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Subsidized Child Care and Development Programs Vary by Race and Ethnicity

May 2017 | By Kristin Schumacher

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.

[iv] Budget Center analysis of US Census Bureau, Current Population Survey data. Data limitations likely result in a conservative estimate of the number of children in California who are eligible for subsidized child care and development programs. For more information about the methodology used to calculate this estimate, see the Technical Appendix from Kristin Schumacher, Over 1.2 Million California Children Eligible for Subsidized Child Care Did Not Receive Services From State Programs in 2015 (California Budget & Policy Center: December 2016).

[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 to Preschool 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 to Preschool 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.

Download full report (PDF) or use the links below to browse individual sections of this report:

May Revision Reflects Modestly Improved Fiscal Outlook
Updated Revenue Projections Lead to Increase in Proposed Reserves
May Revision Proposes Supplemental Payment for State Employee Pensions
May Revision Maintains Shift of In-Home Supportive Services (IHSS) Costs to Counties, but Reduces the Impact
May Revision Continues Implementation of Multiyear Plan to Reinvest in Early Care and Education, but Fails to Update Income Eligibility Limits
May Revision Boosts the Minimum Funding Level for Schools and Community Colleges
Governor Proposes Minor Adjustments to Higher Education Funding
Governor Maintains Proposal to Use Prop. 56 Funds to Pay for Typical, Year-to-Year Growth in Medi-Cal Costs
May Revision Highlights New Rules Implementing Prop. 57, Which Will Help the State Reduce Incarceration
Governor’s Revised Budget Reflects Recent Transportation Funding Agreement With the Legislature
May Revision Adds Modest New Resources to Address Federal Actions on Immigration and Other Issues
May Revision Makes No New Investments in CalEITC, CalWORKs, SSI/SSP, or Optional Medi-Cal Benefits
May Revision Proposes No New Funding for Affordable Housing and No New Changes to Cap-and-Trade

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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.
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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.

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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.”

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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.

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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 percent from 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.

Poverty & Inequality
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Taxes & Revenue

[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.

[20] See endnote 3.

[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 EITC NOFA (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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Among the several executive orders issued by the Trump Administration in its first few weeks was an order to withhold federal funds from “sanctuary cities” that do not cooperate with federal immigration enforcement. Local leaders from a number of California cities have been vocal in declaring their commitment to upholding sanctuary policies. So what could this executive order mean in terms of federal funds withheld from California?

First, it is important to note that there is no legal definition of a “sanctuary city” in the executive order or in existing law. The executive order does reference two ways in which local governments are required or requested to cooperate with federal immigration authorities: sharing information with federal authorities about the immigration status of individuals detained by local law enforcement; and holding detained individuals in jails beyond their regular release date, at the request of federal authorities who wish to prosecute an individual for potential immigration violations and are waiting to obtain a warrant. Sharing of information is currently required by law, while complying with “detainer requests” is legally voluntary.

In California, jails are operated by counties not cities, so “sanctuary counties” is generally the more relevant term. Recently introduced federal legislation proposes a definition of “sanctuary jurisdictions” as states or local jurisdictions that have statutes, policies, or practices that limit or prohibit information sharing or cooperation with detainer requests. Under this definition, all California counties, as well as the state as a whole, could potentially qualify as “sanctuary jurisdictions,” because existing state law limits the extent to which local law enforcement agencies may cooperate with detainer requests in practice. The California Trust Act (Assembly Bill 4 of 2013) prohibits local law enforcement from complying with immigration authority requests to extend the detention of jailed individuals unless the individuals have committed specific serious crimes. Under the Trust Act, local jurisdictions are also allowed to implement their own more restrictive limits on cooperating with detainer requests, including refusing any cooperation. Recently introduced legislation, the California Values Act (Senate Bill 54, De León), would further restrict cooperation with immigrant detention requests, by prohibiting local law enforcement from using any agency or department resources to “investigate, interrogate, detain, detect, or arrest persons for immigration enforcement purposes,” while also prohibiting the detention or transfer of individuals in response to detainer requests when federal immigration authorities do not have a warrant.

While the definition of a sanctuary jurisdiction has yet to be legally set, a separate question raised by the Trump Administration’s executive order is which federal funds sanctuary jurisdictions could potentially lose. The order is somewhat unclear about which funds are targeted to be withheld from sanctuary jurisdictions but could be interpreted to mean any type of federal funding. The implications of withholding all federal funds from California would be huge, as federal funds make up more than one-third of the state budget.

However, legal precedent strongly suggests that the funds the federal government might actually be able to withhold are much more limited. In prior cases, courts have held that the federal government may not withhold funding that is unrelated to the federal interest at hand. This means that federal funds related to immigration enforcement might be able to be withheld from jurisdictions that do not cooperate with immigration authorities, but withholding federal funds for community development, health, education, transportation, or other unrelated purposes on the basis of a jurisdiction’s sanctuary policies would likely be found unconstitutional.

In fact, very little federal funding related to immigration enforcement currently flows to California’s state and local governments. The courts would likely have to determine exactly which federal funds could be considered related to this federal interest, but even the total of all federal funding related to the broad category of criminal justice represents just a small share of state and local government revenues in California.  At the state level, federal funding for all corrections and judicial is less than a quarter of a percent of all federal funds for the state government, less than a tenth of a percent of the total state budget, and less than 1 percent of the state budgets for corrections and judicial proposed for fiscal year (FY) 2017-18, according to California Budget & Policy Center analyses. Of these funds, those specifically for immigration detention total only $50.6 million, or one-five-thousandth of the overall state budget and less than a third of a percent of the state corrections and judicial budgets. Similarly, looking at San Francisco and Los Angeles counties, as two counties with relatively large populations of undocumented immigrants, the total of all federal funds related to any aspect of criminal justice represents a very small share of county budgets. In Los Angeles, federal funds related to corrections or judicial represent less than 3 percent of all federal funds received by the county and less than half a percent of the total county budget for FY 2016-17, while in San Francisco these funds represent less than 1 percent of all federal funds received by the county and less than one-twentieth of a percent of the total county budget.

The question of how much funding could be withheld might be a moot point, moreover. Legal precedent suggests that the executive order might not be enforceable at all, as it could be interpreted as a mandate that state and local governments enforce federal law. The US Supreme Court has repeatedly held that the federal government cannot force states or local governments to enforce federal laws, most recently in the ruling that states could not be forced to participate in the expansion of Medicaid through the Affordable Care Act.

Multiple lawsuits have already been filed by local governments challenging the sanctuary cities executive order on these and other legal bases, including suits filed by San Francisco City and County and Santa Clara County. The courts have not yet responded to these challenges, but local jurisdictions appear to have a strong case. While the final word will have to come from the courts, the available evidence suggests that California is unlikely to face major financial repercussions from this executive order if it upholds or even expands state and local sanctuary policies.

California Budget

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California Budget Perspective is the Budget Center’s annual “chartbook” publication that takes an in-depth look at the Governor’s proposed state budget.

California Budget Perspective 2017-18 examines the economic and policy context for this year’s budget, highlights what the major shifts at the federal level could mean for this year’s state budget debate, and discusses key components of the Governor’s budget proposal.

Read California Budget Perspective 2017-18.

California Budget

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Executive Summary

On January 10, Governor Jerry Brown released a proposed 2017-18 budget that reflects both deep uncertainty about looming federal actions and a tempered economic and fiscal outlook for the state. The Governor forecasts revenues that are $5.8 billion lower — over a three-year period — than previously projected and proposes taking steps to address a $1.6 billion projected shortfall for 2017-18. (This gap would be even larger but for the Administration’s assumption that some state General Fund costs will decrease in 2017-18. For example, the Governor proposes to change how the state and counties share the cost of the In-Home Supportive Services (IHSS) program, with the result that the state would save roughly $600 million in 2017-18, while counties’ costs, in the aggregate, would increase by a like amount.) The Governor’s proposal assumes current federal policies and funding levels, even as the Affordable Care Act and other federal programs face the prospect of cuts with President-elect Trump taking office.

As part of addressing the deficit that his Administration foresees, the Governor proposes to rescind several one-year spending commitments that had been part of the 2016-17 budget agreement, including $400 million for affordable housing programs and $300 million for renovation of state office buildings. The Governor also proposes to “pause” a multiyear plan for reinvesting the state’s child care system.

The Governor’s proposal calls for continued funding of the California Earned Income Tax Credit (CalEITC) and also reflects the state’s increased minimum wage. However, this restrained budget proposal contains no 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 California’s affordable housing crisis.

The Governor’s proposal continues modest increases in funding for the California State University and University of California, but also reduces certain student aid programs. Lower revenue projections also mean slower growth in the Proposition 98 minimum guarantee for K-14 education spending.

The Governor’s proposal includes setting aside $2.3 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 debts. Under the Governor’s proposal, state reserves would total $9.5 billion by the end of 2017-18.

With the near-term state budget facing many uncertainties, it is critical that California’s Congressional delegation and state lawmakers seek to protect the Affordable Care Act and the social safety net, and that state lawmakers ensure that California is well positioned to invest over the long term in education, child care, affordable housing, and other public services that help Californians advance economically.

The following sections summarize key provisions of the Governor’s proposed 2017-18 budget. Please check the Budget Center’s website (calbudgetcenter.org) for our latest commentary and analysis.

Download full report (PDF) or use the links below to browse individual sections:

Administration Expects Economic Growth to Continue, but Notes Several Risks
Governor Projects a Budget Shortfall Partly Due to a Lower Revenue Forecast
Governor’s Proposal Emphasizes the Importance of Reserves
Governor Proposes No Changes to the CalEITC
Lower Revenue Estimates Slow Growth in the Minimum Funding Level for Schools and Community Colleges
Administration Continues Modest Funding Increases for CSU and UC and Reduces Student Aid Programs
Governor’s Proposal “Pauses” Modest Reinvestments in Early Care and Education Programs
Proposed Budget Highlights Impact of Proposition 57, Which Provides New Tools for Reducing Incarceration
Proposed Budget Emphasizes the Uncertainty Over the Fate of the Federal Affordable Care Act
Governor’s Proposal Shifts Additional Costs for In-Home Supportive Services to Counties
Governor’s Proposal Does Not Make Any New Investments in CalWORKs
Governor Does Not Provide a State Cost-of-Living Increase for SSI/SSP Grants in 2017-18
Changes to State Retirement Systems Reflected in the Governor’s Budget Proposal
Governor Again Proposes 10-Year Transportation Funding and Reform Package
Administration Acknowledges Housing Crisis, but Proposes No New Funding to Address the Problem
Governor Makes $2.2 Billion Allocation Plan for Cap-and-Trade Revenues Dependent on Legislative Action Affirming Program

Administration Expects Economic Growth to Continue, but Notes Several Risks

The US economy is now in its seventh year of expansion since the Great Recession ended, and California’s economy has grown at a healthy clip in recent years, with the state’s job growth outpacing that of the nation. The Governor’s proposed budget assumes that economic growth will continue at a moderate pace over the next few years given that gains have slowed recently as the expansion has matured and the job market has neared full recovery from the recession. However, the Administration highlights several “risks to consider” that could weaken gains going forward. These include the possibility that the national economy could fall into another recession; that federal policy changes could disrupt the economy; and that California’s ongoing housing crisis could limit economic growth. While it is important to keep these potential risks in mind, it is worth noting that a recession in the next few years is not inevitable. The Administration states that “it would be a historical anomaly for there not to be a recession before 2020” given that the current economic expansion has lasted longer than the typical expansion. However, the Legislative Analyst’s Office (LAO) and other experts have pointed out that this fact does not in and of itself mean that another recession is likely soon because expansions “do not die of old age.”

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Governor Projects a Budget Shortfall Partly Due to a Lower Revenue Forecast

The Governor’s proposed budget projects that California will face a budget shortfall of $1.6 billion in 2017-18, absent action by policymakers to address this gap. The projected deficit reflects two key factors: lower General Fund revenue projections and a shortfall in the Medi-Cal budget for the current fiscal year (2016-17). According to the Administration, state revenues have fallen short of expectations in most months since the 2016-17 budget was enacted. As a result, the Governor now projects that General Fund revenues (before transfers) over the three-year “budget window,” from 2015-16 to 2017-18, will be $5.8 billion lower than the projections included in the 2016-17 budget agreement. Specifically, the Governor expects personal income tax (PIT) revenues during this three-year period to be $2.1 billion lower, sales and use tax (SUT) revenues to be $1.9 billion lower, and corporation tax (CT) revenues to be $1.7 billion lower than expected when the budget for the current fiscal year was signed into law.

By comparison, the LAO forecast, published in November 2016, expected modestly lower revenues in 2015-16 and 2016-17 relative to projections in the 2016-17 budget agreement, but followed by “healthy revenue growth” in 2017-18. One of the major differences between these forecasts is that the LAO assumes higher growth in wages and salaries and capital gains than does the Administration, which contributes to higher PIT revenues, particularly in 2017-18. The LAO’s November forecast projected that the three largest revenue sources (PIT, SUT, and CT) would increase by 5.4 percent between 2016-17 and 2017-18, driven by a nearly 7 percent increase in PIT revenues, which comprise around 70 percent of General Fund revenues.

To address the projected budget shortfall and rebuild the state’s discretionary reserve, the Governor proposes to:

  • Rescind certain one-year spending commitments included in the 2016-17 budget. These include:
  • $400 million set aside for affordable housing programs. These dollars were to be provided only if lawmakers modified the local review process for certain housing developments, as proposed by the Governor. The Legislature did not adopt the Governor’s proposal.
  • $300 million that was intended to begin the process of renovating or replacing certain state office buildings.
  • $45 million for the Housing and Disability Advocacy Program. The purpose of this program, established in the 2016-17 budget, was to help people who are homeless or at risk of homelessness and who have a disability to access appropriate benefits.
  • Delaying a multiyear plan adopted in 2016 to reinvest in the state’s child care and development system, including by updating provider payment rates and further boosting the number of full-day state preschool slots.
  • Beginning the phase out of the Middle Class Scholarship program by not providing grants to any new students.

In addition, the Governor assumes a lower Proposition 98 minimum guarantee in 2015-16 and 2016-17, which reduces K-14 education spending over the two years by about $886 million.

The Administration notes that it is possible that the revenue forecast will improve by the time the Governor releases his revised 2017-18 budget in May, just after California’s final personal income tax receipts come in, in which case the state could possibly avoid making some or all of these cuts. Indeed, the revenue picture will likely remain “murky” until at least April, according to recent LAO publications. The LAO points out that lower-than-expected PIT revenue collections late in 2016 may reflect changes in taxpayers’ behavior in anticipation of potential federal tax changes. Specifically, the LAO suspects that some personal income tax filers with high incomes are deferring capital gains to calendar year 2017 in order to delay tax payments with the hope that they will owe less in taxes if federal policymakers lower tax rates beginning this year.

Under Prop. 2 (2014), which made changes to California’s constitutional rainy day fund — the Budget Stabilization Account (BSA) — the Governor has the authority to declare a “budget emergency” under certain conditions, allowing the state to suspend or reduce annual transfers into the BSA or withdraw funds from the BSA. A “budget emergency” is defined as resulting from either a disaster or extreme peril, as defined in the state Constitution, or from insufficient resources to maintain General Fund expenditures at the highest level of spending in the three most recent fiscal years, adjusted for state population growth and the change in the cost of living. (For a fuller discussion of Prop. 2, see following section.) The Governor’s proposed budget does not indicate whether the projected budget shortfall would constitute a budget emergency as defined under Prop. 2. Were the Governor to declare a budget emergency, it would allow the state to suspend or reduce the deposit into the BSA and/or withdraw reserve funds, freeing up revenue to help close the projected shortfall.

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Governor’s Proposal Emphasizes the Importance of Reserves

California voters approved Prop. 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 proposed 2017-18 budget projects that the BSA will total $6.7 billion by the end of the current fiscal year (2016-17). Based on the Governor’s revenue projections for 2017-18, Prop. 2 would constitutionally require the state to deposit an additional $1.2 billion in the BSA (as well as use $1.2 billion to repay budgetary debt), bringing the BSA total to $7.9 billion by the end of fiscal year 2017-18.

The BSA is not California’s only reserve fund. Each year, the state deposits additional funds into a discretionary reserve called the “Special Fund for Economic Uncertainties.” For 2017-18, the Governor projects $1.6 billion for this fund. Including this fund, the Governor’s proposal would build state reserves to a total of $9.5 billion in 2017-18.

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Governor 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. In its first year, the CalEITC provided an average credit of slightly more than $500 to over 385,000 households.

The Governor’s proposed budget makes no changes to the CalEITC. Unlike state EITCs in other states, the CalEITC is not automatically provided each year like a typical tax expenditure. Instead, California policymakers must specify in each year’s state budget how large a credit to provide. Specifically, they must set the state credit at a particular percentage of the federal EITC, referred to as the “adjustment factor.” The 2015-16 budget and 2016-17 budget set the state EITC adjustment factor at 85 percent, and the Governor proposes to maintain the adjustment factor at this percentage in the 2017-18 budget. Additionally, the Governor projects that the CalEITC will reduce state General Fund revenues by $240 million in 2016-17 and by $264 million in 2017-18, slightly more than the $200 million cost of the credit in 2015-16. When the CalEITC was first proposed, the Governor projected that it would reach 825,000 households at a cost — in terms of lower revenues — of $380 million annually. However, because claims in the credit’s first year were considerably lower than expected, the projected cost of the credit is also lower.

Raising awareness of the CalEITC could help boost the number of low-earning workers benefiting from the new tax credit. The 2016-17 budget agreement included $2 million to provide grants to community-based organizations and other entities to expand education and outreach efforts in order to increase CalEITC claims. It does not appear that the Governor’s proposed 2017-18 budget includes any funding to maintain these efforts beyond the current year.

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Lower Revenue Estimates Slow Growth in 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 Governor’s proposed budget assumes a 2017-18 Prop. 98 funding level of $73.5 billion for K-14 education, $2.1 billion above the revised 2016-17 minimum funding level. The Prop. 98 guarantee tends to reflect changes in state General Fund revenues, and estimates of 2015-16 and 2016-17 General Fund revenue in the proposed budget are lower than those in the 2016-17 budget agreement. As a result, the Governor’s proposed 2017-18 budget reflects decreases in prior-year Prop. 98 funding levels compared to those assumed in the 2016-17 budget agreement. The Governor’s proposed budget assumes a 2016-17 Prop. 98 funding level of $71.4 billion, $506 million less than the level assumed in the 2016-17 budget agreement, and a $68.7 billion 2015-16 Prop. 98 funding level, $380 million below the level assumed in the 2016-17 budget agreement.

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. The Governor’s proposed budget increases funding for the state’s K-12 education funding formula — the Local Control Funding Formula (LCFF) — and pays 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 Governor’s proposed budget notes shortcomings in the State Facilities Program and suggests that until measures are in place to verify that state GO bond funds “are appropriately used,” the Administration will not support the expenditure of Prop. 51 dollars. The Governor also proposes to engage stakeholders in discussions during the spring budget process to respond to recommendations made to improve the current special education finance system.

Additionally, the Governor’s proposed budget:

  • Increases funding by $744.4 million in 2017-18 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 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 “maintains formula implementation at the current-year level of 96 percent.” In addition, the Governor’s proposed budget defers $859.1 million in 2016-17 LCFF funding to 2017-18 due to a reduction in 2016-17 Prop. 98 funding compared to the 2016-17 budget agreement.
  • Provides $287.3 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 $200 million for the Career Technical Education Incentive Grant Program. The proposed spending plan reflects the final installment of a three-year program that began with the 2015 Budget Act.
  • Provides cost-of-living-adjustments (COLAs) for non-LCFF programs. The Governor’s proposed budget funds a 1.48 percent COLA ($58.1 million) for several categorical programs that remain outside of the LCFF, including special education, child nutrition, and American Indian Education Centers.

California’s community colleges (CCCs) 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 Governor’s proposed budget provides CCCs with $150 million in one-time funding for grants to develop and implement “guided pathways” programs, an institution-wide approach to support student success. Participating CCCs can use guided pathway grants for activities such as targeted advising and support services and designing “academic roadmaps and transfer pathways that explicitly detail the courses students must take to complete a credential or degree on time.”

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Administration Continues Modest Funding Increases for CSU and UC and Reduces Student Aid Programs

The Governor’s proposed budget includes modest increases in General Fund spending for the California State University (CSU) and the University of California (UC), with the expectation that CSU and UC implement new practices that reduce the cost of instruction and expand access to higher education for California students. At the same time, the Governor’s budget proposal notes that the UC Office of the President will propose a 2.5 percent tuition increase to the UC Board of Regents later in January and that the CSU Chancellor’s Office will propose a 5 percent tuition increase to the CSU Board of Trustees in March. The Governor’s proposal notes that these tuition increases would increase the 2017-18 Cal Grant costs for UC and CSU students by $17.7 million and $24.9 million respectively. However, the Governor’s proposed budget does not include funding to pay for these increased costs and states “any tuition increases must be viewed in the context of reducing the overall cost structure at UC and improving the graduation rates at the CSU.”

Specifically, the Governor’s proposed budget:

  • Increases funding for CSU by $161.2 million in 2017-18.
  • Increases funding for UC by $131.2 million in 2017-18. The Governor’s proposal represents a 4 percent increase in funding consistent with the existing agreement between the Administration and the UC President. The Governor’s proposed budget also includes a one-time increase of $169 million in Prop. 2 funds to help pay down unfunded liabilities of the UC Retirement Plan, which reflects the final installment of $436 million provided over a three-year period.
  • Phases out the Middle Class Scholarship Program (MCSP). The Governor’s proposal would provide $74 million to the MCSP in 2017-18, but would only renew scholarships for the approximately 37,000 students who received them in the 2016-17 academic year.
  • Reduces funding for the Cal Grant Program by $76.9 million. The Governor’s proposal would decrease Cal Grants by $24.5 million in 2017-18 and $52.4 million in 2016-17 “to reflect estimated costs.”

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Governor’s Proposal “Pauses” Modest Reinvestments in Early Care and Education Programs

California’s child care and development system is composed of a variety of programs that allow parents with low and moderate incomes to find jobs and remain employed while caring for and preparing children for school. State policymakers dramatically cut support for these programs during and after the Great Recession, and overall funding in the current fiscal year remains nearly 20 percent below pre-recession levels, after adjusting for inflation, even with reinvestments made in recent years. Despite tremendous unmet need, the state currently provides about 70,000 fewer slots than in 2007-08.

The 2016-17 budget agreement called for implementation of a multiyear plan to reinvest in the state’s child care and development system, including by updating provider payment rates in order to keep pace with the state’s rising minimum wage and further boosting the number of full-day state preschool slots. Yet due to the projected decrease in revenue, the Governor’s proposed 2017-18 budget now “pauses” these proposed reinvestments until the 2018-19 fiscal year.

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Proposed Budget Highlights Impact of Proposition 57, Which Provides New Tools for Reducing Incarceration

Currently, more than 129,200 people who have been convicted of a felony offense are serving their sentences at the state level. Most of these individuals — just over 114,000 — are housed in state prisons designed to hold slightly more than 85,000 people. This level of overcrowding is equal to 134 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 roughly 15,200 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 more than 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 this past November 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. In addition, Prop. 57 requires juvenile court judges to decide whether a youth should be tried in adult court.

The CDCR is currently drafting regulations that will implement the new parole process and outline how the Administration will use its new authority to award sentencing credits. With respect to the new parole process, the Governor’s budget summary does not indicate how the new regulations will define a “nonviolent felony offense.” With respect to credits, the summary states that the “current credit-earning structure is convoluted” and suggests that the new regulations will aim to increase the amount of credits earned and “provide more equality in the credit structure.”

The CDCR’s new regulations are expected to be in place by October 1, 2017. The Governor estimates that in 2017-18, Prop. 57 will reduce the number of incarcerated adults by nearly 2,000 below the level that was otherwise projected (130,118). This annual drop in the inmate population is projected to grow to about 9,500 by 2020-21. According to the Administration, the combination of Prop. 57 and other population-reduction measures already in place would allow the CDCR to end the use of out-of-state prison facilities by 2020. Moreover, Prop. 57 would result in estimated net state savings of $22.4 million in 2017-18, rising to about $140 million by 2020-21.

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Proposed Budget Emphasizes the Uncertainty Over the Fate of the Federal Affordable Care Act

The Governor’s proposed budget highlights the uncertainty surrounding the federal Affordable Care Act (ACA), also known as Obamacare. Under the umbrella of the ACA, state policymakers expanded Californians’ access to health care coverage, cutting the state’s uninsured rate in half. President-elect Trump campaigned on repealing the ACA, and Republicans in Congress have begun the process of dismantling the law. However, it is unclear how much of the ACA will ultimately be repealed, when any such repeal would actually take effect, and what the Republicans’ replacement for the ACA — if any — would look like.

California would lose well over $20 billion in federal funding each year if Republicans succeed in repealing two key components of the ACA:

  • The Medicaid expansion. California and 30 other states expanded eligibility for Medicaid health care coverage to low-income adults under age 65 who previously were excluded from the program. (Medicaid is called Medi-Cal in California.) Slightly more than 4 million Californians are expected to be enrolled in Medi-Cal in 2017-18 as a result of this expansion. Moreover, California is projected to receive more than $17 billion in federal funding in the upcoming fiscal year to support health care services for this population, according to the Governor’s budget summary.
  • Federal subsidies for private coverage purchased through online health insurance marketplaces, such as Covered California. Nearly 1.4 million Californians who earn too much to qualify for Medi-Cal but lack access to affordable job-based insurance get their coverage through Covered California. Nearly 9 in 10 of these individuals — 1.2 million — receive federal subsidies to reduce the cost of their coverage, with these subsidies totaling roughly $5 billion per year.

The Governor’s budget summary points out that “a complete repeal of the Affordable Care Act, without a companion replacement program, would not only affect millions of Californians’ health benefits, but would also disrupt the private insurance market.”

In addition, the Governor’s budget proposal:

  • Projects total Medi-Cal enrollment of 14.3 million in 2017-18. This is up from 7.9 million in 2012-13, an increase that is due primarily to California’s full implementation of federal health care reform.
  • Projects total Medi-Cal spending of $102.6 billion in 2017-18, which is comprised primarily of federal dollars. Federal support for Medi-Cal is projected to be $66.8 billion in 2017-18, roughly two-thirds of total funding for the program. State General Fund support for Medi-Cal is projected to be $19.1 billion in the upcoming fiscal year, with other non-federal funds providing the remaining $16.7 billion.
  • Identifies a $1.8 billion General Fund shortfall in the Medi-Cal budget for the current fiscal year (2016-17). According to the Governor’s budget summary, this significant gap is primarily due to “a one-time retroactive payment of drug rebates to the federal government and miscalculation of costs” related to the Coordinated Care Initiative, which coordinates health care and other services for certain seniors and people with disabilities.
  • Uses certain tobacco tax revenues raised by Prop. 56 to fund “increased General Fund health care costs in the Medi-Cal program.” Approved by voters this past November, Prop. 56 increases the state’s excise tax on cigarettes by $2 per pack starting on April 1. The measure also boosts the tax on other tobacco products by an equivalent amount and — for the first time — applies the state excise tax to electronic cigarettes that contain nicotine. Prop. 56 requires that the vast majority of revenues raised by the measure go to Medi-Cal. The Administration projects that Prop. 56 will generate $1.7 billion between April 1, 2017, and June 30, 2018, with $1.2 billion of this amount allocated to Medi-Cal. The Governor does not propose to use any of these new revenues to support payment increases for doctors and others who provide health care services to Medi-Cal enrollees.
  • Assumes that Congress will reauthorize the Children’s Health Insurance Program (CHIP) in 2017, but that the federal share of CHIP funding will be reduced. In California, federal and state funding for CHIP is used primarily to support health care services for certain children enrolled in Medi-Cal. (These children previously would have been enrolled in the Healthy Families Program, which was eliminated in 2013.) Since late 2015, the federal government has paid 88 percent of CHIP costs in California, with the state covering the remaining 12 percent. Previously, the federal share was set at 65 percent. With CHIP currently authorized only through September 2017, the Governor assumes that Congress will reauthorize the program this year, but revert to the prior sharing ratio (65/35) effective October 1, 2017. This change would increase the state’s General Fund costs for CHIP by $536.1 million, according to Administration estimates.

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Governor’s Proposal Shifts Additional Costs for In-Home Supportive Services to Counties

Under the Coordinated Care Initiative (CCI), California integrates health care and other services — including In-Home Supportive Services (IHSS) — for certain seniors and people with disabilities. The Administration indicates 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 the counties’ share of the non-federal costs for IHSS would go up (and the state’s share would go down). This is because the current funding formula — which is tied to the CCI and significantly limits counties’ share of IHSS cost increases — would end. In its place, the state would reestablish — effective July 1, 2017 — the prior funding formula, which requires counties to pay 35 percent of the non-federal portion of IHSS costs, with the state paying the other 65 percent. The Administration anticipates that counties would lack sufficient funding to cover their increased share of IHSS costs in 2017-18, likely creating a “financial hardship and cash-flow problems.” As a result, the Governor proposes to “work with counties to mitigate, to the extent possible,” the financial impact of increasing counties’ share of costs for IHSS.

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Governor’s Proposal Does Not Make Any New Investments in CalWORKs

The California Work Opportunity and Responsibility to Kids (CalWORKs) Program provides modest cash assistance for nearly 1 million low-income children while helping parents overcome barriers to employment and find jobs. State policymakers made a historic advance last year when they repealed the punitive Maximum Family Grant (MFG) or “family cap” rule, which only served to drive families with children deeper into poverty. The Governor’s proposed budget does not make any additional investments in CalWORKs, although this would be necessary to restore cuts made to the program during and after the Great Recession. Currently, CalWORKs grants fail to lift most families out of “deep poverty,” which is defined as having an income that is below half of the federal poverty line ($10,080 for a family of three in 2016). With the minimum wage increase scheduled for January 1, 2018, CalWORKs spending is expected to decrease by $5.3 million General Fund as more families earn an income that is above the eligibility limit but far below the level needed to make ends meet.

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Governor Does Not Provide a State Cost-of-Living Increase for SSI/SSP Grants in 2017-18

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. State policymakers made deep cuts to the SSP portion of these grants in order to help close budget shortfalls that emerged following the onset of the Great Recession in 2007. SSP grants for couples and for individuals were reduced to federal minimums in 2009 and 2011, respectively, and the annual state COLA for SSI/SSP grants was eliminated beginning in 2010-11, after being suspended for several years. However, California took a step toward reinvesting in SSI/SSP during the current fiscal year (2016-17). Effective January 1, 2017, the state increased the SSP portion of the grant by 2.76 percent. This raised the monthly SSP grant to $160.72 for individuals (an increase of $4.32) and to $407.14 for couples (an increase of $10.94).

The Governor does not propose to provide a new state COLA for SSI/SSP grants during 2017-18. However, the Administration projects that the federal government will provide a 2.6 percent COLA to the SSI portion of the grant effective January 1, 2018. As a result of the federal SSI COLA:

  • The maximum monthly SSI/SSP grant for individuals would rise from the current level of $895.72 to $915.72 on January 1, 2018. The projected 2018 grant level equals 5 percent of the current federal poverty guideline for an individual ($990 per month).
  • The maximum monthly SSI/SSP grant for couples would increase from the current level of $1,510.14 to $1,539.14 on January 1, 2018. The projected 2018 grant level equals 3 percent of the current poverty guideline for a couple ($1,335 per month).

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Changes to State Retirement Systems Reflected in the Governor’s Budget Proposal

The Governor’s proposed 2017-18 budget incorporates contributions to three state-run retirement systems: the California Public Employees’ Retirement System (CalPERS), the California State Teachers’ Retirement System (CalSTRS), and the Secure Choice Retirement Savings Program that was authorized in 2016.

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 higher annual contributions in order to pay down unfunded liabilities. Both systems are evaluating long-term investment assumptions, including the “discount rate” that is used to estimate the level of contributions from the state and employers. The Governor’s proposed 2017-18 budget includes $5.3 billion ($2.8 billion General Fund) for state contributions to CalPERS for state pension costs, and $672 million General Fund for CSU retirement costs. A recent CalPERS Board decision to reduce the discount rate from 7.5 percent to 7.0 percent over the next three years (that is, to adjust downward slightly its expected rate of return on the CalPERS investment portfolio) is reflected in these estimates, resulting in additional state contributions of $172 million ($105 million General Fund) in 2017-18.

The Governor’s proposed 2017-18 budget assumes that CalSTRS will also lower its discount rate, along with changes in other investment assumptions, requiring $153 million in additional state contributions from the General Fund. State contributions to CalSTRS are expected to total $2.8 billion from the General Fund in 2017-18.

In 2016, Senate Bill 1234 created the California Secure Choice Retirement Savings Program, a state-administered retirement savings program for private-sector employees in California who are not provided with retirement savings plans at their workplace. Approximately 6.8 million private-sector workers in California do not have access to a retirement savings plan. Secure Choice provides these workers with a low-cost option for investing in their retirement security. The proposed 2017-18 budget includes a $15 million loan from the General Fund for startup and administrative costs to implement the program, which would be repaid in future years with administrative fees.

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Governor Again Proposes a 10-Year Transportation Funding and Reform Package

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 are intended to facilitate the efficient 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 proposed 2017-18 budget includes a 10-year, $43 billion transportation funding and reform package that would provide $1.8 billion in fiscal year 2017-18. The package was first introduced in 2015 and includes a mix of new revenues, additional investments of “cap and trade” auction proceeds, accelerated loan repayments, and efficiencies in the California Department of Transportation (Caltrans).

The Governor’s 10-year plan would be funded through a series of new revenue sources and redirected savings from efficiencies, including:

  • $2.1 billion from a new $65 fee on all vehicles, including hybrids and electrics.
  • $1.1 billion from the state gasoline excise tax, which would be set at the 2013-14 rate of 21.5 cents, with the broader gasoline tax adjusted annually for inflation.
  • $425 million from an 11-cent increase in the diesel excise tax, adjusted annually for inflation.
  • $500 million in additional cap-and-trade proceeds.
  • $100 million from cost-savings reforms in Caltrans.

It is likely that the new or increased revenue sources would require a two-thirds vote in each house of the Legislature.

These revenues, split evenly between state and local governments, would be used for investments in repairing and maintaining existing infrastructure, particularly state highways, local roads, and public transit.

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Administration Acknowledges Housing Crisis, but Proposes No New Funding to Address the Problem

The Governor’s proposed budget includes numerous references to California’s housing crisis and its implications for families and individuals as well as employers and the economy. The Governor notes that California’s lack of affordable housing means that many people have less income to spend on taxable goods, which weakens sales and use tax revenues — a key revenue source for the state budget. In addition, high and rising housing costs make it harder for employers to attract skilled workers in certain areas of the state, and if businesses cannot relocate to lower-cost areas, the state’s job growth could stall. In fact, the Governor identified the state’s housing crisis as a key threat to the state’s economy over the next few years.

Although the Administration views the housing crisis as one of the major challenges facing California, the proposed budget includes no new funding to address the problem. Instead, the Governor eliminates $400 million set aside for affordable housing programs in the 2016-17 budget agreement. These dollars were to be allocated only if lawmakers modified the local review process for certain housing developments, as proposed by the Governor last year. The Legislature did not adopt the Governor’s so-called “by-right” proposal, and so these funds will not be available for affordable housing. The Governor also eliminates $45 million for the Housing and Disability Advocacy Program, established in the 2016-17 budget agreement. The purpose of this program was to help people who are homeless or at risk of homelessness and who have a disability to access appropriate benefits.

Budget documents state that the Administration is “committed to working with the Legislature on the development of a legislative package to further address the state’s housing shortage and affordability pressures.” However, the Governor makes clear that he is not willing to provide resources through the state budget to finance any solutions, as he states that this legislative package “should not rely on the General Fund.” Instead of proposing concrete solutions, the Governor outlines several principles for housing policy, which include reducing local barriers that prevent, slow down, or drive up the cost of housing developments.

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Governor Makes $2.2 Billion Allocation Plan for Cap-and-Trade Revenues Dependent on Legislative Action Affirming Program

Established by the California Global Warming Solutions Acts of 2006 (Assembly Bill 32), California’s “cap and trade” program sets a statewide limit on the emission of greenhouse gases (GHGs) and authorizes the Air Resources Board to auction off emission allowances. Proceeds from these auctions are invested in activities that seek to reduce GHG emissions.

Since cap-and-trade auctions began in 2012, the state has allocated more than $3 billion in proceeds from them. However, the revenues from individual auctions have varied widely over the past the year, a predicament that the Administration attributes in part to “perceived legal uncertainty” about the program beyond 2020.

The Governor’s budget proposal calls on the Legislature to confirm, by a two-thirds vote in both the State Senate and the Assembly, the Air Resources Board’s authority to administer the cap-and-trade program beyond 2020. Contingent on this legislative action, the Governor proposes a $2.2 billion Cap and Trade Expenditure Plan for 2017-18, with the dollars allocated to high-speed rail and other transit investments, affordable housing, pollution-reduction projects, and other activities aimed to promote sustainability and energy efficiency.

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Proposition 57, which will appear on the November 8, 2016 statewide ballot, would amend the California Constitution to give state officials new policy options for reducing incarceration. The measure also would amend state law to require youth to have a hearing in juvenile court before they could be transferred to adult court. This Issue Brief provides an overview of this ballot measure as well as its potential impact on the state correctional system and the state budget. The California Budget & Policy Center neither supports nor opposes Prop. 57.

What Would Proposition 57 Do?

Prop. 57, “The Public Safety and Rehabilitation Act of 2016,” would amend the California Constitution to give state officials new flexibility to reduce the number of people incarcerated by the state. The measure would (1) create a new parole consideration process for people convicted of a nonviolent felony offense who are sentenced to state prison and (2) provide state corrections officials with new authority to award certain credits that reduce the length of state prison sentences. In addition, Prop. 57 would amend state law to require youth to have a hearing in juvenile court before they could be transferred to adult court for prosecution.

Proposition 57 Would Create a New Parole Consideration Process for People Convicted of a Nonviolent Felony Offense

Under current state law, most people convicted of an offense that results in a state prison term receive either a determinate sentence or an indeterminate sentence.

  • A determinate sentence is a prison term with a specified release date. Once individuals have completed their sentence, they are automatically released to parole, meaning that they are supervised in the community for a set period by state parole agents or county probation officers.
  • An indeterminate sentence does not have a specified release date. Instead, individuals serve a life term with the possibility of parole. After serving a minimum required number of years, individuals go before the Board of Parole Hearings, which determines “if or when an offender can be returned to society.”

For each type of sentence, the length of the prison term handed down by a judge often reflects sentencing “enhancements” or alternative sentences that are required by state law. For example, under California’s “Three Strikes and You’re Out” law, a person with one prior conviction for a violent or serious felony who is convicted of any new felony — a “second-strike” offense — receives a prison term that is twice what it would otherwise be under state law. People with at least two prior “strike” convictions who are convicted of a new serious or violent felony — a “third-strike” offense — receive a life sentence with a minimum term of 25 years.

Prop. 57 would amend the state Constitution to create a new parole consideration process for people convicted of a “nonviolent felony offense” who are sentenced to state prison. An individual would be eligible for parole consideration “after completing the full term for his or her primary offense.” The measure defines “full term for the primary offense” as follows: “the longest term of imprisonment imposed by the court for any offense, excluding the imposition of an enhancement, consecutive sentence, or alternative sentence.” This new parole consideration process would apply to people serving determinate sentences as well as to some individuals serving indeterminate sentences. Prop. 57 would require the California Department of Corrections and Rehabilitation (CDCR) to adopt regulations implementing this provision and to certify that such regulations “protect and enhance public safety.”

Proposition 57 Would Give State Corrections Officials New Constitutional Authority to Award Sentencing Credits in Order to Reduce Prison Terms

Under current state law, certain incarcerated adults are eligible to earn sentencing credits to reduce their prison terms. For example, state law gives the CDCR the authority to award a specific amount of credits to individuals who exhibit good behavior and/or complete “approved rehabilitative programming,” such as academic coursework, vocational training, and substance use disorder treatment. In addition, state law limits the amount of credits that prisoners may earn, outlines circumstances under which individuals may lose or be denied credits, and prohibits some individuals — including those convicted of murder — from earning any credits at all.

Prop. 57 would amend the state Constitution to give the CDCR authority “to award credits earned for good behavior and approved rehabilitative or educational achievements.” This new authority would be in addition to any authority granted to the CDCR through state law. Prop. 57 would require the CDCR to adopt regulations implementing this provision and to certify that such regulations “protect and enhance public safety.”

Proposition 57 Would Require Youth to Have a Hearing in Juvenile Court Before They Could Be Transferred to Adult Court

Under current state law, youth ages 14 to 17 who are accused of certain crimes can be tried in adult court. In some circumstances, state law requires the juvenile to be tried as an adult. In other situations, prosecutors have the discretion to directly file charges against a youth in adult court. In the remaining cases, a juvenile court judge decides — if so requested by a prosecutor — whether a youth should be transferred to adult court.

Prop. 57 would amend state law to require youth to have a hearing in juvenile court before they could be transferred to adult court for prosecution. As a result, under Prop. 57, “the only way a youth could be tried in adult court is if the juvenile court judge in the hearing decides to transfer the youth to adult court,” according to the Legislative Analyst’s Office (LAO). In addition, the measure would allow prosecutors to seek transfer hearings only for 16- and 17-year-olds accused of committing a felony, or for 14- and 15-year-olds accused of committing certain crimes outlined in state law, including murder, kidnapping, arson, and certain sex offenses.

Future Amendments to Proposition 57 Would Require Voter Approval in Some Circumstances

Both the statutory and the constitutional provisions of Prop. 57 could be amended:

  • Statutory provisions. The statutory provisions of Prop. 57 revise the process by which youth may be transferred to adult court. Changes to these provisions that “are consistent with and further the intent of” Prop. 57 could be approved in a bill passed by a majority vote of each house of the Legislature and signed by the Governor. The Legislature and the Governor could approve other types of changes to these provisions, but any such changes would also require voter approval.
  • Constitutional provisions. The constitutional provisions of Prop. 57 create a new parole consideration process and give state officials new authority to award sentencing credits. These provisions could be amended only by a subsequent vote of the people.

California Has Substantially Reduced Incarceration in Recent Years, But Significant Challenges Remain

In recent years, California has made significant progress in reducing the number of people involved with the state correctional system. The number of adults incarcerated by the state, which peaked at more than 173,600 in 2007, has declined to roughly 128,900, a reduction of more than one-quarter. This decrease resulted largely from criminal justice reforms adopted by state policymakers and by the voters in the years following a 2009 federal court order requiring California to reduce prison overcrowding to no more than 137.5 percent of the prison system’s capacity. These reforms were largely aimed at keeping people convicted of “lower-level” felonies out of state prisons, while also boosting opportunities for rehabilitation.

Despite this substantial decline in state-level incarceration, significant challenges remain. Specifically:

  • California’s prison system remains severely overcrowded. California currently houses more than 113,600 adults in 34 state prisons designed to hold a total of about 84,300 people.This means that the state prison system is operating at approximately 135 percent of capacity, which is just below the court-ordered prison population cap (137.5 percent of capacity). The state also houses about 10,800 people in “contract” facilities, including out-of-state private prisons. California contracts for bed space because the prison population cap prevents the CDCR from increasing the level of crowding in state prisons beyond the limit set by the court.
  • The number of adults incarcerated by the state is expected to increase modestly in the coming years, reaching a projected 132,070 by mid-2020. Even as the total number of adults in state custody has declined over the past few years, the number of adults “with relatively long sentences” has continued to grow. The CDCR projects that within the next year, the increase in the number of individuals with relatively long sentences “will outpace population reductions being achieved within the lower-level offender population.”
  • Spending on state corrections remains persistently high. The CDCR is slated to receive $10.5 billion from the state’s General Fund in the current fiscal year (2016-17) — the third consecutive year that state support for the CDCR will exceed $10 billion, after adjusting for inflation. The CDCR’s current share of total General Fund spending — 8.5 percent — is more than twice as high as its share was in 1980-81 (2.9 percent).

These facts suggest that additional reforms are needed in order to further decrease incarceration at the state level and substantially reduce the cost of the state correctional system.

Proposition 57 Would Likely Further Reduce the Number of People Incarcerated by the State

If approved by the voters, Prop. 57 would help to restore California’s momentum in reducing incarceration. By requiring juvenile court judges to decide whether a youth should be tried in adult court, Prop. 57 would likely reduce the number of juveniles who end up in the adult criminal justice system, thereby promoting better outcomes for youth who are sentenced for committing a crime. Moreover, the measure’s new rules regarding parole and sentencing credits could result in many prisoners being released on an accelerated timeline. Experts note that scaling back the length of prison terms is crucial to reducing correctional populations, and that doing so has little to no impact on either crime rates or recidivism. Yet, while Prop. 57 would allow prison terms to be reduced, it would not require state officials to take such a course of action. Therefore, the extent of any decrease in incarceration would depend on how state officials interpret and implement the measure.

Some People Convicted of Nonviolent Offenses Could Be Released From Prison More Quickly Due to the New Parole Consideration Process

Prop. 57 would require the state parole board to conduct parole consideration hearings for prisoners who were convicted of a nonviolent felony offense and who have completed the full term for their primary offense. In other words, individuals would be considered for release from prison prior to serving time for other offenses and/or for any sentencing enhancements that may have been added to their base term. This new parole consideration process would apply to roughly 30,000 current prisoners as well as to about 7,500 of the individuals who are expected to enter state prison each year, according to the LAO.

Yet, although the parole board would have to conduct potentially thousands of additional parole consideration hearings, board commissioners — who are appointed by the Governor — would not be required to grant early release to any state prisoners who would be affected by Prop. 57. Decisions about which prisoners to release presumably would adhere to the parole board’s current guidelines, under which commissioners determine if an individual poses “a current, unreasonable risk” of danger to the public. Still, it is likely that some people affected by Prop. 57 would be found to meet these guidelines and thus would be released from prison earlier than their full sentence requires.

Some People Could Be Released From Prison More Quickly Due to the CDCR’s New Authority to Award Sentencing Credits

Prop. 57 would give state corrections officials broad new discretion to award sentencing credits for good conduct and rehabilitative or educational achievements in order to reduce the amount of time that people spend in prison. The CDCR could award more credits than currently allowed and/or provide credits to prisoners who are otherwise prohibited from earning credits. For example:

  • State law generally allows eligible prisoners to earn one day of credit for each discipline-free day that they serve. Under Prop. 57, state corrections officials could — but would not have to — provide additional credits for each day of good behavior.
  • State law also allows eligible prisoners to earn credits for successfully completing rehabilitative programs. However, these “milestone” credits may reduce a prisoner’s sentence by no more than six weeks in a 12-month period. Under Prop. 57, state corrections officials could — but would not have to — lift this six-week limitation and allow individuals who earn sufficient milestone credits to further reduce their prison terms within a 12-month period.
  • State law prohibits some prisoners, including those convicted of specified violent offenses, from earning credits for completing rehabilitative programs. Under Prop. 57, the CDCR could — but would not be required to — allow these individuals to earn credits for participating in rehabilitative programs, thereby reducing the length of their terms and increasing the chances that they will be able to successfully integrate back into their communities when they are released.

Because the CDCR is part of the Governor’s administration, Governor Brown and his successors would ultimately determine whether, or by how much, to increase the amount of credits that state prisoners could earn for good conduct and/or for completing rehabilitative activities. If voters approve Prop. 57, Governor Brown could implement expansive new credit-earning opportunities aimed at promoting rehabilitation and substantially reducing the state prison population. Alternatively, he could take a more limited approach that only modestly increases credits beyond the levels already provided. Moreover, whatever decisions Governor Brown makes could be maintained, modified, or rescinded by subsequent governors.

Proposition 57 Would Likely Generate Annual State Savings

The various provisions of Prop. 57 are expected to result in state budget savings. The LAO projects that net state savings would likely be “in the tens of millions of dollars annually,” while also acknowledging that their estimates “are subject to significant uncertainty.” Most of these savings are attributed to the provisions of Prop. 57 that apply to adults in state prison: the new parole consideration process and the new authority for state corrections officials to award sentencing credits. However, it is not known how state officials would interpret and implement Prop. 57’s new options for reducing incarceration. Therefore, annual state savings could be higher or lower than the LAO projects.

What Do Proponents Argue?

Proponents of Prop. 57, including Governor Brown and the Chief Probation Officers of California, argue that the measure focuses “resources on keeping dangerous criminals behind bars, while rehabilitating juvenile and adult inmates and saving tens of millions of taxpayer dollars.” They further argue that “without a common sense, long-term solution, we will continue to waste billions and risk a court-ordered release of dangerous prisoners.”

What Do Opponents Argue?

Opponents of Prop. 57, including the San Francisco Police Officers Association and the California District Attorneys Association, argue that the measure will allow “state government bureaucrats to reduce many sentences for ‘good behavior,’ even for inmates convicted of murder, rape, child molestation, and human trafficking.” Prop. 57, they argue, “will likely result in higher crime rates as at least 16,000 dangerous criminals…would be eligible for early release.”

Conclusion

Prop. 57 would provide California officials with new policy tools to address ongoing overcrowding in state prisons. Under the measure, thousands of individuals who were convicted of a nonviolent felony offense would go before the state parole board each year to be considered for release from prison prior to serving their complete sentence. In addition, state corrections officials would gain broad new authority to award sentencing credits in order to reduce the amount of time that people spend in prison. Finally, Prop. 57 would require juvenile court judges to decide whether youth should be tried in adult court. This change would likely reduce the number of juveniles who end up in the adult criminal justice system, thereby promoting better outcomes for youth who are sentenced for committing a crime.

Prop. 57 would not reform California’s complex and often draconian Penal Code, which continues to overly rely on incarceration as the consequence for committing a crime, rather than promoting community-based interventions that could provide better avenues for rehabilitation. Consequently, the measure would not directly reduce the number of people who are sentenced to prison in the first place. However, Prop. 57 would provide new opportunities for state officials to mitigate the impact of California’s sentencing laws by accelerating the release of individuals who merit such consideration, particularly where doing so would promote rehabilitation, public safety, and the cost-effective use of limited public resources. Yet, while Prop. 57 would allow prison terms to be reduced, it would not require state officials to take such a course of action. Therefore, the extent of any decrease in incarceration would depend on how state officials interpret and implement the measure.

Ballot Propositions
Justice System

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Proposition 51, which will appear on the November 8, 2016 statewide ballot, would authorize $9 billion in general obligation (GO) bonds for K-12 school and community college facilities. The measure would maintain California’s current financing system under which state and local dollars are used to pay for K-12 school and community college facilities. This Issue Brief provides an overview of Prop. 51 and the policy issues it raises. The California Budget & Policy Center neither supports nor opposes Prop. 51.

What Would Proposition 51 Do?

Prop. 51, the “Kindergarten Through Community College Public Education Facilities Bond Act of 2016,” would authorize $9 billion in GO bonds for construction and modernization of K-12 school and community college facilities. The measure would provide $7 billion in bond proceeds for K-12 education facilities:

  • $3.0 billion for construction of new school facilities;
  • $3.0 billion for modernization of school facilities;
  • $500 million for charter school facilities; and
  • $500 million for career technical education facilities.

Prop. 51 would also provide $2 billion in bond proceeds for California Community Colleges (CCC). These funds could be used for a variety of projects, including:

  • Purchasing land;
  • Constructing new facilities on existing campuses;
  • Renovating and reconstructing facilities;
  • Paying for planning and preconstruction costs for community college facilities; and
  • Equipping new, renovated, or reconstructed facilities.

Prop. 51 would maintain the current system for allocating bond funds for K-12 and CCC facilities. In addition, with respect to K-12 facilities only, state policymakers would be prohibited from changing the rules for allocating Prop. 51’s bond funds unless approved by the voters.

How Has California Historically Funded K-12 School and Community College Facilities?

Until the 1940s, California’s school districts primarily used local GO bonds to fund school facilities. The state did not get involved in financing school facilities until 1947, when the Legislature established the State Allocation Board (SAB) to provide funds for the construction and renovation of schools. California voters approved the first statewide school bond two years later, and the SAB began to provide loans to school districts to finance new school construction. To obtain a loan from the state, school districts had to demonstrate that they had maximized their ability to raise bond dollars at the local level and also had to receive approval of at least two-thirds of local voters to incur the debt to the state.

In 1978, California voters approved Prop. 13, which severely restricted the ability of school districts to issue GO bonds — the primary source of local revenue for new school construction and modernization. Prop. 13 capped local property tax rates at 1 percent, reducing property tax revenues by more than half. This reduction in revenues severely limited the ability of local governments, including school districts, to finance facilities with locally generated property tax revenues and, furthermore, prevented the imposition of additional tax rates dedicated to the repayment of debt. In response, the Legislature began to shift how the state financed school facilities — from issuing loans to providing grants.

In 1986, California voters approved Prop. 46, which re-established the ability of local school districts to issue GO bonds. The measure allowed local governments to levy property tax rates above 1 percent to pay off the principal and interest on bonds used to finance the acquisition or improvement of public facilities with the approval of two-thirds of local voters. This gave local governments, including K-12 school districts and CCC districts, the ability to increase property taxes above Proposition 13’s 1 percent cap for a very specific purpose — the repayment of voter approved debt.

How Does California Currently Pay for K-12 School and Community College Facilities?

California’s system of financing facilities for K-14 education involves a combination of state and local dollars. To receive state funding for facilities projects, K-12 schools and community colleges usually must make their own contributions toward them. The state and local districts (K-12 and CCC) both use GO bonds as the main source of funds for facilities.

  • State GO bond measures must be placed on a statewide ballot, either by a two-thirds vote of the Legislature and approval of the Governor or through the initiative process, where they require approval by a majority of voters. The principal and interest on state GO bonds are paid from the state’s General Fund, which is supported by state taxpayers.
  • Under state law, submitting a local GO school bond measure to voters requires the support of two-thirds of the governing board of a K-12 school district or community college district. Most GO bonds proposed by K-12 school and CCC districts require approval by at least 55 percent of local voters. Once local GO school bonds are issued they are repaid by taxpayers within the district.

K-12 school districts have an additional option for raising dollars to construct or reconstruct schools — imposing fees on developers. In 1986, the Legislature authorized K-12 school districts to levy developer fees on new residential, commercial, and industrial developments, but limited these fees based on the square footage of the development. In practice, developer fees were limited to 50 percent of a school district’s cost as long as state funds were available for new school facility construction. California voters have not passed a state GO bond for school facilities since 2006, and according to the SAB, state funds for new school construction ran out earlier this year. As a result, K-12 school districts are now able to levy developer fees that could cover 100 percent of the cost to build new schools. However, school districts in areas of the state that lack new developments do not have the opportunity to levy developer fees to fund school facilities projects.

How Does the State Allocate Dollars for K-12 School Facilities?

State dollars for the current K-12 facilities program are allocated through the School Facilities Program (SFP). Established by the Legislature in 1998, the SFP funds two major types of school construction projects: new school construction and modernization. SFP funding is allocated primarily through per-student grants to participating K-12 school districts on a first-come, first-served basis. State grants are intended to pay for 50 percent of the costs of a new construction project and 60 percent of modernization project costs.

State construction and modernization grants from the SFP are not provided to school districts until local matching funds are secured. K-12 school districts that are unable to provide the required local match may apply for funding under the state’s Financial Hardship Program (FHP). However, school districts must meet several requirements to receive FHP dollars, including demonstrating that they are unable to contribute the full local match and levying the maximum level of developer fees.

The SFP also provides funding for charter school and career technical education facilities. The Charter School Facilities Program provides funding to construct new charter schools and/or rehabilitate existing facilities that are at least 15 years old and are owned by school districts. The Career Technical Education Facilities Program provides funding to construct new career technical education facilities, modernize existing facilities, and/or purchase equipment for the career technical education programs. State grants are intended to provide 50 percent of the total project costs for charter school and career technical education facilities, but career technical education grants are capped at $3 million for new facilities and $1.5 million for modernization of existing facilities.

How Does the State Allocate Dollars for Community College Facilities?

State funding for community college facilities is allocated through the state budget. To apply for state funds, local CCC districts submit proposals for facilities projects to the CCC Chancellor’s Office. The Chancellor’s Office ranks projects based on several criteria, including prioritizing projects with larger local contributions, and each year submits a capital expenditure plan to the state. The Governor and Legislature approve specific CCC facilities projects as part of state’s annual budget act.

What Are California’s Facilities Needs for K-14 Education?

K-12 Schools

California does not maintain a comprehensive statewide inventory of K-12 school facilities, their capacity, or whether they meet the needs of California’s students. As a result, it is difficult to determine projected future costs for K-12 school facilities.

A 2015 report from the Legislative Analyst’s Office (LAO), which used the replacement cost of existing buildings to assess future K-12 facilities needs, estimated that it would cost $200 billion to replace all California school buildings. The LAO estimated that school districts would have to spend between $4 billion and $8 billion per year for building replacement, modernization, or maintenance, assuming a “useful school building life” of 25 to 50 years. Based on LAO’s estimates, projected costs for K-12 school facilities could range from $40 billion to $80 billion over a decade, without adjusting for inflation.

California Community Colleges

The CCC Chancellor’s Office estimates approximately $40 billion in unmet needs for CCC facilities from 2017-18 through 2026-27. The CCC Chancellor estimates that $20.3 billion in local GO bonds remain uncommitted and may be used to fund these needs, leaving $19.7 billion remaining to be funded by state GO bonds.

Since the Late 1990s, K-12 and Community College Districts Have Contributed Far More for Facilities Than the State

Local districts have raised more dollars for school facilities than the state has over the past two decades. Since 1998, K-12 school and community college districts have sold approximately $85 billion in local GO bonds for facilities projects — more than twice the $40 billion in state GO bonds sold to support facilities for K-14 education. During the same period, K-12 school districts have also raised an additional $10 billion for facilities by imposing fees on developers.

What Policy Issues Does Proposition 51 Raise?

Who Should Pay for California’s K-12 School and Community College Facilities?

Most observers agree that significant funding is needed for new school and community college construction and for modernization of existing K-12 and CCC facilities. However, there is an ongoing debate over who should pay for these costs, and in what proportion. Prop. 51 would authorize additional state GO bond dollars for school and community college facilities, but it is uncertain how much funding K-12 school or CCC districts would raise for facilities at the local level if the measure is approved.

California voters made it easier for K-12 school and CCC districts to raise local dollars for facilities projects when they approved Prop. 39 in 2000. The measure reduced the threshold for voter approval of local GO school bonds from two-thirds to 55 percent. K-12 school and CCC districts that approve local GO bonds raise funds for facilities by increasing property tax rates to repay the bonds. Yet at the same time that Prop. 39 made it easier to pass school facilities bonds, the Legislature capped the tax rates that districts can levy on local taxpayers to repay Prop. 39 bonds. In addition, the state also caps the outstanding debt of K-12 school and CCC districts based on the total assessed property value in the district. Both of these caps limit the dollars K-12 school and community college districts can raise through local GO bonds.

Should California Change How It Allocates Funding for K-12 School Facilities?

Prop. 51 would maintain the requirements of the state’s School Facilities Program and would prohibit state policymakers from changing SFP rules for allocating its bond funds unless approved by the voters. Governor Jerry Brown has pointed to significant shortcomings and inequities with the SFP and has signaled a desire to create a program focused on K-12 school districts with greatest need. To address the Governor’s concerns, the state Department of Finance convened meetings to discuss a new school facilities program and obtain feedback from stakeholders, but no agreement was reached as to program design. This lack of agreement set the stage for Prop. 51, which would provide state dollars for K-12 school facilities, but would also essentially lock in a system that disadvantages certain school districts. For example, under the state’s current SFP, dollars for K-12 facilities are allocated primarily on a first-come, first-served basis, which tends to reward school districts that are able to apply for funding more quickly and/or have more resources, such as larger districts with more staff.

Recent research has pointed to other inequities. In a 2015 report, the University of California, Berkeley’s Center for Cities & Schools found that:

  • School districts that have more taxable property value per student along with higher-income families, on average, raise more capital funds to pay for facilities needs than districts with less taxable property value per student and families with lower incomes.
  • On average, school districts serving the largest share of students from low-income families spent less per student on capital outlay — the construction and purchase of facilities — than districts serving the smallest share of students from low-income families. Because lower-income districts spent less on capital outlay, the study found, these districts spent more of their general operating budgets on facilities maintenance, in turn leaving fewer dollars available for education programs.

The Governor’s 2016 Five-Year Infrastructure Plan recommends that a new facilities program should target state funding for K-12 school districts most in need, including districts with low per-student assessed property value and limited capacity to finance facilities projects. However, Prop. 51 would require that dollars provided by the measure be distributed according to current rules for allocating K-12 facilities dollars, unless voters approve changes to these rules. This provision means that the Prop. 51 funds could not go toward creating the type of school facilities program the Governor recommends.

Should California Change How Much K-12 School Districts Can Levy in Developer Fees?

Prop. 51 would limit the amount that K-12 school districts can levy in developer fees. Because state dollars for new school construction are no longer available, K-12 school districts are currently permitted to levy developer fees that could cover 100 percent of the cost of building new schools. However, if Prop. 51 bond dollars become available, school districts would only be allowed to levy developer fees that cover up to a maximum of 50 percent of construction costs. In addition, Prop. 51 would prohibit the Legislature from changing the fees K-12 districts may collect from developers until 2021 or until all of Prop. 51’s dollars for K-12 facilities are spent, whichever comes first.

Are General Obligation Bonds the Best Way for the State to Finance School Facilities?

Prop. 51 is the first GO bond for K-12 school or higher education facilities to appear on the state ballot since 2006. Between 1996 and 2006, in contrast, the Legislature placed five GO bond measures for K-12 school and higher education facilities on the ballot, all of which were approved by California voters. The irregular timing of the state’s GO bond issuances for school facilities has contributed to uncertainty about the availability of state funding. Moreover, by financing school facilities through GO bonds, the state is paying for an ongoing expense through a temporary funding source.

Using an alternative approach, which treats K-12 school facilities costs as an ongoing expense, the LAO has recommended that the Legislature provide K-12 districts an annual grant per student for school facilities. The grant would pay for a minimum share of a K-12 school district’s expected facilities costs and would be adjusted based on differences in property wealth and on funding already provided to school districts from state dollars.

What Would Proposition 51 Mean for the State Budget?

Prop. 51 would authorize the state to sell $9 billion in GO bonds, a form of debt backed by the state’s General Fund. The LAO estimates that the state would pay an average of $500 million per year in debt service costs for Prop. 51 bonds, less than one-fifth of the $2.7 billion the state will spend in 2016-17 to pay debt service for bonds previously sold to support K-12 school and community college facilities projects.

The California Constitution requires the state to make debt service payments for GO bonds prior to all other expenditures, other than most education expenditures. As a result, dollars the state spends on debt service are not available for other state-supported services such as health care, education, and assistance for low-income families, seniors, and people with disabilities. The state has about $85 billion in outstanding infrastructure-related bond debt backed by the state’s General Fund and paid approximately $6 billion in debt service on these bonds in 2015-16, according to the LAO. In addition, about $31 billion of General Fund-supported bonds have been authorized, but have not yet been issued.

What Could Happen if Proposition 51 Is Not Approved by Voters?

If voters reject Prop. 51, the state would remain without GO bond dollars for school facilities. The state could use alternative approaches to finance school facilities projects, including annual cash expenditures or state loans to school districts. However, to the extent these resources come from the General Fund, the state could need to raise additional revenues or reduce spending on other public services, making these alternatives less likely.

Absent state dollars, K-12 school districts and CCC districts could finance facilities using local funding, including GO bonds. However, the state limits the dollars school districts can raise through local GO bonds by capping outstanding debt based on the total assessed value of property in each district. Moreover, some school districts may not be able to receive approval for GO bonds from local voters.

As another alternative, if Prop. 51 fails, K-12 school districts could finance construction by levying additional fees on new development. Because state funding still would not be available for new K-12 school facilities construction, school districts would be allowed to levy developer fees that could cover 100 percent of the cost to build new schools. However, using developer fees to pay for school facilities is not an option for school districts in areas of the state that lack new developments.

What Do Proponents Argue?

Proposition 51 is supported by the California Building Industry Association. Proponents of Prop. 51, including the California State PTA and the Community College League of California, argue that the measure “will repair outdated and deteriorating schools and upgrade classroom technology, libraries, and computer and science labs.” Proponents also argue that Prop. 51 “will be repaid from a very small amount of the state’s existing annual revenue…[and] does not raise taxes.” Proponents of Prop. 51 claim that “without matching dollars from a statewide school bond, taxpayers will face higher local property taxes to pay for school repairs and upgrades, and some school districts may never be able to afford fixing schools on their own.”

What Do Opponents Argue?

Opponents of Prop. 51, including the California Taxpayers Action Network, argue that the measure is unnecessary as “local bond measures work better than statewide bonds …[and] school enrollment is expected to decline over the next 10 years.” Opponents of Prop. 51 note that “the Legislature did not put Proposition 51 on the ballot. And the Governor opposes it.” Opponents also argue that “Prop. 51 ties the hands of legislators and locks in current rules…that deny disadvantaged schools the help they need.”

Conclusion

Prop. 51 would authorize $9 billion in state GO bonds for construction and modernization of K-12 school and community college facilities. California voters have not had an opportunity to approve state GO bonds for K-14 education facilities since 2006, and state bond funding for this purpose effectively has been exhausted for several years. If voters reject Prop. 51, the state would remain without GO bond dollars for K-12 school and CCC facilities, leaving local districts without a key source of state support.

Prop. 51 would maintain the current systems for allocating state dollars for K-14 education facilities, which typically require contributions from K-12 school and CCC districts. However, state policymakers would be prohibited from changing the rules for allocating Prop. 51’s bond funds for K-12 facilities unless these changes are approved by the voters. In this way, Prop. 51 would essentially lock in place a system that disadvantages certain K-12 school districts.

Ballot Propositions
Education

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