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Budget Conference Committee Time: What We’re Watching and What We’ve Said

May 2019 | By California Budget & Policy Center

With the members of the budget conference committee expected to start their work soon to reconcile differences among the budgets proposed by Governor Newsom, the Senate, and the Assembly, the Budget Center team is closely following how the agreed upon policies will affect the health and well-being of millions of low- and middle-income Californians.

Certainly, there is much to watch as final budget deliberations move forward. Read on about five key issues we’re tracking as the 2019-20 state budget is finalized in the coming weeks.

1. Expansion of California’s Earned Income Tax Credit – CalEITC

The issue:

Governor Newsom has proposed a substantial expansion of the CalEITC, including three major changes: raising the income limit so that all adults working up to full-time at a $15-per-hour wage (the state minimum wage as soon as 2022) would be eligible for the credit; increasing the size of credits for many tax filers who currently get very small credits; and adding an extra $1,000 credit “boost” for filers eligible for the CalEITC who have children under age six. State legislators generally support the Governor’s proposal, though the Assembly has proposed a somewhat smaller expansion. Legislators differ from the Governor in proposing to extend the CalEITC to a group of workers who are currently excluded from accessing the credit: immigrant workers and their families who file taxes using a federally-assigned Individual Taxpayer Identification Number (ITIN) rather than a Social Security Number.

Our take:

As we discussed in our March chartbook — Expanding the CalEITC: A Smart Investment to Broaden Economic Security in California — expanding the CalEITC would improve economic security for many who are struggling to afford California’s high cost of living. This is particularly important for children. Research shows that increasing incomes for children growing up in poverty are linked to short- and long-term improvements in health, educational attainment, and adult earnings. The vast majority of children who would benefit from the proposed CalEITC expansion are children of color, who are disproportionately likely to live in poverty in California.

We’ve also noted the current CalEITC requirement that tax filers and all the children they claim must have a Social Security Number valid for work excludes many working immigrant families and individuals from accessing the CalEITC. Extending the credit to excluded workers who file taxes using an ITIN or any federally-issued Social Security Number would increase economic security for a significant number of immigrant individuals and families as well as contribute to a better future for many children growing up in our state.

See the Budget Center’s piece from earlier this month: Expanding the CalEITC Is an Effective Way to Invest in California’s Children, But Hundreds of Thousands of Children of Immigrants Won’t Benefit Unless Policymakers Act.

2. Additional Spaces for Children in Subsidized Child Care Programs

The issue:

Governor Newsom campaigned on an early childhood agenda and his May Revision follows through on a number of campaign promises by expanding full-day, full-year preschool, providing additional subsidized child care spaces for school-age children, and setting aside hundreds of millions of dollars in one-time funding for child care infrastructure. Yet, both the Senate and the Assembly have advanced budget plans that provide significantly more spaces for children in subsidized child care programs.

Our take:

As our Fact Sheet shows, in 2017, just 1 in 9 children eligible for subsidized child care programs were enrolled in a program that could serve families for more than a few hours a day and throughout the entire year. Some parents have been waiting for subsidized child care for years. Substantial investment in California’s subsidized child care and development system must include increased access to child care programs for children and families, regardless of age. This gives providers the ability to prioritize families with the lowest incomes first.

For the Budget Center’s take, check out our series on the unmet need for subsidized child care:

3. Raising the Earned-Income Disregard in CalWORKs

The issue:

The earned-income disregard (EID) is the amount of a CalWORKs recipient’s gross monthly earnings that is overlooked when their grant levels are calculated. Since the implementation of CalWORKs in 1997-98, state law has exempted the first $225 of monthly earnings, then 50% of the remainder. Unfortunately, the value of the EID has not changed in more than 20 years, falling behind the rising cost of goods and services, as well as a growing minimum wage. State legislators are now considering increasing the EID to allow CalWORKs parents to keep more of their earnings. The Governor’s May Revision does not increase the disregard.

Our take:

As we said in a March analysis, in failing to increase the EID over the years, state policymakers have left struggling families with even fewer resources to meet their basic needs in our state. Raising the value now is a promising step to better serve CalWORKs families. To keep the disregard from losing value in the future, policymakers should ensure that the EID is increased annually to keep pace with inflation. To learn more about the disregard, see the Budget Center’s analysis: The Earned-Income Disregard Falls Short of Supporting Working Families in CalWORKs.

4. Increasing the Number of Competitive Cal Grants

The issue:

Nontraditional students, such as those who attend college more than a year after high school, are not guaranteed state financial aid. Instead, they must apply for a Competitive Cal Grant. There are nearly 350,000 students eligible for competitive cal grants and only 25,700 awards available. Governor Newsom’s May Revision increases the number of available grants to 30,000 while the Assembly seeks to increase available awards to 70,000, and the Senate proposes 44,000.

Our take:

Competitive Cal Grants are one of the most effective financial aid investments the state can make to promote access and affordability because they support the lowest-income and least represented students. Our August analysis shows that increasing the number of Competitive Cal Grant awards would help ensure college is affordable for a larger share of nontraditional students.

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

The issue:

Governor Newsom and state legislators are at odds over whether to seek an extension of California’s current tax on health insurance plans — or MCOs — which expires on July 1. The Governor wants to let this tax expire; the Assembly and Senate are pushing to extend it. The MCO tax generates a net state General Fund benefit of well over $1 billion per year. If the MCO tax goes away, so does this General Fund benefit.

Our take:

As we said earlier this month, allowing the MCO tax to expire would reduce the capacity of the state budget to support public services and systems, including health care. For more information, see this Budget Center piece: Five Key Facts About California’s Soon-to-Expire “MCO Tax.”

Support for this piece was provided by First 5 California.

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In the next few weeks, state policymakers will decide whether to expand California’s Earned Income Tax Credit (CalEITC) — a refundable state tax credit that boosts the incomes of families and individuals who earn little from their jobs. Governor Newsom’s revised budget proposes to expand the credit beyond what he proposed in January, as we explain in our analysis of the May Revision. (For details on the Governor’s January proposal, see our chartbook.) Now all eyes turn to the Assembly and Senate budget committees, which will decide whether to adopt or revise this proposal as they develop their respective budgets in the coming days. On Tuesday, May 14, Assembly Budget Subcommittee 4 will hear the Governor’s proposal, and Senate Budget and Fiscal Review Subcommittee 4 is expected to hear it later in the week.

We at the Budget Center evaluate state policy choices based on research, and this is a case where the evidence is clear: expanding the CalEITC is a smart investment for California’s children. Decades of studies show that earned income tax credits help low-earning workers better provide for their families, while also improving children’s future prospects. Notably, while EITCs are not explicitly health or education policies, they appear to provide important health and educational benefits that likely contribute to a stronger future for children. For example, studies suggest that the EITC:

  • Fosters better health for children, potentially improving their health and economic circumstances later in life. Babies born to mothers who likely received the largest increases in the federal EITC following an expansion of the credit had the greatest improvements in standard infant health measures, such as birth weight, which is highly predictive of health and economic well-being in adulthood. Also, the likelihood of having a low-birth-weight baby fell by more than four times as much for black mothers as for white mothers, suggesting that the EITC could be a tool for advancing health equity, as rates of low birth weight are much higher for black mothers. A recent study examining state EITCs found similar effects. Rates of low birth weight fell significantly more in states with more generous, refundable EITCs. In addition, black mothers experienced the largest percentage point decline in low-birth-weight rates.
  • Boosts children’s school achievement and educational attainment, potentially improving their earnings prospects in adulthood. Children in families who received larger credits as a result of an expansion of the federal EITC scored better on reading and math tests, with higher scores among younger children. These children were also more likely to complete high school, attend college, be employed as young adults, and earn more. In addition, children whose families received larger credits from the federal EITC during the spring of their senior year in high school were more likely to enroll in college.

Although most research focuses on the federal EITC, it’s reasonable to think that the CalEITC amplifies the benefits of the federal credit, particularly given that California’s credit is the most generous, refundable state EITC in the nation for households with very low incomes. Furthermore, it’s likely that increasing the size and scope of the CalEITC, such as through the Governor’s expansion plan, which targets the largest increases to families with young children, would further enhance these benefits.

Hundreds of Thousands of California’s Children Could be Excluded From the Governor’s Proposal

As policymakers consider expanding the CalEITC, they should recognize that hundreds of thousands of California’s children whose parents earn little from their jobs can’t share in the benefits of the credit currently and won’t benefit from an expansion of the credit unless policymakers act. That’s because tax filers and all of the children they claim must have Social Security Numbers (SSNs) that are valid for work in order to qualify for the CalEITC. As a result, many California children who have immigrant parents — including US-born children — are excluded from the credit. And many more could lose access to the credit if they or their parents lose immigration relief, such as Deferred Action for Childhood Arrivals (DACA) or Temporary Protected Status (TPC), due to federal actions.

With a simple rule change California policymakers could make the CalEITC more inclusive of immigrant families and extend the credit’s benefits to their children. Specifically, policymakers could permit tax filers to claim the credit using a federally assigned Individual Taxpayer Identification Number (ITIN) or any federally assigned SSN. According to my colleague Sara Kimberlin’s estimates, more than two-thirds of the tax filers who’d benefit from this policy change live in households with children. Her estimates also show that this rule change would benefit 208,000 to 297,000 children if policymakers also approve the Governor’s expansion of the credit, at relatively little additional cost: around $117 million to $167 million. This is less than the cost of the Governor’s May Revision proposal to invest another $190 million in the CalEITC.

If policymakers allow tax filers to use ITINs or SSNs to claim the CalEITC but do not also approve the Governor’s expansion, Sara estimates that 158,000 to 226,000 children would benefit from the credit, at an added cost of just $40 million to $57 million. These estimates assume a 50% CalEITC take-up rate among tax filers who appear eligible to use ITINs. However, take up could be lower given that many immigrants fear using public benefits due to anti-immigrant actions by the federal government.

Allowing tax filers to use a federally assigned ITIN or SSN to claim the CalEITC would not only allow more of California’s children to enjoy the credit’s benefits, but also it would:

  • Help to reduce the substantial disparities in economic hardship by race, ethnicity, and immigration status. The vast majority of children who could benefit from this policy change are children of color (97%) — primarily Latinx (90%) — and, by definition, all of them are children of immigrants. In California, Latinx children are more than twice as likely to live in poverty as white children. California children of immigrants in working families are also more than twice as likely to live in poverty as other children in working families.
  • Reward workers who provide valuable contributions to our state. Immigrants, including those who are undocumented, contribute billions of dollars each year to California’s state and local revenues, helping to support services that benefit all of us. Immigrants and their children are also vital to the state’s labor force, comprising more than half of California’s workers. Undocumented immigrants’ labor alone contributes more than $180 billion each year to California’s economy, according to state Controller Betty Yee.
  • Help to reduce economic instability due to low pay and immigration-related labor violations. The Californians who stand to benefit the most from a more inclusive CalEITC include farm workers, cooks, housekeeping cleaners, construction laborers, grounds maintenance workers, and janitors, according to our estimates. These workers are engaged in important, but low-paid — and often unstable — work. Compounding their economic challenges, some may be paid less than they are owed. Immigrant workers are far more likely to be victims of wage theft and other workplace violations, in spite of legal protections that cover workers regardless of their immigration status.

Making the CalEITC more inclusive of immigrant families would be a smart investment for California to make both from an equity perspective — given the valuable, but often under-valued, contributions immigrants make to our society — and from an economic perspective — given that the strength of our collective future depends on the investments we make in all of our state’s children today.

— Alissa Anderson

California Budget

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As we mark Mother’s Day, we at the Budget Center believe it is an important opportunity to recognize how California can improve the health and well-being of all mothers. Becoming a mother should be a joyous occasion, but too many women in the United States die due to pregnancy-related causes. In 2015, the United States had the highest maternal mortality rate of any developed country. While other countries have successfully taken steps to decrease maternal mortality, the rate of pregnancy-related deaths in the US has doubled in 20 years. This is despite the fact that women in the US pay top dollar for maternity care compared to women in other countries.

Over a decade ago, the California Department of Public Health (CDPH) noticed the alarming rise in pregnancy-related deaths, and state administrators took action in 2006 by launching an investigation of maternal deaths and by forming the California Maternal Quality Care Collaborative (CMQCC). The CMQCC has been credited in reducing the number of mothers dying in childbirth by using data and research to improve outcomes. It seems to be working. California’s maternal mortality rate peaked in 2006 and has since dropped by more than half. In 2013, the most current and accurate data available, the maternal mortality rate in California was 7.3 maternal deaths for every 100,000 live births — one-third the rate for the US, overall (22.0).

While this is certainly good news for mothers in California, this figure masks severe and persistent disparities experienced by black women. While pregnancy-related deaths have declined in California for women of all races and ethnicities, the black maternal mortality rate was still 3.8 times higher than the rate for white women in 2013. In fact, in California the rate of maternal mortality for black women has consistently been 3 to 4 times higher than the rate for white women over the past two decades.

It’s becoming increasingly clear that race can affect health and wellness over the lifespan, including outcomes in pregnancy and childbirth. For black women who live at the inhospitable intersection of racism and sexism, it can be deadly. A recent report from the Center for American Progress (CAP) recognizes these systemic problems, and outlines a range of policies to address the health inequities experienced by black women, some of which are active policy proposals this year in California. CAP recommendations include:

  • Improving the quality of care pregnant women receive. Senator Holly Mitchell’s Dignity in Pregnancy and Childbirth Act (SB 464) would require evidence-based implicit bias training for health care practitioners who provide care to mothers before, during, and after childbirth.
  • Addressing maternal mental health outcomes. In a blog post earlier this month, the Budget Center discussed strategies to improve maternal mental health, including expanded mental health care for new mothers enrolled in Medi-Cal (AB 577).
  • Enhancing supports for families. The Governor’s proposed budget for the next fiscal year invests more dollars in home visiting programs and in the Black Infant Health Program, both designed to improve outcomes for families.
  • Helping families meet their basic needs. The Governor and state legislators are backing a wide range of budget and policy proposals that would do just that, such as boosting CalWORKs cash assistance, increasing the size of the CalEITC, expanding access to subsidized child care, and extending the duration of paid family leave.

While California has done a commendable job in reducing the maternal mortality rate, the state can do more to address the severe disparities in the number of black women dying due to pregnancy-related causes. Budget and policy proposals outlined above provide a path forward, but there is significant work to be done to ensure all mothers have the opportunity to celebrate Mother’s Day.

— Kristin Schumacher

Aureo Mesquita provided research assistance on this blog post. Support for this piece was provided by First 5 California.

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When Governor Gavin Newsom released his proposed 2019-20 budget this past January, one of the biggest surprises was that he did not include a proposal to extend California’s tax on health insurance plans — or  “managed care organizations” (MCOs) — which expires on July 1. (An extension of this tax would require federal approval.) The Governor’s position is puzzling because the MCO tax package generates a net state General Fund benefit of roughly $1.5 billion each year. If the MCO tax goes away, so does this General Fund benefit, thus reducing the capacity of the state budget to support public services and systems, such as child care for working families and higher education.

The Governor has expressed concern that pursuing a reauthorization of the MCO tax could conflict with the state’s efforts to renegotiate, with the federal government, two Medi-Cal “waivers” that will expire in 2020. (Waivers help to determine how services are delivered in Medi-Cal, our state’s Medicaid program.) However, the nonpartisan Legislative Analyst’s Office (LAO) has evaluated this concern and concluded that the Newsom Administration “has not laid out a convincing rationale” for letting the MCO tax package lapse. Furthermore, the LAO notes that “California’s prospects of receiving federal approval of a reauthorized MCO tax are strong.”

In order to help shed light on a critical policy issue that has major implications for the state budget but has largely been flying under the radar, here are five key facts about California’s current MCO tax package:

1. The current MCO tax package took effect in 2016 following more than a year of intense lobbying by the Brown Administration.

The current MCO tax package was approved by the Legislature on a bipartisan vote in early 2016, following over a year of all-hands-on-deck lobbying by Governor Brown and his administration. Due to new federal rules, California’s then-current MCO tax no longer complied with federal guidelines and needed to be revised. Ultimately, Governor Brown called the Legislature into special session with the goal of creating a new MCO tax that would adhere to federal rules while also generating substantial General Fund savings. In addition to a revamped MCO tax, the final tax package included offsetting state tax cuts for the health insurance industry that were designed to ensure that the industry, as a whole, would be no worse off financially as a result of the revised MCO tax. The final tax package won broad support, including from health plans, and took effect on July 1, 2016.

2. The MCO tax package reduces — or “offsets” — state General Fund spending on Medi-Cal by well over $1 billion per year, freeing up these dollars to support other state priorities.

This General Fund offset results from a complex financing arrangement. (See this LAO report for an overview of how it works.) Essentially, California taxes MCOs and uses the proceeds to leverage federal funds to support Medi-Cal, our state’s Medicaid program. The MCO tax package frees up around $1.5 billion in General Fund revenues each year that would otherwise go to Medi-Cal. These freed-up funds support an array of public services and systems that are funded through the state budget.

3. By leveraging federal dollars for Medi-Cal — at no cost to the state’s General Fund — the MCO tax allows California to come closer to claiming its fair share of federal Medicaid funding.

It’s long been known that the main formula for determining how much federal funding states receive for their Medicaid programs is flawed, and in a way that puts California at a financial disadvantage. (This formula is officially known as the “FMAP.”) For California, the key problem is that the state “receives a low federal matching rate despite its relatively low ability to fund [Medi-Cal] program services,” according to the US Government Accountability Office (GAO). By providing another way for California to tap federal Medicaid funds — at no cost to the General Fund — the MCO tax helps to lessen the inequities that are built into the FMAP formula by boosting federal support for Medi-Cal.

4. If the MCO tax were allowed to expire, state General Fund costs for Medi-Cal would ultimately increase by more than $1 billion per year, but without any additional benefit to the Medi-Cal program.

If the MCO tax expires, policymakers would have to replace the lost MCO tax revenues with state General Fund dollars in order to maintain current federal Medicaid matching funds and keep the Medi-Cal program whole. In fact, this is what Governor Newsom’s proposed 2019-20 budget assumes — that the General Fund will backfill the foregone MCO tax revenues. This, in turn, would reduce the amount of state funds available to support other key public services and systems.

5. Alternatively, extending the MCO tax would free up General Fund dollars that could be used to expand key services beginning in the 2019-20 fiscal year, which starts on July 1.

As noted above, Governor Newsom assumes that state General Fund spending on Medi-Cal will rise beginning in 2019-20 due to the (presumed) expiration of the MCO tax — an assumption that is built into his proposed state budget. Alternatively, if the MCO tax were extended, this General Fund “backfill” for Medi-Cal would not be necessary. As a result, these General Fund dollars, ultimately reaching around $1.5 billion per year, would be newly available — relative to the Governor’s current multi-year budget forecast — to pay for other state priorities. For example, these freed-up dollars could help to move California closer to universal health coverage. Key policy options here include improving and expanding Medi-Cal and creating new state subsidies to reduce the cost of coverage for low- and moderate-income Californians who purchase health insurance on the individual market.

Conclusion

The current MCO tax package leverages federal funds for Medi-Cal, leaves the health insurance industry no worse off financially, and provides a net annual state General Fund benefit of roughly $1.5 billion, with these freed-up dollars supporting critical public services and systems. It’s not too late for the Newsom Administration to reverse course and work with state lawmakers to craft an updated MCO tax package that can win federal approval this year.

— Scott Graves

California Budget

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