Table of Contents
Major Expenditure Proposals in the 1997-98 Budget
The AFDC program (Family Group and Unemployed Parent components) provides cash grants to qualifying families with children whose incomes are not sufficient to provide for their basic needs. The SSI/SSP provides cash assistance to low-income persons who are aged, blind, or disabled.
In the current year, the budget estimates that the General Fund cost of these programs will be $2.2 billion for AFDC and $2.1 billion for SSI/SSP.
Program Flow. Following eligibility determination, counties would have the flexibility to meet temporary emergency needs of families (such as rent, car repairs, relocation expenses, or referrals to other assistance programs) for the purpose of diverting a family from aid. (Under current law, qualified applicants are eligible for Medi-Cal and child care benefits if they choose not to go on AFDC/TANF.) Families that go on aid would proceed to job club/job search for approximately three weeks. Adults unable to find employment would be assessed for employment readiness. An individual participation plan would be developed, which specifies how the 32- or 35-hour participation requirement would be met. After six months on aid, recipients who are not employed would have their grants reduced by 15 percent. Recipients would continue to receive the reduced grant for six months (eighteen months for those on aid prior to January 1, 1998), at which time they will be transferred to the safety net program.
Benefit Levels. Under the Governor's proposal, the maximum monthly grant for a family of three in a high-cost county would be $565; including food stamps, the total benefits would be $826 per month (76 percent of poverty). Total benefits would be reduced by $60 after six months and an additional $64 under the safety net. The full safety net benefit--if counties do not reduce benefits to fund administrative costs--would be approximately 64 percent of the poverty level.
Support Services. To the extent funding is available, child care, transportation and other work expenses would be provided to recipients to complete their participation plan. The child care "disregard" (which accounts for child care costs in the grant structure) would be replaced by a system of direct child care payments.
Program Administration. The state would set basic program elements such as eligibility, time limits, and maximum grant levels. Counties would administer the program pursuant to county plans that are subject to state review and approval. Counties would have the option of contracting with private firms for administration of the program but would remain responsible for their share of costs. Beginning in 1998-99, counties would receive funds for administration and employment/training services in the form of a block grant, if they satisfy unspecified maintenance-of-effort (MOE) requirements. Counties would continue to pay their share (5 percent) of non-federal costs for grants. Counties would be able to share in up to 25 percent of program savings. If the federal government assesses a penalty for noncompliance with federal requirements, the penalties would be passed on proportionally to counties that failed to meet the requirement, unless the state concludes that the failure was beyond the counties' control.
Entitlement Status. The administration indicates that the individual entitlement to benefits would be eliminated; however, it is not clear whether any provision would be made to appropriate additional funds in years when the caseload is higher than budgeted.
Time Limits. Time limits are an important component in both CalTAP and our Welfare-to-Work approach. In both cases, reaching the time limits result in benefit reductions rather than termination of aid; however the time limits are much shorter in the Governor's proposal.
Time limits will result in savings to the government, but these savings may be the result of actions that increase family income (that is, from obtaining employment) or decrease family income (that is, grant reductions from reaching the time limits). A consideration of time limits therefore involves balancing the potential advantages of the behavioral effects of these limits in bringing about increased employment against the potential adverse effects of reducing grants when recipients do not obtain jobs. In this respect, it is important to consider how many recipients might be subject to these time limits. According to the department's October 1995 AFDC Characteristics Survey, about 85 percent of recipients were on aid for more than one year, 70 percent for more than two years, and 35 percent for more than five years. Other studies have estimated that over 40 percent of persons receiving AFDC will eventually accumulate five years on aid.
We note that these estimates assume a continuation of the AFDC program as it has operated in past years. It is important to keep in mind that welfare reform interventions--such as the GAIN program, community service jobs, and the time limits themselves--are designed with the intent of increasing the number of participants who obtain employment, thereby reducing the number of recipients who actually reach the time limit.
While several states are beginning to implement various forms of time-limited aid, no evaluations have been completed on such provisions. An interim report on Florida's time-limited welfare program should be available soon, but the findings will be preliminary.
After adjusting for the number of families that would be exempt from the time limits, we estimate that about 600,000 families potentially could be affected by a one-year limit, 500,000 by a two-year limit, and 250,000 by a five-year limit. The number that would actually reach these limits in the future depends on the success of the various welfare reform provisions in increasing the level of employment among recipients.
Several factors affect a recipient's prospects of obtaining a job. One of these is job availability. By the end of 1999, approximately 600,000 cases could reach their CalTAP time limit. We estimate that the California economy will create approximately 330,000 new jobs per year for the next three years. Based on the current pattern of job creation, less than half of these jobs (each year) would be at a skill level where most welfare recipients could realistically expect to compete. These data suggest that there will be considerable competition for these and other job openings, and that we cannot expect all existing welfare recipients to obtain jobs without some job loss on the part of others (in other words, an increase in the unemployment rate).
Safety Net. Families reaching the time limit would be eligible for the state-funded, county-administered safety net. Under CalTAP, safety net benefits must be paid in the form of vouchers or other types of non-cash assistance. The state would provide funding equivalent to a child-only case, but would not provide any additional funding for administration. Pursuant to their state-approved CalTAP plan, counties would have the flexibility to set (1) benefit levels lower than the equivalent of the child-only case, (2) income disregards (for working recipients), and (3) participation requirements. We note that by not providing separate funding for administration of the safety net, counties would have a fiscal incentive to reduce the level of aid to recipients in order to cover their administrative costs.
Eliminating cash benefits in the safety net program has two potential advantages. First, it makes the benefit package less attractive to recipients, thus increasing their incentive to work. Second, in cases where parents may have difficulty managing money, it may help to assure that most of the benefit will go toward meeting basic needs such as food and housing. We note, however, that providing benefits in voucher form results in additional administrative costs; and, as noted above, the counties would have a fiscal incentive to further reduce benefits in order to cover these additional administrative costs. We also note that inability to obtain employment within one or two years cannot be equated with inability to manage aid in the form of cash. We believe that most AFDC/TANF recipients are probably capable of handling cash.
The voucher proposal may stem from a concern that adult recipients with substance abuse or other personal problems may not use the grant to benefit their children. In this respect, we note that an alternative approach would be to give case managers the flexibility to provide aid in the form of vouchers in those cases where they believe it is in the best interest of the children.
Modified Grant Structure. The existing grant structure contains the following work incentives: (1) the $30 and one-third disregard, whereby about one-third of work earnings are disregarded in determining the amount of a recipient's income that offsets his or her grant; and (2) the "fill-the-gap" grant structure, whereby recipients can earn the "gap" between their grant ($565, family of three) and the need standard ($735, family of three) without having their grant reduced. The Governor proposes to eliminate the current system of disregards and replace them with a single "work incentive." Working recipients would keep 54 percent of every dollar that they earn until they reach an income of $996 per month (full time work at the minimum wage). Earnings above $996 would reduce the grant payment on a dollar for dollar basis.
Compared to current law, the CalTAP provision results in lower levels of family income (grant plus earnings) for working recipients and others with income, regardless of the amount of income. As shown in Figure 8, combined grant and earnings under current law are always greater than under CalTAP. Thus, for welfare recipients who are not working, the CalTAP reduces the work incentive in comparison to current law. However, for recipients who are earning over about $400 per month, the CalTAP provides a greater incentive to earn more money because recipients retain 54 percent of additional earnings, compared to retaining about 33 percent under current law. Thus, for the policy objective of moving recipients into the work force, current law provides the stronger work incentive. However, if the policy objective is to motivate those with half-time earnings to increase hours toward full-time work, then CalTAP has the stronger work incentive for this segment of the caseload. We note, however, that in the latest survey (October 1995), only about 13 percent of AFDC cases reported earned income, and this includes full-time as well as part-time workers.
Services and Participation Requirements. As noted above, CalTAP would require able-bodied adults to participate for 32 hours per week (35 hours for one member of a two-parent family) in some combination of work and/or county-approved education and training activities.
County administrators would determine how this 32-hour or 35-hour requirement breaks down between the number of hours that recipients would be required to work, and the hours required in employment preparation activities. We note that the administration has proposed no guidelines for determining the mix of required work and employment preparation activity in meeting the work component of the requirement. Consequently, counties may vary considerably in how they determine this requirement. The combination of a fixed 32-hour or 35-hour participation requirement and a block grant allocation for services could lead to a situation where the work requirement is primarily a function of the amount of funds a county receives for services, rather than a function of an assessment of the recipient's prospects of obtaining and keeping a job. This could have significant consequences for the recipients, who will be sanctioned for not meeting the 32-hour (or 35-hour) requirement.
In this respect we note that the Governor's budget includes about $140 million in additional funds for employment preparation services in 1997-98, and earmarks $53 million for education of welfare recipients in the community colleges. This would not be sufficient to provide 32 hours of job search and training activities to all eligible recipients, if such activities were provided at a service level comparable to the GAIN program.
Paternity Establishment Provisions. For cases coming on aid after January 1, 1998, paternity must be established before the custodial parent is included in the household for purposes of calculating the family's grant. For a family consisting of a mother and one child, this represents a sanction of approximately 39 percent. For larger families, the sanction is between 10 and 20 percent.
The Department of Social Services estimates that each month 8,800 CalTAP applicants will need paternity establishment and will become subject to this sanction. The department assumes that paternity will be established in an average of seven months in 95 percent of the cases. For the remaining 5 percent, the department assumes that paternity will never be established. The department does not know the comparable rate of paternity establishment currently, but in our judgment 95 percent would be a very significant increase.
We make the following observations regarding this proposal:
In summary, an assessment of this proposal will involve balancing the benefits of budgetary savings against the adverse effects of the sanctions on families, including those that are fully cooperating with paternity establishment requirements.
As an alternative to this policy, the Legislature could provide case managers with greater authority to make sanctions in cases where they have reason to conclude that the custodial parent is not cooperating.
Program Administration. As noted previously, counties would benefit by sharing in program savings, as measured in terms of reduced expenditures. We note that this mechanism rewards counties equally from savings that result from sanctions or time limited grant reductions and savings that result from increased employment.
In our welfare-to-work approach, the GA program would be consolidated with the AFDC/TANF program. With respect to program requirements, however, adults without children would be subject to a different set of provisions than would families with children. (Please see Part V of this volume for more detail.)
The budget estimates that about 87,000 noncitizens will not attain citizenship status and will therefore lose SSI/SSP benefits. This consists of about 49,000 aged persons, and 38,000 disabled persons. These individuals would be eligible for county-funded General Assistance (GA) benefits (averaging about $215 per month/per person, compared to $640 per person in SSI/SSP benefits). The budget also proposes legislation to eliminate the mandate that counties provide GA benefits.
Although no longer eligible for SSI/SSP benefits, legal noncitizens residing in the state as of August 22, 1996, would continue to be eligible for full-scope Medi-Cal services. Noncitizens arriving after that date would be eligible only for emergency services.
The Governor's budget does not propose legislation to restore IHSS eligibility for these noncitizens, thereby assuming General Fund savings of $112,000 in 1996-97 and $23.8 million in 1997-98, and county savings of $61,000 in 1996-97 and $12.1 million in 1997-98. This is based on an estimate of about 11,800 noncitizens losing benefits.
For these reasons, we recommend the enactment of legislation to restore IHSS eligibility for needy noncitizens. This will result in a General Fund cost of $23.8 million in 1997-98.
Eliminate Prenatal Care for Illegal Immigrant Women. The budget reflects the adoption, effective July 1, 1997, of proposed regulations which would eliminate the existing "state-only" program that provides prenatal care for illegal immigrant women. The proposed regulations are based on the federal welfare reform law's prohibition of most types of services to illegal immigrants, absent adoption of new state laws authorizing such services. The budget estimates General Fund savings of $79.9 million in 1997-98 from eliminating this program.
The major 1997-98 budget proposals include:
Figure 9 (see next page) illustrates how the budget would allocate projected growth in the Proposition 98 funds in 1997-98.
We have identified several issues raised by the budget proposal.
Implementation of Class Size Reduction. The Legislature and the Governor created the Class Size Reduction (CSR) program as part of the 1996-97 Budget Act. The program is intended to increase educational achievement by reducing statewide average class size from 28.6 students to no more than 20 students in up to three grades. The Governor's budget proposes expansion of the CSR program to four grades in 1997-98.
Our survey of district CSR implementation showed three major problems with the current program. First, districts are maintaining CSR classes at about 19 students to one teacher in order to be sure of remaining under the 20 students per teacher cap. This increases per-pupil CSR costs by as much as 21 percent, or more than $100 per student.
Districts also report that the approximately 18,400 teachers hired for CSR have less teaching experience, fewer qualifications, and a lower skill level, on average, than teachers hired in previous years. Finally, districts are running out of low-cost options for new facilities, which means that expanding CSR to more classes and grades next year will be more expensive on a per-classroom basis.
Based on these results, we make the following recommendations:
Addressing the K-12 School Maintenance Problem. One of the most common complaints about the state's educational system--from parents and school employees alike--is the physical disrepair of school facilities. These situations result from serious ongoing maintenance problems in California schools. There is also a growing body of educational research that suggests there is a positive relationship between student achievement and the condition of the facility in which they are schooled.
Inadequate funding for maintenance has long been a problem for K-12 school districts, resulting in huge backlogs of deferred maintenance. This backlog is a symptom of a failure of local school districts to adequately fund ongoing maintenance. At the state level, the current School Deferred Maintenance Program and state funding for school modernization may actually create a fiscal incentive for districts to defer projects rather than deal with them in a more timely manner.
We recommend a long-term approach to eliminate the backlog of projects and to fund ongoing maintenance at an adequate level.
Reforming the K-12 Fiscal System. In our review of the 1997-98 K-12 budget, we also examined the overall fiscal structure that the state uses to finance schools. Based on this review, we think the Legislature should alter the structure to make the programs less complicated and focus districts on student achievement rather than state rules. Our recommendations fall into two areas:
The Student Aid Commission provides financial aid to students through a variety of grant and loan programs. The Cal Grant program is the major state-funded aid program.
The UC and the CSU. The budget proposes General Fund support for the UC and the CSU of $4.1 billion in 1997-98, an increase of about $239 million, or 6.2 percent, compared with estimated current-year budgets. Budgeted enrollment levels at the UC and the CSU will increase slightly in 1996-97--by 1,500 full-time equivalent (FTE) students at the UC and 2,500 FTE students at the CSU. The proposed General Fund increase is sufficient to eliminate the need for undergraduate student fee increases proposed by both segments for 1997-98. As a result, the budget assumes no undergraduate student fee increase in the budget year.
Of the $239 million increase for the UC and the CSU, the budget proposes to allocate the funds for employee compensation ($155 million), debt service costs on previously authorized lease-payment bonds ($15 million), enrollment growth ($25 million), and price increases ($15 million). Both segments also receive funds for additional facility maintenance ($8.5 million at CSU and $7.5 million at UC).
Community Colleges. The budget proposes $1.8 billion in General Fund local assistance for the community colleges in 1997-98. This entire amount counts towards the state's K-14 minimum funding guarantee under Proposition 98. The 1997-98 General Fund request represents an increase of $142 million, or 8.7 percent, from the current year. The combined increase proposed from the General Fund, local property tax revenues, lottery funds, and net student fee revenues (after accounting for financial aid) is $192 million, which represents a 5.8 percent increase in combined funding. This figure understates actual budget-year growth, however, because 1996-97 expenditures include $35 million in one-time spending. Thus, actual growth in the CCC base budget is $227 million, or 6.9 percent. Like the UC and the CSU, the budget assumes no student fee increase in the budget year.
In 1997-98, the budget provides $80 million for a 2.8 percent COLA for general-purpose spending, $34 million for statutory enrollment growth, $33 million for "extra" enrollment growth, $57 million for debt service costs on previously authorized lease-payment bonds, and $53 million for special services to students on welfare.
In 1996-97, as a result of an increase in the Proposition 98 guarantee in the current year, the budget provides a total of $59 million in one-time funding for a block grant for instructional equipment, library materials, deferred maintenance, and education technology ($53 million), and loans to child care providers to expand on-campus facilities ($6 million).
Student Aid Commission. The budget proposes a General Fund increase of $30.3 million for the Student Aid Commission in 1997-98. The majority of this increase, $10 million, supports the administration's proposal to increase the maximum annual Cal Grant award for recipients who choose to attend nonpublic schools from $7,164 to about $9,105. The annual cost of this proposal would be about $30 million by 1999-00. The budget also includes $15.8 million in second-year costs of a $20 million increase in the Cal Grant program approved by the Legislature in the 1996-97 Budget Act.
The CCC's maintenance problems have been easier to address because of the large amount of funds available for K-14 education under Proposition 98. The 1996-97 Budget Act increased ongoing maintenance/repair funding for the CCC and provided $60 million of one-time Proposition 98 monies to address the CCC's deferred maintenance backlog. The 1997-98 Governor's Budget proposes to continue the augmented level of $39 million ongoing maintenance/repair funding--with local matches of up to $39 million--and provides additional one-time monies for the deferred backlog as part of a proposed $53 million block grant. In view of the above, we believe the Legislature has placed the CCC on a sound fiscal footing regarding maintenance/repair needs.
Addressing the needs of the four-year universities has proved more difficult. In response to the issues we raised in last year's Analysis, CSU and UC committed to increase annual maintenance/repair expenditures by $9.6 million and $7.5 million, respectively. To match these efforts, the Legislature added $7.5 million to each segment from the General Fund. These actions were seen as the first step in a multiyear effort to stop further growth of--and eventually eliminate--maintenance/repair backlogs. The Governor, however, vetoed the legislative augmentations, stating that the segments should address their maintenance needs within the funding levels he has committed to provide under his "compact" with them.
The 1997-98 Governor's Budget proposes to increase maintenance spending by $8.5 million at CSU and $7.5 million at UC. While this commitment of additional resources to maintain the state's university facilities is commendable, more needs to be done. We think the Legislature should follow its previous plan and augment the CSU and UC budgets for maintenance for the following reasons:
Funds Not Needed for "Extra" Growth at Community Colleges Should Help Meet K-12 Needs. As discussed above, the budget proposes Proposition 98 funding for community colleges to increase by $227 million in 1997-98. We agree with the Governor's 1997-98 spending proposals for the colleges in most program areas. We recommend, however, the following changes:
Underlying our recommendation is the assumption that there should be no fixed proportion of Proposition 98 funds going to community colleges. Instead, we think the Legislature should weigh whether the funds would be better used to support additional growth in the community colleges or meet high priority needs in K-12 education. For 1997-98, we think these funds should be used to meet high priority K-12 needs.
Increased Funding for Cal Grants. The budget proposes $10 million to increase the maximum Cal Grant award for students attending nonpublic schools. We recommend approval. We also recommend transferring $19.8 million in General Fund support from the University of California to the Cal Grant program. The Legislature intended that these funds be spent for financial aid. The transfer would give recipients greater choice among all colleges and universities in the state and ensure the funds are used to provide financial aid.
Currently, the department operates 32 institutions, 52 community correctional centers, and 38 fire and conservation camps. The Community Correctional Program includes parole supervision, operation of community correctional centers and facilities, outpatient psychiatric services for parolees, and narcotic testing.
The budget's total spending figures assume that the state will receive $299 million in federal funds in 1997-98 to offset the costs of incarcerating, and supervising on parole, illegal immigrant adults and juveniles who have been convicted of a felony in California.
Given the long-term implications of the CDC's projected growth on the state's budget, the Legislature will need to consider various options for addressing these increases. There are two basic approaches: (1) reduce the costs of operating the state's prison system and (2) reduce the prison population caseloads themselves.
We have offered a number of examples of both approaches, both in the Analysis and in previous publications. For example, this year we recommend that the Legislature transfer a portion of the Prison Industry Authority's $26 million-cash surplus to the General Fund. In addition, we recommend that the Legislature consider expanding substance abuse treatment services to inmates at an existing prison, because the existing treatment programs have been shown to be successful in reducing the number of inmates who, after release from custody, commit new offenses and return to prison. In previous publications, we have offered a number of alternatives for legislative consideration to control inmate and parole population growth.
Whatever actions the Legislature decides to take, it will be important to closely monitor the changes in the prison population. As indicated earlier, although the population is projected to continue to grow, the rate of growth has slowed. In the Analysis, we offer several possible explanations for why this is so. In addition, we note that, as of mid-January, the population was almost 2,000 inmates below the current projection for that period.
The Legislature could also require that bridge users fund the cost of retrofit through higher tolls. Generating the entire $1.4 billion from tolls would require a $1 toll surcharge for about 14 years, and would also likely delay construction of other bridge improvements that are already scheduled to use toll funds. The Legislature could also use a combination of SHA and toll revenue.
Watershed Initiative. The budget proposes $3.8 million to develop and implement plans to protect species, restore habitat, and enhance water quality on a watershed-wide basis.
Coastal Initiative. The budget proposes $17.1 million to improve coastal resources, by enhancing coastal access, restoring coastal wetlands and beaches (including establishing wetlands mitigation "banks"), assisting local governments with coastal planning, and continuing the development of statewide water quality plans.
Natural Community Conservation Planning. The budget proposes $16 million for land acquisition and implementation of local plans to promote the management and conservation of multiple species and natural communities. This is an expansion of the Natural Community Conservation Planning (NCCP) Program, established by Chapter 765, Statutes of 1991 (AB 2172, Kelley).
Based on our review, we conclude that the initiatives do not measure up to these criteria.
Budget Bill Proposal. The $1.2 billion in the budget bill consists of: (1) $678 million from bond proceeds--general obligation ($560 million) and lease-payment ($118 million), (2) $136 million general Fund, (3) $58 million special funds, and (4) $307 million federal funds. (The budget request includes an authorization for another $225 million in lease-payments bonds that the administration assumes will be offset by proposed appropriations of future federal funds.) The budget bill amount represents a 69 percent increase compared to current-year appropriations. The majority of this increase is in the area of Youth and Adult Corrections. Nearly 90 percent of the proposal in the budget is for prisons, higher education and resources. The future cost to complete all projects in the budget bill totals $1.3 billion.
Bond Debt. We estimate that the state's debt payment on bonds will be $2.5 billion in 1997-98. This is an increase of $114 million, or 4.8 percent, over current-year debt service costs. This amount includes payments on general obligation bonds ($1.95 billion) and lease-payment bonds ($527 million). Debt service on lease-payment bonds is becoming a greater portion of total debt, increasing from 13 percent in 1990-91 to 21 percent in 1997-98.
The debt service ratio (debt payments as a percent of General Fund revenue) is estimated to be 4.9 percent in the current year. We estimate that, as currently authorized bonds are sold, this ratio will increase to 5.2 percent in 1999-00 and decline thereafter if no new bonds are authorized. We estimate that if the Governor's proposal for lease-payment bonds and general obligation bonds is approved, the debt ratio would increase by about 0.4 percent in future years.
Lacking such a plan the Legislature is again presented with a series of funding proposals in 1997-98 absent any statewide context of needs and priorities or a financing plan to complete all proposed projects. Furthermore, the administration has not presented a plan for financing hundreds of million of dollars in costs to complete projects that have been previously approved and are not included in the budget for 1997-98.
The state has an immense inventory of physical facilities. As an example the three segments of higher education alone have about 120 million square feet of building space and extensive utility systems. Other areas such as prisons, state hospitals, parks and office facilities also have large amounts of building space and utility systems. These facilities are aging and will need major renovations to upgrade. Thus, even without additional demand for new facilities to meet growth in an area, the state will have to commit a portion of its annual revenue--on a pay-as-you-go basis and/or through debt financing--for capital improvements to a wide variety of state facilities.
Until a comprehensive long-term capital outlay plan is developed, the state will continue to fund individual projects without benefit of knowing the overall statewide priorities and will continue to initiate projects for which there are no funds to complete. This approach does not get the state the "biggest-bang-for-the-buck" in addressing state facilities and as a result does not serve well the citizens of California.
Specific Capital Outlay Issues Facing the Legislature. There are several areas within the state's capital outlay program that merit consideration in the near-term. The following is a list of some of the major areas that fit this category: