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.

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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.”

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.

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.

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.

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.”

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.”

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.

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.

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.

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.

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.

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).

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.

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.

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.

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.

California Budget

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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

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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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Endnotes are available in the PDF version of this Issue Brief.

Proposition 30, approved by voters in 2012, provided critical revenues to California at a time when the state faced daunting budgetary challenges. Prop. 30’s tax rate increases are scheduled to fully expire at the end of 2018. Prop. 55, which will appear on the November 8, 2016 statewide ballot, would extend for 12 years the Prop. 30 tax rate increases that affect very-high-income Californians. Revenues generated by Prop. 55 – a projected $4 billion to $9 billion per year from 2019 through 2030 – would go to K-12 public schools, community colleges, health care for low-income Californians, the state’s rainy day fund, state debt payments, and other state services. This Issue Brief provides an overview of Prop. 55 and the policy issues it raises. The California Budget & Policy Center neither supports nor opposes Prop. 55.

What Would Proposition 55 Do?

Prop. 55, “The California Children’s Education and Health Care Protection Act of 2016,” would amend the California Constitution to (1) extend Prop. 30’s personal income tax provisions for 12 years beyond their scheduled expiration at the end of 2018 and (2) create a formula to provide additional funding for Medi-Cal from the revenues raised by the measure. Moreover, existing provisions of the state Constitution would require Prop. 55 revenues to go to K-12 public schools, community colleges, the state’s rainy day fund, and state debt payments. Specifically, Prop. 55 would:

Extend Prop. 30’s personal income tax rate increases on very-high-income Californians. Prop. 55 would extend – from 2019 through 2030 – personal income tax rates enacted by Prop. 30. Extending these rates would raise between $4 billion and $9 billion each year (in today’s dollars), according to the Legislative Analyst’s Office (LAO). Prop. 55 would allow Prop. 30’s one-quarter cent increase in the state sales tax rate to expire at the end of 2016 as scheduled.
Create a new constitutional formula to increase funding for Medi-Cal, which provides health care services to Californians with low incomes. For each fiscal year from 2018-19 through 2030-31, the Governor’s Department of Finance would be required to estimate the amount of General Fund revenues – including those raised by Prop. 55 – that are needed to:
- Meet the annual Prop. 98 minimum funding guarantee for K-12 schools and community colleges.
- Fund the cost of services that were authorized as of January 1, 2016 (excluding Prop. 98 spending), as adjusted for population changes, statutory cost-of-living increases, federal mandates, and other factors.

If any Prop. 55 revenues are estimated to remain after meeting these combined expenditures, Medi-Cal would receive 50 percent of the excess, up to a maximum of $2 billion in any fiscal year. Revenues allocated to Medi-Cal under this provision would have to add to – rather than replace – existing General Fund support for the program.

Increase funding for K-12 schools and community colleges as compared to current law. The vast majority of funding for California’s K-12 schools and community colleges is provided by the Prop. 98 minimum funding guarantee. This guarantee is based on varying economic and fiscal conditions, including state General Fund revenue collections. Other things being equal, General Fund revenues from 2018-19 to 2030-31 would be higher if voters approve Prop. 55 than if the measure is rejected. This is because Prop. 55 would extend income tax rate increases that otherwise would expire at the end of 2018 under the provisions of Prop. 30. By increasing General Fund revenues relative to current law – which assumes the expiration of Prop. 30’s income tax rates – Prop. 55 would boost the amount of Prop. 98 funding that K-12 schools and community colleges would otherwise be expected to receive during the period that Prop. 55 is in effect. About half of the revenue raised by Prop. 55 would go to K-14 education, according to the LAO.
Increase deposits into the state’s rainy day fund and repayments of state budgetary debt as compared to current law. Under Prop. 2, which voters approved in 2014, California is required to set aside a certain share of General Fund revenues each year in order to build the state’s rainy day fund (the Budget Stabilization Account) and pay down state budgetary debts, including unfunded state pension liabilities. Because Prop. 55 would increase General Fund revenues relative to current law – as explained above – the measure would result in larger debt payments and bigger deposits into the rainy day fund compared to what would be expected if voters rejected Prop 55. The LAO estimates that Prop. 55 would provide an additional $60 million to approximately $1.5 billion each year for Prop. 2 purposes.
Allow state policymakers to use any remaining revenues raised by Prop. 55 for any budget priorities. Prop. 55 revenues that remain after (1) meeting the constitutional spending obligations described above and (2) helping to maintain state services that were in place as of January 1, 2016 could be used for any public systems and services funded through the state budget. For example, these excess Prop. 55 revenues could be used to raise the number of subsidized child care slots, increase cash assistance for low-income seniors and people with disabilities, and boost state support for the California State University (CSU) and the University of California (UC).

Whose Taxes Would Proposition 55 Affect?

As noted above, Prop. 55 would extend the personal income tax rate increases of Prop. 30, but not the sales tax rate increase. Prop. 30’s income tax rate increases are aimed specifically at the highest-income households. Of the total dollar increase in income taxes brought about by Prop. 30, the top 1 percent of households pay 98.6 percent, and the next 4 percent of households pay the remaining 1.4 percent, according to the Institute on Taxation and Economic Policy (Figure 1). Prop. 55’s income tax rate increases could be expected to have a similar effect.

Compared to those of Prop. 30, Prop. 55’s overall tax-rate changes would be even more progressive. This is because Prop. 55 would not extend Prop. 30’s quarter-cent sales tax increase, which has a disproportionate impact on households with lower incomes. Prop. 55 follows the equity principle of taxation, by which taxes are levied fairly, based on the ability to pay.

Currently, California’s lowest-income families pay the largest share of their incomes in state and local taxes, while the wealthiest, who substantially benefit from public investments and have the greatest ability to contribute, pay much smaller portions of their incomes in state and local taxes. In other words, California’s tax system as a whole is regressive, even with Prop. 30’s income tax increases on the wealthiest households. If voters reject Prop. 55, California’s tax system would become even more regressive because the highest-income households would contribute a smaller share of their income in taxes than if Prop. 55 were approved (Figure 2).

Furthermore, the top 1 percent of California households – those who would be most affected by Prop. 55’s tax rate increases – have seen their average income more than double since the late 1980s, after adjusting for inflation (Figure 3). In contrast, average inflation-adjusted incomes for the bottom 80 percent of California households have declined.

What Would Rejection of Proposition 55 Mean for Public Services?

If California voters do not approve Prop. 55, the personal income tax rate increases on very-high-income Californians enacted by Prop. 30 will expire at the end of 2018. The expiration of Prop. 30’s income tax rates would:

Result in a significant loss of General Fund revenues. Fiscal year 2018-19 would lose half a year of higher personal income tax revenues and 2019-20 would lose a full year of higher revenues – a projected $4.5 billion in 2018-19 and $7.7 billion in 2019-20, with annual revenue losses continuing thereafter (Figure 4).
Create a multi-billion dollar budget deficit that would likely result in cuts to state services. With the expiration of Prop. 30’s income tax rates, the loss of billions of dollars in General Fund revenues would lead to annual multi-billion dollar state budget deficits. Under such a scenario, state policymakers would likely need to reduce spending for critical services in order to help to help balance the budget.
Reduce the Prop. 98 funding guarantee for schools and community colleges. Changes in annual General Fund revenues tend to affect the Prop. 98 guarantee. If Prop. 30’s income tax rates are allowed to expire, the projected decline in annual General Fund revenue growth would reduce Prop. 98 funding for K-14 education compared to the funding that would be required if Prop. 30’s tax rates were extended. Specifically, the Prop. 98 funding level could fall by roughly $2 billion in 2018-19 and by roughly $4 billion in 2019-20 if voters reject Prop. 55.
Restrict the state’s ability to boost investments in a broad range of critical services and systems. These include:
- The state’s child care and development system, which continues to provide tens of thousands fewer subsidized “slots” than in 2007-08, the year the Great Recession began.
- The state’s higher education system – the CSU and UC – for which direct state General Fund support per student is down substantially since the early 2000s, after adjusting for inflation.
- The CalWORKs welfare-to-work program, which provides a level of support that leaves families, including 1 million children, unable to afford even low-cost housing.
- SSI/SSP cash assistance for seniors and people with disabilities, which leaves individuals living below the poverty line and struggling to afford housing, food, and other necessities.
Result in smaller deposits into the state’s rainy day fund and lower debt payments, leaving the state less prepared for the next economic downturn. Building up reserves and paying down budgetary debt gives state policymakers additional options – beyond spending cuts – for balancing the budget and maintaining services during an economic downturn. However, the expiration of Prop. 30’s income tax rates would reduce the amount of revenues that are available for deposit into the Budget Stabilization Account and to pay down budgetary debt. As a result, critical services would likely face larger cuts if a recession significantly reduced state revenues.

In summary, allowing Prop. 30’s income tax rate increases on very-high-income Californians to expire would eliminate billions of dollars from California’s revenue system. This would leave the state with less funding to invest in schools, community colleges, and other vital public services and systems as well as reduce the state’s ability to pay down debts and save for a rainy day.

Policy Issues Raised by Proposition 55

Prop. 55 raises key policy issues, including whether to add a new funding formula for Medi-Cal to the state Constitution and whether to use temporary revenues to support ongoing services.

Adding a New Funding Formula for Medi-Cal to the State Constitution Reflects “Ballot-Box Budgeting”

By creating a new constitutional spending requirement for Medi-Cal, Prop. 55 is an example of what is commonly called “ballot-box budgeting.” On the one hand, critics of ballot-box budgeting argue that the initiative process limits voters to an up-or-down choice in isolation from other potential uses of funds. They argue that earmarking the proceeds from a certain revenue source constrains the ability of the Governor and lawmakers to use the same source for other spending priorities, to make programmatic changes, or to modify spending in response to economic, budget, and demographic shifts.

On the other hand, proponents of initiative-based spending argue that the two-thirds vote requirement for legislative approval of tax increases makes it difficult, if not impossible, to raise revenues through the legislative process to support public services and systems. As a result, they maintain that it is appropriate to offer voters the ability to raise taxes to fund specific state budget priorities.

Proposition 55 Provides Temporary Funds for Ongoing Spending

Prop. 55 extends Prop. 30’s personal income tax rate increases through 2030, but does not make those higher rates permanent. In other words, the revenues raised by Prop. 55 would eventually disappear. Given the temporary nature of these revenues, relying on them to fund permanent, ongoing services – such as K-14 education and Medi-Cal – would mean that state policymakers (and possibly the voters) would again face the question of whether to extend these tax rates, make them permanent, or find a different source of funding. If such efforts failed, state budget shortfalls would likely emerge, meaning that state policymakers would face the prospect of reducing spending on vital public services and systems.

What Do Proponents Argue?

Proponents of Prop. 55, including the California State PTA, the California Teachers Association, and State Superintendent of Public Instruction Tom Torlakson, argue that the measure will prevent “billions in budget cuts without raising taxes by ensuring the wealthiest Californians continue to pay their share.” They state that money from the measure “goes to local schools” with strict accountability requirements that “ensure funds designated for education go to classrooms,” and further that the measure “expands health care access for children.”

What Do Opponents Argue?

Opponents of Prop. 55, including the Howard Jarvis Taxpayers Association, the National Federation of Independent Business/California, and retired Superior Court Judge Quentin L. Kopp, argue that voters supported Prop. 30’s tax rate increases only “because we were promised they’d be temporary.” They assert that funding for schools and other requirements is adequate, and state that “we can’t trust the politicians and special interests.”

Conclusion

Prop. 55 would extend – from 2019 to 2030 – the personal income tax rate increases on very-high-income Californians that voters approved by passing Prop. 30 in 2012. Prop. 55 would not extend Prop. 30’s quarter-cent increase in the state sales tax rate, which would be allowed to expire at the end of 2016 as scheduled. Prop. 55 is projected to generate between $4 billion and $9 billion per year, a range that brackets the roughly $7 billion to $8 billion per year that Prop. 30 has raised to date. Prop. 55’s revenues would be used to meet various constitutional spending obligations, such as for K-14 education and for Medi-Cal, as well as to help maintain services that were in place as of January 1, 2016. After meeting these spending requirements, any Prop. 55 revenues that remained could be used for any budget priorities, including boosting working families’ access to subsidized child care, making higher education more affordable, and improving safety-net services for low-income families with children.

With Prop. 55, voters have a choice to maintain a level of funding that has allowed California to begin reinvesting in its schools and other public services after years of disinvestment during and following the Great Recession. Rejecting Prop. 55, and thus allowing Prop. 30’s income tax rate increases to expire at the end of 2018, would result in reduced state revenues, less funding for schools and community colleges, smaller deposits to the state’s rainy day fund, less repayment of budgetary debt, and – quite possibly – cuts to vital public services and systems. Moreover, California’s state and local tax system would become even more regressive because the wealthiest households – primarily the top 1 percent – would receive a substantial tax cut and thereby contribute less toward strengthening services that can promote economic security and opportunity for all Californians.

Ballot Propositions

California Budget

Taxes & Revenue

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State Policymakers Must Do More to Ensure the State’s Economy Works for Everyone

New Census figures released today show that millions of people in California continue to struggle to get by on extremely low incomes in spite of our state’s recent economic gains. Nearly 6 million Californians, including almost 2 million children, lived in poverty in 2015 based on the official poverty measure. In addition, poverty remained more widespread last year than it was in 2007 when the national recession began. Specifically, 15.3 percent of Californians had incomes below the official poverty line in 2015, down from a recent high of 17.0 percent in 2012, but still well above the state poverty rate in 2007 (12.4 percent). Also, more than 1 in 5 California children lived in poverty last year (21.2 percent), down from a recent high of 23.8 percent in 2012, but still well above the child poverty rate in 2007 (17.3 percent).

The fact that millions of people lived in families that could not adequately support themselves in 2015 — six years after the end of the national recession — underscores the need for California to do more to ensure that all people can share in our state’s economic progress. This report highlights key findings from the data released today and outlines specific steps policymakers can take to increase economic security and opportunity in California.

Figures Based on Official Poverty Measure Understate Hardship in California

Although the newest Census figures show that poverty remains unacceptably high, they understate the number of Californians struggling to get by because they reflect an outdated measure of poverty. Figures released earlier this week based on an improved measure – the Supplemental Poverty Measure (SPM) – show that nearly 8 million Californians, 1 in 5 state residents (20.6 percent), could not adequately support themselves and their families, on average, between 2013 and 2015. California also stands out as having the highest poverty rate in the nation based on the SPM.

This report, however, focuses on the official poverty measure because this measure provides a comprehensive look at state poverty trends and poverty rates for specific groups.

Children — Particularly Children of Color — Are Especially Hard Hit by Poverty

The data released today show that although children make up less than one-quarter of California’s population (23.4 percent), they account for nearly one-third of those living below the official poverty line (32.3 percent). Furthermore, black and Latino children are about three times as likely as white children to live in poverty. Nearly one-third of black children (31.0 percent) lived in poverty in 2015, as did more than 1 in 4 Latino children (28.5 percent), compared to just 1 in 10 non-Latino white children (10.3 percent). If the official poverty rate for black and Latino children were equal to that of white children, nearly 950,000 fewer California children would live in poverty, and the state’s child poverty rate would be cut in half.

Research Strongly Supports Boosting Families’ Incomes to Improve Children’s Life Chances

All parents want a strong future for their children, but parents who struggle with inadequate incomes often face challenges in creating a better life for their kids. Research strongly supports making greater public investments to boost families’ well-being so that all children — including those whose families have historically faced the greatest barriers to opportunity — can have a stronger future. Compelling evidence from national studies shows that supplementing low-income families’ incomes can increase children’s life chances. Even modest increases in the incomes of low-earning families have been linked to improved health, greater academic achievement, and higher future earnings for those families’ children. The research also suggests that increases in income matter most during children’s first few years of life when their brains are developing rapidly, making them particularly vulnerable to the damaging effects of poverty.

State Leaders Can Strengthen California’s Future by Improving Children’s Opportunities

California’s future largely depends on children whose entire lives will be shaped by the extent to which our state invests in their education, health, and well-being. That’s why California’s leaders, together with parents and teachers, share in the responsibility for ensuring that our state’s children have the opportunity to reach their full potential. State policymakers can improve children’s life chances by:

Making sure that parents earn enough to support a family. Most families in poverty work, which means that low-wage jobs and not enough work hours prevent many people from getting ahead. California’s recent commitment to gradually raise the state’s minimum wage will restore decades of wage erosion, but policymakers should do more to help workers create a more secure future. Helpful steps would include strengthening California’s new tax credit for low-earning working families, the CalEITC, and giving workers the right to fair scheduling In addition, California could do more to protect people from predatory lending practices that often trap low-income borrowers in a cycle of debt.
Helping parents to afford high-quality child care so that they can work. High-quality, affordable child care is out of reach for many California families. The typical single mother would have to spend at least half of her income to afford center-based child care for two children in nearly every county in the state, according to our Women’s Well-Being Index, and California falls far short of providing enough affordable child care slots for families that need them. At a minimum, state policymakers should develop a multi-year plan for restoring all of the subsidized child care slots eliminated by budget cuts beginning in 2007-08. However, fully addressing families’ need for affordable child care will require a significant and sustained investment in a much bolder approach that aims to provide all families with access to high-quality child care and preschool.
Helping families to afford decent housing. The majority of low-income households in California spend over half of their incomes on rent making it difficult to afford other necessities and save for the future. Policymakers could begin addressing this problem by better targeting state spending on housing assistance to people who need it most. Currently, California spends 45 times as much on the mortgage interest deduction — a tax benefit that primarily benefits households with six-figure incomes — as it does on the state’s renters’ tax credit, which provides extremely limited assistance primarily to moderate-income renters.
Making sure that families can count on a strong safety net when they experience hard times. A majority of adults will face economic hardship for at least one year during their prime working years, and nearly half will turn to a major safety net program for help. This fact underscores the importance of making sure that our public supports allow people to meet their basic needs during tough times as well as prevent children from suffering the lasting consequences of poverty. Policymakers could begin to shore up California’s safety net by strengthening CalWORKs, the state’s welfare-to-work program, which has suffered from years of disinvestment. Helpful steps would include 1) raising grants so that CalWORKs at least lifts children out of deep poverty, 2) eliminating the “asset test” to qualify for CalWORKs assistance, which discourages low-income families from saving, and 3) restoring the maximum amount of time that parents can access welfare-to-work services to 60 months in order to increase their chances of securing stable employment.
Allowing families to save and build a more secure future. Nearly half of workers ages 25 to 64 are projected to struggle to make ends meet in retirement — a problem that partly reflects inadequate access to job-based retirement plans. State policymakers are on the verge of taking an important step to help more workers prepare for a secure future. Pending approval by the Governor, a bill passed by the Legislature last month would create a voluntary, portable retirement account for workers without access to workplace savings plans. As a next step, policymakers should shore up workers’ earnings and reduce pay disparities so that more people are better able to save for the future.

All Californians have a stake in policies that give children the chance to succeed, but children cannot thrive unless their families thrive. By investing in policies that increase families’ well-being, policymakers can create a stronger future for California’s children — and for all of us.

Poverty & Inequality

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State Leaders Must Do More to Promote Economic Security and Opportunity

Nearly 8 million Californians — 1 in 5 state residents (20.6 percent) — cannot adequately support themselves and their families. This is according to new Census figures released this morning based on the Supplemental Poverty Measure (SPM), a more accurate indicator of economic hardship than the official poverty measure. California also continues to have the highest poverty rate in the nation based on the SPM.

The new Census data also show that:

California’s high housing costs are a key obstacle preventing more people from getting ahead. The SPM improves on the official poverty measure by better accounting for differences in the cost of living across the US. When California’s high housing costs are factored in, a much larger share of the state’s population is living in poverty: 20.6 percent under the SPM, compared to 15.0 percent under the official measure. Accounting for housing costs boosts California’s poverty rate to the highest of any state, up from 17th highest under the official poverty measure.

Public investments improve the lives of millions of Californians. The SPM factors in a broader array of resources that people use to meet their basic needs, making it possible to gauge the extent to which public investments reduce poverty. Major federal and state programs — including Social Security, CalFresh food assistance, and tax credits for working families, such as the federal Earned Income Tax Credit (EITC) and child tax credit — lifted an estimated 4.9 million Californians, including 1.4 million children, above the poverty line each year, on average, between 2009 and 2012. Without these critical investments, millions more Californians would be struggling to get by.

California’s Leaders Can Do More to Promote Economic Security and Opportunity

The new poverty figures out today underscore the urgent need for California’s leaders to do more to help individuals and families who are struggling. In particular, the SPM shows that while public investments help to reduce hardship, they need to go further in a high-cost state like California where a majority of low-income residents spend over half of their incomes on housing. Policymakers can increase economic security and opportunity in our state by investing in good jobs, affordable housing, and a strong safety net; making it easier for people to save for emergencies and build a secure retirement; and allowing more families to access high-quality, affordable child care, preschool, and higher education so that children and youth have greater opportunities to move up the economic ladder. Prioritizing these types of investments would allow more people to fully contribute to our communities and economy and would lay the groundwork for a more prosperous future for California.

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About the Census Bureau Data Released Today

The state-level figures released today reflect average annual poverty rates during a three-year period, from 2013 to 2015.

The SPM addresses a number of shortcomings of the official poverty measure. One is the fact that under the official measure, the income threshold for determining who lives in poverty is the same in all parts of the US. For example, a parent with two children was considered to be living in poverty in 2015 if their annual income was below about $19,096, regardless of whether they lived in a low-cost place like rural Mississippi or a high-cost place like San Francisco. The SPM better accounts for differences in the cost of living by adjusting the poverty threshold to reflect differences in the cost of housing throughout the US.

Another shortcoming of the official poverty measure is that it fails to factor in the broad array of resources that families use to pay for basic expenses. The official measure only counts cash income sources, such as earnings from work, Social Security payments, and cash assistance from welfare-to-work programs. It does not take into account noncash resources, such as food or housing assistance, and it fails to consider how tax benefits, such as the federal EITC, increase people’s economic well-being. The SPM improves on the official measure by including these resources. It also better accounts for the resources people actually have available to spend by subtracting from their incomes what is needed to pay for necessary expenses, including work-related expenses, such as child care; medical expenses, such as health insurance premiums and out-of-pocket costs; and state and federal income and payroll taxes.

Although the SPM provides a more accurate picture of economic hardship in California, it does not indicate how much people need to earn to achieve a basic standard of living. Measures of what it actually takes to make ends meet in California show that families need incomes several times higher than the poverty line to afford basic necessities.

Poverty & Inequality

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Sanctuary Cities and Federal Funds: How Will California Be Affected?

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Water’s Edge: Closing the Largest Corporate Tax Loophole in California

Profitable Corporations Can’t Keep Paying Zero in California State Taxes

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Water’s Edge: Closing the Largest Corporate Tax Loophole in California

Profitable Corporations Can’t Keep Paying Zero in California State Taxes

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Executive Summary

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 a 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

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Water’s Edge: Closing the Largest Corporate Tax Loophole in California

Profitable Corporations Can’t Keep Paying Zero in California State Taxes

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What Would Proposition 57 Do?

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

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

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

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

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

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

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

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

Proposition 57 Would Likely Generate Annual State Savings

What Do Proponents Argue?

What Do Opponents Argue?

Conclusion

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California Passed Prop. 1: What’s Next for Behavioral Health System Reform?

Understanding Proposition 35

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What Would Proposition 51 Do?

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

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

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

How Does the State Allocate Dollars for Community College Facilities?

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

K-12 Schools

California Community Colleges

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

What Policy Issues Does Proposition 51 Raise?

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

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

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

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

What Would Proposition 51 Mean for the State Budget?

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

What Do Proponents Argue?

What Do Opponents Argue?

Conclusion

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Trends in Transitional Kindergarten Enrollment in California

How California Is Expanding Transitional Kindergarten

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What Would Proposition 55 Do?

Whose Taxes Would Proposition 55 Affect?

What Would Rejection of Proposition 55 Mean for Public Services?

Policy Issues Raised by Proposition 55

Adding a New Funding Formula for Medi-Cal to the State Constitution Reflects “Ballot-Box Budgeting”

Proposition 55 Provides Temporary Funds for Ongoing Spending

What Do Proponents Argue?

What Do Opponents Argue?

Conclusion

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