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

Later this week, Governor Jerry Brown will release his proposed budget for 2016-17, the state fiscal year that begins this coming July 1. The Budget Center will put out our “first look” analysis in the days following the budget’s release, and we’ll provide in-depth research, analysis, and commentary throughout the budget deliberations and beyond. (In order to get our latest information, keep reading this blog and also sign up for our email updates if you haven’t already done so.)

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

1. State Revenue Projections

The issue:

The Administration has underestimated state revenues by billions of dollars in each fiscal year since 2012-13, and so far 2015-16 (the current budget year) looks to be no exception. As of November 2015, revenues from the state’s “big three” taxes — personal income, corporate income, and sales taxes — were a combined $653 million above the Administration’s projections. Moreover, the nonpartisan Legislative Analyst’s Office (LAO) anticipates that for the entire 2015-16 fiscal year, “big three” General Fund revenues will turn out to be $3.6 billion higher than what was projected last summer in the enacted budget, which relied on the Governor’s revenue forecast. As we’ve discussed before, low projections have consequences. If a healthier, but still cautious, revenue stream is reasonably projected, state policymakers can use the additional funds to strike a better balance among building up the state’s reserves, allocating for one-time uses, and investing in Californians’ futures. Overly conservative revenue projections leave dollars on the table that could otherwise be invested in services that promote broader and sustainable economic growth.

We’re watching for: updated economic and revenue forecasts.

How will the Administration’s revenue projections compare to those from the LAO? What share of General Fund revenues will go toward fulfilling the Proposition 98 minimum school funding guarantee? How much will go toward meeting Proposition 2 rainy day fund and debt payment requirements? How much room will there be for other state priorities, including building back support for critical public services that are still operating at or not much above recession-era levels of funding?

2. The Pending Expiration of the Managed Care Organization (MCO) Tax

The issue:

A state tax on health plans that currently reduces — or “offsets” — state spending on Medi-Cal by $1.1 billion expires on July 1. Without an extension, the offset will end, leaving a $1 billion-plus General Fund shortfall in the 2016-17 state budget. Despite the high stakes, state policymakers and health plans have not been able to reach an agreement on extending this tax. This is partly because — due to new federal guidelines — the tax must be restructured in a way that will cause some MCOs to see a hit to their bottom lines. (Currently, MCOs are held harmless from the tax through a complex financing mechanism involving federal funds.) This financial impact has caused at least some health plans to oppose extending the tax.

We’re watching for: how Governor Brown will address the looming $1 billion-plus General Fund shortfall. 

The Governor could try a “carrot” approach once again, calling on legislators to pass a revised MCO tax and pledging, in return, to support certain funding and policy changes for which lawmakers have been pressing. By assuming the MCO tax would be extended, the Governor would eliminate the $1 billion-plus funding gap, at least on paper. There’s also the “stick” approach — closing the shortfall with more than $1 billion in spending cuts aimed at putting maximum pressure on lawmakers in order to reach the two-thirds supermajorities needed to pass a new MCO tax. Finally, the Governor could simply give up on the MCO tax and fill the budget hole with General Fund dollars, adding more than $1 billion in new annual state spending obligations. This approach seems the least likely to win the Governor’s support.

3. State Sentencing Policy and Corrections Spending

The issue:

Despite significant reforms, California’s sentencing laws continue to rely heavily on incarceration, and spending on corrections through the state budget remains stubbornly high. Recent reforms include Proposition 47 of 2014, which changed several drug and property crimes to misdemeanors, thereby excluding prison as a sentencing option and allocating the resulting state savings to local mental health and drug treatment programs, services for at-risk youth, and trauma recovery services for crime victims. In the wake of Prop. 47 and other reforms, the number of adults incarcerated by the state has declined by roughly 46,000 (27 percent) since peaking in mid-2007. Despite this drop, spending on prison security and operations — the single largest slice of the state corrections budget — has not budged: It’s expected to be $6.2 billion this fiscal year, roughly equal to the 2007-08 level, after adjusting for inflation. This suggests that reducing state corrections spending will require additional reforms, including cutting the length of sentences for a broad range of offenses.

We’re watching for: whether the Governor proposes a plan to further decrease California’s reliance on incarceration and how he leverages projected Prop. 47 savings.

It’s unclear whether Governor Brown is inclined to tackle the systemic issues, including over-reliance on incarceration, that contribute to prison overcrowding and persistently high corrections spending. In signing the 2015-16 budget last June, the Governor indicated that his Administration would develop a “long-term plan” for the state corrections system. While he didn’t mention the state’s sentencing laws in the context of this plan, he did cite “the need for durable population reductions” in order to stay below the prison population cap established by the federal courts (137.5 percent of prisons’ “design capacity”). In addition, the Department of Finance is charged with calculating the state savings from Prop. 47, and the Governor will likely provide an initial estimate for the current budget year as part of his proposed budget. We’ll be closely examining the Governor’s estimated Prop. 47 savings with an eye toward ensuring that the state redirects an appropriate level of funding away from prisons and toward efforts that improve outcomes for individuals and communities.

4. State Support for Child Care and Development Programs

The issue:

Funding for California’s subsidized child care and development system was cut dramatically during and after the Great Recession, resulting in a loss of over 100,000 child care and preschool “slots” for children across the state. Recent years’ budget agreements have boosted support for these programs, but funding in 2015-16 is still 20 percent lower than funding levels in 2007-08, after adjusting for inflation, and the number of subsidized slots remains far lower than prior to the Great Recession. In addition, Congress reauthorized funding for the federal Child Care and Development Block Grant (CCDBG) in 2014 and, as part of this reauthorization, included new provisions aimed at boosting the quality of subsidized child care. While the 2015 federal omnibus spending bill provides additional funding for this block grant, California’s share likely will not cover the state’s entire cost for coming into compliance with the new federal regulations.

We’re watching for: how the Governor incorporates the reauthorization of the CCDBG into his proposed budget.

State policymakers have choices as to how they interpret and implement the new federal guidelines on child care quality. Will the Governor use the reauthorization of the block grant as an opportunity to boost the quality of services in California’s child care and development system while also raising the level of state support for subsidized child care and preschool? Policy choices made in the next few months could shape the delivery of child care in California for years to come, and it is critical that policymakers place a high priority on retaining services for low- and moderate-income families, boosting the quality of care for all children in California, and supporting the child care and preschool providers that are essential for many families throughout the state.

5. Investing in Working Families and Economic Security

The issue:

Even after several years of job growth and declining unemployment, many California residents are not sharing in the state’s recovery from the Great Recession. More than 6 million Californians, including 2 million children, were living below the federal poverty line in 2014. What’s more, mid-wage workers have seen an erosion of their wages during the current economic recovery, continuing a decades-long trend of California’s economic growth not benefitting large numbers of workers. Yet, the serious economic challenges facing so many Californians have not been met with a robust policy response at the state level. The creation of a state Earned Income Tax Credit (EITC) last year was an important step, but California could be doing much more to support working families, address economic hardship, and foster economic security.

We’re watching for: whether the Governor’s budget proposal includes new or expanded investment in helping more individuals, families, and communities share in California’s prosperity and make ends meet.

The proposed budget could strengthen CalWORKs, the state’s welfare-to-work program, such as by increasing monthly grants – which remain below pre-recession levels — and calling for the repeal of the punitive Maximum Family Grant policy (otherwise known as the “family cap”), which pushes children further into poverty. The Governor’s proposed budget could also begin to reverse cuts to SSI/SSP cash assistance, which helps low-income seniors and people with disabilities to pay for rent, food, and other necessities. We’ll also be looking for proposals that help families afford a college education — especially crucial given that a college degree is a key pathway to high-wage employment — or that promote affordable housing, thereby helping to address the tremendous burden that high housing costs or a lack of stable housing place on many Californians.

—The Staff of the Budget Center