State and National Leaders Must Do More to Promote Economic Security and Opportunity
Around 8 million Californians — roughly 1 in 5 state residents (20.4 percent) — cannot adequately support themselves and their families, according to new Census figures released this morning based on the Supplemental Poverty Measure (SPM). This measure paints a more accurate picture of economic hardship than the official federal poverty measure in part because it better accounts for the state’s high cost of living (see note below).
The new data show that California continues to have the highest poverty rate among the 50 states largely due to high housing costs. This fact underscores the need for California to do more to increase access to affordable housing in order to promote greater economic security in the state. The new Census data also tell a cautionary tale about the potential impact of policies being pursued by federal policymakers. President Trump and congressional leadership have proposed slashing critical supports that help families afford basic necessities like food and housing, and that lift millions of people above the poverty line each year. If signed into law, these proposals would undoubtedly drive California’s already unacceptably high poverty rate even higher. Given this fact, California’s congressional representatives should reject steep cuts to vital public supports and instead prioritize policies that increase people’s economic security and opportunity.
California’s High Housing Costs Drive Up the State’s Poverty Rate
With 20.4 percent of state residents struggling to get by, California ranks first among the 50 states based on the SPM.[1] California’s No. 1 ranking largely reflects the state’s high housing costs. Unlike the official poverty measure, the SPM accounts for differences in housing costs across the US, and when these costs are factored in, a much larger share of the state’s population is living in poverty: 20.4 percent under the SPM, compared to 14.5 percent under the official measure. In fact, California’s poverty rate rises to the highest among the 50 states under the SPM, up from 16th highest under the official poverty measure.[2]
Housing costs are extremely high in many parts of California. Fair market rent for a modest two-bedroom apartment is more than $1,500 per month in the areas where nearly two-thirds of Californians live. At the same time, monthly rent affordable to a full-time worker at the state minimum wage is only $546 per month, which is less than the fair market two-bedroom rent anywhere in California. Thus there is no part of the state where a single mother with a minimum-wage job can expect to afford an apartment with a bedroom for herself and for her children.
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 percent of their incomes toward housing, making them housing cost-burdened, and nearly a third of renter households are severely cost-burdened, paying more than half of their incomes toward housing.
Given the crisis of housing affordability throughout the state, it is important to pursue policies that can help slow down rising housing costs and facilitate production of more affordable housing. State policymakers are currently considering a package of bills that would take an important step toward addressing this problem by increasing the production of housing and streamlining the local review process for certain housing projects in places that have not met their “fair share” housing goals. These measures would represent important first steps in providing some relief to families struggling to afford housing, a challenge that California will need to continue working to address in coming years.
Federal Policy Proposals Threaten to Plunge More Californians Into Poverty
The fact that around 8 million Californians struggle to get by — several years after the national recession ended — highlights the need for policies that allow more people to share in our recent economic gains. Yet the policies being pursued by President Trump and congressional leadership would decimate critical public supports that help struggling families and individuals make ends meet, inflicting serious hardship on millions of people.
Indeed, some of the proposed cuts target supports that are proven tools for reducing poverty. For instance, the Supplemental Nutrition Assistance Program (SNAP) — CalFresh in California — lifted around 800,000 Californians, including about 400,000 children, above the poverty line each year, on average, between 2009 and 2012. In addition, the federal Earned Income Tax Credit (EITC) and child tax credit (CTC) lifted nearly 1.4 million Californians, including roughly 700,000 children, out of poverty. Moreover, these supports not only help families get by day to day, but also may provide longer-term benefits to children. Research shows, for example, that food assistance, working-family tax credits, and other supports that help families afford basic needs help children to do better in school and increase their earning power when they grow up.[3] Given these facts, federal policymakers should reject any proposal that would weaken these vital public supports.
* * *
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 2014 to 2016. 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 parent with two children was considered to be living in poverty in 2016 if their annual income was below about $19,300, 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 parent with two children living in a renter household in the San Francisco metropolitan area was about $29,500 in 2016 — 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 2014 and 2016 (20.4 percent versus 14.5 percent, 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. Measuresof 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.
Endnotes
[1] Florida ranks second among the 50 states with 18.7 percent of state residents living in poverty based on the SPM between 2014 and 2016, followed by Louisiana where the poverty rate was 18.4 percent.
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California’s 2017-18 budget agreement included a major advance for working families who struggle to get by on low incomes. A “trailer bill” included in the budget package significantly expands eligibility for California’s Earned Income Tax Credit, the CalEITC — a refundable state tax credit that helps people who earn little from their jobs to pay for basic necessities.[1] Specifically, this bill 1) allows previously ineligible self-employed workers to qualify for the CalEITC and 2) raises the credit’s income eligibility limits so that workers higher up the income scale can qualify for it. These changes could extend the credit to well over 1 million additional low-income working families beginning in tax year 2017.[2] This represents a significant expansion of the CalEITC given that around half a million families might have been eligible for it prior to the expansion and that roughly 360,000 have annually claimed the credit since it was established in 2015.[3]
This report provides an in-depth look at what the expanded CalEITC means for low-earning Californians. It finds that the higher income limits will allow many more workers living in or near poverty, including single parents working full-time minimum wage jobs, to become eligible for the credit. However, these newly eligible workers will qualify for very modest credits — less than roughly $230 for those with children and under about $84 for those without children. Thus, while the budget agreement makes an important advance for working families by greatly expanding access to the CalEITC, state policymakers could further strengthen this critical tax credit by increasing the benefit these newly eligible workers can receive in future years.
More Low-Earning Self-Employed Workers Will Gain Access to the CalEITC
Prior to the expansion, the CalEITC was the only EITC in the nation that excluded many self-employed workers, such as small-business owners and independent contractors.[4] This exclusion undermined a fundamental purpose of the EITC: to encourage and reward work. The 2017-18 budget agreement ends this exclusion beginning in tax year 2017. As a result, all self-employed workers who meet all other requirements for the CalEITC will be able to benefit from the credit. This change better aligns California’s EITC with the federal EITC and ensures that the state credit incentivizes all types of paid work.
The Income Limits to Qualify for the CalEITC Will Increase Significantly
Prior to the expansion, many workers who struggled to get by were not eligible for the CalEITC because the income limits to qualify for the credit were extremely low. The budget agreement raises these limits in order to allow additional low-earning workers to qualify for the credit. For workers with qualifying children, the new income limit will be $22,300 beginning in tax year 2017 (Table 1). This is more than double the previous income limit for parents with one child and more than one-and-a-half times the previous limit for parents with two or more children. The budget agreement also more than doubles the income limit for workers without qualifying children, from about $6,700 in tax year 2016 to roughly $15,000 in tax year 2017.
Table 1
Higher Income Limit Means More Minimum Wage Workers Will Qualify for the CalEITC
The higher CalEITC income limits will allow more minimum wage workers to benefit from the credit. Prior to the expansion, many minimum wage workers earned too much to qualify for the credit, even though they earned too little to make ends meet given California’s high cost of living. For example, in tax year 2016, families with one child were not eligible for the CalEITC unless they earned less than about $10,000 a year, a salary that translates into working just 19 hours per week at the state minimum wage (Table 2).[5] Families with two or more children did not qualify for the credit unless they earned less than about $14,000 annually, equivalent to working 27 hours per week at the minimum wage. The CalEITC expansion will allow families to work up to 41 hours per week at the state minimum wage to benefit from the credit.[6] This means, for example, that the CalEITC will become available to single parents working full-time at the minimum wage (Figure 1).
Table 2
Figure 1
For workers without qualifying children, the new CalEITC income limit will increase to $15,010. Since this is less than a full-time minimum wage salary, the credit will not be available to full-time minimum wage workers without qualifying children. Nevertheless, this higher threshold means that these workers will be able to work up to 27 hours per week at the minimum wage and still qualify for the credit, up from just 13 hours per week to qualify previously.[7]
Higher CalEITC Income Limit Means More Working Families in Poverty Will Qualify for the CalEITC
Raising the income limits to qualify for the CalEITC will not only allow more minimum wage workers to benefit from the credit, but will also make the credit available to more workers living in or near poverty. Prior to the expansion, the CalEITC’s income limits fell well below the official federal poverty line. As a result, many workers living in poverty were not eligible for the credit. For example, single parents with one child had to earn less than about 62 percent of the poverty line to qualify for the credit. Beginning in tax year 2017, these parents can have incomes up to about 135 percent of the poverty line and still be eligible for the credit (Figure 2). Raising the income limits closer to or above the poverty line is important because many families with incomes this low struggle to afford basic expenses, particularly in high-cost areas of the state.
Figure 2
CalEITC Will “Phase Out” More Gradually, Allowing Workers Higher Up the Income Scale to Qualify
The size of the CalEITC for a particular family or individual depends on how much they earn and how many children they support. Specifically, the credit “phases in” (increases) for higher levels of earnings up to a certain maximum point, after which the credit “phases out” (decreases) for higher levels of earnings until it reaches $0. The budget agreement extends the CalEITC to workers higher up the income scale by phasing out the credit more slowly beginning at an income of $13,794 for workers with two qualifying children (Figure 3).[8] This is the income level at which these parents are estimated to qualify for a CalEITC of $250 in tax year 2017. For workers without qualifying children, the budget package phases out the CalEITC more gradually beginning at an income of $5,354 — the point at which these workers are estimated to qualify for a CalEITC of $100 in tax year 2017.
Figure 3
Most workers who previously qualified for the CalEITC will see no change in the size of the credit, while some will receive slightly larger credits. For example, there will be no change in the credit for parents with two qualifying children and earnings of up to $13,794 (Table 3). Those with incomes between $13,794 and $14,529 will qualify for slightly larger credits. For instance, a parent with two children and earnings of $14,000 will qualify for an estimated $244 from the CalEITC under the expansion, up from an estimated $180 if the credit had not been expanded. Workers with two children and incomes between $14,529 and about $22,300 will newly qualify for the CalEITC.
Table 3
Newly Eligible Workers Will Qualify for Very Modest Credits
Workers who become eligible for the CalEITC because of the higher income limits will qualify for very modest credits. Those with qualifying children will be eligible for roughly $230 or less, depending on their earnings. For example, a worker with two children could qualify for about $214 if she earns $15,000 or $126 if she earns $18,000 (Figure 4). Workers without qualifying children who become eligible for the CalEITC under the expansion will be able to receive about $84 or less, depending on their earnings. For instance, these workers would be eligible for about $84 if they earn $7,000 annually or $52 if they earn $10,000 annually.
Viewed another way, families working a total of 30 hours per week in 2017 at the state minimum wage (earning an annual salary of $16,380) will be eligible for an estimated $115 from the CalEITC if they have one qualifying child, $174 if they have two qualifying children, or $176 if they have three or more qualifying children (Table 4).[9] If the CalEITC had not been expanded in this year’s budget agreement, these workers would not have qualified for the credit at all.
Figure 4
Table 4
Conclusion
Creating the CalEITC was an important advance in how our state helps workers with low incomes to better afford basic necessities and move toward financial security. The 2017-18 budget agreement greatly strengthens this vital tax credit by extending it to well over 1 million additional low-income working families. Although many of the newly eligible workers will qualify for very modest credits, the budget deal lays the foundation for further strengthening the CalEITC, as state policymakers can build on these changes in coming years by increasing the size of the credit that newly eligible workers can receive.
Endnotes
[1] Senate Bill 106 (Committee on Budget and Fiscal Review, Chapter 96 of 2017).
[2] Institute on Taxation and Economic Policy (ITEP). ITEP’s estimate is subject to some uncertainty. This estimate is largely based on Internal Revenue Service (IRS) data on California tax filers who claim the federal EITC. However, only around 75 percent of Californians who are eligible for the federal EITC are estimated to actually claim the credit each year. This means that California’s federal EITC participation rate is implicitly assumed in ITEP’s estimate. In other words, this estimate may be understated to the extent that expanding the CalEITC encourages workers who qualify for the federal EITC, but who do not typically file their taxes, to file in order to benefit from the state credit. On the other hand, ITEP’s estimate could be overstated given that the CalEITC appears to be undersubscribed. ITEP estimates that 553,000 tax units could have claimed the CalEITC in 2016, but actual claims were around 360,000. This suggests that ITEP’s estimate of the number of families who could benefit from the expanded CalEITC could be too high if many workers who are eligible for the credit continue to miss out on it in coming years.
[3] It is not known exactly how many families are eligible for the CalEITC. Estimates prior to the expansion ranged from around 400,000 to 600,000. Soon after the credit was signed into law, the Franchise Tax Board estimated that roughly 600,000 families would likely be eligible for it. (Personal communication with the Franchise Tax Board on September 22, 2015.) Similarly, a Stanford University analysis of US Census Bureau data estimated that approximately 600,000 families would have been eligible for the CalEITC if it had been in place in tax year 2013. (Christopher Wimer, et al., Using Tax Policy to Address Economic Need: An Assessment of California’s New State EITC (The Stanford Center on Poverty and Inequality: December 2016).) A more recent Budget Center analysis of US Census Bureau data estimated that around 416,000 families might have been eligible for the credit in tax year 2015. Additionally, ITEP’s analysis of IRS data suggests that about 550,000 families were likely eligible in tax year 2016. (Personal communication with the Institute on Taxation and Economic Policy on May 6, 2016.)
[4] Prior to the expansion, families and individuals who had self-employment income in addition to “earned income” qualified for the CalEITC if their federal adjusted gross income (AGI) was below the income limit. (“Earned income” was defined as annual wages, salaries, tips, and other employee compensation subject to wage withholding pursuant to the state Unemployment Insurance Code. Federal AGI includes both earned income and self-employment income, as well as several other types of income.) For these tax filers, the size of the CalEITC was based on their “earned income” if their federal AGI was below the income level needed to qualify for the maximum CalEITC. In contrast, if their federal AGI was at or above this threshold, then the size of the CalEITC was based on either their “earned income” or their federal AGI, whichever resulted in a smaller credit. Prior to the expansion, self-employed workers who had no “earned income” were not eligible for the CalEITC. These workers will qualify for the CalEITC beginning in tax year 2017, as long as they meet all other requirements for the credit.
[5] Earnings refer to annual earnings for the entire family.
[6] This means that in a family with one working parent, that parent can work up to 41 hours per week and still qualify for the credit. Families with two married working parents who file joint tax returns could work a combined total of up to 41 hours per week at the minimum wage and still qualify for the credit.
[7] This means that single workers without qualifying children can work up to 27 hours per week at the minimum wage and still qualify for the credit, while married workers without qualifying children can work a combined total of up to 27 hours per week and still qualify for the credit. Most state EITCs base their credits on the same eligibility rules as the federal EITC, which means that all workers who qualify for the federal credit also qualify for the state credit. In contrast, prior to the expansion, the CalEITC was available to just a fraction of those who qualified for the federal EITC because the income limits to qualify for the state credit were extremely low. Beginning in tax year 2017, the new CalEITC income limit for workers without children will match the federal EITC threshold that applies to these workers (Table 1). As a result, all Californians without qualifying children who are eligible for the federal EITC will also be eligible for the CalEITC. The new CalEITC income limits for parents will also be closer to the federal EITC thresholds, which range from about $39,600 to about $48,300 for single parents, depending on the number of children they are supporting.
[8] For workers with three or more qualifying children, the credit begins to phase out more slowly at an income of $13,875 and for workers with one qualifying child, the credit begins to phase out more slowly at an income of $9,484. These income levels do not reflect the income levels specified in SB 106 due to errors in the bill. These income levels will be corrected in a subsequent bill later this fall. (Personal communication with the Department of Finance (DOF) on July 24, 2017.)
[9] Eligibility for the CalEITC is based on annual earnings for the tax filer (for unmarried workers) or the combined annual earnings of the tax filer and his or her spouse (for married couples filing taxes jointly). In other words, families will be eligible for an estimated CalEITC of $115 if they have one working parent who earns $16,380 or two married working parents who earn a combined total of $16,380.
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Senate Bill 562 (Lara and Atkins), which would establish a single-payer health care system with universal coverage in California, was approved by the state Senate in early June, but has stalled in the Assembly. Although it appears that SB 562 will not move forward in 2017, a single-payer proposal could be revived in 2018. This post is the first in a series examining key issues related to SB 562 and, more generally, to efforts to create a universal, single-payer health care system in California. Future posts in this series will examine estimates of how much a single-payer system could cost, proposals for raising the state revenues needed to fund such a system, and other issues.
Senate Bill 562’s Vision for Single-Payer Health Care in California
As envisioned in SB 562, all Californians could enroll in a new “Healthy California” program that would provide a broad range of services, including health, dental, vision, mental health, chiropractic, and hospice care. Under this system, private health insurers and health care service plans generally would be prohibited from providing coverage for services available through Healthy California, and enrollees would pay no premiums, co-pays, or deductibles. Instead, the state — as the “single payer” — would fund the full array of services using both state and federal tax revenues.
Implementing a Single-Payer System in California Would Require Large State Tax Increases
Implementing the single-payer system envisioned in SB 562 would require state tax increases exceeding $100 billion, and possibly as high as $200 billion. SB 562 does not contain the state tax increases that would be needed to fully finance its proposed Healthy California program. Instead, the bill assumes that these tax increases would be approved at a later date. SB 562 also specifies that the Healthy California program would not be implemented until the necessary financing was in place.
The new state taxes needed to fund a single-payer health care system as envisioned in SB 562 could be raised in various ways. For example, the Legislature could pass a bill that increases taxes, which would require a supermajority (two-thirds) vote of each house as well as the Governor’s signature. Alternatively, single-payer proponents could use the initiative process to qualify a tax measure for the statewide ballot. A ballot initiative would require only a simple majority of California voters in order to pass.
Revenues to Support a Single-Payer System in California Would Be Deposited Into a Special Fund, Not the General Fund
As outlined in SB 562, state and federal revenues needed to finance the Healthy California program would be deposited into a new state special fund called the “Healthy California Trust Fund.” In other words, these revenues — including those raised by new state taxes — would not go into the General Fund, which contains state revenues that are not designated for a specific purpose.
The State Tax Increases Required to Implement a Single-Payer System in California Would Face Constitutional Obstacles
Any effort to boost taxes in California must take into account certain provisions in the state Constitution that affect the state’s ability to raise and spend revenues. One of these provisions was discussed above: the two-thirds vote requirement for passing tax increases in the Legislature, which sets a high bar for raising taxes through legislation. Two other key constitutional provisions are:
Proposition 4 of 1979. Prop. 4 established a constitutional state spending limit that is known as the “Gann Limit.” The original Gann Limit was later modified by two ballot measures: Prop. 98 of 1988 and Prop. 111 of 1990. According to the state Senate Appropriations Committee analysis of SB 562, “the very large tax revenues that this bill would require…would clearly exceed the Gann Limit.” Overcoming this obstacle would require the voters to either repeal the Gann Limit or exempt the new taxes from the limit, the Senate analysis suggests.
Prop. 98 of 1988. Prop. 98, as modified by Prop. 111 of 1990, constitutionally guarantees a minimum level of funding for K-12 schools and community colleges. The state Senate Appropriations Committee analysis of SB 562 declares that, “Any taxes raised to support this bill would be considered the proceeds of taxes and would be subject to the requirements of Proposition 98.” This would result in some of the new tax revenues going to K-14 education. In order to avoid this outcome, California voters would have to exempt the new taxes from Prop. 98, the Senate analysis suggests.
In short, in the view of the Senate’s fiscal experts, lawmakers and the Governor could unilaterally create a single-payer system, but they could not implement such a system without asking the voters to resolve some fundamental issues.
Key Single-Payer Proponents: Voter Approval May Not Be Necessary to Address the Obstacles Posed by the Gann Limit and Prop. 98
The primary proponent of SB 562 is the California Nurses Association (CNA). In a rebuttal to a recent article on the politics of SB 562, the CNA makes the following assertion: “There are ways in the bill to address the constitutional issues posed by both Prop. 98 and the Gann Limit….[W]e are developing these legislative approaches.” In other words, the CNA implies that there is a strictly legislative solution to the issues raised by the Gann Limit and Prop. 98, and that voters don’t necessarily need to weigh in. The CNA does not explain how it reaches this conclusion, although the association indicates that it is consulting with “constitutional legal experts.”
In addition, former state Senator Sheila Kuehl — a longtime single-payer advocate — recently “rejected suggestions that lawmakers could not find creative ways to work within existing constitutional limits.” Kuehl is quoted as saying: “That theory won’t fly…I don’t think [the constitutional limits] would actually be a problem.”
In short, in the view of key single-payer advocates, the Legislature could not only create a single-payer system and raise the taxes needed to fund it, but could also as part of the same legislation address the constitutional constraints posed by the Gann Limit and Prop. 98 without seeking voter approval.
Could Single-Payer Proponents Address the Obstacles Posed by the Gann Limit Solely Through the Legislative Process, Without Going to the Voters?
The short answer:
It’s very unlikely that single-payer advocates could address the obstacles posed by the nearly four-decade-old state spending limit without going to the voters.
The long answer:
The Gann Limit aims to “keep [inflation-adjusted] per capita government spending under the 1978-79 level,” according to the nonpartisan Legislative Analyst’s Office (LAO), which provides fiscal and policy advice to the Legislature. This spending limit applies to “appropriations from proceeds of taxes,” the LAO explains. “Essentially, this means that appropriations from tax levies are subject to the limit,” although several types of expenditures are exempt from the limit. These include, but are not limited to, appropriations for debt service or court-mandated costs as well as from certain gas tax revenues.
As noted above, implementing a single-payer system in California would require tax increases exceeding $100 billion, and possibly as high as $200 billion. These revenues would be considered “proceeds of taxes,” all of which would be used to fund (i.e., would be appropriated for) health care and related services through the new Healthy California program. Moreover, expenditures for a single-payer system would not be exempt from the Gann Limit as it is currently structured. Consequently, a tax increase of $100 billion or more would push state expenditures well beyond the Gann Limit threshold. (Currently, the state has only a few billion dollars in “room” under the limit.) Barring the discovery of a previously unidentified loophole, the only way to avoid exceeding the Gann Limit would be to exempt from that limit the new revenues intended to fund a single-payer system. This would require amending the state Constitution – something that only California voters could do.
Could Single-Payer Proponents Address Any Obstacles Posed by Prop. 98 Solely Through the Legislative Process, Without Going to the Voters?
The short answer:
In theory, the Legislature could pass — and the Governor could sign — a bill that raises taxes by $100 billion or more, with none of the new state revenues going to K-12 schools and community colleges via the Prop. 98 minimum funding guarantee. However, such an approach would leave the state vulnerable to legal challenges, and any resulting litigation would jeopardize some or all of the new state revenues needed to finance a single-payer system.
The long answer:
The state Constitution refers to “General Fund revenues” and “General Fund proceeds of taxes” in describing the calculations that help to determine K-14 education’s share of the state budget each year. In other words, special fund revenues are not explicitly mentioned as a factor in calculating the Prop. 98 minimum funding guarantee. This is a critical point: As noted above, SB 562 would deposit the tax revenues needed to support a single-payer system into a special fund, rather than into the state’s General Fund.
However, there is disagreement regarding the relationship between Prop. 98 and state tax revenues. There appear to be at least two competing schools of thought.
One school of thought suggests that state policymakers could — without violating Prop. 98 — raise taxes and deposit all of the revenues into a special fund without any of the new dollars going to K-14 education. This view is clearly expressed in a legal argument drafted in 2012 by the Brown Administration in response to a lawsuit filed by K-12 school officials. (This lawsuit was rendered moot by the passage of Prop. 30 in November 2012 and was therefore dismissed by an appellate court before being resolved.)
This lawsuit stemmed from the state’s decision to redirect a portion of sales tax revenues to counties in order to fund an array of services that were transferred — or “realigned”— to counties beginning in 2011. State policymakers shifted these sales tax revenues out of the General Fund and into a new special fund dedicated solely to the realigned programs. In doing so, the state excluded these revenues from the calculation of the Prop. 98 minimum funding guarantee.
The Administration’s argument in this case included the following assertions:
The sales tax revenues dedicated to the 2011 realignment “are not General Fund revenues. They are never deposited into the General Fund, and unlike General Fund revenues they are not available for general appropriations.”
“Revenues that are never part of the General Fund cannot be treated as ‘General Fund revenues.’”
“Special funds with dedicated revenue streams…have historically not been treated as General Fund revenue, and are excluded from the Prop. 98 calculation.”
“It would be an unprecedented transgression on the Legislature’s authority for a court to decree that funds designated as special fund revenues be treated as ‘General Fund revenues’ for any purpose, including the calculation required by Prop. 98.”
These are strong arguments, but they’re not the end of the story. There’s at least one other school of thought regarding the relationship between Prop. 98 and state revenues. This view holds that the term “General Fund,” as used in the state Constitution, should be understood to encompass a broader range of revenues than those that are deposited into the “General Fund” established by state law. This perspective appears to be based on a particular understanding of the intent of Prop. 98, one goal of which was to take “school financing out of politics,” according to the 1988 ballot argument. This view also seems to reflect concerns about the long-term funding prospects for K-14 education if the Legislature were to use its discretion to direct more and more revenues into special funds that are separate from the General Fund — and seemingly outside the purview of Prop. 98.
To some degree, this line of thinking was expressed by K-12 school officials in the 2012 lawsuit described above and surfaces from time to time in the Legislature. For example, this view is evident in the Senate Appropriations Committee analysis of SB 562, which declares that: “In the context of Proposition 98, the term ‘General Fund’ revenue refers to state tax revenues, not simply revenues that are deposited in the state’s General Fund. Any taxes raised to support [a single-payer system under SB 562] would be considered the proceeds of taxes and would be subject to the requirements of Proposition 98.”
Given these two competing interpretations, the state could be vulnerable to a lawsuit if policymakers raised taxes by $100 billion or more and deposited these revenues into a special fund, with none of these dollars going to K-14 education. Lawmakers could attempt to dissuade potential litigants by adding a so-called “poison pill” to the bill. Such a provision would trigger a severe consequence — such as automatically repealing the new taxes – if a court ultimately found the state’s use of the revenues to be in conflict with Prop. 98. The Legislature included Prop. 98-related poison pills in four bills in the late 1980s and early 1990s. For example, policymakers in 1991 raised the state sales tax rate by a half-cent and directed all of the revenues into a new special fund dedicated to counties. These revenues were — and continue to be — excluded from the Prop. 98 calculation. The bill included a poison pill that would end this tax increase “if a court ruled that the revenues counted toward” the Prop. 98 minimum funding guarantee, according to the LAO. In all four cases, “none of the consequences set forth in the poison pill provisions ultimately occurred,” the LAO notes.
So yes, there may be a way for single-payer advocates to address any constitutional obstacles posed by Prop. 98 solely through the legislative process, without going to the voters. However, this path would leave the state vulnerable to a lawsuit that could put at risk the tax revenues needed to fully finance a single-payer system in California.
Concluding Thoughts
In any state, efforts to create a single-payer health care system would encounter a number of policy, fiscal, and political challenges. In California, these inherent difficulties are magnified by the complex rules that voters have added to the state Constitution — rules that restrict state policymakers’ ability to increase revenues and expenditures as well as to prioritize how new tax dollars should be spent.
In the context of recent attempts to establish a single-payer system in California, there are two fundamental constitutional constraints: 1) the state spending limit known as the Gann Limit and 2) the Prop. 98 minimum funding guarantee for K-14 education. Some single-payer advocates have asserted that these obstacles could be overcome solely through the legislative process without consulting the voters. This is highly unlikely with respect to the Gann Limit, barring the discovery of some as-yet-unidentified loophole. The story is somewhat more complicated with respect to Prop. 98. In theory, state legislators and the Governor could raise taxes by $100 billion or more to support a single-payer system, with none of these revenues going to K-12 schools and community colleges. Yet, this approach would be highly vulnerable to legal challenges that would put at risk some or all of the new state revenues needed to finance a single-payer system.
Addressing these constitutional constraints without seeking voter approval would likely create an extremely shaky legal foundation for a new single-payer system. Even under the best of circumstances, implementing a single-payer model would be a highly complex undertaking. Restructuring California’s current health care system — which comprises one-seventh of the state’s economy — would involve many moving pieces and uncertainties, and the transition would likely need to be phased in over time. Unnecessarily exposing a single-payer system to litigation in its infancy would hamper efforts to ensure a smooth transition and could undercut the long-term success of this new, state-based health care financing model.
In short, rather than trying to devise a clever — and likely counterproductive — way to avoid going to the ballot, single-payer advocates would be well-advised to ask California voters to remove the key constitutional obstacles to the implementation of a single-payer system.
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Executive Summary
On June 27, Governor Brown signed the 2017-18 state budget bill. This year’s budget agreement includes a number of improvements over earlier proposals, though the overall scope of state investments remains constrained by uncertainty about potential federal policy changes. The 2017-18 budget package:
Expands the California Earned Income Tax Credit (CalEITC) to well over 1 million additional families by expanding the credit to the self-employed and increasing the income eligibility limits.
Reflects an agreement between the Governor and legislative leaders over how to spend Proposition 56 tobacco tax revenues for Medi-Cal, with this funding going to supplemental payments for Medi-Cal providers and also to covering ordinary spending growth in the program.
Continues a multiyear reinvestment in subsidized child care and preschool that the Governor had proposed to delay in January. This includes increasing reimbursement rates for providers and adding full-day preschool slots. The enacted budget also increases access to subsidized care by raising income eligibility limits and establishing a 12-month eligibility period.
Requires counties to pay a larger share of In-Home Supportive Services (IHSS) costs, but includes temporary funding and other provisions to mitigate the impact of this cost-shift.
Mitigates a reduction in core funding for counties’ delivery of CalWORKs welfare-to-work services based on an expected decline in caseload and makes other small additional investments in welfare-to-work services.
Continues to increase funding for K-14 education as required by the Prop. 98 guarantee.
Includes dedicated resources to respond to federal action on immigration, including support for people seeking help with naturalization, deportation defense, and securing legal immigration status.
The budget package sets aside $3.6 billion as constitutionally required by Prop. 2 (2014), with half deposited in the state’s rainy day fund and half used to pay down state budgetary debt. The budget package also includes a supplemental $6 billion payment for the California Public Employees’ Retirement System (CalPERS), using funds borrowed from a state short-term investments account. Other notable elements include a significant restructuring of the state Board of Equalization as well as a transportation package agreed to by state leaders earlier this year, which will invest more than $50 billion over 10 years in state and local infrastructure through increases in fuel and vehicle-related taxes and fees.
The budget package makes no increases in basic income support for low-income seniors and people with disabilities (SSI/SSP) and lacks any proposals to address California’s affordable housing crisis.
Download full report (PDF) or use the links below to browse individual sections of this report:
Budget Package Projects Increase in Revenues, Continues to Boost State Reserves
The budget package projects General Fund revenues of $127.7 billion for 2017-18. This represents an increase of $6.1 billion over the current fiscal year (2016-17) and also reflects a modestly improved revenue picture compared to the Governor’s January projection of $125.2 billion for 2017-18 (an increase of $2.5 billion).
Of the $127.7 billion in projected General Fund revenues, $1.8 billion is taken “off the top” and transferred to the Budget Stabilization Account (BSA), the state’s constitutional “rainy day fund.” California voters revised the rules that apply to the BSA by passing Proposition 2 in November 2014. Prop. 2 requires an annual set-aside equal to 1.5 percent of estimated General Fund revenues. An additional set-aside is required when capital gains revenues in a given year exceed 8 percent 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 enacted budget projects that the BSA will total $6.7 billion by the end of the current fiscal year (2016-17). Based on projected revenues for 2017-18, Prop. 2 constitutionally requires the state to deposit an additional $1.8 billion into the BSA (as well as set aside $1.8 billion for repaying budgetary debt), bringing the total amount in the BSA to $8.5 billion by the end of 2017-18.
The BSA is not California’s only reserve fund. Each year, the state deposits additional General Fund revenues into a “Special Fund for Economic Uncertainties” (SFEU). The enacted budget includes $1.4 billion for this fund, bringing state reserves to a total of $9.9 billion (BSA + SFEU) by the end of 2017-18.
The California Earned Income Tax Credit (CalEITC) is a refundable state tax credit that state policymakers established in June 2015. This credit, modeled after the federal EITC, helps working families who earn very little from their jobs to better afford basic necessities. Around 350,000 families benefited from the CalEITC in tax year 2016 — the second year that the credit was available. Single parents with multiple qualifying children received an average of roughly $1,000 from the CalEITC, while workers without qualifying children received an average of about $100.
The 2017-18 budget agreement significantly expands the CalEITC so that well over 1 million additional families could benefit from the credit beginning in tax year 2017. Specifically, the budget agreement:
Allows low-earning self-employed workers to be eligible for the credit. Currently, the CalEITC is the only EITC in the nation that excludes many low-earning, self-employed workers. This exclusion undermines a fundamental purpose of the EITC: to encourage and reward work. The budget deal ends this exclusion, bringing the state credit into better alignment with the federal credit. This change means that independent contractors and small business owners who meet all other eligibility criteria will be able to benefit from the CalEITC beginning in tax year 2017.
Raises the income limits to qualify for the credit. Many workers who struggle to get by are not eligible for the CalEITC because the income limits to qualify for the credit are extremely low. Parents are not eligible for the credit unless their annual earnings are less than around $10,000 to $14,000, depending on the number of children they are supporting. Workers without qualifying children are not eligible unless they earn under about $6,700 annually. These income limits are so low that full-time minimum wage workers earn too much to qualify for the credit, even though they typically earn too little to make ends meet. The 2017-18 budget agreement raises the income limits to qualify for the CalEITC beginning in tax year 2017, thereby allowing many more low-earning workers to benefit from the credit. For parents with qualifying children, the limit will increase to just over $22,000 — roughly equivalent to a full-time, year-round minimum wage worker’s annual earnings. The new limit for parents will also be closer to the threshold to qualify for the federal EITC, which ranges from about $39,600 to about $48,300 for single parents, depending on the number of children they are supporting. For workers without qualifying children, the CalEITC limit will increase to about $15,000 — roughly equal to the threshold for these workers to qualify for the federal EITC.
Maintains support for CalEITC promotion. Awareness of the CalEITC appears to be low, and many people who were eligible for the credit during its first two years appear to have missed out on it. Lower-than-expected take-up of the CalEITC likely reflects the fact that the majority of workers who are eligible for the credit are not required to file state income taxes due to their very low incomes. In other words, many eligible workers may not realize that they can receive a tax refund even if they do not owe state income taxes. For this reason, promoting the CalEITC is critical to maximizing the credit’s success. The 2017-18 budget includes $2 million to maintain a grant program created last year that is designed to help communities expand their efforts to promote the CalEITC. The budget also provides about $5.8 million to the Franchise Tax Board to administer the CalEITC, including the processing and auditing of tax returns that claim the credit.
Budget Package Updates Eligibility Guidelines and Continues Multiyear Investment in Early Care and Education
The 2017-18 budget package continues implementation of the multiyear investment in California’s subsidized child care and development system, as included in the 2016-17 budget agreement. The budget package also takes an important step forward in updating income eligibility guidelines for subsidized programs, which have not been updated in a decade. Specifically, the budget package:
Provides $160.3 million to increase the reimbursement rate for providers that contract directly with the state. The budget increases by 5 percent the Standard Reimbursement Rate (SRR), the payment rate for providers contracting with the state ($43.7 million Proposition 98, $23.9 million non-Prop. 98 General Fund). This increase takes effect July 1, 2017, and reflects the second half of a 10 percent increase included in the 2016-17 budget agreement. In addition, the 2017-18 budget increases the SRR by an additional 6 percent, also effective July 1, 2017 ($60.7 million Prop. 98, $32 million non-Prop. 98 General Fund).
Provides $40.6 million General Fund to update the payment rate for voucher-based providers. Families can access subsidized care by using a voucher to select a child care provider of their choice. The value of these vouchers is based on the state’s Regional Market Rate (RMR) Survey, which is conducted on a periodic basis. The budget package increases the value of vouchers by updating rates to the 75th percentile of the 2016 RMR Survey, effective January 1, 2018.
Provides $25 million General Fund to update income eligibility limits and implement a 12-month eligibility period. The budget agreement updates income eligibility limits using the most current state data on family incomes. The budget also establishes a 12-month eligibility period, where families remain eligible regardless of changes in income or need, as long as family income does not exceed 85 percent of state median income. These changes bring California into compliance with the federal Child Care and Development Block Grant rules and take effect July 1, 2018.
Provides $15.5 million General Fund to create a “child care bridge” for children in foster care. In participating counties, the Emergency Child Care Bridge Program for Foster Children will help foster care families find and pay for short-term child care services, effective January 1, 2018.
Provides $7.9 million Prop. 98 General Fund to increase the number of slots in the state preschool program. The budget package adds 2,959 full-day state preschool slots beginning March 1, 2018, as stipulated in the original multiyear plan in the 2016-17 budget agreement.
Budget Package Boosts the Minimum Funding Level for Schools and Community Colleges
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 2017-18 budget agreement assumes the same Prop. 98 funding levels for 2015-16 ($69.1 billion) and 2016-17 ($71.4 billion) as the May Revision, and a 2017-18 Prop. 98 funding level of $74.5 billion, slightly lower ($77 million) than the May Revision. The Prop. 98 guarantee tends to reflect changes in state General Fund revenues, and while the May Revision’s estimates of 2015-16 revenues were up relative to assumptions in January’s budget proposal, the May Revision’s 2015-16 Prop. 98 funding level was actually greater than the minimum funding guarantee based on the May revenue estimates. Because calculations of the Prop. 98 guarantee are usually based on prior-year funding levels, the 2015-16 Prop. 98 funding level in the budget agreement leads to higher Prop. 98 funding levels in 2016-17 and 2017-18 than the minimum funding guarantee otherwise would have required.
The budget agreement also includes two provisions that affect the Prop. 98 guarantee for 2016-17. The first provision suspends an additional payment that is statutorily required in years when the Prop. 98 guarantee would grow less quickly than the rest of the state budget; this reduces the 2016-17 Prop. 98 guarantee by $405 million from $71.3 billion to $70.9 billion. The second provision allocates up to $514 million in 2016-17 Prop. 98 spending as a settle-up payment for prior-year obligations if Prop. 98 spending exceeds the minimum guarantee in that year. Because actual 2016-17 Prop. 98 spending is $71.9 billion, $993 million above the minimum funding guarantee, the new budget agreement allocates the full $514 million as a settle-up payment, resulting in a 2016-17 Prop. 98 funding level of $71.4 billion.
Budget Increases Support for the Local Control Funding Formula (LCFF) and Other K-12 Spending
California’s school districts, charter schools, and county offices of education (COEs) provide instruction to approximately 6.2 million students in grades kindergarten through 12. Consistent with proposals made in the January budget and the May Revision, the budget agreement increases funding for the LCFF — the state’s K-12 education funding formula — and pays off outstanding obligations to school districts. Specifically, the budget agreement:
Provides $1.4 billion to continue implementation of the LCFF. 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 increase in LCFF funding may reduce the amount of time it takes for its full implementation, which depends on funding sufficient for all districts to reach a target base grant. (All COEs reached their LCFF funding targets in 2014-15.) According to the Administration, the 2017-18 LCFF funding level in the budget agreement would bring the LCFF formula “to 97 percent of full implementation.”
Provides $877 million in one-time funding to reduce mandate debt the state owes to schools. 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.
Provides an additional $50 million, for a total of $600 million, in ongoing funding for the After School Education and Safety (ASES) Program. The boost in ASES’ funding will help cover costs for implementing new minimum wage obligations.
Provides $30 million in one-time funding for teacher workforce programs. The budget agreement provides $25 million, to be available through 2021-22, for a second cohort of school employees to obtain their teaching credential through the Classified School Employee Teacher Credentialing Program. The budget agreement also provides $5 million in competitive grants, to be available through 2019-20, for a newly established Bilingual Teacher Professional Development Program to help California meet the demand for bilingual teachers needed to implement programs authorized by voter approval of Proposition 58 last November.
Provides $10 million in one-time funding to support refugee students. The budget agreement requires the Department of Social Services to allocate these dollars between 2017-18 and 2019-20 to school districts that are impacted by significant numbers of refugee students.
Maintains cost-of-living adjustments (COLAs) for non-LCFF programs. Consistent with the May Revision, the budget agreement provides an additional $3.2 million to fund a 1.56 percent COLA, up from the 1.48 percent COLA proposed in the January budget, for several categorical programs that remain outside of the LCFF. These include special education, child nutrition, and American Indian Education Centers.
Includes provisions to increase accountability for general obligation (GO) school facilities bond funds approved by voters last November. Proposition 51 authorized $7 billion in state GO bonds for K-12 school facilities. However, the Governor’s May Revision stated that the Administration would only support the expenditure of Prop. 51 dollars once measures were taken “to ensure that taxpayers’ dollars are spent appropriately.” The budget agreement includes trailer bill language (AB 99), proposed by the Governor, which requires audits of financial reports that school districts will be required to submit for school facilities projects that began after April 1, 2017.
Budget Agreement Increases Funding for California Community College Operations and Other Purposes
A portion of Proposition 98 funding supports California’s community colleges (CCCs), which help prepare approximately 2.4 million full-time students to transfer to four-year institutions as well as obtain training and skills for immediate employment. The 2017-18 budget agreement increases funding for CCC operating expenses and general-purpose apportionments. Specifically, the budget:
Boosts funding for CCC operating expenses by $183.6 million, $23.6 million above the May Revision. The budget agreement provides funding for the CCCs to pay for increased expenses in areas such as employee benefits, facilities, and professional development.
Maintains cost-of-living adjustment (COLA) for apportionments. Consistent with the May Revision, the budget agreement provides $97.6 million to fund a 1.56 percent COLA for apportionments, up from 1.48 percent as proposed in the Governor’s January budget.
Provides $76.9 million in one-time funding for deferred maintenance and other CCC expenses. The budget agreement provides funding for CCCs to pay for facilities and other items including deferred maintenance, instructional equipment, and certain water conservation projects.
Increases enrollment growth funding. The budget agreement maintains the May Revision proposal to provide $57.8 million in 2017-18 to fund a projected 1 percent increase in enrollment growth. The budget agreement also reduces funding by $33 million to reflect unused dollars allocated for 2015-16 enrollment growth.
Increases financial aid funding for CCC students by $50 million. The budget agreement provides $25 million for a newly established Community College Completion Grant Program and an additional $25 million for the Full-Time Student Success Grant program. Completion grants of up to $2,000 will be awarded to students who fulfill a set of requirements, including having received a Full-Time Student Success Grant and maintaining at least a 2.0 grade point average.
Consistent with the May Revision, the budget agreement provides CCCs with $150 million in one-time funding for grants to develop and implement the Guided Pathways Grant Program, an institution-wide approach to supporting student success.
Budget Agreement Increases Higher Education Funding and Requires Increased Transparency From the UC
The 2017-18 budget agreement increases funding for the California State University (CSU) and University of California (UC), but makes a piece of funding for the UC contingent on certain requirements. Specifically, the new spending plan:
Increases funding for the CSU by $182.2 million. In addition to the $162.2 million in increased ongoing funding included in the Governor’s January budget proposal, the enacted budget includes $20 million to support an additional 2,487 full-time California resident students compared to the 2016-17 academic year. The budget agreement also provides $20 million in one-time funding to support several CSU programs: $12.5 million for the Graduation Initiative, $3 million for the San Bernardino Palm Desert Campus, $2.5 million to support “hunger free” campuses, and $2 million for equal employment opportunity programs.
Increases funding for the UC by $136.5 million, but conditions more than one-third of this boost on the University demonstrating effort to satisfy several expectations. In addition to $131.2 million in increased funding in the Governor’s January budget proposal, the spending plan includes $5 million to support an additional 500 graduate students in 2017-18 compared to the 2016-17 academic year. However, the budget agreement withholds $50 million of this funding, which will be released only if the UC demonstrates — by May 1, 2018 — that it has made a good faith effort to implement: 1) recommendations made by the State Auditor, who identified a number of concerns with UC budgeting practices, 2) a more transparent budgeting process, and 3) a transfer policy at all of its campuses, except for UC-San Francisco and UC-Merced, which aims to ensure that at least one out of every two entering freshman is a transfer student beginning in the 2018-19 academic year.
The budget agreement increases funding for the California Student Aid Commission (CSAC). This includes shifting an additional $117.7 million in federal Temporary Assistance for Needy Families (TANF) funds to support Cal Grants, which offsets General Fund costs for Cal Grants by the same amount. In addition, the budget package:
Provides $96 million to maintain the Middle Class Scholarship Program (MCSP). The Governor proposed to phase out the MCSP in both his January budget proposal and the May Revision. The budget package rejects the Governor’s proposal, but reduces funding for the MCSP by $21 million.
Provides $48.9 million for the CSAC to pay for higher Cal Grant costs due to recently adopted tuition increases at the CSU and the UC. The budget package boosts funding to cover increased Cal Grant costs — $28 million for CSU students and $20.9 million for UC students.
Provides an additional $8 million to maintain Cal Grant funding for new students attending private institutions accredited by the Western Association of Schools and Colleges. The budget agreement maintains the maximum $9,084 Cal Grant award for new students at private nonprofit and for-profit accredited institutions.
Budget Package Uses $546 Million in Proposition 56 Tobacco Tax Revenues to Boost Medi-Cal Provider Rates
The 2017-18 state budget package resolves a months-long disagreement between the Governor and legislators over how to spend new Prop. 56 tobacco-tax revenues that go to Medi-Cal, which provides health coverage for more than 13 million Californians. Approved by voters last November, Prop. 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, which took effect on April 1, will generate nearly $1.3 billion in new funding for Medi-Cal in 2017-18, according to state projections.
The Prop. 56 compromise, which is contained in Assembly Bill 120, includes the following elements:
Of the $1.3 billion in Prop. 56 funds that are projected to flow to Medi-Cal in 2017-18, up to $546 million could go to doctors, dentists, and certain other Medi-Cal providers as “supplemental payments.” These payments will be divided among five groups of providers: Up to $325 million for physicians; up to $140 million for dentists; up to $50 million for women’s health providers; up to $27 million for providers serving people with developmental disabilities; and up to $4 million for providers caring for people with HIV/AIDS. This use of Prop. 56 funds — which state lawmakers promoted, but the Governor initially resisted — reflects the measure’s requirement that the tobacco tax dollars directed to Medi-Cal be used “to increase funding for the existing [program]…by providing improved payments for all healthcare, treatment, and services.” According to Prop. 56, these “improved payments” must be allocated based on criteria that include 1) ensuring timely access to care, 2) bolstering the quality of care, and 3) addressing provider shortages in various parts of the state.
The state Department of Health Care Services (DHCS) will determine the rules for allocating these supplemental payments. These rules must be posted on the DHCS website by July 31, 2017. AB 120 does not require DHCS to solicit public input in developing these rules. However, it seems likely that the Department will reach out to key stakeholders in order to help ensure that the supplemental payments are structured in a way that will achieve the goals established by Prop. 56.
Prop. 56-funded supplemental payments will be disbursed only if:
California receives “all necessary federal approvals” in order to ensure that federal Medicaid matching funds will be available to the state. Supplemental payments will be independently allocated by provider type as federal approval is received for that category of providers. At a Senate Budget and Fiscal Review Committee hearing on June 13, Senator Holly Mitchell — the committee chair — indicated that the intent is to provide supplemental payments retroactive to July 1, 2017, even if federal approval were received much later in the fiscal year. If the Trump Administration does not approve the state’s proposed supplemental payments, then the Prop. 56 revenues that would have funded these payments would have to be used for other purposes in Medi-Cal, although AB 120 does not provide specifics on this point.
The federal government does not cut funding for Medi-Cal. Supplemental payments will not go into effect (or will be suspended) if federal support for Medi-Cal is reduced below the level projected in the state budget. (The Governor’s Department of Finance will make this determination.) While President Trump and Republicans in Congress are attempting to make deep cuts to Medicaid, it’s unclear whether any such reductions will be approved and, if they are, how soon they would take effect. If federal Medicaid cuts do take effect in the coming fiscal year, then any Prop. 56 revenues that would have funded supplemental payments would have to be used for other purposes in Medi-Cal, although AB 120 does not provide specifics on this point.
If California allocates the full $546 million in Prop. 56-funded supplemental payments in 2017-18, the state would receive a projected $613 million in federal Medicaid matching funds. With these federal funds, a total of up to $1.2 billion in supplemental payments would be available to Medi-Cal providers in 2017-18.
The remaining Prop. 56 funds that flow to Medi-Cal will be used to pay for ordinary spending growth in the program. For example, if the state allocates the full $546 million in supplemental payments in 2017-18, the remaining $711 million in Prop. 56 revenues for that year will go toward routine year-over-year cost increases in Medi-Cal, costs that typically would be paid for with state General Fund dollars. This part of the compromise reflects the Governor’s interpretation of Prop. 56 — one that is at odds with how many state lawmakers and Medi-Cal providers interpret the measure.
The compromise sets an expectation that the Governor could disburse up to $800 million in Prop. 56 funds as supplemental payments to Medi-Cal providers in 2018-19, which begins on July 1, 2018. However, the amount of supplemental payments provided in 2018-19 will ultimately be determined based on negotiations between the Governor and legislative leaders as part of the typical state budget deliberations in 2018.
Budget Package Restores Full Dental Services in 2018, Vision Services in 2020, for Adults Enrolled in Medi-Cal
In order to help close a substantial budget gap in 2009, state policymakers eliminated several Medi-Cal benefits for adults that are optional under federal law. (Medi-Cal is California’s Medicaid program.) These cuts included optional dental services as well as optometric and optician services. The 2013-14 state budget package restored some optional dental services for adults effective May 1, 2014. These restored services included fluoride treatments, certain crowns, and full dentures, but excluded certain other dental services, such as implants. The 2017-18 budget agreement (Senate Bill 97):
Restores, as soon as January 1, 2018, the full array of dental services for adults in Medi-Cal. This change is estimated to increase General Fund spending by $34.7 million in 2017-18, with estimated full-year costs of $72.9 million beginning in 2018-19. Implementation is contingent on federal approval.
Restores, as soon as January 1, 2020, optometric and optician services as a Medi-Cal benefit for adults. Implementation is contingent on federal approval as well as on funding being provided in the state budget.
Budget Package Shifts In-Home Supportive Services (IHSS) Costs to Counties, but Reduces the Impact
Under the Coordinated Care Initiative (CCI), California integrates health care and other services — including IHSS — for certain seniors and people with disabilities. In January, the Administration indicated that because the CCI is not cost-effective, it will be discontinued in 2017-18, pursuant to current law. Because of how the CCI is structured, one key outcome of discontinuing this initiative is that counties’ share of the nonfederal costs for IHSS will go up substantially beginning in July 2017, while the state’s share of the costs will drop. (IHSS costs are funded with federal, state, and county dollars.) This past spring, the Administration worked with counties to develop a multifaceted plan to mitigate the impact of this roughly $600 million cost-shift on county budgets. As enacted in Senate Bill 90, this plan includes the following elements:
Maintains a “maintenance-of-effort” (MOE) structure for sharing nonfederal IHSS costs between the state and counties. This county MOE structure was implemented in 2012 as part of the CCI. The state General Fund will continue to pay the difference between counties’ MOE contribution each year and the total nonfederal share of IHSS costs in each county.
Calculates a new MOE base for county IHSS costs in 2017-18 and applies an annual inflation factor to that base beginning in 2018-19. The MOE base will include the cost of IHSS services along with a limited amount of costs related to IHSS administration. The inflation factor is set at 5 percent for 2018-19 and will rise to 7 percent in 2019-20 and each year thereafter. However, the inflation factor could be lower in any given year depending on the performance of sales and use tax revenues that counties receive as part of their “1991 realignment” funding.
Provides counties with General Fund dollars to offset a portion of their increased costs for IHSS. The state will provide counties with $400 million in 2017-18; $330 million in 2018-19; $200 million in 2019-20; and $150 million in 2020-21 and each year thereafter.
Redirects, for five years, certain 1991 realignment “growth” funds in order to offset a portion of counties’ increased costs for IHSS. For the first three years, SB 90 redirects all Vehicle License Fee growth funds from various 1991 realignment subaccounts, including one that provides funding for mental health services. In the fourth and fifth years, the amount of redirected revenues would be cut in half.
Allows counties to avoid repaying revenues that they received in error due to miscalculations by the state Board of Equalization. This amount ranges from $100 million to $300 million, according to the California State Association of Counties (CSAC).
Allows counties that are “experiencing significant financial hardship” due to higher IHSS costs to seek a low-interest loan from the state. This loan option would be available through 2019-20. Loans would have to be paid back within three years.
With this mitigation plan in place, counties’ additional costs for IHSS are expected to be relatively manageable in 2017-18 and 2018-19. However, CSAC warns that the potential for a 7 percent jump in counties’ IHSS contribution in 2019-20 “is problematic…and will lead to growing county general fund impacts.” Any remaining county concerns could be addressed relatively soon: SB 90 requires the Governor’s Department of Finance — in developing the 2019-20 budget — to meet with CSAC and other organizations to examine various issues related to the 1991 realignment, including IHSS costs.
Budget Package Mitigates Cut to Key CalWORKs Funding Source and Calls for Change in Allocation Methodology
The California Work Opportunity and Responsibility to Kids (CalWORKs) Program provides modest cash assistance for 875,000 low-income children while helping parents overcome barriers to employment and find jobs. Counties receive most of their funding to support CalWORKs activities (including employment services, some child care and case management, and eligibility and other administration services) through the “CalWORKs single allocation,” which has historically been budgeted based on projected caseload. Because the CalWORKs caseload is expected to decline next year, the Governor proposed reducing the single allocation by roughly $250 million, about a 13 percent cut relative to the 2016-17 allocation. Counties objected to this cut, citing their limited ability to quickly reduce spending in response to changes in caseload, as well as the need to maintain a baseline level of infrastructure and service capacity in order to be able to respond to future caseload increases. In response to these concerns, the 2017-18 budget agreement reduces the proposed cut to the single allocation with a one-time $108.9 million augmentation, resulting in an overall net reduction to the single allocation of about $140 million compared to the 2016-17 fiscal year. The budget agreement also requires the Administration to work with counties to revise the methodology for developing the single allocation.
The budget agreement does not propose new increases to CalWORKs basic grants or time limits, though this would be necessary to restore cuts made to the program during and after the Great Recession. However, the budget does include some new investments in welfare-to-work services and infrastructure, including financial incentives for participants engaged in education, expansion of substance abuse services to children of CalWORKs participants, and investments in data and evaluation systems.
Budget Agreement Provides Increased Resources to Address Federal Actions on Immigration and Other Issues
California was home to more than 10.7 million foreign-born residents as of 2015. This includes a significant number of undocumented immigrants and their children, who are often US citizens. Aggressive federal enforcement of immigration laws has been an area of particular tension between the Trump administration and California’s state and local governments, and the 2017-18 budget package adopts three new proposals that aim to address this issue. Specifically, the budget agreement:
Prohibits local law enforcement agencies from establishing new contracts or expanding existing contracts with federal authorities to provide space to detain noncitizens facing federal immigration charges. This provision applies to contracts for detaining both noncitizen adults and accompanied or unaccompanied minors.
Requires the Attorney General to review conditions and policies in California detention facilities that hold individuals facing federal immigration charges. The budget provides $1 million to support these activities.
Dedicates $45 million General Fund to the Department of Social Services to increase the availability of legal services for people seeking help with naturalization, deportation defense, and securing legal immigration status. These funds represent an increase over the $30 million for this purpose previously proposed by the Governor.
The enacted budget also maintains the $6.5 million General Fund and 31 positions in the Department of Justice proposed by the Governor for “new legal workload related to various actions taken at the federal level.” These funds are intended to address federal actions broadly in the areas of public safety, health care, the environment, consumer affairs, and general constitutional issues, including actions that may affect the California Secure Choice Retirement Savings Program.
Supplemental Payment for State Employee Pensions Included in Budget Package
The budget package includes higher levels of contributions to state-run retirement systems: the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS). CalPERS and CalSTRS, like many retirement systems, are not funded at levels that will keep up with future benefits, resulting in the state needing to make annual contributions in order to pay down unfunded liabilities. The state’s unfunded liabilities in the two retirement systems have grown recently as a result of lower-than-expected investment returns and changes to the assumptions the systems make about future investment returns. Greater unfunded liabilities from lower investment returns, in turn, mean that state General Fund contributions to the two systems must increase.
The enacted budget includes additional General Fund contributions as a result of CalPERS and CalSTRS reducing the “discount rate” from 7.5 percent to 7.0 percent over the next several years. The discount rate is the assumed future rate of return on investments that is used to estimate the level of contributions from the state and employers.
In addition, the budget includes a supplemental payment to CalPERS of $6 billion, using revenues borrowed from the Surplus Money Investment Fund, a state cash-flow and short-term investments account that is used to pool and invest state funds until they are needed. The purpose of this loan is to help offset increases in state contributions in future years — essentially refinancing a liability to CalPERS. The loan will allow the funds to be invested at CalPERS’ assumed investment return rate (discount rate) of 7 percent, as opposed to the less than 1 percent currently earned by the funds. The Administration estimates that over two decades this will generate an additional $11 billion (after paying for the costs of the loan), helping to reduce state contributions to CalPERS. The General Fund’s share of the repayment of the loan will be covered by funds set aside by Prop. 2 (2014) for repayment of budgetary debt. The rest of the loan repayment will come from a series of state special funds. In other words, the intention is that repaying the loan will not come from money that could otherwise be used to increase spending for other General Fund programs.
Budget Provides More Than $11 Billion for the California Department of Corrections and Rehabilitation
The California Department of Corrections and Rehabilitation (CDCR) operates the state’s prison and parole systems. Funding for the CDCR supports the cost of housing men and women in state prisons and other correctional facilities, providing health care and rehabilitation services, and supervising people who have been released back to their communities after completing their prison terms. CDCR’s budget also pays for youth correctional operations and services that are provided at the state level.
The 2017-18 budget provides $11.1 billion in General Fund support for CDCR operations. Overall General Fund spending for CDCR, including support for capital outlay, is equal to 8.9 percent of total enacted 2017-18 General Fund expenditures. In a significant change, the CDCR’s budget includes — effective July 1, 2017 — $254.4 million that was previously budgeted through the Department of State Hospitals (DSH). These dollars pay for the operation of 1,156 inpatient mental health treatment beds at three state prisons — beds that are part of the broader system of mental health care that is provided to incarcerated adults. Transferring responsibility for these psychiatric services from the DSH to the CDCR is intended to “streamline processes and improve timelines for inmate referrals for psychiatric inpatient treatment,” according to the Administration’s summary of the budget package.
Budget Package Highlights Anticipated Reduction in Prison Population Due to Proposition 57
Currently, more than 131,100 people are serving sentences at the state level in the custody of the California Department of Corrections and Rehabilitation (CDCR). Most of these individuals — over 115,100 — are housed in state prisons designed to hold slightly more than 85,000 people. This level of overcrowding is equal to 135.3 percent of the prison system’s “design capacity,” which is below the prison population cap — 137.5 percent of design capacity — established by a federal court order. In addition, California houses approximately 16,000 individuals in facilities that are not subject to the court-ordered population cap, including fire camps, in-state contract beds, out-of-state prisons, and community-based facilities that provide rehabilitative services.
The total number of people incarcerated by the state has declined by roughly one-quarter since peaking at 173,600 in 2007. This substantial reduction resulted largely from a series of policy changes adopted by state policymakers and the voters in the wake of the 2009 federal court order requiring the state to reduce overcrowding in state prisons.
California voters added a new reform last year by approving Prop. 57, which gives state officials new policy tools to address ongoing overcrowding in state prisons. Prop. 57 requires parole consideration hearings for state prisoners who have been convicted of a nonviolent felony and have completed the full term for their primary offense. The measure also gives the CDCR — which is part of the Governor’s administration — broad new authority to award sentencing credits to reduce the amount of time that people spend in prison. Prop. 57 requires the CDCR to adopt regulations implementing both of these provisions. Finally, Prop. 57 requires juvenile court judges to decide whether a youth should be tried in adult court.
Earlier this year, the Administration drafted emergency regulations to implement Prop. 57, which were approved by the Office of Administrative Law in April. Based on these emergency rules (as published):
The new parole consideration process for nonviolent offenders was scheduled to take effect on July 1, 2017.
New and enhanced sentencing credits for completion of education and rehabilitation programs are scheduled to be implemented on August 1, 2017. (Enhanced sentencing credits for good conduct took effect on May 1.)
The 2017-18 budget package estimates that in 2017-18, Prop. 57 will reduce the number of inmates by 2,675 below the level that was otherwise projected (130,368). This annual drop in the inmate population is projected to grow to about 11,500 in 2020-21. A declining inmate population will allow the CDCR “to remove all inmates from one of two remaining out-of-state facilities in 2017-18, and begin removing inmates from the second facility as early as January 2018,” according to the Administration’s summary of the budget package. The budget agreement assumes that Prop. 57 will result in net state savings of $38.8 million in 2017-18, rising to about $186 million by 2020-21.
Budget Agreement Reorganizes State Tax Administration and Limits Board of Equalization’s Duties
The California Board of Equalization (BOE) currently operates over 30 tax and fee programs and has a quasi-judicial role in ruling on tax appeals. In addition, an elected five-member board governs the BOE, and BOE board members often view themselves in a quasi-legislative role.
There has been longstanding concern regarding the BOE’s conflicting roles and responsibilities, and a recent audit by the Department of Finance showed recent misuse of BOE resources, board member interference in routine operations, and an inability to report accurate and reliable information to the Legislature or the Administration.
In response, the 2017-18 budget agreement reorganizes the BOE’s roles and responsibilities and in doing so creates two new state entities: the California Department of Tax and Fee Administration (CDTFA) and the Office of Tax Appeals (OTA). Under the reorganization, the BOE will retain the core duties specified in the state Constitution, including equalizing county property tax rates, assessing certain intercounty and business property, assessing taxes on insurers, and assessing and collecting alcohol excise taxes. The CDTFA and the OTA will have responsibility for other BOE operations that are defined by state statute. The CDTFA will have responsibility for administering other BOE tax and fee operations, and the OTA will have responsibility for ruling on tax appeals. The reorganization of state tax administration will be effective on July 1, 2017.
California’s expansive transportation infrastructure includes 50,000 lane-miles of state and federal highways, 304,000 miles of locally owned roads, Amtrak intercity rail services, and numerous local transit systems, all of which facilitate the movement of people and goods across the state. The state’s largest category of deferred maintenance is for its existing transportation facilities.
The final 2017-18 budget includes an agreement with the Legislature on a 10-year, $54 billion transportation funding package. This includes $2.8 billion for 2017-18.
The funding will be split equally between state and local transportation programs over the next 10 years. Major state-level allocations include:
$15 billion for highway repairs.
$4 billion in bridge repairs.
$3 billion to improve trade corridors.
$2.5 billion to reduce congestion on major commute corridors.
Major local-level allocations include:
$15 billion for local road repairs.
$8 billion for public transit and intercity rail.
$2 billion for local “self-help” communities that are making their own investments in transportation improvements.
$1 billion for active transportation projects to better link travelers to transit facilities.
The funding package relies on new revenues generated from a series of tax and fee increases:
$24.4 billion from a 12-cent increase in the base gas excise tax starting on November 1, 2017.
$10.8 billion from a 20-cent increase in the diesel fuel base excise tax and a 5.75-cent increase in the diesel fuel sales tax starting on November 1, 2017.
$16.3 billion from a new annual transportation improvement fee that will take effect on January 1, 2018. This fee will range 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.)
$200 million from a new annual fee of $100 on all zero-emission vehicles starting on July 1, 2020.
In addition, the base gas and diesel fuel excise taxes, the new transportation improvement fee, and the new zero emissions vehicle fee will be annually adjusted for inflation starting in 2020-21.
Budget Makes No New Investments in SSI/SSP or Housing, Leaves Cap-and-Trade Allocation Unresolved
The 2017-18 budget agreement includes no new investments in some services and supports that help Californians who have low incomes. In addition, the current budget package leaves unsettled the issue of how to allocate “cap and trade” revenues in 2017-18. Specifically, the budget package:
Does not provide a cost-of-living adjustment (COLA) for SSI/SSP grants. Supplemental Security Income/State Supplementary Payment (SSI/SSP) grants help well over 1 million low-income seniors and people with disabilities to pay for housing, food, and other basic necessities. Grants are funded with both federal (SSI) and state (SSP) dollars. Last year, the state approved a state COLA for the SSP portion of the grant, which took effect in January 2017, but no new state COLA was approved for 2017-18.
Does not propose any new funding to address California’s affordable housing crisis. No major new state funds are allocated to support affordable housing in the budget agreement, though multiple proposals to invest in housing are still pending in the Legislature. The budget does include $43.5 million for the Housing and Disability Advocacy Program, which was created as part of the budget package that was signed into law last year, but which was never implemented. This program is intended to help people who are homeless or at risk of homelessness and who have a disability to access appropriate benefits. The $43.5 million in funding provided for 2017-18 is carried forward from the 2016-17 budget.
Does not resolve the question of allocating cap-and-trade revenues. California’s cap-and-trade program sets a statewide limit on the emission of greenhouse gases (GHGs) and authorizes the Air Resources Board (ARB) to auction off emission allowances, with proceeds invested in activities that seek to reduce GHG emissions. In January, the Governor proposed allocating cap-and-trade funds contingent on the Legislature confirming — with a two-thirds vote in each house — the ARB’s authority to administer the cap-and-trade program beyond 2020. This legislative action has not yet occurred, though negotiations on this vote continue.
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The 2017-18 state budget package negotiated by Governor Brown and legislative leaders resolves a months-long disagreement over how to spend new Proposition 56 tobacco-tax revenues that go to Medi-Cal, which provides health coverage for more than 13 million Californians. Approved by voters last November, Prop. 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, which took effect on April 1, will generate nearly $1.3 billion in new funding for Medi-Cal in 2017-18, according to state projections.
At the moment, the Prop. 56 compromise is included in two bills: Assembly Bill 120 and Senate Bill 105. The Legislature will approve — likely later today — one of these bills as part of the state’s overall spending plan for the 2017-18 fiscal year, which begins on July 1. The Prop. 56 compromise includes the following elements:
Of the $1.3 billion in Prop. 56 revenues that are projected to flow to Medi-Cal in 2017-18, up to $546 million could go to doctors, dentists, and certain other Medi-Cal providers as “supplemental payments.” These payments would be divided among five groups of providers: up to $325 million for physicians; up to $140 million for dentists; up to $50 million for women’s health providers; up to $27 million for providers serving people with developmental disabilities; and up to $4 million for providers caring for people with HIV/AIDS. This use of Prop. 56 revenues — which lawmakers promoted, but the Governor initially resisted — reflects the measure’s requirement that the tobacco-tax dollars directed to Medi-Cal be used “to increase funding for the existing [program]…by providing improved payments for all healthcare, treatment, and services.”
The state Department of Health Care Services (DHCS) will determine the rules for allocating these supplemental payments. These rules must be posted on the DHCS website by July 31, 2017. The legislation does not require DHCS to solicit public input in developing the rules, although it seems likely that the Department will reach out to key stakeholders for feedback.
Prop. 56-funded supplemental payments will be disbursed only if:
California receives “all necessary federal approvals” in order to ensure that federal Medicaid matching funds will be available to the state. Supplemental payments would be independently allocated by provider type as federal approval is received for that category of providers. At a Senate Budget and Fiscal Review Committee hearing on June 13, Senator Holly Mitchell — the committee chair — indicated that the intent is to provide supplemental payments retroactive to July 1, 2017, even if federal approval were received much later in the fiscal year.
The federal government does not cut funding for Medi-Cal. Supplemental payments would not go into effect (or would be suspended) if the federal government reduces support for Medi-Cal below the level projected in the state budget. (The Governor’s Department of Finance would make this determination.) While President Trump and Republicans in Congress are attempting to make deep cuts to Medicaid, it’s unclear whether those cuts will be approved and, if they are, how soon they would take effect.
What comes next? On the state front, once the Prop. 56 compromise is signed into law, attention will turn to DHCS as it moves swiftly to develop the rules that will apply to supplemental payments. Medi-Cal provider payment increases that are funded with Prop. 56 dollars must be based — according to the measure — on criteria that include 1) ensuring timely access to care, 2) bolstering the quality of care, and 3) addressing provider shortages in various parts of the state. By seeking input from key stakeholders, DHCS can help to ensure that supplemental payments are structured in a way that will actually achieve these important goals, thereby improving Medi-Cal for the millions of children, seniors, people with disabilities, and other Californians who rely on it.
At the same time, however, anyone who cares about the future of Medi-Cal, and health care in our state in general, will be keeping an eye on federal deliberations and the actions of California’s congressional delegation. If President Trump and Republicans in Congress succeed in scaling back federal support for Medicaid, California would lose billions of dollars that fund Medi-Cal each year. This massive cost-shift would force state policymakers to make difficult choices regarding Medi-Cal coverage and benefits — and would almost certainly undo any progress on provider payments afforded by Prop. 56 revenues.
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This analysis is the second part of a multiphase effort to analyze subsidized child care and development programs in California. (Read the first part.) Future phases of this work will examine the unmet need for subsidized child care for children from birth through age five.
Abstract
California’s child care and development system allows parents with low and moderate incomes to find and maintain employment while providing care and education for their children. On average, from 2013 to 2015, more than 1.5 million children were eligible for subsidized programs, but only 13 percent were served in a program that could accommodate families for a full day and throughout the year. While the share of eligible children participating in these programs was low across all racial and ethnic groups, Asian and Latino children had the smallest share of eligible children enrolled in subsidized care. There are a number of reasons why Asian and Latino children could have lower rates of participation, including the rapid population growth of these two groups over the past decade; immigration- and language-related barriers to accessing subsidized care; and difficulties in utilizing subsidized care while working in low-wage jobs. Policymakers should substantially boost funding for the subsidized child care and development system to allow for greater participation for all children, in addition to addressing burdensome eligibility and reporting rules and increasing subsidized child care provider payment rates, which could improve access for many families in California.
Ensuring that children receive a strong education is one of the keys to shared economic prosperity. Learning begins even before birth, so it is imperative that all children get a solid start in early childhood in order to be prepared to learn when they enter kindergarten.[i] Unfortunately, poverty has a powerful, negative impact on children in their early years, and substantial disparities exist at the intersection of race, ethnicity, and family income.[ii] Latino and black children are significantly more likely to live in poverty than their white and Asian peers, and these disparities result in developmental gaps that can emerge very early and with lifelong consequences. [iii]
Ensuring that families have access to high-quality child development programs can mitigate the effects of poverty and close gaps in learning and development. However, largely due to inadequate state and federal funding, only a small fraction of families who are eligible for California’s subsidized child care and development programs receive care. On average, from 2013 to 2015, more than 1.5 million children from birth through age 12 were eligible for subsidized care in California, according to a California Budget & Policy Center analysis of federal survey data.[iv] Yet, on average, just 210,000 children (13.2 percent) were enrolled in a program that could accommodate families for an entire day and throughout the year.[v]
In addition, enrollment in California’s subsidized child care and development programs varies by race and ethnicity (see chart below).[vi] During the three-year period from 2013 to 2015:
The share of eligible children enrolled in a subsidized child care and development program was low across all racial and ethnic groups, ranging from 7.8 percent of the eligible population for Asian children to 31.8 percent for black children. Even for black children — the demographic group with the highest share of eligible children enrolled in a full-day, full-year program — roughly 2 out of 3 eligible children did not receive subsidized care.
Nearly 1.1 million Latino children were eligible for subsidized care, but only 119,000 (11.0 percent) were enrolled in a state program. Latino children are the largest child demographic group in California, accounting for slightly more than half of the state’s children.[vii]
Only about 1 in 13 eligible Asian children were enrolled in a subsidized program — just under 9,000 out of an estimated 112,000 eligible children (7.8 percent, as noted above).
An estimated 128,000 black children were eligible for subsidized care, but only 41,000 (31.8 percent, as noted above) were enrolled in a state program.
Fewer than 1 in 5 eligible white children received subsidized care (18.2 percent). An estimated 207,000 white children were eligible, but only 38,000 were enrolled in a full-day, full-year program.
There are various reasons why enrollment in subsidized programs could vary by race and ethnicity in our state. [viii] These include:
Population Growth. In part, demographic groups experiencing rapid population growth are less likely to be enrolled in subsidized care because the number of child care and development “slots” has not kept up with this growth.[ix] For example, over the last decade the Asian child population in California (from birth through age 12) increased by 14.3 percent and the Latino child population grew by 7.8 percent.[x] At the same time, funding for subsidized care decreased and the number of slots shrank as state policymakers made dramatic cuts during and after the Great Recession. As noted above, Asians and Latinos have a markedly lower share of eligible children enrolled in subsidized care, as compared to white and black children.
Immigration- and Language-Related Barriers. Navigating California’s subsidized child care and development system can be complicated, and families with low incomes may encounter barriers to accessing subsidized care. This is especially true for low-income families with immigrant parents or with parents who have limited English proficiency.[xi] In California, more than half (57.8 percent) of low-income children from birth through age 12 have at least one immigrant parent, and more than one-third (38.2 percent) of low-income children have parents who speak English less than “very well.” The majority of these children are Latino.[xii] Research shows that for these families a lack of understanding of subsidized programs, complicated eligibility and enrollment processes, and a fear of interacting with government agencies all may contribute to lower-than-expected enrollment in subsidized programs.[xiii]
The Nature of Low-Wage Employment. Many families in California rely on low-wage jobs that include night and/or weekend shifts, unpredictable schedules, and hours that fluctuate from month to month or even from week to week.[xiv] Working parents who have nontraditional hours or irregular schedules may use vouchers to select care from a subsidized child care provider of their choice. Many of these families rely on “license-exempt” providers — typically friends or relatives — to watch their children on short notice or during evenings or weekends. However, amid budget shortfalls due to the Great Recession, state policymakers reduced the payment rates for license-exempt providers, lowering them from 90 percent of the licensed rate to just 60 percent. For providers who watch children on a part-time basis, the payment rate is even lower — roughly one-third of the licensed rate. While the 2016-17 state budget increased the license-exempt rate, it remains much lower as a share of the licensed rate than prior to the recession and, in some cases, fails to pay even the equivalent of the minimum wage. If providers are unwilling to accept vouchers due to low reimbursement rates, this could limit low-income families’ access to care, with a disparate impact for Latinos. In California, 28.1 percent of employed Latinas work in low-wage jobs, compared to 13.2 percent of white women and 15.4 percent and 15.2 percent of Asian and black women, respectively.[xv]
Governor Brown and lawmakers can take steps to improve eligible families’ access to subsidized child care and development programs. For example, state policymakers should:
Substantially increase funding for subsidized child care and development programs. State policymakers could improve access to subsidized care across racial and ethnic groups in part by ending years of underinvestment. Funding for California’s subsidized child care and development programs was cut by about 40 percent (inflation-adjusted) during and after the Great Recession. While state policymakers have made reinvestments in recent years, far fewer children overall are being served in the current fiscal year than in 2007-08, at the onset of the Great Recession. Significantly boosting funding for subsidized care would help to address the lack of access among every racial and ethnic group.
Address eligibility reporting rules that are especially burdensome for families that face barriers to accessing subsidized care. Current rules for subsidized care require parents to resubmit eligibility information in a wide variety of situations — such as changes in income or to a work or class schedule — often resulting in frequent re-reporting by families within a given 12-month period. These reporting rules are burdensome for all families, but especially for families with variable work schedules, immigrant families, and for families that have limited English proficiency.[xvi] Further, these arduous reporting requirements can cause disruption in caregiving for children, undermine parents’ employment, and even lead to the premature loss of subsidized care.[xvii] A proposal in the state Legislature — Assembly Bill 60 (Santiago & Gonzalez Fletcher) — would bring California into compliance with federal regulations by creating a 12-month window of eligibility for subsidized care once families have secured a child care slot. A 12-month window of eligibility would reduce barriers to care; allow more children to benefit from stable, positive relationships with caregivers, thus enhancing child development; and also help parents maintain employment and increase earnings.[xviii]
Continue to increase payment rates for subsidized child care providers, including license-exempt providers. Families access child care and preschool programs via licensed child care providers that contract directly with the state or by using vouchers to select the child care provider (licensed or license-exempt) of their choice. During and after the Great Recession, policymakers failed to update the payment rates for these providers, and even cut the payment rate for license-exempt providers. Lack of funding for payment rates means that the providers may not be able to reimburse employees at a level that is commensurate with their experience and education or cover other operational costs. Recent years’ investments in provider payment rates have resulted in modest gains, but policymakers have much further to go. As California’s minimum wage increases to $15 per hour in coming years, many child care workers will receive a much-needed raise.[xix] If reimbursement rates are not increased annually to keep pace with the minimum wage, this will continue to place a strain on providers that offer subsidized care. Moreover, as mentioned previously, policymakers cut license-exempt provider payment rates from 90 percent to 60 percent of the licensed rate for family child care homes. While the 2016-17 budget agreement increased the payment rates to 70 percent of the licensed rate, policymakers should increase the payment rates even further to ensure that license-exempt providers are paid at least the equivalent of the minimum wage.
Children are the engine that will drive California forward in years to come. Investing in our state’s child care and development system can increase families’ economic security and, in turn, boost children’s health and well-being. These are some of the first steps necessary to improving school readiness and closing achievement gaps that affect low-income children and children of color. Making greater investments in our state’s subsidized child care and development system, and improving access for eligible children, will not only change children’s lives, but will also maximize California’s future potential.
Endnotes
[i] Center on the Developing Child, Harvard University, Five Numbers to Remember About Early Childhood Development (2009) and Christine Moon, Hugo Lagercrantz, and Patricia K. Kuhl, “Language Experience In Utero Affects Vowel Perception After Birth: A Two-County Study,” Acta Paediatrica 102 (2013), pp. 156-160.
[ii] Emma García, Inequalities at the Starting Gate: Cognitive and Noncognitive Skills Gaps Between 2010-2011 Kindergarten Classmates (Economic Policy Institute: June 2015) and Nicole L. Hair, et al., “Association of Child Poverty, Brain Development, and Academic Achievement,” JAMA Pediatrics 169 (2015), pp. 822-829.
[iii] For data on child poverty rates by race and ethnicity see Alissa Anderson, A Better Measure of Poverty Shows How Widespread Economic Hardship Is in California (California Budget & Policy Center: October 2016), p. 2. For research on disparities by race and ethnicity, see Tamara Halle, et al., Disparities in Early Learning and Development: Lessons From the Early Childhood Longitudinal Study — Birth Cohort (ECLS-B) (The Council of Chief State School Officers and Child Trends: June 2009) and James J. Heckman, “Schools, Skills, and Synapses,” Economic Inquiry 46 (2008), pp. 289-324.
[v] The 210,000 figure reflects children enrolled in the full-day California State Preschool Program (CSPP) or in one of the following subsidized child care programs: Alternative Payment Program; CalWORKs Stages One, Two, or Three; Family Child Care Home Network; General Child Care; and the Migrant Child Care and Development Program. Data are not available for California Community Colleges’ CalWORKs Stage 2. Enrollment is a three-year average for October 2013, October 2014, and October 2015. This analysis includes the full-day CSPP, which consists of part-day preschool and “wraparound” child care, because it accommodates many — although not all — families’ work schedules throughout the year, and thus approximates the experience that a child would have in a high-quality subsidized child care program. In contrast, this analysis excludes an average of roughly 94,000 children who were enrolled in the part-day CSPP, without access to wraparound child care, in October 2013, October 2014, and October 2015. This is because most families with low and moderate incomes likely need wraparound care in order to supplement the CSPP’s part-day, part-year schedule. This analysis reports enrollment data for a single month — as opposed to a monthly average for a calendar year or fiscal year — because the California Department of Education (CDE) does not typically separate part-day and full-day CSPP enrollment when reporting monthly averages. The CDE also states, “Caution should be used when interpreting monthly averages as some programs do not operate at full capacity throughout the entire year (e.g., State Preschool) while other programs have seasonal fluctuations in enrollment (e.g., Migrant Child Care).” Finally, the data are for October 2013, October 2014, and October 2015 because the CDE’s point-in-time reports are only available for the month of October.
[vi] Racial and ethnic groups included in this analysis are Latino, non-Latino Asian, non-Latino black, and non-Latino white. Native American children, Pacific Islander children, or children identified as more than one race were not included due to small sample sizes.
[vii] US Census Bureau, Current Population Survey, 2013-2015 3-Year Estimates. On average, from 2013 to 2015, Latino children made up 51.5 percent of the child population from birth through age 12.
[viii] Other reasons why enrollment in subsidized child care and development programs could vary by race and ethnicity include: 1) parents’ preferences regarding care for their children and 2) having an immigration status that precludes enrollment in these programs. First, with respect to parents’ child care preferences, existing research has produced mixed results. Some studies show that child care preferences vary by the race and ethnicity of the parents, while other research suggests that child care preferences are not related to race and ethnicity. See Nicole Forry, et al., Child Care Decision-Making Literature Review (Office of Planning, Research and Evaluation, US Department of Health and Human Services: December 2013), p.18. With that said, newly published research using more recent data demonstrates that, among low-income families, Latinos’ perceptions regarding child care settings generally do not differ from those of white and black parents, nor are Latino families more likely to have family members nearby to care for their children while at work or in school. (Cited research did not explore data for the Asian population.) Researchers hypothesize that Latinos’ underutilization of formal child care arrangements, such as center-based care, may be due to specific barriers such as access to certain child care providers or language barriers. See Danielle Crosby, et al., Hispanic Children’s Participation in Early Care and Education: Type of Care by Household Nativity Status, Race/Ethnicity, and Child Age (National Research Center on Hispanic Children & Families: November 2016); and Lina Guzman, et al., Hispanic Children’s Participation in Early Care and Education: Parents’ Perceptions of Care Arrangements, and Relatives’ Availability to Provide Care (National Research Center on Hispanic Children & Families: November 2016). Second, with respect to immigration status, Budget Center estimates take this eligibility-related factor into account. Certain demographic groups’ underutilization of subsidized care is not related to children’s or parents’ eligibility based on their immigration status.
[ix] Christina Walker and Stephanie Schmit, A Closer Look at Latino Access to Child Care Subsidies (Center for Law and Social Policy: December 2016), p. 4.
[x] Overall in California, the child population from birth through age 12 decreased by about 3 percent in the past decade. The white and black child population also decreased by 21.3 percent and 26.0 percent, respectively, during this same period. (Budget Center analysis of US Census Bureau, Current Population Survey. Data based on three-year averages: 2003 to 2005 and 2013 to 2015.)
[xi] Erica Greenberg, Gina Adams, and Molly Michie, Barriers to Preschool Participation for Low-Income Children of Immigrants in Silicon Valley: Part II (Urban Institute: January 2016) and Lynn A. Karoly and Gabriella C. Gonzalez, “Early Care and Education for Children in Immigrant Families,” The Future of Children 21(1) (2011), pp. 71-101.
[xii] Of the number of low-income children in California with at least one immigrant parent, 82.6 percent are Latino and 9.4 percent are Asian. Low-income children with parents with limited English proficiency are also overwhelmingly Latino (87.4 percent). The next largest share are Asian children (8.2 percent). Budget Center analysis of US Census Bureau, American Community Survey, 2011-2015 5-Year Estimates. “Low-income” is defined as less than 200 percent of the federal poverty line. English proficiency is self-reported in the American Community Survey.
[xiii] See Julia Gelatt, Gina Adams, and Sandra Huerta, Supporting Immigrant Families’ Access to Prekindergarten (Urban Institute: March 2014); Erica Greenberg, Gina Adams, and Molly Michie, Barriers toPreschool Participation for Low-Income Children of Immigrants in Silicon Valley: Part II (Urban Institute: January 2016); Lynn A. Karoly and Gabriella C. Gonzalez, “Early Care and Education for Children in Immigrant Families,” The Future of Children 21(1) (2011), pp. 71-101; and Christina Walker and Stephanie Schmit, A Closer Look at Latino Access to Child Care Subsidies (Center for Law and Social Policy: December 2016).
[xiv] Liz Watson, Lauren Frohlich, and Elizabeth Johnston, Collateral Damage: Scheduling Challenges for Workers in Low-Wage Jobs and Their Consequences (National Women’s Law Center: April 2014).
[xv] Data are for the female civilian population age 16 and over. Racial and ethnic groups are mutually exclusive. Asian, black, and white exclude people who also identify as Latina. Low-wage occupations are defined as those that have a median hourly wage that is less than two-thirds of the overall median hourly wage. In California, this includes food preparation and serving; building and grounds cleaning and maintenance; personal care and service; and farming, fishing and forestry occupations. Budget Center analysis of California Employment Development Department, Occupational Employment & Wage Data, 2015 and US Census Bureau, American Community Survey, 2015 One-Year Estimates.
[xvi] Erica Greenberg, Gina Adams, and Molly Michie, Barriers toPreschool Participation for Low-Income Children of Immigrants in Silicon Valley: Part II (Urban Institute: January 2016) and Christina Walker and Stephanie Schmit, A Closer Look at Latino Access to Child Care Subsidies (Center for Law and Social Policy: December 2016).
[xvii] Gina Adams and Jessica Compton, Client-Friendly Strategies: What Can CCDF Learn From Research on Other Systems? (Urban Institute and Office of Planning, Research and Evaluation, Administration for Children and Families: December 2011); Gina Adams and Monica Rohacek, Child Care Instability: Definitions, Context, and Policy Implications (Urban Institute: October 2010); and Danielle Ewen and Hannah Matthews, Adopting 12-Month Subsidy Eligibility (Center for Law and Social Policy: October 2010).
[xviii] Nicole D. Forry and Sandra L. Hofferth, “Maintaining Work: The Influence of Child Care Subsidies on Child Care-Related Work Disruptions,” Journal of Family Issues 32 (2011), pp. 346-368; Yoonsook Ha, “Stability of Child-Care Subsidy Use and Earnings of Low-Income Families,” Social Service Review 83 (2009), pp. 495-523; Hannah Matthews, et al., Implementing the Child Care and Development Block Grant Reauthorization: A Guide for States (Center for Law and Social Policy and National Women’s Law Center: 2015), pp.35-37; and Judith Reidt-Parker and Mary Jane Chainski, The Importance of Continuity of Care: Policies and Practices in Early Childhood Systems and Programs (The Ounce: November 2015).
[xix] Senate Bill 3 (Leno, Chapter 4 of 2016) gradually raises the state minimum wage to $15 per hour by 2023, or potentially later depending on the condition of the economy and the state budget. After the state minimum wage reaches $15 per hour, it will be indexed annually for inflation. For an in-depth discussion of the minimum-wage increase, see Alissa Anderson and Chris Hoene, California’s $15 Minimum Wage: What We Know and Don’t Know (California Budget & Policy Center: April 13, 2016).
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Executive Summary
On May 11, Governor Jerry Brown released the May Revision to his proposed 2017-18 state budget. The Governor forecasts revenues $2.5 billion higher — over a three-year window — than projected in January, mostly reflecting higher personal income tax (PIT) projections due to stock market gains.
In addition to showing an upturn in the fiscal outlook, the May Revision makes several improvements over the Governor’s January proposal. The revised budget provides funds to offset a large portion of the In-Home Supportive Services program costs that are being shifted to counties. In addition, the May Revision continues plans — which the Governor’s January proposal had put on hold — for a multiyear reinvestment in subsidized child care and preschool. Higher-than-expected revenues result in increases in the Proposition 98 minimum guarantee for K-14 education spending. Also, the May Revision shifts funds to cover higher Cal Grant costs due to recently adopted tuition increases at the California State University and University of California.
The May Revision assumes current federal policies and funding levels, yet still reflects deep uncertainty about potential federal actions. The revised budget highlights the prospect of major changes to Medicaid, other areas of federal spending, and tax policy, among others.
The Governor’s May Revision — like his January proposal — calls for continued funding of the California Earned Income Tax Credit (CalEITC). However, the revised budget does not propose any additional investments in the welfare-to-work system (CalWORKs) or in basic income support for low-income seniors and people with disabilities (SSI/SSP). In addition, the Governor’s budget does not include proposals to address affordable housing.
The Governor’s revised budget sets aside $3.6 billion as constitutionally required by Prop. 2 (2014), with half deposited in the state’s rainy day fund and half used to pay down state budgetary debt. Under the Governor’s proposal, state reserves would total $10.1 billion by the end of 2017-18.
As the Governor and Legislature work toward a budget agreement in the coming weeks, they do so amid the continuing, and in many ways troubling, prospect of federal cuts that could threaten health care coverage for millions of Californians, the social safety net, and other critical services. California’s Congressional delegation needs to ensure that federal policy choices provide the necessary support to communities in California and elsewhere.
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May Revision Reflects Modestly Improved Fiscal Outlook
The Governor’s revised budget reflects a “modestly improved fiscal outlook,” with General Fund revenues over the three-year “budget window,” from 2015-16 to 2017-18, expected to be $2.5 billion higher than projected in January. Nevertheless, General Fund revenues would still be $3.3 billion lower than the projections included in the 2016-17 budget agreement. (In January, the Administration projected that General Fund revenues would be $5.8 billion lower than assumed in the budget agreement.) The revised revenue forecast means that the Governor is now projecting a 2017-18 budget shortfall of about $400 million, absent any action by policymakers to address the gap. This is considerably smaller than the $1.6 billion budget gap projected by the Governor in January.
The Administration’s improved revenue forecast mostly reflects higher personal income tax (PIT) projections due to recent increases in stock market values, which in turn are expected to boost capital gains revenues. Specifically, the Administration now projects that PIT revenues during the three-year budget window will be $2.9 billion higher than expected in January. In contrast, the May Revision reflects sales and use tax (SUT) receipts that are $1.2 billion lower than projected in January, while corporate tax (CT) receipts are expected to be almost $400 million higher than projected four months earlier.
The May Revision projects that California’s economic growth will continue at a moderate pace over the next few years. However, the revised budget outlines a number of “risks to the outlook” that could weaken the state’s economy and have potentially significant negative effects on the state budget. These risks include major federal policy changes, the state’s ongoing housing affordability crisis, and the possibility of a national recession.
Updated Revenue Projections Lead to Increase in Proposed Reserves
California voters approved Proposition 2 in November 2014, amending the California Constitution to revise the 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 percent of estimated General Fund revenues. An additional set-aside is required when capital gains revenues in a given year exceed 8 percent 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 Governor’s revised budget continues to project that the BSA will total $6.7 billion by the end of the current fiscal year (2016-17). Based on the Governor’s updated revenue projections for 2017-18, Prop. 2 would constitutionally require the state to deposit an additional $1.8 billion into the BSA (as well as set aside $1.8 billion for repaying budgetary debt), bringing the total amount in the BSA to $8.5 billion by the end of 2017-18.
The BSA is not California’s only reserve fund. Each year, the state deposits additional funds into a “Special Fund for Economic Uncertainties.” For 2017-18, the Governor projects $1.6 billion for this fund. This means that the Governor’s revised budget would build state reserves to a total of $10.1 billion by the end of 2017-18.
May Revision Proposes Supplemental Payment for State Employee Pensions
The Governor’s revised budget includes higher levels of contributions to state-run retirement systems: the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS). CalPERS and CalSTRS, like many retirement systems, are not funded at levels that will keep up with future benefits, resulting in the state needing to make annual contributions in order to pay down unfunded liabilities. The state’s unfunded liabilities in the two retirement systems have grown recently as a result of lower-than-expected investment returns and changes to the assumptions the systems make about future investment returns. Greater unfunded liabilities from lower investment returns, in turn, mean that state General Fund contributions to the two systems must increase.
The May Revision includes additional General Fund contributions as a result of CalPERS and CalSTRS reducing the “discount rate” — the assumed future rate of return on investments that is used to estimate the level of contributions from the state and employers — from 7.5 percent to 7.0 percent over the next several years.
In addition, the May Revision includes a supplemental payment to CalPERS of $6 billion, made through a loan from the Surplus Money Investment Fund, a state cash-flow and short-term investments account that is used to pool and invest state funds until they are needed. Comprised of a revolving mix of cash held by the state, the state portion of this fund (which also includes segregated local government funds) is valued at $50 billion. The purpose of this loan is to help offset increases in state contributions in future years — essentially refinancing a liability to CalPERS. The Administration projects that, without the loan, state contributions to CalPERS would grow from $5.8 billion ($3.4 billion General Fund) in 2017-18 to $9.2 billion ($5.3 billion General Fund) by 2023-24. The proposed loan of $6 billion will allow the loan funds to be invested at CalPERS’ assumed investment return rate (discount rate) of 7 percent, as opposed to less than 1 percent currently earned by the funds. The Administration estimates that over two decades this will generate an additional $11 billion (after paying for the costs of the loan), helping to reduce state contributions to CalPERS. For example, the state’s pension costs in 2023-24 would be $8.6 billion ($4.9 billion General Fund), instead of $9.2 billion ($5.3 billion General Fund), with additional savings accrued in other years across the life of the loan. The General Fund’s share of the repayment of the loan would be covered by funds set aside by Prop. 2 (2014) for repayment of budgetary debt. The rest of the loan repayment would come from a series of state special funds. In other words, the intention is that repaying the loan would not come from money that could otherwise be used to increase spending for other General Fund programs.
May Revision Maintains Shift of In-Home Supportive Services (IHSS) Costs to Counties, but Reduces the Impact
Under the Coordinated Care Initiative (CCI), California integrates health care and other services — including IHSS — for certain seniors and people with disabilities. In January, the Administration indicated that because the CCI is not cost-effective, it will be discontinued in 2017-18, pursuant to current law. One key outcome of discontinuing the CCI is that counties’ share of the nonfederal costs for IHSS would go up, and the state’s share would go down. This is because the current cost-sharing formula — which is tied to the CCI and significantly limits counties’ share of IHSS cost increases — would end this coming July and be replaced with a formula that is less favorable to counties. (The current formula is based on a “maintenance of effort,” or MOE, structure that adjusts counties’ annual IHSS expenditures by an inflation factor; the less favorable formula is a simple cost-sharing ratio that requires counties to pay 35 percent of nonfederal IHSS costs and the state to pay 65 percent.) While the Governor acknowledged in January that counties would experience financial hardship due to this change, he did not initially specify any proposals that could ease the fiscal impact on counties.
The May Revision maintains the IHSS cost-shift, which will increase counties’ costs by an estimated $592 million in 2017-18. However, the revised budget also includes a multifaceted proposal to mitigate the impact of this cost-shift on county budgets. Included in the Governor’s package are proposals to:
Provide counties with General Fund dollars to offset a portion of their increased costs for IHSS. General Fund support would be set at $400 million in 2017-18; $330 million in 2018-19; $200 million in 2019-20; and $150 million in 2020-21 and each year thereafter.
Redirect certain growth funds generated by the “1991 realignment” funding structure for five years. For the first three years, this proposal would redirect all Vehicle License Fee growth funds from certain 1991 realignment “subaccounts” in order “to provide additional resources for IHSS,” according to the May Revision. In the fourth and fifth years, the amount of redirected revenues would be cut in half.
Allow counties to avoid repaying revenues that they received in error due to miscalculations by the state Board of Equalization. This amount “ranges from $100 [million] to $300 million and would protect each county’s realignment base revenues,” according to an analysis by the California State Association of Counties (CSAC).
Maintain an MOE structure for sharing IHSS costs between the state and counties rather than switching to a 35/65 county-state cost-sharing ratio. The state General Fund would pay the difference between the county’s annual MOE contribution and the total nonfederal share of IHSS costs.
Calculate a new MOE base for county IHSS costs in 2017-18 and apply an annual inflation factor to that base beginning in 2018-19. The MOE base would include the cost of IHSS services and administration. The inflation factor would be 5 percent in 2018-19. Beginning in 2019-20, the inflation factor would vary annually depending on the performance of revenues provided through the 1991 realignment. This ongoing inflation factor would range from zero to 7 percent. An inflation factor of 7 percent could “lead to county general fund impacts,” according to CSAC.
Even with the changes proposed in the May Revision, counties would face additional ongoing costs for IHSS. These costs would be relatively manageable in 2017-18 ($141 million) and 2018-19 ($129 million) because they would not be much higher than the increases that counties were anticipating under the current cost-sharing formula, according to CSAC. However, counties’ additional annual costs for IHSS could grow to $251 million by 2020-21, based on the Administration’s estimates. The Governor’s proposal would allow counties that experience financial hardship to apply to the state for “a low-interest loan to help cover” their additional IHSS costs. Moreover, the Administration indicates that it will hold ongoing discussions with counties regarding their share of IHSS costs and the impact of the proposed inflation factor.
May Revision Continues Implementation of Multiyear Plan to Reinvest in Early Care and Education, but Fails to Update Income Eligibility
California’s subsidized child care and development system allows parents with low and moderate incomes to find and maintain employment while providing care and education for their children. This system is composed of a variety of programs that state policymakers cut dramatically during and after the Great Recession. In recent years, policymakers have restored a portion of the funding for these programs, and the 2016-17 budget agreement included legislative intent to implement a multiyear plan to reinvest in the state’s child care and development system.
Facing a forecasted budget shortfall, the Governor in his January proposal “paused” this multiyear reinvestment until the 2018-19 fiscal year. The May Revision reverses course and continues the timely implementation of the planned reinvestments in the subsidized child care and development system. Specifically, the May Revision:
Provides $160.3 million to increase the reimbursement rate for providers that contract directly with the state. The 2016-17 budget agreement included a 10 percent increase in the Standard Reimbursement Rate (SRR), which is the payment rate paid for providers that contract with the state, to go into effect on January 1, 2017. Due to implementation issues related to a midyear rate increase, the SRR was increased by 5 percent, effective July 1, 2016, and was scheduled to increase by the remaining 5 percent effective July 1, 2017. The proposed “pause” in the 2017-18 fiscal year would have delayed this second increase until 2018-19. The May Revision does not delay the rate increase and provides $67.6 million ($43.7 million Proposition 98) to increase the SRR by 5 percent on July 1, 2017, as originally scheduled. Furthermore, the Governor increases the SRR by an additional 6 percent, also effective on July 1, 2017 ($60.7 million Proposition 98, $32 million non-Proposition 98 General Fund).
Updates the payment rate for voucher-based providers. Families can access subsidized care by using a voucher to select a child care provider of their choice. The value of these vouchers is based on a Regional Market Rate (RMR) Survey, which is conducted by the state on a periodic basis. The May Revision increases the value of vouchers by updating rates based on the 2016 RMR Survey ($42.2 million General Fund), effective January 1, 2018.
Boosts the number of slots in the state preschool program. The May Revision provides $7.9 million in Proposition 98 funds to add 2,959 full-day state preschool slots beginning April 1, 2018, as scheduled in the original multiyear plan.
The May Revision maintains positive momentum in restoring funding for a system that is still operating below pre-recession levels. However, the May Revision does not update income eligibility limits, which are currently based on data that are over a decade old. As state and local minimum wages increase, many families find that they are no longer eligible for subsidized care, yet do not earn enough to afford the high cost of early care and education.
May Revision Boosts the Minimum Funding Level for Schools and Community Colleges
Approved by voters in 1988, Prop. 98 constitutionally guarantees a minimum level of funding for K-12 schools, community colleges, and the state preschool program. The Prop. 98 guarantee tends to reflect changes in state General Fund revenues, and due to revised revenue estimates in the May Revision, the Governor assumes a 2017-18 Prop. 98 funding level of $74.6 billion, $1.1 billion above the level assumed in the January budget proposal. The May Revision also assumes a 2016-17 Prop. 98 funding level of $71.4 billion, $22 million more than January; and a 2015-16 Prop. 98 funding level of $69.1 billion, $432 million more than January.
While revised estimates of 2015-16 revenues are up relative to assumptions in January’s budget proposal, the May Revision assumes a 2015-16 Prop. 98 funding level that is actually greater than the minimum funding guarantee based on these revised revenue estimates. Because calculations of Prop. 98’s annual funding levels are usually based on prior-year funding levels, this overappropriation of the Prop. 98 guarantee for 2015-16 results in higher Prop. 98 funding levels in 2016-17 and 2017-18 than the Prop. 98 minimum funding guarantee otherwise would have required. The Governor’s May Revision states that this additional funding made available in 2015-16 and 2016-17, coupled with a proposed “settle-up” payment of $603 million for prior-year Prop. 98 obligations, is sufficient to eliminate the January budget proposal to defer $859 million in 2016-17 funding to 2017-18.
The largest share of Prop. 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 May Revision proposes to expand increases in funding for the state’s K-12 education funding formula — the Local Control Funding Formula (LCFF) — and to pay off outstanding obligations to school districts.
Voter approval of Prop. 51 in November 2016 authorized $7 billion in state general obligation (GO) bonds for K-12 school facilities. However, the May Revision, continuing to note shortcomings in the School Facilities Program, states that the Administration will only support the expenditure of Prop. 51 dollars once measures are “in place to ensure that taxpayers’ dollars are spent appropriately.” Additionally, the May Revision:
Provides an additional $643 million, for a total of $1.4 billion, to continue implementation of the LCFF. 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 May Revision would provide additional LCFF funding above the $744 million increase proposed in January. The Governor’s proposal to increase LCFF funding may reduce the amount of time it takes to fully implement the LCFF, which depends on funding sufficient for all districts to reach a target base grant. (All COEs reached their LCFF funding targets in 2014-15.) According to the Administration, the proposed 2017-18 LCFF funding level would bring the LCFF formula “to 97 percent of full implementation.”
Provides an additional $725 million in one-time funding, for a total of more than $1.0 billion, to reduce mandate debt the state owes to schools. 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.
Increases the cost-of-living adjustment (COLA) for non-LCFF programs. The Governor’s May Revision provides an additional $3.2 million to fund a 1.56 percent COLA for several categorical programs that remain outside of the LCFF, including special education, child nutrition, and American Indian Education Centers. The May Revision would increase the 1.48 percent COLA ($58.1 million) proposed in the January budget.
A portion of Prop. 98 funding supports California’s community colleges (CCCs), which help prepare approximately 2.4 million full-time students to transfer to four-year institutions as well as obtain training and skills for immediate employment. The May Revision increases funding for CCC operating expenses, deferred maintenance, and general-purpose apportionments. Specifically, the May Revision:
Increases funding for CCC operating expenses by $160 million. The May Revision provides funding for the CCCs to pay for increased expenses in areas such as employee benefits, facilities, and professional development.
Boosts one-time funding for deferred maintenance and other CCC expenses by $92.1 million. The May Revision provides funding for the CCCs to pay for deferred maintenance, instructional equipment, and certain water conservation projects.
Provides a net increase of $34.1 million in overall apportionment funding. The May Revision boosts apportionments — which provide general purpose funding for CCCs — to reflect a $28.5 million increase for funding earned back by CCC districts that experienced declining enrollment during the previous three fiscal years, an increase of $23.6 million due to unused prior-year enrollment growth funding, and a $3.5 million increase to fund a 1.56 percent COLA for apportionments, up from 1.48 percent as proposed in the Governor’s January budget. The May Revision also decreases apportionments by $21.5 million to adjust enrollment growth from 1.34 percent to 1 percent.
Consistent with the Governor’s January budget proposal, the May Revision continues to provide CCCs with $150 million in one-time funding for grants to develop and implement the Guided Pathways Program, an institution-wide approach to support student success.
Governor Proposes Minor Adjustments to Higher Education Funding
The Governor’s revised budget makes several minor adjustments to higher education funding. Specifically, the May Revision:
Reverses a scheduled reduction to maximum Cal Grant awards for new students attending private institutions accredited by the Western Association of Schools and Colleges (WASC). The 2012-13 state budget adopted a reduction in Cal Grant awards for students attending independent nonprofit and accredited for-profit institutions. This reduction was to be implemented beginning in 2014-15, but subsequent budget actions postponed this reduction until 2017-18. The May Revision proposes cancelling this scheduled reduction in Cal Grant awards, contingent upon WASC-accredited institutions making “measurable achievements” in three areas: 1) enrolling the “neediest” students, 2) making it easier for students to transfer in from California community colleges, and 3) expanding online education programs. To fund this proposal, the Governor redirects $8 million that originally was intended for the California State University (CSU) and University of California (UC).
Shifts additional funds to the California Student Aid Commission (CSAC) to cover higher Cal Grant costs due to recently adopted tuition increases. The May Revision estimates that recently approved tuition increases that will go into effect this fall will raise 2017-18 Cal Grant costs by $28 million for students at the CSU and $20.9 million for students at the UC. (The CSU Board of Trustees approved a 5 percent and 6.5 percent increase in tuition for undergraduate students and graduate students, respectively, and the UC Board of Regents approved a tuition hike of 2.5 percent.) To cover increased Cal Grant costs, the Governor proposes shifting an additional $194 million in federal Temporary Assistance for Needy Families (TANF) funds to the CSAC. This means that the revised budget would offset $1.1 billion in General Fund costs for Cal Grants with federal TANF dollars when combined with the TANF reimbursements included in the Governor’s January budget proposal. Additionally, the May Revision summary warns that “if the universities raise tuition in the future, additional downward adjustments to state support may be needed to cover the higher Cal Grant costs.”
Maintains the Governor’s January proposal to phase out the Middle Class Scholarship Program (MCSP). The May Revision reflects a net decrease of $10 million due to revised estimates of the cost of this proposal.
Proposes to withhold $50 million in funds for the UC. These funds would be withheld until the UC has made progress implementing 1) the recommendations recently made by the State Auditor, who identified a number of concerns with UC budgeting practices and 2) a series of reforms agreed to by the Governor and the UC President in 2015 related to “activity-based costing” — a more transparent budgeting process — and the enrollment of transfer students from community colleges.
Governor Maintains Proposal to Use Prop. 56 Funds to Pay for Typical, Year-to-Year Growth in Medi-Cal Costs
Approved by voters last November, Prop. 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. Prop. 56 requires most of the revenues raised by the measure to go to the Medi-Cal program, which provides health care services to more than 13 million Californians with low-incomes. The Administration projects that Prop. 56 will raise approximately $1.8 billion through June 2018, with more than $1.3 billion of this amount allocated to Medi-Cal. In January, the Governor proposed to use Prop. 56 revenues to pay for typical, year-to-year cost increases in Medi-Cal, rather than funding “improved payments” for health care services as Prop. 56 requires. The May Revision maintains this proposal, which the Administration argues is consistent with the requirements of Prop. 56.
May Revision Highlights New Rules Implementing Prop. 57, Which Will Help the State Reduce Incarceration
Currently, more than 130,400 people are serving their sentences at the state level. Most of these individuals — nearly 114,900 — are housed in state prisons designed to hold slightly more than 85,000 people. This level of overcrowding is equal to 135 percent of the prison system’s “design capacity,” which is below the prison population cap — 137.5 percent of design capacity — established by federal court order. In addition, California houses more than 15,500 individuals in facilities that are not subject to the court-ordered population cap, including fire camps, in-state contract beds, out-of-state prisons, and community-based facilities that provide rehabilitative services.
The total number of people incarcerated by the state has declined by roughly one-quarter since peaking at 173,600 in 2007. This substantial reduction resulted largely from a series of policy changes adopted by state policymakers and the voters in the wake of the 2009 federal court order requiring the state to reduce overcrowding in state prisons.
California voters added a new reform last year by approving Prop. 57, which gives state officials new policy tools to address ongoing overcrowding in state prisons. Prop. 57 requires parole consideration hearings for state prisoners who have been convicted of a nonviolent felony and have completed the full term for their primary offense. The measure also gives the California Department of Corrections and Rehabilitation (CDCR) — which is part of the Governor’s administration — broad new authority to award sentencing credits to reduce the amount of time that people spend in prison. Prop. 57 requires the CDCR to adopt regulations implementing both of these provisions. Finally, Prop. 57 requires juvenile court judges to decide whether a youth should be tried in adult court.
The May Revision highlights the Administration’s new emergency regulations implementing Prop. 57, which were approved by the Office of Administrative Law in April. These emergency rules, which could change prior to being finalized, stipulate that:
The new parole consideration process for nonviolent offenders will take effect on July 1, 2017.
New and enhanced sentencing credits for completion of education and rehabilitation programs will be implemented on August 1, 2017. (Enhanced sentencing credits forgood conduct took effect on May 1.)
The Administration estimates that in 2017-18, Prop. 57 will reduce the number of inmates by 2,675 below the level that was otherwise projected (130,368). This annual drop in the inmate population is projected to grow to about 11,500 in 2020-21. According to the Administration, this reduction would allow the CDCR “to remove all inmates from one of two remaining out-of-state facilities in 2017-18, and begin removing inmates from the second facility as early as January 2018.” The May Revision projects that Prop. 57 will result in net state savings of $38.8 million in 2017-18, rising to about $186 million by 2020-21.Back to Top
Governor’s Revised Budget Reflects Recent Transportation Funding Agreement With the Legislature
California’s expansive transportation infrastructure includes 50,000 lane-miles of state and federal highways, 304,000 miles of locally owned roads, Amtrak intercity rail services, and numerous local transit systems, all of which facilitate the movement of people and goods across the state. The state’s largest category of deferred maintenance is for its existing transportation facilities.
The Governor’s revised budget includes a recently enacted agreement with the Legislature on a 10-year, $54 billion transportation funding package. This includes $2.8 billion for 2017-18.
The funding will be split equally between state and local transportation programs over the next 10 years. Major state-level allocations include:
$15 billion for highway repairs.
$4 billion in bridge repairs.
$3 billion to improve trade corridors.
$2.5 billion to reduce congestion on major commute corridors.
Major local-level allocations include:
$15 billion for local road repairs.
$8 billion for public transit and intercity rail.
$2 billion for local “self-help” communities that are making their own investments in transportation improvements.
$1 billion for active transportation projects to better link travelers to transit facilities.
The funding package relies on new revenues generated from a series of tax and fee increases:
$24.4 billion from a 12-cent increase in the base gas excise tax starting on November 1, 2017.
$10.8 billion from a 20-cent increase in the diesel fuel base excise tax and a 5.75-cent increase in the diesel fuel sales tax starting on November 1, 2017.
$16.3 billion from a new annual transportation improvement fee that will take effect on January 1, 2018. This fee will range 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.)
$200 million from a new annual fee of $100 on all zero-emission vehicles starting on July 1, 2020.
In addition, the base gas and diesel fuel excise taxes, the new transportation improvement fee, and the new zero emissions vehicle fee will be annually adjusted for inflation starting 2020-21.
May Revision Adds Modest New Resources to Address Federal Actions on Immigration and Other Issues
Aggressive federal enforcement of immigration laws has been an area of particular tension between the new federal administration and California’s state and local governments. The state was home to more than 10.7 million foreign-born residents as of 2015. These include a significant number of undocumented immigrants and their children, who are often US citizens or legal residents. Since the beginning of the Trump Administration, the Governor has been vocal in his support for California’s immigrant residents.
New in the Governor’s May Revision are two modest increases in state resources dedicated to addressing federal actions that affect California’s immigrant residents and state government. The Governor’s May Revision dedicates an additional $15 million General Fund to the Department of Social Services to increase the availability of legal services for people seeking help with naturalization, securing legal immigration status, and defense against deportation. To address federal actions more broadly, the Governor also proposes adding $6.5 million General Fund and 31 positions in the state’s Department of Justice for new legal workload related to various actions taken at the federal level that impact public safety, health care, the environment, consumer affairs, and general constitutional issues.”
May Revision Makes No New Investments in CalEITC, CalWORKs, SSI/SSP, or Optional Medi-Cal Benefits
Consistent with the Governor’s budget proposal in January, the May Revision proposes no new investments in a number of services and income supports that help Californians with low incomes. The Governor’s revised budget:
Proposes no changes to the CalEITC. The California Earned Income Tax Credit (CalEITC) is a refundable state tax credit designed to boost the incomes of low-earning workers and their families and help them afford basic expenses. The credit was established by the 2015-16 budget agreement and became available to claim in the 2015 tax year, providing an average credit of slightly more than $500 to over 385,000 households that year. The May Revision makes no changes to CalEITC credit amounts or eligibility. Also, while the 2016-17 budget agreement included $2 million for education and outreach efforts to increase CalEITC claims, the Governor’s 2017-18 budget does not include funding to continue these efforts beyond the current year, despite evidence that many eligible workers may not be claiming the credit.
Makes no new investments in CalWORKs. The California Work Opportunity and Responsibility to Kids (CalWORKs) program provides modest cash assistance for 875,000 low-income children while helping parents overcome barriers to employment and find jobs. The May Revision accounts for increases in CalWORKs grants due to last year’s repeal of the punitive Maximum Family Grant (MFG) or “family cap” rule, but does not propose new increases to CalWORKs grants or time limits, though this would be necessary to reverse cuts made to the program during and after the Great Recession. CalWORKs funding overall is reduced in the May Revision, compared to the Governor’s January budget proposal, due to expected lower costs based on updated projections of caseload and average cost per case.
Provides no state COLA for SSI/SSP grants. Supplemental Security Income/State Supplementary Payment (SSI/SSP) grants help well over 1 million low-income seniors and people with disabilities to pay for housing, food, and other basic necessities. Grants are funded with both federal (SSI) and state (SSP) dollars. Last year, the state approved a 2.76 percent state COLA for the SSP portion of the grant, which took effect in January 2017, but the May Revision does not propose a new state COLA for 2017-18, though the SSI/SSP grant level for single individuals remains below the federal poverty guideline. SSI/SSP grants are still expected to increase modestly in January 2018, however, because the federal government is projected to provide a 2.6 percent COLA to the SSI portion of the grant. SSI/SSP funding overall is reduced in the May Revision compared to the Governor’s January budget due to expected lower costs based on updated caseload and average cost-per-case projections.
Does not propose to restore Medi-Cal benefits that state policymakers eliminated during the Great Recession to help close a budget shortfall. Under federal law, certain Medicaid benefits are provided at state option. In 2009, state policymakers eliminated several of these optional benefits from the Medi-Cal program, including adult dental services, acupuncture, audiology, optical services, and certain mental health services. Policymakers later restored acupuncture services and some dental services for adults. Fully restoring the remaining optional benefits would cost $311.1 million ($106.8 million General Fund) in 2017-18, according to the Department of Health Care Services.
May Revision Proposes No New Funding for Affordable Housing and No New Changes to Cap-and-Trade
Like the Governor’s January budget proposal, the May Revision repeatedly notes the serious effects of California’s housing affordability crisis, including its implications for family budgets, state sales tax revenues, job growth, and inflation. The Governor again highlights the insufficient supply of housing as one of the most serious threats to the state’s economy. At the same time, however, the May Revision — like the January budget proposal — calls for no new state investment in affordable housing. Indeed, the Governor’s revised budget continues to rescind the $400 million set-aside for affordable housing programs in the 2016-17 budget agreement. Allocation of these funds was contingent on lawmakers modifying the local review process for certain housing developments, as outlined in the Governor’s “by-right” proposal from last year, which was not adopted by the Legislature.
The May Revision also makes no change to the January proposal to eliminate the $45 million Housing and Disability Advocacy Program, established in the 2016-17 budget agreement, which was intended to help individuals who are homeless or at risk of homelessness and who have a disability to access appropriate benefits.
Affordable housing is one of the areas slated to receive funding from California’s “cap and trade” program, which sets a statewide limit on the emission of greenhouse gases (GHGs) and authorizes the Air Resources Board to auction off emission allowances, with proceeds invested in activities that seek to reduce GHG emissions. The Governor’s May Revision includes no new proposals related to cap-and-trade relative to his January budget. The January proposal called on the Legislature to confirm with a two-thirds vote the authority of the Air Resources Board to administer the cap-and-trade program beyond 2020, in order to reduce “perceived legal uncertainty” about the program beyond that time. Contingent on this legislative action, the Governor proposed a plan to spend $2.2 billion in cap-and-trade auction proceeds on transit investments, affordable housing, pollution reduction, and other activities to promote environmental sustainability and energy efficiency.
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The California Earned Income Tax Credit (CalEITC), established in 2015, is a refundable state tax credit that helps low-earning workers and their families make ends meet and build toward economic security.[1] Yet, fewer than 1 in 5 visitors to county human services offices who were likely eligible for this new tax credit had heard of it, according to a Budget Center survey.[2] (County office visitors were surveyed because many would likely be eligible for the CalEITC or know people who are eligible for it.) In addition, only half of respondents who were likely eligible for the CalEITC filed their taxes for tax year 2015. These findings suggest that California needs to do more to raise awareness of the credit in order to boost participation.[3] The survey also found that most people who were likely eligible for the CalEITC and did file their taxes paid a tax preparer even though they would have qualified for free tax assistance. This means that many people did not get the full benefit of the CalEITC because they paid tax preparation fees. This report recommends strategies to maximize the success of the CalEITC, including by supporting research to better assess CalEITC utilization gaps and determine which outreach strategies are most effective, bolstering efforts by community organizations and county offices to promote the credit, and expanding and promoting free tax preparation services.
What Is the CalEITC and How Does It Work?
The CalEITC is a refundable state tax credit, modeled after the federal EITC, that helps working families who earn very little to better afford the basics. (Refundable credits allow people whose credit is larger than the amount of income taxes they owe to get the difference in a tax refund. This means that people who do not owe state income taxes, but who do pay other taxes, like the sales tax, can benefit from the credit.)
People qualify for the CalEITC based largely on how much they earn and how many qualifying children they are supporting. Families with multiple children qualify for the credit for tax year 2016 if they have earnings that do not exceed $14,161, while those with just one child qualify if their earnings do not exceed $10,087. Individuals without qualifying children can benefit from the CalEITC if their earnings do not exceed $6,717.
The size of the credit people can receive from the CalEITC also depends on how much they earn and how many children they are supporting. Working families with three or more qualifying children can receive up to $2,706 for tax year 2016, those with two children can receive as much as $2,406, and those with one child can receive up to $1,452. Individuals who do not have qualifying children are eligible for a much smaller credit — a maximum of $217.
The CalEITC is designed to build on federal working-family tax credits. Families with three or more children who qualify for the maximum CalEITC, for example, can see their incomes rise by as much as 92 percentfrom the CalEITC, in combination with the federal EITC and federal child tax credit. In this way, the CalEITC may enhance the federal EITC’s well-documented benefits to children, families, and communities.
Very Few People Who Were Likely Eligible for the CalEITC Had Heard of the Credit
Promoting the CalEITC will be key to its success because this new tax credit targets workers who — due to their very low earnings — are not required to file state personal income taxes and may not realize that they can receive cash back if they do.[4] However, a Budget Center survey of visitors to county human services offices found that:
Just 18 percent of those who were likely eligible for the CalEITC had heard of the credit (Figure 1).[5] Similarly, just 15 percent of all respondents had heard of the credit.
Among all respondents, Latinos were far less likely to have heard of the CalEITC. Only 10 percent of Latinos surveyed had heard of the credit compared to 25 percent of white respondents.[6]
Only Half of People Who Were Likely Eligible for the CalEITC Filed Their Taxes
Just half (50 percent) of people surveyed who were likely eligible for the CalEITC filed their taxes for tax year 2015 — the first year the credit was available (Figure 2).[7] In other words, a large number of workers may have missed out on hundreds or thousands of dollars in tax credits, not only from the CalEITC, but also from the federal EITC. (As noted earlier, many people who qualify for the CalEITC are not required to file state income taxes.)
These are dollars that are clearly needed. The vast majority of respondents who were likely eligible for the CalEITC (80 percent) had faced at least one major hardship in the past year, such as not being able to afford enough food, falling behind on rent or on utility bills, or having to forego necessary health care due to a lack of money.
The Majority of Tax Filers Who Were Likely Eligible for the CalEITC Paid a Tax Preparer
Seven in 10 people surveyed who were likely eligible for the CalEITC and filed their taxes in 2015 (70 percent) paid a tax preparer even though they would have qualified for free tax assistance given their extremely low incomes (Figure 3).[8] This suggests that many workers did not receive the full benefit of the CalEITC or other tax credits because some of their tax refund went to tax preparation fees.
Although tax preparation fees are rarely transparent and can vary widely, studies suggest that they tend to range in the low hundreds of dollars. For example, the US Government Accountability Office found, in one metro area, fees ranging from $160 to $408 for a single mother with one child who qualified for the federal EITC in tax year 2013.[9] Also, a national survey of tax preparers found that the average fee charged for filing a federal and state tax return without any itemized deductions was $176 in 2016.[10] By comparison, heads of household with one child received an average CalEITC of $610 during the credit’s first year, according to state data.[11] This suggests that tax preparation fees could have substantially reduced the benefit of the CalEITC for many low-earning workers.
Few Tax Filers Who Were Likely Eligible for the CalEITC Knew That Free Tax Preparation Services Were Available
Lack of awareness of free tax preparation services may help explain why many workers who were likely eligible for the CalEITC paid to file their taxes. Only 25 percent of tax filers surveyed who were likely eligible for this credit knew of a free tax preparation service in their community (Figure 4).[12]
High use of paid tax preparers may also reflect insufficient access to free tax services. California has over 900 Volunteer Income Tax Assistance (VITA) sites, which provide free tax preparation services by volunteers who are trained and certified by the Internal Revenue Service (IRS).[13] However, nearly half of the ZIP codes with the highest percentages of households that are potentially eligible for the CalEITC have no VITA sites at all, according to United Ways of California.[14] In addition, many VITA sites lack the capacity to meet the need for free tax preparation.[15]
Only About 2 in 5 People Who Were Likely Eligible for the CalEITC Had Heard of the Federal EITC
Just 42 percent of people surveyed who were likely eligible for the CalEITC had heard of the federal EITC, even though most of them likely qualified for it (Figure 5).[16] By contrast, awareness of the federal EITC among very-low-income parents nationwide ranges between 55 percent and 66 percent.[17]
Latino respondents were far less likely to have heard of the federal EITC than were other survey respondents. This is similar to national surveys, which find lower rates of awareness among Latinos, and particularly those who completed surveys in Spanish.[18]
Policy Options for Maximizing the Success of the CalEITC
Findings from the Budget Center’s survey suggest that California needs to do more to raise awareness of the CalEITC and to connect tax filers to free tax preparation services so that they can get the full benefit of their tax refunds. Such efforts could also increase federal EITC claims, drawing additional federal dollars into the state that would both help working families make ends meet and boost California-based businesses and the state economy.[19] Specifically, state policymakers could:
Use state data to more precisely assess CalEITC utilization gaps as well as evaluate the effectiveness of targeted outreach strategies. While the survey findings described in this report, together with other research, suggest that many eligible Californians may have missed out on the CalEITC in its first year, a precise participation rate is not known. This is because, as discussed earlier, the CalEITC targets workers who are not required to file state personal income taxes, which means that tax filer data alone cannot be used to determine how many people likely qualify for the credit.[20] California could better assess CalEITC utilization — overall and across demographic groups — by linking data across state agencies. For example, California could pursue a data-sharing effort similar to one undertaken by Virginia, which facilitated a collaboration between that state’s tax board and social services department to produce a more accurate picture of federal EITC participation among people receiving major public benefits.[21] Specifically, Virginia used a combination of state tax filer and social services data to estimate which public benefits participants were likely eligible for the EITC, and then determined how many of those participants actually filed their taxes and claimed the credit. This revealed that 34 percent of public benefits participants who were likely eligible for the EITC did not claim the credit in 2006, largely because those individuals did not file their taxes.[22] More importantly, these data allowed Virginia to target EITC outreach efforts specifically to this group of nonfilers and to measure the effectiveness of these efforts by tracking whether they boosted EITC participation over time.[23] A similar data-sharing effort in California — potentially linking the Medi-Cal Eligibility Data System (MEDS) to Employment Development Department (EDD) and Franchise Tax Board (FTB) data — could provide valuable information that would help better tailor CalEITC outreach strategies to groups who are less likely to claim the credit and to learn which strategies work best in boosting claims.[24]
Increase support for community-based efforts to promote the CalEITC. The 2016-17 budget agreement included $2 million for grants to help communities expand their efforts to raise awareness of the CalEITC. However, the Governor’s proposed budget for 2017-18 (the state fiscal year that begins on July 1, 2017) does not include funding to maintain or expand these efforts. Given that awareness of the CalEITC appears to be low, state policymakers could continue, and potentially expand, this grant program so that community groups can maintain their promotional efforts year-round and build on the educational strategies that they have developed.[25] Indeed, efforts to raise awareness of the CalEITC need to be ongoing because the workers who qualify for the credit will likely change from year to year.[26] In addition, because little is known about which educational strategies are most effective, policymakers could require a more robust evaluation of the strategies supported by this grant program.[27]
Provide support to expand promotional efforts at county human services offices. County offices are ideally positioned to promote the CalEITC because they serve families and individuals with low incomes, many of whom likely qualify for the new credit. Yet many counties lack the resources to undertake robust promotional efforts. California could allow counties to expand their efforts by establishing a state-funded competitive grant program in which counties could apply to participate. The funds provided through this program could support a range of activities to raise awareness of the CalEITC, the federal EITC, and free tax preparation services. For example, funds could:
Support an EITC coordinator to facilitate efforts to raise awareness of the state and federal EITCs among county clients and connect them to free tax preparation services.
Support peer-to-peer learning opportunities, where counties could share best practices and learn to replicate effective promotional strategies. For instance, some counties train CalWORKs participants to be Volunteer Income Tax Assistance (VITA) tax preparers as part of their welfare-to-work plans, either as volunteer work experience or as subsidized employment. These workers help to both expand the capacity of local VITA sites and promote tax credits and free tax services in their communities. Counties that have established such programs could provide technical assistance to other counties interested in developing similar programs.
Help counties operate VITA sites at their offices to facilitate free tax preparation for their clients. For example, state funds could cover the costs of keeping county offices open outside of standard business hours in order to provide tax services. Alternatively, counties could partner with local VITA programs.
Support the development and implementation of assisted self-filing workshops where clients learn how to set up free, online tax filing accounts and receive technical assistance with filing their taxes.[28] Such workshops could be easier to establish than VITA sites.[29] Moreover, they would provide a valuable service because many adults — particularly those with low incomes — lack the literacy skills needed to file their taxes on their own.[30]
Finance text messaging services to notify clients about tax credits and free tax services.
Cover outreach costs, such as printing flyers to be included in required mailers to clients.
Strengthen and expand free tax preparation services. Workers with incomes low enough to qualify for the CalEITC struggle to pay for basic expenses and cannot afford to lose part of their tax refunds by paying tax preparers.[31] Although these workers qualify for free tax services, VITA programs that run sites lack the capacity to meet the need and increasing demand for free tax preparation.[32] State funds could help expand the number of VITA sites in high-need communities and enable existing sites to serve more clients.[33] State support could also help VITA programs promote their services and better compete with marketing by paid tax preparers.[34] In addition, state funds could help communities assist people with filing their taxes on their own.[35] Self-filing assistance could be easier for some communities to provide because it would not require as many highly trained and certified volunteers as VITA sites require.[36]
Promote free tax filing services, particularly targeting “nonfilers” who could benefit from the CalEITC and federal EITC.[37] One of the key challenges to maximizing participation in the CalEITC is that this credit targets workers who are not required to file state income taxes, as discussed earlier. This means that the credit’s success largely depends on encouraging “nonfilers” to file. Two research projects underway at Stanford University are testing whether mailing postcards with information about free tax filing services increases the use of those services.[38] If these mailings appear to be effective, California could consider promoting free tax filing services through mailers, particularly targeting people who are likely eligible for the CalEITC and federal EITC, but who have not recently filed state income taxes.[39] In addition, California could consider expanding the existing requirement that employers notify workers of their potential eligibility for the CalEITC and federal EITC to include information about accessing free tax filing services.[40] Under current law, this notification is not required to include specific information about how workers can claim these credits.
Overview of the Budget Center’s Survey
The Budget Center surveyed 938 visitors to county human services offices in eight counties during the fall of 2016. The primary purpose of the survey was to determine whether the visitors had heard of the CalEITC, since many would likely be eligible for the credit or know people who are eligible for it.
Budget Center staff designed the survey in consultation with academic researchers and other experts, and whenever possible utilized questions from long-standing national surveys. Initial drafts of the survey were pilot-tested in the late summer of 2016, and several questions were revised based on this testing.
Thirteen counties volunteered for the survey and, of these, the Budget Center selected the following eight to participate: Contra Costa, Los Angeles, Merced, Orange, San Bernardino, Stanislaus, Tehama, and Yolo. These counties were chosen in order to include communities in most major regions of the state as well as ensure a mix of urban and rural locations.
Surveys were administered between August and November 2016 on days that the counties identified as likely to have a high volume of walk-in traffic. All people who visited the county offices on those days were asked to participate in the survey. (It was not possible for the counties to identify in advance which of their clients were most likely to be eligible for the CalEITC. Therefore, eligibility had to be estimated through the survey using respondents’ self-reported earnings and family characteristics.)
Participation in the survey was voluntary and, when feasible, respondents were given a $5 gift card for their time. Most surveys were completed online using computers in the county offices. In a few counties that could not accommodate an online survey, Budget Center staff and volunteers distributed paper surveys to county visitors. Respondents could choose to take the survey in either English or Spanish.
While the number of survey respondents is large, and large samples increase the reliability of the survey results, the survey was not designed to be representative of all county human services clients or of all people who are eligible for the CalEITC. Also, many of the analyses reported are based on small subsets of the respondents. For example, just over one-quarter of the respondents (266 out of 938) appeared to be eligible for the CalEITC.
Determining Whether Respondents Were Likely Eligible for the CalEITC
An estimated 28 percent of survey respondents were likely eligible for the CalEITC for tax year 2015. This determination was based on respondents’ estimated annual earnings from work and the number of children they were living with and financially supporting, which are two key factors that determine eligibility for the credit. Respondents who reported that they lived with their spouse and that someone else in the household worked in 2015 were assumed to not be eligible for the CalEITC in case their spouses had earnings that would have disqualified them for the credit.[41] In addition, a small number of respondents who reported hourly wages below the 2015 statewide minimum wage were assumed to not be eligible for the CalEITC in case these respondents were being paid under the table. (To qualify for the CalEITC, workers must have earnings subject to wage withholding.) The survey did not collect any information about the immigration status of respondents or their family members, and therefore it is not possible to determine whether some of those who otherwise appeared to be eligible for the CalEITC did not actually qualify for the credit. (To qualify for the CalEITC, all family members reported on the tax form must have valid Social Security numbers.) Also, in order to keep the survey short and simple, respondents were not asked to report how much of their earnings came from self-employment, and since self-employment earnings are not counted in determining eligibility for the CalEITC, it is possible that some respondents’ assumed eligibility status is incorrect.
Determining Whether Respondents Had Heard of State and Federal Tax Credits
The survey asked respondents whether they had heard of the federal EITC, child tax credit, CalEITC, and a fictitious tax credit, the Family Support Tax Credit (FSTC). The share of people who reported that they had heard of the CalEITC and the federal EITC excludes all of those who reported having heard of the FSTC. This fictitious credit was included on the survey in order to identify potential “false positive” responses. (Respondents may report having heard of a credit when they actually had not because, for example, they believe that an affirmative answer is the response that researchers are looking for.)
Respondents were not asked whether they actually received the CalEITC or other tax credits. According to experts who have conducted similar surveys, such questions do not tend to provide accurate information because tax filers often do not know exactly which tax credits they received.
The survey also collected information regarding how people learned about the CalEITC. However, so few respondents had heard of the CalEITC that it was not possible to reliably report the most common ways that clients learned about the credit.
Characteristics of Respondents
Three-quarters of the survey respondents were women (75 percent) and the majority of all respondents were living with and financially supporting children (76 percent). The majority of respondents had worked in 2015 (58 percent), and these respondents had median annual earnings of $13,173.[42] Four in 10 of the respondents (40 percent) were the only workers in their household, and another 19 percent reported that they and others in their household worked.[43] Nearly half of the respondents (47 percent) were Latino, close to one-quarter (23 percent) were white, and 11 percent were black. The remaining 19 percent were of another race or ethnicity or reported multiple races or ethnicities. Respondents’ ages ranged from 17 to 80, with an average age of 35.
[1] This new credit is modeled after the federal EITC, which has provided extensive benefits to families, children, and communities, according to decades of research. For a summary of this research, see Alissa Anderson, State Earned Income Tax Credits (EITCs) Build on the Well-Documented Success of the Federal EITC (California Budget and Policy Center: March 9, 2017).
[2] The Budget Center surveyed 938 people who visited county human services offices in eight counties during the fall of 2016 to gauge awareness of the CalEITC. Of these individuals, just over one-quarter (266) appeared to be eligible for the CalEITC based on their estimated annual earnings from work as well as the number of children they were living with and financially supporting (see survey methodology for more information). Most people who participated in the survey reported that they visited the county office to apply for or renew benefits or to access employment services. The vast majority of respondents reported that they and/or their spouse and/or children currently participate in a major public program, such as Medi-Cal, CalFresh, or CalWORKs.
[3] CalEITC claims also suggest that many people who were eligible for the credit did not claim it. About 385,000 tax filers benefited from the CalEITC for tax year 2015. It is not possible to determine a precise participation rate because it is not known how many “tax units” (families) are eligible for the credit. In 2015, the Franchise Tax Board estimated that around 600,000 families would be eligible. (Personal communication with the Franchise Tax Board on September 22, 2015.) Similarly, a Stanford University analysis of US Census Bureau data also estimated that roughly 600,000 families would be eligible. (Christopher Wimer, et al., Using Tax Policy to Address Economic Need: An Assessment of California’s New State EITC (The Stanford Center on Poverty and Inequality: December 2016).) However, other estimates suggest that only about 466,000 families would be eligible. (Personal communication with the Institute on Taxation and Economic Policy on May 6, 2016.) This suggests that between 64 percent and 83 percent of those who were eligible for the CalEITC claimed it in tax year 2015. By comparison, around 75 percent of California families that are eligible for the federal EITC are estimated to claim it each year. However, EITC eligibility estimates have limitations. For more information, see Alan Berube, Earned Income Credit Participation: What We (Don’t) Know (Brookings Institution: February 15, 2005) and Dean Plueger, Earned Income Tax Credit Participation Rate for Tax Year 2005 (Internal Revenue Service: no date).
[4] It is likely that the majority of people who are eligible for the CalEITC are not required to file state personal income taxes. Personal communication with the Franchise Tax Board on April 7, 2017.
[5] Just over one-quarter of the people surveyed were likely eligible for the CalEITC. See survey methodology for more information.
[6] Since few respondents who were likely eligible for the CalEITC had heard of the credit, it is not possible to reliably report demographic information for this group. Therefore, these figures refer to the share of all people surveyed who had heard of the CalEITC, regardless of whether they were likely eligible for the credit. In this report, white respondents and Latino respondents are mutually exclusive groups and refer to people who said that they identify with only one race or ethnicity. Data for other race and ethnic groups could not be reported individually due to the small number of respondents in each of those groups.
[7] For simplicity, the survey asked, “Did you or your spouse file income taxes this year?” without asking respondents to specify the tax year, or whether they filed state or federal income taxes or both.
[8] By comparison, 65 percent of Californians who claimed the federal EITC paid a tax preparer in tax year 2014, according to Internal Revenue Service data compiled by the Brookings Institution. Brookings Institution, Earned Income Tax Credit (EITC) Interactive and Resources (December 21, 2016).
[9] US Government Accountability Office, Paid Tax Return Preparers: In a Limited Study, Preparers Made Significant Errors, testimony presented to the US Senate Committee on Finance (April 2014).
[10] National Society of Accountants, 2016-2017 Income & Fees of Accountants and Tax Preparers in Public Practice Survey Report (no date). Some tax preparers charge tax filers per form, which means that fees would be higher for people who claim credits like the federal EITC and CalEITC because claiming these credits requires additional paperwork.
[11] Personal communication with the Franchise Tax Board on November 15, 2016.
[12] Surprisingly, awareness of free tax preparation services did not always translate into use of those services. More than one-third of all tax filers surveyed who knew of a free tax preparation service in their community (37 percent) paid a tax preparer when they filed for tax year 2015.
[13] VITA sites offer free tax assistance to people who generally make $54,000 or less annually. Only 2.3 percent of California tax filers who claimed the federal EITC filed their taxes at a free tax preparation site such as VITA in 2014. Brookings Institution, Earned Income Tax Credit (EITC) Interactive and Resources (December 21, 2016).
[14] Personal communication with United Ways of California on March 8, 2017.
[15] For example, United Ways of California, which supports member United Ways that operate many VITA sites, reports that the majority of California VITA sites offer services for limited hours during the week, many lack enough volunteers to meet the demand for services, and that few sites have full-time, paid coordinators who can help the sites run more efficiently. In addition, some sites report that appointments often fill up quickly, limiting their ability to accept additional clients. Personal communication with United Ways of California on March 22, 2017 and April 5, 2017.
[16] A slightly smaller share of all people surveyed (37 percent) had heard of the federal EITC.
[17] Percentages refer to parents with incomes below half of the official federal poverty line (FPL) and those with incomes between 50 percent and 100 percent of the FPL, respectively. See Katherine Ross Phillips, Who Knows About the Earned Income Tax Credit? (The Urban Institute: January 2001), Table 1. Another national survey found that around 58 percent of low-income parents had heard of the federal EITC. See Elaine Maag, Disparities in Knowledge of the EITC (Urban Institute and Brookings Institution Tax Policy Center: March 14, 2005).
[18] Katherine Ross Phillips, Who Knows About the Earned Income Tax Credit? (The Urban Institute: January 2001).
[19] Estimates suggest that roughly 1 in 4 eligible California families or individuals do not claim the federal EITC each year, depriving California of more than $1 billion in federal funds annually. See Internal Revenue Service, EITC Participation Rate by States, downloaded from https://www.eitc.irs.gov/EITC-Central/Participation-Rate on March 1, 2017 and Antonio Avalos, The Costs of Unclaimed Earned Income Tax Credits to California’s Economy: Update of the “Left on the Table” Report (Commissioned by the California Department of Community Services and Development: March 2015). Studies suggest that workers who are eligible for, but do not claim, the federal EITC tend to have lower incomes than eligible workers who do claim this credit. Since the CalEITC is available only to workers with extremely low incomes, this group likely includes people who are missing out on the federal EITC. In other words, promoting the CalEITC provides an ideal opportunity to raise awareness of the federal EITC.
[21] See Erik Beecroft, EITC Take-Up by Recipients of Public Assistance in Virginia, and Results of a Low-Cost Experiment to Increase EITC Claims (Virginia Department of Social Services: May 2012) and Erik Beecroft, To What Extent Do VDSS Clients Claim the Federal Earned Income Credit? (Virginia Department of Social Services: January 31, 2008).
[22] Indeed, national estimates suggest that almost two-thirds of people who were likely eligible for the federal EITC, but who did not claim it, did not file federal income taxes, underscoring the need to target outreach strategies to “nonfilers.” Dean Plueger, Earned Income Tax Credit Participation Rate for Tax Year 2005 (Internal Revenue Service: no date), Table 8.
[23] Specifically, Virginia’s social services department conducted a “random assignment” study to test whether mailers and automated phone calls boosted EITC claims. Researchers, sometimes in collaboration with the Internal Revenue Service, have conducted similar studies to evaluate EITC outreach efforts nationwide. See, for example, work by Day Manoli at http://www.daymanoli.com/researchpapers/ .
[24] Specifically, California could explore the possibility of linking MEDS, a database of people participating in major public programs, to wage withholding data from the EDD in order to identify public benefits recipients who are potentially eligible for the CalEITC based on their earnings from work. This information could then be shared with the FTB to determine which of these individuals did not file state income taxes in the prior year. These “nonfilers” who are potentially eligible for the CalEITC could then be targeted for direct outreach on the credit, and the effectiveness of this outreach could be evaluated by tracking whether these individuals eventually filed their state taxes and claimed the CalEITC. See endnotes 38 and 40 for information about researchers who have conducted, or are currently conducting, such evaluations.
[25] Currently, these grants support CalEITC promotional efforts for a limited time, from November 2016 through May 2017. For more information about this grant program, see Department of Community Services and Development, Notice of Funding Availability (NOFA) California Earned Income Tax Credit Education and Outreach Grant: 2016 Cal EITCNOFA (August 15, 2016).
[26] Research shows that many people at the low-end of the income scale experience large swings in their incomes from year to year. See, for example, Andrew Stettner, Michael Cassidy, and George Wentworth, A New Safety Net for an Era of Unstable Earnings (The Century Foundation: December 15, 2016). In addition, studies find that a sizeable share of the US population falls into poverty for short periods of time. See Bernadette D. Proctor, Jessica L. Semega, and Melissa A. Kollar, Income and Poverty in the United States: 2015 (US Census Bureau: September 2016), p. 3 and Robin J. Anderson, Dynamics of Economic Well-Being: Poverty, 2004-2006 (US Census Bureau: March 2011).
[27] The Legislature could direct the Department of Community Services and Development, which administers the current grant program, to contract with an independent, research-based institution with expertise in program evaluation. The Legislature has required such evaluations in the past. See, for example, SB 1041 (Committee on Budget and Fiscal Review, Chapter 47 of 2012), which required the Department of Social Services to contract with a research organization to evaluate changes in the California Work Opportunity and Responsibility to Kids (CalWORKs) program.
[28] There are many free online filing programs that could be used in these workshops, including: MyFreeTaxes.org, which is operated by United Ways of California; Free File (freefilealliance.org), a nonprofit coalition of tax software companies in partnership with the IRS; and CalFile (https://www.ftb.ca.gov/online/calfile/), a free, online filing program operated by the Franchise Tax Board that allows tax filers to automatically import information from their W-2 forms, which summarize workers’ annual wages and the amount of taxes withheld from their paychecks.
[29] Self-filing workshops would not require as many volunteers as VITA sites require, and the volunteers would not necessarily need to be as highly trained. VITA sites typically provide one-on-one tax preparation services by volunteers who must be certified by the IRS after completion of a tax-training course and passage of an exam.
[30] Research suggests that “a substantial majority of [federal] EITC filers have such limited literacy as to seriously compromise their capacity to prepare their own tax return.” See Michael I. O’Conner, Tax Preparation Services for Lower-Income Filers: A Glass Half Full, or Half Empty? (Tax Notes: January 8, 2001), p. 8. An estimated 40 million to 80 million Americans lack the skills necessary to fill out IRS forms. Edward E. Gordon and Elaine H. Gordon, Literacy in America cited in Joseph Bankman, Simple Filing for Average Citizens: The California ReadyReturn (State Tax Notes: June 13, 2005). Also, more than one-quarter of adults living in households with annual incomes below $10,000 lack basic literacy skills. Mark Kutner, et al., Literacy in Everyday Life: Results From the 2003 National Assessment of Adult Literacy (US Department of Education: April 2007), p. 32.
[31] The majority of Californians who claim the federal EITC pay to have their taxes prepared in spite of their modest incomes (see endnote 8), and many people who claimed the CalEITC in 2015 also appear to have paid to file.
[32] VITA sites offer free tax assistance to people who generally make $54,000 or less annually. According to United Ways of California, the majority of California VITA sites offer services for limited hours during the week, many sites lack enough volunteers to meet the demand for services, and few have full-time, paid coordinators who can help them run more efficiently. Also, as noted earlier, many communities where large shares of households are likely eligible for the CalEITC lack VITA sites altogether.
[33] State support could allow VITA sites to hire a full-time coordinator, train additional volunteers, and expand their hours of service. Iowa and Virginia have provided state funds to support EITC outreach and expand free tax preparation services. For more information, see National Conference of State Legislatures, Tax Credits for Working Families: Earned Income Tax Credit (EITC) (February 21, 2017).
[34] Tax preparation fees are rarely transparent, as discussed earlier. Therefore, it would also be useful for California to require tax preparers that charge for their services to specify their fees before tax filers begin the process of preparing their taxes. For example, preparers could be required to display their fees for each tax form and service they provide. See Chi Chi Wu, It’s a Wild World: Consumers at Risk From Tax-Time Financial Products and Unregulated Preparers (National Consumer Law Center: February 2014), pp. 18-19.
[35] These services could be provided at various community locations, such as schools, libraries, food banks, and one-stop centers, which offer employment-related services to people who are searching for work.
[36] VITA sites typically provide one-on-one tax preparation by volunteers who must complete a tax-training course, pass an exam, and be certified by the IRS. Communities that have difficulty establishing or expanding these services could consider establishing self-filing assistance programs, in which volunteers help clients file their taxes on their own using free, online tax filing software. Some VITA sites provide such self-filing services, called Facilitated Self-Assistance (FSA), in order to expand their capacity without having to recruit additional IRS-certified volunteers. See Shervan Sebastian, Ezra Levin, and David Newville, Strengthening VITA to Boost Financial Security at Tax Time & Beyond (CFED: June 2016) and Rebecca Thompson, Learn More About Facilitated Self Assistance for Your Clients! (CFED: February 22, 2017).
[37] Free tax filing programs are underutilized, suggesting a need to better promote these services. For example, less than 2 percent of the nation’s tax returns in 2016 were filed through Free File (freefilealliance.org), a nonprofit coalition of tax software companies in partnership with the IRS, even though this service is available to 70 percent of tax filers. See Jessica Huseman, “Filing Taxes Could Be Free and Simple. But H&R Block and Intuit Are Still Lobbying Against It,” ProPublica (March 20, 2017).
[38] These two projects are being conducted by Jacob Goldin, an assistant professor of law at Stanford University. The first study, which is being conducted in Colorado in collaboration with the Colorado United Way Network, is testing the effect of sending postcards promoting United Way’s free, online tax service, MyFreeTaxes, to a random sample of households in low-income neighborhoods. The second study, which is being conducted in collaboration with the US Treasury Department and the IRS, is testing the effect of sending postcards promoting various types of free tax preparation services to people who are likely to qualify for these services and who prepared their own tax returns in the prior year. The preliminary results of this research should be available in the late spring or early summer of 2017.
[39] The data-sharing project discussed earlier would make it possible to identify “nonfilers” who are likely eligible for the CalEITC. Notices about free tax preparation services could also be mailed to a broader group of individuals with low incomes — not just those who qualify for the CalEITC — given that use of paid preparers is high among this group. The Employment Development Department (EDD), for example, could mail such notices to workers with low earnings based on their wage withholding statements or to people who apply for unemployment insurance. The EDD is currently required by law to notify unemployment insurance claimants that they may be eligible for the CalEITC and federal EITC, but the notification does not have to include information about free tax preparation services.
[40] AB 650 (Lieu, Chapter 606 of 2007) requires most employers to notify their employees that they may be eligible for the federal EITC. This notification must occur within one week of providing an annual wage statement, such as a W-2 or 1099 form. (The specific statement employers are required to provide is posted on this website: http://www.edd.ca.gov/Payroll_Taxes/Year-End_Notification_Requirements.htm.) AB 1847 (Stone, Chapter 294 of 2016) requires this notification to include information about the new CalEITC. However, the current notification is not required to include information about how to access free tax filing assistance. Providing this information could help encourage people who do not have a filing requirement to file. California could also consider simplifying the information that employers are required to provide. A recent study tested the impact of mailing various types of notifications to more than 35,000 California tax filers who appeared to be eligible for, but did not claim, the federal EITC in tax year 2009. The study found that simple notices that included how much tax filers might receive from the EITC were most effective in boosting EITC claims. Examples of these notifications can be found in Saurabh Bhargava and Dayanand Manoli, “Psychological Frictions and the Incomplete Take-Up of Social Benefits: Evidence From an IRS Field Experiment,” American Economic Review 105:11 (2015), pp. 3489-3529.
[41] In order to keep the survey short and simple, the survey did not ask respondents to report earnings from spouses or anyone else in their household. This means that some respondents’ estimated eligibility for the CalEITC could be incorrect. For example, some respondents who did not work, and therefore were assumed to be ineligible for the credit, may actually have been eligible if their spouse had earnings that would have qualified the family for the credit.
[42] Respondents were considered to have worked in 2015 if they reported a positive number for at least one of two questions: the number of months they worked in 2015 and/or the number of hours they usually worked per week during those months. Due to incomplete information, annual earnings could be estimated for only 80 percent of respondents who worked in 2015. Annual earnings were estimated based on respondents’ hourly pay, usual hours worked per week, and total months worked in 2015. Respondents’ estimated annual earnings ranged widely, from $6,890 at the 25th percentile to $22,741 at the 75th percentile.
[43] Another 13 percent reported that they did not work, but someone else in their household did, while 28 percent of respondents reported that no one in their household worked.
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