LAO 2004-05 Budget Analysis: Perspectives and Issues

Analysis of the 2004-05 Budget Bill

Legislative Analyst's Office
February 2004

Additional Options for Addressing the State's Fiscal Problem

Introduction

As we have noted elsewhere in this document, the Governor's budget proposes significant reductions in most program areas. These proposed expenditure reductions reflect the Governor's choices and priorities, as do his proposed revenue increases. In many cases, the Legislature will have very different takes on how spending should be reduced and revenue should be raised. As a result, it may need alternative proposals to adopt in place of or in addition to those proposals. We provide such alternatives in both the Analysis of the 200405 Budget Bill and this piece:

These expenditure options are grouped in the following categories: (1) spending reductions, (2) fund shifts, (3) federal funds (in effect, using increased federal resources in place of state funds), and (4) fees (in place of General Fund support).

Figure 1 lists the options for all program areas except for Proposition 98. Further below, we describe the particular circumstances involving Proposition 98 funding and list options related to this area in Figure 2. In Figure 3, we provide selected revenue options. 

Figure 1

Selected LAO Budget Options

(In Millions)

Department/Program—Description

2004-05

2005-06

Health

Spending Reductions

 

 

Department of Health Services—Allow Medi-Cal applicants to self-certify the value of their assets at the time of application.

$1.3

$1.3

Comments: The simplification of program rules would make it easier for applicants to complete the enrollment process. The number of persons enrolled in Medi-Cal would increase but a reduction in administrative costs would result in net savings.

Department of Health Services—Rescind continuous eligibility for Medi-Cal children and implement semi-annual status reports.

$50.0

$51.5

Comments: This change would be consistent with the mid-year reporting requirement for parents established in the 2003‑04 Budget Act. This option would disenroll children who are no longer eligible to receive Medi-Cal benefits.

Department of Health Services—Streamline and reduce administrative and medical costs in treatment authorization and claims management in Medi-Cal.

Unknown
Savings

Comments: The current systems for processing claims result In provider and beneficiary dissatisfaction and unnecessary costs. Implementing this change would take the cooperation of several departments and providers.

Department of Health Services—Reduce General Fund support for the Expanded Access to Primary Care Clinic Program (EAPC).

$2.4

$2.4

Comments: Last May, the administration proposed a reduction in the EAPC program in lieu of the realignment proposal. The Legislature did not accept this proposal last year. Counties do receive realignment funding to provide services to this population.

Department of Health Services—Reduce funding for HIV Education and Prevention Services.

Up to $3

Up to $3

Comments: This option would reduce funds slightly to a base amount for local health agencies. This approach is consistent with the Legislature’s intent to prioritize the provision of direct services over other activities.

Department of Health Services/Medi-Cal—Impose a one-year moratorium on new applications for adult day health centers.

$5.5

Comments: This option would temporarily slow the rapid growth that has been occurring in the number of adult day health centers. This is an alternative to a related proposal of the administration to immediately halt program expansion.

Department of Developmental Service—Eliminate funding for Devereux program.

$1.2

$1.2

Comments: This option would eliminate funding for Devereux, a nonprofit organization that provides programs for children and adults with developmental disabilities. Incorporating the funding for such programs into the department’s budget is unusual, given that Regional Centers are responsible for the delivery of these services.

Department of Developmental Services—Establish
annual expenditure limits for regional centers for
selected services.

$114.2

$127.1

Comments: This option would establish limits for the maximum allowable units of specific types of services regional centers are allowed to purchase for clients thereby slowing the rapid rate of growth in this program. Regional Centers would have to reduce the amount of services provided to clients in order to implement this option.

Federal Funds

 

 

Department of Developmental Services—Draw down federal funding for Regional Center services provided to residents in intermediate care facilities for the developmentally disabled (ICF/DDs).

$46.5

$51.1

Comments: The state could draw down additional federal funds to offset the state costs of services provided to residents by modifying the rate structure of the ICF/DDs and through other options.

Department of Health Services/Medi-Cal—Screen for veterans who could receive VA health coverage.

Undetermined
Savings

Comments: Federal survey data suggest that there could be more than 100,000 veterans on Medi-Cal (at a cost to the state of an estimated $250 million annually) who could be eligible instead for comprehensive health care from the United States Department of Veterans Affairs (VA). The state could verify this data to determine if actions are warranted to ensure they receive VA care, thereby reducing General Fund costs.

Department of Health Services—Move the Indian Health Program from DHS to MRMIB.

Up to $4

Up to $4

Comments: A consolidation of the program with the Rural Health Demonstration Projects (RHDP) under MRMIB would maximize federal matching funds and reduce General Fund expenditures. A significant, but not complete, overlap in client populations exists between these programs and the RHDP.

Department of Health Services—Move the Seasonal, Agricultural and Migratory Worker Program from DHS to MRMIB.

Up to $5

Up to $5

Comments: A consolidation of the program with the Rural Health Demonstration Projects (RHDP) under MRMIB would maximize federal matching funds and reduce General Fund expenditures. A significant, but not complete, overlap in client populations exists between these programs and the RHDP.

Fund Shifts

 

 

Department of Alcohol and Drug Programs—Redirect state and federal asset forfeiture proceeds.

$10.0

$10.0

Comments: This option would use part of the proceeds taken from illegal narcotics traffickers to help pay for substance abuse treatment programs.

Department of Health Services—Eliminate Proposition 99 funds to assist emergency room (ER) physicians given increased access to local Emergency Medical Services funds (EMS).

Up to $24.8

Up to $24.8

Comments: The Legislature recently relaxed restrictions on EMS funds making tens of millions of additional local dollars available annually to assist ER physicians. In light of the local resources, the Legislature could eliminate Proposition 99 funding available for the same purpose, which it only began providing as of 2000. This option would allow these Proposition 99 funds to be used for other health programs currently supported by the General Fund.

Fees

 

 

Department of Health Services—Implement copayment for AIDS Drug Assistance Program (ADAP).

$1.5

$1.6

Comments: Last May, the Administration proposed a per prescription copayment requirement for ADAP participants to partially offset General Fund support of this program. The Legislature did not accept this proposal. This option would require those who can afford to do so to contribute to the cost of their care.

Social Services

Spending Reductions

 

 

Social Services—Reduce maximum monthly SSI/SSP grants for couples by $174 .

$89.0

$178.0

Comments: In January 2005, the SSI/SSP grant for couples will be $1,399 (39 percent above the 2003 federal poverty guideline) whereas the grant for an individual will be 5.5 percent above the guideline. Lowering grants for couples to the minimum required by federal law would reduce the disparity in grants between couples and individuals, while maintaining the grant for couples at about 21 percent above the poverty guideline.

Social Services—Reduce state-only SSI/SSP grants for immigrants by 10 percent.

$7.0

$7.0

Comments: The Legislature set state-only SSI/SSP monthly grants for immigrants $10 below the level for regular SSI/SSP benefits. Under this proposal, maximum monthly grants would be reduced by 10 percent ($78 for individuals, $138 for couples).

Social Services—Eliminate CalWORKs grants for families above 120 percent of poverty

$37.0

$37.0

Comments: CalWORKs families with incomes exceeding 120 percent of poverty generally have relatively modest grant payments (up to about $150 monthly). Removing these families from cash assistance would preserve their time on aid for future periods during which they may become unemployed. About 45 percent of the grant loss would be recouped in the form of greater food stamps benefits.

Social Services—Suspend Foster Care clothing allowance.

$4.0

$4.0

Comments: Foster parents are given a monthly grant to cover the costs of food, clothing, and shelter for foster children. The clothing allowance provides an extra $100 per year to supplement the grant.

Social Services—Suspend stipends for emancipated foster youth.

$3.6

$3.6

Comments: The emancipated foster youth stipend (created in 2000) is not a core component of the foster care program. Emancipating youth would still be provided with some assistance and services through the Independent Living Program.

Social Services—Means test state-only Adoptions Assistance Program (AAP)

$1.5

$4.9

Comments: The state-only AAP program is not bound by federal prohibitions against means testing. This estimated savings assumes that only future AAP cases will be means tested; with an average savings of 50 percent per case.

Social Services—Reduce frequency of group home visits from monthly to quarterly.

$8.1

$8.1

Comments: Federal law requires that group home facilities be visited semi-annually. State law currently requires a monthly visit. By reducing the visits to quarterly, the state would save General Fund dollars while still requiring twice as many annual visits as the Federal government requires.

Social Services—Cap annual social worker costs at $135,000.

$20.8

$20.8

Comments: There is a considerable amount of variation among counties in the amount that is paid for social workers (including overhead). The variance in per social worker costs appears to be unrelated to actual cost differences. For example, Riverside County receives $162,558 per worker, while San Bernardino’s cost is $112,675. Sacramento and Yolo Counties have a similar disparity. A statewide cap on the amount that the state will pay for social workers would help to temper some of this variation, without significant program impacts.

Judiciary and Criminal Justice

Spending Reductions

 

 

Corrections—Place nonviolent elderly inmates on parole early.

$11.0

$11.0

Comments: Under this option nonviolent/nonserious inmates age 60 and older would be placed on parole early. Research shows elderly inmates are two to three times more expensive to incarcerate yet they have a high level of success on parole.

Corrections—Home detention for elderly inmates.

$9.0

$11.0

Comments: This option would be limited to nonviolent/nonserious offenders age 60 and older who would be released early from prison to home detention with electronic monitoring. Research shows elderly inmates are two to three times more expensive to incarcerate yet they have a high level of success on parole.

Corrections—Discharge nonviolent parolees early.

$100.0

$125.0

Comments: This option would allow parolees who have met the conditions of their parole for 6, 9, or 12 months to be discharged early. This option minimizes the risk to public safety by focusing on nonviolent and nonserious parolees. Savings would range up to amounts shown depending on the length of time required to meet conditions of parole. This option would exclude “lifers,” “strikers,” and inmates who have committed a serious or violent offense.

Corrections—Direct discharge of inmates from prison.

$200.0

$225.0

Comments: This option would allow nonviolent/nonserious offenders to be discharged from prison without serving a parole term. This option would exclude “lifers,” “strikers,” and inmates who have committed a serious or violent offense.

Corrections—Place nonviolent inmates on parole early.

$290.0

$290.0

Comments: This option would allow certain inmates to be discharged from prison and placed on parole up to 12 months early. This option would be limited to nonviolent inmates who would be released early from prison and placed on parole. The focus on nonviolent and nonserious inmates minimizes the risk to public safety. This option would exclude “lifers,” “strikers,” and inmates whose offense is serious or violent. Savings depend on how early inmates are placed on parole.

Corrections—Remove prison as an option for persons convicted of petty theft with a prior.

$28.0

$30.0

Comments: “Petty theft with a prior” is currently prosecuted as either a misdemeanor or a felony. This proposal would require the crime to be prosecuted as a misdemeanor, thereby reducing admissions to state prison in the budget year and beyond. The public safety impact of this option would be minimal since these offenders would likely be sentenced to jail or probation.

Corrections—Parole in lieu of prison for inmates with short sentences.

$155.0

$170.0

Comments: This option would allow nonviolent/nonserious offenders with short-term sentences of 3, 6, 9, or 12 months to be placed directly on parole without incarceration. The focus on nonviolent and nonserious inmates minimizes the risk to public safety. Savings would range up to amounts shown depending on the maximum length of sentence permitted.

Youth Authority—Eliminate the Gang Violence Reduction Program.

$1.7

$1.7

Comments: This program, which provides grants to local law enforcement agencies for gang prevention, is duplicative of crime prevention programs administered by the Department of Justice and Department of Education.

Youth Authority—Eliminate the Young Men as Fathers Program.

$0.9

$0.9

Comments: This program provides grants to counties for parenting programs in county juvenile facilities and alternative schools. This program is duplicative of a program administered by the Department of Health Services.

Local Government—Eliminate Citizens’ Option for Public Safety (COPS) grant program.

$100.0

$100.0

Comments: The COPS program provides grants to local law enforcement mostly for personnel and equipment. Given that COPS funding represents less than 1 percent of local law enforcement expenditures, its impact on public safety, if any, is likely to be relatively small.

Local Government—Suspend the Juvenile Justice grants program for one year pending evaluation results.

$100.0

$100.0

Comments: The Juvenile Justice grants provide funds to address service gaps in county juvenile justice systems. This option would suspend funding for one year pending evaluations currently underway. Suspension would not stop the programs because grant recipients receive funding one year in advance of projected expenditures.

Trial Courts—Authorize courts to implement electronic reporting.

$33.0

$33.0

Comments: This option would give courts the authority to replace court reporters with electronic recording equipment in some courtrooms and for certain types of cases. Electronic reporting is used in other states and by the federal government. Research shows it can be as accurate as using court reporters, and is cost-effective.

Higher Education

Spending Reductions

 

 

University of California (UC)—Reduce base funding for
UC Merced.

$5.0

Comments: The university is able to provide neither information on expenditures in the current year nor an expenditure plan for the budget year. This option reduces half of the base budget for UC Merced. (We recommend rejection of a $10 million augmentation in the Analysis.) The 2003‑04 budget expresses legislative intent that the opening of the campus be delayed from fall 2004 to fall 2005. This option could further delay the campus.

UC—Increase state’s share of federal overhead reimbursements by 10 percent.

$35.0

$35.0

Comments: The federal government reimburses UC for the overhead costs of contracted research. The state funds much of this overhead, but currently shares with UC these federal reimbursements. This option would increase the state’s share from 55 percent to 65 percent, generating an estimated General Fund savings of $35 million.

California State University (CSU)—Defer costs associated with Common Management System (CMS).

$51.0

Comments: Governor proposes to defer $6 million (or roughly 10 percent) of the total $57 million costs that could be deferred for CSU’s CMS. This option would cause a one-year delay in the implementation of new computer applications at selected campuses. These campuses would continue to use their existing computer applications another year.

Resources

Spending Reductions

 

 

Department of Forestry and Fire Protection (CDFFP)—Sell King Air aircraft.

$0.4

$0.4

Comments: The King Air is one of five “support” aircraft used by CDFFP to transport people and equipment in support of CDFFP’s mission. It is not used directly for fire suppression efforts. The aircraft is used approximately 200 flight hours a year. Alternatives to the use of the King Air include the use of the other planes in CDFFP’s fleet, commercial flights, and private charters. Selling the King Air would result in about $400,000 (General Fund) savings per year. (This savings level accounts for the additional costs CDFFP would incur if it elected to use charter flights instead of the King Air).

Department of Water Resources (DWR)—Defer funding for Colorado River Management Account.

$16.1

$39.1

Comments: Chapter 813, Statutes of 1998 (SB 1765, Peace) provides a continuous General Fund appropriation for Colorado River management, mainly to reimburse local beneficiary agencies for the lining of the All-American Canal. The Governor’s budget proposes to transfer $16.1 million from the General Fund to the Colorado River Management Account for reimbursement, despite a 2003‑04 budget trailer bill (Chapter 228, Statutes of 2003 [AB 1756, Budget Committee]) that explicitly directs the Governor to exclude funding for the All-American Canal in the 2004‑05 budget proposal. Currently, $172 million remains from this appropriation. This option would defer funding in the budget year (as intended by the Legislature) and for an additional year. (The savings projected in 2005‑06 is an estimate based on even allocation of the remaining funds owed the account by December 31, 2008, which is the statutory deadline for funding this account.)

DWR—Defer funding for local flood control subventions.

$91.2

Comments: Local flood control subventions pay for the state’s statutorily obligated share of costs of federally authorized local flood control projects. The state is not obligated to make the payment by a specific date. No funding is proposed for these subventions in the budget year. This option would defer funding for subventions through 2008‑09; estimated savings assume that amounts owing local governments will be allocated in even payments over a four-year repayment period.

Fees

 

 

Various Cal-EPA/Resources/Health and Human Services Departments—Establish fees to cover costs of all state agency pesticide-related workload.

$3.0

$3.0

Comments: Based on the “polluter pays” principle, all departmental costs related to pesticide workload would be funded by fees. Departments include State Water Resources Control Board ($2.3 million), Office of Environmental Health Hazard Assessment ($0.6 million), Department of Fish and Game ($0.1 million), and Department of Health Services (unknown).

General Government

Spending Reductions

 

 

Office of Planning and Research (OPR)—Eliminate office.

$4.3

$4.3

Comments: The OPR provides the Governor with staff support on land use, local government, and environmental issues. The office has been given a broad range of responsibilities—reducing its ability to effectively succeed in any one area. Any functions considered essential could be absorbed into the Governor’s office or various other departments in state government.

Department of Housing and Community Development—Reduce homeless shelter assistance.

$2.0

$2.0

Comments: The historical level of funding for the Emergency Housing Assistance Program was $2 million. Recently, the program—which provides funding to homeless shelters—has been funded at higher levels, including $5.3 million in 2003‑04. The Governor proposes funding the program at $4 million in 2004‑05. The Legislature could reduce the program’s funding level to its historic level, for an additional savings of $2 million. This option would reduce the number of shelter bed nights funded by the state.

Agency Secretaries—Eliminate General Fund support for agencies.

$5.1

$5.1

Comments: The need for the agency level of government is unclear. Most agency workload is legislative and budget document review, which are activities already conducted by departments and the Department of Finance. The 2003-04 Budget Act reduced budgets for a number of agencies. This option is a continuation of that effort. Funding includes Youth and Adult Corrections ($1.5 million); Education ($1.5 million); Health and Human Services ($0.9 million); State and Consumer Ser-vices ($0.7 million); and Environmental Protection ($0.4 million).

Business, Transportation & Housing Agency—Eliminate the Small Business Loan Guarantee program.

$14.0

$14.0

Comments: The $30 million reserve fund (from previous General Fund appropriations) backs bank loans to small businesses in the case of default. The Governor’s budget proposes $4 million (General Fund) for 11 financial development corporations to administer the program. Based on a 1998 program review, the program results in little or no net tax revenue to the state. Eliminating the program would result in annual savings of $4 million for administrative costs and three years of approximately $10 million transfers to the General Fund from the reserve as guaranteed loans are paid off.

Department of Fair Employment & Housing—Handle employment discrimination complaints through mediation.

$1.0

$1.0

Comments: In the 2000‑01 Budget Act, the department received $1 million for a pilot mediation program. Rather than having the department investigate complaints, parties using the program agreed to mediate the complaints. An independent evaluation found that participants were satisfied with the program. The department estimates a cost difference of about $500 per case between mediation and investigation. Thus, the department could handle the same number of cases at less cost by directing cases to mediation. Assuming 2,000 employment discrimination cases (approximately 20 percent) go to mediation, there would be ongoing savings of $1 million.

Department of Industrial Relations—Consolidate complaint investigations.

$1.7

$1.7

Comments: The Division of Apprenticeship Standards approves and certifies apprenticeship programs for various occupations and trades and investigates complaints related to these programs. These complaint activities could be consolidated into the department’s Division of Labor Standards Enforcement (DLSE). The DLSE currently handles all other workplace complaints related to labor standards. This could result in improved investigative efficiencies. The DLSE could work within its $36 million General Fund budget to investigate apprenticeship complaints on a priority basis.

Department of Public Employees’ Retirement System (PERS)—Adopt alternative to the Governor’s retirement plan for new employees.

Potentially Several
Millions of Dollars

Comments: As we discuss in detail in the “General Government” chapter of the Analysis, the Legislature could adopt alternatives to the Governor’s retirement plan for new employees. Such alternatives—Tier 2 or defined contribution plans for all new employees—would result in state savings and other benefits. The savings would likely total several millions of dollars annually in the short term but grow significantly in the longer term.

Office of Administrative Law (OAL)—Eliminate office.

$1.8

$1.8

Comments: The OAL is responsible for reviewing proposed department regulations. The Legislature could eliminate OAL and transfer any essential activities to other departments. For example, department legal staff could perform regulation reviews, and the Attorney General or the Department of General Services’ Office of Administrative Hearings could provide oversight and resolve regulation disputes. This proposal would require changes in the State Administrative Procedures Act.

Stephen P. Teale Data Center/California Home Page—Outsource the home page and make it self-sufficient.

$2.0

$2.0

Comments: The annual cost of the California Home Page is about $4 million (half is provided by the General Fund). Other states have outsourced their home pages and cover costs through the collection of fees for online services (primarily for businesses). In addition, these out-sourcing agreements have allowed states to implement more online services.

Science Center—Delay opening of Center for Science Learning.

$1.4

$1.4

Comments: The Science Center School and Center for Science Learning are colocated and scheduled to open in July 2004. The elementary school will be operated and paid for by the Los Angeles Unified School District. The center, however, will be operated and paid for by the state at a cost of $1.4 million General Fund. The goal is for the center to provide programming to enhance the school’s focus on science. The Legislature could delay the opening of the center. The school could still open as planned (with more limited services available).

Tax Relief—Senior Citizens’ Tax Relief

$75.0

$75.0

Comments: Lower senior citizens’ renters and property-owners tax relief back to 1999‑00 baseline level.

Treasurer’s Office—Staffing

$0.3

$0.3

Comments: Five positions in the Public Finance Division were approved in 2001 and 2002 to assist with the issuance of energy and tobacco bonds. Four of the five positions have had their responsibilities concluded.

Fees

 

 

Department of Industrial Relations—Bill for safety inspections of elevators and pressure vessels.

$2.2

$2.2

Comments: The department bills private building owners for elevator and pressure vessel safety inspections, but the General Fund pays for these inspections in buildings owned by the state or local governments. Local governments account for two-thirds of these inspections. Instead of providing General Fund support, the department could bill public agencies for these inspections which are a cost of doing business. This would treat all entities in the same manner for purposes of these safety inspections.

Department of Food and Agriculture/Pierce’s Disease—Eliminate General Fund support for control of Pierce’s Disease.

$4.4

$4.4

Comments: Fees already support a portion of the program’s costs. The General Fund costs could be shifted to fees as well. Pierce’s Disease, carried by the glassy-winged sharpshooter, threatens the wine, table and raisin grape industry. We discuss the program in more detail in the “General Government” chapter of the Analysis.

Fund Shifts

 

 

Department of Fair Employment & Housing—Return joint jurisdiction cases to the federal government.

$8.0

$8.0

Comments: By agreement with the federal government, the department investigates complaints on behalf of the Equal Employment Opportunities Commission (EEOC) and the Department of Housing & Urban Development (HUD) when there is joint jurisdiction between federal and state law (approximately 70 percent of department cases). The EEOC and HUD reimburse the department for part of the investigation expenses (about one-third for most cases). The General Fund covers the remaining costs. The state could return to EEOC and HUD these joint-jurisdiction cases instead of doing the federal government’s work. As a result, the department would need fewer staff to handle remaining complaints that fall solely under state jurisdiction (medical condition, sexual orientation, and businesses with under 15 employees, for example).

Department of Housing and Community Development—Convert multifamily housing loan to bond funds.

$36.8

Comments: In past years, the state awarded several hundreds of millions of dollars from the General Fund for multifamily housing projects. These dollars are not disbursed until the construction of a project is completed. Consequently, the 2002-03 and 2003-04 budgets loaned $59 million in project funds back to the General Fund—with the loans to be repaid from the General Fund as needed. Instead of this approach, the Legislature could, with accompanying legislation, replace the General Fund dollars with Proposition 46 bond funds and eliminate the need to repay the loans. Of the original loans, $36.8 million would be available for this approach. This would be similar to actions taken in the 2003-04 budget package for other housing programs. Since the multifamily housing program still has more than $580 million in bond funds available, this action would not affect scheduled bond allocations until at least 2007-08.

Proposition 98 Budget Options

The Governor proposes to suspend the Proposition 98 minimum guarantee. The Governor's proposed spending level would be $2 billion less than the minimum guarantee. In the Analysis of the 2004-05 Budget Bill, we recommend the Legislature (1) suspend the minimum guarantee for 2002-03 through 2004-05, and (2) balance funding for K-14 education with other General Fund priorities without regard to the exact suspension level proposed by the Governor.

The Legislature is likely to disagree with some of the spending reduction proposals in the Governor's budget-year plan. If it wants to stay at the Governor's proposed level of Proposition 98 spending, it would need to adopt alternative savings in place of those proposals. The Legislature would also need to consider alternative savings proposals if, in weighing education and noneducation spending priorities, it felt that a higher suspension was necessary. (It is important to note that while the Governor suspends the minimum guarantee by $2 billion, the budget still would provide sufficient funding to expand base programs beyond growth and COLA for K-14 education. In contrast, other General Fund supported program areas face base reductions and no COLAs under the Governor's proposal.)

In the Analysis, we identify about $400 million in recommended Proposition 98 funding reductions. In Figure 2, we provide additional options for K-14 spending reductions. 

Figure 2

Selected LAO Budget Options
Proposition 98 Spending Reductions

(In Millions)

Department/Program—Description

2004‑05

2005‑06

Revenue Limit Cost-of-Living Adjustment (COLA)—Suspend statutory adjustment.

$550.0

$567.8

Comments: The 2004‑05 COLA is 1.84 percent.

Revenue Limit Deficit Factor—Eliminate requirement to restore 3 percent revenue limit reduction taken in 2003‑04.

$942.0

Comments: When the Legislature did not provide a COLA (1.8 percent)—and reduced revenue limits by 1.2 percent, it created an obligation to restore those reductions by 2005‑06. This option would eliminate the restoration requirement.

Statutory COLA (Categorical Programs)—Suspend statutory adjustments.

$114.6

$117.3

Comments: Option covers categorical programs that receive a statutory COLA. The 2004‑05 COLA rate is 1.84 percent. Excludes special education because the COLA is paid with federal funds.

Statutory Growth (Categorical Programs)—Suspend statutorily required growth allocations for categorical programs.

$88.7

$90.7

Comments: Assumes 1 percent growth in student enrollment. Excludes special education for which the growth is paid for by increased federal funds.

County Offices of Education (COEs) COLA—Do not fund statutory growth in county apportionments.

$10.1

$10.3

Comments: Adjustment is based on projected inflation for state and local goods and services. The 2004‑05 COLA rate is 1.84 percent. We suggest treating county programs similar to categorical programs.

COEs Growth—Suspend statutorily required growth for county run programs.

$4.3

$4.4

Comments: County programs are similar in nature to categorical programs. If the Legislature does not provide growth to categorical programs, we would suggest treating county programs similarly.

K-3 Class-Size Reduction (CSR)—Allow a districtwide cap of 1:20 (teacher:student ratio), with the state capturing half of potential savings.

$141.0

$143.0

Comments: Currently, K-3 CSR law requires each school site to maintain a teacher-student ratio of 1:20. This option would amend law to apply the cap at the district level rather than the school-site level. The existing school-site cap encourages sites to “undersize” K-3 classes (maintain classes serving fewer than 20 students). A district-level cap would make reaching the 1:20 ratio easier and would allow schools to keep children in the classroom that is best suited for them (rather than busing them to another school site just to remain under the school-site cap.

Ninth Grade CSR—Suspend program.

$110.0

$110.0

Comments: Schools with greatest need less likely to use program because of the lack of qualified teachers.

Gifted and Talented Education Program—Suspend program.

$46.5

$46.5

Comments: Targets extra resources at highest-achieving students to provide supplemental services that could be funded within base resources.

Year-Round Schools Facility Grant Program—Phase out over next two years.

$42.1

$84.2

Comments: This program no longer meets its original intent, which was to provide schools with incentives to go year-round in lieu of building new facilities. Now, year-round schools can obtain bond funding to build additional facilities, and, contrary to the intent of the grant program, schools can simultaneously receive both bond funding and grant funding. Thus, the state’s building program no longer provides any fiscal incentive to school sites to go year-round.

Development Program (MRPD)Eliminate program.

$31.7

$31.7

Comments: This option would eliminate the MRPD program but allow school districts to continue using staff development buyout monies to complete any MRPD training that the district already had begun. Several other large professional development programs would continue to be funded—including the staff development buyout program, the Peer Assistance and Review (PAR) program, the Beginning Teacher Support and Assessment (BTSA) program, and the National Board certification program.

Dropout Prevention Program—Eliminate program.

$21.9

$21.9

Comments: Success of program difficult to determine due to the lack of accurate dropout data. Analysis of a selection of long-term grantees does not validate program effectiveness.

Peer Assistance and Review—Eliminate funding.

$25.9

$25.9

Comments: No available evidence showing program effectiveness.

Civic Education—Eliminate program.

$0.3

$0.3

Comments: Program funds curriculum development by nonprofit entity that is duplicative of state efforts.

Paraprofessional Teacher Training Program—Eliminate program.

$6.6

$6.6

Comments: Two other large programs also support paraprofessional teacher training. The state currently provides $230 million for the staff development buyout program, which reimburses school districts for one full day of paraprofessional training. The state also receives $343 million for the federal Title II program, which allows school districts to engage in a variety of activities designed to improve the quality of instruction of teachers and paraprofessionals.

School Library Materials—Suspend program.

$4.2

$4.2

Comments: Expenses for school library materials are typically one time in nature and program’s suspension will not affect core classroom services.

Gang Risk Intervention Program—Eliminate program.

$3.0

$3.0

Comments: These services could be provided through existing school safety programs.

Statewide Education Technology Services Program—Eliminate program.

$2.3

$2.3

Comments: Program provides services that do not affect core classroom services.

Bilingual Teacher Training Program—Eliminate program.

$1.8

$1.8

Comments: The state funds several other professional development programs (including staff development buyout, PAR, and BTSA programs)—all of which may be used for bilingual teacher training. Additionally, the state spends a substantial amount on the University of California and the California State University’s teacher education programs, many of which include bilingual and multicultural components.

Opportunity Programs—Account for lower-than-expected participation.

$1.1

$1.1

Comments: These savings would reflect anticipated savings due to low participation.

School Safety Competitive Grants—Eliminate program.

$14.6

$14.6

Comments: These competitive grant programs have high state and local administrative burden, and may not focus on schools with the greatest need.

Advanced Placement Fee Waiver Program—Eliminate program.

$1.5

$1.5

Comments: This state-funded program is duplicative of a federally funded program that serves the identical purpose.

College Readiness Program—Eliminate program.

$1.0

$1.0

Comments: This is a very small scale program (it benefits only 25 to 30 schools each year), whose objectives (to improve classroom instruction in math) might be accomplished through other programs (such as PAR, the National Board certification program, Assumption Program of Loans for Education [APLE], and federal Title II program). For example, the PAR program also provides funding for full-time mentor teachers to work with new or struggling teachers, and the APLE program offers special benefits to teachers who agree to teach math in a low-performing school.

Angel Gate Academy—Eliminate program.

$0.6

$0.6

Comments: The federal Department of Defense provides $4 million in funding that covers a majority of the program’s expenses.

California Community Colleges—Terminate funding for Partnership for Excellence (PFE) when it sunsets.

$112.5

$225.0

Comments: The 2004‑05 budget includes $225 million for the PFE. Community college districts use this money to improve outcomes in specified areas. The PFE sunsets on January 1, 2005, but the Governor shifts funding to other community college purposes. This option would eliminate half of the proposed funding to reflect the program’s sunsetting after half the fiscal year is over.

Selected Revenue-Related Options

Should the Legislature wish to consider additional revenue-related options as a means of addressing the budget problem, there are several approaches it could take. These include broadening tax bases, raising tax rates, and establishing new fees. It also could include eliminating or modifying tax expenditure programs, most of which have been established in the past to provide various incentives or income transfers to qualifying taxpayers.

We have long taken the position that many tax expenditures are either ineffective at achieving their objectives or are not the most efficient means of doing so. The revenue-related options listed in Figure 3 primarily involve tax expenditure programs that at least partially fall into one or both of the above two categories.

Figure 3

Selected LAO Revenue Options

(In Millions)

Department/Program—Description

2004‑05

2005‑06

Mortgage Interest Deduction—Limit deduction beginning 2004 tax year.

$580

$525

Comments: The mortgage interest deduction is currently available for interest paid on mortgages of up to $1 million on first and second homes. This option would limit the deduction to interest on mortgages of up to about $600,000 and on first homes only.

Dependent Exemption Credit—Reduce credit to equal the personal exemption credit beginning 2004 tax year.

$1,180

$885

Comments: Through the 1997 tax year, the dependent exemption credit was equal to most other exemption credits. In order to grant tax relief, this credit was increased beginning in 1998 to more than three times the personal exemption credit. The 2003 credits are $257 for the dependent exemption credit and $82 for the personal exemption credit.

Teacher Retention Tax Credit—Eliminate credit beginning 2004 tax year.

$190

$190

Comments: The adequacy of teacher compensation is best addressed through direct funding of education, not through the tax system. In addition, special treatment of particular professions weakens the neutrality of the tax system since it gives preferential treatment to certain taxpayers.

Research and Development Tax Credit—Reduce credit amount to one-half current rate (7.5 percent) beginning 2004 tax year.

$160

$170

Comments: While a federal-level research and development credit is an appropriate tax policy, evidence supporting state level credits is weaker. In addition, California’s credit is the highest in the nation.

Subchapter S Corporation Tax Treatment—Limit filing status qualification beginning 2004 tax year.

$275

$295

Comments: Subchapter S corporation filing status—which allows most income to be taxed at the individual level rather than the corporate level—was intended to assist small- and medium-sized businesses. Limiting the availability of this filing status to businesses with receipts of $20 million or less would be consistent with the original purpose.

Renter’s Credit—Suspend credit availability for two years beginning with 2004 tax year.

105

$100

Comments: The renters’ credit was suspended in the early 1990s, and is now income limited.

Dependent Care Tax Credit—Limit availability of the credit beginning with 2004 tax year.

$80

$80

Comments: The dependent care credit is based on a percentage of the similar federal credit and is currently not available to those earning $100,000 or more—an amount well in excess of the average California household income. This option would limit the availability of the credit to those earning $50,000 or less.

Sales and Use Tax—Expand base to include certain entertainment services beginning 2004-05.

$500 - $700

$500 - $700

Comments: Expanding the sales and use tax to include certain entertainment services—such as admissions fees, cable television, and private club membership—would broaden the base of the tax.


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