Some Initial Reflections on the 2013-14 Budget Deal

The pause between the Legislature’s recent passage of the 2013-14 budget bill and the Governor’s action on the full budget package provides an opportunity to reflect on the emerging budget agreement and what it means for Californians.

In many respects the 2013-14 state budget is poised to be a historical turning point. In the short term, California is continuing to turn the corner on years of severe budget shortfalls. Thanks to new revenues approved by voters last November and the state’s gradual economic recovery, the 2013-14 budget boosts state spending for schools and other key public systems and services, pays down budgetary debt, and provides a sizeable reserve — a far cry from the budget shortfalls of recent years.

Considered in a broader, longer-term context, the 2013-14 budget takes two significant strides forward: (1) restructuring California’s K-12 school finance system through the new Local Control Funding Formula (LCFF), which allocates additional resources for educating disadvantaged students, and (2) expanding the state’s Medi-Cal Program to make more than 1 million low-income Californians eligible for affordable coverage as part of federal health care reform. These fundamental advances in policy position the state to improve education and health care outcomes for Californians in the coming decade and beyond.

While there is much to like in the soon-to-be-finalized budget, the budget deal struck between the Governor and both houses of the Legislature does fall short in a number of important respects, and some key issues remain unresolved. Here is a bit of what we like, what could be improved, and what we’ll be watching in the coming weeks.

Funding K-12 Schools, Higher Education, and Adult Education

The LCFF is an important step forward in making the state’s system of school funding more transparent, rational, and equitable than it is today. The LCFF compromise accepts a key premise of the Governor’s proposal: that it takes additional resources to educate disadvantaged students. However, compared to the Governor’s original LCFF proposal, the compromise version provides fewer resources specifically for these students. Key decisions remain on the issue of funding accountability — that is, how to ensure that school districts spend the LCFF dollars allocated for disadvantaged students to directly benefit these students.

The budget deal also adopts notable improvements for higher education and adult education. The budget deal includes a new scholarship program for California college students from middle-class families. In addition, policymakers have produced a budget that maintains existing funding and structures for adult education programs, while planning for a new regional-partnership system of adult education providers within two years.

Expanding Medi-Cal

The expansion of Medi-Cal eligibility in January 2014 to more than 1 million low-income Californians will substantially broaden access to affordable health care coverage. However, the budget deal also shifts to the state a significant share of the dollars that counties currently use to fund health care for uninsured Californians, many of whom are expected to enroll in Medi-Cal in 2014 under the expansion. It’s uncertain — given this shift in funds to the state — whether counties will be left with sufficient resources to provide health care for the 3 to 4 million Californians who are expected to remain uninsured even after full implementation of health care reform.

The budget agreement also leaves in place the Medi-Cal provider rate cut enacted in 2011, which has not yet taken effect due to litigation. A federal appeals court has ruled in the state’s favor, and the Administration intends to move forward with implementation as soon as it gets the final go-ahead. The cut will be applied retroactively to June 2011 and means that doctors and other health care providers will face Medi-Cal payment cuts of 15 percent or more at the very time the state is expanding the program.

Also on the Medi-Cal front, one especially positive outcome of the budget deal is the partial restoration of adult dental benefits starting next May.

Beginning to Reinvest in Human Services

The budget deal makes a number of enhancements to CalWORKs, such as retaining “early engagement” investments proposed in the Governor’s May Revision, providing a “child-poverty adjustment” to the CalWORKs grant, and increasing the CalWORKs vehicle asset limit in recognition of the fact that many parents need a reliable vehicle in order to successfully secure and retain employment. The CalWORKs changes are considerably more modest than some proposals that had been considered, but nevertheless represent a step in the right direction. More will be needed in the future, especially given that many Californians are still hurting in the aftermath of the Great Recession.

What to Watch For: Restructuring Enterprise Zones and the Final Budget Agreement

Still to be resolved in this year’s budget deal is the potential reform of the state’s Enterprise Zone (EZ) Program. Established in 1984, the EZ Program provides a variety of tax credits to encourage business location in economically distressed areas and to promote job creation. While well intended, the EZ Program as currently structured fails to achieve its goals — and at a significant financial cost to the state. The Governor’s May Revision included a set of proposals to narrow and better target the EZ tax credits, and legislation that would reform the EZ Program has been under consideration. Our recent analysis of the EZ program provides updates on the cost and use of the EZ credits and offers a set of recommendations for reform.

Stay tuned in the coming weeks for more from the CBP, including our analysis of the final budget agreement and a series of publications expanding on the issues summarized here.

— Chris Hoene