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August 31, 2007

Major Features of the 2007 California Budget

On August 24, 2007, the Governor signed the 2007-08 Budget Act. In this report we highlight the major features of the budget package.

I. Budget Overview

II. Proposition 98

III. Higher Education

IV. Health

V. Social Services

VI. Judiciary & Criminal Justice

VII. Transportation

VIII. Resources and Environmental Protection

IX. Other Major Provisions

I. Budget Overview

On August 21, 2007, the Legislature passed the 2007-08 Budget Bill, along with implementing legislation. The Governor signed the budget on August 24, after using his line item veto authority to reduce General Fund appropriations by $703 million. The budget package authorizes total General Fund spending of $102.3 billion.

General Fund Condition

The budget assumes the state ended the 2006-07 fiscal year with a reserve of $4.1 billion. As shown in Figure 1, it projects $102.3 billion in budget-year revenues, an increase of 6.5 percent from 2006-07. The budget authorizes expenditures of an equal amount, an increase of 0.6 percent from 2006-07. Thus, the plan leaves the General Fund with a year-end reserve of $4.1 billion. This reserve is made up of two components:

• $2.6 billion in the state’s traditional reserve—known as the Special Fund for Economic Uncertainties.

• $1.5 billion in the Budget Stabilization Account, which was established when voters approved Proposition 58 in March of 2004. The budget act provides authority for the administration to transfer these funds to the General Fund during the fiscal year if needed.

 

 

Operating Shortfalls. As noted above, 2007-08 budget expenditures do not exceed revenues. By comparison, state spending exceeded revenues by more than $5 billion in 2006-07. Based on the 2007-08 budget plan’s policies, however, the state would once again face operating shortfalls of more than $5 billion in both 2008-09 and 2009-10. This is because, as described below, many of the solutions enacted in the budget plan are of a one-time nature. We will be updating our fiscal projections in November 2007, when we release our California Fiscal Outlook.

Key Features

In order to address the state’s operating shortfall, the budget includes the following major solutions:

• Proposition 98. The Governor’s May Revision revenue forecast (assumed by the Legislature in enacting its budget) results in a higher Proposition 98 guarantee for 2006-07 than included in the 2006-07 Budget Act. Due to uncertainty regarding this revenue projection (particularly as it relates to final 2006-07 revenues), the budget does not provide $411 million in 2006-07 Proposition 98 “settle-up” funds. As a result, the budget also assumes the 2007-08 minimum guarantee will be lower by $427 million, generating additional General Fund savings. If the May Revision revenue forecast proves accurate, therefore, the state would owe more than $800 million in additional funds to education under the Proposition 98 minimum guarantee. These funds would come from the budget’s reserve.

• Transportation. The budget uses almost $1.3 billion in Public Transportation Account funds to reduce General Fund expenditures. The budget plan assumes $596 million in General Fund benefit for 2008-09.

• Revenue Assumptions. The budget package assumes $1 billion in one-time revenues from the sale of EdFund, the state’s nonprofit student loan guaranty agency. The budget also assumes $293 million in new General Fund revenues from amended tribal gambling compacts. The budget package accelerates the transfer of $600 million in tobacco securitization funds to the General Fund. These tobacco funds were originally scheduled to be transferred in 2008-09 and 2009-10.

• Social Services Savings. The budget achieves ongoing savings of about $247 million from suspending a California Work Opportunity and Responsibility to Kids cost-of-living adjustment (COLA) for one year and permanently delaying the state Supplemental Security Income/State Supplementary Program COLA for five months.

• Governor’s Vetoes. The Governor vetoed $703 million in General Fund expenditures from the budget passed by the Legislature. The largest veto was a $332 million reduction to the state’s Medi-Cal Program based on the administration’s assertion that earlier estimates were too high. The second largest veto was a $72 million reduction in the amount provided for higher state employee compensation costs. The administration expects departments to pay for these higher costs from existing funds.

Figure 2 lists the budget bill and accompanying “trailer bills” which implement the budget package’s solutions.

 

 

Prepared by the State Administration Section—(916) 319-8310

II. Proposition 98

Figure 1 summarizes the Proposition 98 budget for K-12 schools and community colleges. As shown, the budget for 2007-08 includes $57.1 billion in total ongoing Proposition 98 spending. This reflects an increase of $2.1 billion, or 3.8 percent, over the prior year. Whereas General Fund support covers about one-third of this increase, additional local property tax revenue covers the remainder. Of the total increase, K-12 education funding grows by $1.8 billion, or 3.7 percent, and community college funding grows by $289 million, or 4.9 percent.

 

 

Revenue Fluctuations Affect Proposition 98 Decision Making. Estimates of state revenues fluctuated notably throughout 2006-07, which, in turn, affected estimates of the 2006-07 Proposition 98 minimum guarantee. At the time of the May Revision, the Proposition 98 minimum guarantee for 2006-07 was believed to have increased by roughly $400 million—generating a settle-up obligation of that amount. Since the release of the May Revision, state General Fund revenues appear to be down such that no settle-up obligation is owed. The budget, therefore, contains no additional Proposition 98 funding for 2006-07. (If finalized revenue figures for 2006-07 come in higher, the state will automatically owe a settle-up payment and need to provide it through subsequent budget action. Alternatively, if finalized revenue figures come in lower than projections, the state will have spent more than the Proposition 98 minimum guarantee.) The Proposition 98 spending level for 2007-08 builds off the 2006-07 spending level assuming no settle-up payment is needed—meaning the 2007-08 funding level is about $430 million less than the May Revision level.

Budget Relies Heavily on Non-Proposition 98 Monies, Contains Large Ongoing K-12 Shortfall. Year-to-year growth in the Proposition 98 minimum guarantee is insufficient to cover all 2007-08 K-14 baseline costs. In response, the Legislature made adjustments to the Proposition 98 budget—all relating to K-12 education. In particular, the budget package uses a considerable amount of one-time and special fund monies ($567 million) to support baseline K-12 costs. The state, therefore, will enter 2008-09 with a large ongoing shortfall for K-12 education.

Notable Increases in Per Pupil Spending. Several factors complicate year-to-year per pupil spending comparisons. For K-12 education, the comparisons are complicated by the substantial reliance on one-time and special fund monies. If these monies are not included, ongoing Proposition 98 K-12 spending is $8,563 per pupil in 2007-08—an increase of $345, or 4.2 percent, over the current year (see Figure 1). If the one-time and special fund monies are included, per pupil spending rises to $8,635—an increase of $417, or 5.1 percent. For community colleges, the rebenching of district apportionments resulting from enrollment declines complicates year-to-year comparisons. Without the rebenching, ongoing spending per community college full-time equivalent student increases by $96, or 1.9 percent, over the current year. Adjusting for the rebenching, the increase would be $167, or 3.3 percent. As shown in Figure 1, community college per pupil spending rises to $5,260 in 2007-08.

Ongoing Proposition 98 Funding

Figure 2 displays changes in ongoing K-14 spending from the revised 2006-07 budget. Below, we highlight the major changes.

 

 

• COLAs. For both K-12 education and the community colleges, the bulk of new spending ($2.4 billion) is for a 4.53 percent COLA.

• Growth. Whereas K-12 education achieves savings from a projected 0.48 percent decline in average daily attendance, the budget includes $114 million to fund 2 percent enrollment growth at the community colleges.

• Child Care Shift. The budget increases the Proposition 98 share of child care funding by $269 million, thereby achieving a like amount of General Fund savings.

• School Meals. The budget provides $29 million to increase the school meals reimbursement rate from 15 cents to 21 cents per meal. (Technically, the budget provides $4.3 million to increase the rate from 15 cents to 16 cents, consistent with a 4.53 percent COLA, and an additional $24.9 million to further increase the rate to 21 cents, consistent with statutory directive.)

One-Time Proposition 98 Funding

In addition to the $2.1 billion increase in ongoing Proposition 98 monies, the budget provides $703 million one-time Proposition 98 and special fund monies for K-14 education. Figure 3 shows how these monies are to be spent. As shown, $567 million is for ongoing K-12 transportation, maintenance, and district/school intervention costs. (This amount reflects the ongoing shortfall discussed above.) In addition, $100 million is provided for the K-12 Emergency Repair Program, $15 million is provided for various other one-time K-12 initiatives, and $21 million is provided for several one-time community college initiatives.

 

 

Governor’s Vetoes

The Governor vetoed $52 million in ongoing Proposition 98 spending. Of this amount, the Governor vetoed $5 million for wrap-around child care and $47 million for several community college initiatives. The largest community college veto was a $33 million reduction in base funding for the basic skills program. (The Governor, however, expressed willingness to restore this funding via legislation that enhanced program accountability and student outcomes.) The Governor also vetoed a $14 million legislative augmentation to increase the funding rate for certain noncredit community college courses. Two legislative augmentations using one-time funds were also vetoed: $4 million for the part-time faculty health insurance program and $1.5 million in grants for construction training programs.

In addition to reducing Proposition 98 spending, the Governor reduced General Fund ($253,000) and federal spending ($12 million) for K-12 education. These vetoes affect various legislative priorities—including elimination of several initiatives involving low-performing schools, alternative schools, English Learners, and special education.

Prepared by the K-12 Education Section—(916) 319-8332

III. Higher Education

The budget provides a total of $11.3 billion in General Fund support for higher education in 2007-08 (see Figure 1). This reflects an increase of $375 million, or 3.4 percent, above the amount provided in 2006-07. As shown in the figure, the budget provides the University of California (UC) with $3.3 billion in General Fund support, which is $191 million, or 6.2 percent, more than the 2006-07 level. For the California State University (CSU), the budget provides $3 billion in General Fund support, which is an increase of $176 million, or 6.2 percent. 

 

 

The budget provides the California Community Colleges (CCC) with $4.2 billion in General Fund support for 2007-08, which is $61 million less than 2006-07. (All but about $30 million of this amount counts toward Proposition 98.) However, as explained in the prior section on K-14 Proposition 98 support, CCC also receives more than $2 billion in local property tax revenue that is interchangeable with General Fund support for program purposes. When General Fund and local property tax support are combined, CCC’s Proposition 98 funding increases by $289 million, or 4.9 percent, from the prior year. These figures reflect gubernatorial vetoes of $47 million in CCC Proposition 98 ongoing funding, due to a base reduction in the basic skills program ($33 million) and the veto of a legislative augmentation for certain noncredit courses ($14 million).

The budget also provides $873 million in General Fund support to the California Student Aid Commission (CSAC). This funding, which supports the state’s Cal Grant and other financial aid programs, is $70 million, or 8.7 percent, above the 2006-07 level.

Intersegmental Issues

Base Increases. All three higher education segments received substantial General Fund base augmentations to address salaries and other cost increases. These include $117 million (4 percent) for UC, $109 million (4 percent) for CSU, and $263 million (4.5 percent) for CCC. The CCC’s base increase follows the same statutory formula used to calculate the K-12 cost-of-living adjustment.

Enrollment Growth. The three higher education segments received augmentations to fully fund all anticipated enrollment growth. The budget provides a total of $117 million for 2.5 percent growth at both UC and CSU. This funds an additional 5,000 full-time equivalent (FTE) students at UC and 8,355 FTE students at CSU. Funding for these students is determined using a methodology adopted by the Legislature in 2006-07 for determining the marginal cost of serving each additional student. For the second year in a row, the Legislature rejected a different methodology proposed by the Governor.

The budget provides CCC with $114 million to fund enrollment growth of 2 percent, or about 22,000 FTE students. The budget also reverts $80 million associated with enrollment slots that were unfilled in 2006-07. Even after this reversion, however, CCC retains additional unused enrollment funding. When this existing enrollment capacity is combined with the funded growth, CCC could accommodate a total of 34,000 additional FTE students in 2007-08.

Student Fees. The budget assumes UC and CSU will receive additional revenue as a result of fee increases of 7 percent and 10 percent, respectively. These fee increases are expected to provide UC with an additional $105 million and CSU with an additional $98 million. Fees at the community colleges would remain unchanged at $20 per unit.

Student Academic Preparation (Outreach). The Legislature rejected the Governor’s proposal to eliminate General Fund support for student academic preparation programs at UC and CSU. Instead, the budget provides General Fund support of $19.3 million to UC and $7 million to CSU for these programs.

Proposed Sale of EdFund

The budget package assumes the sale of EdFund, which is a nonprofit public benefit corporation that acts on behalf of CSAC to administer federal loan guarantee programs. The budget assumes that the sale would provide $980 million in net one-time revenue to the state. With the sale of EdFund, CSAC would relinquish its status as California’s federally designated guarantor for the Federal Family Education Loan program.

Prepared by the Higher Education Section—(916) 319-8331

IV. Health

The 2007-08 budget plan provides about $20.3 billion from the General Fund for health programs, which is an increase of about $734 million, or 3.8 percent, compared to the revised prior-year level of spending. Several key aspects of the budget package are discussed below and summarized in Figure 1.

 

 

Medi-Cal

The 2007-08 enacted budget provides about $14.3 billion from the General Fund ($37 billion all funds) for Medi-Cal local assistance expenditures. This amounts to about a $642 million, or 5 percent, increase in General Fund support for Medi-Cal local assistance. This increase would have been greater except for combined Governor’s vetoes of $416 million General Fund from the budget. In his veto messages, the Governor indicated that $332 million of this reduction is based on historical data showing that on average, over the last three fiscal years, Medi-Cal expenditures have fallen short of estimated levels. However, if expenditures exceed the revised level, the Legislature would have to pass a supplemental appropriations bill.

Major Cost Factors. The net increase in expenditures primarily reflects: (1) increases in managed care provider rates, (2) lower drug costs, (3) increases in county administration costs due to changes in federal law, and (4) ongoing growth in base costs and caseloads. Specifically, the Medi-Cal Program is assumed to grow by about 50,000 cases, or 0.8 percent, in 2007-08 to a total of 6.6 million average monthly users.

Changes in Medi-Cal Managed Care Provider Rates. The budget plan includes $54 million General Fund for rate adjustments to Medi-Cal managed care plans as determined by a new rate setting methodology which will be applied to rates established beginning August 1, 2007. The Governor vetoed $53 million in General Fund approved by the Legislature to “hold harmless” certain managed care plans that would have otherwise received a rate reduction under the new rate setting methodology.

Drug Cost Savings. The budget plan includes savings of almost $39 million General Fund due to reductions in the amount Medi-Cal will reimburse pharmacies for certain drug ingredients. It is anticipated that the reduction in drug ingredient payments will bring them more in line with the actual cost of drug ingredients to pharmacies. The change in reimbursements to pharmacies is consistent with recent changes in federal law and regulations. In order to help ensure that pharmacies continue to participate in Medi-Cal after their reimbursements for certain drug ingredients are reduced, the Legislature adopted statutory language to allow for a one-time adjustment in the dispensing fee paid to pharmacies.

County Administration. The budget plan includes increased funding for county administration costs due mainly to program growth, and adjustments to account for increased costs. The budget plan also includes about $25 million General Fund for one-time and ongoing costs for implementation of the federal Deficit Reduction Act citizenship verification requirements.

Minor Consent. The budget plan includes $20 million General Fund to backfill a loss of federal funds. California will not require minors who independently seek certain health care services to show proof of citizenship and personal identification. As such, the state will not receive its usual federal share of funding for services provided to these beneficiaries.

Establishment of the Department of Public Health

Effective July 1, 2007, Chapter 241, Statutes of 2006 (SB 162, Ortiz), created the new Department of Public Health (DPH) and the Department of Health Care Services (DHCS) from the existing Department of Health Services (DHS). The DPH will administer a broad range of public and environmental health programs to prevent illness in, and promote the health of, the public at large. In contrast, DHCS will deliver health care services to eligible individuals, through the state’s Medicaid program (known as Medi-Cal in California) and through other programs, such as the Genetically Handicapped Persons Program and the California Children’s Services Program. As intended by Chapter 241, the creation of the two new departments did not result in increased expenditures for state operations in 2007-08.

Public Health Programs

The 2007-08 enacted budget provides about $390 million from the General Fund ($3.1 billion all funds) for support of public health programs. The Legislature adopted statutory language requiring more accountability in budgeting for the new DPH in order to ensure that it will be able to better exercise fiscal oversight in the future. Specifically, the amounts budgeted for each branch within DPH have to be identified by the administration in budget documents starting in 2008-09.

Foodborne Illness. The budget plan provides almost $1 million for DPH to expand its existing efforts to investigate foodborne illnesses and to provide additional emergency outbreak investigation capacity. These additional resources should increase DPH’s capability to investigate foodborne illnesses, obtain and review food processors’ records, review growing and harvesting practices on farms, and embargo contaminated products.

Healthy Families Program

The 2007-08 enacted budget provides about $399 million from the General Fund ($1.1 billion all funds) for local assistance under the Healthy Families Program. This reflects an increase of about $94 million all funds ($36.5 million General Fund), or almost 10 percent, in annual spending for the program. This growth is primarily due to increases in caseload and provider rates.

Department of Developmental Services

The budget provides $2.6 billion from the General Fund ($4.4 billion all funds) for services to individuals with developmental disabilities in developmental centers (DCs) and regional centers (RCs). This amounts to an increase of about $96 million, or 3.7 percent, in General Fund support over the revised prior-year level of spending.

Community Programs. The 2007-08 budget includes a total of $2.2 billion from the General Fund ($3.6 billion all funds) for community services for the developmentally disabled, an increase in General Fund resources of about $108 million over the revised prior-year level of spending. The growth in community programs is due mainly to increases in caseload, costs, and utilization of RC services. The budget continues several, mostly temporary, actions to hold down community program costs.

The budget plan includes an allocation of $129 million from the Public Transportation Account (PTA) in lieu of General Fund to provide certain transportation services to RC clients. If this allocation from the PTA had not been included in the budget, General Fund expenditures for community services for 2007-08 would have grown by about $237 million above the prior-year spending level.

Agnews Developmental Center Closure. The budget continues to support plans to close Agnews DC and place many of its clients in community programs by June 2008.

Department of Mental Health

The budget provides about $1.9 billion from the General Fund ($4.8 billion all funds) for mental health services provided in state hospitals and in various community programs. This is an increase of about $49 million from the General Fund compared to the revised prior-year level of spending.

Community Programs. The 2007-08 budget includes about $777 million from the General Fund ($3.5 billion all funds) for local assistance for the mentally ill, a decrease of about $73 million in General Fund support compared to the revised prior-year level of spending.

Integrated Services for Homeless Mentally Ill Program. The Governor vetoed almost $55 million General Fund for Integrated Services for Homeless Mentally Ill, effectively eliminating all funding for the program. In his veto message the Governor indicated that counties could choose to restructure the program to meet the needs of the counties’ homeless population using other county funding sources, such as federal funds, realignment funds, or Proposition 63 funds.

Early and Periodic Screening Diagnosis and Treatment (EPSDT). The budget provides about $454 million General Fund for support of EPSDT, an increase over the prior-year adjusted spending leve