Proposition 2, which will appear on the November 6, 2018 statewide ballot, would allow California to move forward with a program, called No Place Like Home (NPLH), to finance the development of permanent supportive housing for Californians with mental illness who are homeless or at risk for chronic homelessness. The Legislature and Governor Brown placed Prop. 2 on the ballot because a lawsuit challenging NPLH and the state’s original financing plan has prevented California from implementing this new program. This post provides an overview of Prop. 2, discusses its expected impact, and examines other issues the measure raises in order to help voters reach an informed decision.
What Would Proposition 2 Do?
Prop. 2 asks California voters to approve a housing program — along with related financing — that state policymakers created in 2016, but which has been on hold due to litigation. No Place Like Home (NPLH) aims to develop permanent supportive housing for people with mental illness who are homeless or at risk for chronic homelessness. The state would finance this new housing using proceeds from the sale of up to $2 billion in bonds. These bonds would be repaid over several decades, with interest, using revenues from an existing state tax on California millionaires, which was imposed by Prop. 63 of 2004, the Mental Health Services Act. Currently, most of the proceeds from this tax — a 1% surcharge on taxpayers with annual taxable incomes of more than $1 million — pay for a broad range of mental health services that are provided or coordinated by California’s 58 counties. Voter approval of Prop. 2 would allow the state to use a portion of these Prop. 63 revenues — up to $140 million per year — to pay off the NPLH bond debt, likely over a 30-year period.
What Problem Does the No Place Like Home Program Aim to Address?
Safe and affordable housing is a key building block of health and well-being. Moreover, because housing is rooted in specific neighborhoods — each with its own unique mix of advantages and challenges — where people live helps to determine the opportunities that are available to them. These opportunities, in turn, influence each person’s educational, health, and economic outcomes. As one federal agency aptly puts it, without “a safe, affordable place to live, it is almost impossible to achieve good health or…one’s full potential.”
Unfortunately, California’s worsening housing crisis means that many people lack access to stable housing and find themselves living on the streets. As of January 2017, more than 134,000 residents of the Golden State — including both adults and children — were experiencing homelessness, according to the most recently published point-in-time count. This means that 34 out of every 10,000 Californians lacked a stable home, double the national rate of 17 per 10,000.
What’s more, a large share of people experiencing homelessness also struggle with mental illness. In January 2017, almost 34,700 homeless Californians — just over one-quarter of the total estimated homeless population — were identified as having a severe mental illness. Given the challenges of accurately gauging the true scope of homelessness, some research (here and here, for example) suggests that the actual share of homeless people with severe mental illness may be closer to one-third. Even more troubling: A sizeable share of those who are both homeless and mentally ill (half or more) grapple with drug or alcohol addiction stemming from their efforts to “self-medicate” in order to relieve their symptoms, according to experts.
No Place Like Home aims to assist Californians with mental illness who are homeless or at risk for chronic homelessness by building or rehabilitating permanent supportive housing specifically for this population. Supportive housing “is a highly effective strategy that combines affordable housing with intensive coordinated services to help people struggling with chronic physical and mental health issues maintain stable housing and receive appropriate health care,” according to one review of the literature. In other words, this approach provides affordable, long-term housing linked to wraparound services that can help people address mental health issues and other challenges.
Under NPLH, the state would borrow up to $2 billion and distribute nearly all of these funds to counties to both 1) finance the capital costs and 2) capitalize the operating reserves of permanent supportive housing.* In addition, counties would use other revenue sources — such as their annual Prop. 63 funds — to provide or coordinate services, including mental health and substance abuse treatment, for the tenants of supportive housing developments “for at least 20 years,” as required by the legislation that created NPLH in 2016 (Assembly Bills 1618 and 1628).
What Is the Expected Impact of the No Place Like Home Program?
No Place Like Home could significantly reduce the number of Californians with mental illness who are living on the streets. Assuming voter approval of Prop. 2, the state plans to award $262 million in NPLH funds each year for seven years, beginning at the end of 2018, the Legislative Analyst’s Office (LAO) has reported. This amount of funding could pay for the creation of “roughly 20,000 supportive housing units” over the course of a decade, with “a few thousand units” available by late 2020 or early 2021, the LAO estimates.
However, well over 30,000 Californians with severe mental illness are homeless, as noted above. This means that the projected 20,000 supportive housing units would fall short of the number needed to assist every Californian with severe mental illness who is experiencing homelessness. Therefore, even if voters approve Prop. 2, state and local leaders would still need to adopt additional policies targeting this population to fully address California’s overlapping crises of homelessness and mental illness.
Boosting the supply of permanent supportive housing could also decrease the use of other public systems by homeless residents with mental illness, in turn reducing state and local costs for these systems. For example, savings could come from lowering the number of homeless residents who end up in local jails or emergency rooms, according to a recent review of the research. Moreover, the evidence suggests that “the greatest reductions are likely achieved with supportive housing that focuses on people who are the costliest utilizers of services.”
Case in point: Los Angeles County’s “Housing for Health” (HFH) program. Launched in 2012, HFH uses permanent supportive housing to address the housing and health care needs of homeless residents, targeting “frequent users of health care services,” according to a RAND evaluation. RAND’s key finding: HFH “reduced health care use and county costs.” Even after taking into account the cost of supportive housing, LA County saved $1.20 (from reduced health care and other social service costs) for every $1 invested in the program.
What Are the Tradeoffs in Using Bond Dollars to Build Supportive Housing Through the No Place Like Home Program?
Under No Place Like Home, the state would issue up to $2 billion in bonds, with the proceeds going to build permanent supportive housing for homeless Californians with mental illness. These bonds would be repaid, with interest, from annual revenues that are generated by Prop. 63’s “millionaire’s tax,” which provides funding for mental health services that are delivered or coordinated by counties. As outlined in AB 1628 of 2016, the state would use up to $140 million per year in Prop. 63 revenues to pay the debt service (principal + interest) on the bonds. The most recent state estimate assumes a 30-year debt-service schedule with a 4.2% interest rate, resulting in projected payments of approximately $120 million per year.
By comparison, Prop. 63’s tax on millionaires typically generates over $1 billion per year for mental health services, and the state expects to collect more than $2 billion from the tax in 2018-19, the fiscal year that began on June 30. (Proceeds from this tax fluctuate significantly from year to year.) As a result, a relatively small share of Prop. 63 revenues would be used to pay debt service on the NPLH bonds in any given year. For example, if Prop. 63 generated $1 billion in revenues, the state’s projected payment would equal 12% of these funds ($120 million / $1 billion). If, in another year, Prop. 63 raised $2 billion in revenues, the state’s projected payment would amount to 6% of these funds ($120 million / $2 billion).
Issuing bonds would allow the state to quickly amass a large amount of funding (up to $2 billion) to jump-start the development of permanent supportive housing around the state. Boosting the supply of supportive housing over a relatively short period would allow counties to better focus their resources on an otherwise hard-to-serve population — those with mental illness who are homeless or at risk for chronic homelessness — while potentially achieving improved outcomes for this population through the provision of long-term housing combined with mental health and other supportive services.
However, in selling bonds, California would incur a debt that would have to be repaid with interest. As a result, over time the cost of servicing the debt would far exceed the amount of the borrowed funds. Using the example cited above, debt service on the NPLH bonds could amount to $120 million per year, assuming a 30-year debt-service schedule with a 4.2% interest rate. Over three decades, these payments would total $3.6 billion — much higher than the original $2 billion bond issuance. If the state used the maximum allowable amount of Prop. 63 revenues for NPLH ($140 million per year), then the debt service would total $4.2 billion over 30 years — more than double the amount of the original bond issuance. Moreover, because annual NPLH bond payments would be funded with Prop. 63 revenues — which primarily go to county mental health programs — counties would receive well over $100 million less in Prop. 63 funding each year to meet the mental health needs of their residents.
Yet, Californians who are struggling with mental illness and living on the streets are among the most vulnerable people in the state — a reality that is explicitly recognized in Prop. 63 (see Section 2(d) of the initiative’s “Findings and Declarations”). What’s more, counties have long been responsible for assisting Californians with severe mental illness and collectively receive billions of dollars each year to do so. While counties’ annual mental health funding would be reduced if voters approve Prop. 2, counties could also experience savings in other public systems, such as jails, due to the expansion of supportive housing, as explained above. Counties could use such savings to expand or enhance other local services, including services for residents of supportive housing. Moreover, counties could bolster their support for mental health services by prudently allocating the large amounts of unspent Prop. 63 funds that have been allowed to accumulate at the local level due to what the State Auditor recently called the state’s “ineffective oversight of local mental health agencies.”
What Do Proponents Argue?
Proponents of Prop. 2 include the California Police Chiefs Association, the California State Association of Counties, the League of California Cities, and Mental Health America of California. Proponents argue that Prop. 2 “delivers the proven solution to help the most vulnerable people experiencing homelessness in California” by “build[ing] housing and keep[ing] mental health services in reach for people — the key to alleviating homelessness complicated by mental illness.”
What Do Opponents Argue?
The National Alliance on Mental Illness (NAMI) Contra Costa opposes Prop. 2. NAMI Contra Costa argues that Prop. 2 “takes Billions [of dollars] away from our loved ones and rewards developers, bond-holders, and bureaucrats.” This organization further states that “counties already know where to best acquire housing for access to critical services. Prop. 2 cuts off local input and predetermines the balance between treatment and housing needs.”
Conclusion
Our state’s worsening housing crisis has left more than 130,000 Californians homeless, including tens of thousands of people with severe mental illness. Prop. 2 would take a significant step toward reducing the number of people with mental illness who are living on the streets. It would do so by allowing the state to sell up to $2 billion in bonds and use the proceeds to spur the creation of permanent supportive housing (stable housing linked to services) for this population. These bonds would be repaid over several decades with revenues from an existing state tax on California millionaires that was imposed by Prop. 63 of 2004. Prop. 63 directs most of the funds raised by this “millionaire’s tax” to county mental health programs. If voters approve Prop. 2, up to $140 million per year in Prop. 63 revenues would be used to pay off the new bond debt, leaving less for mental health services.
A key question for voters is whether the benefits of using bond funds to develop up to 20,000 supportive housing units around the state outweigh the potential impact of a relatively small decrease in counties’ annual mental health funding. On the one hand, increasing the supply of supportive housing for homeless residents with mental illness would allow counties to better focus their resources on an otherwise hard-to-serve population while potentially improving outcomes for these individuals. On the other hand, counties would receive less annual Prop. 63 funding to address the mental health needs of their residents.
Two key factors would mitigate the impact of this Prop. 63 funding reduction on local mental health services. First, developing supportive housing for homeless residents with mental illness could decrease the use of other public systems, such as jails, thus reducing state and local costs for these systems. At least some of the resulting savings would accrue to counties, which could shift these freed-up revenues to other services, including mental health treatment. Second, many counties have amassed exceedingly large sums of unspent Prop. 63 funds that could be drawn down over a number of years in order to bolster annual support for mental health services.
* Up to 5% of the total bond funds could be used for state administrative expenses. In addition, up to 4% of the bond funds that would be allocated to counties through NPLH’s “competitive program” could be used to create default reserves.
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The share of Californians who are uninsured has fallen by almost 60% in recent years. This astounding decline largely reflects California’s decision to fully implement federal health care reform, including strengthening Medi-Cal (our state’s Medicaid program) so that it reaches more residents who would otherwise lack access to affordable health coverage.
Unfortunately, California’s progress in reducing the uninsured rate nearly ground to a halt in 2017 in the face of fierce headwinds blowing out of Washington, DC. Republican leaders in Congress tried to repeal the Affordable Care Act (ACA) and make deep cuts to federal funding for Medicaid, and President Trump used his executive authority to undermine the ACA in multiple ways.
Will California be in a stronger position next year to push forward new policies aimed at further improving health care access and affordability? The answer will largely depend on whether the ACA and Medicaid remain intact. This, in turn, will hinge on the outcome of the November 6 midterm elections, which will decide whether Republicans retain control of both houses of Congress — and get another shot at rolling back federal health care reform.
After Several Years of Major Declines, California’s Uninsured Rate Barely Budged in 2017
The share of Californians lacking health coverage in 2017 was 7.2%, down slightly from 7.3% in 2016, according to data released this month by the US Census Bureau.* On the bright side, California was one of only three states that saw a statistically significant drop in their uninsured rates last year. (Louisiana saw a 1.9% year-over-year decline; New York, a 0.4% reduction.) Uninsured rates were statistically unchanged in most other states. Still, the relatively small drop in California’s uninsured rate in 2017 paled in comparison to the major declines of the prior few years. Between 2013 and 2016, the share of Californians without health coverage plunged by nearly 10 percentage points — from 17.2% to 7.3% — the largest drop in the nation during this period.
In some ways, it’s not surprising that the decline in California’s uninsured rate has slowed. The large gains of recent years, particularly in 2014 and 2015, occurred as California rolled out new coverage options for low- and moderate-income Californians through Medi-Cal as well as through Covered California, the state-run online health insurance marketplace. With these new options, the number of uninsured Californians plunged by nearly half between 2013 and 2015, falling from 6.5 million to 3.3 million. This number declined further to 2.8 million in 2016, where it then stayed put (more or less) in 2017. Many Californians who remain uninsured face greater obstacles to enrolling in coverage than those who enrolled in the early years of health care reform. For example, a large share of uninsured Californians are undocumented immigrant adults who, under current policies, cannot sign up for comprehensive Medi-Cal coverage — even if their incomes are low enough to qualify — or buy private insurance through Covered California. Other Californians are eligible for federal financial assistance to help lower the cost of private health insurance, but find that this help is too small to make a difference.
So yes, there were good reasons to expect California’s uninsured rate to begin declining more slowly as the ACA matured. However, the fact that our state’s progress in expanding access to health coverage nearly came to a standstill last year, rather than just slowing down a bit, suggests that something else was going on. Clearly, that “something else” was the turmoil in federal health policy that ensued after Donald Trump — who campaigned on a promise to repeal the Affordable Care Act — took office as President in January 2017.
California Faced Fierce Federal Headwinds in 2017 as Congress and the President Worked to Dismantle the Affordable Care Act and Medicaid
In 2017, Republican leaders in Congress made multiple attempts to repeal the ACA and slash federal funding for Medicaid. These efforts ultimately collapsed. However, the tremendous uncertainty surrounding federal health care policy forced state officials to focus their attention on protecting the ACA and Medicaid — as well as preserving California’s gains under health care reform — rather than on advancing policies to further expand access to health coverage and reduce the cost of health insurance.
Unable to enact a full-scale repeal and deep funding cuts, Republicans found other ways to chip away at the foundation of health care reform. For example, the federal tax legislation passed last December ended the ACA’s financial penalty for being uninsured. This change, which takes effect in 2019, is expected to prompt many healthy consumers “to roll the dice and take the risk of going without health insurance,” according to a recent report from Covered California. In fact, premiums for health plans available through Covered California are already set to rise by an average of 3.5% in 2019 “due to concerns that the removal of the penalty will lead to a less healthy and costlier consumer pool,” state officials have noted.
Moreover, President Trump has used his executive authority to undermine the ACA in multiple ways. These include cutting federal funding for marketing and outreach and shortening the open enrollment in federally run health insurance marketplaces; ending federal payments that reduce out-of-pocket health care costs for consumers with low incomes; promoting unnecessary and counterproductive work requirements in Medicaid; and expanding the availability of limited-benefit health plans (“junk insurance”), which offer skimpier coverage than ACA-compliant plans, lack key consumer protections, and can leave people with expensive uncovered medical bills. California policymakers have generally succeeded in shielding consumers from the impacts of the President’s executive actions. Moreover, Governor Brown recently signed key bills that push back against the President’s agenda, including Senate Bill 910 (Hernandez), which bans the sale of short-term health plans in California.
California Can Further Improve Health Care Access and Affordability in the Coming Years — if the Affordable Care Act and Medicaid Remain Intact
California’s ability to invest in and further improve the state’s health care system over the next couple of years will largely depend on whether the ACA and Medicaid remain intact. The fate of federal health care reform, in turn, will hinge on the outcome of the November elections. If Republicans retain control of Congress, House and Senate leaders, with continued support from President Trump, will renew their efforts to repeal the ACA and gut federal funding for Medicaid. What’s more, a lawsuit aimed at undoing the entire ACA is winding its way through the federal courts and could ultimately be decided by a US Supreme Court majority that is hostile to the health care law.
If Republicans ultimately succeed in their years-long quest to dismantle the ACA and gut federal funding for Medicaid, California’s health care system and state budget would be thrown into disarray. State leaders’ focus would inevitably shift from planning for the future to addressing the fallout from these damaging federal policy choices.
In contrast, if the ACA and Medicaid survive in their current forms, state leaders could advance new policies aimed at continuing to move the state toward universal coverage and making health insurance more affordable, as the Care4All California coalition has been urging the state to do. For example, California could expand coverage options for undocumented immigrant adults by allowing them to enroll in Medi-Cal if they are income-eligible. There’s precedent for such a policy: California uses state funds to provide “full-scope” Medi-Cal coverage to low-income undocumented immigrant children and youth, a policy that took effect in 2016.
In addition, California could boost the affordability of health insurance purchased in the individual market, which continues to be financially out of reach for many residents. One idea: Provide state-funded premium assistance to people who buy health insurance through Covered California. This new state subsidy would be on top of existing federal subsidies, which are available to households with incomes up to 400% of the poverty line — around $48,000 for a single person in 2018. Another option: Reduce the cost of copays and deductibles that people are required to pay when they visit the doctor or fill a prescription. This new state assistance could be targeted to households with moderate incomes — in the range of 200% to 400% of the poverty line — who purchase health plans through Covered California. Households with lower incomes qualify for relatively strong federal assistance to reduce the cost of their copays and deductibles.
Health Care Policy Will Be Back on the State and Federal Agendas in 2019, Whatever the Outcome of the November Elections
As with so many public policy issues, California’s approach to health policy couldn’t be further removed from that of Republicans at the national level. Moving toward universal — and universally affordable — health coverage remains a high priority for many Californians, including a number of state lawmakers and Gavin Newsom, the leading candidate for governor. In contrast, President Trump and his allies in Congress continue to look for ways to repeal the ACA and slash federal funding for Medicaid. Whatever the outcome of the November elections, health care policy will undoubtedly be back on the state and federal agendas — for good or ill — in 2019.
* The changes in the uninsured rate reported in this post are statistically significant at the 90% confidence level. The data come from the American Community Survey (ACS) and reflect one-year estimates. These estimates are based on respondents’ coverage status at the time of the ACS interview and reflect “an annual average of current health insurance coverage status,” according to the US Census Bureau.
Proposition 5, which will appear on the November 6, 2018 statewide ballot, would make significant changes to California’s local property tax system. Local property taxes provide resources that go to support a broad range of local services and systems across our state. Prop. 5 would expand special rules that allow certain property owners to lower their property taxes. The reduced property tax revenue under Prop. 5 over time would result in losses of approximately $1 billion annually for cities, counties, and special districts and similar reductions in state funding available for public services and supports in most years, other than for K-14 education (K-12 schools and community colleges). In addition, Prop. 5 would reduce local funding for some K-14 districts. The ultimate effect of Prop. 5 would be to expand tax breaks for older, wealthier California homeowners at the expense of other homeowners, including those who are younger and less affluent. Prop. 5 is sponsored by the California Association of Realtors and supported by the Howard Jarvis Taxpayers Association. This Issue Brief provides an overview of the measure; discusses what it would mean for homeowners, housing supply and affordability, and funding for public services; and examines other policy issues the measure raises in order to help voters reach an informed decision.
What Would Proposition 5 Do?
Prop. 5 would amend both the state Constitution and state law to expand special rules for assessing certain property values that are the basis for calculating property taxes. Property taxes support services provided by local governments, such as cities, counties, special districts, and school districts. When local governments levy taxes on property owners, these taxes equal the taxable value of the property multiplied by a property tax rate. Prop. 13, approved by California voters in 1978, capped property tax rates at 1%, with limited exceptions, and replaced the practice of reassessing the taxable value of property each year at fair market value (what the property could sell for) with a system based on cost at acquisition (what the owner paid for the property).[1] Under Prop. 13, increases in the taxable value of property are limited to an annual inflation factor of no more than 2%, and property is only assessed at market value for tax purposes when it changes ownership.
In the 40 years since Prop. 13 passed, California voters have approved several ballot measures that apply special property tax rules (some of which are described in the following section) to certain types of property owners. Beginning on January 1, 2019, Prop. 5 would expand several of these special rules and apply them to:
Homes purchased or constructed by existing California homeowners who are age 55 or older or who are severely disabled.
Any property purchased or constructed to replace property substantially damaged or destroyed by a disaster.[2]
Any property purchased or constructed to replace “qualified contaminated property,” such as property that is no longer habitable or usable due to the presence of toxic or hazardous materials.[3]
Proposition 5 Would Expand Special Rules for Certain Homeowners
Currently, special rules allow California homeowners who are age 55 or older or who are severely disabled to transfer the taxable value of a home they sell to a new home within the same county, provided that the market value of the new home is the same or less than the market value of the home they sold.[4] California counties also may allow older or disabled homeowners to transfer the taxable value of homes sold in a different county to a home purchased in their county. Currently, 11 counties accept these inter-county transfers.[5] Older homeowners who transfer the taxable value of existing property to new homes purchased within or across counties may only do so once in their lifetime.[6] In most cases, these special rules mean that homeowners age 55 or older who purchase a new home pay less in property taxes than a younger person would pay for the same home, because its market value is often greater than the taxable value of the home sold by the older homeowner.
Prop. 5 would expand the special rules for California homeowners who are age 55 or older or who are severely disabled. Specifically, Prop. 5 would allow these homeowners to:
Purchase or construct a new home that is more expensive than the home they sell, but pay property taxes that are tied to the taxable value of the old home.
Purchase or construct a new home that is less expensive than the home they sell and reduce the taxable value of the new home below the taxable value of the old home.
Transfer the taxable property value under Prop. 5’s special rules anywhere in the state, regardless of whether the county where the new home is located currently allows such transfers.
Transfer the taxable property value under Prop. 5’s special rules to new homes an unlimited number of times, rather than just once per lifetime as under current law.
Proposition 5 Would Expand Special Rules for Any Owner of Contaminated Property or Property Destroyed by a Disaster
Under current law, special rules allow any owner of contaminated property or any owner of property that is substantially damaged or destroyed by a disaster to transfer its taxable value to a replacement property — regardless of whether this property is acquired or newly constructed — within the same county based on certain conditions. Owners of contaminated property may transfer its taxable value to a replacement property if the market value of the replacement property is the same or less than the market value of the contaminated property, assuming the property had not been contaminated.[7] Owners of property destroyed by a disaster may transfer its taxable value to a replacement property assuming the replacement property is comparable in size, utility, and function to the property it replaces and does not exceed 120% of the market value of the replaced property in its pre-damaged condition.[8]
Prop. 5 would expand the special rules for owners of contaminated property or property that is substantially damaged or destroyed by a disaster. Specifically, Prop. 5 would allow owners of contaminated property to purchase or build replacement property that is more expensive than the contaminated property, but pay property taxes that are tied to the taxable value of the contaminated property. Prop. 5 also would expand the special rules for owners of property destroyed by a disaster and allow them to transfer the taxable value of the destroyed property to any replacement property regardless of its size or value. Prop. 5 also would allow the assessment of the value of contaminated or destroyed property under its special rules to be transferred anywhere in the state regardless of whether the county where the new property is located allows such transfers from other counties.
Proposition 5 Would Provide Additional Tax Breaks for Eligible Properties
Prop. 5 would establish two formulas to calculate the taxable value of an eligible property. (As previously described, an eligible property is a new home purchased by an older or disabled homeowner or a property that replaces a contaminated property or property destroyed in a disaster.) Both formulas would tie the taxable value of an eligible property to the owner’s prior property.
The property tax formulas established by Prop. 5 would be based on three factors: the prior property’s market value (the price it sold for), the eligible property’s market value (what it was purchased for), and the prior property’s taxable value. One formula would apply when the market value of the eligible property is greater than the prior property, and the other formula would apply when the market value of the eligible property is less than the prior property.
Prop. 5 Would Establish a Formula That Reduces the Taxable Value of an Eligible Property if It Is More Expensive Than the Prior Property
If an eligible property is more expensive than the prior property, the taxable value of the eligible property would equal the difference between the eligible property’s market value and the prior property’s market value, added to the taxable value of the prior property.
Prop. 5 Would Establish a Formula That Reduces the Taxable Value of an Eligible Property Below the Taxable Value of the Prior Property if the Eligible Property Is Less Expensive Than the Prior Property
If an eligible property is less expensive than the prior property, the taxable value of the eligible property would equal the market value of the eligible property divided by the market value of the prior property, multiplied by the taxable value of the prior property.
What Would Proposition 5 Mean for Homeowners?
Proposition 5 Would Expand Tax Advantages for Older Homeowners
Under current law, special rules provide a tax break to California homeowners who are age 55 or older by allowing them to transfer the taxable value of a home they sell to a new home they purchase, but only if the market value of the new home is the same or less than the market value of the home they sold.[9] These rules usually provide a tax advantage for older homeowners, who pay less in property taxes than a younger person would pay for the same home. This is because the market value of the home that is purchased by the older homeowner is often much greater than the taxable value of the home that is sold.
Prop. 5 would expand this annual tax break in two ways. Prop. 5 would:
Increase the annual tax break for older homeowners who purchase homes that are worth the same or less than the market value of the home they sold. Under current law, an older Californian who sells a home that has a taxable value of $200,000 and purchases a new home for $450,000 pays $2,000 in property taxes ($200,000 x 1%) annually as long as the prior home sold for more than $450,000.[10] In comparison, people under the age of 55 would pay $4,500 in property taxes ($450,000 x 1%) annually for the same home. Prop. 5 would establish a new formula that would actually increase this $2,500 annual tax advantage for older homeowners. For example, under the new formula, an older Californian who sells a $500,000 home that has a taxable value of $200,000 and purchases a new home for $450,000 would pay $1,800 in property taxes annually, increasing the tax break under current law by $200 annually (see Figure 1).
Allow older homeowners to purchase a new home that is more expensive than the home they sell and tie the property taxes for the new home to the taxable value of the old home. For example, an older Californian who sells a $1.4 million home with a taxable value of $200,000 and purchases a new home for $1.5 million would only pay $3,000 in property taxes annually, a $12,000 tax advantage compared to someone under the age of 55 who would pay $15,000 in property taxes annually ($1,500,000 x 1%) for the same home (see Figure 2). In other words, in this example, the older homeowner could purchase a home with a value more than seven times larger than the taxable value of the current home, with only a relatively modest increase in property taxes.
The expansion of these tax breaks under Prop. 5 would provide even more substantial benefits to older homeowners who already, under current law, receive preferential treatment that allows them to pay far less in annual property taxes than younger homeowners.
Figure 1
Figure 2
Proposition 5’s Annual Tax Breaks Would Increase as the Market Value of a Prior Home Increases
Whether older homeowners purchase property that is more or less expensive than the market value of their prior home, the tax break provided by Prop. 5 would increase as the market value of the prior property increases. Using the prior example, under Prop. 5 an older Californian who sells a home that has a taxable value of $200,000 and purchases a new home for $450,000 would pay $1,800 in property taxes annually if they sold their prior home for $500,000. However, if the same homeowner sold their prior home for $1.4 million, they would pay less than $650 in property taxes annually (see Figure 1). Similarly, under Prop. 5, an older Californian who sells a $500,000 home with a taxable value of $200,000 and purchases a new home for $1.5 million would pay $12,000 in property taxes annually, whereas if the same homeowner sold their prior home for $1.4 million, they would pay $3,000 in property taxes annually (see Figure 2). As a result, Prop. 5 would most benefit Californians who have seen substantial increases in their home values, such as people from areas of the state where home values have increased rapidly relative to other areas and those who have owned their properties for longer periods of time.
Proposition 5 Would Provide Larger Tax Breaks for Older, Wealthier Californians Who Can Afford More Expensive Homes
The tax breaks Prop. 5 proposes for California homeowners who are age 55 or older would be larger for newly purchased homes that are more expensive than prior homes than they would be for newly purchased homes that are less expensive than prior homes. For example, under Prop. 5 an older Californian who sells a home with a market value of $500,000 and a taxable value of $200,000, and then purchases a new home for $450,000 would receive an annual tax break of $200 compared to current law (see Figure 1). By contrast, the annual tax break would be far larger — $3,000 — if the same Californian purchased a new home for $1.5 million (see Figure 2). As a result, Prop. 5 would provide larger tax breaks to wealthier Californians who are able to afford more expensive homes.
Proposition 5 Disadvantages Younger, Less Wealthy Homeowners
As noted in the sections above, Prop. 5 would expand tax advantages for older homeowners, allowing them to pay less in annual property taxes for a newly purchased home than younger homeowners would pay for the same home. These new tax advantages would be larger for older homeowners whose prior home has experienced the most substantial gains in value prior to being sold. The annual tax advantages would be larger for older, wealthier homeowners able to purchase more expensive homes. Prop. 5 also would remove limits on how many times eligible homeowners can transfer the taxable value of their home. In other words, eligible homeowners could carry forward the tax break to all future home purchases.
Younger, less wealthy homeowners, would also be adversely affected by a potential increase in home prices that could result from Prop. 5.[11] This is because the tax advantage provided to older, wealthier homeowners means that they would have more annual resources at their disposal to use in negotiating the purchase price of new homes. Using the earlier example, an older Californian who sells a $1.4 million home with a taxable value of $200,000 and purchases a new home for $1.5 million would pay only $3,000 in property taxes annually. Someone under the age of 55 would pay $15,000 in property taxes each year — a $12,000 annual tax advantage for the older homeowner. That annual tax advantage would likely be used in negotiating the purchase price of new homes, particularly in highly competitive housing markets, and could result in an increase in housing prices.
Prop. 5 would also reduce local property tax capacity, as noted in the section below on local government implications. As a result, local governments would necessarily rely more heavily upon younger and less wealthy homeowners to pay for local services, including the costs of infrastructure financed through local government general obligation bonds that are also tied to local property values.[12]
Characteristics of Eligible Homeowners Under Proposition 5
Homeowners who would be eligible for the special property tax rules under Prop. 5 include people age 55 or older as well as those with severe disabilities.[13] Of these two major eligible groups, older homeowner households make up by far the largest share. Statewide, about 4.1 million older or disabled homeowner households would be eligible under Prop. 5, of which 4.0 million are age-eligible (97.4%) and roughly 100,000 are eligible due to disability only (2.6%), according to a Budget Center analysis.[14]
In fact, a majority of California’s 7.0 million homeowner households (59.6%) would meet Prop. 5’s eligibility criteria. In a given year, however, only a small fraction of these eligible homeowners would be expected to sell their homes, buy new homes within California, and claim the new property tax reductions that would be allowed under Prop. 5.[15]
Homeowner households that would be eligible for special property tax rules proposed by Prop. 5 are relatively advantaged. Their median household income of $77,000 is 14.9% greater than the overall statewide median household income ($67,000). Moreover, eligible homeowner households headed by someone who is younger than the traditional retirement age — those with household heads under age 65 — have a median household income of nearly $100,000 ($98,900), meaning that about half have annual incomes greater than $100,000. These relatively high incomes translate into relatively low poverty rates, as well. While about 1 in 5 heads of household in California overall (19.0%) are in poverty based on the California Poverty Measure (CPM) — an improved poverty measure that accounts for housing costs — only about 1 in 9 homeowner household heads eligible under Prop. 5 (11.8%) are in poverty under the same measure.[16] In terms of sources of income, about 1 in 7 eligible homeowner households (15.0%) receive more than $15,000 in annual investment income. Moreover, only 11.6% of Prop. 5-eligible households depend on fixed retirement or disability payments from Social Security and/or Supplemental Security Income (SSI) for more than three-quarters of their total household income.
The characteristics of Prop. 5-eligible homeowner households contrast sharply with those of older renter households in California, who are much less economically secure. Renter households headed by individuals age 55 or older have a median income of only $32,900, roughly half the overall statewide median household income. Older renter households also have a much higher poverty rate, with 1 in 3 (33.3%) older renter household heads living in poverty based on the CPM (see Figure 3). They are much more likely to rely on fixed Social Security or SSI payments than Prop. 5-eligible homeowners, with more than 1 in 4 older renter households (27.3%) relying on Social Security and/or SSI for more than three-quarters of their household income, including 43.7% of renters with a head of household age 65 or older.
Figure 3
In terms of race and ethnicity, the homeowners eligible under Prop. 5 are primarily white. Nearly two-thirds (64.0%) of eligible household heads are white (and not Latino). In contrast, less than half of all California households (48.3%) are headed by someone who is non-Latino white, while the majority (51.7%) are headed by a person of color. Older renter households are largely similar to California households overall in terms of race and ethnicity.
The advantaged position of Prop. 5-eligible households is perhaps clearest, however, when examining their wealth in the form of the value of their homes. Most are long-term homeowners who have had the opportunity to accrue significant home equity as California’s housing prices have grown over time. About half of eligible homeowner households have lived in their homes for at least 20 years, during which time the median price of a single-family home in California has increased by 280%, or 1.8 times the rate of inflation, according to a Budget Center analysis of home price data from the California Association of Realtors. More than a quarter of eligible households (26.1%) have lived in their homes for at least 30 years.
In terms of the value of their homes, about half of eligible homeowner households (47.7%) own homes worth a half-million dollars or more. About 1 in 7 (13.9%) own homes worth $1,000,000 or more. Furthermore, nearly 4 in 10 eligible homeowners (38.8%) own their homes free and clear, with no mortgage, so that they stand to receive the full appreciated value of their homes if they sell. The typical home values of eligible homeowners vary by region, but home values are relatively high in the top two regions with the largest number of eligible homeowners: Los Angeles and the South Coast, and the San Francisco Bay Area (see Table 1).
Table 1
Because so many of the homeowners eligible under Prop. 5 have lived in their homes for many years, their property taxes tend to be significantly lower than the property taxes paid by younger homeowners who would not be eligible for special property tax rules under Prop. 5. This is because Prop. 13 (1978) caps the allowed increase in annual property taxes at a rate that is typically lower than the annual increase in a home’s market value, as described above. As a result, in 2016 the older and disabled homeowner households who would be eligible under Prop. 5 paid median property taxes of $2,950, equal to only about three-quarters of the median taxes paid by younger homeowners ($4,050).
In summary, taken as a whole the older and disabled homeowner households who would be eligible for special property tax rules under Prop. 5 have higher incomes and lower poverty rates than California households overall, and much higher incomes and lower poverty rates than older renter households. Prop. 5-eligible households are also more likely to be headed by white individuals and much less likely to be headed by people of color than California households overall. Most are long-term homeowners, and nearly half own homes worth a half-million dollars or more. At the same time, their current typical property tax payments are significantly lower than the typical property taxes paid by younger homeowners, who would not be eligible for the special tax advantages provided by Prop. 5.
Though Prop. 5-eligible homeowners as a group are relatively well-off economically, there are some older and disabled homeowners, and homeowners affected by unexpected disasters, with low fixed incomes who would be unable to pay higher property taxes out of their existing incomes if they moved. As a result, they may feel “stuck in place” in homes that are larger than they need or not as close to family or other supports as they would prefer. However, many of these homeowners could likely take advantage of existing special property tax rules for older and disabled homeowners and find suitable new homes of equal or lesser market value within the county where they currently live, or within one of the counties that allows for inter-county transfer of existing property taxes for older and disabled homeowners under current law (as described above). As a result, they could meet their housing needs without the new tax advantages that would be created by Prop. 5. Moreover, many of these homeowners have built up significant home equity over time, and could reasonably afford to pay higher property taxes by withdrawing some of their equity when selling their homes and using some of those funds each year to cover the cost of higher property taxes for their new homes.
For the small number of older, disabled, and disaster-affected homeowners who are truly “stuck in place” — those with low fixed incomes and limited home equity who cannot find a suitable new home where they can carry over their current property tax amounts within the geographic limits allowed by current law — more narrowly targeted policies could be developed that would help these homeowners specifically. Better targeted policy approaches, such as tax credits for homeowners who meet specific income and asset limits as well as criteria related to age, disability, and/or disaster, would allow for more efficient use of limited public resources, and would be preferable to Prop. 5, which offers tax breaks to many homeowners who do not need public financial assistance, at the expense of local and state government budgets and the key services they support. Alternatively, if the policy goal is to address the housing needs of older Californians with low or fixed incomes, focusing on older renter households would make much more sense than focusing on older homeowners, since older California renters, as a group, face much greater economic insecurity.
How Would Proposition 5 Affect Housing Mobility, Supply, and Affordability?
Many parts of California face a range of housing affordability challenges, including a lack of supply to meet the demand for housing, higher housing prices resulting from increased competition for available housing, and a lack of housing mobility because people are less able to afford changing homes and/or are unable to find available housing. How would extending tax breaks to older homeowners affect these forces?
As noted earlier, Prop. 5 could lead to an increase in home prices. [17] The annual tax advantage for older homeowners would likely be used in negotiating the purchase price of new homes. Because Prop. 5 changes existing law to allow older homeowners to base their property tax bill for a more expensive newly purchased home on their prior home, the effect on home prices might be particularly notable for already higher-priced markets. In addition, as noted earlier, the tax advantages from Prop. 5 will largely accrue to wealthier, older homeowners who can already afford to move.
In terms of housing supply and mobility, the Legislative Analyst’s Office (LAO) projects that the number of potential movers as a result of Prop. 5 could increase by “a few tens of thousands” and that there could be some effect on home building.[18] But, the potential impact would be small relative to the total number of homeowners in California and the demand for housing. California has 7 million homeowner households and the state Department of Housing and Community Development estimates that California needs 1.8 million new homes to meet demand by 2025.[19] If some increase in home building results from increased demand from Prop. 5-eligible homeowners, this additional supply would simply be meeting a corresponding increase in demand that is also due to Prop. 5 — in other words, Prop. 5 would do little to address the state’s current shortage of housing. In short, Prop. 5’s effects on housing supply and mobility would be marginal, and largely accrue to a set of homeowners in California who can already afford to move.
What Would Proposition 5 Mean for Public Services?
Proposition 5 Would Reduce Funding for Local Governments
Prop. 5 would reduce funding for local governments including cities, counties, and school districts. This is because the measure would reduce the taxes paid from people who would have moved anyway. The LAO notes that, at current, about 85,000 homeowners who are 55 and older move to different homes each year without receiving the tax break provided by Prop. 5, resulting in these homeowners paying higher property taxes.[20] Prop. 5 would reduce their property taxes and, therefore, reduce property tax revenue available to local governments. Prop. 5’s tax break would result in more people moving, with the number of movers increasing by “a few tens of thousands,” and could also have some effect on home prices and home building that would lead to more property tax revenue.[21] Since Prop. 5 would increase home sales it would also affect local property transfer taxes collected by cities and counties, likely in the tens of millions of dollars per year. The LAO analysis finds that the potential revenue losses from people who would have moved anyway are larger than the gains from higher home prices and home building. As a result, property tax revenues available to local governments would be reduced. In the first few years, the losses would be over $100 million per year for local governments and over $100 million per year for school districts, growing to approximately $1 billion annually for both over time.[22]
Reductions in local property tax revenue caused by Prop. 5 would decrease the amount of funding available for an array of local government services including schools, police, fire services, housing, infrastructure, and human services. The reduction in local property tax revenues would also lower local governments’ bonding capacity — the ability to issue bonds to finance local infrastructure projects.
What Would Proposition 5 Mean for Total K-14 Education Funding?
Prop. 5 would reduce the amount of annual property tax revenue available to K-12 school and community college districts by about $1 billion over time, according to the LAO.[23] In most years, however, the total amount of dollars provided to K-14 education statewide would not be affected by this reduction in local property tax revenue, due to provisions in California’s Constitution — added by Prop. 98 in 1988 — that guarantee K-14 education a minimum level of funding each year.
Under the Prop. 98 guarantee, two revenue sources together fulfill the state’s funding requirement for K-14 education: local property tax revenue and state General Fund dollars.[24] In most years, property tax revenue represents the first dollars applied toward meeting the Prop. 98 minimum guarantee, and the state’s General Fund fills the gap between the property tax revenue and the minimum funding level.[25] In such years, reductions to local property taxes under Prop. 5 would not affect the total amount of K-14 education funding statewide. This is because any reduction in property taxes would be offset by a corresponding increase in the amount of state General Fund dollars used to fulfill the Prop. 98 guarantee. In these years, the fiscal effects of extending property tax advantages to older homeowners under Prop. 5 would come at the expense of other vital state services that are supported with state General Fund dollars.
In certain other years, however, total K-14 education funding declines dollar for dollar with any reduction in property tax revenue. In these years, an alternative provision of Prop. 98 (known as “Test 1”) requires the state to provide K-12 schools and community colleges with a specific percentage of total General Fund revenue regardless of the amount of local property taxes that K-14 districts receive.[26] As a result, to the extent that Prop. 5 reduces local property tax revenue in Test 1 years, the total Prop. 98 funding level for K-14 education would fall because the state would not be required to spend General Fund dollars to make up the difference. Moreover, any reduction to local property tax revenue in a Test 1 year could affect calculations of the Prop. 98 guarantee in future years because the base for calculating the guarantee in most years is the prior-year Prop. 98 funding level.
Proposition 5 Would Reduce Funding for Some K-12 School and Community College Districts
While Prop. 5 would reduce local property taxes for K-14 education statewide, total annual revenue for most individual districts would not change. This is due to the difference between formulas in the state Constitution that determine the annual Prop. 98 funding guarantee for K-14 education and other formulas in state law that determine the amount of dollars allocated to individual K-12 school and community college districts. Annual revenue for a large majority of the state’s individual K-14 districts comes from a combination of sources that include local property taxes and the state budget. For these districts, reductions in local property taxes are backfilled by the state.[27] As a result, most California K-14 districts would not experience a change in their total revenue if Prop. 5 reduces the amount they receive from local property taxes.
In contrast, reductions in local property taxes under Prop. 5 would decrease funding for a small but significant share of K-12 and community college districts. Roughly 10% of California’s K-14 districts receive local property tax revenue beyond the amount of funding to which they are entitled based on formulas in state law.[28] The state does not backfill reductions in local property tax revenue for these so-called “excess tax” districts.[29] As a result, any decline in local property taxes caused by Prop. 5 would mean a dollar-for-dollar reduction in funding for K-12 school and community college “excess tax” districts.
What Would Proposition 5 Mean for the State Budget?
Prop. 5 would increase state spending to support K-14 education and, in turn, reduce the amount of General Fund dollars available for other state budget priorities. Over time, the LAO estimates that the measure would cause annual state spending for K-14 districts to increase by about $1 billion, though without raising the total amount of funds available to schools and community colleges.[30] This is because, as described above, Prop. 5 would reduce the amount of property tax revenue received by K-14 districts, which in most years would require the state General Fund to backfill the local property tax shortfall dollar-for-dollar up to the total funding level required by the Prop. 98 funding guarantee.[31] In these years, reductions in local property tax revenue caused by Prop. 5 would reduce funding available for programs other than K-14 education, such as health care, housing, human services, and higher education.
What Do Proponents Argue?
Proponents of Prop. 5, which is sponsored by the California Association of Realtors, include the Howard Jarvis Taxpayers Association, Californians for Disability Rights, Inc., and the California Senior Advocates League. Proponents argue that the measure “gives all seniors (55+) and severely disabled the right to move without penalty” and “empowers retirees living on fixed incomes.”[32] They state that “Prop. 5 helps Californians who want the opportunity to move,” “does not take funding away from public schools,” and “does not take funding away from public safety.”[33]
What Do Opponents Argue?
Opponents of Prop. 5 include the California State Association of Counties, Middle Class Taxpayers Association, National Housing Law Project, California Alliance for Retired Americans, and the League of Women Voters of California. Opponents argue that Prop. 5 will “further raise the cost of housing,” and “lead to hundreds of millions of dollars and potentially $1 billion in local revenue losses” and that it “gives a huge tax break to wealthy Californians.”[34] Opponents state that “Prop. 5 does nothing to help most low-income seniors but does help corporate real estate interests who are funding it.”[35]
Conclusion
Prop. 5 would make changes to California’s local property tax system by significantly expanding tax breaks for certain property owners. These tax breaks would provide advantages to older, wealthier homeowners at the expense of younger, less affluent homeowners and would do little to address the state’s current housing shortage. Voters should weigh Prop. 5’s tax breaks against annual revenue losses that would reduce funding available for local services and state programs. Prop. 5 would reduce annual funding for local governments by $1 billion over time, dollars that would no longer be available to support an array of local services including schools, police, fire services, housing, infrastructure, and human services. Another important consideration is the measure’s impact on the state budget. Prop. 5 in most years would reduce funding available to the state by $1 billion over time for key programs such as health care, housing, human services, and higher education.
[2] A property is considered substantially damaged or destroyed if the physical damage it sustains is more than 50% of its value immediately before the disaster. California Constitution, Article XIIIA, Section 2(f)(1).
[5] The 11 counties that allow inter-county transfers are Alameda, El Dorado, Los Angeles, Orange, Riverside, San Bernardino, San Diego, San Mateo, Santa Clara, Tuolumne, and Ventura. However, El Dorado County repealed its acceptance of inter-county transfers effective November 7, 2018.
[6] SB 1692 (Petris, Chapter 897 of 1996) created one exception to this one-time limit by allowing homeowners age 55 or older who transfer the taxable value of existing property to a new home to do so twice in a lifetime if they subsequently become disabled.
[7] California counties also may allow owners of contaminated property to transfer their taxable value from another county to a property that is acquired or newly constructed in their county.
[8] Property owners can still transfer the assessed value of a damaged or destroyed property to a replacement property that is greater than 120% of the market value of the destroyed property, but any amount over the 120% threshold is assessed at the full market value and added to the taxable value of the destroyed property.
[9] As noted above, these rules apply to homes purchased in the same county and in 11 California counties that allow older homeowners to transfer the taxable value of homes sold in a different county to a home purchased in their county.
[10] The taxable value of property typically increases each year based on an inflation adjustment that Prop. 13 limits to no more than 2% annually. This Issue Brief does not include annual inflation adjustments in calculations of annual property taxes in order to simplify the discussion.
[11] Legislative Analyst’s Office, “Proposition 5. Changes Requirements for Certain Property Owners to Transfer Their Property Tax Base to Replacement Property. Initiative Constitutional Amendment and Statute. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 37.
[13] As noted earlier, owners of property that has been substantially damaged or destroyed by disaster or contamination would also be eligible for the special property tax rules under Prop. 5. However, these owners would likely make up a very small share of the total number of eligible property owners. For example, the 2017 Tubbs Fire in Napa and Sonoma counties — the most destructive in California history as of August 2018 — destroyed 5,636 structures, a tiny number compared to the 4.0 million households estimated to be eligible under Prop. 5 due to the age of the homeowner.
[14] Unless otherwise indicated, all statistics in this section are from a Budget Center analysis of US Census Bureau, American Community Survey data for 2016.
[15] The Legislative Analyst’s Office (LAO) notes that about 85,000 homeowners age 55 or older currently move to different homes each year without receiving a tax break, and estimates that the number moving might increase by “a few tens of thousands” if Prop. 5 were to pass. See Legislative Analyst’s Office, “Proposition 5. Changes Requirements for Certain Property Owners to Transfer Their Property Tax Base to Replacement Property. Initiative Constitutional Amendment and Statute. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, pp. 36-37.
[16] The California Poverty Measure (CPM) is a state-specific measure of poverty modeled on the US Census Bureau’s Supplemental Poverty Measure. The CPM provides a more accurate measure of economic hardship than the official federal poverty measure and is particularly appropriate to measure poverty for this analysis, because it accounts for local differences in the cost of housing and differences in housing costs across renters, homeowners with mortgages, and homeowners without mortgages, among other improvements. See https://inequality.stanford.edu/publications/research-reports/california-poverty-measure.
[17] Legislative Analyst’s Office, “Proposition 5. Changes Requirements for Certain Property Owners to Transfer Their Property Tax Base to Replacement Property. Initiative Constitutional Amendment and Statute. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 37.
[18] Legislative Analyst’s Office, “Proposition 5. Changes Requirements for Certain Property Owners to Transfer Their Property Tax Base to Replacement Property. Initiative Constitutional Amendment and Statute. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 37.
[20] Legislative Analyst’s Office, “Proposition 5. Changes Requirements for Certain Property Owners to Transfer Their Property Tax Base to Replacement Property. Initiative Constitutional Amendment and Statute. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 36.
[21] Legislative Analyst’s Office, “Proposition 5. Changes Requirements for Certain Property Owners to Transfer Their Property Tax Base to Replacement Property. Initiative Constitutional Amendment and Statute. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 37.
[22] The LAO’s long-term estimates reflect inflation-adjusted figures. Legislative Analyst’s Office, “Proposition 5. Changes Requirements for Certain Property Owners to Transfer Their Property Tax Base to Replacement Property. Initiative Constitutional Amendment and Statute. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 36.
[23] The LAO’s estimate reflects annual property tax losses adjusted for inflation. See Legislative Analyst’s Office, “Proposition 5. Changes Requirements for Certain Property Owners to Transfer Their Property Tax Base to Replacement Property. Initiative Constitutional Amendment and Statute. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 37.
[24] Prop. 98 states that K-14 education is guaranteed an annual funding level that is the greater of a fixed percentage of state General Fund revenues (Test 1) or the amount that K-12 schools and community colleges received in the prior year, adjusted for enrollment and changes in the state’s economy (Test 2 and Test 3). For an explanation of the Prop. 98 guarantee, see California Budget & Policy Center, School Finance in California and the Proposition 98 Guarantee(April 2006).
[25] In Test 2 and Test 3 years, the state is required to provide General Fund dollars equal to the funding level guaranteed under Prop. 98 less local property tax revenue provided to K-12 schools and community colleges.
[26] Test 1 has been operative five times since the Prop. 98 guarantee was established in 1988-89 and ties the minimum funding level for K-14 education to a percentage of General Fund revenue, which has ranged from 35% to 41%. For a description of the history of Prop. 98, see Legislative Analyst’s Office, A Historical Review of Proposition 98 (January 2017).
[27] Under current formulas in state law, reductions in local property taxes for individual K-14 districts are backfilled by the state even in Prop. 98 Test 1 years when reductions in overall statewide local property tax revenue cause the Prop. 98 guarantee to fall.
[28] In 2017-18, so-called “excess tax” districts, excluding county offices of education, comprised 10.6% of K-12 school districts and 9.7% of community college districts.
[29] Similarly, any boost to the amount of property taxes that “excess tax” districts receive results in a dollar-for-dollar increase in their total funding.
[30] The LAO’s estimate reflects annual state spending for K-14 education adjusted for inflation. See Legislative Analyst’s Office, “Proposition 5. Changes Requirements for Certain Property Owners to Transfer Their Property Tax Base to Replacement Property. Initiative Constitutional Amendment and Statute. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 37.
[31] As noted above, in Prop. 98 Test 2 and Test 3 years the state is required to provide General Fund dollars equal to the funding level guaranteed under Prop. 98 less local property tax revenue provided to K-12 schools and community colleges.
Proposition 6, which will appear on the November 6, 2018 statewide ballot, would eliminate taxes and fees that California enacted in 2017 to fund transportation infrastructure and also would amend the state Constitution to require voter approval of any future fuel and vehicle-related tax and fee increases. Eliminating the new revenues enacted in 2017 would result in the loss of $5.1 billion annually for transportation infrastructure. Requiring voters to approve increases in fuel and vehicle-related taxes and fees would make it more difficult to fund transportation improvements. Moreover, any future increases in transportation funding could come at the expense of other vital public systems and supports, such as education, public safety, and health and human services. Prop. 6 qualified for the ballot with key support from members of California’s Republican congressional delegation; Republican gubernatorial candidate John Cox; and Carl DeMaio, chairman of Reform California. This Issue Brief provides an overview of the measure, discusses what it would mean for transportation and other public services, and examines other policy issues the measure raises in order to help voters reach an informed decision.
What Would Proposition 6 Do?
Prop. 6 would 1) eliminate transportation funding approved by the Legislature and Governor Brown as part of the Road Repair and Accountability Act of 2017 (also known as Senate Bill 1, or SB 1) and 2) amend the California Constitution to require the Legislature to submit any measure enacting taxes or fees on gas or diesel fuel, or related to the operation of a vehicle on public highways, to voters for approval.[1] Specifically, Prop. 6 would:
Eliminate recently enacted funding for roads, highways, and public transportation. Prop. 6 would reduce funding for highway and road maintenance/repair and transit programs by more than $5 billion annually by eliminating the fuel and vehicle-related taxes and fees established by SB 1.[2]
Require the Legislature to obtain voter approval of fuel and vehicle-related taxes. Prop. 6 would amend the California Constitution to require the Legislature to obtain voter approval of new or increased taxes on the sale, storage, use, or consumption of gasoline or diesel fuel, as well as for taxes paid for the privilege of operating a vehicle on public highways. The Legislative Analyst’s Office (LAO) notes that requiring voter approval would make it more difficult to enact fuel and vehicle-related taxes, potentially resulting in less revenue for transportation purposes in the future. The amount by which revenues would be reduced is unknown, as it would depend upon future actions of the Legislature and voters.[3]
What Did Last Year’s Transportation Package (SB 1) Do?
Governor Brown and the Legislature enacted SB 1, the Road Repair and Accountability Act of 2017, in April 2017, allocating more than $5 billion per year for transportation infrastructure improvements.[4] This transportation package provides funding for highway and road maintenance and rehabilitation, public transit, and projects to improve conditions for pedestrians and bicyclists as well as to facilitate the movement of goods. The revenue comes from both higher fuel taxes and new vehicle-related fees, with a key component being the increase to the state’s base excise tax on gasoline (the “gas tax”).[5] Prior to being raised in 2017, this tax had been frozen since 1994, with the result that revenues from the gas tax were unable to keep up with demands for transportation improvements.
In total, SB 1 seeks to address billions of dollars in deferred maintenance by restoring the purchasing power of the gas tax and boosting other fuel taxes and vehicle-related fees. The transportation package is projected to generate:
$2.5 billion per year from increased state taxes on gasoline, primarily from a 12-cent per gallon increase in the state’s base gas tax, which took effect on November 1, 2017.
$1 billion per year from a 20-cent increase in the state’s excise tax on diesel fuel and a 4 percentage point increase in the diesel fuel sales tax, both of which took effect on November 1, 2017.
$1.7 billion per year from a new annual transportation improvement fee, which took effect on January 1, 2018. This fee ranges from $25 to $175 per vehicle based on the value of the vehicle. For instance, a vehicle valued at less than $5,000 would incur a fee of $25, while a vehicle valued at $60,000 or more would incur a $175 fee.
$19 million per year from a new annual fee of $100 on all zero-emission vehicles starting on July 1, 2020.
These taxes and fees will be annually adjusted for inflation to prevent them from losing value over time. The transportation improvement fee will be adjusted starting on January 1, 2020; the gas and diesel fuel excise taxes will be adjusted starting on July 1, 2020; and the zero-emission vehicle fee will be adjusted starting on January 1, 2021.
SB 1’s initial allocations are already reflected in the state budget. For example, in its first (partial) year of implementation, the state budget for 2017-18 (the fiscal year that ended on June 30, 2018) allocated over $2.8 billion for SB 1 transportation improvements, with half going to state projects and half to local projects. The 2018-19 state budget allocates $4.6 billion for SB 1 transportation improvements, with half going to state projects and half to local projects.[6] By 2020, when all of SB 1’s taxes and fees are fully in effect and the inflation adjustments begin, the state expects the annual allocation to be $5.1 billion, split evenly between state and local projects.
The revenues raised by SB 1 support a variety of state highway, local road, transit, and other transportation improvements. Annual funding is allocated as follows:[7]
$1.9 billion per year for state highway and bridge repairs.
$1.8 billion per year for local road repairs.
$750 million per year for public transit and intercity rail.
$310 million per year to improve trade corridors.
$250 million per year to reduce congestion on major commute corridors.
$100 million per year for bicycle and pedestrian projects to better link travelers to transit facilities.
$170 million per year for a range of smaller programs, including freeway service patrols, local planning grants, university transportation research, and parks and agricultural programs.
What Would Passage of Proposition 6 Mean for Transportation and Other Public Services?
If California voters approve Prop. 6, the implications for public services would include:
Reduced funding for road, highway, and transit improvements. In the current state fiscal year (2018-19), Prop. 6 would eliminate $2.4 billion in transportation funding. By 2020-21, Prop. 6 would mean a reduction of $5.1 billion annually in funding for road and transit improvements.[8]
Decreased ability to raise state revenues for transportation infrastructure in the future. Prop. 6 would require the Legislature to obtain voter approval for all future increases in fuel and vehicle-related taxes and fees. While the actual revenue impact of this provision would depend on future legislative actions and the will of California voters, requiring voter approval would undoubtedly make it harder to raise revenues for transportation infrastructure.[9]
Increased pressure on state and local budgets to finance future public transportation improvements. The combination of reducing state funds for transportation infrastructure and making it more difficult to raise revenues for transportation projects in the future would put the state, as well as local governments, under increasing pressure to fund future transportation investments from their general funds, from which they must also pay for an array of other vital public systems and supports. Demands for transportation investments would, as a result, compete with needed investments in education, public safety, housing, and health and human services.
Reduced ability to keep up with critical public transportation needs in the future and reduced safety levels. The increased difficulty of raising dedicated state revenues for transportation, coupled with competition for state and local general fund support, would make it harder for state and local governments to keep up with the demand for transportation improvements in the future. California’s state and local governments already confront a large backlog of deferred maintenance (see more on this topic in the next section). The costs of maintenance and repairs rise the longer they are deferred due to increasing decay and the likelihood that facilities may need to be fully replaced. Putting off maintenance and repairs also increases the safety risk of the state’s transportation facilities — roads, highways, bridges, and transit facilities.
Fewer jobs and slower economic growth. Reduced transportation funding would mean fewer jobs and less economic activity in communities across California. The state estimates that there are more than 4,000 local transportation projects already receiving SB 1 funding, including projects in every county in the state. Those projects generate jobs and economic activity. For instance, the White House Council of Economic Advisors has estimated that every $1 billion in highway and transit investment supports 13,000 jobs.
Does California Need Additional Funding for Transportation?
California has a vast state and local transportation infrastructure that encompasses a state highway system with 50,000 lane-miles, 300,000 miles of locally owned roads, 25,000 bridges (13,000 state, 12,000 local), and 200 local transit agencies that operate bus, light rail, and subway systems.[10] The California Department of Finance notes that “[e]fficient operation of this vast network is vital to the state’s continued economic growth and also serves much of the country, with nearly 20 percent of the goods imported to the United States moving through California ports, highways, and railways. Bottlenecks in the state’s trade corridors constrain economic growth and reduce quality of life when Californians spend hundreds of hours in traffic.”[11]
Approximately $35 billion is spent each year on transportation in California, including $16 billion from local sources, $12 billion from state sources, and $7 billion from federal sources.[12] Local sources come from local sales taxes (which are closely restricted by state law), transit fares, and local government general funds that must also fund other vital programs and services such as public safety, housing, and health and human services. Federal funding primarily comes from federal fuel taxes, including the federal excise tax on gasoline. The federal gas tax is not automatically adjusted for inflation each year to account for the rising costs of goods and services. This means that Congress and the President must agree to raise the federal gas tax rate. However, federal policymakers have not increased this rate since 1993, leaving the federal Highway Trust Fund (the primary source of federal funding for state and local transportation) unable to keep pace with demands for new facilities or for maintaining and repairing existing highways, roads, bridges, and other facilities.[13]
State transportation funding primarily comes from fuel taxes and vehicle-related fees. Until the passage of SB 1, California had not increased its gas tax rate since 1994, leaving the state unable to keep up with demands for transportation improvements.[14] As a result, California has faced a significant deficit in transportation funding to pay for infrastructure improvements and deferred maintenance — a deficit that has been exacerbated by inadequate federal funding. In its 2017 “Infrastructure Report Card” assessing the state of the nation’s infrastructure, the American Society of Civil Engineers estimated that 50% of California’s public roads are in poor condition, that 5.5% (1,388) of the state’s bridges are structurally deficient, and that Californians pay $844 per driver annually for the costs of driving on poorly maintained roads.[15] As recently as the 2016-17 state budget, Governor Brown’s Administration estimated that California confronts $57 billion in total deferred maintenance needs related to transportation.[16]
The SB 1 transportation package aims to address the state’s transportation infrastructure needs by providing more than $5 billion in additional annual funding. As noted above, about half of this funding comes from the increase to the state’s base gas tax rate, which had been frozen since 1994. If the 1994 rate ($0.18 per gallon) had been adjusted each year to account for changes in the cost of living, it would have risen to $0.32 per gallon by 2018 — slightly higher than the current rate of $0.30 per gallon established by SB 1 (see chart below). In other words, SB 1 nearly restores the purchasing power of the gas tax to fund transportation improvements. Moreover, by annually adjusting all of the fuel and vehicle-related taxes and fees for inflation, SB 1 ensures that the state’s sources of funding for transportation infrastructure will be better able to keep up with future needs.
Is the Gas Tax a Fair Tax?
Whenever increases in the gas tax are considered, questions are raised about the fairness of the tax. There are different ways to assess the fairness of taxes, but most people agree that a fair tax system asks taxpayers to contribute to the cost of public services based on their ability to pay. When lower-income households spend a larger share of their budgets on taxes, such as for transportation, than do higher-income households, those taxes are considered to be regressive. Conversely, taxes that impose a relatively greater cost on higher-income households are considered to be progressive.[17] In this respect, gas taxes are often thought to be regressive because all households pay the same rate regardless of their income.
However, it is important to put the gas tax in the broader context of overall funding for the transportation package. State leaders structured the transportation improvement fee on vehicles — another key piece of the package’s revenue mix — so that it is based more on people’s ability to pay, with the fee increasing relative to the value of the vehicle.
Moreover, the critique that the gas tax has a greater impact on low-income households would be more concerning if this tax were chosen over other, more progressive ways of funding these improvements. The reality is that transportation funding in California, and nationally, as outlined above, primarily relies on a set of usage-based excise taxes and fees — taxes and fees that households and businesses pay to use highways, roads, transit facilities, ports, airports, and so on. While usage-based taxes and fees may be mostly regressive, they can be considered fair, to a degree, in that they are paid as the cost of using the service. Even alternative transportation funding options — toll roads and fees based on vehicle miles traveled, for instance — raise revenues based on people’s use of highways and roads, and not with regard to users’ incomes. Another potential alternative, the carbon tax — a tax imposed on the burning of carbon-based fuels such as coal, oil, and gas — would still generate revenues based on the demand for, and use of, those fuels.
Another option would be to fund transportation improvements from the state’s General Fund, or through general obligation (GO) bonds where the service on the debt is paid out of the General Fund, because most state General Fund revenues come from California’s progressive income tax. However, as noted above, relying on the state General Fund would put transportation investments in competition with other vital public systems and supports for limited state funding.
Usage-based taxes and fees also make sense as a source of transportation funding because they can be structured in ways that meet other policy goals. For instance, because driving creates emissions that harm the environment, taxes and fees can be designed to encourage transit use and alternative forms of transportation.
Concerns about how particular taxes affect lower-income individuals can be addressed by providing offsets. For instance, California could expand its state Earned Income Tax Credit (the CalEITC) — a refundable credit for low-income working Californians — as a means of offsetting increased gas costs.[18] The Institute for Taxation and Economic Policy recommends that states modernize their gas taxes by increasing gas tax rates to reverse long-term declines (relative to inflation), structuring gas taxes so that their rates keep up with rising costs, and creating or enhancing tax credits, like the EITC, for low-income families to offset the impact of gas tax increases.[19]
Are SB 1 Revenues Required to Be Spent on Transportation Improvements?
One of the questions raised about the SB 1 transportation package is whether the funds are assured to go toward transportation improvements. In fact, SB 1 dedicates approximately two-thirds of its revenues to highway and road repairs and the remainder to other transportation improvements, such as public transit, according to the LAO.[20] In addition, the SB 1 transportation funding package included a set of accountability provisions designed to ensure that the revenues are spent as intended.[21] Among these was a constitutional amendment on the June 2018 statewide ballot (Prop. 69, approved by 4 in 5 voters) that prevents SB 1 funds from being used for anything other than specified transportation purposes.[22]
What Do Proponents Argue?
Proponents of Prop. 6, including Republican gubernatorial candidate John Cox, the Howard Jarvis Taxpayers Association, and the National Federation of Independent Business, argue that the measure would “immediately lower the price” of gasoline and that much of the funds from state fuel and vehicle-related taxes and fees are “used for programs other than streets, roads and highways.”[23]
What Do Opponents Argue?
Opponents of Prop. 6, including the League of California Cities, the California State Association of Counties, associations representing first responders and public safety personnel, and the California Chamber of Commerce, argue that Prop. 6 “eliminates funding for more than 6,500 road safety and transportation improvement projects,” “threatens public safety,” and “eliminates thousands of jobs and hurts our economy.”[24]
Conclusion
Prop. 6 would eliminate recently enacted funding for transportation infrastructure by repealing certain fuel and vehicle-related taxes and fees. The measure would also amend the state Constitution to require the Legislature to obtain voter approval of any future increases in fuel and vehicle-related taxes and fees. The fiscal impact of Prop. 6 would be to eliminate $5.1 billion in annual revenues used to fund highway and road maintenance and repairs, transit, and other transportation programs. Requiring voters to approve future fuel and vehicle-related taxes and fees would make it more difficult to fund transportation infrastructure improvements in the future.
Prop. 6 presents California voters with a choice as to whether they are willing to support continued investments in California’s transportation infrastructure. Approving Prop. 6 would undo recent increases in fuel and vehicle-related taxes and fees and significantly decrease funding available for transportation infrastructure. Rejecting Prop. 6 would allow California to continue to invest in highways, roads, bridges, transit, and other transportation improvements.
Endnotes
[1] Secretary of State’s Office, California General Election Tuesday November 6, 2018: Text of Proposed Laws, downloaded from https://vig.cdn.sos.ca.gov/2018/general/pdf/topl.pdf on August 21, 2018. See also Legislative Analyst’s Office, “Proposition 6: Eliminates Certain Road Repair and Transportation Funding. Requires Certain Fuel Taxes and Vehicle Fees Be Approved by the Electorate. Initiative Constitutional Amendment. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 40.
[2] Legislative Analyst’s Office, “Proposition 6: Eliminates Certain Road Repair and Transportation Funding. Requires Certain Fuel Taxes and Vehicle Fees Be Approved by the Electorate. Initiative Constitutional Amendment. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 41.
[3] Legislative Analyst’s Office, “Proposition 6: Eliminates Certain Road Repair and Transportation Funding. Requires Certain Fuel Taxes and Vehicle Fees Be Approved by the Electorate. Initiative Constitutional Amendment. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 41.
[5] In addition to the “base” excise tax, the state has a separate excise tax on gasoline known as the “swap” excise tax. For a description of the swap excise tax, see Legislative Analyst’s Office, Overview of the 2017 Transportation Funding Package (June 2017), pp. 2-3.
[8] Legislative Analyst’s Office, “Proposition 6: Eliminates Certain Road Repair and Transportation Funding. Requires Certain Fuel Taxes and Vehicle Fees Be Approved by the Electorate. Initiative Constitutional Amendment. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 41.
[9] Legislative Analyst’s Office, “Proposition 6: Eliminates Certain Road Repair and Transportation Funding. Requires Certain Fuel Taxes and Vehicle Fees Be Approved by the Electorate. Initiative Constitutional Amendment. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 41.
[12] For a discussion of transportation infrastructure funding in California see Legislative Analyst’s Office, “Proposition 6: Eliminates Certain Road Repair and Transportation Funding. Requires Certain Fuel Taxes and Vehicle Fees Be Approved by the Electorate. Initiative Constitutional Amendment. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, p. 40.
[17] For a discussion of California’s tax system, including state and local sales taxes and other sources of revenue, see Jean Ross, Alissa Anderson, and Samar Lichtenstein, Principles and Policy: A Guide to California’s Tax System (California Budget & Policy Center: April 2013).
[20] Legislative Analyst’s Office, “Proposition 6: Eliminates Certain Road Repair and Transportation Funding. Requires Certain Fuel Taxes and Vehicle Fees Be Approved by the Electorate. Initiative Constitutional Amendment. Analysis by the Legislative Analyst,” in Secretary of State’s Office, California General Election Tuesday November 6, 2018: Official Voter Information Guide, pp. 40-41.
[22] Proposition 69 was approved on June 5, 2018 (81% yes, 19% no). See Secretary of State’s Office, Statewide Direct Primary Election – Statement of the Vote, June 5, 2018: State Ballot Measures (Propositions 68-72) by County, downloaded from https://elections.cdn.sos.ca.gov/sov/2018-primary/sov/132-ballot-measures.pdf on August 22, 2018.
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New Census figures released today show promising gains in income and employment for Californians, yet also show that millions of California residents are still struggling to get by on extremely low incomes. These data underscore the need for policymakers to ensure that the economy’s recent gains are shared among all Californians.
The latest Census figures indicate that median household income in California grew to $71,805 in 2017, an increase of 3.8% over the prior year after adjusting for inflation. Median family income and median earnings for all workers also increased compared to inflation-adjusted income and earnings in 2016, and a larger share of Californians were employed. These positive economic gains are encouraging, but must be considered within the context of the slow speed overall with which the California economy has recovered from the Great Recession. Compared to 2007, when California incomes peaked before the Great Recession, median household income has only increased by 1.1% after adjusting for inflation. This modest real change in the incomes of typical households, this far into the economic recovery, helps explain why many Californians report that they do not feel economically secure, despite the state’s improving job market.
More troubling are new data from the Census that show that millions of people in California continue to struggle to get by on extremely low incomes. On the positive side, California’s official poverty rate of 13.3% for 2017 was lower compared to the previous year, when it was 14.3%. The state’s official child poverty rate also dropped to 18.1% in 2017, from a rate of 19.9% in 2016. However, 5.2 million Californians, including 1.6 million children, still lived in poverty in 2017 based on the official poverty measure. For a family of two adults and two children, for example, this means living on an annual cash income of less than about $24,900. Moreover, the state’s poverty rate and child poverty rate under the official poverty measure still have not dropped to their pre-Great Recession levels.
Also troubling, 2.2 million individuals, including 600,000 children, lived in deep poverty in 2017 based on the official poverty measure, meaning that their families had cash incomes of less than half of the official poverty threshold last year, or less than about $12,400 for a two-parent family with two children. The state’s deep poverty rates of 5.8% overall and 7.2% for children were lower than in 2016 (when they were 6.2% overall and 8.1% for children), but remain problematically high.
The latest Census figures also show that there are stark differences in people’s economic well-being across California’s counties. In 2017, the official poverty rate ranged from a low of 5.6% to a high of 24.6% across the counties, while the official child poverty rate ranged from 3.2% to 37.1%. In eight counties, more than 1 in 5 people lived in poverty, largely in the Central Valley (see Map 1). Additionally, more than 1 in 5 children lived in poverty in 14 counties, and this includes four counties — again, most in the Central Valley — where over 30% of children were in poverty (see Map 2).
Although these Census figures published today show that poverty remains unacceptably high in California, they actually understate the problem of economic hardship in the state because they reflect an outdated measure of poverty. Census figures released yesterday based on an improved measure — the Supplemental Poverty Measure (SPM), which accounts for the high cost of housing in many parts of the state — show that roughly 7.5 million Californians per year, nearly 1 in 5 state residents (19.0%), could not adequately support themselves and their families between 2015 and 2017. Under this more accurate measure of hardship, California continues to have one the highest poverty rates and by far the most residents in poverty of the 50 states.
Other specific steps that policymakers can take include:
Reject steep cuts to public supports that help families make ends meet and get ahead. Public supports such as food assistance through the Supplemental Nutrition Assistance Program (SNAP) (CalFresh in California) provide vital resources to help Californians make ends meet now, while also helping children in poverty succeed over the long-term, according to research. Yet this month federal policymakers are considering changes to SNAP that would reduce the number of individuals able to access this support. People in communities throughout the state would likely be harmed.
Help families afford their basic needs. With housing costs far outpacing many families’ earnings in recent years, it has become increasingly challenging for people with low incomes to keep a roof over their heads. Over half of California renters are housing cost-burdened, meaning that they pay more than 30 percent of their income toward housing, and nearly a third spend more than half of their income on housing. Since housing costs are most families’ biggest basic expense, addressing the housing affordability crisis is key to broadening economic security in California. Voters will have the chance to consider multiple ballot measures this fall that aim to address the state’s housing challenges (which will be discussed in upcoming Budget Center blog posts and publications). Continuing to invest in affordable child care, another major basic expense for many working families, can also make a difference.
Make sure workers earn enough to support themselves and their families. Most families in poverty work, which means that low pay and not enough work hours are key barriers to economic security and opportunity. California’s recent decision to gradually raise the state’s minimum wage to $15 per hour by 2023 has already made a difference for the lowest-paid workers in our state. California policymakers have also supported low-wage workers by creating the CalEITC — a refundable state tax credit that helps low-earning workers pay for basic necessities — and expanding it in recent years to benefit all full-time minimum wage working parents and self-employed workers as well as low-income working young adults and seniors. Policymakers could build on this important investment by increasing the size of the CalEITC, particularly for working adults without dependent children; extending the credit to workers who remain excluded (such as those filing taxes with an Individual Taxpayer Identification Number); expanding access to free tax preparation services; and ensuring that CalEITC funding is protected in future economic downturns, when tax revenues are lower but need is even greater.
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State and National Leaders Must Do More to Promote Economic Security and Opportunity
California continues to have one of the highest poverty rates among the 50 states, statistically tied for first with Florida and Louisiana, according to new Census data released this morning based on the Supplemental Poverty Measure (SPM). This poverty measure provides a more accurate indicator of economic need in California than the official federal poverty measure because it accounts for the high cost of living in many parts of the state, among other factors (see note below).
The new data show that about 7.5 million Californians — nearly 1 in 5 state residents (19.0%) — do not have enough resources to cover the costs of basic necessities. High housing costs are a key reason for California’s high SPM poverty rate, underscoring the need to increase access to affordable housing within the state. The new data also show the critical role played by public supports like tax credits, food assistance, and disability benefits in reducing poverty at the national level. Protecting and strengthening these supports is vital to bringing down California’s high poverty rate. State lawmakers have taken recent steps to bolster supports like the CalEITC, California’s refundable tax credit for working families, and CalWORKs, the state’s welfare-to-work program. National policymakers, on the other hand, over the past year have proposed changes to public supports that would reduce their effectiveness in addressing poverty, including changes currently being considered to the most important public source of food assistance.
High and Growing Housing Costs Drive Up California’s Poverty Rate
With 7.5 million state residents struggling to get by, California has by far the largest number of individuals in poverty of any state, based on the SPM.[1] In fact, nearly 1 in 6 Americans in poverty live in California. The state’s high SPM poverty rate largely reflects the high housing costs in many parts of California. The SPM accounts for differences in housing costs across the country, unlike the official federal poverty measure, and when these costs are factored in, a much larger share of the state’s population is shown to be living in poverty: 19.0% under the SPM, compared to 13.4% under the official measure.[2] As a result, California’s poverty ranking among the 50 states jumps from 16th under the official poverty measure up to first under the SPM (statistically tied with Florida and Louisiana), a dubious distinction.[3]
Housing affordability is a problem throughout California, even in areas where housing costs are lower, because incomes are also lower in these areas. Statewide, more than half of renter households pay more than 30% of their incomes toward housing, making them housing cost-burdened, and nearly a third are severely cost-burdened, paying more than half of their incomes toward housing. California’s unaffordable housing costs are particularly a problem because they have been growing faster than incomes for most workers. While median household rents increased by 13.2% from 2006 to 2016, median annual earnings for full-time workers (those working at least 35 hours per week) grew by only 4.1% during that period.
Given California’s serious housing affordability challenges, it is important to pursue policies that can help increase the availability of affordable housing and meet the needs of individuals and families facing housing crises. This year state policymakers took several important steps to support local and statewide efforts to increase the availability of shelter and support services for Californians at risk of or struggling with homelessness. Building on these steps, voters will have the opportunity to consider several state ballot measures this fall that aim to address the state’s housing challenges (as will be discussed in upcoming Budget Center publications and blog posts).
Federal Policy Proposals Threaten to Plunge More Californians Into Poverty
With nearly 1 in 5 residents still struggling with poverty, even as the unemployment rate has dropped substantially since the Great Recession, Californians need strong support from state and national leaders to enable more people to share in the economy’s recent gains. Yet proposals by federal policymakers would change key public supports in ways that would reduce support for families and individuals struggling with poverty. Congress is currently considering a proposal to cut funding and impose new work requirements on people who receive food assistance through the Supplemental Nutrition Assistance Program (SNAP, known as CalFresh in California) as part of the Farm Bill that is expected to be passed this month. The Trump Administration is also soon expected to propose a new “public charge” rule for immigrants applying for green cards that would jeopardize their chances of long-term legal status if they or any of their family members (including US-born citizen children) use supports like public health insurance or receive benefits like refundable tax credits for low-income working families.
These proposed policy changes would result in fewer families and individuals accessing the public supports they need to meet critical basic needs, likely increasing California’s already unacceptably high poverty rate. Moreover, research shows that public investment in safety net supports for children, in particular, produces important long-term public and private benefits as a result of improvements in health and economic productivity in adulthood — an argument for strengthening, rather than shrinking, these types of investments.[4]
* * *
Note About the Census Bureau Data Released Today
The state-level figures released today reflect average annual poverty rates during a three-year period, from 2015 to 2017. The SPM addresses a number of shortcomings of the official poverty measure. One is the fact that under the official measure, the income threshold for determining who lives in poverty is the same in all parts of the US. For example, a single parent with two children was considered to be living in poverty in 2017 if their annual income was below about $19,700, regardless of whether they lived in a low-cost place like rural Mississippi or a high-cost place like San Francisco. The SPM better accounts for differences in the cost of living by adjusting the poverty threshold to reflect differences in the cost of housing throughout the US. For example, the SPM poverty line for a single parent with two children living in a renter household in San Francisco was about $30,800 in 2017 — considerably higher than the poverty line based on the official measure.
Another shortcoming of the official poverty measure is that it fails to factor in the broad array of resources that families use to pay for basic expenses. The official measure only counts cash income sources, such as earnings from work, Social Security payments, and cash assistance from welfare-to-work programs. It does not take into account noncash resources, such as food or housing assistance, and it fails to consider how tax benefits, such as the federal Earned Income Tax Credit (EITC), increase people’s economic well-being. The SPM improves on the official measure by including these resources. It also better accounts for the resources people actually have available to spend by subtracting from their incomes what is needed to pay for necessary expenses, including work-related expenses, such as child care; medical expenses, such as health insurance premiums and out-of-pocket costs; and state and federal income and payroll taxes.
After incorporating these improvements over the official poverty measure, the SPM produces a more realistic picture of poverty in California: the state’s SPM poverty rate was 1.4 times the official poverty rate between 2015 and 2017 (19.0% versus 13.4%, respectively).
Although the SPM provides a more accurate picture of economic hardship in California, it does not indicate how much people need to earn to achieve a basic standard of living. Measures of what it actually takes to make ends meet in California show that families need incomes several times higher than the official poverty line to afford basic necessities.
[3] Florida had an annual average of 18.1% of state residents living in poverty based on the SPM from 2015 to 2017, while in Louisiana the poverty rate was 17.7%. The annual average SPM poverty rates for California, Florida, and Louisiana were not statistically different for this three year period, so all three states were statistically tied for the highest state SPM poverty rate.
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Women’s participation in the California workforce has become critical to families’ financial security and the state’s economic well-being. As part of our work on the California Women’s Well-Being Index, the Budget Center recently released a set of issue briefs focusing on women’s employment, earnings, and economic security, highlighting how gender- and race-based discrimination continues to hold women back. Labor Day presents an opportunity to highlight the data and analysis from these new briefs and also to discuss policy solutions that could boost the financial security of women and their families in California.
Mothers Have Become Breadwinners in California
The share of working women with children has nearly doubled in the past 50 years, and the most recent data show that 2 out of 3 women with children under the age of 18 are in the labor force. Because so many mothers are working for pay, over half (55%) made a significant contribution to their families’ finances in California in 2016 — more than double the share in 1967 (see chart below). Yet, despite the dramatic increase in mothers’ labor force participation, state and federal policies do not go far enough to support parents struggling to balance work and family obligations. This holds women, their families, and the economy back. The right policy choices are particularly important for parents with low incomes who often have limited benefits and are subject to unpredictable and nonstandard work schedules, making it difficult to both hold a job and care for their families.
Women Are More Likely Than Men to Earn Low Wages
Women are more likely overall than men to earn low wages, but a much larger share of Latinx women earned low wages compared to women in other racial and ethnic groups. In California in 2016, 55% of Latinx women earned low wages — defined as less than $14.71 per hour (see chart below). The share of Latinx women who earned low wages is more than double that of white women (26%). In addition, more than 1 in 3 Native American and African-American women earned low wages in 2016. Women earning low wages often struggle to pay rent or buy food. This lack of financial security is stressful and affects women’s mental and physical health as well as the health and well-being of their children.
Women Are Overrepresented in Low-Wage Occupations
More than half (53%) of workers in the 10 lowest-paid occupations are women, while only 30% of workers in the 10 highest-paid professions are women (see chart below). Women aren’t clustering in low-wage jobs simply due to personal preferences. Research shows that “women’s work” is often valued less than comparable work done by men, regardless of skill level. In fact, as the share of women working in a given occupation increases, the pay in that occupation decreases. Alternatively, women may make career choices — even taking a pay cut or turning down a promotion — to minimize harassment or maximize their ability to juggle work and family obligations.
Women Are Still Paid Less Than Men
For the reasons mentioned above, and more, women working full-time, year-round in California earned just a fraction of what white men earned in 2016. These disparities vary by race and ethnicity, but the wage gap is significantly larger for Latinx women, who earned just 42 cents for every dollar earned by white men (see chart below). Native American, Pacific Islander, and African-American women all earned less than 60 cents for every dollar earned by white men. Even the highest-earning racial groups — white and Asian women — earned just 78 and 75 cents, respectively, compared to white men.
If women had earned the same amount as comparable men in 2016, the state would have seen a decrease in poverty rates and an increase in economic activity. According to the Institute for Women and Policy Research, eliminating the wage gap in California would have resulted in an estimated average increase of roughly $6,400 in earnings per working woman. This would have cut working women’s poverty rate from 7.6% to 3.6%. Because 2 out of 3 mothers with children under the age of 18 were working in California in 2016, equal pay for working moms would have also benefited children across the state, cutting their poverty rate nearly in half (from 11.6% to 6.2%). Finally, eliminating the wage gap would have added $55.5 billion to the state’s economy, equal to 2.1% of California’s Gross Domestic Product in 2016.
Policy Solutions to Boost Women’s Economic Security
Women’s work is critical to their families’ financial security, and it is a boon to the economy. Yet, women continue to face persistent disparities that continue to hold them back — particularly women of color who face both gender- and race-based discrimination. State and local policymakers should craft policies that boost women’s economic security, particularly for working mothers. This includes increasing funding for the state’s subsidized child care and development system, continuing to strengthen the California Earned Income Tax Credit (CalEITC), adopting policies that combat unfair scheduling practices, and expanding California’s paid family leave program. (The Budget Center’s full suite of policy recommendations can be downloaded here.)
It is crucial that state and local policymakers work to address women’s economic security. This could improve health and well-being, with positive outcomes for women, their children, and the communities they live in. When women thrive, their families and communities prosper.
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Executive Summary
Earlier today, Governor Jerry Brown signed more than 20 bills in the 2018-19 state budget package, his final budget as Governor. The new budget package forecasts revenues that are $8.0 billion higher — over a three-year window — than projected in January, due to strong economic growth.
The budget agreement prioritizes building up state reserves. As required by Proposition 2 (2014), $3.5 billion is set aside, with half going to the state’s rainy day fund and half to pay down debts. An optional $2.6 billion is deposited into a new, temporary reserve; $2 billion is placed in a discretionary reserve; and a new $200 million “safety net reserve” is created to help support CalWORKs and Medi-Cal services in an economic downturn. State reserves are expected to total almost $16.0 billion by the end of 2018-19.
The 2018-19 budget makes some notable investments in the economic security of Californians. It strengthens the California Earned Income Tax Credit (CalEITC) by extending eligibility to young adults and seniors who are currently excluded and raising the income eligibility limit to account for the rising state minimum wage. The budget also includes key investments in the safety net: providing funding for CalWORKs grant increases to help address deep poverty; establishing a CalWORKs home visiting pilot; and ending the “SSI cash-out,” a state policy that prohibits many low-income seniors and people with disabilities from receiving federal food assistance through the CalFresh program.
Significant investments are also made in education. Growth in state revenues means increased funding for K-14 education under the Prop. 98 minimum guarantee, including funding to support full implementation of the Local Control Funding Formula for K-12 schools. The budget also provides additional support for California’s Community Colleges (CCCs), creates a new formula allocating CCC funds, and establishes an online community college. The California State University and University of California receive increases in one-time and ongoing funding. In addition, the new budget package provides modest increases for early childhood education and to address homelessness, though far less than what the Legislature had sought.
In several areas, the budget provides a roadmap for investments in coming years, calling for future savings in excess of the state’s rainy day fund cap to be split among construction and maintenance of state buildings, housing, and rail projects; cost-of-living-adjustments (COLAs) to be reinstated for CalWORKs and SSI/SSP by 2022-23; and a plan for achieving unified financing of health care delivery in California.
The following sections summarize key provisions of the 2018-19 budget.
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Budget Package Brings Constitutional Rainy Day Fund Balance to Its Maximum Level
California voters approved Proposition 2 in November 2014, amending the California Constitution’s rules for the state’s Budget Stabilization Account (BSA), commonly referred to as the rainy day fund. Prop. 2 requires an annual set-aside equal to 1.5% of estimated General Fund revenues. An additional set-aside is required when capital gains revenues in a given year exceed 8% of General Fund tax revenues. For 15 years — from 2015-16 to 2029-30 — half of these funds will be deposited into the rainy day fund and the other half will be used to reduce certain state liabilities (also known as “budgetary debt”).
The 2018-19 budget package assumes that Prop. 2 will constitutionally require the state to deposit $1.75 billion into the BSA and to use an additional $1.75 billion to repay budgetary debt. Moreover, the budget deal includes the Governor’s proposal to make an optional deposit of $2.6 billion into the BSA in 2018-19 in order to bring the rainy day fund to its constitutional maximum — 10% of General Fund tax revenue. (As explained in the section titled “Budget Agreement Creates Two New Reserves,” this additional $2.6 billion will temporarily be held in a new reserve called the Budget Deficit Savings Account.) Overall, the 2018-19 budget agreement assumes a $4.4 billion transfer from the General Fund to the BSA: $1.75 billion as required by the state Constitution, plus the $2.6 billion optional deposit. With these funds, the BSA balance is projected to grow to $13.8 billion by the end of the 2018-19 fiscal year, which ends on June 30, 2019. If future mandatory deposits exceed the BSA’s maximum capacity, Prop. 2 would require these “overflow” funds to be spent on infrastructure. The 2018-19 budget package includes a plan for allocating any such excess funds, beginning in 2019-20, for “state buildings and their deferred maintenance, housing, and rail projects,” according to the Assembly Floor Report.
Along with the constitutional rainy day fund, the state has a separate discretionary reserve called the Special Fund for Economic Uncertainties (SFEU), which was established in the early 1980s. The budget package assumes that the state will end the 2018-19 fiscal year with an SFEU balance of $2.0 billion.
The 2018-19 budget deal creates two new reserves: the Safety Net Reserve Fund, which includes both a CalWORKs subaccount and a Medi-Cal subaccount, and the Budget Deficit Savings Account (BDSA). The purpose of the Safety Net Reserve Fund is to set aside funds that can be used to maintain benefits and services for CalWORKs and Medi-Cal participants during economic downturns when state revenues decline and need rises. The budget agreement deposits $200 million General Fund into the CalWORKs subaccount and requires the Department of Finance (DOF), in consultation with certain other departments, to establish a process for making future deposits into the reserve and for withdrawing and distributing funds from the reserve.
The BDSA will temporarily hold a $2.6 billion discretionary deposit (above what is constitutionally required to be deposited) into the state’s existing rainy day fund, the Budget Stabilization Account (BSA). This reflects the amount of additional funds the Administration currently projects are needed to bring the BSA up to its constitutional maximum in 2018-19. The Administration will revise this amount based on updated budget projections in May 2019 and that amount will be transferred from the BDSA to the BSA no earlier than May 31, 2019. Half of any funds remaining in the BDSA will be transferred to the Safety Net Reserve Fund, while the remainder will stay in the BDSA.
The 2018-19 budget deal strengthens the California Earned Income Tax Credit (CalEITC) — a refundable state tax credit that boosts the incomes of low-earning workers and their families, helping them afford necessities. Specifically, the agreement:
Extends the CalEITC to low-earning young adults and seniors who are ineligible for the credit. Currently, workers without dependents have to be between the ages of 25 and 64 to qualify for the CalEITC. The budget deal would change this requirement beginning in tax year 2018 so that workers without dependents could qualify for the credit as long they are at least age 18.
Modestly increases the income limit to qualify for the credit to account for the rising state minimum wage. Currently, workers with dependents have to earn less than about $22,000 annually to qualify for the credit — roughly equal to full-time, year-round earnings for a worker earning $10.50 per hour (the state’s minimum wage for large businesses in 2017). The budget deal would raise this income limit beginning in tax year 2018 to just under $25,000 — equivalent to full-time, year-round earnings for workers earning $12 per hour (the state’s minimum wage for large businesses in 2019.) The CalEITC income limit would also increase for workers who do not have dependents, going from about $15,000 currently to almost $17,000.
These two provisions are expected to reduce General Fund revenues by $60 million in 2018-19.
The budget agreement also provides $10 million General Fund to support community-based efforts to promote the CalEITC and evaluate those efforts as well as to support organizations that provide free tax preparation services.
The budget deal does not include an Assembly proposal to extend the CalEITC to low-earning immigrants who are currently ineligible for the credit because they file their taxes using Individual Taxpayer Identification Numbers (ITINs).
Budget Package Creates New Process for Certifying Proposition 98 Minimum Funding Guarantee
Approved by voters in 1988, Proposition 98 constitutionally guarantees a minimum level of funding for K-12 schools, community colleges, and the state preschool program. The 2018-19 budget agreement assumes the same Prop. 98 funding levels as were reflected in the May Revision: $78.4 billion in 2018-19, $75.6 billion in 2017-18, and $71.6 billion in 2016-17.
The budget agreement establishes a new process for how the state certifies the final annual funding level guaranteed under Prop. 98. Specifically, the budget package requires the Department of Finance (DOF) to calculate and publish the Prop. 98 guarantee no later than May 14 for the prior fiscal year and, after a period of public comment, to issue a final certification of the minimum funding obligation and publish this amount by August 15. (For example, the final certification for fiscal year 2017-18 must be published by August 15, 2019.) Any legal challenge to a final certification must be filed within 90 days of DOF’s publication of the Prop. 98 guarantee. The budget agreement also establishes a new process for finalizing prior-year Prop. 98 spending, adjusts the Prop. 98 guarantee to include the cost of wraparound preschool provided by K-12 school districts and county offices of education (COEs), and requires DOF to certify the Prop. 98 guarantee for 2009-10 through 2016-17.
Budget Supports Full Implementation of the Local Control Funding Formula (LCFF) for K-12 Education
The largest share of Proposition 98 funding goes to California’s school districts, charter schools, and county offices of education (COEs), which provide instruction to approximately 6.2 million students in grades kindergarten through 12. The 2018-19 budget agreement increases funding for the state’s K-12 education funding formula — the Local Control Funding Formula (LCFF) — and, consistent with the Governor’s January proposal and his May Revision, provides sufficient dollars to reach the LCFF’s target funding level in 2018-19. Specifically, the budget agreement:
Provides $3.7 billion to support full implementation of the LCFF, an increase of $407 million above the May Revision. The LCFF provides school districts, charter schools, and COEs a base grant per student, adjusted to reflect the number of students at various grade levels, as well as additional grants for the costs of educating English learners, students from low-income families, and foster youth. The budget agreement provides a 3.7% cost-of-living adjustment (COLA) in 2018-19 for the purpose of calculating LCFF grant targets for K-12 districts and charter schools and provides the remaining funds needed to reach those grant targets and fully implement the LCFF in 2018-19. (All COEs reached their LCFF funding targets in 2014-15.) The budget agreement also includes a provision that would appropriate LCFF dollars to K-12 school districts in future years even if the Legislature does not act and, further, automatically adjusts this appropriation for increases in the cost of living and for changes in enrollment.
Provides $1.1 billion in one-time funding to reduce mandate debt the state owes to schools, down from $2.0 billion proposed in the May Revision. Mandate debt reflects the cost of state-mandated services that school districts, charter schools, and COEs provided in prior years, but for which they have not yet been reimbursed.
Rejects an Assembly proposal to create an ongoing LCFF grant for low-performing students. However, the budget agreement provides $300 million in one-time funding to establish the Low-Performing Students Block Grant to support students who do not meet academic standards on English and mathematics assessments and who are not eligible to receive supplemental grant funding under the LCFF nor identified to receive special education services.
Provides $164 million to support the Strong Workforce Program, down from $212 million proposed in the Governor’s January budget proposal. The budget agreement provides $150 million for a K-12-specific component of the Strong Workforce Program, which was established as part of the 2016-17 budget for the purpose of expanding community college career technical education (CTE) and workforce development programs. The budget package also allocates $14 million for K–12 Workforce Pathway Coordinators and K–14 Technical Assistance Providers to provide technical support to K-12 districts that operate CTE programs.
Allocates $125 million in one-time funding to address the state’s teacher shortage in special education and other areas. The budget package establishes two new competitive grant programs to address areas in which California currently has teacher shortages. The budget allocates $75 million for a new Teacher Residency Grant Program, including $50 million to recruit and prepare special education teachers and $25 million to recruit and prepare science, technology, engineering, mathematics, or bilingual education teachers. The budget also includes $50 million for a new Local Solutions Grant Program to provide “locally identified solutions” that address the need for special education teachers.
Maintains the COLA for non-LCFF programs proposed in the May Revision. The budget agreement provides $114 million to fund a 2.71% COLA proposed in the May Revision for several categorical programs that remain outside of the LCFF, up from the January proposal of a 2.51% COLA. These programs include special education, child nutrition, and American Indian Education Centers.
Provides $27.1 million for the English Language Proficiency Assessment for California (ELPAC). The budget agreement approves the Governor’s May Revision proposal to convert the ELPAC to a computer-based assessment from one that is paper-based as well as to develop a computer-based alternative for children with exceptional needs. The budget agreement makes these one-time dollars available for fiscal years 2018-19 through 2021-22.
Provides $15 million in one-time funding to expand the state’s Multi-Tiered System of Support (MTSS). The budget agreement approves the May Revision proposal to provide funding to the Orange County Department of Education to contract, jointly with the Butte County Office of Education, a to-be-identified California higher education institution to expand the state’s MTSS with the goal of fostering positive school climate in both academic and behavioral areas.
Provides $13.3 million in one-time funding to create the Community Engagement Initiative. The budget agreement approves the May Revision proposal to create this initiative to build the capacity of communities and school districts to deepen community engagement with the goal of improving student outcomes. The budget agreement allocates these one-time dollars to the California Collaborative for Educational Excellence, includes several performance benchmarks for their use, and makes funding available through the 2023-24 fiscal year.
Budget Agreement Moves Forward With New Community College Funding Formula and Online College
A portion of Proposition 98 funding provides support for California’s community colleges (CCCs), which help prepare over 2 million students to transfer to four-year institutions as well as obtain training and employment skills. The 2018-19 budget agreement approves two new community college proposals: a new funding formula for CCC general-purpose apportionments and the establishment of a fully online community college. Specifically, the new spending plan:
Provides a $522.8 million increase forthenew CCC funding formula and adjusts apportionments. The spending plan adopts a new funding formula that apportions funding to districts based on three grant components: a base grant, a supplemental grant, and a student success incentive grant. Funding is allocated as follows:
A 70% base grant for each district, based on enrollment of per-Full-Time Equivalent Students (FTES).
A 20% supplemental grant based on the number of low-income College Promise Grant fee waiver recipients; specified undocumented students qualifying for resident tuition; and all Pell grant recipients.
A 10% student success incentive grant based on performance outcomes of economically disadvantaged students, student transfer rates to four-year institutions, wages of students who have completed a degree or certification program, and other factors.
The final budget includes a “hold harmless” provision that maintains funding for all CCC districts for three years at no less than the amount of funding received in 2017-18 and provides an increase for each district to reflect a cost-of-living adjustment.
Approves new fully online community college. The final budget agreement allocates $120 million ($100 million in one-time funding and $20 million in ongoing funding) for the creation of a new online college. The agreement specifies that this online college will develop unique courses and programs that lead to short-term credentials that are not available at local campuses and that lead into pathways offered at existing colleges. The plan permits the online college to establish its own fee structure, but prohibits it from charging fees higher than a traditional college. The final agreement requires the online college to provide evidence to the Department of Finance (DOF) and the Legislature that it has achieved accreditation candidacy by April 1, 2022 and full accreditation by April 1, 2025.
Consolidates the Student Success and Support Program, the Student Success for Basic Skills Program, and the Student Equity Program into a single block grant. These three categorical programs, which target similar communities of students, will be integrated with the intent of increasing program flexibility.
Provides $23 million for deferred maintenance and other CCC expenses.
Budget Package Increases Funding for CSU and UC, While Making Several Adjustments Regarding Financial Aid Programs
The budget package significantly boosts the funding levels in the May Revision for the California State University (CSU) and the University of California (UC). Specifically, the revised spending plan:
Increases CSU ongoing funding by nearly $200 million and also provides significant one-time funding. The budget agreement allocates $197.1 million in ongoing funding and $161.6 million in one-time funding to support legal services for undocumented students, faculty, and staff and to address student hunger and basic needs, deferred maintenance, and enrollment growth, among others.
Increases UC ongoing funding by nearly $100 million and also provides significant one-time funding. The budget agreement allocates $98.1 million in ongoing support (includes enrollment growth) and $248.8 million in one-time funding to support legal services for undocumented students, faculty, and staff, and to address student hunger and basic needs and deferred maintenance, among others.
The spending plan also makes the following adjustments regarding the state’s financial aid programs:
Creates a new stipulation for addressing the potential impact of tuition increases. The plan allows the Department of Finance (DOF) to reduce primary appropriations for the CSU and UC by the amount of estimated Cal Grant and Middle Class Scholarship program cost increases if tuition is increased in 2018-19.
Increases admission goals for private nonprofit institutions to maintain the maximum Cal Grant tuition awards. The final budget agreement maintains the maximum award for new students attending private nonprofits at $9,084, but adjusts the annual admissions goal for students who have earned an Associate Degree for Transfer (ADT) required to maintain the maximum award level. The budget requires the private nonprofit sector to admit at least 2,000 ADT students in award year 2019-20; 3,000 students in award year 2020-21; and 3,500 in award year 2021-22.
Expands grant eligibility for current and former foster youth. The Cal Grant B Entitlement award provides low-income students with a “living allowance” to help pay for basic expenses. Currently, this award is restricted to students who attend college within one year of graduating high school. The budget agreement extends the Cal Grant B Entitlement award eligibility for current and former foster youth up to age 26. The age limit for current or former foster youth receiving the Chafee Grant has also been extended from 22 to 26.
Budget Package Uses Federal Funds to Provide Additional Subsidized Child Care Slots
California’s child care and development system allows parents with low and moderate incomes to find jobs and remain employed while caring for and preparing their children for school. The state’s subsidized child care and development system is funded with state and federal dollars, but after adjusting for inflation, overall funding for this system is lower than it was 10 years ago due to both state budget cuts made during and after the Great Recession and relatively flat federal funding.
The 2018-19 state budget package utilizes newly available federal funds and continues to reinvest state resources in California’s subsidized child care and development system, but does not adopt the expansive proposals put forth by both the Assembly and the Senate. Specifically, the budget package:
Utilizes newly available federal funding to create time-limited subsidized child care and development slots and to conduct annual inspections. Federal policymakers appropriated additional federal dollars for subsidized child care as part of the omnibus spending legislation for the 2018 federal fiscal year. California will receive $232 million in newly available federal funds as a result. The final state budget package creates 11,307 Alternative Payment Program (AP) slots with $204.6 million of the newly available dollars to be used over two state fiscal years: 2018-19 and 2019-20, which means that the slots are only available to eligible families until June 30, 2020. If federal policymakers appropriate the same amount of money for the 2019 federal fiscal year, then these 11,307 slots will be available through June 30, 2022. The budget package also includes $26.4 million in federal funds for annual inspections of licensed child care providers, as required by federal law.
Modestly increases the number of subsidized child care and state preschool slots with state funds. The budget package includes $15.8 million to add 2,100 AP slots on September 1, 2018. In addition, the budget package provides $8.5 million in Proposition 98 funding to add 2,959 full-day state preschool slots beginning on April 1, 2019, as agreed upon in the 2016-17 budget agreement.
Increases payment rates for providers that contract with the state. The final budget agreement includes a 2.8% rate increase and a 2.7% cost-of-living adjustment for the Standard Reimbursement Rate (SRR), which is the base rate paid to child care providers that contract directly with the state. The budget package also includes $40.2 million to increase the adjustment factors for the SRR for infants, toddlers, and children with special needs, effective January 1, 2019, which will boost payment rates for providers caring for these children.
Increases funding for quality improvement programs. The budget package provides one-time funding for a number of quality and support programs, including $5.0 million for professional development for child care teachers, $5.0 million for the California Child Care Initiative, and $6.0 million in federal funding for other one-time quality activities, such as consumer education.
Provides $109.2 million General Fund for CalWORKs Stage 2 and Stage 3 caseload adjustments. The 2017-18 budget agreement included $25 million to increase the decade-old income eligibility limits and implement a 12-month eligibility period. Based on communication with the Administration, the budget agreement adjusts funding for CalWORKs Stage 2 and Stage 3 child care mainly to reflect a larger-than-expected increase in caseload due to these provisions.
Includes provisions to increase access to early care and education for children with special needs. The 2018-19 budget package creates two new grant programs and establishes a stakeholder workgroup to focus on expanding access to early care and education for children with special needs.
The budget package provides $167.2 million in one-time Prop. 98 funding to create the Inclusive Early Education Expansion Program with the goal of increasing access to inclusive subsidized early care and education programs. This new program will provide grantees with resources for “infrastructure costs” such as facilities renovation or professional development. Because the new program is funded with Prop. 98 dollars, only Local Education Agencies (LEA) are eligible to apply for the grant program, but the Administration is encouraging partnerships with non-LEAs. Grant funds will be available through June 30, 2023. Grant funds will not be available to provide additional subsidized slots, though that is a requirement of the grant program.
The final budget agreement includes $10.0 million in Prop. 98 funding to create the Inclusive Early Care Pilot program for county offices of education. This new grant program will also focus on increasing access to subsidized child care and development programs for children with special needs, including children with severe disabilities. Ongoing funding for this grant program will be contingent upon an appropriation in the annual budget act.
Trailer bill language also creates a stakeholder group — including grantees from the aforementioned programs — to focus on continuously improving access to early care and education for children with special needs. The stakeholder group will work on this issue through June 30, 2023.
The final budget agreement does not include a variety of proposals put forth by both the Senate and Assembly to increase access to subsidized child care for families with low and moderate incomes. For example, the Assembly and the Senate both proposed additional funding for AP slots and General Child Care slots as well as a rate increase for license-exempt providers — often family, friends or neighbors — who care for children on a part-time basis. These providers often are reimbursed at a rate that is well below the minimum wage, which could limit families access to license-exempt care if providers are unwilling to accept the sub-minimum wage rate.
Enacted Budget Takes Preliminary Steps to Raise CalWORKs Grants and Indicates Intent to Reinstate the State COLA
The California Work Opportunity and Responsibility to Kids (CalWORKs) program provides modest cash assistance for over 830,000 low-income children while helping parents overcome barriers to employment and find jobs. The annualized maximum CalWORKs grant for a family of three has been well below the deep-poverty threshold (50% of the federal poverty line) for the past 11 years. In this year’s budget deliberations, the Senate proposed to end deep child poverty in CalWORKs by 2021-22 with phased-in increases to the maximum grant, starting with $400 million in 2018-19 and growing to $1.5 billion by 2021-22. However, the 2018-19 budget package reflects a more modest increase, providing $90 million for a 10% grant increase beginning April 1, 2019. This increase would amount to $360 million in ongoing full-year costs starting 2019-20, if no further increases followed. However, this act is intended as the first of three tentative steps to raise grants above deep poverty potentially over three years. After this initial step, the Legislature plans to halve the gap between the new maximum grant and 50% FPL and then finally close the gap. However, these last two increases are not yet funded and so would depend upon future budget appropriations.
The statutory annual state cost-of-living adjustment (COLA) allows grants to maintain their purchasing power despite inflation, though state policymakers eliminated the COLA for CalWORKs in 2009. In its set of proposals aimed at ending deep poverty in CalWORKs, the Senate called for reinstating the COLA to allow grants to keep pace with the cost of living. Though the enacted budget does not actually reinstate the COLA, it expresses the intent to do so starting July 1, 2022, setting it at 0% with the potential for funding in future budgets.
Enacted Budget Revises Governor’s Proposal for CalWORKs Home Visiting Initiative
In January, the Governor proposed allocating $158.5 million in one-time Temporary Assistance for Needy Families (TANF) funds for a new CalWORKs home visiting pilot initiative, with $26.7 million in TANF dollars allocated in the 2018-19 state budget year and the remaining $131.8 million to be available through calendar year 2021. Under the Administration’s proposal, the initiative would provide up to 24 months of home visiting for first-time CalWORKs parents under age 25, who would have to be either pregnant or parenting a child under age 2. (Participation in this new program would be voluntary.) These eligibility requirements would have excluded many families, as the average CalWORKs household has two children and is headed by a 34-year-old caregiver. The 2018-19 budget package addressed this by extending home visiting services to participants of any age and lifting the restriction on the number of children participants may have, though continuing to prioritize first-time parents. The enacted budget funds the initiative for the first three years, subject to appropriation in the annual Budget Act.
Budget Agreement Ends the “SSI Cash-Out,” Allowing People Enrolled in SSI/SSP to Receive Federal Food Benefits for the First Time Since the 1970s
Supplemental Security Income/State Supplementary Payment (SSI/SSP) grants help well over 1 million low-income seniors and people with disabilities in California pay for housing, food, and other basic necessities. Grants are funded with both federal (SSI) and state (SSP) dollars. Since the mid-1970s, the state has prohibited people enrolled in SSI/SSP from receiving federal food benefits provided through the Supplemental Nutrition Assistance Program (SNAP), which is called CalFresh in California. This state policy is known as the “SSI cash-out.”
The 2018-19 budget package ends the state’s SSI cash-out policy. SSI/SSP recipients will become eligible for CalFresh food assistance as soon as June 1, 2019, or no later than August 1, 2019, depending on how rapidly the state can implement this change. Ending the SSI cash-out will primarily benefit households that consist solely of one or more SSI/SSP recipients; the state projects that 369,000 such households will sign up for CalFresh after gaining eligibility, which assumes a 75% participation rate among these households. In addition, the budget agreement creates a state-funded food benefit for certain households whose current CalFresh benefits will be reduced or eliminated when the SSI cash-out ends. These households contain a mix of SSI/SSP recipients and other people with low incomes who 1) are not enrolled in SSI/SSP and 2) receive CalFresh benefits. Because of how CalFresh benefits are calculated, once SSI/SSP recipients become eligible for CalFresh about 80,000 of these mixed households will see their CalFresh assistance reduced or lose eligibility for CalFresh, according to state projections.
The state budget provides $230 million to end the SSI-cash out. Of this amount, $199.3 million will pay for the new state-funded food benefit and the remainder will support automation changes (such as reprogramming computer systems) and counties’ additional costs for administering the CalFresh program. The budget package authorizes the Department of Finance (DOF) to transfer additional funds, as needed, to pay for other costs associated with ending the SSI cash-out.
Budget Package Does Not Provide a State Cost-of-Living Adjustment for SSI/SSP Grants, but Sets the Stage for Annual Increases Beginning in 2022-23
For many years, California law required the state to provide an annual cost-of-living adjustment (COLA) for SSI/SSP grants. The Legislature often suspended these automatic annual increases in order to limit the state’s General Fund obligations for SSI/SSP. Nonetheless, this requirement for an annual state COLA remained in place until the 2011 calendar year, when a new policy — approved by the Legislature in 2009 — took effect: The state COLA for SSI/SSP grants became optional rather than mandatory. In the wake of this change, state policymakers have provided only a single discretionary COLA for SSI/SSP grants: a 2.76% increase to the SSP portion that took effect on January 1, 2017.
The new budget package does not provide a state increase for SSI/SSP grants in 2018-19. However, the budget agreement does revise state law to once again require annual state COLAs for SSI/SSP grants beginning on July 1, 2022. However, this new requirement is substantially watered down compared to the “statutory COLA” that existed prior to 2011. This is because the annual state COLA will be set at 0% each year starting in 2022-23 and can only exceed that level if the Legislature specifies a higher percentage in the budget bill. This means that — as under current law — decisions about whether to provide a COLA will be subject to annual negotiations between state lawmakers and the Governor. Nonetheless, by essentially signaling the Legislature’s intent to begin providing COLAs for SSI/SSP grants within a few years, the 2018-19 budget package sets the stage for annual state increases to this critical source of basic income for low-income seniors and people with disabilities.
Budget Package Aims to Address Health Care Affordability and Financing, but Includes None of the Policy Expansions Advanced by the Legislature
The 2018-19 budget agreement includes provisions that aim to boost the affordability of health insurance, reform health care financing, and develop a statewide database to collect information on health care prices and utilization. Specifically, the budget package:
Requires Covered California — the state’s health insurance exchange — to develop options for providing financial assistance to help Californians purchase health care coverage. These options must include a focus on Californians with incomes up to 600% of the federal poverty line, which equals $72,840 for an individual or $150,600 for a family of four in 2018. Covered California is required to report these options to state policymakers by February 1, 2019.
Creates a state council to examine pathways toward achieving “unified financing” of health care delivery in California. This new five-member council is required to consider a number of factors in developing a plan, including key design elements (such as eligibility and benefits), financing options, and whether any proposed changes would require approval by the federal government and/or by California voters. This plan must be submitted to state policymakers by October 1, 2021.
Provides $60 million to help create a statewide database to collect information on health care prices and utilization in California. This database is intended to be “substantially completed” by July 1, 2023, with the goal of providing “greater transparency regarding health care costs” as well as informing health care policy decisions, according to Assembly Bill 1810, the health care “trailer bill.” The development of this database will be led by the Office of Statewide Health Planning and Development (OSHPD) with input from an advisory committee made up of health care policy experts. OSHPD is required to submit a report to the Legislature by July 1, 2020, that addresses a number of considerations, including recommending “a plan for long-term, non-General Fund financing to support the ongoing costs of maintaining the database.”
While the budget agreement promotes long-term efforts to improve California’s health care system, it does not incorporate any health care coverage expansions or affordability policies that the Legislature had advanced. For example, the budget package:
Does not expand eligibility for Medi-Cal to undocumented immigrant adults. The Assembly’s spending plan proposed to expand Medi-Cal eligibility to undocumented adults up to age 26; the Senate’s plan would have expanded eligibility to undocumented adults age 65 or older.
Does not provide state-funded assistance to moderate-income Californians who buy health insurance on the individual market, including through Covered California. The Assembly’s spending plan included new premium assistance or tax credits to help Californians with incomes up to 600% of the federal poverty line pay for health insurance.
Does not end Medi-Cal’s “senior penalty.” Currently, Californians age 65 and older can qualify for no-cost Medi-Cal only if their income is at or below about 123% of the poverty line. In contrast, for younger adults the income limit for no-cost Medi-Cal is 138% of the poverty line. Seniors who fall into this coverage gap must pay a deductible (known as a “share of cost”) that can amount to hundreds of dollars per month in order to access Medi-Cal services. Both the Assembly and the Senate proposed to eliminate this senior penalty by increasing the income limit for adults age 65 and older to 138% of the poverty line.
Budget Package Allocates More Than $1 Billion in Proposition 56 Tobacco Tax Revenues for Medi-Cal Provider Payment Increases and a New Loan Assistance Program
Approved by California voters in 2016, Proposition 56 raised the state’s excise tax on cigarettes by $2 per pack and triggered an equivalent increase in the state excise tax on other tobacco products. These increases took effect on April 1, 2017. Prop. 56 requires most of the revenues raised by the measure to go to Medi-Cal, which provides health care services to more than 13 million Californians with low or moderate incomes. The 2018-19 budget package allocates more than $1 billion of Medi-Cal’s share of Prop. 56 dollars for 1) payment increases for doctors, dentists, and other Medi-Cal providers ($821.3 million) and 2) a new loan assistance program for recent medical and dental school graduates who serve Medi-Cal beneficiaries ($220 million). The state Department of Health Care Services will develop the eligibility rules and other criteria for the loan assistance program, which is called the “Proposition 56 Medi-Cal Physicians and Dentists Loan Repayment Act Program.”
Budget Includes Some New Funding for Legal Services for Immigrants, but Leaves Other Immigrant-Focused Proposals Unfunded
California has the largest share of immigrant residents of any state, and immigrants make up a third of the state’s workforce. Given the prominence of immigrants in California’s population and the state’s economy, recent and ongoing federal actions to limit immigration and aggressively enforce immigration laws particularly impact California. Despite the significance of immigrants to California, and the heightened attention to immigration issues nationally, the budget agreement includes only relatively modest new investments to address the specific needs of immigrants.
The 2018-19 budget agreement provides a total of $31 million in one-time funding for legal services for immigrants, adding to the increased funding for immigrant legal services already included in the current year’s budget. This one-time funding includes a $10 million augmentation to the Department of Social Services for legal services for immigrants, including undocumented unaccompanied minors and individuals with current or past Temporary Protected Status (TPS). The budget also includes one-time allocations for legal services for undocumented and other immigrant students, faculty, and staff at California’s public colleges and universities, including $4 million General Fund for those at the University of California and $7 million for those at the California State University, as well as $10 million Proposition 98 General Fund for those at California community colleges. In addition, the budget includes a new allocation of $670,000 ongoing in Mental Health Services Act (Prop. 63) funding to address mental health needs of immigrants and refugees.
The 2018-19 budget agreement does not include funding for other proposals to address the needs of immigrants that had been introduced in the Legislature. These included proposals to extend Medi-Cal eligibility to undocumented immigrant young adults (which would have cost an estimated $125 million in 2018-19 and $250 million ongoing) and to undocumented seniors (which would have cost an estimated $75 million in 2018-19 and $150 million ongoing), as mentioned above (in the section titled “Budget Package Aims to Address Health Care Affordability and Financing, but Includes None of the Policy Expansions Advanced by the Legislature”), and to extend eligibility for the CalEITC to immigrant workers who file taxes with an Individual Taxpayer Identification Number (ITIN), as mentioned above (in the section titled “Budget Agreement Strengthens the CalEITC”).
Budget Package Dramatically Increases State Funding for the 2020 Census
The 2018-19 budget includes $90.3 million in state funding for the 2020 federal census, more than double the $40.3 million proposed by the Governor in January. Funding will support the California Complete Count Committee, which oversees census outreach, awareness, and coordination efforts — particularly for hard-to-count residents. The committee was created after the undercount of the state’s population in the 1990 decennial federal census. This undercount likely resulted in California losing a seat in the US House of Representatives as well as about $2 billion in federal funding over a 10-year period. This funding in the 2018-19 budget package aims to ensure an accurate count of California’s population through statewide coordination of a multiyear, multilingual campaign.
There are a number of issues that raise concerns about the 2020 Census. First, federal funding for the 2020 Census has not been adequate to fully prepare for the count. Second, the US Census Bureau has significantly changed the way in which it plans to administer the 2020 survey, and the agency will be hiring far fewer field workers to follow up with households who are late to respond. Third, the Trump Administration has announced that it will be adding a citizenship question to the census, which could depress response rates given the administration’s virulent attitude toward immigrants.
The decennial census is an important tool that provides indispensable social and economic data about the state and the country. The census count also determines how federal dollars are distributed to states and how many seats each state has in the House of Representatives. It is in California’s best interest to ensure that the 2020 census is as accurate as possible, a goal reflected in this state funding for census outreach, awareness, and coordination.
Budget Includes New Funding to Address Homelessness and Proposes Future Investment in Affordable Housing
California has nearly 25% of the nation’s population of homeless individuals, with an estimated 134,000 homeless residents as of January 2017. More than two-thirds of California’s homeless residents are unsheltered, sleeping in locations such as in a vehicle, in a park, or on the street. The 2018-19 budget agreement dedicates a share of the higher-than-projected revenues received this year to address homelessness, incorporating proposals introduced by both the Governor and the Legislature. These include significant one-time investments as well as some smaller new ongoing expenditures. Specifically, the budget:
Allocates $500 million to one-time Homeless Emergency Aid block grants. These grants will be available to localities that declare a local shelter crisis (or receive a waiver of that requirement). Grants can be used for one-time activities to address homelessness that may include, but are not limited to, “prevention, criminal justice diversion programs to homeless individuals with mental health needs, and emergency aid,” with at least 5% of funds dedicated to addressing the needs of homeless youth. Of the total amount available for these block grants, $350 million will be administered through existing Continuum of Cares (local homelessness planning bodies), of which $250 million will be distributed according to a formula based on the size of the local homeless population, and an additional $100 million will be distributed based on each locality’s share of the total statewide homeless population. The remaining $150 million in block grants will be awarded to cities that have a population of 330,000 or more, with these grants proportionate to the size of the local homeless population.
Increases funding for two CalWORKs programs that assist homeless families. The budget agreement adopts the proposal in the Governor’s May Revision to increase funding for these two ongoing programs. The CalWORKs Housing Support Program, which helps families secure permanent housing, receives an additional $24.2 million in 2018-19, increasing to an additional $48.4 million in 2019 and beyond (for total ongoing funding of $95 million annually). The CalWORKs Homeless Assistance Program, which provides up to 16 days per year of temporary housing for homeless CalWORKs participants via vouchers for temporary shelter or hotels/motels, receives an additional $8.1 million in 2018-19 in order to raise the daily voucher rate, so that a family of four would be allowed $85 per night rather than the current $65 per night, beginning January 1, 2019.
Dedicates $15 million in one-time funding over three years for a pilot program to prevent and address homelessness among seniors. The budget adopts the Governor’s May Revision proposal to create the Home Safe Pilot Program, housed within Adult Protective Services, which will provide funds to address homelessness among seniors. Funds are available to counties that provide a local match.
Increases General Fund dollars on a one-time basis to address homelessness among domestic violence survivors and youth. The budget adopts the proposal in the Governor’s May Revision to allocate an additional $10 million to support domestic violence shelter services and an additional $1 million to support homeless youth shelters through the Office of Emergency Services.
Makes a one-time $50 million allocation to the Department of Health Care Services to provide services for homeless individuals with mental illness. The budget adopts the Governor’s May Revision proposal to allocate one-time funds for county mental health services for homeless individuals. Counties will submit requests for funds, and allocations will consider the local number of homeless individuals with serious mental illness, county population, and the population of homeless individuals with recent criminal justice system involvement.
The budget agreement also adopts the proposal in the Governor’s May revision to dedicate $500,000 to expand staffing and provide ongoing support for the Homeless Coordinating and Financing Council, which was created in 2016 to identify and oversee implementation of homeless programs at the state level. The Council will be elevated from its current location within the Department of Housing and Community Development (HCD) to its own department-level status within the Business, Consumer Affairs, and Housing Agency.
A final homelessness item included in the budget agreement does not allocate new funding, but rather provides that the No Place Like Home program will be placed on the November 2018 statewide ballot for voter validation. This program was developed as a legislative proposal and dedicates $2.0 billion in bond proceeds, to be repaid with funds from the Mental Health Services Act (MHSA), for permanent supportive housing for individuals with mental illness who are homeless or at risk of homelessness. Though the Governor signed the legislation in July 2016, it has not been implemented due to a legal challenge asserting that MHSA funds cannot be used for this purpose. Voter validation of this use of MHSA funds would allow the program to proceed. The budget agreement includes a provision that $1.2 million General Fund will be loaned to HCD, which the Governor had proposed in his May Revision to allow the Department to issue an initial Notice of Funding Availability prior to November. This way, if voters approve the No Place Like Home measure, the first funding awards can be announced by December. The November ballot will also include the $4 billion bond for affordable housing that was part of the legislative housing package signed in September 2017. With the No Place Like Home proposal on the ballot as well, voters will be asked to approve two major housing-related bond measures in November.
In addition to the above provisions related to homelessness, the 2018-19 budget agreement includes details of the first-year allocations from the Building Homes and Jobs Trust Fund, which is funded by the new real estate recording fee created last year by Senate Bill 2 (Atkins) as part of the 2017 legislative housing package. Half of the recording fee funds available for local assistance in this first year ($122.6 million) are dedicated to supporting housing planning by local jurisdictions. The remaining $122.6 million available for local assistance in 2018-19 are dedicated to addressing homelessness, and the budget agreement allocates $56.3 million of these funds to Continuum of Cares to support specific eligible activities to prevent and address homelessness. Another $56.3 million of these funds are allocated to the Housing for a Healthy California program, which supports interim and long-term housing for homeless individuals who receive Medi-Cal, are eligible for Supplemental Security Income, are eligible to receive services that promote housing stability, and are likely to improve their health with supportive housing. The budget agreement also allocates $10 million of the recording fee funds to specific homelessness projects in Orange County and Merced County.
A final housing-related provision in the 2018-19 budget agreement is a proposal to allocate future state dollars to support affordable housing development. As described above (in the section titled “Budget Package Brings Constitutional Rainy Day Fund Balance to Its Maximum Level”), the budget includes an optional deposit into the state’s constitutionally-required “rainy day fund” in order to bring the rainy day fund balance up to its constitutional maximum of 10% of General Fund tax revenue in 2018-19. In future years, if the rainy day fund balance remains at this maximum level, the “overflow” revenue that would have been required to be set aside in the rainy day fund must be spent on infrastructure instead, and housing qualifies as infrastructure under the applicable definition. The 2018-19 budget agreement specifies that if “overflow” infrastructure funds are available in fiscal years 2019-20 through 2021-22, the first $415 million of these funds shall be used for state buildings and their deferred maintenance. Any “overflow” infrastructure funds beyond this first $415 million shall be split evenly between spending on rail infrastructure and spending on affordable housing development through the Multifamily Housing Program. Though this future spending plan for “overflow” funds is outlined in this year’s budget, policymakers in future years can choose to follow this plan or allocate these funds differently, as long as any “overflow” funds are spent on items that qualify as infrastructure.
Budget Agreement Includes a $1.4 Billion Plan for Allocating Cap-and-Trade Revenues
Established by the California Global Warming Solutions Act of 2006 (Assembly Bill 32), California’s “cap and trade” program sets a statewide limit on the emission of greenhouse gases and authorizes the Air Resources Board to auction off emission allowances. Proceeds from these auctions are deposited in the state’s Greenhouse Gas Reduction Fund (GGRF), with these funds generally invested in activities that seek to reduce greenhouse gas emissions. The budget package allocates $1.4 billion in GGRF revenues in 2018-19, with 80% of these funds ($1.1 billion) going to three state entities: the Air Resources Board ($845 million), the Department of Forestry and Fire Protection ($195 million), and the Energy Commission ($80.5 million). The remaining funds are allocated primarily to the Department of Food and Agriculture ($104 million) and the Strategic Growth Council ($60 million).
Budget Agreement Creates a Roadmap for Reducing the Capacity of the State Correctional System if the Number of Incarcerated Adults Continues to Decline
In recent years, California has made substantial progress in reducing the number of adults incarcerated at the state level. This reduction has resulted largely from a series of criminal justice reforms adopted by state policymakers and the voters — reforms that came on the heels of a 2009 federal court order that required California to reduce overcrowding in state prisons and established a prison population cap. (This court order is still in effect.) The Governor’s Administration anticipates that state-level incarceration will continue falling in the near term, which will allow California to end the use of out-of-state prisons by early 2019. Currently, well over 2,000 Californians are housed in facilities in Arizona and Mississippi because there is no room for them in state prisons in light of the court-imposed prison population cap.
The 2018-19 budget package establishes a roadmap for reducing the capacity of the state correctional system if the number of prisoners continues to decline. The top priority is to close “private in-state male contract correctional facilities that are primarily staffed” by workers who are not employed by the California Department of Corrections and Rehabilitation (CDCR). If there are further declines in state-level incarceration, the CDCR would be required to reduce “the capacity of state-owned and operated prisons or in-state leased or contract correctional facilities, in a manner that maximizes long-term state facility savings, leverages long-term investments, and maintains sufficient flexibility to comply with the federal court order to maintain the prison population at or below 137.5% of design capacity.”
In addition, the 2018-19 budget agreement:
Provides $50 million to help formerly incarcerated adults transition back to their communities. The Board of State and Community Corrections (BSCC) will distribute these funds through a competitive grant process to community-based organizations (CBOs) to support people who have been released from prison. Of the total funding, $25 million is available for rental assistance, $15 million will be used to upgrade existing buildings that will be used to house formerly incarcerated adults, and $9.4 million is set aside “to support the warm hand-off and reentry” of people transitioning out of prison. Nearly all of the remaining funds will be used to support program administration.
Provides $37.3 million to establish a new Youth Reinvestment Grant Program to support local “trauma-informed” diversion programs for minors. The BSCC will distribute the vast majority of funds (94%) through a competitive grant process to cities and counties, which must provide a match of between 10% and 25%. Local jurisdictions then must pass through most of these funds to CBOs to “deliver services in underserved communities with high rates of juvenile arrests.” Services must include education, mentoring, and mental and behavioral health services, along with “diversion programs and alternatives to arrest, incarceration, and formal involvement with the juvenile justice system.” The remaining Youth Reinvestment Grant Program funding will go to Indian tribes (3%) or be used to support program administration (3%).
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