Sitemap

October 2009

The Budget Package: 2009-10 California Spending Plan

Contents

Chapter 1 Key Features of the 2009–10 Budget Package

• Budget Overview
• Evolution of the Budget

Chapter 2 Revenue Provisions

Chapter 3 Expenditure Highlights

• Proposition 98
• K–12 Education
• Higher Education
• Health
• Social Services and Labor
• Judiciary and Criminal Justice
• Resources and Environmental Protection
• Transportation
• Local Government
• Other Major Provisions

---

Chapter 1

Key Features of the 2009–10 Budget Package

Budget Overview

Total State and Federal Funds Spending

The 2009–10 state spending plan was enacted into law on February 20, 2009, and substantial amendments to that plan were enacted on July 28, 2009. Both of these packages included various amendments to the 2008–09 spending plan (originally enacted in September 2008) in order to benefit the state’s overall financial condition.

General and Special Fund Spending Down 15 Percent From Two–Years Ago. After considering both the February and July budget packages (including the Governor’s line–item vetoes), the 2009–10 state spending plan includes total state budget expenditures of $110 billion from the General Fund and special funds, as shown in Figure 1. This consists of $85 billion from the General Fund and $25 billion from special funds. Spending from these funds in 2009–10 will be $20 billion—15 percent—less than it was in 2007–08. In addition, the budget assumes spending from bond funds of nearly $10 billion as the state continues to allocate moneys from the $43 billion bond package approved at the November 2006 election. Figure 2 (see next page) shows General Fund spending in 2007–08, 2008–09, and 2009–10 by policy area.

Figure 1 Total State and Federal Funds Expenditures
(Dollars in Millions)
Fund Type	Actual 2007-08	Estimated 2008-09	Enacted 2009-10	Change From 2008-09
				Amount	Percent
General Fund	$103,000	$91,547	$84,583	-$6,964	-7.6%
Special funds	26,674	26,530	25,123	-1,407	-5.3
Budget Totals	$129,659	$118,077	$109,706	-$8,371	-7.1%
Selected bond funds	$8,405	$14,158	$9,539	-$4,619	-32.6%
Federal funds	$56,211	$76,629	$93,636	$17,007	22.2%

 

 

Figure 2 General Fund Spending by Major Program Area
(In Millions)
	Actual 2007‑08	Estimated 2008‑09	Enacted 2009‑10
K-12 Education	$39,825	$32,356	$33,745
Higher Education	11,823	10,138	10,495
Health	19,906	18,794	16,077
Social Services	9,432	10,009	8,876
Criminal Justice	13,059	12,778	9,032
All other	8,954	7,472	6,358
Totals	$103,000	$91,547	$84,583

 

Big Increase in Stimulus Funds From Federal Government. While state expenditures decline in 2009–10, federal funds spending will increase dramatically, as shown in Figure 1. Federal stimulus funding provided by the American Recovery and Reinvestment Act (ARRA) is largely responsible for the increase in spending from federal funds—from $56 billion in 2007–08 to $77 billion in 2008–09 and an estimated $94 billion in 2009–10. (The President signed ARRA into law on February 17, 2009, as the Legislature and the Governor concluded consideration of the February state budget package.)

The Condition of the General Fund

Figure 3 summarizes the estimated General Fund condition for 2007–08 through 2009–10.

2008–09: Large Revenue Drops and a Year–End Deficit. At the time the Governor signed the original 2008–09 Budget Act on September 23, 2008, General Fund revenues and transfers in 2008–09 were expected to total $102 billion—just slightly less than the total recorded in 2007–08. Despite over $1 billion of 2008–09 tax increases enacted as part of the February 2009 budget package, the recession took a massive toll on state revenues. As shown in Figure 3, only $84 billion of General Fund revenues and transfers were recorded during 2008–09—18 percent less than estimated in September 2008. In the February and July budget packages, the Legislature and the Governor took action to reduce spending in response to the revenue trend. Because of these actions, 2008–09 General Fund spending will be over 11 percent less than the total estimated when the 2008–09 budget was first passed in September 2008.

Because the Legislature did not reduce 2008–09 spending as much as the decline in revenues that materialized during the fiscal year, the state ended 2008–09 with a significant deficit—the largest year–end shortfall in the state’s reserve ever recorded. As shown in Figure 3, the state’s General Fund reserve had a negative balance of about $4.5 billion as of June 30, 2009. Despite spending more than it took in, the state continued operations through a variety of cash management measures, as discussed in the box on page 5.

 

Cash Management Cash Management Measures Included in Both Budget Packages. Throughout the 2009–10 budget process, the state’s budget problems and disruptions in the worldwide credit markets contributed to serious problems with California’s state government cash flows—that is, the state’s ability to make payments on time. In response, the Legislature included cash flow management measures in both the February and July budget packages. The Legislature chose to delay billions of dollars in payments (largely for K–14 education) to later within the 2009–10 fiscal year. In addition, the February budget package added about $3 billion in borrowable special funds—internal state resources available to bridge seasonal lows in the General Fund’s cash flow. Moreover, the budgetary changes in the two packages also benefitted the state’s ability to make its scheduled payments on time. Controller Delayed Payments in February 2009 and Issued IOUs in July and August 2009. The February and July budget packages were not enacted early enough to prevent the Controller from: (1) delaying over $3 billion of scheduled payments (mainly tax refunds) in February 2009 and (2) issuing 449,000 registered warrants (also known as IOUs) for a total of $2.6 billion of payments in July and August 2009. The February 2009 delayed payments generally were paid in March 2009, and the IOUs were able to be redeemed by recipients beginning on September 4, 2009. This was only the second time since the Depression that the state issued IOUs for some of its budgeted payments. In effect, the IOUs forced recipients (such as state vendors and local governments) to provide the state with a loan involuntarily. The IOUs were redeemable with interest, paid at a 3.75 percent annual rate. “Priority payments”—including school, payroll, and debt service payments—were not subject to IOUs. About $9 Billion of Cash–Flow Borrowing Projected in 2009–10. As the Legislature began consideration of the Governor’s May budget proposals, officials warned lawmakers that, absent corrective action by the Legislature, the state might need to seek a 2009–10 cash–flow borrowing in the unprecedented (and unlikely) amount of over $23 billion in order to pay all of its bills on time throughout the fiscal year. As a result of the July budget package, that amount was whittled down to about $10 billion, according to estimates prepared by the administration in August 2009. The administration also sought and received legislative approval for an additional $1.7 billion of delays in payments now scheduled in early 2010 (principally for higher education and in September budget legislation). The administration estimates these September actions will reduce the state’s 2009–10 revenue anticipation note borrowing requirements to about $9 billion.

2009–10: Large Operating Surplus Projected in Order to Rebuild a Reserve. The budget plan projects revenues and transfers of about $90 billion and expenditures of $85 billion in 2009–10. The resulting $5 billion operating surplus is necessary for the state to address the $4.5 billion carry–in deficit discussed above and rebuild a small $500 million reserve by June 30, 2010. Due in large part to the tax increases enacted as part of the February budget package, revenues and transfers are expected to grow from $84 billion in 2008–09 to $90 billion in 2009–10—an increase of 6.5 percent. Budgeted expenditures decline from $92 billion to $85 billion—a drop of 7.6 percent. As described later in this report, budgeted revenues and expenditures in 2008–09 and 2009–10 include a variety of one–time and temporary measures—such as federal ARRA funds which reduce General Fund expenditures—that make multiyear budget comparisons unusually difficult.

Solutions Adopted During the Budget Process

Figure 4 shows the budget solutions adopted during the 2009–10 budget process. As described above, these solutions affected both the 2008–09 and 2009–10 state budgets. Of the roughly $60 billion of General Fund budget solutions adopted by the Legislature, about $15 billion (including $10 billion of spending measures and over $1 billion of new tax revenues) affected the 2008–09 budget, and $45 billion (including $22 billion of spending measures and about $11 billion from increased taxes) affected the 2009–10 budget.

 

Spending–Related Solutions. About $32.5 billion of the solutions affected state spending. These measures will result in service reductions across state government and many parts of local government as well. The solutions include:

• Reduced Proposition 98 Spending for K–14 Education. By far, the largest single group of solutions adopted during the budget process—totaling $14.5 billion—brought Proposition 98 spending for K–14 education down to its minimum guaranteed funding level under the State Constitution in both 2008–09 and 2009–10. The reductions are offset by school districts’ receipt of $6 billion in federal ARRA funds in 2008–09 and 2009–10. In addition, requirements attached to many categorical funding programs were relaxed to give districts increased program and financial flexibility.
· Other Budgeted Solutions. In addition to budget solutions affecting Proposition 98 expenditures, the 2009–10 spending plan includes solutions affecting health and social services spending ($5 billion), state employee compensation ($3 billion), appropriations to the university systems ($2.9 billion), and virtually every other category of General Fund spending. (More details of these actions are provided in Chapter 3.)
• Temporary Tax Increases. In the February budget package, the Legislature enacted several temporary tax increases, as well as some new tax credits. In 2008–09 and 2009–10 combined, these tax changes were estimated in February to increase General Fund revenues by a net amount of $12.5 billion. (These are also described in more detail in Chapter 2.)

One–Time Revenue Measures and Transfers to the General Fund. In addition to the tax increases in the February budget package, the Legislature and the Governor agreed to various additional revenue measures—mainly one–time in their benefit to the General Fund—in the July budget package. These measures total about $3.5 billion in 2009–10. (These are described in more detail in Chapter 2.)

Federal Stimulus Funds. The February budget package took account of expected funds resulting from ARRA that could offset General Fund expenditures in 2008–09 and 2009–10. These federal stimulus funds—described in more detail in Chapter 3—were budgeted at the time of the February budget package to total about $8.5 billion. Most of these funds will not be available to help balance the state budget after 2009–10 as the ARRA funds are one–time in nature.

Borrowing. The budget package includes about $2.5 billion of borrowing to help return the 2008–09 and 2009–10 state budgets to balance. The largest single provision consists of $1.9 billion to be borrowed from city, county, and special district property taxes, which will be used to offset state General Fund spending for education and other programs. The $1.9 billion loan is authorized through the Legislature’s suspension of Proposition 1A (2004).

Evolution of the Budget

The 2009–10 budget process was highly unusual. Because 2008–09 revenues were severely affected by the recession, lawmakers and the Governor worked to address both 2008–09 and 2009–10 annual budget deficits simultaneously from November 2008 through July 2009.

November 2008 Special Session

On November 6, 2008, just two days after the general election, the Governor called a special session of the Legislature to deal with major economic and budget developments that had occurred in the six weeks since he and the Legislature agreed to terms of the 2008–09 budget.

A Huge Deterioration in Revenue and Economic Forecasts. In September 2008, when the Governor signed the 2008–09 Budget Act, the state had a projected reserve of $1.7 billion at the end of 2008–09. By the time of the Governor’s November 2008 special session proclamation, the administration reported that it expected revenues for 2008–09 to fall short of original projections by $11 billion. In total, it estimated the state would end 2008–09 with a $9.5 billion shortfall if no corrective actions were taken. In addition, the administration adjusted its previous projection of 2009–10 state revenues downward by $13 billion and said the state needed to adopt about $22.5 billion in budget solutions for the two fiscal years combined in order to keep the General Fund in the black.

Governor’s November 2008 Proposals. Total budget solutions proposed in the Governor’s November 2008 package equaled $24.9 billion over 2008–09 and 2009–10 combined. The majority of the solutions over the two–year period—totaling an estimated $14 billion—consisted of tax increases. Major components of the package included:

• A 1.5 cent increase in the sales and use tax for three years.
• Expansions of the sales and use tax (SUT) to various services.
• Imposition of an oil severance tax.
• A $2.5 billion midyear reduction in 2008–09 Proposition 98 spending related to the large drop in projected General Fund revenues.
· Reductions in Supplemental Security Income/State Supplementary Payment grants.

Legislative Session Ended Without a Budget Agreement. The 2007–08 biennial legislative session (including the November special session) came to an end on November 30. No revised budget agreement was reached by that date.

December 2008 Special Sessions

New Special Session Called as 2009–10 Legislature Begins Its Work. On December 1, 2008, the first day of the 2009–10 Legislature, the Governor declared a fiscal emergency pursuant to his powers under Proposition 58 (2004) and called a special legislative session. The Governor reiterated his estimate of a 2008–09 revenue shortfall of about $11 billion and noted our office’s estimate during November 2008 that the budget problem over the two–year period of 2008–09 and 2009–10 could total $28 billion. The Governor continued to advance the major elements of his November 2008 special session proposals.

Cash Situation Becomes Major Concern During December 2008. During December 2008, state finances continued their steep decline. Due largely to the mounting declines in revenues, the Pooled Money Investment Board voted on December 17, 2008, to cease advancing money to about 2,000 bond–funded projects. In the subsequent weeks, this would cause many such projects to grind to a halt. (That funding halt would continue for many projects until the state resumed general obligation bond sales and secured over $13 billion in financing from investors in March and April 2009.) On December 30, 2008, the State Controller announced that he would begin delaying many categories of state payments or issuing IOUs as early as February 1, 2009, due to the lack of sufficient state cash resources if the Legislature and the Governor did not reach agreement on returning the budget to balance. The Controller eventually took action to delay over $3 billion in scheduled state payments in February 2009, but the state did not issue IOUs at that time.

December Legislative Package Was Vetoed by the Governor. On December 18, 2008, the Legislature passed a budget package addressing a portion of the state’s then–identified budget shortfall—similar in scope to the Governor’s special session proposals. Many spending reductions in the vetoed legislative package were similar to proposals made by the Governor, although in some cases—particularly in the health and social services areas—the administration’s reductions at the time went further than the Legislature’s. The Legislature also passed a personal income tax (PIT) surcharge, a change in income tax withholding, a 0.75 cent increase in the sales tax, and a conversion of the gas tax to a fee. The Legislature’s December 2008 package was passed on a majority vote (as opposed to a two–thirds vote) on the premise that the package was not a net tax increase. The Governor immediately announced his intention to veto the December 2008 legislative package, and he did so formally on January 6, 2009.

Another Special Session Called. Following the Legislature’s actions described above, the Governor used his Proposition 58 authority to declare another fiscal emergency on December 19, 2008, and he called another special session. The Governor also directed his administration to develop a plan to go into effect in February 2009 to furlough state employees by two days per month in order to generate budgetary savings. (The furlough plan went into effect on February 1, 2009, following a Superior Court judge’s rejection of a lawsuit challenging it.)

January 2009 Governor’s Budget Proposals

Governor Released Outline of 2009–10 Budget Proposal Nearly Two Weeks Early. On December 31, 2008, the Governor released the outline of the administration’s 2009–10 budget proposals nearly two weeks before the typical January 10 deadline. (Because the administration released the details of the proposal in the ensuing days, we refer to these as the Governor’s January 2009 budget proposals.)

Huge Additional Budget Problems Forecast by the Administration. Updating fully its revenue and expenditure estimates, the administration estimated in its January 2009 package that the state would face a deficit of $39.6 billion at the end of 2009–10. Compared to its November 2008 estimate, the administration announced that it expected $7 billion less in revenue over 2008–09 and 2009–10 combined. In addition, the magnitude of the revenue drop, as well as the year–to–year change in revenues, affected the administration’s calculation of the 2009–10 Proposition 98 minimum guarantee, making it about $3.5 billion higher than our office’s November 2008 estimate.

Governor’s Package of Proposed Budget Solutions Grows to $41.7 Billion. Generally, the Governor included his November 2008 special session proposals in his January 2009 budget proposals, but the value of several of these options was reduced to reflect the delay in enacting them. In total, his proposed $41.7 billion of budget solutions in 2008–09 and 2009–10 consisted of $17.5 billion of spending–related actions, $14.2 billion of revenue increases (primarily tax increases), and $10 billion of borrowing. The major new proposals included:

• A proposal to borrow $4.7 billion through issuance of revenue anticipation warrants (RAWs) that would be applied to eliminate the year–end 2008–09 General Fund deficit.
• A reduction in the value of the PIT dependent credit beginning in 2009.
• Deferring Proposition 98 costs in 2008–09 to 2009–10.
· Recognizing $5 billion of lottery securitization proceeds originally proposed for voter approval along with passage of the 2008–09 budget, as well as other budget solutions requiring voter approval.

February 2009 Budget Package

Earliest Budget Act Passage in Modern California History. On February 19, 2009, the Legislature approved the 2009–10 Budget Act, amendments to the 2008–09 Budget Act, and related legislation. The Governor signed the measures on February 20. The list of bills included in the February budget package can be found at the end of this chapter. As we discussed in our publication, The Fiscal Outlook Under the February Budget Package, the early passage of the 2009–10 budget was unprecedented.

Package Includes $41.7 Billion of Solutions. The February budget package included $41.7 billion of budget solutions to close an approximately $40 billion shortfall and build up a reserve that was then projected to be $2.1 billion by the end of 2009–10. (The $41.7 billion figure included about $6 billion of measures—principally included proceeds from the proposed lottery securitization—which were later rejected by voters and, therefore, are not listed in Figure 4.) The four main components of the package were:

• Spending Reductions. The package included about $15 billion of spending–related budget solutions, the largest of which involved K–12 education funding.
• Temporary Tax Increases. The package included about $12.5 billion of temporary tax increases, principally the result of increased rates for the SUT, the vehicle license fee, and the PIT. The tax increases were scheduled to remain in effect for about two years under the package. The budget package, however, specified that if voters approved Proposition 1A (a measure to make changes to state budget practices) at the May 19, 2009 special election, the tax increases would be extended for either one or two years.
• Borrowing. As described above, the February budget package assumed that voters would approve $5 billion of borrowing from future lottery profits, which required passage of Proposition 1C at the May 19, 2009, special election.
· Federal Stimulus Funds and the Federal Funds Trigger. The February budget package assumed receipt of $8.5 billion in federal funds from ARRA to help balance the budget. In addition, because the exact amount of funds the state would receive to offset General Fund expenditures was unknown at the time the February budget package was passed, legislation provided that if the Treasurer and the Director of Finance determined that more than $10 billion of ARRA funds would be available to offset General Fund spending through June 30, 2010, then $2.8 billion of spending reductions and tax increases in the budget package would not go into effect. This was known as the federal funds “trigger.” (On March 27, 2009, the Treasurer and the Director of Finance determined that the state would receive less than $10 billion of ARRA funds to offset General Fund spending during the specified time period.)

Governor’s May 14 Budget Proposals

Large New Budget Problem Identified. The Governor released his May Revision on May 14, identifying a new $15.5 billion budget problem. Over $12.5 billion of this problem related to projected drops in revenues related to the recession in 2008–09 and 2009–10. These declines affected all major taxes. In addition, various other changes contributed to an additional $3 billion of budgetary problems, including a $1.3 billion lower property tax forecast that affected state Proposition 98 obligations and a $1.1 billion increase in health and social services costs related to program caseloads.

Proposals Included $14.5 Billion of Solutions. The Governor’s May 14 package included about $14.5 billion of budget solutions, assuming that voters approved Propositions 1A through 1E on May 19. The largest proposal was to issue $6 billion of RAWs and apply them to reducing the 2008–09 year–end budget deficit. The Governor also proposed to reduce Proposition 98 funding by $1 billion in 2008–09 and $2 billion in 2009–10 and to reduce University of California (UC) and California State University (CSU) funding by a combined $1 billion in 2008–09. The proposals included an array of cuts in health and social services and the proposed $1 billion sale of State Compensation Insurance Fund. The Governor’s package included a proposed $1.1 billion General Fund reserve at the end of 2009–10—down from the $2.1 billion assumed in the February budget package.

Contingency Proposals Included to Address Possible Failure of Special Election Measures. On May 14, the Governor also announced an additional $6.8 billion of contingency measures to address the possible failure of Propositions 1A through 1E on the May 19 ballot. The additional measures included $2.3 billion more of Proposition 98 funding reductions over 2008–09 and 2009–10, the suspension of a different ballot measure also designated as Proposition 1A (2004) to borrow about $2 billion of local government property taxes, additional cuts in the corrections budget, and various health and social services cuts, such as $302 million of savings from limiting In–Home Supportive Services program benefits. The Governor proposed increasing PIT withholding schedules by 10 percent to produce an estimated 2009–10 budgetary benefit of $1.7 billion.

May 19 Special Election and Its Aftermath

Voters Reject Propositions 1A Through 1E. Voters rejected Propositions 1A through 1E at the May 19, 2009 special election. In addition to the loss of $5 billion in lottery securitization funds, the defeat of the special election measures resulted in the loss of over $800 million of assumed 2009–10 budget solutions related to early childhood development and mental health funds.

Governor’s May 26 Budget Proposal

Governor Changes Position on Budgetary Borrowing. On May 21, the Governor issued a statement indicating he had directed his administration to develop “additional options to cut state spending so that we can eliminate the need to seek borrowing in the form of a RAW.” In making this decision, the Governor cited discussions with legislative leaders and federal officials (who announced on May 21 that additional extraordinary assistance to the state was unlikely), as well as the results of the May 19 special election.

Administration Proposes $5.5 Billion of Additional Budget Solutions. To make up for the loss of the $5.5 billion RAW from its budget proposal, the administration proposed an additional $5.5 billion of General Fund solutions on May 26, 2009. The May 26 proposals included the elimination of the California Work Opportunity and Responsibility to Kids (CalWORKs) and Healthy Families Programs (HFP); redirection of local gas tax funds; additional university budget cuts; elimination of new Cal Grant awards; deletion of General Fund support for state parks; and an array of health, corrections, employee compensation, and other spending actions.

Governor’s May 29 Budget Proposal

Administration Shifts Position to Address Possible $3 Billion Revenue Overestimate. In our May 21 review of the Governor’s original May Revision proposals, we described the administration’s May revenue estimates as “reasonable” but noted that our revenue estimates for 2009–10 were about $3 billion less than the administration’s. In response to our lower revenue estimates, on May 29 the administration released another round of budget solutions totaling $2.8 billion to address this possible additional revenue problem.

Proposed $2.8 Billion of Additional Actions Affects Various Areas. The Governor’s May 29 proposals included a $680 million reduction in Proposition 98 funding to reflect the lower revenue estimates, $550 million from realigning state and county costs, and $470 million from a permanent 5 percent base salary reduction for all state employees.

Governor’s May Proposals Included Cumulative Total of $24 Billion of Solutions. Essentially, the Governor’s final set of May proposals included each of the proposals made on May 14, May 26, and May 29. Cumulatively, these proposals produced $3.1 billion of budgetary relief for 2008–09 and $20.8 billion of relief for 2009–10, for a total of $24 billion over the two fiscal years combined. On June 5, 2009, the administration estimated that its proposals would leave the state with a General Fund reserve of $4.5 billion at the end of 2009–10 excluding its acknowledged $3 billion potential overestimate of General Fund revenues. (In other words, if the administration had reduced its revenue estimate by $3 billion at that time, the estimated reserve under its package would have been $1.5 billion at the end of 2009–10.)

Conference Committee Package

Conference Committee Meets in May and June. A conference committee consisting of five Senators and five Assembly Members began public meetings on May 21, 2009, to consider the Governor’s May Revision proposals. The conferees adopted a set of proposed budget revisions on June 16, 2009.

Conference Package Rejects Several Key Administration Proposals. The conference committee package rejected several administration proposals, including proposed eliminations of CalWORKs, HFP, and new Cal Grant awards. Borrowing from local governments through suspension of Proposition 1A (2004) was rejected. A 5 percent base salary cut for state employees was rejected, although the conference committee continued to score savings from a two–day monthly furlough of essentially all state employees and added a measure to delay the June 30, 2010 state payroll one day so about $1 billion in costs could be attributed to the 2010–11 fiscal year.

More Revenues, Less Expenditure Solutions Than Governor’s May Proposals. The conference package included a larger revenue package—totaling $7.7 billion—than that in the Governor’s May proposals, including $2 billion from requiring income tax withholding for payments to independent contractors, $1 billion from increasing cigarette taxes by $1.50 per pack, $800 million from instituting a 9.9 percent tax on each barrel of extracted oil, and $200 million from establishing a park access tax on California vehicles to preserve park funding. Included in the $15.5 billion of spending–related solutions proposed by the conference committee were cuts in virtually every area of state government, although—in many cases, such as in health and social services—these cuts were much less than proposed by the Governor. The conference committee package included $5.5 billion of reductions in Proposition 98 funding, as well as $2 billion in university cuts—generally mitigated by receipt of federal ARRA funds by the educational institutions. The conference committee package failed to pass either house of the Legislature.

Governor’s July 1 Budget Proposal

Another Special Session Called, and Another Furlough Day Ordered. On July 1, 2009, the Governor declared another fiscal emergency pursuant to Proposition 58 and initiated another special session of the Legislature. In conjunction with the declaration, the Governor ordered state employees to take another furlough day—bringing the total number of furlough days to three per month for essentially all executive branch employees—and reduced their pay by an additional amount of approximately 5 percent. Effective July 1, most state offices were ordered closed on the first three Fridays of most months, known as “furlough Fridays.” (Previously, state workers generally chose their own furlough days with managerial approval and state offices did not close.)

Another $4.9 Billion of Solutions Proposed. On July 1, the administration updated its revenue estimates to acknowledge officially that revenues would be $3 billion less than it projected on May 14. In addition, the administration stated that the Legislature’s failure to enact several proposed solutions by the end of the 2008–09 fiscal year—principally related to K–12 and higher education—had eroded $5.3 billion of possible savings in the 2008–09 and 2009–10 budget. To offset this loss, the administration proposed the following new solutions:

• Suspending the Proposition 98 Minimum Funding Guarantee. The Governor proposed suspending the Proposition 98 minimum funding guarantee in 2009–10 to achieve $3 billion of savings.
• Retroactive Cuts to UC and CSU. The Governor proposed implementing his proposed 2008–09 cuts to UC and CSU on a retroactive basis totaling $1.4 billion.
• Scoring Savings From Third Furlough Day. The Governor implemented the third monthly furlough day under his executive power, as described by the Superior Court decision upholding his initial furlough order in February. In his July 1 budget proposal, he proposed scoring $425 million of savings in 2009–10 from this action.

Governor Lowers Reserve Target to $1.1 Billion. Under his July 1 budget proposals and revenue revisions, the Governor lowered his reserve target to $1.1 billion at the end of 2009–10.

July 2009 Budget Package

Legislature Passes Package, but Rejects Solutions Totaling Over $1 Billion. Following several days of debate, the Legislature adopted further revisions to both the 2008–09 and 2009–10 budgets, as well as accompanying legislation (listed in Figure 5), on July 24. Measures negotiated by the legislative leaders and the Governor included about $24 billion of solutions and an estimated $900 million reserve at the end of 2009–10. Two key measures that emerged from these negotiations did not receive the required number of votes to pass the Assembly. These measures were (1) a proposed loan of $1 billion of gasoline excise tax revenue from cities and counties to the General Fund in 2009–10 and 2010–11 for reimbursement of transportation–related bond payments and (2) authorization for a lease worth about $100 million in 2009–10 for oil drilling in federal waters near Santa Barbara. By approving the remaining measures, the Legislature adopted budget revisions that left the state with a slight projected deficit in the General Fund reserve at the end of 2009–10.

Governor’s Line–Item Vetoes and Subsequent Constitutional Challenges. On July 28, 2009, the Governor signed the July budget package and announced line–item vetoes to reduce budgeted General Fund spending by $489 million, principally in health and human services. In addition to the vetoes, the administration announced $118 million of reduced 2008–09 spending items, such as lower–than–expected interest payments from the General Fund. After considering these adjustments, the administration estimated the General Fund reserve at the end of 2009–10 would total $500 million, as shown in Figure 3. The Legislative Counsel subsequently opined that because the Legislature had structured most of these budget revisions as reductions to existing appropriations approved in February, they did not comprise an “item of appropriation” subject to the Governor’s line–item veto power under the State Constitution. Subsequently, the President pro Tempore of the Senate and others filed suit against the Governor challenging the constitutionality of the line–item vetoes. Our report lists as savings the Governor’s line–item vetoes (since this annual report usually is based on estimates of the Department of Finance). We note, however, that spending would return to its higher levels if the vetoes are overturned by the courts.

September Budget–Related Legislation

Additional Measures Passed During Session’s Final Days. During the closing days of its 2009 regular session, the Legislature passed several additional budget–related measures listed in Figure 5. These include several “cleanup” bills, as well as legislation affecting prisons, HFP, and schools.

Chapter 2

Revenue Provisions

The 2009–10 budget package contains several major revenue–related changes, including more than $10 billion in temporary tax increases and $1 billion from the sale of state workers’ compensation insurance business. Figure 1 displays the revenue assumptions underlying the 2009–10 Budget Act, by source. General Fund revenues are estimated at $89.5 billion, an increase of $5.4 billion, or 6.5 percent, from the revised 2008–09 level. Increases in personal income tax (PIT), sales and use tax (SUT), and vehicle license fee (VLF) revenues in 2009–10 are the result of tax increases, as described below.

2009–10 Revenues. The 2009–10 estimates for the different revenue sources are based on the Department of Finance (DOF) economic forecast and its estimate of the impact of policy changes that were made as part of the budget package—with one exception. Figure 1 shows a “revenue forecast adjustment” downward of $3 billion in 2009–10. This adjustment reflects the assumption adopted in the budget that final General Fund revenues for the fiscal year will be $3 billion lower than estimated in the May Revision (based on the Legislative Analyst’s Office’s May forecast). Rather than alter its baseline revenue forecast for individual tax sources, however, DOF includes the reduction as a net adjustment to revenues. If the $3 billion does not materialize (as assumed in the budget), total collections from PIT, SUT, and the other major revenue sources would be lower than shown in the figure.

2008–09 Revenues. The 2008–09 revenues in Figure 1 also differ from the department’s May Revision estimates. Because budget discussions continued well into July, actual collections data from May and June affected the revenue picture. Receipts in 2008–09 were lower than estimated by DOF in the May Revision by about $1.9 billion, partially offset by $1.3 billion in increases to prior–year revenue amounts. Figure 1 reflects downward adjustments to DOF’s 2008–09 revenue totals for PIT (about $1.5 billion), SUT ($324 million), and corporation taxes ($101 million) to account for the lower receipts in May and June 2009.

Tax Rate Increases

As noted above, the 2009–10 Budget Act reflects more than $10 billion in estimated revenues resulting from four temporary tax increases. These changes were adopted as part of the February package, and two of the increases also affected 2008–09 revenues. The estimated revenue gains from these hikes are shown in Figure 2. As the figure illustrates, the temporary increases are expected to generate $10.3 billion in additional revenues in 2009–10. As a result of the continuing struggles of the state’s economy, this estimate is about $1 billion lower than when the taxes were adopted in February. In 2010–11, the total revenue expected falls to $8.1 billion, as some of the tax increases expire halfway through the year. Below, we briefly describe the four increases.

 

One–Cent SUT Increase. The increase in the state’s SUT became effective April 1, 2009—raising the state’s General Fund rate to 6 percent and the average state and local rate to almost 9 percent. The higher rate will end on June 30, 2011. The budget assumes additional revenues of $4.4 billion in 2009–10 from this change.

The PIT Rate Increase. This change increases each of the seven PIT tax rates by one–quarter of 1 percent. For example, the top PIT rate in 2008 for most taxpayers was 9.3 percent. With this increase, the top rate will now be 9.55 percent. Similarly, the lowest rate will increase from 1 percent to 1.25 percent. The change in the rates is assumed to bring in $2.8 billion in additional revenues in 2009–10. This rate increase is effective for the 2009 and 2010 tax years.

The VLF Increase. The Legislature increased the VLF from 0.65 percent to 1.15 percent as part of the budget package. Of this increase, 0.15 percent is dedicated to local public safety programs, with the remainder deposited into the state’s General Fund. The VLF is essentially a personal property tax on cars and trucks. This change became effective in May 2009, thereby generating a small amount of revenues in 2008–09. For 2009–10, the budget assumes this provision will raise revenues by $1.7 billion. The VLF rate increase ends on June 30, 2011.

Reduction in the Dependent Credit. This change reduces the dependent credit ($309 in 2008) to the same level as the personal credit ($99 in 2008). The budget assumes the reduction in the dependent credit will increase revenues by $1.4 billion in 2009–10. This reduction is in effect for the 2009 and 2010 tax years.

Other Revenue Changes

The 2009–10 budget package contains a number of other changes to the state’s revenue base. Figure 3 summarizes these revisions. In 2009–10, the net increase from the revisions is $3.1 billion. As the figure shows, most of the increases are one–time revenue accelerations or sales of assets that boost 2009–10 receipts, but provide no or relatively small long–term increases. In addition, the budget package includes several new credits that reduce revenues in 2009–10 and 2010–11. These revisions are discussed briefly below.

 

Personal Income Tax. The budget package includes two PIT revenue accelerations that generate almost $2 billion in 2009–10. These changes do not increase the amount of taxes owed. Instead, they seek to collect the existing tax liabilities earlier in the year. For instance, the budget increases suggested income tax withholding rates for individuals by 10 percent (effective November 2009). The budget assumes an additional $1.7 billion in 2009–10 from this change. As a result, unless individual taxpayers make manual adjustments to their withholding, they will see larger income tax deductions from their monthly paychecks. By paying more during the year, however, individuals will pay less in April 2010 to settle their 2009 taxes or they will receive larger refunds.

The package also assumes an additional $250 million in PIT revenues from a permanent revision in how individuals are required to calculate estimated payments. Prior to the 2010 income years, payments were required quarterly, generally in equal amounts. (The 2008–09 Budget Act “front–loaded” the payments in 2009.) The budget package makes additional changes beginning with the 2010 income year, adopting a system of three payments each year, coming in April, June, and December. The April payment equals 40 percent of the expected tax liability, and the June and December payment equal 30 percent each.

Corporate Income Tax. Corporate tax payments also are affected by the change in estimated payments, resulting in an expected increase of $360 million in revenues in 2009–10. The budget package also includes several tax reductions for corporations. Three new credits were authorized:

• Employment Credit. The employment credit has the largest fiscal impact in 2009–10, reducing General Fund revenues by an estimated $264 million. The employment credit provides $3,000 for each net new hire in 2009 or 2010. The credit is designed to provide firms that are expanding an incentive to hire more workers. This credit (which also is available to small business through a PIT credit) is capped at $400 million over its life.
• Film and New Home Credits. The budget package also establishes two other temporary credits: a film credit that provides $500 million in personal or corporate tax credits for qualified activities beginning in 2011–12, and $100 million in credits of up to $10,000 for individuals who buy newly built homes by March 2010. These two credits are expected to reduce General Fund revenues by $11 million in 2009–10.

The Legislature also enacted legislation as part of the February package that permanently gives multistate or multinational corporations another option for determining the proportion of profits that is subject to California’s corporate tax. Currently, companies must use a three–part formula that includes the proportion of total company sales, workforce, and property that is attributable to its California operations. The new legislation allows companies the option to use only sales to determine income attributable to California. This “single factor” option becomes effective for the 2011 tax year and, therefore, has no impact on revenues in 2008–09 or 2009–10. This change, however, is expected to reduce state revenues by $260 million in 2011–12, reaching about $1 billion annually over the long run.

Sale of State Compensation Insurance Fund (SCIF) Activities. The budget assumes $1 billion in one–time revenues in 2009–10 from the sale of a part of the state’s SCIF business. The SCIF is a publicly run workers’ compensation insurer that was created as the “insurer of last resort” for businesses in California. The state also contracts with SCIF to administer workers’ compensation benefits for injured state employees. Legislation enacted with the budget authorizes the administration to sell certain areas of SCIF’s business . The budget assumes such a sale would occur by the end of the 2009–10 fiscal year. (The Insurance Commissioner filed suit in August to block the sale. Among other things, he has claimed the sale of parts of SCIF could threaten its solvency.)

Chapter 3

Expenditure Highlights

Proposition 98

Proposition 98 funding constitutes about three–fourths of total funding for child care, preschool, K–12 education, and the California Community Colleges (CCC). In this section, we review major Proposition 98 decisions for 2008–09 and 2009–10, identify outstanding Proposition 98 funding obligations, and discuss the K–12 and child care budgets in more detail. In the “Higher Education” section, we discuss the community college budget in more detail.

Major Proposition 98 Budget Decisions

Below, we explain the effect of revenue changes on the Proposition 98 funding requirement for 2008–09 and 2009–10 and describe the February and July Proposition 98 packages. Figure 1 shows the various budget reductions made for 2008–09 and 2009–10.

February Proposition 98 Package Reflects Initial Drop in Revenues. Due to the ongoing deterioration of the state’s economic situation, General Fund revenues for 2008–09 were significantly lower than estimated in the September 2008–09 Budget Act. This revenue decline resulted in a decrease in the Proposition 98 funding requirement (commonly known as the “minimum guarantee”). In response to the drop in the guarantee, the state, as part of the February special session, reduced 2008–09 Proposition 98 spending to $50.7 billion, a decrease of $7.3 billion. The February reductions included a $2.4 billion cut to base programs, primarily from K–12 revenue limits and categorical programs. The remaining $5 billion in Proposition 98 reductions reflected funding swaps and deferrals, which were not intended to affect base programs in 2008–09. The February package also approved an additional $700 million reduction to 2009–10 spending. This reduction also was primarily from K–12 revenue limits and categorical programs.

July Package Reflects Continued Deterioration of Revenue Situation. The July package made additional Proposition 98 reductions to both 2008–09 and 2009–10. Due to a further decline in General Fund revenues, the Proposition 98 funding requirement further decreased for both years. As a result, the spending levels approved in February were $1.6 billion higher than the estimated minimum guarantee in 2008–09 and $4.5 billion higher than the 2009–10 estimate. The July package reduces Proposition 98 spending to the revised estimates of the minimum guarantee for both years. For 2008–09, the package made a downward accounting adjustment to recognize $1.6 billion in K–12 cash disbursements that had not yet been provided to districts at the time of enactment. The bulk of these funds (with the exception of $90 million) are paid to school districts in 2009–10 instead. The new 2009–10 reductions include $2.7 billion in base reductions and $1.8 billion in payment deferrals.

Various Factors Mitigate Significant Drop in Proposition 98. Figure 2 shows the effect of all the reductions made to Proposition 98 spending in 2008–09 and 2009–10. As shown in the figure, the July package provides $49.1 billion in 2008–09 and $50.4 billion in 2009–10. By comparison, Proposition 98 spending in 2007–08 totaled $56.6 billion. Various factors help mitigate this significant drop in Proposition 98 spending. Most notably, California is to receive more than $6 billion in federal stimulus funds from the American Recovery and Reinvestment Act (ARRA) for K–14 education (discussed in more detail in the “K–12 Education” and “Higher Education” sections). In addition, the state allowed school districts access to more than $3 billion in previously restricted reserves—resulting in a like increase in some districts’ general purpose funding. Lastly, the state also provided school districts and community colleges with substantially more discretion over previously restricted categorical funding, as well as loosened certain state program requirements. For example, the state allowed school districts to reduce the academic year up to five days. (These flexibility provisions are discussed in more detail below.)

 

Maintenance Factor

During 2008–09, a disagreement arose regarding the implementation of the “maintenance factor” provisions in Proposition 98. In years when state General Fund revenues grow relatively slowly, Proposition 98 typically allows the state to provide a lower level of funding than otherwise required. Though the state can spend at the lower funding level, it must keep track of the difference between the amount that otherwise would have been required and the actual funding provided. This difference is known as the maintenance factor. In future years, the state makes payments based upon a formula that is intended to accelerate funding until it reaches the level it otherwise would have been absent the earlier reduction. At the close of 2007–08, the state had an outstanding maintenance factor obligation of $1.4 billion.

2008–09 Scenario Leads to Uncertainty. When budget and economic data was updated as part of the February package, an unprecedented Proposition 98 scenario arose. Although the Proposition 98 minimum guarantee was clear, the maintenance factor obligation created in 2008–09 was unclear. Differing interpretations of the Constitution led to a disagreement whether maintenance factor was created in certain low–growth General Fund situations. Under one interpretation, a $9.3 billion maintenance factor obligation was believed owed (a $7.9 billion obligation created in 2008–09, plus the existing $1.4 billion obligation). Under a second interpretation, only the prior–year $1.4 billion obligation was owed, with no new obligation created in 2008–09.

July Package Resolves the Issue on a One–Time Basis. As part of the February budget, the Legislature and Governor agreed to resolve the issue on a one–time basis by placing Proposition 1B on the May 2009 ballot. Voters, however, rejected the measure. Similarly, the July budget package includes a statutory change that addresses the issue on a one–time basis. The July package establishes an $11.2 billion maintenance factor obligation as of the close of 2008–09 (the obligation increased as a result of additional Proposition 98 reductions in July). As with Proposition 1B, the July package does not address similar situations in the future.

“Other” Outstanding Funding Obligations

The state currently has several other outstanding Proposition 98–related funding obligations. Several of these obligations, highlighted in Figure 3, can be funded from within the annual Proposition 98 appropriation. These include “deferrals,” unpaid mandate claims, and the revenue limit “deficit factor.” At times, the state also can have K–14 obligations that are paid on top of the Proposition 98 appropriation using other state General Fund monies. Currently, the state has one such obligation relating to a K–14 program it created in 2006–07. These specific obligations are discussed in more detail below.

Deferrals to a Subsequent Fiscal Year. In 2001–02, the state achieved a budget solution by deferring $1.3 billion in K–14 education costs to the subsequent fiscal year. These deferrals resulted in districts receiving some state funds a few weeks later than normal (in early July rather than late June). To achieve additional budget solutions as part of this year’s budget process, the state approved $3.2 billion in new deferrals of school district and community college payments for 2008–09 and $1.8 billion for 2009–10. As a result of all these actions, a total of $6.4 billion in Proposition 98 funds, 12 percent of funding for 2009–10, will not be provided until 2010–11.

Mandates. Since 2001–02, the state has not funded the annual ongoing costs of school and community college mandate claims. Essentially, the state requires schools and colleges to undertake certain activities each year without providing them immediate reimbursement. Despite a 2008 Superior Court decision questioning the constitutionality of delaying mandate reimbursements, the 2009–10 Budget Act continues this practice. We estimate 2009–10 costs for K–14 mandates are about $245 million. (This figure, however, could easily double once several costly mandate claims finish the mandate determination process.) Coupled with the backlog of mandate claims from previous years, we estimate the state will end 2009–10 with outstanding K–14 mandate claims totaling $1.4 billion.

Revenue Limits. State law requires school districts to receive annual cost–of–living adjustments (COLA) to their revenue limits as well as certain categorical programs. Though the state suspended this statutory requirement, it created a deficit factor for K–12 revenue limits. The deficit factor is intended to track both the foregone COLA as well as base revenue limit reductions. In essence, the deficit factor creates a statutory commitment to use Proposition 98 funds at some point in the future to raise revenue limits to the level they would have been absent the 2008–09 and 2009–10 reductions. As shown in the figure, the base reductions and foregone revenue limit COLA total almost $7.3 billion in 2009–10—$7.1 billion for school districts (resulting in a deficit factor of 18.4 percent) and $140 million for county offices of education (resulting in a deficit factor of 18.6 percent).

Quality Education Investment Act (QEIA). The QEIA, established by Chapter 751, Statutes of 2006 (SB 1133, Torlakson), appropriated a total of roughly $2.8 billion over a seven–year period. The state provided $300 million in 2007–08 and was scheduled to provide $450 million ($402 million for K–12 education and $48 million for CCC) every year thereafter until the obligation was paid in full (through 2013–14). These payments were to be made outside of annual Proposition 98 spending. The July package required the 2009–10 QEIA payment to be made from within Proposition 98 spending. This resulted in districts with QEIA schools essentially shifting some revenue limit funding to the affected school sites to cover program costs. The July package also extended the QEIA payment schedule for an additional year (until 2014–15), thereby lengthening the life of the program. Senate Bill 84, (Steinberg) (Governor’s action pending at time of publication) makes a further modification—essentially requiring districts to shift revenue limit funding to the affected school sites only upon determination by the Superintendent of Public Instruction and the Director of Finance that an equivalent amount of additional federal or state general purpose funds had been identified to backfill the loss. Regardless of whether these general purpose funds materialize, districts with QEIA schools will receive Proposition 98 funding to cover program costs, while also being encouraged to access federal school improvement funding.

“Settle–Up” Obligation Retired. In 2002–03 and 2003–04, the Proposition 98 constitutional funding requirement ended up being higher than the amount of Proposition 98 funding appropriated. As a result, the state incurred a settle–up obligation totaling $1.1 billion across the two years. As part of the February package, however, the state provided $1.1 billion to school districts in 2008–09 to retire the entire settle–up obligation.

K–12 Education

Major Budget Decisions

Figure 4 displays all significant funding sources for K–12 education for 2007–08, 2008–09, and 2009–10. The figure shows that total K–12 funding in 2009–10 is $66.7 billion. This is a 2.6 percent decline from 2008–09 and a 6.2 percent decline from 2007–08. The decline in ongoing Proposition 98 funding is larger—11 percent from 2007–08. The significant reductions to state funding, however, are mitigated by various factors—including federal stimulus funding, funding swaps, deferred rather than eliminated payments, access to restricted reserves, categorical flexibility, and loosened state requirements, as discussed in more detail below.

July Package Includes Further 2008–09 K–12 Reductions. To further reduce spending to the 2008–09 minimum guarantee, the July package makes a $1.6 billion downward accounting adjustment to reflect K–12 cash disbursements not yet made to districts. (In turn, these reductions lower the 2009–10 guarantee.) Of these funds, $1.5 billion is subsequently paid to school districts in 2009–10.

Makes 2009–10 Reductions Mostly From K–12 Revenue Limits. In the February budget package, K–12 programmatic reductions for 2008–09 were split between revenue limits and categorical programs. As part of the July package, however, 2009–10 reductions were made primarily from revenue limits. Specifically, the July package reduces revenue limits across–the–board by $4 billion. Of this amount, $1.5 billion is reduced on a one–time basis to backfill the categorical reductions from 2008–09.

asdf

Significant Increase in K–12 Payment Deferrals. The state relied significantly on payment deferrals to achieve budget and cash solutions in 2008–09 and 2009–10. As shown in Figure 5, the 2009–10 budget includes $5.7 billion in inter–year deferrals for K–12 education. These are payment deferrals that are not paid until the next fiscal year, thereby achieving one–time Proposition 98 savings. The state also adopted $6 billion in intra–year deferrals—payment deferrals that are paid off within the fiscal year. These deferrals shift various payments to improve the state’s cash situation in its cash–poor months, but they do not produce annual budget savings.

Federal Stimulus Funds for Education

Federal stimulus funding will help school districts mitigate the reductions and deferrals adopted in the February and July packages. In April 2009, the state received its first installment of federal stimulus funding as part of ARRA, which included over $2.6 billion in “stabilization” funding to support K–12 education (as well as $537 million for higher education). The stabilization funds are intended to help mitigate cuts in state funding. Sometime during 2009–10, the state is likely to receive the remainder of its ARRA stabilization funding (totaling $1.8 billion for all of education). In anticipation of this additional federal support, the 2009–10 Budget Act provides ARRA stabilization spending authority of $600 million for K–12 education, and $130 million for CCC. (The division of funds among educational segments could change slightly as the state finalizes its second–round application. To allow the state to more easily make adjustments, the federal funds spending authority in the budget is greater than the amount of funding actually available. More detail on higher education funding is included in the “Higher Education” section.)

Additional Stimulus Funds for Low–Income Students and Students With Disabilities. The ARRA also provides additional stimulus funding for states to support educational programs serving low–income students and students with disabilities. In April 2009, California received authority for the first half of this funding—$540 million for low–income students and $613 million for students with disabilities. The 2009–10 Budget Act includes additional spending authority for the other half of available funding. California likely will receive authority from the federal government for the remainder of this funding in the summer of 2009.

Greater Flexibility for the Next Several Years

In addition to the changes in spending, the February and July packages also made several significant policy changes to loosen restrictions and give school districts more discretion in making spending decisions. Among the larger changes, the state eliminated spending restrictions for a number of categorical programs, postponed the requirements that school districts purchase new textbooks, and allowed school districts to reduce the length of the school year. Figure 6 provides a comprehensive list of these changes.

Programmatic Per Pupil Funding Changes Moderately

“Programmatic” funding reflects the amount of resources school districts have available to spend each year after accounting for funding swaps, payment deferrals, and other funding sources (such as ARRA funds). When these adjustments are taken into account, the change in per–pupil funding from 2007–08 levels could range from an increase of roughly 3 percent to a decrease of roughly 3 percent.

Child Care and Development

The July budget package includes nearly $3.1 billion for child care and development (CCD) in 2009–10. Of that total, nearly $2.6 billion is for CCD programs administered by the California Department of Education (CDE). Total CCD funding decreased by just over 3 percent compared to the revised 2008–09 level of spending.

Programmatic Reductions. Most of the year–to–year reduction can be attributed to policy changes in the California Work Opportunity and Responsibility to Kids (CalWORKs) program that are expected to reduce demand for Stage 1 child care in 2009–10. The July package also eliminates the Extended Day program (which serves school–age children from low–income families before and after school), effective August 31, 2009, to achieve $27 million in savings. The apportionments and number of children expected to be served in the remaining CCD programs were held virtually flat from 2008–09 levels.

Higher Education

The budget provides a total of $10.5 billion in General Fund support for higher education in 2009–10 (see Figure 7, next page). While this reflects an increase over the revised 2008–09 level of funding, it is about $1.3 billion (11 percent) less than the amount provided in 2007–08. Much of the decline in General Fund support is offset with one–time federal funding provided through ARRA. In addition, all three public segments will receive additional new funding as a result of student fee increases. When all major funding sources are considered, higher education funding for 2009–10 exceeds 2007–08 funding by $555 million, or 3.3 percent. (See Figure 8.)

UC and CSU

Overall Funding. As shown in Figure 7, the 2009–10 budget provides University of California (UC) with $2.6 billion, and California State University (CSU) )with $2.3 billion, in General Fund support. These amounts reflect reductions of about 20 percent from 2007–08 levels. However, as shown in Figure 8, the two segments will receive increases of 5.8 percent and 7.4 percent, respectively, on a programmatic basis when other major funding such as ARRA funding and student fee revenue are considered. (The exact amount of federal ARRA funds had not been determined at the time the report was prepared.)

The figures reflect 2009–10 Budget Act provisions reverting $1.5 billion in 2008–09 General Fund support from UC and CSU. About $64 million of this unallocated reduction originally took the form of cuts the Governor imposed through an executive order in fall 2008.

Student Fees. For 2009–10, UC and CSU have enacted fee increases of 9.3 percent and 32 percent, respectively. The enacted budget assumes these fee increases will provide additional revenue of $166 million for UC and $366 million for CSU (At the time this publication was prepared, the UC Regents were considering a further fee increase for 2009–10.) Because fee revenue is unrestricted, the fee increases effectively offset General Fund reductions. Both segments plan to direct about a third of this new revenue to augment campus–based financial aid for their students.

Enrollment. The budget does not specify an expected level of student enrollment for UC and CSU, nor does it specify a “marginal cost” associated with enrolling additional students at the universities. In budget hearings, UC indicated that it expects to enroll about 2,300 fewer new freshmen, and about 500 more transfer students, in 2009–10 compared to 2008–09. The CSU indicated it intends to admit no students in spring 2010, thus trying to reduce overall enrollment by about 40,000 students. The budget directs the segments to report by March 15, 2010 on whether they met their 2009–10 enrollment goals.

Academic Preparation Programs. The Legislature rejected the Governor’s proposal to eliminate funding for academic preparation (outreach) programs. Instead, the enacted budget contains language requiring the segments to limit any redirection of funding from these programs to an amount proportionate to their overall reduction in General Fund support.

California Community Colleges

The July 2009–10 budget package provides $3.7 billion in General Fund support for CCC. This is $434 million (10.4 percent) less than the 2007–08 level. However, some of this funding pays for costs incurred in different fiscal years. Also, CCC receives substantial funding from other sources, primarily local property taxes. When all funding sources are considered and counted toward the year in which costs are incurred, CCC’s 2009–10 programmatic funding totals $6.5 billion, which is $189 million (2.8 percent) less than 2007–08, or $287 million (4.2 percent) less than 2008–09.

Proposition 98. Like K–12 education (but unlike the universities), CCC’s General Fund support and local property tax revenue are subject to Proposition 98. For 2009–10, CCC receives $5.7 billion in Proposition 98 support, which is 11.2 percent of total state Proposition 98 spending. This reflects a reduction of $265 million (4.5 percent) from the revised 2008–09 level. In addition, the budget package establishes a maintenance factor obligation for CCC (as well as K–12) for payments in future years. Proposition 98 spending is discussed in more detail in the “Proposition 98” section of this chapter.

Deferrals. As shown in Figure 3, in 2008–09, the Legislature added $340 million to the existing $200 million in CCC funding deferrals. Thus, while community colleges incurred costs for certain programs in 2008–09, they did not actually receive these deferred state payments until early 2009–10. The budget package defers an additional $163 million from 2009–10 to 2010–11, thereby creating an ongoing deferral of $703 million annually.

No New Funding for Enrollment or Cost–of–Living Increases. The budget provides neither enrollment growth nor a COLA for CCC in 2009–10. This is the second consecutive year that community colleges have not received a COLA.

Base Apportionment Reductions. The budget reflects cuts totaling $140 million (about 2 percent) to Proposition 98 General Fund support for CCC apportionments (general–purpose monies). This includes an unallocated reduction of $130 million as well as $10 million in savings from the elimination of the California High School Exit Exam remediation program.

Local Property Tax Backfill. The budget includes a total of $63.3 million in General Fund support to partially compensate for an estimated $116.7 million drop in CCC’s local property tax revenues in 2009–10 from earlier estimates. This backfill is derived from two sources: (1) a redirection of $58.3 million in funds previously intended for enrollment growth, and (2) a $5 million reappropriation of unspent funds from prior years.

Student Fees. The budget package increased enrollment fees from $20 per unit to $26 per unit, which returned student fees back to their 2006 level. These higher fees are expected to generate $80 million in additional revenue for CCC, thereby mitigating the impact of reduced Proposition 98 support for apportionments. Lower– and middle–income students are largely shielded from the fee increase by CCC’s fee waiver program and recently expanded federal tax credits.

Workload–Reduction Provision. The budget package includes a provision that permits community colleges to reduce the number of students they serve in 2009–10 in proportion to the net reduction in base apportionment funding. Another provision expresses the Legislature’s intent that any resulting workload reductions be limited as much as possible to areas other than basic skills, workforce training, and transfer–level coursework.

Categorical Cuts and Flexibility. The budget package reduces Proposition 98 support for categorical programs by a total of $263 million compared with revised 2008–09 levels. The budget assumes that $130 million of this reduction will be backfilled by federal stimulus funding, for a net reduction of $133 million. In order to better accommodate these cuts, 12 of CCC’s 21 categorical programs were moved to a “flex item” (see Figure 9). From 2009–10 though 2012–13, districts are permitted to transfer funds from categorical programs in the flex item to any other categorical spending purpose.

California Student Aid Commission

The budget package provides $967 million in General Fund support for the California Student Aid Commission (CSAC), which reflects a $70 million increase from 2008–09 and a $101 million increase (11.6 percent) from 2007–08. In addition, the budget provides CSAC with $32 million from the Student Loan Operating Fund to help cover Cal Grant costs.

Rejection of Governor’s Proposals. The Legislature rejected the Governor’s proposals to phase out the Cal Grant programs. Instead, the enacted budget fully funds projected Cal Grant awards in both the competitive and entitlement programs. The budget package also does not include the Governor’s proposals to (1) decentralize the administration of Cal Grants to the campuses and (2) eliminate CSAC and the California Postsecondary Education Commission and transfer some of their functions to an executive agency. The Governor in turn vetoed $6.3 million from CSAC’s support budget, and signaled a willingness to restore $4.3 million of this amount if the Legislature enacts a decentralization plan. The veto eliminates about half of CSAC’s support budget, which could affect its ability to administer state financial aid programs.

Capital Outlay

The 2009–10 spending plan authorizes the segments to spend $263 million in general obligation bond funding for a variety of capital outlay projects. As the only segment with a substantial remaining balance of authorized general obligation bonds, the community colleges received the majority of the capital outlay appropriations—$216 million for 17 new projects and 8 continuing projects. The Legislature rejected the Governor’s proposal to use lease–revenue bonds to fund new capital outlay projects at UC and CSU and provided funding for only those projects that could be completed using remaining, authorized general obligation bonds. The spending plan also contained reappropriations for many projects approved in previous years including:

• Numerous projects that experienced delays due to the Pooled Money Investment Board’s freeze on loan disbursements during 2008–09.
• $10 million for the new Life Sciences Research and Nursing Education facility at Charles Drew University.
• The Helios Energy Research Facility at UC Berkeley that was delayed due to changes in the project’s scope.

Health

The 2009–10 spending plan provides $16.1 billion from the General Fund for health programs. This is a decrease of $2.7 billion (14.5 percent) compared to the revised prior–year spending level and a decrease of $3.8 billion from the 2007–08 level, as shown in Figure 10. These spending reductions result in large part from federal economic stimulus legislation that increased the federal medical assistance percentage (FMAP) in 2008–09 and 2009–10. The FMAP is the federal formula used to determine the amount of federal matching funds the state receives for Medi–Cal and certain social services programs. Part of the reduction in health spending relates to local government financing shifts discussed later in this chapter. Significant program reductions were also made by the Legislature and the Governor to various health programs. The amounts shown in Figures 10 and 11 also reflect about $270 million in gubernatorial vetoes that are the subject of pending litigation. The key aspects of the budget package are discussed below and summarized in Figure 11.

Medi–Cal

The spending plan provides about $10.9 billion from the General Fund ($38.7 billion all funds) for Medi–Cal local assistance expenditures. This is a decrease of almost $2 billion, or 15.3 percent, in General Fund support for Medi–Cal local assistance compared to the revised prior–year spending level. We discuss the most significant spending changes below.

Additional Federal Funds. The spending plan assumes a significant increase in the receipt of federal funds, which reduces the overall level of General Fund spending. Under ARRA, California benefits from an enhanced FMAP, which adjusts the federal share from 50 percent minimum FMAP for most services to 61.59 percent. The enhanced FMAP began in October 2008 and will continue through December 2010. It mainly affects General Fund expenditure levels for Medi–Cal benefits provided by the Department of Health Care Services (DHCS), but also affects components of the Medi–Cal Program administered by other health departments as shown in Figure 12. The budget assumes that the enhanced FMAP will provide $2.4 billion in 2008–09 and $3.7 billion in 2009–10 in federal relief for the Medi–Cal Program.

Savings From Increased Federal Flexibility. The budget plan assumes $1 billion in General Fund savings from the receipt of additional federal funds and obtaining additional flexibility to reduce program costs. This includes the possibility that the federal government will reimburse the state for costs of care for disabled beneficiaries who should instead have received their care under the federal Medicare program. Savings may also be achieved through other changes being sought by the state in the way federal authorities administer the program.

Funding Shifts. The spending plan includes $565.2 million in funding from a local government finance shift to support Medi–Cal. We discuss the shift of these funds in more detail in the “Local Government” section of this chapter. In addition, $50 million in tobacco tax revenues from the Proposition 99 ballot measure approved by voters in November 1988 were redirected from various health programs to support Medi–Cal.

Unspecified Reduction. The budget plan includes an unspecified reduction in Medi–Cal local assistance of $323 million from the General Fund. Comparable amounts of savings for this purpose were initially assumed in the 2007–08 and 2008–09 budget plans, although the savings were not achieved in 2008–09.

Elimination of Optional Benefits. The February 2009 budget package eliminated certain optional benefits for adults effective July 2009 for General Fund savings of $122.2 million. The bulk of the savings come from the elimination of adult dental services, but savings also come from the elimination of optician services, incontinence creams and washes, audiology, acupuncture, and other services.

Reductions in Hospital Payments. The February budget plan includes a 10 percent reduction to designated public hospital rates to achieve savings of $54.2 million for the General Fund. An additional $54.8 million in General Fund savings were achieved in July through (1) a 10 percent reduction in payments to private hospitals ($23.9 million), (2) redirecting the Distressed Hospital Fund and hospital stabilization funds ($23.9 million), and (3) reducing rates for small and rural hospitals by 10 percent ($7 million).

Freeze on Long–Term Care Facility Rates and Expanded Fees. The spending plan freezes rate adjustments that would otherwise occur for certain long–term care facilities for General Fund savings of $90 million. In addition, the budget plan expands quality assurance fee assessments on certain long–term care facilities to include Medicare revenues, resulting in increased state revenue of $17 million in 2009–10.

Changes to Reduce the Cost of Prescription Drugs. The spending plan includes several changes in pharmacy practices to reduce the cost of prescription drugs and achieve total General Fund savings of about $66 million. These changes include: (1) paying lower drug reimbursements ($37 million), (2) requiring pharmacy providers to bill at lower rates ($22.5 million), (3) requiring eligible entities to use “340B” program drug pricing ($3.8 million), and (4) performing a “therapeutic category review” of antipsychotic drugs to see which are most cost–effective ($1.5 million) and requiring drug manufacturers to pay certain rebates for HIV/AIDS and cancer drugs ($1.3 million).

Reduction in Funding for County Administration. The budget plan includes savings of $24.7 million General Fund from the suspension of a cost–of–living adjustment for county administration. The Governor vetoed an additional $60.6 million from the General Fund for county administration of Medi–Cal.

Expansion of Anti–Fraud Efforts. The budget plan assumes that efforts to reduce fraud, waste, and abuse in the areas of adult day health care (ADHC), physician services, and pharmacy will achieve General Fund savings of $46.8 million.

Limits on ADHC. The spending plan adopts several modifications to the ADHC benefit to achieve $28.1 million in General Fund savings. The changes include: (1) a three day per week cap on services, (2) standards on medical necessity that will be developed through a workgroup process, (3) on–site processing of treatment authorization requests, and (4) a freeze on provider rates as of August 2009. Some of these savings may not be realized due to a preliminary court injunction on the three day per week cap.

Development of Plan for Changes to Eligibility Processing. The budget authorizes the development of a plan to create a centralized eligibility and enrollment process for Medi–Cal, CalWORKs, and the Supplemental Nutrition Assistance Program (formerly the Food Stamp Program). The development of the plan includes stakeholder involvement, and implementation of the plan requires legislative approval.

Improvement of Care Coordination and Long–Term Cost Containment. The budget plan gives DHCS broad authority to implement a demonstration project intended to accomplish a series of goals, including:

• Strengthening the “safety net” of health care for the poor.
• Improving health care quality and outcomes.
• Restructuring the delivery of services to be more responsive to the most vulnerable Medi–Cal beneficiaries, such as the aged, blind, and disabled.

The administration estimates that savings of $400 million annually to the General Fund could be achieved by 2012–13 through this effort to provide earlier and more appropriate health care to patients.

Other DHCS Programs

Elimination of Community Clinic Programs. State funding for various community clinic programs was eliminated for General Fund savings of $35.1 million. This amount reflects the Governor’s veto of $25 million. The affected programs included Indian Health, Seasonal, Agricultural, and Migratory Workers; Rural Health Services Development; and Expanded Access to Primary Care.

Department of Public Health

In total, the spending plan provides about $199 million from the General Fund ($2.9 billion all funds) for the Department of Public Health. This reflects a decrease of about $153 million or 44 percent from the General Fund ($49 million from all fund sources), compared to the revised prior–year spending level. The budget reflects a number of reductions in public health spending.

HIV/AIDS Programs. The budget reduces General Fund spending on HIV/AIDS programs by a total of $85.7 million. Of this total, $33.5 million was approved by the Legislature as a package of cuts to HIV/AIDS programs. These included cuts to: (1) therapeutic monitoring, education and prevention, home and community–based care, surveillance and epidemiology, and housing ($4.6 million); (2) state operations in the Office of AIDS ($3.4 million); and (3) the AIDS Drug Assistance Program (ADAP) ($25.5 million). The Legislature backfilled almost all of the reduction to ADAP with ADAP Rebate Fund monies.

In addition to these cuts, the governor vetoed $52.2 million from HIV/AIDS local assistance programs. This eliminated the remaining General Fund support for a variety of programs, including therapeutic monitoring, education and prevention, home and community–based care, and housing, as well as the Early Intervention Program and HIV counseling and testing. As a result, all remaining state funding is now devoted to support HIV/AIDS surveillance and epidemiology, and ADAP.

Maternal, Child, and Adolescent Health (MCAH) and Domestic Violence Shelters. In total, the budget plan reduces spending for MCAH programs by $20.5 million from the General Fund, and for domestic violence shelters by $20.4 million from the General Fund. The Legislature reduced spending for MCAH programs by $8.6 million and for domestic violence shelters by $4.1 million. The Governor then vetoed an additional $11.9 million from MCAH local assistance programs and $16.3 million from domestic violence shelters. These vetoes eliminated all remaining General Fund support for the MCAH program and domestic violence shelters.

Proposition 99 Programs. The spending plan reduces Proposition 99 spending by eliminating funding for uncompensated emergency care and reducing funding for asthma, breast cancer screening, and other programs as part of the $50 million shift of funds to support the Medi–Cal Program discussed above.

Immunization and Other Reductions. The budget plan suspends local assistance funding for immunization programs in 2009–10 for savings of $18 million to the General Fund. In addition, the plan makes General Fund reductions to other public health programs for savings of $9.1 million. These include: (1) denial of a capital outlay budget request for state laboratory improvements ($3.1 million), (2) a reduction in grants to Alzheimer’s Disease Research Centers ($3.1 million), and (3) suspension of preventative dental services to low–income children ($2.9 million).

Healthy Families Program

In total, the July budget package provided about $225 million from the General Fund for the Healthy Families Program (HFP), which is administered by the Managed Risk Medical Insurance Board (MRMIB). This reflected a net General Fund decrease of about $166 million, or 42 percent, compared to the revised prior–year spending level. The February budget initially increased funding to HFP for caseload adjustments by about $13 million, but this augmentation was more than offset by a reduction in General Fund support for the HFP of almost $179 million. These figures do not reflect the significant post–budget changes to the HFP discussed below.

In May, the Governor proposed elimination of General Fund support for HFP. The Legislature rejected the Governor’s proposal and instead adopted a reduction of $124 million from the General Fund, along with budget bill language directing MRMIB to seek assistance from philanthropic and other organizations to maintain funding for the program. Support for certified application assistance was also eliminated by the Legislature for General Fund savings of $4.6 million. Subsequently, the Governor vetoed an additional $50 million of General Fund from HFP.

Several actions subsequent to adoption of the budget package are expected to largely restore funding for the program in 2009–10. These actions include: (1) a contribution of $81.4 million from the California Children and Families Commission (also known as First 5 California) for coverage of children up to age five, (2) estimated program savings of $17.5 million from premium and co–payment increases for families enrolled in the program, and (3) estimated funding of $97 million from a temporary gross premiums tax on Medi–Cal managed care plans that would be in place until 2011. Changes to co–payments would be made through regulation, while the gross premiums tax and changes to HFP premiums would be implemented through post–budget legislation—Chapter 157, Statutes of 2009 (AB 1422, Bass). This tax measure is expected to raise about $157 million for the General Fund in 2009–10. It specifies that 38 percent of these revenues (about $60 million) are to be continuously appropriated to augment the Medi–Cal Program, while the remaining 62 percent of revenues ($97 million) are continuously appropriated to support HFP.

MRMIB—Other Programs

The Legislature reduced Proposition 99 funding for two programs by cutting (1) $6.6 million from the Major Risk Medical Insurance Program, the state’s high–risk health insurance pool program, and (2) $4.9 million from the Access for Infants and Mothers (AIM) health insurance program for pregnant women. These reductions were part of a larger redirection of Proposition 99 funds to support the Medi–Cal Program. Also, Proposition 99 funding for AIM was reduced by $28.5 million to reflect one–time savings in 2009–10 from implementation of a new methodology for payments to health plans.

Department of Mental Health

The spending plan provides about $1.9 billion from the General Fund ($3.5 billion from all fund sources) for the Department of Mental Health (DMH). This is a net decrease of about $104 million from the General Fund, or 5.3 percent, compared to the revised prior–year level of spending. The reductions to DMH community programs are partly offset by spending increases that are provided mainly for state hospital operations.

Reduction to Mental Health Managed Care. The spending plan provides $113.3 million General Fund for support of the Mental Health Managed Care program, a decrease from the revised prior–year spending level of $72.3 million General Fund, or 39 percent. This decrease reflects a $64 million reduction in state funding for certain services as well as adjustments due to increased FMAP under ARRA.

Reduction to Early and Periodic Screening, Diagnosis, and Treatment (EPSDT). The spending plan provides about $349 million General Fund for support of EPSDT, a net decrease from the revised prior–year adjusted spending level of about $30 million, or 8 percent. This decrease includes an assumption that $28 million in EPSDT support will come from county Proposition 63 funds rather than the state General Fund, the deferral until 2010–11 of $15.8 million for prior–year county cost settlements, and FMAP adjustments. These reductions are offset by other General Fund spending increases, including $19 million for compliance with the Emily Q. v. Bonta ruling, which requires DMH to implement a nine–point plan to increase county use of therapeutic behavioral services.

Assembly Bill 3632 Mandate Funding Deferred. The spending plan includes $52 million General Fund in the DMH budget to pay for mental health services provided to children enrolled in special education as directed under so–called AB 3632 programs. This represents a decrease of $52 million General Fund or 50 percent compared to revised prior–year spending levels.

Caregiver Resource Centers Reduced. The spending plan reduces funding for CRCs by $7.6 million, or about 72 percent, as compared to revised prior–year spending levels. The CRCs provide services to caregivers of a family member with a cognitive impairment such as respite and counseling. The budget reflects the Governor’s veto of $4.1 million in addition to a $3.5 million legislative reduction to the CRCs.

State Hospitals/Long–Term Care Services. The spending plan provides about $1.2 billion from the General Fund for state hospital operations and long–term care services for the mentally ill, a $66.2 million increase in General Fund resources over revised prior–year spending levels. This includes $25.3 million for the expansion of mental health beds for prison inmates in the Salinas and Vacaville psychiatric programs, $24.4 million in increased lease–revenue debt service payments for DMH facilities, and costs due to projected caseload growth and other program changes. The spending plan also achieves $8.3 million General Fund savings in the Sex Offender Commitment Program due to reduced costs for evaluations and court testimony.

Department of Developmental Services

The budget provides $2.4 billion from the General Fund ($4.7 billion from all fund sources) for services for individuals with developmental disabilities who are clients of developmental centers (DCs) and regional centers (RCs). This amounts to a net decrease of about $170 million, or 6.6 percent, in General Fund support compared to the revised prior–year spending level. The decrease in General Fund spending for the Department of Developmental Services (DDS) is largely due to increased federal funds provided under ARRA and the adoption of several proposals to achieve a department savings target of $334 million. These spending reductions are partly offset by increases for caseload, costs, and utilization of services. We describe these proposals in more detail below.

Savings in Community Programs. The spending plan includes a total of $2.1 billion from the General Fund for community services for the developmentally disabled. This reflects a decrease in General Fund support of about $126 million, or 5.8 percent, over the revised prior–year spending level. Working with various stakeholder groups, DDS developed a variety of proposals to generate $334 million in General Fund savings in 2009–10. For example, $60 million in savings would come from obtaining additional federal Medicaid funds for certain services. In addition, the Governor vetoed $50 million from the community programs budget for services provided to children up to age five and directed DDS to request replacement funds from the First 5 Commission. The spending plan includes savings of $26.6 million to the General Fund due to the availability of additional federal funds for California’s Early Start program under ARRA. The DDS was also required to develop a new service model that provides consumers with an “individual choice budget” that allows RC clients to choose the services they want within a fixed budget.

Net Reduction in DCs. The spending plan includes about $301 million from the General Fund for the DCs, a decrease in General Fund of about $27 million, or 8.3 percent, compared to the revised prior–year spending level. This decrease in General Fund spending is mainly due to the delay of several capital outlay projects, and from the closure of the Sierra Vista Community Facility.

Department of Alcohol and Drug Programs

The budget provides about $189.5 million from the General Fund ($478.9 million all funds) for the Department of Alcohol and Drug Programs. This is a decrease of $93.8 million from the General Fund, or 33.1 percent, compared to the revised prior–year spending level, that is due mainly to reductions in funding for the Proposition 36 and Drug Medi–Cal programs.

Proposition 36 Programs Reduction. The spending plan includes the elimination of $90 million in General Fund support from the Substance Abuse and Crime Prevention Act (also known as Proposition 36), while maintaining $18 million in General Fund support for the Offender Treatment Program, which also serves Proposition 36 offenders. These spending reductions are, in effect, partly offset with $45 million in one–time federal Byrne Memorial Justice Assistance Grant funds for the Offender Treatment Program.

Drug Medi–Cal Reduced. The spending plan includes an across–the–board 10 percent reduction in the rates paid to Drug Medi–Cal providers that is estimated to achieve $8.8 million in General Fund savings. The spending plan also includes adjustments due to increased FMAP under ARRA.

Emergency Medical Services Authority (EMSA)

The spending plan eliminates $3 million, or one–half of the current General Fund support, for the California Poison Control System (CPCS). The EMSA is currently attempting to secure alternative sources of funding in order to continue CPCS operations through 2009–10.

Social Services and Labor

General Fund support for social services programs in the 2009–10 budget totals $8.9 billion, a reduction of $1.1 billion (11 percent) compared to the revised prior–year level. Most of this decrease is from grant reductions for recipients in the Supplemental Security Income/State Supplementary Program (SSI/SSP), eligibility and service restrictions for recipients of In–Home Supportive Services (IHSS), reduced funding for child welfare services and foster care, and additional available funds from ARRA. Figure 13 shows the change in General Fund spending in each major social services program or department. The budget plan also achieved some significant General Fund savings on labor programs, which we discuss later in this section.

Savings From ARRA. For 2008–09, ARRA provided about $800 million in federal funds which were used to offset General Fund costs for social services programs. In 2009–10, ARRA funding is projected to increase to about $1 billion. Figure 14 shows ARRA funding used to offset General Fund spending by program area.

Summary of Other Major 2009–10 Budget Changes. Figure 15 summarizes the major programmatic changes to social services programs which were included in the February budget and the July revised package compared to prior law. The budget totals reflect the Governor’s vetoes of approximately $125 million in funding for child welfare services, Department of Aging programs, and IHSS, some of which are now the subject of pending litigation.

The amounts shown in Figure 15 generally reflect the ongoing annual savings from the policy changes. For some of the changes in CalWORKs and IHSS, however, the amounts shown overstate the impact in 2009–10. This is because the federal government—under ARRA—is temporarily picking up a greater share of program costs, thereby reducing the value of General Fund savings in 2009–10 from service reductions. (The footnotes to the figure provide additional information regarding this interaction with ARRA.) Although Figure 15 shows a total General Fund solution of $2.1 billion, the net General Fund savings in 2009–10 would be about $1.8 billion after accounting for the interaction with ARRA.

Elimination of Automatic COLAs and Other Long–Term CalWORKs Changes. Prior law required that the maximum monthly grants for SSI/SSP and CalWORKs be adjusted each year to reflect the change in the California Necessities Index. Beginning with 2010–11, budget legislation eliminates this automatic adjustment. Effective in July 2011, the budget plan substantially modifies the CalWORKs program by increasing the magnitude of sanctions imposed for noncompliance and reducing the number of consecutive months an adult may receive cash assistance. These longer–term changes are discussed in the box on page 49.

Longer–Term CalWORKs Policy Changes Effective July 2011, budget legislation makes significant changes to CalWORKs sanction policies, time limits, and eligibility rules. When implemented, these changes are likely to result in ongoing General Fund savings potentially in the low hundreds of millions. Limit to 48 Consecutive Months of Aid. Currently, able–bodied adults are generally limited to 60 months of aid. Once an adult reaches 60 months, the family’s grant is reduced by the amount attributable to the adult, and the children continue to receive aid in a program informally known as the safety net. Budget legislation limits adult receipt of aid to 48 consecutive months. After 48 months, the adult is removed from the case and the children continue to be aided in the safety net. After “sitting out” for one year, the adult can rejoin the case for up to one year and the family’s grant is restored, assuming the adult avoids program sanctions. Self–Sufficiency Reviews. Currently, aided adults must be recertified for eligibility with an in–person interview each year. Budget legislation requires adults in CalWORKs cases who are not meeting participation requirements to instead meet with a county social or employment worker every six months. The purpose of the review is to determine barriers to participation and help connect the recipient to appropriate services and resources. If the adult does not attend the review, the family’s grant is reduced by 50 percent. In