Press Release:
Highlights of the 1997-98 Analysis and P
& I
State Fiscal Picture
Budget Summary
California's Fiscal Outlook Remains Generally Positive
- The current year will end with a modest General Fund budgetary reserve, the second year in a
row.
- Revenue growth in 1997-98 will be sufficient to fund moderate expenditure increases and
provide a one-half billion dollar General Fund reserve.
- However, the state will not be able to fund all of the requirements of current law. Thus,
budgetary trade-offs will be necessary.
Legislature Faces Major Challenges in Two Areas
- First, how best to allocate $1.9 billion in new Proposition 98 funds, including the mix
between state-determined versus locally determined purposes.
- Second, developing a state welfare reform program which moves program recipients into the
work force, provides a "safety net" for children, and controls public costs.
LAO's Assessment
- We estimate that adoption of the Governor's budget proposal would result in a General Fund
reserve of $768 million in 1997-98 ($214 million higher than the Governor's estimate).
- Our higher reserve estimate takes into account offsetting factors, including our higher
estimate of revenues, our lower estimate of health and welfare caseloads, and our lower
assumption of state savings that are reliant on federal actions.
Economy and Revenues
Continued Moderate Growth Expected
- Economic growth in California surpassed the nation in 1996, and this trend is projected to
continue through the rest of the decade.
- The state's economic expansion is broad based, with most industries and regions now
expanding.
- Consistent with the moderate growth projected for the economy, the budget forecasts that
General Fund revenues will increase by slightly over 4.5 percent in both the current and
budget years.
LAO's Assessment
- We also forecast moderate economic and revenues growth.
- However, our revenue forecast is higher by $343 million in the current and budget years
combined, partly reflecting recent cash trends.
- Our higher revenue estimate reflects offsetting factors. We project higher personal income
and sales taxes, but lower corporation taxes.
P & I Highlights
Does the Earned Income Tax Credit Encourage Californians to Work?
- Our review of the federal Earned Income Tax Credit (EITC) indicates that the program
improves work incentives for the very poorest residents of the state, but may create
disincentives for some workers as well.
- A California version of this program would likely have similar consequences, but could also
be structured differently, depending on the Legislature's goals. (P & I, page 169.)
Proposed Corporate Tax Rate Reduction
- The main provision is a 10 percent phased-in corporate tax rate reduction, beginning in 1998.
Combined with last year's 5 percent rate reduction, the proposal would provide a total
corporate rate reduction of 15 percent.
- Revenue effect would be a $90 million loss in 1997-98, increasing to $608 million in 2000-01
after full phase-in.
Benefits Would Be in Proportion to Current Corporate Tax
Liabilities
- About 15 percent of all businesses would see their taxes reduced in any given year. The rest
are not taxed as regular corporations or have no profits.
- Corporations with net income over $1 million would receive most of the benefits because
they pay 80 percent of corporate taxes.
- Because noncorporate businesses (such as partnerships and sole proprietors) pay personal (as
opposed to corporate) income taxes, their marginal tax rates could be as much as 15 percent
above that of corporations under the proposal.
Corporate Tax Environment Would Benefit
- California's relatively high corporate tax rate would be reduced, although its comparative
ranking would not change.
- California's overall corporate tax burden is currently about average, and the proposal would
reduce it modestly. (P & I, page 179.)
Program Highlights
Transportation
- Revenues and expenditures roughly balance out over the seven years (1996-97 through
2002-03) of the current state transportation program. This balance was achieved by adding no
new projects in the 1994 and 1996 transportation programs and by deleting $500 million in
projects from the 1996 program. (Analysis, page A-12.)
- However, $1.35 billion in new bond funds (from Proposition 192) may be consumed by
higher costs for existing programs, rather than being available for new projects. (Analysis,
page A-12.)
- The 1998 State Transportation Improvement Program will present the first opportunity in six
years to schedule a large number of new transportation projects. (Analysis, page A-16.)
- Seismic retrofit of state-owned toll bridges faces a $1.4 billion funding gap, and a funding
solution is needed in 1997-98 for retrofit to proceed. (Analysis, page A-17.)
- We recommend that the Legislature enact a funding solution consisting of a mix of toll bridge
revenues and State Highway Account funds. (Analysis, page A-17.)
- The Motor Vehicle Account will have a deficit in both the current and budget years if
corrective actions are not taken. The budget proposes to reduce expenditures, shift funding to
other sources, and raise $50 million in revenues from unspecified fee increases in the budget
year. Legislation will be needed to accomplish this. (Analysis, pages A-22 to A-25.)
- In 1996, the Legislature enacted legislation authorizing the transfer of intercity rail service
from the Department of Transportation (Caltrans) to regional boards in order to improve this
rail service. (Analysis, page A-44.)
- Implementation of the transfer has been slow because the regional boards have expressed
several concerns, including their liability for train accidents and electrical and mechanical
problems of the trains. (Analysis, page A-44.)
Resources
- The budget proposes three initiatives intended to manage and restore the state's
(1) endangered and threatened species and natural communities, (2) watersheds, and
(3) coastal resources. The initiatives are an effort to move beyond a project-by-project focus
to implement a broader approach to natural resource conservation and management.
- We think that taking a broader approach to resource conservation and management has merit.
However, our review indicates that the Governor's initiatives need (1) better defined
objectives and measures of accomplishment, (2) coordination with existing state programs
and policies, (3) identification of long-term costs and funding sources, and (4) greater
legislative oversight over policy direction. (Analysis, page B-13.)
- Although the budget proposes to spend in 1997-98 all Proposition 204 funds available for the
River Parkway Program ($27 million), the program's goals are not yet defined and criteria to
prioritize funding of projects are lacking. We recommend that (1) $26.3 million requested for
the program's implementation in 1997-98 be deleted and (2) the Legislature direct the
Resources Agency to establish project selection criteria and identify priority projects for
funding in 1998-99. (Analysis,page B-23.)
- We recommend that increased funding requested for the Natural Community Conservation
Planning (NCCP) Program be denied because the policy of the state's funding land acquisition
for the program ought to first be determined statutorily by the Legislature. (Analysis, page
B-50.)
- We conclude that the proposed reductions in funding for fire protection and vegetation
management by the California Department of Forestry and Fire Protection are likely to result
in increased General Fund expenditures for emergency fire suppression and inmate custody.
(Analysis, page B-46.)
- Given that the Railroad Accident Prevention and Immediate Deployment (RAPID) program
helps to make state and local response to hazardous spills from surface transportation
accidents more coordinated and effective, the Legislature should reinstate the RAPID fee--at
a reduced level--in order to continue to fund the program. (Analysis, page B-85.)
- Funding needs for direct site cleanup at "orphan" hazardous waste sites are likely to increase
in future years. There are a number of broad-based fee options that the Legislature may wish
to consider in order to supplement funding from the General Fund for this program.
(Analysis,page B-87.)
Health & Social Services
- The Governor's California Temporary Assistance Program (Cal-TAP) proposal would make
major changes in the Aid to Families with Dependent Children/Temporary Assistance for
Needy Families (AFDC/TANF) program, effective January 1, 1998. Among other changes,
the proposal would reduce grants; limit cash aid to one and two years; and modify the grant
structure by eliminating the existing disregards and replacing them with a single "work
incentive."
- The time limits would increase the financial incentive for families to work and would result in
state and county savings; however, it would result in a significant loss of income for needy
families if the parents do not obtain employment. Compared to current law, the modification
of the grant structure would reduce the work incentive for recipients who are not working, but
increase the incentive for those who are working part time.
- After adjusting for exemptions to the time limit, we estimate that by the end of 1999
approximately 600,000 families would reach their Cal-TAP time limit if they do not go off of
aid prior to that time. After reaching the time limit, they would go on to a "safety net"
program where the benefits would be reduced significantly and converted from cash to
noncash forms of assistance. (Analysis, page C-84.)
- The Governor proposes legislation to eliminate the requirement that counties provide General
Assistance to indigent persons who are ineligible for other welfare programs.
- We note that if some counties reduce or eliminate these benefits, it could lead to migration of
recipients to other counties which, in turn, could increase the financial incentive for these
counties to reduce their benefit levels. (Analysis, page C-95.)
- We estimate that the AFDC/TANF caseload will decrease by 4.2 percent in the current year
and 2.1 percent in the budget year, instead of 1.9 percent and 0.9 percent, respectively, as
estimated by the Governor's budget. This would result in General Fund savings of
$117 million in 1996-97 and $161 million in 1997-98, compared to the budget.
- Similarly, we project that the AFDC-related caseload in the Medi-Cal program will decrease
by 3.5 percent in the current year and 2.2 percent in the budget year; whereas the Governor's
budget estimates 1.1 percent and 0.2 percent, respectively. This would result in General Fund
savings of $38 million in 1996-97 and $71 million in 1997-98, compared to the budget.
(Analysis, pages C-35.)
- The budget includes $153 million in General Fund savings due to noncitizens losing their
eligibility for Supplemental Security Income/State Supplementary Program (SSI/SSP) as a
result of federal welfare reform. This assumes that approximately two-thirds of the
noncitizens currently receiving benefits will become citizens prior to September 1997 and
therefore retain eligibility. We note that there is considerable uncertainty regarding the
number who will become citizens.
- We identify some alternative approaches for the Legislature's consideration: continuing full
SSI/SSP benefits using state funds; providing SSP benefits (the state-funded portion of
SSI/SSP) to noncitizens; and creating programs that facilitate the citizenship process.
(Analysis, page C-106.)
- The federal welfare reform legislation of 1996 made most noncitizens ineligible for SSI/SSP
benefits. One of the indirect effects of the act is that noncitizens who lose SSI/SSP eligibility
will no longer be eligible for the In-Home Supportive Services (IHSS) Program benefits
because state law links the two programs.
- The Governor's budget assumes 11,800 noncitizens will lose IHSS benefits, resulting in a
General Fund savings of $112,000 in 1996-97 and $23.8 million in 1997-98.
- We recommend legislation to provide for the continuation of IHSS eligibility for these
noncitizens. We believe that this would be consistent with the intent and prior actions of the
Legislature. In addition, we note that the IHSS Program is designed to provide assistance to
persons who are unable to remain in their homes without such assistance, and therefore
should result in some long-term savings by preventing institutionalized care. (Analysis, page
C-116.)
- The budget includes $484 million in General Fund savings in health and social services
programs that require federal legislation: (1) grant reductions in the SSI/SSP program
($268 million in net savings) that are dependent on elimination of the maintenance-of-effort
(MOE) requirement, and (2) the assumption of federal funds to offset state costs of providing
emergency Medi-Cal services to illegal immigrants ($216 million savings).
- We note that federal legislation has not been introduced to eliminate the SSI/SSP MOE.
Legislation has been enacted to authorize, but not appropriate, federal funds for the Medi-Cal
emergency services. To the extent the required legislation is not forthcoming, there will be a
budgetary hole in these programs. (P&I, page 18 and Analysis, page C-13.)
Judiciary & Criminal Justice
- The California Department of Corrections (CDC) projects that the prison population will
increase about 6.4 percent annually, reaching 204,000 inmates by June 2002.
- Although the growth continues to be significant, it is substantially less than projected in
recent forecasts.
- A principal reason for the change is the slowing of new admissions to prison from court,
which appears to be closely linked to the drop in crime. (Analysis, pages D-62 to D-65.)
- The CDC has been plagued by serious allegations of misconduct by some of its correctional
personnel. Some of these cases have led to court judgments and settlements which have
resulted in collective state costs of millions of dollars.
- The CDC investigates allegations of staff misconduct through its internal affairs system.
Based on our review of that system, we conclude that it is fragmented, duplicative, and
ineffective. We recommend a number of steps to improve the process. (Analysis, page D-13.)
- The Youth Authority's ward and parole populations are expected to remain stable over the
next several years.
- Recently, counties began paying higher fees for committing less serious offenders to the
Youth Authority. These fee increases provide counties with an incentive to treat these youth
in the local communities, thereby resulting in lower ward populations. (Analysis, pages D-113
to D-119.)
- A blue-ribbon task force reviewed the state of juvenile crime and the juvenile justice system
and made many recommendations for reform. We recommend that the Legislature enact many
of the recommendations and modify others. (Analysis, page D-24.)
- The Governor's proposal to consolidate funding responsibility for support of the trial courts at
the state level has merit.
- However, because county costs will be capped with the state picking up all increased costs in
the future, the Legislature will need to ensure that there are adequate cost control and
performance measures in place. (Analysis, page D-141.)
- We recommend the enactment of legislation requiring law enforcement agencies to pay for
the costs of services provided by the Department of Justice's crime laboratories.
- Adoption of this recommendation would result in aligning local government's funding
responsibilities with its programmatic responsibilities for investigation and prosecution of
criminal cases. (Analysis, page D-174.)
- More than half of the inmates on death row, who have an automatic appeal of their sentence
before the California Supreme Court, are awaiting appointment of counsel. It typically takes
three to four years before counsel is appointed in such cases.
- Although the Legislature and Governor have taken steps to reduce the backlog of inmates on
death row without legal representation, given the size of the backlog, it is unlikely to be
reduced easily or in the near-term. We review the issues and offer some options for
addressing the backlog. (Analysis, page D-48.)
K-12 Education
- The Governor's budget proposes to direct all new Proposition 98 funding in 1997-98 to
support new or expanded K-12 categorical programs. No budget-year increase in general
purpose funding is proposed.
- After providing adequate funding to support continuing program costs and other financial
commitments, we recommend the Legislature direct about half of any available funds for
state-directed purposes and use the remaining funds to increase local general purpose funding.
(Analysis, page E-17.)
Revise K-12 Funding Structure to Reduce Complexity and Focus
Districts on Student Achievement
- Simplify and Equalize Revenue Limits. Revenue limits, which provide general purpose
funding to districts, are overly complex and cumbersome to administer. We recommend
simplifying the system, redesigning the cost-of-living adjustment so that it works to equalize
revenue limits, and phasing-out payments of "basic aid" to 56 districts over a three-year
period. (Analysis, page E-59.)
- Consolidate Categorical Programs. Our current system of categorical programs creates many
restrictions over the use of funds but does not require any real accountability over increasing
student achievement. We recommend consolidating 21 current programs into four block
grants. We also recommend establishing a program of evaluation that would begin assessing
the impact of local categorical program strategies. (Analysis,page E-68.)
- A survey of 150 districts showed three major problems with the current program, including
(1) the inflexibility of the 20 students to one teacher limit creates substantially higher costs
and other problems for districts, (2) teachers hired for the program are less qualified than
teachers hired in previous years, and (3) districts appear to be running out of lower-cost
options for class size facilities.
- Our recommendations include (1) providing greater district flexibility over the use of teachers
funded under the program, (2) delaying implementation of a fourth grade due to shortages of
qualified teachers and facilities, and (3) approving the per-pupil level of class size funding
proposed in the budget. (Analysis, page E-35.)
- District deferred maintenance needs totaled about $2.7 billion in 1995-96. To address this
problem, we recommend the state commit $2 billion in new state funds over ten years to help
districts reduce or eliminate their current backlog.
- In return, districts must commit to increasing ongoing maintenance over three years to a level
that ensures that districts are no longer deferring needed maintenance. Districts would be
eligible for a portion of the $2 billion in deferred maintenance funds only if a commitment to
adequate maintenance is made. (Analysis, page E-82.)
Higher Education
Significant Budget-Year Increases for UC and CSU
- The budget proposes an increase of $126 million, or 6.1 percent, for the University of
California (UC) and an increase of $113 million, or 6.4 percent, for the California State
University (CSU).
- We recommend net budget-year reductions of $28.8 million in UC's funding--of which
$19.8 million would be redirected to the Student Aid Commission--and $29.3 million in
CSU's funding. (Analysis, pages F-19 and F-27.)
- While we agree with the Governor's 1997-98 spending proposals for the colleges in most
program areas, we recommend a reduction of $29.3 million in funding for "extraordinary"
enrollment growth to conform funding with the underlying change in the state's college-age
population.
- We further recommend that, with these savings, the state: (1) provide $8 million of
equalization funds to address historic inter-district funding disparities and (2) redirect the net
savings of $21.3 million to address pressing needs in K-12 programs. (Analysis, page F-35.)
- The UC and CSU have growing backlogs of deferred facility maintenance, a major problem
that is not adequately addressed by the Governor's budget.
- We recommend a $26 million augmentation as part of a comprehensive approach to the
systems' maintenance problems--deferred and ongoing--by initiating a state-segment
partnership to increase funding for ongoing maintenance and eliminate deferred maintenance
backlogs.
- Our recommended approach is essentially the same adopted by the Legislature in last year's
budget, but vetoed by the Governor. (Analysis,page F-15.)
- The budget proposes $10 million to increase the maximum Cal Grant award level for
recipients who attend private colleges and universities. We recommend approval of this
increase.
- In addition, we recommend transferring $19.8 million in financial aid from the UC to the Cal
Grant program for additional awards because the transfer would (1) allow recipients greater
choice among colleges and universities and (2) ensure the funds would be used for financial
aid. (Analysis, page F-24.)
General Government
- Because the Department of Information Technology (DOIT) was established in 1995, it is too
early to determine conclusively how well the department is performing. However, its
performance to date in meeting its statutory responsibilities has been mixed. (Analysis, page
G-66.)
- The Department of General Services and DOIT have proposed the divestiture of the state's
telecommunications operations.
- We raise several concerns about the administration's proposal. Given the dependence of state
operations on telecommunications, it is essential that the proposal be on a sound footing.
(Analysis, page G-117.)
- The state will face a significant challenge to modify its computer programs to accommodate
the year 2000 change, because most programs were written to accommodate only years
beginning with "19."
- The statewide costs of conversion are unknown, but will likely exceed $50 million.
(Analysis,page G-145.)
- The ability of the Office of Emergency Services (OES) to carry out its disaster recovery and
hazard mitigation responsibilities continues to be hampered by internal shortcomings.
- The Legislature should consider whether these functions ought to be transferred to another
state agency. (Analysis, page G-91.)
- The Citizen's Option For Public Safety (COPS) program is not an ideal structure for
furthering state public safety objectives, or for providing local fiscal relief.
- We recommend that the Legislature use the proposed $100 million (General Fund) of COPS
funds to (1) augment spending for other state-local public safety programs or (2) provide
general purpose fiscal relief to local governments. (Analysis, page G-173.)
- The Lottery Commission budget for administration of the lottery is over $300 million
annually. The commission spends these funds without external review by either the
administration or the Legislature.
- Recently the commission's spending on administration has been about the statutory maximum
of 16 percent of lottery revenues. If the commission spends less than 16 percent of revenues,
the difference is available for education.
- Given recent concerns about some of the commission's administrative expenditures and their
impact on education funding, the Legislature should amend the Lottery Act to provide
accountability through legislative and executive branch oversight. (Analysis, page G-27.)
- The Governor's budget includes $18.9 million and 145 positions for the Board of Equalization
and the Franchise Tax Board. The augmentations are, for the most part, justified on the basis
of potential revenue gains or losses.
- The Legislature does not have sufficient information to validate the tax agencies' contention
that without the augmentations there will be an effect on state revenues. (Analysis, page
G-11.)
- The budget proposes $939,000 to establish foreign offices in Shanghai, China; Seoul, South
Korea; and Sao Paulo, Brazil.
- Establishing foreign offices raises significant policy issues. We recommend that the
Legislature delete the budget request and consider the need for foreign offices in legislation
separate from the budget. (Analysis, page G-131.)
Capital Outlay
- The administration has not identified funding sources for $800 million in future costs of
projects proposed in the budget.
- The Legislature should not approve any capital outlay project unless there is a specific plan
for funding the future completion costs.
- The Legislature also should consider a multipurpose state facilities bond act for the June 1998
ballot in order to finance the state's highest priority capital outlay needs. (Analysis, page
H-15.)
- The administration has presented no plan to fund the nearly $1.4 billion in costs to complete
proposed and previously approved higher education projects.
- The Legislature should fund only those projects that can be completed using available funds
and defer all other projects until the state has a multiyear capital outlay plan identifying the
state's highest priority needs and financing strategies to complete them. (Analysis, page
H-19.)
- Recent administrative actions have disregarded the scope and cost of projects approved by the
Legislature.
- To maintain appropriate authority over projects, the Legislature should provide funding only
for the preliminary plan phase of all new projects. (Analysis, page H-28.)
- The state could receive several hundred million dollars in federal grants over a five-year
period to build or modify correctional facilities. The administration has requested legislative
authorization in the 1997-98 budget to spend all these funds.
- The Legislature should instead appropriate funds on an annual basis in order to retain
legislative oversight of these expenditures and to allocate the funds based on a yearly
assessment of its priorities for using these monies. (Analysis, page H-32.)
- The Governor's budget includes proposals involving the development of six new state prisons
with a total cost of $1.6 billion.
- Actual inmate population growth continues to be lower than projected. Thus, the need for and
timing of new prison development projects is uncertain. (Analysis, page H-75.)
- The Department of Justice (DOJ) plans to request $45 million over the next two years for
projects to replace six regional crime laboratories which provide most of their services at no
cost to state and local law enforcement agencies.
- The Legislature should instead require user agencies to reimburse the DOJ for the costs of
crime laboratory services. Under a fee-for-service scenario, the workload of the regional
laboratories would diminish as some local agencies choose other providers.
- Rather than embarking on a costly capital outlay program, the DOJ could consolidate
laboratories and close those that are substandard. (Analysis, page H-43.)
- The Legislature should not approve an additional $22.6 million of state funds requested by
University of California (UC) to match federal funds committed to constructing a 2.3 million
gross square foot partial replacement for the UC Los Angeles Center for Health Sciences.
- The UC has justified neither the need for additional state funds nor the scope and cost of this
proposal and related future work at the center. (Analysis, page H-98.)
- The Legislature should not approve the $2.5 million requested by California State University
(CSU) for building and site improvements at the new CSU Stockton Regional Center for
Education and Human Services.
- The CSU has not justified the need for these improvements and any necessary improvements
at the center should be funded from revenues generated by leasing agreements with nonstate
entities. (Analysis, page H-108.)
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