such an initiative because the sales tax on their professional services is something they view as a threat to their profession.

So, it appears to political, fiscal, and policy analysts and think tanks that the Republicans only earned, if anything, a “hallow victory” from the seemingly endless budget battles. Even though their resistance forced the Democrats enact the “all cuts” budget they promise to resist and to balance the budget agreement on what is, by any definition, a very tenuous budget agreement. Republicans earned absolutely no boasting rights to achieving meaningful pension overhaul, reductions in business regulations, or a cap on state spending. While it is true that they can spin a message to their constituents that they blocked “massive” tax hikes, in reality all they accomplished was prevent a statewide vote on whether to extend about $10 billion a year in taxes over 5 years.

Republican political messengers and media spinners naturally have a different perspective. Some commentators praised them from holding on to their core principles even after the November 2010 election significantly reduced their numbers in the Legislature. A California Republican National Committee Member, Shawn Steel, wrote that:

“When a party’s fortunes have ebbed as low as those of California Republicans, there’s almost nothing to do but rally to our philosophical redoubt, hoist the colors, wait out the siege, and present the voters with a choice: Do we continue liberal policies that don’t work? Or do we adopt conservative policies based on principles that are true because they work?”

Those of us who have seen the hardships these spending reductions have imposed upon our consumers would certainly question whether programs and services for people with disabilities that enable them to live independently are “liberal policies that don’t work.” Instead, we view them as critical investments that sustain independent living and lower state institutionalization costs. 

As to the argument that they held out for “conservative policies that work,” there is a strong argument to be made that their proposals to reduce taxes for the wealthy and corporations and the deregulation of government-controlled monitoring and enforcement agencies contributed to the decline of the financial and housing markets and a weak national and state economies. Reducing government spending is not a “one size fits all” solution.

A Case Study About How Republican Refusal to Make any Concessions Hurt a Local Community: Residents of Riverside County were very disappointed that their delegation of Republican state Senators and Assembly Members failed to successfully negotiate a $15 million appropriation so that the University of California at Riverside could proceed with a plan to open a medical school. The county is a safe Republican district represented by Senate Minority Leader Bob Dutton, Senator Bill Emerson, Senator Joel Anderson and Assembly Members Brian Nestande, Jeff Miller, Paul Cook, Mike Morrell, and Kevin Jeffries. 

None of them were able to garner support for the medical school due to their united stance against the Governor’s tax package. If only two of them had pre-conditioned their support for the tax extension package in this way, the $15 million certainly would have been found. This is a critical issue in Riverside County because it is the only county in the state with a population above a million that has fewer than 100 physicians per 100,000 residents.

The Riverside Press-Enterprise reported that a medical school accreditation panel wrote a letter to the university that it was denying the application for accreditation because the university did not have the resources to assure that a sound program of medical education could be sustained. In the absence of the $15 million appropriation, the fiscal stability they were looking toward was not available.

Senator Dutton claimed that such a quid pro quo for the medical school and the tax package was against his principles. Nevertheless, such vote exchanges have been part of numerous past budgets and the failure to obtain a medical school that local residents strongly supported could be viewed by many of them as neither a principled moral victory nor sound strategic political thinking.

CRUNCHING THE DOLLARS: HOW THE

BUDGET DEFICIT WAS BALANCED AND

WHAT CHALLENGES REMAIN

Once Again, the Budget Bill Disproportionately Cuts Spending for Seniors, the Poor, and People With Disabilities: After dealing with multiple, consecutive budget deficits and witnessing parallel actions in Congress to gut entitlement programs, it is clear that the threats to health and human services programs our community is facing are monumental. The hard-earned gains in enacting programs that support independent living that began in the civil rights era are at a dangerous cross-road.

Perhaps this is best reflected in the comments made during a recent June 15^th keynote speech by Jean Ross, Executive Director of the California Budget Project. Her core message was that Congress and the Legislature are struggling with the proper role government policies play in both economies and how government should fill in gaps when the private market does not work. 

She noted that tax cuts for the wealthy and corporations have been sold to lawmakers on false promises of economic growth, but what remains are very real problems that need to be funded out of a diminishing base of low- and middle-income taxpayers if the wealthy and corporations are given tax breaks and fail to stimulate the economy or create jobs. As a result, she believes that seniors, families in poverty, and people with disabilities are facing a “sea change” in the way government is expected to operate.

Recent data indicates that public spending both nationally and in California is at a 40-year low. The budget that was just passed shows that state spending is at its lowest level since 1974, the year that Governor Brown served his first year at California’s Governor. The Legislature has reduced General Fund spending from $103 billion in 2007-08 to $87.3 billion in 2009-10, which represents a drop of 15.3 percent even with continued caseload growth.

With the proposed realignment of many health and human services back to local government after they were shifted to the state level beginning in 1977 after the voter-approved Proposition 13, the question that needs to be asked is why our communities are expected to disproportionately bear these spending cut burdens. Our national and state elected officials have been timid in undertaking a serious discussion about what we want from government. More and more voters think that they can have it all---all of the public services that have been available historically without having to pay for them.

The budget that was finally agreed to makes it certain that the disability community will be back in the same untenable position as this year. The trigger mechanism ensures that school districts, counties, and the nonprofit community throughout the state will face yet another year of uncertainty at a time when there is nothing left to give.

Accordingly, the message we deliver as Independent Living Centers and the Systems Change Network Advocates must focus not only on the impact of any future cuts, but call for a realistic dialogue. We need to have the voters and taxpayers understand that they must communicate on what they expect government to provide. The nonprofit community has been asked to deal with constant setbacks and reassessments of how we can continue to serve our consumers. So, we must also realistically assess what the nonprofit sector can and cannot do in this scenario.

Republicans always contend that budget gaps can be filled by charities and philanthropists. This is an unrealistic counterpoint because charitable giving would have to double or triple the amounts actually given. They need to be called on this baseless point.

Summary of Major Provisions of the

FY 2011-12 Budget 

The most important and the most disturbing aspects of the final budget agreement as the related to health and human services programs for people with disabilities is that the final budget agreement retains almost all of the deep cuts in core programs. Balancing the budget produced a budget that is largely based on those cuts, very “optimistic” revenue assumptions and projections, and potentially devastating additional cuts through under a “trigger” mechanism if revenues fall short. 

As a result, a total of $1.6 billion was eliminated from Medi-Cal that sets into place all of the following:

• Subject to Federal approval, mandatory copayments for all beneficiaries, including $3 to $5 for prescriptions, $5 for hospital and clinic visits, $50 for emergency room visits, and $100-$200 for one or more nights in a hospital;
• Subject to Federal approval, a cap of 5 to 7 doctor or clinic visits per year, unless it is determined that additional visits are “medically necessary” by the provider;
• Elimination of enteral nutrition products, unless they are needed by tube-feeding recipients;
• A hard cap of $1,510 annually for hearing aids;
• Maintaining a 10 percent reduction for Medi-Cal providers at a time when fewer and fewer providers are accepting Medi-Cal patients;
• $448 million in unallocated Gederal Fund reductions to Medi-Cal and Healthy Families;
• A shift of $860 million from Proposition 63 mental health funding into the Early Periodic Screening Diagnosis and Treatment program, Medi-Cal Specialized Mental Health Managed Care, and mental health services to Special Education pupils; and
• Continuation of the Governor’s May Revision proposal to move all children enrolled in the Healthy Families Program to Medi-Cal.

Human Services: Among other things, the budget enacts commencing July 1, 2011 more than $1 billion through:

•  Grant cuts, time limits, and other program changes in CalWORKS and SSI;
•  Cal WORKS reductions in time on aid for adults from 60 months to 48 months of eligibility;
•  An 8 percent across-the-board cuts for all CalWORKS families;
•  Cutting the CalWORKS earned income disregard by half; and
•  Cutting SSI monthly grant payments to the Federal minimum. 

Additional Medi-Cal Cuts Above the March Budget: The final budget agreement includes a $345 million cut that comes on top of the $1.6 billion in reductions enacted in March. It is due to all of the following:

• The expiration of the managed care tax that the Governor sought to make a permanent tax. The tax expired on June 30^th and ended the recent efforts to use these funds to draw down matching Federal funds. Those funds were targeted to pay for increases in health plans and funding for the Healthy Families Program.
• The expiration of the hospital fee that became effective on the same day as the managed care tax. The Governor had proposed a one-year extension of these fees on hospitals the proceeds of which were also used to draw down matching Federal funding. The additional dollars were to have been used to provide health coverage for children under the Medi-Cal and Healthy Families programs.
• The agreement also does not adopt a shift of $1 billion in tobacco tax revenues imposed by Proposition 10 of 1998 that would have been used to pay for Medi-Cal services for children up to age 5. The State will also continue to defend a legal challenge that would have shifted county First Five Commissions for these programs for children from birth to age 5, using the funds provided from a 50 cents per pack tax imposed by Proposition 10. 

Adult Day Health Care (ADHC): The Governor vetoed an allocation of $85 million that the Legislature had reinstated to fund alternative services for seniors who will be losing access to ADHC services. The Governor did sustain $60 million in state funding to be used to transition current recipients to other available (i.e. non-existing) appropriate services. Although the Governor promised to work with the Legislature to assess what additional services would be part of the transition, the Legislature is concerned that he does not support a continuing program and therefore has to date withheld sending him a key budget trailer bill, AB 96, that would create the “Keeping Adults from Institutions (KAFI)” program.

In the interim, the Federal government has issued a letter indicating that they would not oppose the Governor’s proposal to eliminate ADHC entirely. Supporters of ADHC are still assessing the ramifications of the letter from CMS and how this will play out if the Legislature sends him AB 96 and the Governor vetoes that bill.

Redevelopment: The final budget agreement eliminates Redevelopment Agencies effective October 1, 2011 unless cities or counties opt to participate in a new Alternative Voluntary Redevelopment Program that would require them to make payments to help fund schools, fire protection, and transit services. This is projected to produce $1.7 billion in revenues in 2012-13. In all subsequent years, these payments would total $400 million each year, $340 million of which would be directed to schools.

Realignment: The budget agreement establishes a framework to shift primary authority for various public safety and related services, together with authority for generating dedicated sources of funding to counties beginning in 2011-12. Counties would be responsible for $5.6 billion in total program costs in 2011-12 and this figure would rise to $6.8 billion in 2014-15.

These costs would be funded by transferring revenues from an existing 1.06 percent sales tax rate to counties that is projected to provide $5.1 billion in 2011-12. The budget also redirects $453 million in Vehicle License Fee (VLF) revenues for these costs in 2011-12.

Commencing October 1, 2011, counties will assume responsibility for incarcerating low-level felons, adult parolees, and juvenile offenders. It would enable the State to begin meeting a Federal court prison overcrowding order recently sustained on appeal by the U.S. Supreme Court.

Realignment revenues will also support local public safety programs that had been funded with the temporary VLF that expired June 30^th. It also shifts responsibility for other programs that will now be overseen by counties, including child welfare services, mental health services, substance abuse treatment, and adult protective services. The latter requirements will not be substantially changed until a more detailed realignment bill is enacted this year.

Higher Education: Funding for California Community Colleges will be reduced by $400 million under the final budget agreement. They would also have certain apportionment payments delayed until FY 2012-13.

The California State University and University of California systems have been reduced by $650 each. The two systems to continue to receive all of their state funding even if they do not meet enrollment targets.

Additional “Trigger” Cuts: One of the most disturbing features of the final budget agreement is the automatic triggering of up to $2.5 billion in additional cuts that would go into effect by statute on January 1, 2012 if the Director of the Department of Finance (DOF) determines that 2011-12 revenues will not meet their targets upon which the budget was balanced. They would be triggered if revenues do not total $87.5 billion by the end of 2011-12 and the Director of DOF would be required to make that determination on or about December 15, 2011.

If the Director of DOF determines that revenues will be less than the $87.5 billion, but at least $86.5 billion, the following reductions that total $600 million in the aggregate will be made:

• $100 million from the University of California;
• $100 million from the California State University;
• $100 million from the Department of Developmental Services;
• $100 million from reducing hours in IHSS;
• $72 million from the Division of Juvenile Justice;
• $30 million from the California Community Colleges;
• $23 million from child care programs;
• $20 million from the Department of Corrections and Rehabilitation;
• $16 million from library grants;
• $15 million by extending various Medi-Cal managed care reductions approved in March to the PACE, Senior Care Action Network, and the AIDS Health Care Foundation;
• $15 million by reducing “vertical prosecution grants” administered by Cal EMA; and
• $10 million by reducing funding for IHSS anti-fraud grants. 

If the Director of DOF estimates that revenues will be below $86.5 billion, and additional $1.9 billion in reductions above what is listed above will be made by reducing:

• $1.5 billion from K-12 education and a statutory provision that could allow school districts to reduce the school year by 7 days;
• $248 million by eliminating funding for home-to-school transportation; and
• $72 million by reducing apportionments for California Community Colleges. 

Additional Vetoes: The Governor used his veto authority to cut an additional $24 million from various line items, including specified programs or proposals. Among other things, the vetoes reduced transportation capital outlay and local assistance, eliminated the California Postsecondary Education Commission, funds to generate energy, and a $200,000 reduction in funding to support the Commission on the Status of Women.