LAO 2004-05 Budget Perspectives and Issues: Issue-By-Issue TOC Analysis of the 2004-05 Budget Bill
Perspectives and Issues Outline
Part I: State Fiscal Picture

LAO Bottom Line

The Budget's Economic and Revenue Outlook

The Budget Proposal

Total State Spending

General Fund Condition

Prior Year

Current and Budget Years

How the Plan Addresses the Budget Shortfall

Program Reductions/Savings

Economic Recovery Bond

Other Loans and Borrowing

Local Government-Related Actions

Transfers/Other Revenues and Fund Shifts

Key Programmatic Features

The LAO's Budget Outlook

More Solutions Will Be Needed for 2004-05 to Balance

Major Threats Could Increase Shortfall to About $4 Billion

Nearly $7 Billion Operating Shortfall to Remain in 2005-06

Considerations for the Legislature

Part II: Perspectives on the Economy and Demographics

Recent Economic Developments

National Trends

Recovery Finally Gaining Balance and Momentum

Strength Is Carrying Over Into 2004

Inflation and Interest Rates Remain Subdued

Jobs Lag

California Trends

State Also Participating in the Recovery

However, Jobs Are Also Lagging in the State

The Budget's Economic Outlook

National Outlook

California Outlook

LAO's Economic Outlook

National Outlook

California Outlook

Comparison to Other Forecasts

Risks to the Outlook

The Demographic Outlook

State Population to Hit 37 Million in 2005

Population Growth Components

Growth to Vary by Age Group

Overall Budgetary Implications

Part III: Perspectives on State Revenues

The Budget's Forecast for Total State Revenues

Recent and Proposed Tax-Related Changes

Changes in Underlying Revenues

The Budget's General Fund Revenue Outlook

The LAO's General Fund Revenue Outlook

LAO Forecast Down Modestly From Budget

The LAO's Forecast for Major Revenue Sources

Personal Income Tax


PIT Liabilities

Withholding Mysteriously Outpaces Wage Growth

PIT Revenue Forecast

Sales and Use Tax


SUT Rates

Taxable Sales Improved in 2003

Farmer Bros. Co. Legal Challenge

SUT Revenue Forecast

Corporation Tax


Profits Rebounding

Corporation Tax Revenue Forecast

Other Revenues and Transfers

The Budget's Forecast for Special Funds Revenues

Part IV: Perspectives on State Expenditures

An Overview of State Expenditures

Proposed Total Spending in 2002-03 and 2003-04

General Fund Spending

Special Funds Spending

Spending in Relation to the State's Economy

Spending From Federal Funds and Bond Proceeds

Federal Funds

Spending of Bond Proceeds

State Appropriations Limit

State Spending—A Historical Overview

Spending by Program Area

Total State Spending

Relative Program Growth in the Budget Year

Major Expenditure Proposals in the 2004-05 Budget

Proposition 98


Issues for Legislative Consideration

K-12 Proposition 98


Issues for Legislative Consideration

Higher Education

California Community Colleges


Issues for Legislative Consideration

Other Higher Education Programs


Issues for Legislative Consideration

Health and Social Services


Issues for Legislative Consideration

Juvenile Justice System Reform


The Problem

Issues for Legislative Consideration



Issues for Legislative Consideration



Issues for Legislative Consideration

Employee Compensation


Issues for Legislative Consideration

Mid-Year Spending Reductions


Issues for Legislative Consideration

Maximizing Federal Funds


Issues for Legislative Consideration

Part V: Major Issues Facing the Legislature

Another Property Tax Shift?

Should the State Shift Property Taxes to Help Solve Its Budget Difficulties? If So, How Could the Proposed Shift Be Modified to Reduce Its Negative Effects on Local Governments?



Administration's Proposal

LAO Assessment

Guidelines to Consider

Minimize Reductions to General Purpose Revenues

Leave Past Formulas in the Past

Allow Local Control

Be Mindful of Effects on Land Use Incentives

Consider Impact of Revenue Reductions

An Alternative Approach

Reduce Restricted Purpose Subventions First

Give Local Flexibility Over Special District Shift

Focus the Redevelopment Shift

Shift Sales Taxes and Reallocate Vehicle License Fee (VLF) Instead


Deficiencies: Rethinking How to Address Unexpected Expenses



Appropriation Authority and Delegated Powers

Changes to Spending After the Start of a Fiscal Year

Examples of Delegation

Concerns With Delegated Authority

Attempt to Circumvent Budget Process

Changes to the Deficiency Process in 2003-04

Addressing Past Concerns

Limiting Deficiency Requests

Use of Section 27.00 in 2003-04

Deficiency Authorizations

Transfers of Funds

Misuse of Section 27.00 for the VLF Backfill

Administration's Proposals for 2004-05

How Much Authority Should the Legislature Provide?

Rethinking How to Address Unanticipated Expenses

When in Session—Affirmative Approval

When Out of Session—Use Only Appropriated Funds

Other Recommendations


"Remodeling" the Drug Medi-Cal Program

How Could the Drug Medi-Cal Program Be Restructured To Hold Down Administrative Costs, Draw Down More Federal Support, and Improve Participation?




What Is Drug Medi-Cal?

Program Administration and Funding

A Patchwork of Services

Significant Inconsistencies in Resources

Disproportionately Small Share of Program for Children and Women

Variations in Services From County to County

State Not Taking Full Advantage of Federal Assistance

A Difficult and Costly Program to Administer

Lack of Treatment May Be Adding to State Costs

Drug Medi-Cal Could be "Remodeled"

Shifting Funding and Programs to Local Control

Implementing Cost Containment For Methadone


Integrating Buprenorphine Into Drug Medi-Cal

Better Care Reduces Health Care Costs for Aged and Disabled Persons

How Can the State Better Coordinate Care for the Aged and Disabled in Medi-Cal and Save Money?



The Medi-Cal Health Care Delivery System

Medi-Cal Fee-for-Service System

Medi-Cal Managed Care

Mandatory and Voluntary Participation in Managed Care

Managed Care has Proven Advantages Over the Fee-for-Service System

Coordination of Services to Improve Health Outcomes

Quality of Care

Access to Providers

Cost Containment

Additional Persons Could Be Enrolled in Managed Care

Who Could Shift to Managed Care?

Focus Initially on Certain Aged or Disabled Persons

Shift to Managed Care Problematic for Some

Medi-Cal Managed Care Administrative Problems

Some Services Best Excluded From Managed Care

Shift to Managed Care Would Result in State Savings

Key Assumptions

LAO Estimate of Net Savings

A Blueprint for Expanding Aged or Disabled Enrollment in Managed Care

Implement Gradual Shift of Some Aged or Disabled Into Managed Care

Maximizing the Chances for a Successful Expansion

Strengthen the Existing Managed Care System

County Organized Health System (COHS) Offers a Model


Mandates: Mounting Liabilities and Need for Reform

How Much Does the State Owe Local Agencies for Mandates? What Problems Should Mandate Reform Correct?



How Much Does the State Owe?

What Does the Administration Propose?

LAO Assessment of Mandate Proposals

Need for reform

Lack of Payments Undermines Credibility of Mandate Requirement

Little Confidence in Mandate Determination Process

Claiming System Invites Problems

Legislature Needs Better Information

Delays Decrease Legislative Oversight

Mandate Determinations Get Stuck in the Past


The Problem of Abusive Tax Shelters

What Steps Should the Legislature Take to Curb the Increasing Use of Tax Avoidance Schemes and the Large and Growing State Revenue Losses They Produce?



Field of Schemes

Historical Perspective and Recent ATS Trends

What Constitutes an ATS?

Gimme Shelter: The Recent Growth of ATSs

Illustrative Examples of Abusive Tax Shelters

Implications for California's Revenue System

Revenue Losses From ATSs

A Fundamental Threat to the Tax System?

What Is Being Done About the ATS Problem?

Federal ATS Efforts

California's ATS Efforts

Considerations for the Legislature

LAO Recommendations

Additional Options for Addressing the State's Fiscal Problem