What We Were Watching for in the May Revision — and How It Looks Thus Far

Last week, in the run-up to Governor Brown’s May Revision, we blogged about the five things we were looking for in his revised 2013-14 budget and the ensuing budget debate. Here we reflect back on what were looking for — and provide a brief take on what we’ve seen. Our initial analysis of the May Revision — published the day after the Governor released his revised budget — provides a fuller discussion of the major changes and important new proposals. In the coming days and weeks, we’ll provide continued analysis and commentary here at California Budget Bites.

1. Education Finance Reform

We were watching for: potential changes to the mix of Local Control Funding Formula (LCFF) grants as well as any new accountability provisions. Under the Governor’s proposal to restructure school finance in California – a topic the CBP recently examined in its chartbook on the LCFF — each school district would receive a base grant per student and, in addition, a supplemental grant based on the unduplicated number of English learners or students from low-income families and a concentration grant for the share of these students above 50 percent of district enrollment. We were watching for preservation of the additional dollars allocated for disadvantaged students and stronger accountability provisions that would ensure that districts are using the LCFF dollars to directly benefit the students for whom they are intended.

The May Revision: preserves the LCFF formula proposed in January, including the concentration grants. The May Revision also strengthens LCFF accountability provisions by clarifying that supplemental and concentration grants are provided “primarily for the benefit” of students for whom they are intended. Further, the May Revision requires school districts, upon full implementation of the LCFF, to report how they plan to spend supplemental grant dollars in proportion to the number of disadvantaged students at each school site.

2. Medi-Cal Expansion

We were watching for: a call for a state-led expansion that leaves existing funding with counties, for now. As part of federal health care reform, the Governor has called for expanding Medi-Cal  to cover low-income adults who currently are not eligible — a topic addressed in our recent Medi-Cal chartbook. In January, the Governor presented two approaches to expansion — a county-based approach and a state-led approach — while also linking the expansion to his proposal to “realign” some human services programs to counties. Under the Governor’s plan, counties’ new costs would be funded with dollars that counties now use to provide health care to low-income, uninsured (“medically indigent”) Californians — many of whom would enroll in Medi-Cal under the expansion. We were watching for a commitment to a state-led expansion of Medi-Cal that allows counties to retain any savings they realize and put it toward providing local health services for the remaining uninsured, at least until the impact of health care reform on both the state and the counties is better understood.

The May Revision: endorses a state-led expansion of Medi-Cal where newly eligible Californians would enroll in Medi-Cal and receive the same benefits available to other Medi-Cal enrollees. However, the May Revision also maintains — and provides new details about — the Governor’s proposal to shift costs for certain human services programs to counties. The Governor now proposes that counties “assume greater financial responsibility” for CalWORKs, CalWORKs child care, and CalFresh administration. Counties would cover these costs with dollars shifted from their health care safety nets, thereby generating state savings that the Administration estimates would exceed $1 billion per year by 2015-16.

3. State Revenue Projections

We were watching for: revised economic and revenue forecasts and the implications for state spending. Through April 2013, state revenue for the current (2012-13) fiscal year was running ahead of the Governor’s January projections by $4.6 billion, prompting speculation that the May Revision would feature revenue forecasts for 2013-14 much higher than had been expected in January. We were watching for revised economic and revenue forecasts and the implications of those revisions for the Proposition 98 minimum school funding guarantee.

The May Revision: presents somewhat weakened economic and revenue forecasts. The Administration reported that higher-than-anticipated revenues for the current year (2012-13) are spread over several fiscal years and that “the influx is expected to be short-lived.” The May Revision projects additional revenue collections in the current fiscal year ($2.8 billion higher than assumed in January), derived from taxpayers shifting revenue from 2013 to 2012 in response to federal tax changes, followed by a slight decrease in revenue in 2013-14 ($1.3 billion lower than assumed in January). The assumed Proposition 98 minimum funding level follows a similar pattern, increasing in 2012-13 and decreasing slightly in 2013-14. The May Revision also adjusts the state’s short-term economic outlook downward due to federal actions, including federal tax changes and sequester cuts, and weaker global economic growth. However, the Legislative Analyst’s Office argues that the Administration’s economic and revenue forecast “seems too pessimistic” and projects that revenues will come in more than $3 billion higher – over the three-year period from 2011-12 to 2013-14 – than the Governor assumes.

4. Pay-Down of California’s Budgetary Debt

We were watching for: any changes to the Governor’s proposed pay-down of budgetary debt. The Governor’s January proposal called for paying down $4.2 billion in budgetary debt as part of a plan to reduce this debt from $35 billion in 2010-11 to less than $5 billion by 2016-17. We were watching for any increases to the proposed pay-down as a result of higher-than-anticipated revenues or possibly a more gradual repayment schedule in order to free up dollars for other spending priorities.

The May Revision: maintains the Governor’s general plan for paying down budgetary debt to less than $5 billion by 2016-17. The adjustments to the state’s revenue forecast noted earlier alter the repayment schedule, but do not change the multiyear objective. The May Revision also maintains the Administration’s planned $1 billion contribution to the state’s Special Fund for Economic Uncertainties.

5. Enterprise Zone Reform

We were watching for: any changes to proposals to restructure the Enterprise Zone (EZ) Program. The Governor’s January proposal included a set of regulatory changes to the state’s EZ Program, which provides tax credits intended to encourage businesses to locate in economically distressed areas. While the intent of the program is to promote business development and job creation in targeted areas, research shows that the program fails to achieve its goals while placing an increasing strain on the state budget — with the cost projected to rise to $1 billion by 2015-16. We were watching for proposals to more aggressively restructure the program to better target job creation and business development, boost accountability and evaluation of program effectiveness, and reduce the costs to the state.

The May Revision: significantly alters the Governor’s proposal to restructure the EZ Program. The new proposal narrows the EZ hiring tax credit to specific areas with high unemployment and poverty rates, and limits availability to hiring of three targeted groups of individuals (as opposed to 10 groups currently). The May Revision also expands the EZ sales tax credit for manufacturing and biotech equipment purchases to be a statewide — rather than a zone-specific — incentive, in an effort to discourage within-state competition for jobs. The May Revision also creates a new business recruitment and retention fund, administered by the Governor’s Office, for use in negotiating business tax credits in exchange for investments and employment expansion in California. Early reviews of these newly proposed reforms – which as a whole the Administration projects to be revenue-neutral — suggest that the tax-credit changes would largely eliminate the EZ Program in its current form.

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Beyond the five budget issues detailed in our May Revision preview and discussed above, there were other notable components of the Governor’s revised budget proposal. The Governor essentially put on hold for two years his complete restructuring of adult education, during which time the Governor proposes to transition to a new regional partnership system. The May Revision also leaves many previous cuts to health and human services unchanged, though it does include a new funding allocation ($48 million) for CalWORKs “early engagement” strategies to better address client needs during the shortened 24-month time window imposed in 2012-13. All of these proposals are discussed in the initial May Revision analysis we issued last week.

The initial analysis we released last week also highlights some of the key choices that policymakers could face during the coming weeks as they move toward enacting a 2013-14 budget, which would take effect on July 1. California Budget Bites will provide continued analysis and commentary on the issues shaping the budget debate and what the latest policy proposals mean for low- and middle-income Californians and for the future of our state.

— Chris Hoene