Another Good News, Bad News Day for the Healthy Families Program

August 27, 2009

Children at risk of being dropped from the Healthy Families Program in October got a reprieve today. The Managed Risk Medical Insurance Board (MRMIB), which administers the program, voted to delay the start date for disenrollments by one month, to November 1, with tens of thousands of children removed every month. MRMIB estimates that more than 650,000 kids will be dropped from Healthy Families between November 2009 and June 2010, unless additional funds are found to help close the state funding shortfall that the program faces in 2009-10 largely due to state budget cuts. The shortfall exceeded $190 million until the state First 5 Commission voted earlier this month to provide $81 million to support enrollment of about 200,000 children from birth to age 5 in Healthy Families through June 2010. However, this contribution still leaves a shortfall of more than $110 million, which is why dropping children from the program remains on the table and why the waiting list implemented on July 17 continues to grow, with more than 70,000 kids on the list as of August 25.

MRMIB also adopted four emergency regulations to trim program spending, three of which increase families’ out-of-pocket costs for Healthy Families services. Beginning November 1, families will pay higher copays for non-preventive health, dental, and vision services; prescription drugs; and emergency room visits that do not result in hospitalization. For example, families will pay $15 for using the emergency room, up from the current $5. A fourth emergency regulation requires families to enroll in the lowest-cost dental plans for their first two years on the program, at which point families could shift to a higher-cost plan. These four changes will generate net savings of $12 million in 2009-10, according to MRMIB estimates. MRMIB did not take action on a staff proposal to increase families’ premiums for savings of $5.5 million in 2009-10, because the increases are included in a bill currently moving through the Legislature (AB 1422, Bass).

– Scott Graves

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Schools Suffer the Budget Blues

August 27, 2009

As students prepare to kiss summer goodbye and head back to the classroom, it is worth pondering what the current round of budget cuts means for California’s schools. Previous CBP blog posts have examined the impact on children’s health and social service programs, and our budget summaries document the cuts that touch all areas of state services from parks to criminal justice. How do big numbers – such as the $16.1 billion of reductions in the July budget agreement or the $8.6 billion in 2008-09 cuts to public schools – translate at the local level?

As enacted in September 2008, the 2008-09 Budget established a funding level of $51.6 billion for K-12 education programs covered by the Proposition 98 funding guarantee. The February budget agreement reduced 2008-09 school funding to $44.7 billion and the recent July budget agreement further reduced K-12 education funding to $43.1 billion. The September budget translated into a per pupil funding level of $8,726. The July budget reductions cut this amount to $7,243 – 17.0 percent less than the level established by the September Budget Act – or nearly $45,000 less for a classroom of 30 students.

The American Recovery and Reinvestment Act (ARRA) will lessen the impact of recent cuts to education funding but it doesn’t come anywhere near making California’s schools whole. Reductions to 2008-09 school funding made by the February and July 2009 budget agreements were more than twice the amount of ARRA payments to California’s schools last year. Moreover, cuts to 2009-10 school funding included in the recent budget agreements exceed remaining ARRA payments to California by at least $1.5 billion. Therefore, despite substantial infusion of federal funds, schools will have fewer resources with which to educate California’s students this back-to-school season.

– Jonathan Kaplan

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Taxing Child Care To Give Tax Breaks to Millionaires

August 26, 2009

A tax attorney friend of mine recently characterized the Commission on the 21st Century Economy’s proposal to eliminate the corporate income and state sales taxes and reduce personal income taxes disproportionately for the wealthy while establishing a new business net receipts tax (BNRT) as “taxing child care to provide tax breaks for millionaires and taxing groceries so that oil companies don’t have to pay the corporate income tax.” One might wonder why this might be considered an “improvement” in California’s tax system. Last week we looked at underlying economic indicators and concluded that the Commission’s direction would likely result in a tax system that grows more slowly – and thus leads to wider budget gaps – than the state’s current tax system.  It turns out that modeling done for the Commission clearly discloses that the changes under consideration would lower the growth of revenues. Commission documents estimate that revenues raised by California’s current tax system would rise by 40.2 percent between 2012 and 2016, while the options under consideration by the Commission would increase by 32.4 percent or 35.6 percent over the same period. In dollar terms, the difference translates into $4 billion to $7 billion. By way of comparison, the state currently spends about $5 billion per year to support the California State University and University of California systems combined.

Who would ultimately pay the new tax? Documents prepared for the Commission address that question as well. About three-quarters (71 percent) of the BNRT would be passed on to consumers in the form of higher prices, just under a fifth (19 percent) would be passed on to workers in the form of lower wages or fewer benefits, and the remainder would be divided between shareholders and business owners (9 percent) and individuals outside of California (1 percent). The same report estimates that the lowest income Californians would pay twice as much of their income toward the new tax as the highest income Californians.  That makes the BNRT substantially more regressive than California’s current tax system – which results in the lowest-income Californians paying about a third more as a share of their income than the wealthiest Californians.

As with any complex area of public policy, the devil is in the details and the Commission’s plan still lacks critical details. We do know that the Commission’s draft proposals would eliminate exemptions in the state’s current sales tax – such as those for childcare, groceries, and prescription drugs – while giving disproportionate benefits to the wealthy and corporate shareholders. It is hard to see how a tax system that widens already significant income gaps and leads to larger, not smaller, budget gaps helps prepare California for the challenges of the 21st century.

– Jean Ross

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California Forward?

August 24, 2009

The CBP will take a closer look at the proposals for changing California’s fiscal and governance practices released by California Forward in future blog posts and analyses. In the meantime, two provisions warrant mention. California Forward proposes to reduce the legislative vote requirement for passage of a state budget to a simple majority, while leaving the vote requirement for passage of tax increases intact. The CBP has historically argued, and continues to believe, that it is essential to reduce the vote requirements for both the spending and revenue side of the budget ledger. To change one, but not the other, will in our opinion result in budgets that are either balanced through cuts alone and/or no change in the current level of gridlock. We’d argue that delays in tough years are largely due to disagreement over how to pay for the budget, not over the appropriate level of spending per se. In this case, half a loaf may be worse than none.

Moreover, another of California Forward’s proposals would actually take away one of the few tools lawmakers have to raise revenues by majority vote. While the devil is in the details and we don’t have the details, California Forward would narrow the circumstances under which fees could be imposed by majority vote and subject more fees to the same two-thirds requirement that now applies to tax increases. Voters previously rejected an attempt to narrow the Legislature’s ability to impose fees in Proposition 37 of 2000. As we noted in our analysis of Proposition 37, the Legislature’s ability to impose fees by majority vote is already quite constrained and further changes would make it more difficult to use fees to mitigate the social or economic impact of products or activities.  A story in this morning’s Calbuzz examines how constraining the Legislature’s ability to impose fees became part of California Forward’s recommendations.

– Jean Ross

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Stormy Skies Ahead

August 24, 2009

The Department of Finance has posted its most recent multiyear budget forecast, updated to reflect the July budget agreement. The forecast, which assumes that all of the savings and other solutions included in the budget agreement are realized, projects an operating shortfall of $7.4 billion in 2010-11, widening to $15.5 billion in 2011-12, the first year of the next governor’s term in office. The forecast assumes that governors will suspend the transfer into the Budget Stabilization Account, a budget reserve added by Proposition 58 of 2004, through 2012-13, something that most likely would not have been possible if the voters had approved Proposition 1A of 2009 in May.

Back up materials to the forecast, not posted on the web, but circulating among Sacramento budget wonks, provide interesting insights into the implications of the recent agreement.  The forecast assumes, for example, that the state will repay local governments for property tax dollars borrowed pursuant to Proposition 1A of 2004 in 2012-13. The state will repay local governments $2.37 billion in 2012-13 in exchange for the $1.935 billion borrowed in the recent agreement – that’s an extra $435 million in interest and other amounts owed. The spending detail also reflects continuation of the recent spending cuts, such as the deep reductions in the Healthy Families Program, through the end of the forecast period and continued diversion of so-called “spillover” funds from transit to cover state debt service costs. Speaking of debt service, that’s one area of the budget that is expected to rise sharply, increasing by 91.5 percent between 2008-09 and 2012-13, driven both by General Obligation bond debt, which is expected to increase by 84.2 percent, and lease revenue bond debt, anticipated to rise by 136.0 percent.  In contrast, Proposition 98 spending is anticipated to rise by a modest 17.1 percent over the same period.

– Jean Ross

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