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Subsidized Child Care and Development Programs Vary by Race and Ethnicity

May 2017 | By Kristin Schumacher

This analysis is the second part of a multiphase effort to analyze subsidized child care and development programs in California. (Read the first part.) Future phases of this work will examine the unmet need for subsidized child care for children from birth through age five.

Abstract

California’s child care and development system allows parents with low and moderate incomes to find and maintain employment while providing care and education for their children. On average, from 2013 to 2015, more than 1.5 million children were eligible for subsidized programs, but only 13 percent were served in a program that could accommodate families for a full day and throughout the year. While the share of eligible children participating in these programs was low across all racial and ethnic groups, Asian and Latino children had the smallest share of eligible children enrolled in subsidized care. There are a number of reasons why Asian and Latino children could have lower rates of participation, including the rapid population growth of these two groups over the past decade; immigration- and language-related barriers to accessing subsidized care; and difficulties in utilizing subsidized care while working in low-wage jobs. Policymakers should substantially boost funding for the subsidized child care and development system to allow for greater participation for all children, in addition to addressing burdensome eligibility and reporting rules and increasing subsidized child care provider payment rates, which could improve access for many families in California.

Ensuring that children receive a strong education is one of the keys to shared economic prosperity. Learning begins even before birth, so it is imperative that all children get a solid start in early childhood in order to be prepared to learn when they enter kindergarten.[i] Unfortunately, poverty has a powerful, negative impact on children in their early years, and substantial disparities exist at the intersection of race, ethnicity, and family income.[ii] Latino and black children are significantly more likely to live in poverty than their white and Asian peers, and these disparities result in developmental gaps that can emerge very early and with lifelong consequences. [iii]

Ensuring that families have access to high-quality child development programs can mitigate the effects of poverty and close gaps in learning and development. However, largely due to inadequate state and federal funding, only a small fraction of families who are eligible for California’s subsidized child care and development programs receive care. On average, from 2013 to 2015, more than 1.5 million children from birth through age 12 were eligible for subsidized care in California, according to a California Budget & Policy Center analysis of federal survey data.[iv] Yet, on average, just 210,000 children (13.2 percent) were enrolled in a program that could accommodate families for an entire day and throughout the year.[v]

In addition, enrollment in California’s subsidized child care and development programs varies by race and ethnicity (see chart below).[vi] During the three-year period from 2013 to 2015:

  • The share of eligible children enrolled in a subsidized child care and development program was low across all racial and ethnic groups, ranging from 7.8 percent of the eligible population for Asian children to 31.8 percent for black children. Even for black children — the demographic group with the highest share of eligible children enrolled in a full-day, full-year program — roughly 2 out of 3 eligible children did not receive subsidized care.
  • Nearly 1.1 million Latino children were eligible for subsidized care, but only 119,000 (11.0 percent) were enrolled in a state program. Latino children are the largest child demographic group in California, accounting for slightly more than half of the state’s children.[vii]
  • Only about 1 in 13 eligible Asian children were enrolled in a subsidized program — just under 9,000 out of an estimated 112,000 eligible children (7.8 percent, as noted above).
  • An estimated 128,000 black children were eligible for subsidized care, but only 41,000 (31.8 percent, as noted above) were enrolled in a state program.
  • Fewer than 1 in 5 eligible white children received subsidized care (18.2 percent). An estimated 207,000 white children were eligible, but only 38,000 were enrolled in a full-day, full-year program.

There are various reasons why enrollment in subsidized programs could vary by race and ethnicity in our state. [viii] These include:

  • Population Growth. In part, demographic groups experiencing rapid population growth are less likely to be enrolled in subsidized care because the number of child care and development “slots” has not kept up with this growth.[ix] For example, over the last decade the Asian child population in California (from birth through age 12) increased by 14.3 percent and the Latino child population grew by 7.8 percent.[x] At the same time, funding for subsidized care decreased and the number of slots shrank as state policymakers made dramatic cuts during and after the Great Recession. As noted above, Asians and Latinos have a markedly lower share of eligible children enrolled in subsidized care, as compared to white and black children.
  • Immigration- and Language-Related Barriers. Navigating California’s subsidized child care and development system can be complicated, and families with low incomes may encounter barriers to accessing subsidized care. This is especially true for low-income families with immigrant parents or with parents who have limited English proficiency.[xi] In California, more than half (57.8 percent) of low-income children from birth through age 12 have at least one immigrant parent, and more than one-third (38.2 percent) of low-income children have parents who speak English less than “very well.” The majority of these children are Latino.[xii] Research shows that for these families a lack of understanding of subsidized programs, complicated eligibility and enrollment processes, and a fear of interacting with government agencies all may contribute to lower-than-expected enrollment in subsidized programs.[xiii]
  • The Nature of Low-Wage Employment. Many families in California rely on low-wage jobs that include night and/or weekend shifts, unpredictable schedules, and hours that fluctuate from month to month or even from week to week.[xiv] Working parents who have nontraditional hours or irregular schedules may use vouchers to select care from a subsidized child care provider of their choice. Many of these families rely on “license-exempt” providers — typically friends or relatives — to watch their children on short notice or during evenings or weekends. However, amid budget shortfalls due to the Great Recession, state policymakers reduced the payment rates for license-exempt providers, lowering them from 90 percent of the licensed rate to just 60 percent. For providers who watch children on a part-time basis, the payment rate is even lower — roughly one-third of the licensed rate. While the 2016-17 state budget increased the license-exempt rate, it remains much lower as a share of the licensed rate than prior to the recession and, in some cases, fails to pay even the equivalent of the minimum wage. If providers are unwilling to accept vouchers due to low reimbursement rates, this could limit low-income families’ access to care, with a disparate impact for Latinos. In California, 28.1 percent of employed Latinas work in low-wage jobs, compared to 13.2 percent of white women and 15.4 percent and 15.2 percent of Asian and black women, respectively.[xv]

Governor Brown and lawmakers can take steps to improve eligible families’ access to subsidized child care and development programs. For example, state policymakers should:

  • Substantially increase funding for subsidized child care and development programs. State policymakers could improve access to subsidized care across racial and ethnic groups in part by ending years of underinvestment. Funding for California’s subsidized child care and development programs was cut by about 40 percent (inflation-adjusted) during and after the Great Recession. While state policymakers have made reinvestments in recent years, far fewer children overall are being served in the current fiscal year than in 2007-08, at the onset of the Great Recession. Significantly boosting funding for subsidized care would help to address the lack of access among every racial and ethnic group.
  • Address eligibility reporting rules that are especially burdensome for families that face barriers to accessing subsidized care. Current rules for subsidized care require parents to resubmit eligibility information in a wide variety of situations — such as changes in income or to a work or class schedule — often resulting in frequent re-reporting by families within a given 12-month period. These reporting rules are burdensome for all families, but especially for families with variable work schedules, immigrant families, and for families that have limited English proficiency.[xvi] Further, these arduous reporting requirements can cause disruption in caregiving for children, undermine parents’ employment, and even lead to the premature loss of subsidized care.[xvii] A proposal in the state Legislature — Assembly Bill 60 (Santiago & Gonzalez Fletcher) — would bring California into compliance with federal regulations by creating a 12-month window of eligibility for subsidized care once families have secured a child care slot. A 12-month window of eligibility would reduce barriers to care; allow more children to benefit from stable, positive relationships with caregivers, thus enhancing child development; and also help parents maintain employment and increase earnings.[xviii]
  • Continue to increase payment rates for subsidized child care providers, including license-exempt providers. Families access child care and preschool programs via licensed child care providers that contract directly with the state or by using vouchers to select the child care provider (licensed or license-exempt) of their choice. During and after the Great Recession, policymakers failed to update the payment rates for these providers, and even cut the payment rate for license-exempt providers. Lack of funding for payment rates means that the providers may not be able to reimburse employees at a level that is commensurate with their experience and education or cover other operational costs. Recent years’ investments in provider payment rates have resulted in modest gains, but policymakers have much further to go. As California’s minimum wage increases to $15 per hour in coming years, many child care workers will receive a much-needed raise.[xix] If reimbursement rates are not increased annually to keep pace with the minimum wage, this will continue to place a strain on providers that offer subsidized care. Moreover, as mentioned previously, policymakers cut license-exempt provider payment rates from 90 percent to 60 percent of the licensed rate for family child care homes. While the 2016-17 budget agreement increased the payment rates to 70 percent of the licensed rate, policymakers should increase the payment rates even further to ensure that license-exempt providers are paid at least the equivalent of the minimum wage.

Children are the engine that will drive California forward in years to come. Investing in our state’s child care and development system can increase families’ economic security and, in turn, boost children’s health and well-being. These are some of the first steps necessary to improving school readiness and closing achievement gaps that affect low-income children and children of color. Making greater investments in our state’s subsidized child care and development system, and improving access for eligible children, will not only change children’s lives, but will also maximize California’s future potential.

Endnotes

[i] Center on the Developing Child, Harvard University, Five Numbers to Remember About Early Childhood Development (2009) and Christine Moon, Hugo Lagercrantz, and Patricia K. Kuhl, “Language Experience In Utero Affects Vowel Perception After Birth: A Two-County Study,” Acta Paediatrica 102 (2013), pp. 156-160.

[ii] Emma García, Inequalities at the Starting Gate: Cognitive and Noncognitive Skills Gaps Between 2010-2011 Kindergarten Classmates (Economic Policy Institute: June 2015) and Nicole L. Hair, et al., “Association of Child Poverty, Brain Development, and Academic Achievement,” JAMA Pediatrics 169 (2015), pp. 822-829.

[iii] For data on child poverty rates by race and ethnicity see Alissa Anderson, A Better Measure of Poverty Shows How Widespread Economic Hardship Is in California (California Budget & Policy Center: October 2016), p. 2. For research on disparities by race and ethnicity, see Tamara Halle, et al., Disparities in Early Learning and Development: Lessons From the Early Childhood Longitudinal Study — Birth Cohort (ECLS-B) (The Council of Chief State School Officers and Child Trends: June 2009) and James J. Heckman, “Schools, Skills, and Synapses,” Economic Inquiry 46 (2008), pp. 289-324.

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

[v] The 210,000 figure reflects children enrolled in the full-day California State Preschool Program (CSPP) or in one of the following subsidized child care programs: Alternative Payment Program; CalWORKs Stages One, Two, or Three; Family Child Care Home Network; General Child Care; and the Migrant Child Care and Development Program. Data are not available for California Community Colleges’ CalWORKs Stage 2. Enrollment is a three-year average for October 2013, October 2014, and October 2015. This analysis includes the full-day CSPP, which consists of part-day preschool and “wraparound” child care, because it accommodates many — although not all — families’ work schedules throughout the year, and thus approximates the experience that a child would have in a high-quality subsidized child care program. In contrast, this analysis excludes an average of roughly 94,000 children who were enrolled in the part-day CSPP, without access to wraparound child care, in October 2013, October 2014, and October 2015. This is because most families with low and moderate incomes likely need wraparound care in order to supplement the CSPP’s part-day, part-year schedule. This analysis reports enrollment data for a single month — as opposed to a monthly average for a calendar year or fiscal year — because the California Department of Education (CDE) does not typically separate part-day and full-day CSPP enrollment when reporting monthly averages. The CDE also states, “Caution should be used when interpreting monthly averages as some programs do not operate at full capacity throughout the entire year (e.g., State Preschool) while other programs have seasonal fluctuations in enrollment (e.g., Migrant Child Care).” Finally, the data are for October 2013, October 2014, and October 2015 because the CDE’s point-in-time reports are only available for the month of October.

[vi] Racial and ethnic groups included in this analysis are Latino, non-Latino Asian, non-Latino black, and non-Latino white. Native American children, Pacific Islander children, or children identified as more than one race were not included due to small sample sizes.

[vii] US Census Bureau, Current Population Survey, 2013-2015 3-Year Estimates. On average, from 2013 to 2015, Latino children made up 51.5 percent of the child population from birth through age 12.

[viii] Other reasons why enrollment in subsidized child care and development programs could vary by race and ethnicity include: 1) parents’ preferences regarding care for their children and 2) having an immigration status that precludes enrollment in these programs. First, with respect to parents’ child care preferences, existing research has produced mixed results. Some studies show that child care preferences vary by the race and ethnicity of the parents, while other research suggests that child care preferences are not related to race and ethnicity. See Nicole Forry, et al., Child Care Decision-Making Literature Review (Office of Planning, Research and Evaluation, US Department of Health and Human Services: December 2013), p.18. With that said, newly published research using more recent data demonstrates that, among low-income families, Latinos’ perceptions regarding child care settings generally do not differ from those of white and black parents, nor are Latino families more likely to have family members nearby to care for their children while at work or in school. (Cited research did not explore data for the Asian population.) Researchers hypothesize that Latinos’ underutilization of formal child care arrangements, such as center-based care, may be due to specific barriers such as access to certain child care providers or language barriers. See Danielle Crosby, et al., Hispanic Children’s Participation in Early Care and Education: Type of Care by Household Nativity Status, Race/Ethnicity, and Child Age (National Research Center on Hispanic Children & Families: November 2016); and Lina Guzman, et al., Hispanic Children’s Participation in Early Care and Education: Parents’ Perceptions of Care Arrangements, and Relatives’ Availability to Provide Care (National Research Center on Hispanic Children & Families: November 2016). Second, with respect to immigration status, Budget Center estimates take this eligibility-related factor into account. Certain demographic groups’ underutilization of subsidized care is not related to children’s or parents’ eligibility based on their immigration status.

[ix] Christina Walker and Stephanie Schmit, A Closer Look at Latino Access to Child Care Subsidies (Center for Law and Social Policy: December 2016), p. 4.

[x] Overall in California, the child population from birth through age 12 decreased by about 3 percent in the past decade. The white and black child population also decreased by 21.3 percent and 26.0 percent, respectively, during this same period. (Budget Center analysis of US Census Bureau, Current Population Survey. Data based on three-year averages: 2003 to 2005 and 2013 to 2015.)

[xi] Erica Greenberg, Gina Adams, and Molly Michie, Barriers to Preschool Participation for Low-Income Children of Immigrants in Silicon Valley: Part II (Urban Institute: January 2016) and Lynn A. Karoly and Gabriella C. Gonzalez, “Early Care and Education for Children in Immigrant Families,” The Future of Children 21(1) (2011), pp. 71-101.

[xii] Of the number of low-income children in California with at least one immigrant parent, 82.6 percent are Latino and 9.4 percent are Asian. Low-income children with parents with limited English proficiency are also overwhelmingly Latino (87.4 percent). The next largest share are Asian children (8.2 percent). Budget Center analysis of US Census Bureau, American Community Survey, 2011-2015 5-Year Estimates. “Low-income” is defined as less than 200 percent of the federal poverty line. English proficiency is self-reported in the American Community Survey.

[xiii] See Julia Gelatt, Gina Adams, and Sandra Huerta, Supporting Immigrant Families’ Access to Prekindergarten (Urban Institute: March 2014); Erica Greenberg, Gina Adams, and Molly Michie, Barriers to Preschool Participation for Low-Income Children of Immigrants in Silicon Valley: Part II (Urban Institute: January 2016); Lynn A. Karoly and Gabriella C. Gonzalez, “Early Care and Education for Children in Immigrant Families,” The Future of Children 21(1) (2011), pp. 71-101; and Christina Walker and Stephanie Schmit, A Closer Look at Latino Access to Child Care Subsidies (Center for Law and Social Policy: December 2016).

[xiv] Liz Watson, Lauren Frohlich, and Elizabeth Johnston, Collateral Damage: Scheduling Challenges for Workers in Low-Wage Jobs and Their Consequences (National Women’s Law Center: April 2014).

[xv] Data are for the female civilian population age 16 and over. Racial and ethnic groups are mutually exclusive. Asian, black, and white exclude people who also identify as Latina. Low-wage occupations are defined as those that have a median hourly wage that is less than two-thirds of the overall median hourly wage. In California, this includes food preparation and serving; building and grounds cleaning and maintenance; personal care and service; and farming, fishing and forestry occupations. Budget Center analysis of California Employment Development Department, Occupational Employment & Wage Data, 2015 and US Census Bureau, American Community Survey, 2015 One-Year Estimates.

[xvi] Erica Greenberg, Gina Adams, and Molly Michie, Barriers to Preschool Participation for Low-Income Children of Immigrants in Silicon Valley: Part II (Urban Institute: January 2016) and Christina Walker and Stephanie Schmit, A Closer Look at Latino Access to Child Care Subsidies (Center for Law and Social Policy: December 2016).

[xvii] Gina Adams and Jessica Compton, Client-Friendly Strategies: What Can CCDF Learn From Research on Other Systems? (Urban Institute and Office of Planning, Research and Evaluation, Administration for Children and Families: December 2011); Gina Adams and Monica Rohacek, Child Care Instability: Definitions, Context, and Policy Implications (Urban Institute: October 2010); and Danielle Ewen and Hannah Matthews, Adopting 12-Month Subsidy Eligibility (Center for Law and Social Policy: October 2010).

[xviii] Nicole D. Forry and Sandra L. Hofferth, “Maintaining Work: The Influence of Child Care Subsidies on Child Care-Related Work Disruptions,” Journal of Family Issues 32 (2011), pp. 346-368; Yoonsook Ha, “Stability of Child-Care Subsidy Use and Earnings of Low-Income Families,” Social Service Review 83 (2009), pp. 495-523; Hannah Matthews, et al., Implementing the Child Care and Development Block Grant Reauthorization: A Guide for States (Center for Law and Social Policy and National Women’s Law Center: 2015), pp.35-37; and Judith Reidt-Parker and Mary Jane Chainski, The Importance of Continuity of Care: Policies and Practices in Early Childhood Systems and Programs (The Ounce: November 2015).

[xix] Senate Bill 3 (Leno, Chapter 4 of 2016) gradually raises the state minimum wage to $15 per hour by 2023, or potentially later depending on the condition of the economy and the state budget. After the state minimum wage reaches $15 per hour, it will be indexed annually for inflation. For an in-depth discussion of the minimum-wage increase, see Alissa Anderson and Chris Hoene, California’s $15 Minimum Wage: What We Know and Don’t Know (California Budget & Policy Center: April 13, 2016).

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Child Care & Preschool

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Does California need significant new investments in its transportation infrastructure? Given our state’s deteriorating highways, roads, bridges, and other transportation infrastructure, not to mention billions of dollars in deferred maintenance, the answer should clearly be “yes.”

Governor Brown and state legislative leaders agree. They recently enacted Senate Bill 1, the Road Repair and Accountability Act of 2017, allocating $54 billion over the next 10 years in a transportation package that is split equally between state and local investments. This transportation package provides funding for highway and road maintenance and rehabilitation, public transit, improving conditions for pedestrians and bicyclists, and facilitating goods movement. The revenue to pay for these investments comes from a 12-cent increase in the state excise tax on gasoline (the “gas tax”), increased diesel fuel taxes, and new transportation improvement fees.

The new transportation package seeks to address billions of dollars in deferred maintenance and represents the culmination of deliberations that started in 2015, with an initial proposal from the Governor and a special legislative session on transportation funding that ran from June 2015 to December 2016.

While the overriding question should be whether California needs these transportation investments and improvements, much of the attention leading up to and following the enactment of the package has focused on questions about the fairness of the gas tax, whether the funds actually will be spent on transportation improvements, and whether the package was hastily passed without sufficient debate. After briefly recapping what the package actually includes — on both the spending and revenue sides — we examine each of these questions, in part by adding some much-needed context.

How Will the Money Be Spent?

The funds from the $54 billion package will be split equally between state and local transportation programs.

Major state-level allocations include:

  • $15 billion for highway repairs.
  • $4 billion in bridge repairs.
  • $3 billion to improve trade corridors.
  • $2.5 billion to reduce congestion on major commute corridors.

Major local-level allocations include:

  • $15 billion for local road repairs.
  • $8 billion for public transit and intercity rail.
  • $2 billion for local “self-help” communities that are making their own investments in transportation improvements.
  • $1 billion for active transportation projects to better link travelers to transit facilities.

How Will the Money Be Generated?

The package generates $54 billion in new revenues over 10 years from a series of tax and fee increases:

  • $24.4 billion from a 12-cent increase in the base gas excise tax starting November 1, 2017.
  • $10.8 billion from a 20-cent increase in the diesel fuel base excise tax and a 5.75-cent increase in the diesel fuel sales tax starting November 1, 2017.
  • $16.3 billion from a new annual transportation improvement fee that will take effect on January 1, 2018. This fee will range from $25 to $175 per vehicle based on the value of the vehicle. For instance, a vehicle valued at less than $5,000 would incur a fee of $25, while a vehicle valued at $60,000 or more would incur a $175 fee.
  • $200 million from a new annual fee of $100 on all zero-emission vehicles starting on July 1, 2020.

In addition, the base gas and diesel fuel excise taxes, the new transportation improvement fee, and the new zero emissions vehicle fee will be annually adjusted for inflation starting in 2020-21. Further, the base gas and diesel fuel excise taxes and new transportation improvement fee will be annually adjusted for inflation starting on July 1, 2020. The new road improvement fee will be annually adjusted for inflation starting on July 1, 2021.

The Question of Fairness: Gas Taxes and Vehicle Fees Are How We Fund Transportation

Whenever increases in the gas tax are considered, issues are raised about the fairness of the tax. As noted in our primer on California’s tax system, there are different ways to assess the fairness of taxes. Most people agree that a fair tax system asks taxpayers to contribute to the cost of public services based on their ability to pay. When lower-income households spend a larger share of their budgets on taxes than higher-income people do, we refer to those taxes as regressive. Conversely, taxes that require higher-income people to spend a larger share of their budgets on taxes are considered progressive. Lower-income households spend more of their incomes on daily necessities, such as basic transportation. In this respect, gas taxes are regressive.

However, this critique of the gas tax as a way to fund transportation improvements would be more concerning if we had other, more progressive ways of funding these improvements. The reality is that transportation funding in California, and nationally, primarily relies on a set of usage-based excise taxes and fees — taxes and fees that people pay to use highways, roads, transit facilities, ports and airports, and so on. While usage-based taxes and fees may be mostly regressive, they are fair in that they are paid as the cost of using the service. Even alternatives in transportation funding — toll roads and charges based on vehicle miles traveled (VMT), for instance — still raise revenues based on people’s use of highways and roads, and not with regard to users’ incomes. Another potential alternative, the carbon tax — a tax imposed on the burning of carbon-based fuels such as coal, oil, and gas — would still generate revenues based on the demand for and use of those fuels.

Some people contend that transportation should be funded from the state’s General Fund, or by general obligation (GO) bonds where the service on the debt is paid out of the General Fund, because the General Fund in California is largely reliant upon the state’s progressive income tax. However, this raises a major concern: Using General Fund dollars would put transportation investments in competition with other vital programs and services for limited state funding. General Fund dollars should be reserved for services for which lower-income households are especially burdened by the cost of the service (e.g., health insurance) or programs from which the entire society benefits and which we want to encourage (e.g., K-12 education).

Usage-based taxes and fees also make sense as a source of transportation funding because they can be structured in ways that meet other policy goals. For instance, because driving creates emissions that are harmful to the environment, taxes and fees can be designed to encourage alternative forms of transportation. Further, concerns about the impacts on lower-income individuals can be addressed by providing offsets. For instance, California could expand its Earned Income Tax Credit (EITC) — a refundable credit for low-income Californians — as a means of offsetting increased gas costs.

There is another factor to consider as to the wisdom of the recently enacted increase in California’s gas tax: our state’s gas taxes have not been increased in 23 years. Since the state last increased the rate, the real (inflation-adjusted) buying power of the gas tax per mile driven has dropped significantly. (Miles driven is a good proxy for the deterioration of roads.) There are a few reasons for this. One is that the tax is not indexed to inflation. Second, it is imposed as a fixed amount per gallon, not a percentage of the sales price of gasoline, so it does not increase as gasoline prices increase. Finally, because cars are more fuel-efficient than years ago, drivers pay less per mile driven than they did in 1994, when the gas tax last rose. When gas tax revenues fail to keep up with both inflation and wear and tear, less money is available to maintain and build streets and highways, and a backlog of deferred maintenance accumulates. The cost of addressing the deferred maintenance on the state’s transportation assets (not even including local roads) is now $57 billion. The relatively large 12-cent-per-gallon increase in the gas tax, which represents an approximate 4 percent increase in the overall cost of gasoline, is partly the result of 23 years of no increases. Furthermore, since the new package starts to adjust the gas tax rate for inflation in 2020, it will result in much more gradual annual changes in the rate, in turn helping ensure that revenues keep up with ongoing needs.

Lastly, it is important to put the gas tax in the broader context of the transportation package overall. State leaders structured the transportation improvement fee on vehicles — another key piece of the package’s revenue mix — so that it is based more on people’s abilities to pay, with the fee increasing relative to the value of the vehicle.

One of the other critiques offered about the new package is that the funds are not assured to go toward transportation improvements.

This critique is simply not based in fact. As noted in our quick summary above, the funds are all earmarked for state and local transportation investments. In addition, the package includes a set of accountability provisions designed to ensure that the revenues are spent as intended. Among these is a constitutional amendment (ACA 5) that will require voter approval on the June 2018 ballot. ACA 5 would 1) prohibit spending the funds on anything other than transportation and 2) create a state transportation inspector general within the California Department of Transportation (Caltrans) to ensure both that funds are spent as intended and that this spending complies with state and federal requirements.

The Question of Timing: State Leaders Have Been Working on a Transportation Package for Over Two Years

Opponents of the package have also charged that the package was “rammed through,” without enough opportunity for deliberation.

This simply is not the case. Governor Brown initially proposed a similar package in early 2015 and called a special legislative session that ran from June 2015 through the end of 2016, without resolution. The Governor then outlined the contours of a new package in his proposed budget for 2017-18, released in January, and state legislative leaders crafted alternative proposals in the weeks that followed. So, at a minimum, the new transportation package represents deliberations that had been underway for more than two years. And, given that the state has not increased the gas tax in 23 years, while billions of dollars in deferred maintenance has mounted, enacting a new transportation funding package was long overdue.

Ultimately, the most important question is whether California needs to invest more in its transportation infrastructure, improving its highways, roads, public transit and other alternative transportation options, and its ability to move people and goods efficiently. Years of neglect and billions of dollars in deferred maintenance, exacerbated by a lack of political will to increase taxes and fees, mean that the answer to that question is clearly “yes,” and that the recently enacted transportation package is a significant advance for California.

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Taxes & Revenue

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Executive Summary

On May 11, Governor Jerry Brown released the May Revision to his proposed 2017-18 state budget. The Governor forecasts revenues $2.5 billion higher — over a three-year window — than projected in January, mostly reflecting higher personal income tax (PIT) projections due to stock market gains.

In addition to showing an upturn in the fiscal outlook, the May Revision makes several improvements over the Governor’s January proposal. The revised budget provides funds to offset a large portion of the In-Home Supportive Services program costs that are being shifted to counties. In addition, the May Revision continues plans — which the Governor’s January proposal had put on hold — for a multiyear reinvestment in subsidized child care and preschool. Higher-than-expected revenues result in increases in the Proposition 98 minimum guarantee for K-14 education spending. Also, the May Revision shifts funds to cover higher Cal Grant costs due to recently adopted tuition increases at the California State University and University of California.

The May Revision assumes current federal policies and funding levels, yet still reflects deep uncertainty about potential federal actions. The revised budget highlights the prospect of major changes to Medicaid, other areas of federal spending, and tax policy, among others.

The Governor’s May Revision — like his January proposal — calls for continued funding of the California Earned Income Tax Credit (CalEITC). However, the revised budget does not propose any additional investments in the welfare-to-work system (CalWORKs) or in basic income support for low-income seniors and people with disabilities (SSI/SSP). In addition, the Governor’s budget does not include proposals to address affordable housing.

The Governor’s revised budget sets aside $3.6 billion as constitutionally required by Prop. 2 (2014), with half deposited in the state’s rainy day fund and half used to pay down state budgetary debt. Under the Governor’s proposal, state reserves would total $10.1 billion by the end of 2017-18.

As the Governor and Legislature work toward a budget agreement in the coming weeks, they do so amid the continuing, and in many ways troubling, prospect of federal cuts that could threaten health care coverage for millions of Californians, the social safety net, and other critical services. California’s Congressional delegation needs to ensure that federal policy choices provide the necessary support to communities in California and elsewhere.

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

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

May Revision Reflects Modestly Improved Fiscal Outlook

The Governor’s revised budget reflects a “modestly improved fiscal outlook,” with General Fund revenues over the three-year “budget window,” from 2015-16 to 2017-18, expected to be $2.5 billion higher than projected in January. Nevertheless, General Fund revenues would still be $3.3 billion lower than the projections included in the 2016-17 budget agreement. (In January, the Administration projected that General Fund revenues would be $5.8 billion lower than assumed in the budget agreement.) The revised revenue forecast means that the Governor is now projecting a 2017-18 budget shortfall of about $400 million, absent any action by policymakers to address the gap. This is considerably smaller than the $1.6 billion budget gap projected by the Governor in January.

The Administration’s improved revenue forecast mostly reflects higher personal income tax (PIT) projections due to recent increases in stock market values, which in turn are expected to boost capital gains revenues. Specifically, the Administration now projects that PIT revenues during the three-year budget window will be $2.9 billion higher than expected in January. In contrast, the May Revision reflects sales and use tax (SUT) receipts that are $1.2 billion lower than projected in January, while corporate tax (CT) receipts are expected to be almost $400 million higher than projected four months earlier.

The May Revision projects that California’s economic growth will continue at a moderate pace over the next few years. However, the revised budget outlines a number of “risks to the outlook” that could weaken the state’s economy and have potentially significant negative effects on the state budget. These risks include major federal policy changes, the state’s ongoing housing affordability crisis, and the possibility of a national recession.

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Updated Revenue Projections Lead to Increase in Proposed Reserves

California voters approved Proposition 2 in November 2014, amending the California Constitution to revise the rules for the state’s Budget Stabilization Account (BSA), commonly referred to as the rainy day fund. Prop. 2 requires an annual set-aside equal to 1.5 percent of estimated General Fund revenues. An additional set-aside is required when capital gains revenues in a given year exceed 8 percent of General Fund tax revenues. For 15 years — from 2015-16 to 2029-30 — half of these funds will be deposited into the rainy day fund, and the other half will be used to reduce certain state liabilities (also known as “budgetary debt”).

The Governor’s revised budget continues to project that the BSA will total $6.7 billion by the end of the current fiscal year (2016-17). Based on the Governor’s updated revenue projections for 2017-18, Prop. 2 would constitutionally require the state to deposit an additional $1.8 billion into the BSA (as well as set aside $1.8 billion for repaying budgetary debt), bringing the total amount in the BSA to $8.5 billion by the end of 2017-18.

The BSA is not California’s only reserve fund. Each year, the state deposits additional funds into a “Special Fund for Economic Uncertainties.” For 2017-18, the Governor projects $1.6 billion for this fund. This means that the Governor’s revised budget would build state reserves to a total of $10.1 billion by the end of 2017-18.

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May Revision Proposes Supplemental Payment for State Employee Pensions

The Governor’s revised budget includes higher levels of contributions to state-run retirement systems: the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS). CalPERS and CalSTRS, like many retirement systems, are not funded at levels that will keep up with future benefits, resulting in the state needing to make annual contributions in order to pay down unfunded liabilities. The state’s unfunded liabilities in the two retirement systems have grown recently as a result of lower-than-expected investment returns and changes to the assumptions the systems make about future investment returns. Greater unfunded liabilities from lower investment returns, in turn, mean that state General Fund contributions to the two systems must increase.

The May Revision includes additional General Fund contributions as a result of CalPERS and CalSTRS reducing the “discount rate” — the assumed future rate of return on investments that is used to estimate the level of contributions from the state and employers — from 7.5 percent to 7.0 percent over the next several years.

In addition, the May Revision includes a supplemental payment to CalPERS of $6 billion, made through a loan from the Surplus Money Investment Fund, a state cash-flow and short-term investments account that is used to pool and invest state funds until they are needed. Comprised of a revolving mix of cash held by the state, the state portion of this fund (which also includes segregated local government funds) is valued at $50 billion. The purpose of this loan is to help offset increases in state contributions in future years — essentially refinancing a liability to CalPERS. The Administration projects that, without the loan, state contributions to CalPERS would grow from $5.8 billion ($3.4 billion General Fund) in 2017-18 to $9.2 billion ($5.3 billion General Fund) by 2023-24. The proposed loan of $6 billion will allow the loan funds to be invested at CalPERS’ assumed investment return rate (discount rate) of 7 percent, as opposed to less than 1 percent currently earned by the funds. The Administration estimates that over two decades this will generate an additional $11 billion (after paying for the costs of the loan), helping to reduce state contributions to CalPERS. For example, the state’s pension costs in 2023-24 would be $8.6 billion ($4.9 billion General Fund), instead of $9.2 billion ($5.3 billion General Fund), with additional savings accrued in other years across the life of the loan. The General Fund’s share of the repayment of the loan would be covered by funds set aside by Prop. 2 (2014) for repayment of budgetary debt. The rest of the loan repayment would come from a series of state special funds. In other words, the intention is that repaying the loan would not come from money that could otherwise be used to increase spending for other General Fund programs.

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May Revision Maintains Shift of In-Home Supportive Services (IHSS) Costs to Counties, but Reduces the Impact

Under the Coordinated Care Initiative (CCI), California integrates health care and other services — including IHSS — for certain seniors and people with disabilities. In January, the Administration indicated that because the CCI is not cost-effective, it will be discontinued in 2017-18, pursuant to current law. One key outcome of discontinuing the CCI is that counties’ share of the nonfederal costs for IHSS would go up, and the state’s share would go down. This is because the current cost-sharing formula — which is tied to the CCI and significantly limits counties’ share of IHSS cost increases — would end this coming July and be replaced with a formula that is less favorable to counties. (The current formula is based on a “maintenance of effort,” or MOE, structure that adjusts counties’ annual IHSS expenditures by an inflation factor; the less favorable formula is a simple cost-sharing ratio that requires counties to pay 35 percent of nonfederal IHSS costs and the state to pay 65 percent.) While the Governor acknowledged in January that counties would experience financial hardship due to this change, he did not initially specify any proposals that could ease the fiscal impact on counties.

The May Revision maintains the IHSS cost-shift, which will increase counties’ costs by an estimated $592 million in 2017-18. However, the revised budget also includes a multifaceted proposal to mitigate the impact of this cost-shift on county budgets. Included in the Governor’s package are proposals to:

  • Provide counties with General Fund dollars to offset a portion of their increased costs for IHSS. General Fund support would be set at $400 million in 2017-18; $330 million in 2018-19; $200 million in 2019-20; and $150 million in 2020-21 and each year thereafter.
  • Redirect certain growth funds generated by the “1991 realignment” funding structure for five years. For the first three years, this proposal would redirect all Vehicle License Fee growth funds from certain 1991 realignment “subaccounts” in order “to provide additional resources for IHSS,” according to the May Revision. In the fourth and fifth years, the amount of redirected revenues would be cut in half.
  • Allow counties to avoid repaying revenues that they received in error due to miscalculations by the state Board of Equalization. This amount “ranges from $100 [million] to $300 million and would protect each county’s realignment base revenues,” according to an analysis by the California State Association of Counties (CSAC).
  • Maintain an MOE structure for sharing IHSS costs between the state and counties rather than switching to a 35/65 county-state cost-sharing ratio. The state General Fund would pay the difference between the county’s annual MOE contribution and the total nonfederal share of IHSS costs.
  • Calculate a new MOE base for county IHSS costs in 2017-18 and apply an annual inflation factor to that base beginning in 2018-19. The MOE base would include the cost of IHSS services and administration. The inflation factor would be 5 percent in 2018-19. Beginning in 2019-20, the inflation factor would vary annually depending on the performance of revenues provided through the 1991 realignment. This ongoing inflation factor would range from zero to 7 percent. An inflation factor of 7 percent could “lead to county general fund impacts,” according to CSAC.

Even with the changes proposed in the May Revision, counties would face additional ongoing costs for IHSS. These costs would be relatively manageable in 2017-18 ($141 million) and 2018-19 ($129 million) because they would not be much higher than the increases that counties were anticipating under the current cost-sharing formula, according to CSAC. However, counties’ additional annual costs for IHSS could grow to $251 million by 2020-21, based on the Administration’s estimates. The Governor’s proposal would allow counties that experience financial hardship to apply to the state for “a low-interest loan to help cover” their additional IHSS costs. Moreover, the Administration indicates that it will hold ongoing discussions with counties regarding their share of IHSS costs and the impact of the proposed inflation factor.

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May Revision Continues Implementation of Multiyear Plan to Reinvest in Early Care and Education, but Fails to Update Income Eligibility

California’s subsidized child care and development system allows parents with low and moderate incomes to find and maintain employment while providing care and education for their children. This system is composed of a variety of programs that state policymakers cut dramatically during and after the Great Recession. In recent years, policymakers have restored a portion of the funding for these programs, and the 2016-17 budget agreement included legislative intent to implement a multiyear plan to reinvest in the state’s child care and development system.

Facing a forecasted budget shortfall, the Governor in his January proposal “paused” this multiyear reinvestment until the 2018-19 fiscal year. The May Revision reverses course and continues the timely implementation of the planned reinvestments in the subsidized child care and development system. Specifically, the May Revision:

  • Provides $160.3 million to increase the reimbursement rate for providers that contract directly with the state. The 2016-17 budget agreement included a 10 percent increase in the Standard Reimbursement Rate (SRR), which is the payment rate paid for providers that contract with the state, to go into effect on January 1, 2017. Due to implementation issues related to a midyear rate increase, the SRR was increased by 5 percent, effective July 1, 2016, and was scheduled to increase by the remaining 5 percent effective July 1, 2017. The proposed “pause” in the 2017-18 fiscal year would have delayed this second increase until 2018-19. The May Revision does not delay the rate increase and provides $67.6 million ($43.7 million Proposition 98) to increase the SRR by 5 percent on July 1, 2017, as originally scheduled. Furthermore, the Governor increases the SRR by an additional 6 percent, also effective on July 1, 2017 ($60.7 million Proposition 98, $32 million non-Proposition 98 General Fund).
  • Updates the payment rate for voucher-based providers. Families can access subsidized care by using a voucher to select a child care provider of their choice. The value of these vouchers is based on a Regional Market Rate (RMR) Survey, which is conducted by the state on a periodic basis. The May Revision increases the value of vouchers by updating rates based on the 2016 RMR Survey ($42.2 million General Fund), effective January 1, 2018.
  • Boosts the number of slots in the state preschool program. The May Revision provides $7.9 million in Proposition 98 funds to add 2,959 full-day state preschool slots beginning April 1, 2018, as scheduled in the original multiyear plan.

The May Revision maintains positive momentum in restoring funding for a system that is still operating below pre-recession levels. However, the May Revision does not update income eligibility limits, which are currently based on data that are over a decade old. As state and local minimum wages increase, many families find that they are no longer eligible for subsidized care, yet do not earn enough to afford the high cost of early care and education.

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May Revision Boosts the Minimum Funding Level for Schools and Community Colleges

Approved by voters in 1988, Prop. 98 constitutionally guarantees a minimum level of funding for K-12 schools, community colleges, and the state preschool program. The Prop. 98 guarantee tends to reflect changes in state General Fund revenues, and due to revised revenue estimates in the May Revision, the Governor assumes a 2017-18 Prop. 98 funding level of $74.6 billion, $1.1 billion above the level assumed in the January budget proposal. The May Revision also assumes a 2016-17 Prop. 98 funding level of $71.4 billion, $22 million more than January; and a 2015-16 Prop. 98 funding level of $69.1 billion, $432 million more than January.

While revised estimates of 2015-16 revenues are up relative to assumptions in January’s budget proposal, the May Revision assumes a 2015-16 Prop. 98 funding level that is actually greater than the minimum funding guarantee based on these revised revenue estimates. Because calculations of Prop. 98’s annual funding levels are usually based on prior-year funding levels, this overappropriation of the Prop. 98 guarantee for 2015-16 results in higher Prop. 98 funding levels in 2016-17 and 2017-18 than the Prop. 98 minimum funding guarantee otherwise would have required. The Governor’s May Revision states that this additional funding made available in 2015-16 and 2016-17, coupled with a proposed “settle-up” payment of $603 million for prior-year Prop. 98 obligations, is sufficient to eliminate the January budget proposal to defer $859 million in 2016-17 funding to 2017-18.

The largest share of Prop. 98 funding goes to California’s school districts, charter schools, and county offices of education (COEs), which provide instruction to approximately 6.2 million students in grades kindergarten through 12. The May Revision proposes to expand increases in funding for the state’s K-12 education funding formula — the Local Control Funding Formula (LCFF) — and to pay off outstanding obligations to school districts.

Voter approval of Prop. 51 in November 2016 authorized $7 billion in state general obligation (GO) bonds for K-12 school facilities. However, the May Revision, continuing to note shortcomings in the School Facilities Program, states that the Administration will only support the expenditure of Prop. 51 dollars once measures are “in place to ensure that taxpayers’ dollars are spent appropriately.” Additionally, the May Revision:

  • Provides an additional $643 million, for a total of $1.4 billion, to continue implementation of the LCFF. The LCFF provides school districts, charter schools, and COEs a base grant per student, adjusted to reflect the number of students at various grade levels, as well as additional grants for the costs of educating English learners, students from low-income families, and foster youth. The May Revision would provide additional LCFF funding above the $744 million increase proposed in January. The Governor’s proposal to increase LCFF funding may reduce the amount of time it takes to fully implement the LCFF, which depends on funding sufficient for all districts to reach a target base grant. (All COEs reached their LCFF funding targets in 2014-15.) According to the Administration, the proposed 2017-18 LCFF funding level would bring the LCFF formula “to 97 percent of full implementation.”
  • Provides an additional $725 million in one-time funding, for a total of more than $1.0 billion, to reduce mandate debt the state owes to schools. Mandate debt reflects the cost of state-mandated services that school districts, charter schools, and COEs provided in prior years, but for which they have not yet been reimbursed.
  • Increases the cost-of-living adjustment (COLA) for non-LCFF programs. The Governor’s May Revision provides an additional $3.2 million to fund a 1.56 percent COLA for several categorical programs that remain outside of the LCFF, including special education, child nutrition, and American Indian Education Centers. The May Revision would increase the 1.48 percent COLA ($58.1 million) proposed in the January budget.

A portion of Prop. 98 funding supports California’s community colleges (CCCs), which help prepare approximately 2.4 million full-time students to transfer to four-year institutions as well as obtain training and skills for immediate employment. The May Revision increases funding for CCC operating expenses, deferred maintenance, and general-purpose apportionments. Specifically, the May Revision:

  • Increases funding for CCC operating expenses by $160 million. The May Revision provides funding for the CCCs to pay for increased expenses in areas such as employee benefits, facilities, and professional development.
  • Boosts one-time funding for deferred maintenance and other CCC expenses by $92.1 million. The May Revision provides funding for the CCCs to pay for deferred maintenance, instructional equipment, and certain water conservation projects.
  • Provides a net increase of $34.1 million in overall apportionment funding. The May Revision boosts apportionments — which provide general purpose funding for CCCs — to reflect a $28.5 million increase for funding earned back by CCC districts that experienced declining enrollment during the previous three fiscal years, an increase of $23.6 million due to unused prior-year enrollment growth funding, and a $3.5 million increase to fund a 1.56 percent COLA for apportionments, up from 1.48 percent as proposed in the Governor’s January budget. The May Revision also decreases apportionments by $21.5 million to adjust enrollment growth from 1.34 percent to 1 percent.

Consistent with the Governor’s January budget proposal, the May Revision continues to provide CCCs with $150 million in one-time funding for grants to develop and implement the Guided Pathways Program, an institution-wide approach to support student success.

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Governor Proposes Minor Adjustments to Higher Education Funding

The Governor’s revised budget makes several minor adjustments to higher education funding. Specifically, the May Revision:

  • Reverses a scheduled reduction to maximum Cal Grant awards for new students attending private institutions accredited by the Western Association of Schools and Colleges (WASC). The 2012-13 state budget adopted a reduction in Cal Grant awards for students attending independent nonprofit and accredited for-profit institutions. This reduction was to be implemented beginning in 2014-15, but subsequent budget actions postponed this reduction until 2017-18. The May Revision proposes cancelling this scheduled reduction in Cal Grant awards, contingent upon WASC-accredited institutions making “measurable achievements” in three areas: 1) enrolling the “neediest” students, 2) making it easier for students to transfer in from California community colleges, and 3) expanding online education programs. To fund this proposal, the Governor redirects $8 million that originally was intended for the California State University (CSU) and University of California (UC).
  • Shifts additional funds to the California Student Aid Commission (CSAC) to cover higher Cal Grant costs due to recently adopted tuition increases. The May Revision estimates that recently approved tuition increases that will go into effect this fall will raise 2017-18 Cal Grant costs by $28 million for students at the CSU and $20.9 million for students at the UC. (The CSU Board of Trustees approved a 5 percent and 6.5 percent increase in tuition for undergraduate students and graduate students, respectively, and the UC Board of Regents approved a tuition hike of 2.5 percent.) To cover increased Cal Grant costs, the Governor proposes shifting an additional $194 million in federal Temporary Assistance for Needy Families (TANF) funds to the CSAC. This means that the revised budget would offset $1.1 billion in General Fund costs for Cal Grants with federal TANF dollars when combined with the TANF reimbursements included in the Governor’s January budget proposal. Additionally, the May Revision summary warns that “if the universities raise tuition in the future, additional downward adjustments to state support may be needed to cover the higher Cal Grant costs.”
  • Maintains the Governor’s January proposal to phase out the Middle Class Scholarship Program (MCSP). The May Revision reflects a net decrease of $10 million due to revised estimates of the cost of this proposal.
  • Proposes to withhold $50 million in funds for the UC. These funds would be withheld until the UC has made progress implementing 1) the recommendations recently made by the State Auditor, who identified a number of concerns with UC budgeting practices and 2) a series of reforms agreed to by the Governor and the UC President in 2015 related to “activity-based costing” — a more transparent budgeting process — and the enrollment of transfer students from community colleges.

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Governor Maintains Proposal to Use Prop. 56 Funds to Pay for Typical, Year-to-Year Growth in Medi-Cal Costs

Approved by voters last November, Prop. 56 raised the state’s excise tax on cigarettes by $2 per pack and triggered an equivalent increase in the state excise tax on other tobacco products. These increases took effect on April 1. Prop. 56 requires most of the revenues raised by the measure to go to the Medi-Cal program, which provides health care services to more than 13 million Californians with low-incomes. The Administration projects that Prop. 56 will raise approximately $1.8 billion through June 2018, with more than $1.3 billion of this amount allocated to Medi-Cal. In January, the Governor proposed to use Prop. 56 revenues to pay for typical, year-to-year cost increases in Medi-Cal, rather than funding “improved payments” for health care services as Prop. 56 requires. The May Revision maintains this proposal, which the Administration argues is consistent with the requirements of Prop. 56.

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May Revision Highlights New Rules Implementing Prop. 57, Which Will Help the State Reduce Incarceration

Currently, more than 130,400 people are serving their sentences at the state level. Most of these individuals — nearly 114,900 — are housed in state prisons designed to hold slightly more than 85,000 people. This level of overcrowding is equal to 135 percent of the prison system’s “design capacity,” which is below the prison population cap — 137.5 percent of design capacity — established by federal court order. In addition, California houses more than 15,500 individuals in facilities that are not subject to the court-ordered population cap, including fire camps, in-state contract beds, out-of-state prisons, and community-based facilities that provide rehabilitative services.

The total number of people incarcerated by the state has declined by roughly one-quarter since peaking at 173,600 in 2007. This substantial reduction resulted largely from a series of policy changes adopted by state policymakers and the voters in the wake of the 2009 federal court order requiring the state to reduce overcrowding in state prisons.

California voters added a new reform last year by approving Prop. 57, which gives state officials new policy tools to address ongoing overcrowding in state prisons. Prop. 57 requires parole consideration hearings for state prisoners who have been convicted of a nonviolent felony and have completed the full term for their primary offense. The measure also gives the California Department of Corrections and Rehabilitation (CDCR) — which is part of the Governor’s administration — broad new authority to award sentencing credits to reduce the amount of time that people spend in prison. Prop. 57 requires the CDCR to adopt regulations implementing both of these provisions. Finally, Prop. 57 requires juvenile court judges to decide whether a youth should be tried in adult court.

The May Revision highlights the Administration’s new emergency regulations implementing Prop. 57, which were approved by the Office of Administrative Law in April. These emergency rules, which could change prior to being finalized, stipulate that:

  • The new parole consideration process for nonviolent offenders will take effect on July 1, 2017.
  • New and enhanced sentencing credits for completion of education and rehabilitation programs will be implemented on August 1, 2017. (Enhanced sentencing credits forgood conduct took effect on May 1.)
The Administration estimates that in 2017-18, Prop. 57 will reduce the number of inmates by 2,675 below the level that was otherwise projected (130,368). This annual drop in the inmate population is projected to grow to about 11,500 in 2020-21. According to the Administration, this reduction would allow the CDCR “to remove all inmates from one of two remaining out-of-state facilities in 2017-18, and begin removing inmates from the second facility as early as January 2018.” The May Revision projects that Prop. 57 will result in net state savings of $38.8 million in 2017-18, rising to about $186 million by 2020-21.
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Governor’s Revised Budget Reflects Recent Transportation Funding Agreement With the Legislature

California’s expansive transportation infrastructure includes 50,000 lane-miles of state and federal highways, 304,000 miles of locally owned roads, Amtrak intercity rail services, and numerous local transit systems, all of which facilitate the movement of people and goods across the state. The state’s largest category of deferred maintenance is for its existing transportation facilities.

The Governor’s revised budget includes a recently enacted agreement with the Legislature on a 10-year, $54 billion transportation funding package. This includes $2.8 billion for 2017-18.

The funding will be split equally between state and local transportation programs over the next 10 years. Major state-level allocations include:

  • $15 billion for highway repairs.
  • $4 billion in bridge repairs.
  • $3 billion to improve trade corridors.
  • $2.5 billion to reduce congestion on major commute corridors.

Major local-level allocations include:

  • $15 billion for local road repairs.
  • $8 billion for public transit and intercity rail.
  • $2 billion for local “self-help” communities that are making their own investments in transportation improvements.
  • $1 billion for active transportation projects to better link travelers to transit facilities.

The funding package relies on new revenues generated from a series of tax and fee increases:

  • $24.4 billion from a 12-cent increase in the base gas excise tax starting on November 1, 2017.
  • $10.8 billion from a 20-cent increase in the diesel fuel base excise tax and a 5.75-cent increase in the diesel fuel sales tax starting on November 1, 2017.
  • $16.3 billion from a new annual transportation improvement fee that will take effect on January 1, 2018. This fee will range from $25 to $175 per vehicle based on the value of the vehicle. (For instance, a vehicle valued at less than $5,000 would incur a fee of $25, while a vehicle valued at $60,000 or more would incur a $175 fee.)
  • $200 million from a new annual fee of $100 on all zero-emission vehicles starting on July 1, 2020.

In addition, the base gas and diesel fuel excise taxes, the new transportation improvement fee, and the new zero emissions vehicle fee will be annually adjusted for inflation starting 2020-21.

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May Revision Adds Modest New Resources to Address Federal Actions on Immigration and Other Issues

Aggressive federal enforcement of immigration laws has been an area of particular tension between the new federal administration and California’s state and local governments. The state was home to more than 10.7 million foreign-born residents as of 2015. These include a significant number of undocumented immigrants and their children, who are often US citizens or legal residents. Since the beginning of the Trump Administration, the Governor has been vocal in his support for California’s immigrant residents.

New in the Governor’s May Revision are two modest increases in state resources dedicated to addressing federal actions that affect California’s immigrant residents and state government. The Governor’s May Revision dedicates an additional $15 million General Fund to the Department of Social Services to increase the availability of legal services for people seeking help with naturalization, securing legal immigration status, and defense against deportation. To address federal actions more broadly, the Governor also proposes adding $6.5 million General Fund and 31 positions in the state’s Department of Justice for new legal workload related to various actions taken at the federal level that impact public safety, health care, the environment, consumer affairs, and general constitutional issues.”

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May Revision Makes No New Investments in CalEITC, CalWORKs, SSI/SSP, or Optional Medi-Cal Benefits

Consistent with the Governor’s budget proposal in January, the May Revision proposes no new investments in a number of services and income supports that help Californians with low incomes. The Governor’s revised budget:

  • Proposes no changes to the CalEITC. The California Earned Income Tax Credit (CalEITC) is a refundable state tax credit designed to boost the incomes of low-earning workers and their families and help them afford basic expenses. The credit was established by the 2015-16 budget agreement and became available to claim in the 2015 tax year, providing an average credit of slightly more than $500 to over 385,000 households that year. The May Revision makes no changes to CalEITC credit amounts or eligibility. Also, while the 2016-17 budget agreement included $2 million for education and outreach efforts to increase CalEITC claims, the Governor’s 2017-18 budget does not include funding to continue these efforts beyond the current year, despite evidence that many eligible workers may not be claiming the credit.
  • Makes no new investments in CalWORKs. The California Work Opportunity and Responsibility to Kids (CalWORKs) program provides modest cash assistance for 875,000 low-income children while helping parents overcome barriers to employment and find jobs. The May Revision accounts for increases in CalWORKs grants due to last year’s repeal of the punitive Maximum Family Grant (MFG) or “family cap” rule, but does not propose new increases to CalWORKs grants or time limits, though this would be necessary to reverse cuts made to the program during and after the Great Recession. CalWORKs funding overall is reduced in the May Revision, compared to the Governor’s January budget proposal, due to expected lower costs based on updated projections of caseload and average cost per case.
  • Provides no state COLA for SSI/SSP grants. Supplemental Security Income/State Supplementary Payment (SSI/SSP) grants help well over 1 million low-income seniors and people with disabilities to pay for housing, food, and other basic necessities. Grants are funded with both federal (SSI) and state (SSP) dollars. Last year, the state approved a 2.76 percent state COLA for the SSP portion of the grant, which took effect in January 2017, but the May Revision does not propose a new state COLA for 2017-18, though the SSI/SSP grant level for single individuals remains below the federal poverty guideline. SSI/SSP grants are still expected to increase modestly in January 2018, however, because the federal government is projected to provide a 2.6 percent COLA to the SSI portion of the grant. SSI/SSP funding overall is reduced in the May Revision compared to the Governor’s January budget due to expected lower costs based on updated caseload and average cost-per-case projections.
  • Does not propose to restore Medi-Cal benefits that state policymakers eliminated during the Great Recession to help close a budget shortfall. Under federal law, certain Medicaid benefits are provided at state option. In 2009, state policymakers eliminated several of these optional benefits from the Medi-Cal program, including adult dental services, acupuncture, audiology, optical services, and certain mental health services. Policymakers later restored acupuncture services and some dental services for adults. Fully restoring the remaining optional benefits would cost $311.1 million ($106.8 million General Fund) in 2017-18, according to the Department of Health Care Services.

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May Revision Proposes No New Funding for Affordable Housing and No New Changes to Cap-and-Trade

Like the Governor’s January budget proposal, the May Revision repeatedly notes the serious effects of California’s housing affordability crisis, including its implications for family budgets, state sales tax revenues, job growth, and inflation. The Governor again highlights the insufficient supply of housing as one of the most serious threats to the state’s economy. At the same time, however, the May Revision — like the January budget proposal — calls for no new state investment in affordable housing. Indeed, the Governor’s revised budget continues to rescind the $400 million set-aside for affordable housing programs in the 2016-17 budget agreement. Allocation of these funds was contingent on lawmakers modifying the local review process for certain housing developments, as outlined in the Governor’s “by-right” proposal from last year, which was not adopted by the Legislature.

The May Revision also makes no change to the January proposal to eliminate the $45 million Housing and Disability Advocacy Program, established in the 2016-17 budget agreement, which was intended to help individuals who are homeless or at risk of homelessness and who have a disability to access appropriate benefits.

Affordable housing is one of the areas slated to receive funding from California’s “cap and trade” program, which sets a statewide limit on the emission of greenhouse gases (GHGs) and authorizes the Air Resources Board to auction off emission allowances, with proceeds invested in activities that seek to reduce GHG emissions. The Governor’s May Revision includes no new proposals related to cap-and-trade relative to his January budget. The January proposal called on the Legislature to confirm with a two-thirds vote the authority of the Air Resources Board to administer the cap-and-trade program beyond 2020, in order to reduce “perceived legal uncertainty” about the program beyond that time. Contingent on this legislative action, the Governor proposed a plan to spend $2.2 billion in cap-and-trade auction proceeds on transit investments, affordable housing, pollution reduction, and other activities to promote environmental sustainability and energy efficiency.

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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.

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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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Endnotes are available in the PDF version of this Fact Sheet.

Federal dollars support a wide array of public services and systems that touch the lives of all Californians — from Social Security and health care to highway construction and public schools. A large share, but less than a majority, of this federal funding flows through California’s state budget. The Governor’s proposed state budget for 2017-18 — the fiscal year that begins this coming July 1 — includes $105.0 billion in federal funds. This is more than one-third (36.9%) of the total state budget, which also includes nearly $180 billion in state funds for the 2017-18 fiscal year.

More than 7 in 10 federal dollars that flow through California’s state budget — a projected $78.1 billion in 2017-18 — support health and human services (HHS) for children, seniors, and many other Californians. Most of these federal dollars, roughly $67 billion, go to Medi-Cal (California’s Medicaid program), which provides health care services to more than 13 million Californians with low incomes. The second-largest share of federal funding for HHS programs — $7.5 billion — goes to the state Department of Social Services. These funds support child welfare services, foster care, the CalWORKs welfare-to-work program, and other services that assist low-income and vulnerable Californians.

The remaining federal funds that flow through the state budget — a projected $26.9 billion in 2017-18 — support a broad range of public services and systems. This includes $7.5 billion for K-12 education; $6.8 billion for labor and workforce development programs, primarily for unemployment insurance benefits for jobless Californians; $5.2 billion for higher education (the California State University and the University of California); $5.0 billion for transportation, primarily to improve state and local transportation infrastructure; and $2.5 billion for additional public services and systems, including environmental protection, the state court system, and state corrections.

The outcome of the November 2016 national election portends major cuts to federal funding for key public services. For example, Republicans have vowed to repeal the Affordable Care Act (ACA), which would include rolling back the recent expansion of Medicaid coverage to low-income parents and childless adults. This change alone would reduce annual federal funding for Medi-Cal by more than $17 billion. Other services are also at risk, including some that are funded with federal dollars that flow directly to Californians outside of the state budget — such as federal food assistance provided through the state’s CalFresh program and federal Supplemental Security Income (SSI) payments for low-income seniors and people with disabilities. Republicans are likely to succeed in scaling back federal support in a number of policy areas. If so, state policymakers will face difficult choices about how to fill the resulting funding gaps in order to prevent the erosion of public services and systems that promote economic security and opportunity for millions of Californians.

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Supplemental Security Income/State Supplementary Payment (SSI/SSP) grants are a critical source of basic income for well over 1 million low-income people with disabilities and adults age 65 or older in California. Grants are funded with both federal (SSI) and state (SSP) dollars. Currently, the maximum monthly grant for an individual is roughly $896, which consists of an SSI grant of $735 and an SSP grant of $160.72. In order to help close budget shortfalls during the Great Recession, state policymakers made deep cuts to the SSP portion of the grant, reducing it from $233 per month in early 2009 to $156.40 per month by mid-2011. With an improving fiscal outlook, policymakers recently provided a state cost-of-living adjustment to the SSP portion, effective January 2017. However, this modest increase — $4.32 per month for individuals — represents only a small step toward restoring the SSP portion to its pre-recession value. Because state cuts largely remain in place, the full SSI/SSP grant continues to lose ground to housing costs, which have risen throughout much of California in recent years. For example, in every county, the “Fair Market Rent” (FMR) for a studio apartment exceeds 50% of the maximum SSI/SSP grant for an individual. People are at greater risk of becoming homeless when housing costs account for more than half of household income.

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