What We Were Watching for in the May Revision — and How It Looks Thus Far

May 20, 2013

Last week, in the run-up to Governor Brown’s May Revision, we blogged about the five things we were looking for in his revised 2013-14 budget and the ensuing budget debate. Here we reflect back on what were looking for — and provide a brief take on what we’ve seen. Our initial analysis of the May Revision — published the day after the Governor released his revised budget — provides a fuller discussion of the major changes and important new proposals. In the coming days and weeks, we’ll provide continued analysis and commentary here at California Budget Bites.

1. Education Finance Reform

We were watching for: potential changes to the mix of Local Control Funding Formula (LCFF) grants as well as any new accountability provisions. Under the Governor’s proposal to restructure school finance in California – a topic the CBP recently examined in its chartbook on the LCFF — each school district would receive a base grant per student and, in addition, a supplemental grant based on the unduplicated number of English learners or students from low-income families and a concentration grant for the share of these students above 50 percent of district enrollment. We were watching for preservation of the additional dollars allocated for disadvantaged students and stronger accountability provisions that would ensure that districts are using the LCFF dollars to directly benefit the students for whom they are intended.

The May Revision: preserves the LCFF formula proposed in January, including the concentration grants. The May Revision also strengthens LCFF accountability provisions by clarifying that supplemental and concentration grants are provided “primarily for the benefit” of students for whom they are intended. Further, the May Revision requires school districts, upon full implementation of the LCFF, to report how they plan to spend supplemental grant dollars in proportion to the number of disadvantaged students at each school site.

2. Medi-Cal Expansion

We were watching for: a call for a state-led expansion that leaves existing funding with counties, for now. As part of federal health care reform, the Governor has called for expanding Medi-Cal  to cover low-income adults who currently are not eligible — a topic addressed in our recent Medi-Cal chartbook. In January, the Governor presented two approaches to expansion — a county-based approach and a state-led approach — while also linking the expansion to his proposal to “realign” some human services programs to counties. Under the Governor’s plan, counties’ new costs would be funded with dollars that counties now use to provide health care to low-income, uninsured (“medically indigent”) Californians — many of whom would enroll in Medi-Cal under the expansion. We were watching for a commitment to a state-led expansion of Medi-Cal that allows counties to retain any savings they realize and put it toward providing local health services for the remaining uninsured, at least until the impact of health care reform on both the state and the counties is better understood.

The May Revision: endorses a state-led expansion of Medi-Cal where newly eligible Californians would enroll in Medi-Cal and receive the same benefits available to other Medi-Cal enrollees. However, the May Revision also maintains — and provides new details about — the Governor’s proposal to shift costs for certain human services programs to counties. The Governor now proposes that counties “assume greater financial responsibility” for CalWORKs, CalWORKs child care, and CalFresh administration. Counties would cover these costs with dollars shifted from their health care safety nets, thereby generating state savings that the Administration estimates would exceed $1 billion per year by 2015-16.

3. State Revenue Projections

We were watching for: revised economic and revenue forecasts and the implications for state spending. Through April 2013, state revenue for the current (2012-13) fiscal year was running ahead of the Governor’s January projections by $4.6 billion, prompting speculation that the May Revision would feature revenue forecasts for 2013-14 much higher than had been expected in January. We were watching for revised economic and revenue forecasts and the implications of those revisions for the Proposition 98 minimum school funding guarantee.

The May Revision: presents somewhat weakened economic and revenue forecasts. The Administration reported that higher-than-anticipated revenues for the current year (2012-13) are spread over several fiscal years and that “the influx is expected to be short-lived.” The May Revision projects additional revenue collections in the current fiscal year ($2.8 billion higher than assumed in January), derived from taxpayers shifting revenue from 2013 to 2012 in response to federal tax changes, followed by a slight decrease in revenue in 2013-14 ($1.3 billion lower than assumed in January). The assumed Proposition 98 minimum funding level follows a similar pattern, increasing in 2012-13 and decreasing slightly in 2013-14. The May Revision also adjusts the state’s short-term economic outlook downward due to federal actions, including federal tax changes and sequester cuts, and weaker global economic growth. However, the Legislative Analyst’s Office argues that the Administration’s economic and revenue forecast “seems too pessimistic” and projects that revenues will come in more than $3 billion higher – over the three-year period from 2011-12 to 2013-14 – than the Governor assumes.

4. Pay-Down of California’s Budgetary Debt

We were watching for: any changes to the Governor’s proposed pay-down of budgetary debt. The Governor’s January proposal called for paying down $4.2 billion in budgetary debt as part of a plan to reduce this debt from $35 billion in 2010-11 to less than $5 billion by 2016-17. We were watching for any increases to the proposed pay-down as a result of higher-than-anticipated revenues or possibly a more gradual repayment schedule in order to free up dollars for other spending priorities.

The May Revision: maintains the Governor’s general plan for paying down budgetary debt to less than $5 billion by 2016-17. The adjustments to the state’s revenue forecast noted earlier alter the repayment schedule, but do not change the multiyear objective. The May Revision also maintains the Administration’s planned $1 billion contribution to the state’s Special Fund for Economic Uncertainties.

5. Enterprise Zone Reform

We were watching for: any changes to proposals to restructure the Enterprise Zone (EZ) Program. The Governor’s January proposal included a set of regulatory changes to the state’s EZ Program, which provides tax credits intended to encourage businesses to locate in economically distressed areas. While the intent of the program is to promote business development and job creation in targeted areas, research shows that the program fails to achieve its goals while placing an increasing strain on the state budget — with the cost projected to rise to $1 billion by 2015-16. We were watching for proposals to more aggressively restructure the program to better target job creation and business development, boost accountability and evaluation of program effectiveness, and reduce the costs to the state.

The May Revision: significantly alters the Governor’s proposal to restructure the EZ Program. The new proposal narrows the EZ hiring tax credit to specific areas with high unemployment and poverty rates, and limits availability to hiring of three targeted groups of individuals (as opposed to 10 groups currently). The May Revision also expands the EZ sales tax credit for manufacturing and biotech equipment purchases to be a statewide — rather than a zone-specific — incentive, in an effort to discourage within-state competition for jobs. The May Revision also creates a new business recruitment and retention fund, administered by the Governor’s Office, for use in negotiating business tax credits in exchange for investments and employment expansion in California. Early reviews of these newly proposed reforms – which as a whole the Administration projects to be revenue-neutral — suggest that the tax-credit changes would largely eliminate the EZ Program in its current form.

*  *  *

Beyond the five budget issues detailed in our May Revision preview and discussed above, there were other notable components of the Governor’s revised budget proposal. The Governor essentially put on hold for two years his complete restructuring of adult education, during which time the Governor proposes to transition to a new regional partnership system. The May Revision also leaves many previous cuts to health and human services unchanged, though it does include a new funding allocation ($48 million) for CalWORKs “early engagement” strategies to better address client needs during the shortened 24-month time window imposed in 2012-13. All of these proposals are discussed in the initial May Revision analysis we issued last week.

The initial analysis we released last week also highlights some of the key choices that policymakers could face during the coming weeks as they move toward enacting a 2013-14 budget, which would take effect on July 1. California Budget Bites will provide continued analysis and commentary on the issues shaping the budget debate and what the latest policy proposals mean for low- and middle-income Californians and for the future of our state.

— Chris Hoene

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What We’re Watching For in the May Revision and Beyond

May 13, 2013

Governor Brown is set to release the May Revision of his proposed 2013-14 budget tomorrow, kicking off the sprint to a final budget agreement in June. The CBP will provide a series of analyses of the revision, including a same-day statement, a brief analysis of major changes and important new proposals — and the issues they raise — and a more in-depth scan in the days that follow. You can find all the latest updates and analyses here at California Budget Bites.

The following are five issues that we’ll be watching for in the Governor’s May Revision and the budget deliberations that follow in the coming weeks:

1.   Education Finance Reform

The issue: The Governor’s proposed Local Control Funding Formula (LCFF) seeks to make the state’s system of school finance more equitable by providing additional revenue to school districts with disadvantaged students, a topic the CBP recently examined in its chartbook on the LCFF. Under the Governor’s proposal, each school district would receive a base grant per student and — in addition — a supplemental grant based on the unduplicated number of English learners or students from low-income families as well as a concentration grant for the share of these students above 50 percent of district enrollment.

We’re watching for: potential changes to the mix of LCFF grants as well as any new accountability provisions. Will the May Revision preserve the additional dollars allocated for disadvantaged students? If the LCFF concentration grants are reduced or eliminated, will the freed-up dollars be used to provide larger supplemental grants? The May Revision may also include stronger accountability provisions in terms of addressing district spending of LCFF dollars. Our view is that policymakers should preserve additional dollars the LCFF would allocate for disadvantaged students, including concentration grants, and that school districts should be required to use these dollars to directly benefit the students for whom they are intended.

2.    Medi-Cal Expansion

The issue: As part of federal health care reform, the Governor’s proposed 2013-14 budget calls for expanding Medi-Cal — the state’s Medicaid program — to cover low-income adults who currently are not eligible. Our recent Medi-Cal chartbook provides an in-depth look at the program and the issues raised by the expansion. In January, the Governor presented two approaches to expansion — a county-based approach and a state-based approach — while also linking the expansion to his proposal to “capture” some funding that counties now use to provide health care to low-income, uninsured Californians. The Governor’s proposal also assumes a 10 percent cut in payments for Medi-Cal providers that was approved by state policymakers in 2011 and is currently pending in the U.S. 9th Circuit Court of Appeals.

We’re watching for: a call for a state-led expansion that leaves existing funding with counties, for now, and that reconsiders the cuts to provider payments. Counties and health care advocates are nearly unanimous in their push for a state-led expansion. Also, any savings that counties do realize, at least in the near term, should be prioritized for local health services given that millions of Californians will remain uninsured even after health care reform is fully implemented and will turn to the counties for care. Lastly, amid concerns that payment cuts on the eve of the Medi-Cal expansion could drive providers from the program at the very time when provider participation needs to increase, we’ll be watching for a call to repeal those cuts.

3.    State Revenue Projections

The issue: Ten months through the current fiscal year, the State Controller’s Office reports that total revenue is running ahead of the Governor’s January projections by $4.6 billion. The state’s revenue collections are prompting speculation about increased revenue forecasts for the upcoming 2013-14 fiscal year.

We’re watching for: updated economic and revenue forecasts. If there is a projected increase in General Fund revenues compared to January projections, what will the revised level of the Proposition 98 minimum school funding guarantee be, and how will the May Revision propose to use additional Proposition 98 funding? Options would include using the dollars to pay back money borrowed from K-12 schools, providing additional funding to implement the Local Control Funding Formula, and/or providing resources for other one-time or ongoing education priorities. How much of this higher-than-anticipated revenue is left over beyond the Proposition 98 minimum funding level? And how is that revenue allocated? Calls for paying down budgetary debt and/or building up the state’s reserves are likely to be among the options considered. But, with many Californians still hurting in the wake of the Great Recession, a balanced approach would prioritize providing additional resources for critical programs such as child care and state preschool, CalWORKs, and adult dental coverage.

4.    Pay-Down of California’s Budgetary Debt

The issue: The Governor’s proposed 2013-14 budget calls for paying down $4.2 billion in budgetary debt as part of a plan to reduce this debt from $27.8 billion in 2012-13 to $4.3 billion by 2016-17. “Budgetary debt” includes money borrowed from K-12 schools, unpaid costs to local governments, and loans from state special funds.

We’re watching for: any changes to the Governor’s proposed pay-down. If the May Revision does project higher revenue collections, increasing the pay-down in 2013-14 could be part of proposals for allocating these additional revenues. The Governor and the Legislature may also choose to adopt a more gradual repayment schedule in order to free up funds to support other budget priorities.

5.    Enterprise Zone Reform

The issue: The Governor’s proposed 2013-14 budget includes a set of regulatory changes to the state’s Enterprise Zone (EZ) Program, which provides a variety of tax credits intended to encourage businesses to locate in economically distressed geographic areas. While the intent of the program is to promote business development and job creation in targeted areas, research shows that the program fails to achieve its goals and places an increasing strain on the state budget — $720 million in 2010, projected to rise to $1 billion by 2015-16.

We’re watching for: any changes to proposals to restructure the EZ Program. Proposals that are currently under consideration include the Governor’s proposed regulatory reforms as well as a number of legislative proposals that seek to restructure the program. Given that lawmakers are very unlikely to eliminate the program, we think that it should be restructured to better target the jobs and business development intended, boost accountability and evaluation of program effectiveness, and reduce the strain on the state budget.

— Chris Hoene

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New CBP Analysis Looks at the Governor’s Proposal to Restructure Education Finance in California

May 10, 2013

Yesterday the CBP released a new report — Moving Forward: Addressing Inequities in School Finance Through the Governor’s Local Control Funding Formula — that examines Governor Jerry Brown’s proposal to fundamentally change how the state funds K-12 education. This report shows that by directing additional resources to disadvantaged students — in particular, students from low-income families and English learners — the Governor’s proposed Local Control Funding Formula (LCFF) would address significant inequities in California’s current system of school finance.

The CBP’s analysis includes estimates of the LCFF’s impact on selected school districts across the state and also highlights the importance of holding districts accountable for ensuring that the additional funds the LCFF would provide for disadvantaged students directly benefit these young people.

Introduced as part of the Governor’s 2013-14 budget proposal this past January, the LCFF would provide each school district with a base grant per student as well as additional dollars based on the number of economically disadvantaged students and English learners as a share of total district enrollment. The CBP’s report undescores the importance of preserving these additional dollars for disadvantaged students in LCFF policy deliberations.

— Steven Bliss

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Repairing California’s Ladder to Opportunity: Making Sure That Hard-Working Families Can Prosper

May 8, 2013

Nearly 60 percent of low-income working families in California have no education beyond high school, the largest share of any state. A new report from the Campaign for College Opportunity and the Women’s Foundation of California, Working Hard, Left Behind, draws attention to the state’s more than 1.3 million low-income working families, highlights the critical link between higher education and economic mobility, and calls for changes to improve the educational pathway to opportunity.

A large proportion of California’s working families — more than a third — are low income, defined as making below 200 percent of the poverty line, or $45,397 for a family of four in 2011. Improving the educational attainment of these working families has the potential to boost their earnings and improve their employment prospects. A college degree is strongly tied to economic security and mobility: On the whole, only Californians with bachelor’s degrees made strong wage gains over the past generation, and, since the recession, job growth nationwide has largely benefited those with education beyond a high school diploma.

Improving access to higher education is a key step that California can and must take to improve economic opportunity for low-income working families. Recent research suggests that every dollar California invests in higher education pays off with a return of $4.50, so this step is also likely to strengthen the state’s economy.

Working Hard, Left Behind outlines actions policymakers can take to improve the state’s pathways to higher education and vocational training and certification. These include:

  • Improving and expanding financial aid options for nontraditional students such as older working adults.
  • Strengthening the delivery of basic skills instruction so that more students can transition into college-level courses.
  • Prioritizing educational resources such as orientation, counseling and advising, and other support services that promote student success and degree completion, particularly for low-income students.
  • Creating a public agenda for higher education that sets clear goals for preparing high school students for college, transitioning adult students into higher education and the workforce, and increasing certificate and degree completion rates.

Of course, the pathway to higher education and workforce success arguably begins as early as preschool. Making sure kids in California’s K-12 public schools have the resources they need to get on track toward higher education must also be a priority for policymakers. A CBP report out tomorrow will look at the current debate surrounding a major policy proposal intended to strengthen educational equity. Moving Forward: Addressing Inequities in School Finance Through the Governor’s Local Control Funding Formula examines Governor Jerry Brown’s bid to direct additional funding to school districts with a larger proportion of disadvantaged students. Stay tuned.

— Hope Richardson

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Supporting All Young Learners, Taking on Inequality

May 1, 2013

In a major opinion piece in the New York Times this past Sunday, Stanford University professor — and 2013 CBP conference speaker — Sean Reardon discusses the growing academic achievement gap between children in the wealthiest families and other children. As Reardon explains, the achievement gap between high-income students (those from families at the 90th percentile of the US income distribution) and lower-income students (those from families at the 10th percentile) has widened substantially during the past few decades.

Reardon partly attributes this growing divide in academic achievement to increased income inequality in the US and, relatedly, to the fact that affluent families are spending more of their resources — financial and otherwise — on their children’s preparation for school, in light of the higher-than-ever stakes of educational success. One way to close the achievement gap between higher-income children and their peers, notes Reardon, is to level the playing field by ensuring that all young people enter school ready to learn:

Maybe we should take a lesson from the rich and invest much more heavily as a society in our children’s educational opportunities from the day they are born. Investments in early-childhood education pay very high societal dividends. That means investing in developing high-quality child care and preschool that is available to poor and middle-class children. It also means recruiting and training a cadre of skilled preschool teachers and child care providers. These are not new ideas, but we have to stop talking about how expensive and difficult they are to implement and just get on with it.

Reardon’s piece underscores that broad access to child care and preschool programs among low-income families is one of the keys (though not the only key) to addressing the achievement gap between affluent children and their less-well-off peers and, in turn, reversing the trend toward greater income inequality. In light of the past generation of widening inequality in California, it is troubling that state policymakers have cut annual support for child care and preschool by about $1 billion — or almost one-third ­— in the past several years. As California’s fiscal picture improves, policymakers should seek to rebuild the state’s investment in high-quality child care and preschool programs that allow low-income parents to work and that also provide critical developmental opportunities for children from lower-income families.

Additional details on Professor Reardon’s research can be found in his presentation from our March 2013 annual conference. Read his presentation slides.

— Steven Bliss

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