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California’s 58 counties are at risk of receiving a huge new annual bill from the state under the terms of Governor Brown’s proposed budget for 2017-18, the fiscal year that begins this coming July 1. This prospect has set off alarm bells across the state, with local officials declaring that the cost-shift envisioned in the Governor’s proposal would be “devastating to counties.

At issue is how the state and counties share the nonfederal costs of the In-Home Supportive Services (IHSS) Program, which helps roughly half a million low-income older adults and people with disabilities to live safely in their own homes, thereby preventing their placement in more costly out-of-home care. Currently, counties’ share of IHSS costs is based on a “maintenance of effort” (MOE) formula. This requires counties to maintain their IHSS spending at 2011-12 levels, with two adjustments: an annual increase of 3.5 percent and additional increases to reflect locally negotiated wage increases for IHSS workers. As a result of this formula, counties’ share of IHSS costs has grown modestly and predictably over the past several years, as the state has taken on a relatively larger proportion of the program’s rising costs.

The county MOE formula took effect in July 2012 as part of the state’s roll-out of the Coordinated Care Initiative (CCI), which aims to improve care for older adults and people with disabilities while also reducing the cost of providing this care. However, the MOE formula is far from set in stone. Under state law, this formula is automatically repealed if the Governor’s Department of Finance (DOF) determines that the CCI is not cost-effective, meaning that it fails to generate net General Fund savings for the state. In this event, a prior IHSS cost-sharing formula would be reinstated. This older formula requires counties to pay 35 percent of the nonfederal share of IHSS costs — regardless of how high those costs rise — with the state paying the other 65 percent (this is known as a 35/65 sharing ratio).

Last month, the DOF announced that the CCI is not cost-effective and thus will be discontinued this coming July. As a result — and barring a subsequent change to state law — the county MOE formula will be rescinded, and counties will go back to paying 35 percent of the nonfederal portion of IHSS costs.

Reinstating the 35/65 county-state sharing ratio, as the Governor envisions, would shift huge new costs for IHSS from the state to the counties. County spending on IHSS in 2017-18 would rise to a projected $1.8 billion — a one-year jump of $623 million compared to what counties would be expected to pay if the MOE formula remained in effect ($1.2 billion). By 2022-23, counties’ total IHSS expenditures would rise to a projected $3 billion. This is $1.6 billion higher — more than double — compared to what the counties would be expected to pay based on the MOE formula. These unpublished estimates, which were developed by the County Welfare Directors Association of California, account for a range of factors that drive IHSS costs, including anticipated growth in enrollment; the gradual increase in the state’s minimum wage to $15 per hour, as required by last year’s Senate Bill 3; and a provision in state law that requires counties to pay 100 percent of the nonfederal cost of IHSS workers’ wages that exceed $12.10 per hour.

Can counties’ already strained budgets absorb annual IHSS cost increases of this magnitude? The answer is clearly “no.” Even the Governor acknowledges that there’s a problem. The funds that counties rely on to pay their share of IHSS costs — “1991 realignment” revenues — “will not be sufficient to cover” the additional costs that counties are expected to take on in 2017-18, according to a key DOF document. (In brief, the 1991 realignment transferred from the state to counties the responsibility for various programs, including IHSS; modified state-county cost-sharing ratios; and provided counties with dedicated annual revenues intended to support these changes.)

The Governor has offered to help mitigate — “to the extent possible” — the “financial hardship and cash flow problems” that counties will experience if the IHSS cost-shift is allowed to take effect. At this point, it’s uncertain what this “mitigation” would look like and how much relief it would actually provide to cash-strapped counties. It’s also unknown whether any such mitigation would extend across multiple years or would apply only to 2017-18. This is a key question because the revenues provided by the 1991 realignment are expected to continue to fall short of allowing counties to cover the huge IHSS spending increases envisioned in the Governor’s proposal.

Any effort to mitigate the impact of the IHSS cost-shift would — by definition — only lessen the severity of the financial hit to counties, rather than eliminate it entirely. As such, counties would still need to find other revenues in the coming years in order to fully meet their rapidly rising IHSS obligations. Increasing local taxes is out of the question, given that counties’ ability to raise revenues is extremely constrained. Therefore, any additional funding that counties need to cover their higher share of IHSS costs would likely have to be redirected from other critical local services, such as health and mental health programs. (Counties, however, would not be able to make cuts to IHSS, which is governed by state and federal laws.)

The question of whether to shift additional costs for IHSS to counties is sure to spark a vigorous debate among state and county officials as budget deliberations unfold in the coming months. The Governor has so far staked out an extreme position: In his view, the 35/65 county-state sharing ratio must be reinstated — no questions asked — and county spending for IHSS should immediately jump to reflect this new 35 percent share. Not surprisingly, counties have vowed to “oppose the state’s efforts to shift new IHSS program costs to counties.” This puts state legislators in a tough spot, particularly since any IHSS costs that do not shift to the counties would have to be paid for with state General Fund dollars — expenditures that were not accounted for in the Governor’s proposed 2017-18 budget.

In our view, any state effort to increase counties’ share of cost for IHSS should take into account the anticipated growth of 1991 realignment revenues — the funding that counties use to pay their share of IHSS costs. In other words, the amount that counties are required to pay for IHSS should have some reasonable relation to the amount of revenues that counties are expected to receive for this purpose. The IHSS cost-shift envisioned by the Governor runs afoul of this basic principle.

The Legislature begins digging into this contentious issue next month: Budget subcommittees are scheduled to review the Governor’s IHSS proposals on March 2 in the state Senate and on March 8 in the Assembly.

— Scott Graves

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