The 2018-19 Budget: The May Revision

The Administration’s Proposition 55 Estimates in the May Revision

This post describes the Proposition 55 calculation for Medi-Cal spending in the Governor’s May Revision. This post updates the analysis described in The 2018‑19 Budget: The Administration’s Proposition 55 Estimates based on the administration’s new revenue projections, spending estimates, and budget proposals in the May Revision.

Proposition 55 (2016). Proposition 55 (2016) extended tax rate increases on high‑income earners from 2018 until 2030 (which voters originally passed on a temporary basis in 2012 as part of Proposition 30). Revenues raised by the measure benefit the General Fund. These revenues increase required spending on schools and community colleges through the funding requirements under Proposition 98 (1988) and increase reserve requirements and debt payments under Proposition 2 (2014). In addition, Proposition 55 aimed to increase funding for Medi‑Cal, the state’s health insurance program for low‑income Californians, through a formula administered by the Department of Finance (DOF).

Overview of the Formula. The Proposition 55 formula has three major inputs, which are shown in Figure 1. First, the measure directs DOF to estimate the upcoming year’s available revenues. Second, it subtracts from this total the constitutional minimum funding level for schools and community colleges. Third, the formula then subtracts an estimate of the “workload budget” costs of government services that were “currently authorized” as of January 1, 2016. Put simply, the workload budget is the cost of continuing to provide state services in place at that time. If a surplus results from this third step, half of it, up to $2 billion, is dedicated to increase spending on Medi‑Cal. If a deficit results, there is no additional funding for Medi‑Cal.

“Workload Budget” Key to Interpreting Proposition 55. One of the key provisions in Proposition 55 that is open to alternative interpretations is the “workload budget” (shown in the third step of the calculation above). Proposition 55 defines the workload budget as the budget‑year cost of “currently authorized services,” adjusted for enrollment, caseload, population, and the nine other factors. These are: (1) statutory cost‑of‑living adjustments, (2) chaptered legislation, (3) one‑time expenditures, (4) the full‑year costs of partial‑year programs, (5) costs incurred pursuant to constitutional requirements, (6) federal mandates, (7) court‑ordered mandates, (8) state employee merit salary adjustments, and (9) state agency operating expense and equipment cost adjustments to reflect price increases. Proposition 55 adds that currently authorized services must be interpreted as those that were “currently authorized” as of January 1, 2016.

The Administration Continues to Identify a Deficit Under Calculation. In January, the administration’s calculations under the Proposition 55 formula resulted in a net deficit, meaning there were no additional funds for Medi-Cal provided by the calculation. (We described these estimates in our budget brief: The 2018‑19 Budget: The Administration’s Proposition 55 Estimates.) The administration has updated its estimates in May and, as Figure 2 shows, the deficit under the calculation is now larger. That is because, although the Governor proposed new discretionary spending of over $3 billion in the May Revision, DOF counts nearly all of it as “currently authorized services” under its very broad interpretation of this phrase.

Two Key Reasons for a Deficit. There are two key choices the administration makes in administering the calculation, which could be open to alternative interpretations. In particular, the administration:

• Very Broadly Interprets “Currently Authorized Services.” In implementing the workload budget provisions of the calculation, the administration takes a very broad approach to interpreting “currently authorized services.” (By including more in the workload budget calculation, the administration reduces the potential surplus for Medi-Cal.) In some cases, the administration interprets currently authorized services to mean any services of the general type that were in place on January 1, 2016, even if the specific service was not funded or available at that time. For example, the administration includes some program expansions and new benefits—like the newly created Emergency Child Care Bridge Program—in the workload budget, even if the programs or benefits were not available on January 1, 2016.

• Uses Revenues Net of Optional Deposit. In some budgetary formulas “General Fund revenues” means proceeds of taxes minus transfers and loans in and out of the General Fund. In its Proposition 55 calculation, the administration continues to reflect its 2018‑19 proposed optional deposit into the state’s rainy day fund as a negative transfer in available revenues. This action reduces available revenues by $2.6 billion, reducing a potential surplus for Medi-Cal.

An Alternative Approach. Figure 3 shows alternative interpretations of these two key parts of the calculation. In particular, the figure shows alternative approaches to:

• The Workload Budget. The second column of Figure 3 uses a stricter definition of workload budget, but maintains DOF’s interpretation of General Fund revenues. Specifically, this interpretation excludes program expansions and new benefits as currently authorized services. As a result, this approach excludes most of the administration’s discretionary spending proposed in the May Revision. For example, the workload budget excludes the Governor’s proposals to spend $170 million on urban flood control projects and $250 million for new block grants to local governments for emergency homeless aid. The alternative approach presented here makes adjustments for all price increases whether or not they are explicitly allowed under the measure. (A stricter interpretation of the Proposition 55 formula would only allow for a small subset of price increases in the workload budget—e.g. statutory COLAs—but not other kinds of price increases like increases in drugs prices for Medi-Cal.) As the figure shows, under this alternative only, there is still a deficit in the calculation.

• Available General Fund Revenues. The third column of Figure 3 uses an alternative interpretation of available General Fund revenues, but maintains the administration’s approach on the workload budget. Under this alternative, constitutional deposits into the state’s rainy day fund are counted as negative transfers for the purposes of calculating General Fund revenues, but the proposed optional deposit is not counted this way. As the figure shows, under this alternative only, there is still a deficit in the calculation.

• Both. The final column of Figure 3 shows that, under the administration’s current estimates of revenues, using both an alternative workload budget definition and a different calculation for available revenues, there would be $900 million available for Medi-Cal in 2018‑19.

Workload Budget Provisions More Consequential to Calculation in 2019‑20. Figure 4 shows this calculation for 2019‑20, using the administration’s revenue estimates, the administration’s programmatic spending forecasts, and our own projections of workload budget changes. In 2019‑20 there is no proposed optional deposit into the state’s rainy day fund, so only the workload budget provisions affect the calculation. As the figure shows, under the administration’s current approach and projections, there would be a small amount (roughly $300 million) dedicated to Medi-Cal in the calculation. Under our office’s alternative approach on the workload budget, but the administration’s revenue and spending projections, there would about $1 billion directed to Medi-Cal under the calculation.