Major Features of the 2000-01 Budget

Legislative Analyst's Office, July 3, 2000

	Major Features of the 2000 California Budget

Budget Overview

On June 30, 2000, Governor Davis signed the 2000-01 Budget Act. Along with related implementing legislation (see Appendix 1) the budget authorizes total state spending from all funds of $99.4 billion. Of this total, $78.8 billion is from the General Fund, $15.6 billion from special funds, and $5.0 billion from bond funds. Figure 1 shows total state spending by major program area.

The budget reflects major increases in General Fund revenues. Total receipts are estimated to increase by over 21 percent in 1999-00 and a further 3.8 percent in 2000-01. The majority of the increased funds are directed toward education, tax relief, and transportation, although the budget also includes new or expanded initiatives in a variety of other areas, such as housing and health.

The General Fund Condition

Figure 2 summarizes the General Fund budget condition for 1999-00 and 2000-01. As a result of major revenue increases in 1999-00, the current year is expected to end with a reserve of $7.2 billion. In 2000-01, revenues are forecast to be $73.9 billion (a 3.8 percent increase from the current year) and expenditures are anticipated to be $78.8 billion (a 17.3 percent increase from the current year). (The revenue figures are based on the Governor's May Revision forecast adjusted upward in 1999-00 by $238 million to reflect unanticipated receipts in May). The budget includes a $500 million set-aside for litigation. This leaves a 2000-01 year-end reserve of $1.8 billion, or about 2.2 percent of expenditures.

Figure 2
The 2000-01 Budget General Fund Condition
(In Millions)
	1999-00	2000-01

Starting balance	$3,851	$7,827
Revenues and transfers	71,162	73,856
Total resources available	$75,013	$81,683
Expenditures	$67,186	$78,816
Fund balance	$7,827	$2,867
Encumbrances	$592	$592
Set aside for litigation	--	$500
Reserve	$7,235	$1,775

Major Features

The budget's major funding priorities are education, tax relief, transportation, and housing. Specifically:

Education. The budget includes major funding increases for education. It provides $6,696 in per pupil funding for K-12 education, an 11.1 percent increase from the 1999-00 Budget Act amount. It includes a $1.8 billion increase in general purpose funding (deficit reduction), a block grant for teacher recruitment and retention, and an augmentation for beginning teacher salaries. In higher education, the budget includes substantial funding increases for the University of California, California State University, and California Community Colleges, as well as funding for expanded financial aid.

Tax Relief. The budget includes $1.5 billion in this area. The major provision is an acceleration of the vehicle license fee rate reduction to 67.5 percent from January 2003 to January 2001. Other provisions include a teachers' tax credit, a child care tax credit, an increase in senior citizens' property tax assistance, and a variety of targeted tax reductions.

Transportation. The budget includes a General Fund commitment of $2 billion for transportation, financed by a one-time direct General Fund appropriation of $1.5 billion and a diversion of $500 million of sales taxes from the General Fund to a transportation special fund to support traffic congestion relief efforts. In the five subsequent years, all General Fund sales taxes on gasoline and diesel fuel (about $1 billion per year) would be diverted for this purpose.

Housing and Other Programs. In other areas, the budget provides $500 million for various housing-related augmentations, with an emphasis on multifamily housing. It also includes a variety of provider rate increases for physicians, hospitals, and other health care providers, as well as funding increases for the Governor's Aging with Dignity initiative, and a variety of other targeted increases in health and social services programs. With regard to local governments, the budget sets aside $200 million in one-time funds for local government financial reform.

Vetoes

Before signing the budget, the Governor used his line item veto authority to delete $1.1 billion in 2000-01 budget spending, of which about
$1 billion is from the General Fund. The General Fund vetoes include:

$210 million from health and social services programs, including legislative augmentations for mental health programs and various provider rate increases.
$173 million from K-12 education, including funds for child care and a school safety block grant.
$151 million from youth and adult corrections, including $121 million for juvenile justice programs.
$176 million from higher education, including community college apportionments and funding for the student aid commission. The Governor also reduced or deleted various legislative augmentations in resources, environmental protection, and arts programs.

Tax Provisions

The budget includes approximately $1.5 billion in tax relief for 2000-01, $2 billion in 2001-02 and $1.1 billion in 2002-03. This consists of an acceleration of the vehicle license fee (VLF) reduction, tax credits for credentialed teachers and child care, senior citizens' property tax assistance, and other targeted relief (see Figure 1).

Figure 1
2000-01 Budget Tax Package
(In Millions)
	Fiscal Effect
Description of Provision	2000-01	2001-02	2002-03

Vehicle license fee acceleration	$887	$1,426 ^a	$553
Credentialed teacher tax credit	218	188	202
Child care credit	195	189	193
Senior citizens' property tax assistance	154	--	--
Targeted tax cuts	88	161	133
Totals	$1,542	$1,964	$1,081

^a Of this fiscal effect, $1.165 billion is appropriated and counted as an expenditure in 2000-01.

Vehicle License Fee Cut

The budget includes a rebate to taxpayers equivalent to accelerating by two years a cumulative reduction of 67.5 percent in the VLF.

Background

The VLF is an annual fee on the ownership of a registered vehicle in California, levied in place of taxing vehicles as personal property. The revenues are distributed to cities and counties. As part of the 1998 budget, the VLF was cut by 25 percent, with the potential of additional reductions in future years if specific revenue levels (or "triggers") are reached. Under the 1998 law, the first such trigger would have resulted in a cumulative 35 percent reduction beginning in 2001. The maximum reduction possible under the agreement would have lowered the VLF by a cumulative 67.5 percent, beginning in 2003. As part of last year's budget, the reduction was increased to 35 percent for calendar year 2000 only.

In addition, the 1998 law provided that, for any year in which additional non-VLF tax relief was passed by the Legislature totaling more than $100 million, the level of VLF tax relief would be reduced on a dollar-for-dollar basis in order to maintain the same overall level of tax relief.

Under the 1998 agreement, cities and counties continue to receive the same amount of revenues as under prior law, with the reduced VLF amounts replaced by General Fund spending. The state currently spends about $1.4 billion annually to backfill revenues to local governments.

Acceleration of 67.5 Percent Reduction

The 2000-01 budget package accelerates the 67.5 percent cumulative reduction from calendar year 2003 to 2001. As Figure 1 shows, this will have a fiscal effect of $887 million in the budget year, $1.4 billion in 2001-02, and $553 million in 2002-03. (The cost in 2001-02 reflects a full fiscal-year impact, while the costs in both 2000-01 and 2002-03 reflect only half-year impacts.) As under the previous VLF reductions, local governments will continue to receive payments from the state to replace the lost VLF revenues.

For 2001 and 2002, the difference between the 67.5 percent reduction and the reduction percentage provided under current law will be refunded to taxpayers in the form of a check, after paying their fees. For 2003 and thereafter, taxpayers will receive credit for the 67.5 percent reduction on their bill. The 67.5 percent reduction level would not be reduced by the passage of other non-VLF tax relief. Figure 2 compares the maximum reduction percentages under the original law with the budget proposal.

Figure 2
Comparison of Vehicle License Fee Reduction Percentages

	Calendar Year
	2001	2002	2003^a

Maximum possible reduction under 1998 law	35.0%	46.5%	67.5%
2000-01 budget	67.5	67.5	67.5
^a Rates apply to future years also.

Tax Credit for Credentialed Teachers

The budget also calls for credentialed teachers in K-12 public and private schools to receive tax credits linked to years of teaching experience. The tax credit amounts would be $250 for those with at least 4 years but fewer than 6 years of experience, $500 for those with at least 6 years but fewer than 11 years of experience, $1,000 for those with at least 11 years but fewer than 20 years of experience, and $1,500 for those with 20 or more years of experience. The credit is limited to 50 percent of tax liabilities associated with teaching-related income and will result in estimated revenue losses of $218 million in 2000-01, $188 million in 2001-02, and $202 million in 2002-03.

Child Care Credit

In addition, the budget provides for a refundable tax credit for child care expenses. The credit will be 63 percent of the federal child care credit for those earning $40,000 or less, 53 percent for those earning between $40,000 and $70,000, and 42 percent for those earning between $70,000, and $100,000. Taxpayers earning in excess of $100,000 will not be eligible for the credit. This will result in a revenue loss of $195 million in 2000-01 and similar reductions thereafter.

Senior Citizens' Property Tax Assistance

Two programs currently provide property tax assistance to low-income homeowners and renters who are either senior citizens (age 62 and older), disabled, or blind. For homeowners, the tax assistance is provided in the form of a partial reimbursement of property taxes paid; for renters, the amount of assistance is based on an estimate of the property tax paid by the renter. For both programs, eligibility is limited to those with incomes of less than $34,000, and the amount of assistance provided is determined by the claimant's income level. The budget proposes spending an additional $154 million on a one-time basis to increase the benefits of the program by 150 percent. The budget does not change the eligibility requirements of the programs.

Other Targeted Tax Reductions

The budget contains an additional $88 million in targeted tax relief measures, most of which were included in the Governor's budget or May Revision. These include a new long-term care credit, an increase in the credit for research and development expenses, and an increase in the deduction for net operating losses.

K-12 Proposition 98

In this section we describe the major features of the budget package as it relates to the Proposition 98 level of spending and K-12 schools.

Proposition 98 Provisions

The budget includes $43 billion in Proposition 98 spending in 2000-01 for K-14 education. This represents an increase of $5 billion, or 13 percent, from last year's budget package. Figure 1 summarizes for the two fiscal years the effect of the budget package on K-12 schools, community colleges, and other affected agencies.

Figure 1
Proposition 98 Budget Summary
1999-00 and 2000-01 (Dollars in Billions)
	1999-00 Budget Package		2000-01
	As Enacted	Revised	2000-01

K-12 Proposition 98
General Fund	$23.7	$25.1	$27.3
Local property taxes	9.9	10.0	10.7
Subtotals, K-12	($33.6)	($35.1)	($38.0)
Average Daily Attendance (ADA)	5,578,766	5,600,743	5,682,112
Amount per ADA	$6,025	$6,269	$6,696
California Community Colleges
General Fund	$2.3	$2.4	$2.7
Local property taxes	1.6	1.6	1.7
Subtotals, Community Colleges	($3.9)	($4.0)	($4.4)
Other
Other agencies	$0.1	$0.1	$0.1
Loan repayment	0.3	0.3	0.4
Totals, Proposition 98	$37.8	$39.5	$42.8
General Fund	$26.4	$27.9	$30.4
Local property taxes	11.4	11.6	12.4

Totals may not add due to rounding.

The Proposition 98 totals (including the revised total for 1999-00) reflect the Legislature's action to appropriate more General Fund monies than required to meet the constitutional minimum. Specifically, the Legislature appropriated $1.5 billion more than the 1999-00 minimum funding level and $1.2 billion more than the guarantee in 2000-01.

K-12 Program Impacts

The K-12 portion of the Proposition 98 budget package includes:

1999-00. Funding of $6,269 per pupil, or $244 more per pupil than anticipated in the 1999-00 Budget Act.
2000-01. Funding of $6,696 per pupil, which represents an increase of over $670, or 11 percent, above the budget package adopted last year.

2000-01 Baseline Increases

Compared to last year's budget package, K-12 Proposition 98 funding as approved by the Legislature increased by $4.6 billion. The budget allocates almost $1.6 billion to provide for inflation and growth adjustments. Specifically, the budget includes about $490 million to accommodate a projected 1.45 percent increase in the student population, and almost $1.1 billion for a 3.17 percent cost-of-living adjustment (COLA) (applicable to most program funding).

The budget approved by the Legislature directs the remaining $3 billion for other purposes, including new and existing programs (see Figure 2). The major increases are as follows:

Revenue Limit "Deficit Reduction"
($1.84 Billion). This action eliminates a deficit in school district and county office of education revenue limits that existed since the early 1990s, when the state did not fully fund COLAs. It provides a significant increase in general purpose funding for school districts (about 7 percent) and county offices (about 9 percent).
Child Care Increases ($180 Million). The budget funds the Governor's proposal for an increase of $47 million for State Preschool, providing preschool to an additional 100,000 children (over a two-year period that began in January 2000). The Legislature added $133 million for various child care increases, including an increase in the reimbursement rate for child care providers ($33 million), and half-year costs for 24,000 new child care slots ($75 million, ages infant to five).
Teacher Recruitment/Retention--Low-Performing Schools ($143 Million). The Governor proposed a total of $143 million for four new categorical programs to recruit and retain credentialed teachers in low-performing schools (defined as schools in the lowest half of test scores according to the Academic Performance Index [API]). The Legislature consolidated two of these proposed programs into a $119 million block grant, allowing local school districts flexibility in the use of recruitment/retention incentives. (The Legislature approved the remainder of the Governor's request--$24 million--as budgeted.) The Legislature targeted the block grant, giving schools in the lowest 30 percent of test scores 1.5 times the funding per pupil as other low-performing schools. The Legislature also added language allowing small and alternative low-performing schools access to block grant funds.
School and Certificated Staff Performance Awards ($85 Million). The Legislature approved a $50 million augmentation proposed by the Governor for purposes of the Certificated Staff Performance Incentive Act (Chapter 52, Statutes of 1999 [AB 1114, Steinberg]). This program provides bonuses to teachers and other certificated staff at "low-performing" schools that achieve specified increases in pupil test scores. The augmentation brings the budget-year amount for the program to $100 million. The Legislature also approved a $35 million augmentation for the Governor's Performance Awards Program. (The Governor had requested $40 million.) This program awards schools that achieve specified increases in pupil test scores (both low- and "high-performing" schools are potentially eligible). The augmentation brings the budget-year amount for this program to $227 million, including a carry over of $96 million that was not allocated in the current year.

Figure 2
Major K-12 Increases As Approved by the Legislature
2000-01 (In Millions)
Purpose	Amount

Revenue limit "deficit reduction"	$1,840
Cost-of-living adjustments	1,060
Enrollment growth	491
Child care	180
Teacher recruitment/retention--low-performing schools	143
Supplemental instruction	102
School/staff performance awards	85
School safety	61
Beginning teacher salary	55^a

^a Includes carry over of $20 million of one-time savings.

Governor's Vetoes. The Governor vetoed a total of $119 million in ongoing K-12 Proposition 98 funding, including a $61 million legislative augmentation for school safety. As part of the $119 million in vetoes, the Governor reduced the Legislature's $75 million augmentation for new child care slots by $35 million.

Current-Year Funds

The budget approved by the Legislature adds $1.5 billion of one-time funds to the $33.6 billion of Proposition 98 funds approved for K-12 education in the 1999-00 Budget Act. Figure 3 lists the most significant of these one-time allocations.

Figure 3
Major K-12 Expenditures One-Time Funds
(In Millions)
Purpose	Amount

District and school site block grants	$425
School site and staff performance awards	350
English Language Learner Intensive	250
Education technology (high schools)	175
Mandates (deficiencies)	139
Digital high school	88^a

^a Funded from prior-year savings.

The Governor proposed a $500 million one-time allocation to teachers at low- and high-performing schools meeting test score improvement criteria. The Legislature reduced this amount to $350 million, and changed the nature of the allocation. Half the monies will go to eligible schools for purposes decided on by the school sites, and half will fund performance awards for all employees at these schools.

Non-Proposition 98 Provisions

The budget package also includes two tax-related provisions which provide significant benefits to California teachers:

Tax Credit. Under a budget trailer bill
(AB 2879, Jackson), credentialed teachers at public and private schools would receive a tax credit ranging from $250 (for those with four or five years of experience), to $1,500 (for those with 20 or more years). The tax credit would be limited to 50 percent of the tax liability attributable to teaching-related income. This provision would result in a General Fund revenue loss of $218 million in the budget year, with comparable losses annually thereafter.
State Teachers' Retirement System (STRS) Enhanced Retirement. In a budget trailer bill (AB 1509, Machado) the Legislature established a new retirement benefit under STRS. Specifically, the measure establishes a tax deferred annuity for teachers equal to 2 percent of their salary. Contributions from the STRS fund for these annuities would be made for a ten-year period. The total cost of the benefit over that period would be $2.9 billion and would be paid for out of the existing STRS actuarial surplus.

Higher Education

The budget as signed by the Governor, includes significant funding increases for the University of California (UC), California State University (CSU), California Community Colleges (CCC), and the Student Aid Commission. Figure 1 shows the change in funding for each major segment of higher education for 2000-01 from the General Fund and local property tax revenue.

Figure 1
Higher Education Budget Summary General Fund and Local Property Tax Revenue
(Dollars in Millions)
	2000-01	Change From 1999-00
	2000-01	Amount	Percent

University of California	$3,205.6	$487.7	17.9%
California State University	$2,473.0	$278.9	12.7%
California Community Colleges
General Fund (Proposition 98)	$2,689.4	$389.0	16.9%
Property taxes	1,683.3	114.9	7.3
Totals, Community Colleges	$4,372.7	$503.9	13.0%
Student Aid Commission	$531.5	$142.0	36.5%

Governor's Veteos. The Governor deleted $170.1 million from the amount approved by the Legislature for higher education in 2000-01. Of this amount, the governor deleted $14 million from UC, $6.5 million from CSU,
$98 million from CCC, and $51.6 million from the Student Aid Commission.

University of California

The budget provides $487.7 million, or 18 percent, more in General Fund support for UC in 2000-01 than in 1999-00. The major augmentations include:

$128.7 million for employee compensation increases.

$108.9 million for various K-12 initiatives.
$51.2 million for a 3.75 percent growth in enrollment.
$30 million for the UC Davis MIND Institute to study neurodevelopmental disorders.
$13.8 million to reduce summer fees.

California State University

The budget provides $278.9 million, or 13 percent, more in General Fund support for CSU in 2000-01 than in 1999-00. Major augmentations include:

$113.2 million to provide a 6 percent increase in the employee compensation pool. How these funds are used (for COLAs, merit increases, and parity adjustments) will be determined through collective bargaining.

$73.1 million for 4.5 percent enrollment growth.
$19.9 million to reduce summer fees.

California Community Colleges

The budget package contains major funding increases for community colleges. General Fund spending for community colleges totals approximately $2.7 billion in the budget year. This represents a $389 million, or 17 percent, increase above the 1999-00 level.

2000-01 Expenditures. Figure 2 illustrates the major program increases funded in 2000-01. The budget includes $155 million for the Partnership for Excellence, $122.2 million to fund enrollment growth of 3.5 percent, and $149.1 million for a COLA of 4.17 percent. As noted above, the governor vetoed $98 million in community college funding, including $45 million for equalization.

Figure 2
Community Colleges Major Increases 2000-01
General Fund (In Millions)
Purpose	Amount

Partnership for Excellence	$155.0
Cost-of-living adjustment (4.17 percent)	149.1
Enrollment growth (4 percent)	122.2

Student Aid Commission

The budget appropriates $531.5 million from the General Fund for the Student Aid Commission in
2000-01. This is $142 million, or 37 percent, above expenditures in 1999-00. The increase is for expanding the number and size of Cal Grant A, B, and C programs.

The Governor vetoed $51.6 million from the amount of legislative augmentations to the Cal Grant program.

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