On January 10, Governor Jerry Brown released his proposed budget for 2017-2018 (the state fiscal year runs from July 1, 2017 to June 30, 2018). With a dimmer view on the state’s fiscal health, the budget proposes to address a projected $1.6 billion deficit. This deficit is driven by a slower growth in revenues, predominantly in the state’s three primary revenue sources: income, sales, and corporate taxes.
This memorandum provides highlights from the Governor’s proposed budget, which will face scrutiny by the State Legislature over the next few months. Uncertainties at the federal level will drive many of the changes to this proposed budget as the Legislature deliberates. With the repeal of the Affordable Care Act (ACA) set in motion earlier this month, the state may face additional fiscal hurdles in funding health priorities.
Highlights are aggregated in the following areas of interest to funders: preparations for Census 2020, children’s welfare, criminal justice reform, education (both K-12 and higher education), environmental policy, health, housing, and transportation.
Grants Address Reduced Federal Funding: The Governor proposes $7 million in grants to cities and counties to encourage voluntary participation in efforts to ensure the accuracy of the Census Bureau’s 2020 count. These grants will range in $7,500 to $125,000. These state funds seek to address reduced federal funding for the Census. The U.S. Census Bureau has reduced canvassing in-field from 100 percent to 25 percent. By providing these grants, the Governor seeks to ensure the accuracy of the Master List of Addresses, an important tool to prevent an undercount of the state’s population.
- Early Childhood Education and Child Care Funding: The Governor’s plan reneges on an agreement with legislative leaders made last year by suspending reimbursement rates for childcare providers at 2016-17 levels for FY2017-18 and delaying the addition of 2,959 full-day State Preschool slots planned to begin on April 1, 2018. In total, these proposals save $226 million.
- Continuum of Care Reform: The Budget includes $217.3 million to continue implementation of the Continuum of Care reforms. The reforms emphasize home-based family care, improvement of access to services without having to change out-of-home placements to get those services, and increasing the role of children, youth, and families in assessment and case planning.
- CalWORKS: The proposed budget provides $5.4 billion to the stateâ€™s assistance to needy families. The average monthly CalWORKs caseload is estimated to be about 459,000 families in 2017-18, a 5.6 percent decrease from the previous yearâ€™s projection. According to the Governorâ€™s Office, due to an improving economy, caseloads have decreased every year from a recent peak of 587,000 in 2010-11.
Criminal Justice Reform
- Proposition 47: The Department of Finance estimates net savings of $42.9 million as a result of the passage of Proposition 47. This estimate assumes net savings from a reduction in the stateâ€™s adult inmate population and increased costs due to a temporary increase in the parole population and trial court workload associated with resentencing. California voters adopted Proposition 47 in 2014. The ballot initiative reduced certain drug felonies to misdemeanors, and made changes to other crimes.
- Elimination of Community Infrastructure Grants: The budget eliminates the $67.5 million provided for community infrastructure grants to cities and/or counties to promote public safety diversion programs and services by increasing the number of treatment facilities for mental health, substance use disorder, and trauma-related services.
- The Community Corrections Performance Incentive Grant: The budget includes $114.9 million to continue this successful program. This program is an incentive for counties to reduce the number of felony probationers sent to state prisons.
- Spending Up, but Not as Much: Proposition 98 guarantees a certain level of spending on K-12 education based on complex formulas set forth in law. When revenues fall short or exceed original estimates, funding for education is revised downward or upward, respectively. Because of changes in estimated revenues for the past, current, and future fiscal years, the Governor’s plan makes changes to education funding in three ways:
o Past Fiscal Year (2015-2016): Revenues collected by the state failed to meet estimates by $1.5 billion, reducing the state guarantee for education funding by $379 million, bringing total education funding to $68.7 billion. The Governor proposes to address this change by making the FY2015-16 payment in this fiscal year.
o Current Fiscal Year (2016-2017): Due to a decline in estimated revenues by $1.6 billion, the current fiscal year’s minimum guarantee to education is reduced by $506 million to$71.4 billion. The Governor proposes to address this change by deferring the FY2016-17 payment from June 2016 to July 2017, which allows the state to count the deferred payment for 2017-18 guarantee.
o Future Fiscal Year (2017-2018): The Governor proposes a 3 percent increase over the revised 2016-17 revenue, adding $2.1 billion for a total of $73.5 billion.
Prop 98 Minimum Guarantee (includes funding for California Community Colleges)
- Local Control Funding Formula (LCFF): Increases LCFF implementation by $744 million, bringing investment over the last four years to almost $16 billion. However, the budget also shifts $859 million in LCFF expenditures by one month (June 2017 to July 2017) to reflect a reduction in education funds (Proposition 98). Additionally, the budget proposes an increase of $2.4 million to County Offices of Education for LCFF implementation to reflect cost-of-living adjustments.
- Charter School Growth: Provides an increase of $93 million to support projected charter school average daily attendance.
- Proposition 47: Provides $10.1 million to support investments aimed at improving outcomes for public school pupils in K-12 by reducing truancy and supporting pupils who are at risk of dropping out of school or are victims of crime.
- Proposition 56: Provides $29.9 million to support tobacco and nicotine prevention and reduction programs at K-12 schools. Proposition 56, adopted by California voters in 2016, increased the cigarette tax to $2 per pack.
- Community Colleges: The Governor proposes $150 million for grants to support community colleges’ efforts to develop and implement “guided pathways” programs, which endeavor to improve student success through integrated, institution-wide approaches. These include detailed, term-by-term roadmaps for students to complete academic programs, accompanied by early academic planning and ongoing student support service. Additionally, the Governor proposes increasing the Chancellor of the Community College’s Innovation Grants by $20 million. These grants seek to incent the development and implementation of innovative practices in designated areas.
- Middle Class Opportunity Scholarship: As proposed, this scholarship will no longer accept new students. Awards will be renewed only for the approximately 37,000 students who received awards in 2016-17, with no new awards for the program. By 2020-21, this proposal will reduce annual General Fund costs by $115.8 million.
- Cal Grant: As proposed, the budget decreases Cal Grant funds by $24.5 million to reflect the reduced number of eligible students for Cal Grants.
- Cap-and-Trade: Governor Brown plans to sponsor a bill to extend the Cap-and-Trade program, which sets a statewide limit on the emission of greenhouse gases past 2020. This will require a two-thirds vote in both the Senate and Assembly. Additionally, the Governor proposes a $2.2 billion Cap and Trade Expenditure Plan for 2017-18. The budget assumes $1.5 billion in auction revenue to be collected in FY2017-18 and $700 million from prior years. The dollars will be allocated to high-speed rail and other transit investments, affordable housing, pollution- reduction projects, and other activities aimed to promote sustainability and energy efficiency.
- Drought: The budget includes $178.7 million to provide immediate response to drought impacts such as protection of water supplies and conservation, emergency response (California Disaster Assistance Act), and protection of fish and wildlife. This amount includes $5 million to provide emergency drinking water support for small communities by developing additional water supplies. Additionally, the budget proposes a $248 million increase for Proposition 1 funding for the Department of Water Resources to promote water conservation, infrastructure to adapt to climate change and improvements toward water self-reliance.
- Safe Water for All: The budget includes efforts to reduce source of water contamination to provide safe water for all communities with an increase of $1 million to the Waste Discharge Permit Fund to address contamination of groundwater basins from agricultural practices.
- Conservations: The proposed budget includes $11 million for the San Gabriel and Lower Los Angeles Rivers and Mountains Conservancy to continue their mission of recreational and educational uses as well as water conservation.
- Medicaid: California’s Medicaid program, Medi-Cal, is projected to have 14.3 million caseloads in FY17-18. The Budget assumes costs of $20.1 billion ($888 million General Fund) in 2016-17 and $18.9 billion ($1.6 billion General Fund) in 2017-18 for the 4.1 million Californians in the optional Medi-Cal expansion. However, these amounts do not reflect potential changes entertained by Congress. Congressional leaders have indicated an interest in making Medicaid a block grant, which would have an estimated impact of $1 trillion to states over 10 years. If Medicaid changes are made this year, this would have significant impacts to the state budget.
- Children’s Health Insurance Program (CHIP) Reauthorization: CHIP is a partnership between the federal government and states and territories to help provide low-income children, not otherwise eligible for Medi-Cal, with health insurance coverage. The Affordable Care Act (ACA) included a provision that allows the program’s federal matching assistance percentage to increase from 65 percent to 88 percent for federal fiscal years 2016 through 2019. However, the CHIP program is only authorized by the federal government through September 2017. To extend the CHIP program beyond September 2017, Congress must pass legislation. The budget assumes the program is reauthorized, but uncertainties remain.
- Full-Scope Medi-Cal Coverage for Undocumented Children: The Budget includes $279.5 million to provide benefits to approximately 185,000 undocumented children. This amount reflects the full-year costs for this program.
- Children's Mental Health Crisis Services Grants: The proposed budget eliminates $17 million intended for grants to local governments to increase the number of facilities providing mental health crisis services for children and youth under the age of 21. The Governor notes that nearly $11 million in Mental Health Services Act funding remains available for this program.
- Affordable Housing: Last year, Governor Brown proposed $400 million as a set-aside for affordable housing contingent on the adoption of streamlining local permitting. Because the Legislature failed to enact legislation to meet the Governor’s requests, this money was not allocated. This year, the Governor eliminates the $400 million set-aside for affordable housing completely.
- Governor’s Demands: Despite eliminating the $400 million incentive for the Legislature to adopt housing reforms, the Governor continues to make the following legislative requests:
o Streamline Housing Construction: Reduce local barriers to limit delays and duplicative reviews. This reflects his proposal last year that failed in the State Legislature. This previous proposal sought to establish a “by-right” component to approving housing development that met specified conditions.
o Lower Per-Unit Costs: Reduce permit and construction policies that drive up unit costs.
o Production Incentives: Those jurisdictions that meet or exceed housing goals, including affordable housing, should be rewarded with funding and other regulatory benefits. Those jurisdictions that do not build enough to increase production should be encouraged by tying housing construction to other infrastructure-related investments.
o Accountability and Enforcement: Compliance with existing laws—such as the housing element—should be strengthened.
o No Impact to the Budget: No new costs, or cost pressures, can be added to the state’s budget, if new funding commitments are to be considered. Any permanent source of funding should be connected to these other reforms.
- New Revenue: A key component of this package is a 10-year investment plan that will provide nearly $4.2 billion in new funding for the Governor’s transportation priorities. These revenues include:
$65 vehicle registration tax
Increasing gasoline excise tax rates, and indexing the rates for inflation.
Cap-and-trade auction revenues
Increasing diesel excise tax rates, and indexing the rates for inflation.
Efficiency savings from Caltrans
Highlights of the 10-year plan include:
o Active Transportation Program: $1 billion for active transportation projects with at least 50 percent of funds directed to benefit disadvantaged communities.
o Local Street and Roads/Local Partnership Funds: $11.4 billion allocated to cities and counties for local road maintenance and over $2.2 billion in state-local partnership grants.
o Sustainable Transportation Grants: An increase of $25 million annually for competitive planning grants to assist regions and local governments in achieving sustainable transportation infrastructure.
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