What We’re Watching for in the Governor’s Budget Proposal

Next week Governor Jerry Brown will release his proposed budget for 2017-18, the state fiscal year that begins this coming July 1. The California Budget & Policy Center will put out our “first look” analysis in the days following the budget’s release, and we’ll provide in-depth analysis and commentary throughout the budget deliberations and beyond. (In order to get our latest work, keep reading this blog and also sign up for our email updates if you haven’t already.)

As a way of highlighting some of the key issues that we expect will shape this year’s budget debate, here are five things that we’re looking for in the Governor’s proposal.

1. The New – and Uncertain – Federal Policy Landscape

The issue:

The outcome of the November 2016 national election raises the very real prospect of major cuts to federal funding for key public services. For example, Republicans have begun the process of repealing the Affordable Care Act (ACA), including rolling back the recent expansion of Medicaid coverage (Medi-Cal in California) to low-income parents and childless adults. This change alone would reduce annual federal funding for Medi-Cal by more than $15 billion. Other services are also at risk, including federal food assistance provided through the state’s CalFresh program and federal Supplemental Security Income (SSI) cash assistance for low-income seniors and people with disabilities, including children. Republicans are likely to succeed in scaling back federal support in a number of policy areas, with some of these cuts intended to offset the lost revenue that would result from President-elect Trump’s proposal to slash certain federal taxes. If so, state policymakers will face difficult choices about how to fill funding gaps in order to prevent the erosion of public services and systems that promote economic security and opportunity for millions of Californians.

What we’re watching for: how the Governor responds to the new federal policy landscape.

Governor Brown has maintained a relatively cautious approach toward the state budget since winning his third term as California’s chief executive in 2010. This has included limiting, to some extent, the state’s long-term spending obligations; paying down state debts; and building up reserves in order minimize the need for spending cuts and/or tax increases in addressing a future budget deficit. In addition to facing a highly uncertain federal policy environment in 2017, California is seeing key state revenues for the current fiscal year (2016-17) run nearly $1 billion below projections. As a result, the Governor’s proposed 2017-18 budget likely will reflect his generally cautious stance toward new spending and his focus on setting aside dollars to prepare for state budget challenges – a new round of which could be triggered by funding cuts and policy rollbacks approved by President Trump and the Republican-led Congress after the Trump Administration begins on January 20.

2. Implementation of Proposition 56, Which Increases the State Tobacco Tax and Directs Most of the New Revenues to Medi-Cal

The issue:

This past November, California voters approved Proposition 56, which increases the state’s excise tax on cigarettes by $2 per pack starting on April 1. The measure also boosts the tax on other tobacco products by an equivalent amount and — for the first time — applies the state excise tax to electronic cigarettes that contain nicotine. These changes are expected to increase net state revenue by more than $1 billion in 2017-18, according to the Legislative Analyst’s Office. Prop. 56 requires that the vast majority of these new funds go to Medi-Cal, specifically to boost payments for doctors and other health care providers who serve the more than 13 million low-income Californians who are enrolled in the program.

What we’re watching for: whether the Governor proposes a plan for allocating Medi-Cal’s share of the new Prop. 56 revenues.

While Prop. 56 provides new annual funding to boost Medi-Cal provider payments, the measure doesn’t outline how these dollars are to be allocated among doctors, clinics, and other health care providers. Instead, these new funds will be divided up by the Governor and the Legislature as part of the annual state budget process. Prop. 56 establishes certain criteria that state policymakers must consider in boosting Medi-Cal payments, including addressing shortages of providers in various parts of the state and improving the quality of care. The Governor’s proposed budget could lay out a plan — or at least offer some general principles — for allocating Medi-Cal’s share of the new tobacco tax revenues in 2017-18 and beyond.

3. Implementation of Proposition 57, Which Provides State Officials With New Flexibility to Reduce the Prison Population

The issue:

California voters this past November also approved Prop. 57. This measure gives state officials new policy tools to address overcrowding in state prisons — potentially allowing California to reduce spending on the state correctional system, which currently exceeds $10 billion per year. Prop. 57 requires parole consideration hearings for state prisoners who have been convicted of a “nonviolent felony offense” and have completed the full term for their primary offense. This means these individuals must be considered for release from prison prior to serving time for any sentencing enhancements that may have been added to their base term. Prop. 57 also gives state corrections officials broad new authority to award sentencing credits for good conduct as well as for rehabilitative or educational achievements in order to reduce the amount of time that people spend in prison.

What we’re watching for: how the Governor interprets and implements Prop. 57.

The California Department of Corrections and Rehabilitation (CDCR) — which is part of the Governor’s administration — must adopt regulations implementing both (1) the new parole consideration process for people convicted of a nonviolent felony offense and (2) the Administration’s new authority to award sentencing credits. For example, the CDCR must clarify which offenses are considered to be “nonviolent” felonies. In addition, Governor Brown has to decide how broadly to interpret the CDCR’s new discretion regarding credits. The Governor could implement expansive new credit-earning opportunities to help accelerate the release of thousands of prisoners. Or he could take a more limited approach that only modestly increases credits beyond the levels already provided by state law. The Governor’s approach to implementing Prop. 57 will help to determine whether — and by how much — the state prison population declines as well as the extent to which state budget savings materialize in 2017-18 and beyond.

4. Addressing Ongoing Economic Challenges in Many Communities Across California

The issue:

As state policymakers begin work crafting the 2017-18 budget, the US economy is in its seventh year of recovery from the Great Recession. Yet many communities throughout our state have not shared in the nation’s recent economic gains. Millions of Californians continue to struggle to make ends meet. Moreover, the share of people living below the official federal poverty line remains higher than in 2007 (when the recession began) in 30 out of 40 California counties for which data available. Insufficient earnings from work and an inadequate safety net, together with California’s high cost of living — and particularly high housing costs — contribute to the severe economic hardship that many families and individuals across the state are experiencing.

What we’re watching for: whether the Governor seeks to build on recent state progress in boosting Californians’ economic security.

Recent state policy advances will improve conditions for people with low and moderate incomes. These gains include increasing the state’s minimum wage, bolstering California’s paid family leave program, and ending the punitive “family cap” rule in CalWORKs, which served only to push many families in the state’s welfare-to-work program deeper into poverty. However, state policymakers need to do more to put economic security and opportunity within more people’s reach. The Governor could continue the state’s recent progress by expanding California’s Earned Income Tax Credit (the CalEITC), which helps low-earning workers better afford basic expenses; strengthening CalWORKs so that parents are better able to support their children; boosting state support for SSI/SSP grants, which provide a critical source of basic income for low-income seniors and people with disabilities; and/or further increasing funding for California’s child care and development system, which helps parents who are struggling to make ends meet afford the high cost of care.

5. Taking on California’s Housing Crisis

The issue:

A lack of affordable housing is one of the biggest challenges facing California. High housing costs undercut many Californians’ ability to make ends meet and get ahead. In fact, California has the highest poverty rate in the nation when the state’s housing costs are taken into account. Many Californians in the middle of the income scale face serious challenges affording housing, and those with lower incomes struggle even more. Among households with very low incomes, the vast majority — almost 9 in 10 — spend more than 30 percent of their incomes on rent, and 51 percent spend more than half of their incomes on rent. This means that, after paying rent, many low-earning households have little money left over for other basic expenses or to build the savings needed to move up the economic ladder. Adding to the problem, critical public supports like CalWORKs and SSI/SSP grants haven’t kept up with rising housing costs in recent years and fall far short of providing enough assistance to help people keep a roof over their heads.

What we’re watching for: whether the Governor proposes any solutions to California’s housing crisis.

The state budget for the current fiscal year (2016-17) took some steps to address California’s housing crisis, but policymakers need to do much more. Part of the solution entails increasing the supply of affordable housing, especially since homebuilding over the past decade has severely lagged demand. Inadequate housing supply affects most Californians, but presents a particularly grim situation for renters with low incomes: California currently has a shortage of 1.5 million units available at rents that low-earning households can afford, according to unpublished figures provided by the National Low Income Housing Coalition. Increasing the supply of housing will require, in part, reforming local and state rules that create unreasonable barriers to housing development and increase construction costs. Yet while boosting supply would help reduce housing costs, additional steps are needed to ensure that a sizeable share of new housing is affordable to Californians with low and moderate incomes. These could include creating a permanent source of state funding to build affordable housing and/or increasing support for the Low Income Housing Tax Credit Program. Moreover, state policymakers could provide relief to people struggling to keep a roof over their heads, such as by strengthening the renter’s tax credit and boosting state investments in the CalEITC, CalWORKs, child care, and other programs that help Californians make ends meet.

— The Staff of the Budget Center