|
Legislative Analyst's Office
The 2003-04 Budget Bill:
|
SummaryThe centerpiece of the administration's spending plan is a "realignment" of 12 percent of state General Fund program obligations. Under this plan, the state would increase taxes by a net of $8.2 billion and shift this funding to counties and courts, along with a commensurate amount of program obligations. Similar to state actions to implement its 1991 realignment plan, the administration does not include the new taxes in its calculation of the minimum spending requirement for K-14 education under Proposition 98. Given the size and diversity of California, we think that realignment of some state programs could improve program outcomes. For this reason, we think realignment merits consideration by the Legislature— regardless of its decisions regarding taxes or education funding. To assist the Legislature in its review, we identify factors for the Legislature to weigh in considering which programs would benefit from realignment. Using these factors, we identify $9.1 billion in programs meriting consideration: $5.1 billion of programs proposed by the administration and $4 billion of programs suggested by our office. Because of complexities associated with realignment, however, we do not think that a full $9.1 billion realignment plan could be "ready to go" by the start of the fiscal year. Instead, some realignment changes would need to be phased in over several years. Given the requirements of the California Constitution and voter-approved measures, enacting realignment will require achieving a broad consensus among many parties. Because realignment plans are difficult to modify over time, we recommend the Legislature take a long-term view in enacting program and funding changes. |
When different levels of government share responsibility for a program, deciding which government should control, pay for, and administer the program is a complex, but critical, task. If these program responsibilities are aligned sensibly, intergovernmental tension is minimized and program managers can focus their efforts on improving program outcomes and finding efficiencies.
The relationship between the State of California and its 58 counties long has been complicated by tension arising from a poor "sorting out" of many program duties. Typically, the state controls a program's rules, but counties administer the program, paying for it with a mixture of state and county funds. Frequently, state and county governments disagree over the efficacy and efficiency of state program requirements, the extent of county administrative discretion, and the allocation of program costs.
The centerpiece of the Governor's budget proposal is a major "realignment" of program duties, similar to the plan enacted by the state in 1991. In short, the Governor's plan raises $8.3 billion in taxes, and shifts $7.9 billion to counties to implement increased program obligations, $300 million to courts for security costs, and $100 million to other funds to compensate for cigarette tax revenue losses. To enable counties to manage their increased fiscal responsibilities, the administration proposes giving them some increased authority over most realigned programs.
Because counties and courts—not the state—would receive the new revenues, the administration indicates that the new revenues are not included in its calculations of the state's Proposition 98 minimum funding guarantee. Thus, the administration counts the $8.2 billion realignment package as part of its "budget solution."
In our opinion, this proposed realignment, like California's 1991 realignment plan, has potential to improve the delivery of services. For this reason, we believe realignment merits consideration regardless of the Legislature's decisions regarding new taxes or Proposition 98 spending.
Enacting any program realignment, however, would be very complex and involve difficult trade-offs regarding state and county control. In addition, given the difficulties associated with modifying a realignment plan after its enactment, the Legislature would need to develop a plan that could withstand the test of time.
To assist the Legislature in its deliberations, this piece:
The administration proposes to shift about 12 percent of state General Fund spending obligations to counties and trial courts—and to fund these programs from new realignment revenues.
County Changes. The realignment plan transfers to counties full—or increased—funding responsibility for a variety of health, social services, and child care programs, effective July 1, 2003. Along with this $7.9 billion increase in county fiscal responsibilities, the administration indicates it would support changes to increase county authority over most realigned programs.
Court Changes. The administration's plan provides $300 million of realignment revenues to replace state General Fund support for trial court security. The administration indicates courts would be given increased authority over court security decisions.
Figure 1 (see next page) displays the programs in the realignment plan, along with the administration's characterization of the extent of program discretion it proposes be given to counties and the courts. In the chart, the word "Full" identifies programs for which the administration envisions transferring full program authority to counties or courts, including the authority not to operate the program at all. "Partial" identifies programs over which the administration proposes to give counties or courts some additional discretion, such as the authority to change eligibility rules or administrative practices. "Minimal" indicates that the administration envisions very limited changes to county or court program control.
The administration proposes three tax increases to raise $8.3 billion in new revenues: a one cent increase in the sales tax, new 10 percent and 11 percent tax brackets for the personal income tax, and a $1.10 per pack increase in the excise tax on cigarettes. After compensating special funds for expected revenue declines due to the cigarette price increase, $8.2 billion would be available for realignment.
As discussed in the preceding piece, we estimate that over the next several years the realignment revenue portfolio would likely grow in the range of 5.5 percent to 6 percent annually. This rate of projected growth is slightly lower than the 6.4 percent we estimate for the state's General Fund over the same period.
Under the administration's proposal, about $3 billion of the new revenues would be set aside in a new statewide funding pool for county Medi-Cal costs and $300 million of the funds raised from the sales tax increase would be deposited in the state's Trial Court Trust Fund. The remainder of the realignment money, about $5 billion, would be allocated to counties as a single large block grant. In the first year of realignment, the administration proposes to allocate the $5 billion block grant to individual counties based on existing program formulas. Because many existing program formulas reflect dated distribution methodologies rather than current conditions, the administration proposes that a working group comprised of the Legislature, administration, and counties develop a new county block grant formula for 2004-05 and thereafter.
It is our understanding that counties would have the authority to allocate the block grant funds to any realigned program, as local priorities indicate. In the case of drug and alcohol programs, however, counties would need to send a certain portion of its realignment funding back to the state to have it counted as a state expenditure pursuant to a federal maintenance of effort agreement. (We discuss this issue in more detail below.)
Finally, the administration indicates that the new realignment revenues would not affect any element of the 1991 realignment. For programs realigned in 1991 and 2003, therefore, counties would comply with separate sets of funding and program provisions.
The administration indicates that it did not include the realignment revenues in its calculation of Proposition 98's minimum funding guarantee because the new realignment revenues are allocated to counties and the courts, not the state. Were these revenues included in the calculation, we estimate it would raise the state's minimum funding level for schools by about $3.5 billion.
The administration also indicates that it "rebenched," or lowered its estimate of 2003-04 Proposition 98 support, by $880 million to reflect the transfer of child care responsibilities from the State Department of Education (SDE) to counties.
The administration indicates that it is evaluating whether legislation is needed to suspend Proposition 98 if a court were to rule that the realignment revenues must be included in the minimum funding calculation. (The 1991 realignment legislation included such a conditional suspension of Proposition 98.) The administration is also evaluating options to reduce the likelihood of a challenge to the rebenching of Proposition 98.
Before reviewing the individual components of the administration's realignment plan, we recommend that the Legislature consider several matters relating to the realignment package as a whole. Figure 2 summarizes these considerations, which we discuss separately below.
In a state as large and diverse as California, it is difficult to establish statewide program rules, while at the same time promoting program innovation, efficiency, and responsiveness to local conditions. Typically, state laws and regulations strive for uniformity in county actions and compliance with minimum state standards. While this emphasis on "sameness" is appropriate for programs of great statewide concern, for other programs it is an impediment to county program collaboration and innovation.
Achieving good program outcomes in many health and human service programs, for example, requires county agencies to work across policy areas and to experiment with different approaches. Helping a homeless family, for example, often requires services in addition to housing assistance, such as mental health, drug or alcohol treatment, employment services, child care, and/or income assistance under California Work and Opportunity to Kids (CalWORKS). When each of these programs is operated in isolation, in compliance with extensive state rules, the total benefit may be less than if the county structured the programs to work collaboratively.
The administration's realignment plan provides the Legislature with an opportunity to "re-sort" state-county program responsibilities and consider which programs need statewide control and which could benefit from devolution to counties. The lesson California learned from the 1991 realignment is that counties, given the dependability of a dedicated funding stream and freed from centralized regulation, can achieve noteworthy program results.
As discussed above, realignment, implemented correctly, can improve the management and delivery of important programs. For this reason, we believe the Legislature's decision to realign a program should focus on program policy objectives and interest in increasing local control—not simply on raising revenues.
To that end, we recommend that the Legislature begin its work by identifying programs that would benefit from realignment. Should the Legislature determine that it wishes to raise more revenues than it wishes to realign programs, we recommend the Legislature avoid adding programs to the realignment package that are inconsistent with the concept of realignment—or programs over which the Legislature is unwilling to grant counties greater control.
If the Legislature wishes to raise more revenues than is needed to finance its realignment plan, but is concerned about interactions with Proposition 98, we note that the Legislature has other options. As we discuss in the "Education" chapter of the Analysis, for example, the Legislature could enact additional revenues, allow the money to count towards Proposition 98, but suspend the minimum guarantee. Such a one-time suspension of Proposition 98 would have about the same long-term impact on school spending as enacting the realignment plan proposed by the administration.
Alternatively, should the Legislature wish to enact realignment without increasing taxes, the Legislature could earmark a portion of existing state revenues as the dedicated revenues for realignment.
Realignment plans are not easily amenable to future legislative or administrative change. Under the administration's realignment proposal (as well as the 1991 realignment), counties assume a series of program obligations and commit to pay for them with revenues from a dedicated tax base. Developing the realignment package requires extensive legislative work and negotiations with many parties. As discussed further below, the realignment plan likely will be "backed up" by legislative provisions referred to as "poison pills" which safeguard the state's fiscal interests if elements of the realignment are successfully challenged in court.
The net result of these elements is that future changes to the realignment program and tax "package" become exceedingly complicated to change. We note, for example, that very few provisions of the 1991 realignment plan have been modified over the last 12 years. In contrast with many other state-local program and funding relationships, the basic structure of the 1991 realignment plan has remained constant. Before enacting a realignment plan, therefore, the Legislature should have a high degree of comfort with the program changes and revenue base.
The concept of realignment is to focus accountability by placing—to the greatest extent possible—program control, funding responsibility, and administration at the same level of government. Transferring funding responsibility to counties, therefore, is only the first step. Counties also need authority over the realigned programs.
Counties need program authority so that they may modify their programs to meet the highest needs in their community and facilitate innovative approaches and collaboration. Counties also need authority so that they can respond to the inevitable fluctuations in realignment revenues—as well as any long-term gap between realignment revenue growth and program demands. Just as the Legislature annually reviews program requirements and expenditures in light of the state's fiscal fortunes, counties would need authority to adjust program requirements and expenditures to reflect changes in realignment revenues. In fact, counties may have greater need for such authority because counties have less ability to increase taxes to pay for the programs.
In determining a revenue base for the realignment programs, the Legislature should roughly match the revenue base's projected growth rate with projections for overall long-term program spending. This does not mean there must be a "perfect" match between revenues and expenditures, but that the revenue base should grow at about the same rate as program costs.
Our review indicates that, over time, the administration's proposal could result in a contraction of spending for some programs. Specifically, we project that, as currently administered, the cost of the programs proposed for realignment by the administration would grow at about 7 percent to 8 percent annually over the next several years, while realignment revenues likely will increase by 5.5 percent to 6 percent annually. Thus, unless counties used their increased program authority to reduce program costs, or supplementary state or local revenues were added to realignment, funding for some realignment programs may be constrained over time. Alternatively, the Legislature, in reviewing the Governor's proposal, may decide that it would prefer a different mix of revenue sources, a mix which more closely tracks to the projected expenditure growth of the realigned programs.
In addition to selecting programs suitable for realignment, the Legislature will need to develop an appropriate structure for the realignment package. Details of this structure are key to the success of the realignment program and, given the difficulties in enacting future realignment changes, should be considered carefully.
Several components of the realignment structure are particularly important:
California's Constitution and statutory measures approved by the state's voters contain provisions that constrain the Legislature's authority to modify state and local government responsibilities and revenues: Proposition 98, the mandate provision of Proposition 4, Proposition 36, and others.
In 1991, the Legislature's realignment plan sidestepped some of these provisions through the enactment of four legislative provisions referred to as "poison pills." For example, one of these poison pill provisions suspends Proposition 98 if a court rules that the 1991 realignment revenues must be counted towards the Proposition 98 minimum funding guarantee. Another provision renders the entire realignment plan inoperative if a court rules that its provisions are a state-reimbursable mandate under Proposition 4. These poison pill provisions continue to this day, placing the 1991 realignment plan and the delivery of important programs at some risk. To a large extent, therefore, the 1991 realignment plan survives because the various parties involved with realignment think its end results are superior to the alternatives.
Our review indicates that the administration's 2003 realignment plan probably would require at least as many poison pill provisions as in 1991. Before enacting realignment, therefore, the Legislature, administration, counties, education community, and other key parties should achieve general consensus that realignment is a reasonable approach. Absent this consensus, the various requirements in the State Constitution and voter-approved initiatives may prove to be too great of an obstacle to overcome.
Much of the work involved in developing a realignment plan is "sorting out" which level of government should have program authority and funding responsibilities over different programs. As we have discussed in previous publications, government accountability is enhanced when residents know which level of government is responsible for different programs, and efficiency is enhanced when the level of government that pays the bill sets the program requirements. Thus, as the Legislature reconsiders state and county program responsibilities, we recommend that, whenever possible, a single level of government pay for a program and have authority over its design and implementation.
Given this, which programs should the state control and which should counties control? There is no "right" answer to this question. To assist the Legislature in its decision making, we highlight several factors, summarized in Figure 3 (see next page), for the Legislature to weigh as it reviews the assignment of program responsibilities.
Which Programs Should the State Control? As Figure 3 indicates, state control of programs makes sense under certain circumstances. If statewide uniformity is vital because service level variation would impede the achievement of overriding state objectives or create incentives for people to move across county borders, state control of a program makes sense. In addition, state control is appropriate for programs where the costs or benefits of a program are not restricted geographically, and thus individual counties might underinvest in a program because the county does not see the full impact of its actions. Finally, state control over income support programs makes sense, because it allows the redistribution of income to reflect the resources of the entire state, as opposed to the resources of a specific county.
Which Programs Should Counties Control? County control over programs offers different advantages. Counties have greater ability to adjust programs to meet the needs of their communities and experiment to determine which efforts improve program outcomes. Because county departments are smaller than state agencies, it is easier for counties to develop programs involving multiple program specialties. Finally, when budget constraints are significant, counties are in a better position to discern what works in their community and preserve the activities yielding the best outcomes. Thus, when program innovation, responsiveness to community interests, and efficiency is critical, we recommend the Legislature consider assigning the program to counties.
What About Programs That Are Closely Linked to Another? From a practical standpoint, many California programs are linked to others. Sometimes one person, or family, receives services under multiple programs simultaneously (such as mental health and drug or alcohol treatment services) or in succession (such as child welfare services, foster care, and adoptions), with some of the programs being "preventive" in nature and others oriented towards responding to acute problems. When assigning program responsibilities, it is important for the Legislature to acknowledge these program linkages because fostering collaboration among pro gram administrators will facilitate successful program outcomes. Given the scale of California state government, usually counties are in a better position to manage these programs. By keeping closely linked programs "under the same roof," the government controlling the programs can make sure that different program efforts are coordinated—and have the appropriate incentives to invest in programs that focus on prevention.
What About Sharing Responsibilities for Programs? Sometimes, because of federal laws, overriding state concerns, or other factors, it is not practical for the Legislature to assign full program control and funding responsibility to a single level of government. In this case, the state may wish to develop a hybrid system of program control and funding responsibility. If the Legislature assigns funding and program responsibilities to multiple levels of government, we recommend that the Legislature ensure that the state's share of cost is reflective of its degree of program control. As a general rule, we believe that the greater the program control a level of government has, the greater its fiscal share should be. Making sure that the state pays a share reflective of its degree of program control serves as an important check on the state as it contemplates future program changes with fiscal implications.
Using the factors discussed above, we reviewed the programs the administration proposed for realignment, as well as programs not included in the administration's plan. In undertaking this review, we focused primarily on whether a program was a good "fit" with the concept of realignment. For example, we examined whether a transfer to counties of program and funding responsibilities might yield better outcomes—or whether it would impede achievement of overall state objectives. The purpose of our review, therefore, was not to develop a definitive recommendation as to whether the Legislature "should" realign a program, but to identify programs that show the greatest potential for improvement under realignment.
From this review, we identified programs, totaling $9.1 billion, which appear to be good candidates for realigning to county control. These programs are listed in Figure 4 (see next page), along with page numbers denoting where our discussion of each program begins. As shown in Figure 4, we recommend the Legislature consider for realignment $5.1 billion of programs from the administration's plan and $4 billion of additional programs. In considering the list of programs in Figure 4, however, it is important to note that we do not believe that all these proposed changes could be implemented by the start of the fiscal year. Figure 4 denotes the programs where we think the program changes are so significant that future-year implementation would be necessary.
In beginning the Legislature's review of realignment, we recommend the Legislature focus its efforts on the programs shown in the consider column of Figure 4. Over the coming weeks, we will continue to examine state-county programs and may be able to identify additional programs for legislative consideration. Given the short time since the release of the administration's realignment plan, and the conceptual nature of our review, we are not certain whether unknown factors—such as federal regulatory requirements—might limit the Legislature's ability to realign some of the programs in Figure 4. To the extent that we are aware of significant issues limiting the Legislature's ability to realign a program, however, we discuss them in the write-ups below.
Finally, in our program write-ups, we identify some of the areas where the Legislature would need to increase county program authority and flexibility. As we have discussed throughout this document, however, counties would need significant authority for all programs in the realignment package.
The Governor's budget summary indicates that the realignment plan shifts $3.4 billion of health program costs from the state to counties. If the Legislature enacted the administration's provider rate and other budget cuts, however, the proposed health program shift to counties would total $2.9 billion. Regardless of the total amount shifted, as shown in Figure 1, the administration's plan gives counties "full" or "partial" program control over about $375 million of the realigned health programs. Thus, the administration's plan gives counties major fiscal responsibility without the program authority to manage the vast majority of these costs.
As we discuss below, we think that—with modifications—a substantial portion of the health programs in the administration's plan would be appropriate to realign. In our discussion below, we also identify additional programs (totaling about $1.2 billion) meriting consideration for realignment.
The administration's realignment plan shifts to counties a 15 percent share of costs for Medi-Cal medical benefits, or $1.3 billion to $1.6 billion, depending on the Legislature's actions regarding the administration's budget reduction proposals. (The $1.6 billion amount shown in our figures reflects the amount shown in the Governor's Budget Summary.) The estimated Medi-Cal cost for all counties would be taken "off the top" of the new realignment revenues and placed into a single statewide health care cost pool. The state, in turn, would use this revenue pool to pay Medi-Cal benefit costs, without reference to the county in which the Medi-Cal cost was incurred. Individual counties, therefore, would not realize any direct advantage or cost from changes in their residents' utilization of Medi-Cal services.
As shown in Figure 4, we recommend the Legislature remove Medi-Cal benefits from the list of programs to be considered for realignment because federal law requires that this program be provided uniformly across the state and because counties have little ability to affect long-term Medi-Cal benefit costs. Federal and state governments establish eligibility requirements for this program, what services will be provided, and how much will be paid to health care service providers. For these reasons, we see little program or fiscal benefit to assigning counties a share of the cost for medical services provided under this program.
Consider Establishing a Medi-Cal Administrative Cost Share. Although counties have little control over the costs of Medi-Cal benefits, county decision-making and collective bargaining affect the costs of Medi-Cal eligibility determinations. Under current law, however, counties do not pay a share of costs associated with county employees screening applicants for Medi-Cal eligibility. Thus, counties do not face an incentive to minimize these administrative costs. To align county and state fiscal interests in minimizing the administrative cost of this program, we propose that the Legislature consider a county share of costs for Medi-Cal eligibility determinations. Such a cost arrangement would be consistent with current requirements for the CalWORKs and Food Stamps programs. In determining the level of costs to be shared, it is important to note that county Medi-Cal eligibility workers frequently screen individuals and families for other programs, such as CalWORKs and Food Stamps. Establishing a similar state-county administrative cost share for these programs would reduce any incentive for inappropriately cost shifting among programs. As we note under our CalWORKs discussion, we think an administrative cost-sharing ratio for these programs of up to 50 percent would be appropriate, given the extent of county control over these program costs.
Under current law, the state and federal government share the cost of providing nursing home care for Medi-Cal recipients. The administration's realignment plan shifts to counties 100 percent of the state's cost for Medi-Cal long-term care: $1.1 billion to $1.4 billion annually. (The amount of the shift depends on the Legislature's actions regarding the administration's budget reduction proposals. The dollar amount shown in our figure reflects the amount shown in the administration's budget summary.) Similar to the administration's Medi-Cal services proposal, funding for nursing homes would be taken "off the top" of the new realignment revenues and placed into a single statewide cost pool.
Our review indicates that counties would have few tools to manage this major new funding responsibility. Specifically, counties would not have authority over the major factors driving Medi-Cal long-term care costs: provider reimbursement rates, program eligibility, or the decision to place Medi-Cal recipients into nursing homes. Moreover, the Governor's proposal would not address the serious fragmentation and lack of coordination that now exists for long-term care in which multiple agencies operate multiple programs with no real system in place.
Accordingly, we do not recommend the Legislature approve the program shift as proposed for the budget year. We find, however, that the state's long-term care delivery system would benefit greatly by county coordination and control. Thus, we recommend the Legislature transform the administration's proposal into a plan that phases-in over a longer period an integrated system of long-term care, managed by counties. Such a system, described below, would be similar to current county responsibilities for mental health services.
An Alternative Approach to Realignment of Long-Term Care. Under
our modified realignment concept, commencing in two to three years counties
would fund and manage a range of programs and services associated with long-
term care. Thus, counties would manage the shift of Medi-Cal patients, when
medically appropriate, from expensive acute care hospital beds to lower levels
of care. Counties also would coordinate additional support services needed to
care for Medi-Cal beneficiaries in the community and thus in some cases avoid
inappropriate and costly institutionalization in nursing homes.
Developing such a major realignment of long-term care responsibility would be complex, and pilot projects to implement similar changes have encountered significant delays. Accordingly, we do not believe that the transfer of authority over long-term care programs could be implemented immediately. For this reason, we suggest the Legislature consider the following approach:
The administration's realignment plan shifts to counties the fiscal and program responsibility for various maternal and child health, primary and rural health care, and county health grant programs. To offset these program costs, the county block grant includes $68 million in realignment revenues. In addition, counties would receive $78 million in additional Proposition 99 revenues and some related federal funding.
Public health programs, including indigent care for poor individuals not qualified for enrollment in Medi-Cal, were a major component of the 1991 realignment plan. The proposed shift of additional health "safety net" programs would increase coun