Despite recent projections from the Legislative Analyst’s Office (LAO) that the state would face a $1.9 billion deficit, the Governor projects a balanced budget with multi-year surpluses through FY 2016-17. During the press conference the Governor declared that the state’s operating deficit was “gone.”
City officials will likely find much in common with the Governor’s impassioned defense of his new proposals affecting education.
“We’re investing in our schools but we’re doing so in the context of encouraging local flexibility, local control. We want to put the decisions closer to the classroom. And I use the term ‘subsidiarity,’ and that means let problems be solved closest to where they exist. Those institutions that have the most direct contact with the situation, the problem, should have the greatest authority,” said Gov. Brown.
For video of the Governor’s comments please visit the California Channel’s website. This quote can be found 5 minutes and 20 seconds into the video.
Deficit vs. Surplus
In its November report “The 2013-14 Budget: California’s Fiscal Outlook,” the LAO projected California’s deficit for FY 2013-14 at $1.9 billion. Conversely, the Governor has projected a surplus of $851 million by the end of 2013. Department of Finance (DOF) Director Ana Matosantos explained the difference in projections.
The Governor’s budget takes a less aggressive approach to special funds repayment and assumes a greater collection of redevelopment dissolution revenue despite LAO’s estimates. Further, the plan proposes to increase education funding both by using Proposition 30 revenues and allocating Prop. 39 money to a special fund to lower the state’s Prop. 98 obligation.
While Gov. Brown declared that there would be no operating deficit for FY 2013-14, that does not include the state’s so-called “wall of debt” which is a result of previous year’s budgetary borrowing. The Governor proposes in FY 2013-14 to pay down the debt by $4.2 billion and further projects that by FY 2016-17 the wall of debt will be reduced from $27.8 billion to a total of $4.3 billion. This reduction will be accomplished mostly through repayments to education and special funds.
The Governor’s budget numbers, however, are still contingent on factors such as:
Federal actions, including the pending sequester;
Uncertain economic recovery;
Legal actions by the federal government which could blocks cuts; and
Increased healthcare costs under the Affordable Care Act (ACA).
Major Policy Priorities
More Funding and Local Control for Schools
Gov. Brown’s plan proposes to eliminate categorical school funding in favor using a “Local Control Funding Formula.” In explaining the policy, the Governor stated: “It is controversial, but it’s fair; it’s right and it’s just.”
A Local Control Funding Formula would entitle all schools to a base funding grant but provides additional money for schools based on the proportion of English language learners and the number of students eligible for free or reduced cost meals. The Governor’s proposal states the plan will “increase local control, reduce state bureaucracy and ensure that student needs drive the allocation of resources.”
Health Care Reform Implementation
Under ACA, expanded health care coverage is provided for in a few ways including:
The health insurance exchange, a new marketplace in which individuals who do not have access to public coverage or affordable employer coverage can purchase insurance and access federal tax credits; and
Two expansions of Medicaid – a mandatory expansion by simplifying rules affecting eligibility, enrollment, and retention; and an optional expansion to adults with incomes up to 138 percent of the federal poverty level (FPL).
The Governor’s budget includes a placeholder of $350 million from the General Fund for the cost of the mandatory expansion until a more refined estimate can be developed. The budget outlines two alternatives to the optional expansion: a state-based approach and a county-based approach. A state-based approach would build upon the Medicaid program and managed care delivery system. The county-based expansion of Medicaid would build upon the existing Low Income Health Program. These options are intended to serve as a basis for a dialogue about how to move health care reform forward. It is likely to be discussed in a special session that DOF has indicated would be called before February.
Funding Available from Redevelopment Dissolution
The budget projects that the state will realize General Fund savings from the dissolution of redevelopment agencies in the amount of $2.1 billion in FY 2012-13 and $1.1 FY 2013-14. Over the same two-year period the Administration projects that counties will receive approximately $1.6 billion, cities $1.2 billion and special districts $400 million. An Administration official estimated the amount dedicated for enforceable obligations over this period to range between $4 – 4.5 billion.
Enterprise Zones: Undefined Legislative Intentions Despite Talk of Regulatory Reform
As anticipated, the Governor’s plan includes reforms to the Enterprise Zone program through regulatory changes. The Department of Housing and Community Development (HCD) has been working on these proposed changes since 2011. The regulations are expected to garner $10 million in FY 2012-13 and $50 million in FY 2013-14 for the General Fund.
The proposed regulations will:
Limit retrovouchering by requiring all voucher applications to be made within one year of the date of hire;
Require third party verification of employee residence within a Targeted Employment Area;
Streamline the vouchering process for hiring veterans and recipients of public assistance and
Create stricter zone audit procedures and audit failure procedures.
While the Governor’s budget document details what could be viewed as relatively modest reforms, he was unclear about his intent with regard to expected legislative efforts. Communities with Enterprise Zones would be wise to monitor such legislative efforts extremely carefully. In 2011, the Governor unsuccessfully proposed the elimination of the Enterprise Zone program and legislative leadership has also carried similar proposals in recent years.
For more background on Enterprise Zones, including a history of the program and advocacy talking points, please see the Jan. 8 CA Cities Advocate story “Enterprise Zone Program May Continue as Budget Target.”
Local Assistance Grant Funding: The Governor’s budget augments the $20 million grant for local assistance for Realignment implementation by $4 million in the current fiscal year, for a total allocation of $24 million in FY 2012-13. The budget increases the local assistance grant to $27.5 million in FY 2013-14. For details, please see page 4 under “Local Assistance” in the budget document for the Board of State and Community Corrections.
Suspension of Local Government Mandates
The Governor proposes to continue FY 2012-13 mandate suspensions, as well as suspend nine more. Four of these mandates have recently determined statewide cost estimates and five have been determined as mandates by the Commission on State Mandates, but statewide costs have not yet been calculated.
Suspended mandates with approved cost estimates include:
Modified Primary Election (01-TC-13)
Domestic Violence Background Checks (01-TC-29)
Permanent Absentee Voter II (03-TC-11)
Identity Theft (03-TC-08)
Suspended mandates for which cost estimates have not been determined include:
CA Public Records Act (02-TC 10 and 02-TC-51)
Local Agency Ethics (07-TC-04)
Tuberculosis Control (03-TC-14)
Interagency Child Abuse and Neglect Investigation Reports (00-TC-22)
Voter ID Procedure (03-TC-23)
All Energy Efficiency Funding from Prop. 39 Proposed for Schools
Will Legislature Make Some of These Funds Available to Other Local Agencies?
Prop. 39, passed by voters in November 2012, closed a corporate tax break and will generate approximately $1 billion in state revenue. According to Prop. 39’s requirements, one-half of those revenues per year for the next five years must be dedicated for various energy efficiency programs.
Prop. 39 specifically allows for the funds to be used to support various energy efficiency projects in public schools, universities and colleges, and also provides that funding may be used to support similar local government programs.
The Governor proposes in his budget to allocate the entire amount, estimated at $450 million, to a special fund to benefit schools. By allocating these moneys to a special fund, the Governor scores additional savings to the General Fund by reducing the state’s Prop. 98 obligation.
Several pieces of legislation, AB 29 (Williams), AB 39 (Skinner and Pérez), and SB 39 (de León and Steinberg), have already been introduced to address the distribution of these funds. One significant area of policy discussion will be whether or not the Legislature will make some of these funds available to other local agencies as consistent with the language in Prop. 39.
Other Issue Areas
Employment Development Department (EDD): The budget proposes a $1.5 billion decrease in funding to EDD as a result of the end of the federal Unemployment Insurance (UI) extension in December 2013 and a reduction in the unemployment rate, as well as $42.2 million in other adjustments, including an increase in the Disability Insurance (DI) benefit payments.
To continue to pay UI benefit payments without interruption, EDD began borrowing funds from the Federal Unemployment Account. At the end of 2011, the UI fund deficit was $9.69 billion. The UI deficit is projected to be $10.2 billion by the end of 2013. The interest payment for September 2013 is estimated to be $291.2 million. A reduction in the employer tax credit was triggered in 2012 as a mechanism to begin repaying the federal loan. This tax credit will continue to decrease each year until the loan is repaid. To address this deficit, the Secretary of Labor and Workforce Development will begin a series of meetings to bring together key stakeholders, including business and labor by Feb. 1, in an effort identify alternatives to meet annual federal interest obligations, repay the federal loan, and return the UI Fund to solvency.
The budget also proposes an increase of $2 million in various payroll taxes, including increased penalty assessments and interest of $649,000 as a result of increased data sharing efforts between the Franchise Tax Board and EDD.
Department of Industrial Relations: The budget proposes an increase of $152.9 million in the Workers’ Compensation Administrative Revolving Fund and 82 positions to implement the workers’ compensation reforms. The proposal includes a $120 million increase to permanent disability payments as part of the return-to-work program and eliminates the July 1, sunset date for the employer surcharge for the Occupational Safety and Health Fund and the Labor Enforcement and Compliance Fund to permanently fund these programs.
The budget also proposes several changes to help fund the Compliance Monitoring Unit, which was created in 2009 and was to be funded by specified bond funds. However, funding for the Compliance Monitoring Unit has been insufficient. These changes include:
Redirection of $2.5 million from the General Fund to the unit from worker’s safety and labor standards enforcement activities, with a corresponding backfill to those programs from the employer surcharge;
A $5 million loan from the Targeted Inspection and Consultation Fund, and;
Cost recovery from other sources that support these public works projects.
Cap-and-Trade: The budget proposal estimates Cap-and-Trade auction revenues of $200 million in FY 2012-13 and $400 million in FY 2013-14. DOF is required to provide three-year investment plans for auction proceeds, beginning with the FY 2013-14 May Revision. The first plan, when completed in May, will prioritize programs that significantly advance the goals of AB 32 (Núñez; 2006). Specific details will be developed by the Administration, but reducing transportation emissions will be a top priority. Electricity and commercial/residential energy is the second largest contributor of greenhouse gas emissions. Encouraging energy efficiency projects, including sustainable agriculture practices, forest management and urban forestry and the diversion of organic waste to bioenergy are other areas to be examined.
The first auction held Nov. 14, 2012, generated $233.3 million from allowances for independently operated electric utilities and $55.8 million from other allocations. The electricity-related revenues will be credited to consumers, and the other revenues will go towards the investment plan.
Reforming Parks: In July 2012, the California Natural Resources Agency announced that the Department of Parks and Recreation had not reported $20.5 million in the State Parks and Recreation Fund and $34 million in the Off-Highway Vehicle Trust Fund to DOF.
In September 2012, $20.5 million for the State Parks and Recreation Fund was appropriated to improve the park system and to keep parks open. DOF has conducted reconciliation for the Off-Highway Vehicle Trust Fund and estimated a $59 million balance at the end of the current fiscal year.
The budget also includes:
A $5 million augmentation in local assistance grants, which will bring grants up to $26 million, the level before budget reductions in recent years. The Administration will be looking at additional efforts to develop new revenues and balance available resources with expenditures.
An increase of $3.7 million from Prop. 12 and Prop. 84 funds to fund additional projects to meet the requirements of the federal consent decree resulting from Tucker v. California Department of Parks and Recreation.
Beverage Container Recycling Fund Reform: The Administration anticipates introducing budget-related reform measures in the spring to address fraud, review program operations, and ensuring cash flow and revenues support the long-term viability of the recycling program.
State Responsibility Area Fire Prevention Fees: The budget provides an increase of $11.7 million and 65.1 positions in 2013-2014 to implement SB 1241 (Kehoe; 2012) that revises safety element requirements for state responsibility areas and very high fire hazard severity zones.
Hazardous Waste Control Account Reform: The Administration proposes to streamline the hazardous waste fee system, modify the fees to ensure long-term stability of the Hazardous Waste Control Account, and align the fees with program objectives.
Electricity Program Investment Charge Program: The budget includes an increase of $192.2 million for Electric Program Investment Charge funds and 58.5 position to implement the program to support cost-effective energy efficiency and conservation activities, renewable energy resources, and public interest research and development within the operating area of the investor-owned utilities.
Delta Stewardship Council: The Delta Stewardship Council released a final draft of the Delta Plan and a corresponding draft of Programmatic Environmental Impact Report in Fall 2012. The plan should be adopted formally in the spring of 2013 and the necessary resources to oversee and implement the plan will be evaluated in the spring budget process.
Timber Harvest Plans: The budget includes an increase of $6.6 million for Timber Regulation and Forest Restoration Fund and 49.3 positions in the California Natural Resources Agency, the Department of Conservation, the Department of Forestry and Fire Protection, the Department of Fish and Wildlife, and the State Water Resources Control Board to increase review of timber harvest plans.
Bond Debt Service: Voters over the past decade have approved almost $30 million of general obligation bonds for transportation purposes. As a result, approximately 13 percent of annual state transportation revenues continue to be dedicated to offsetting debt service costs. The Governor’s FY 2012-13 budget proposes to continue using $67 million of miscellaneous state highway account revenues to partially offset transportation bond debt service costs, freeing up General Fund revenues to maintain a $1 billion reserve. This is not expected to impact city transportation funding, but staff will need to confirm once budget bill language is released.
Addressing the Needs Assessment: The California Transportation Committee published the “2011 Statewide Transportation System Needs Assessment” identifying $538.1 billion in total infrastructure needs over the next 10 years. Current revenues are estimated at $24 billion annually, leaving nearly $300 billion in unmet needs. The Administration announced plans to convene a working group in the spring to explore long-term, pay-as-you-go funding options, and to evaluate the most appropriate level of government to deliver high-priority investments.
MAP-21: The new federal Surface Transportation Act (MAP-21) was enacted last year and consolidated many programs. This provided additional flexibility to the state in allocating federal funds. While stakeholders continue to meet and negotiate how the funding will be allocated in the long-term, the budget proposal maintains the existing federal funding split between state and local transportation agencies in the short-term. This will ensure that existing projects already scheduled for construction will continue.
Zero-Based Budgeting: CalTrans is in the process of transitioning to a zero-based budget. The Local Assistance and Planning Programs were reviewed in Fall 2012 and resulted in the following proposals included in the budget. Additional changes are likely to come forward as the review continues.
Active Transportation Program: Five existing programs will be consolidated into a single Active Transportation Program that will cover bicycle, pedestrian, and mitigation programs. The existing programs are: the federal Transportation Alternatives Program (which also includes the Recreational Trails Program), federal and state Safe Routes to Schools Programs, state Environmental Enhancement and Mitigation Program, and the state Bicycle Transportation Account program: The Administration also plans to streamline the application process for the program.
A reduction of $1.5 million and 20 positions to the Local Assistance Program associated with implementation of various efficiency measures.
An increase of $8.4 million and 10 positions for the Planning Programs to address additional workload and implement various efficiency measures. The budget also proposes streamlining and standardizing CalTrans’ planning documents and reducing administrative costs for existing grant programs.
High-Speed Rail: The High-Speed Rail project continues to be a priority for the Governor. His udget proposal does not indicate any additional funding now, but does note that additional funding will be necessary to complete the Initial Operating Section from Merced to the San Fernando Valley, and that Cap-and-Trade revenues will be available as a fiscal backstop.
Autonomous Vehicles: Last year the Governor signed SB 1298, which authorizes the operation of autonomous vehicles on public roads. His budget proposal includes $980,000 for start-up costs related to implementation to this legislation. UC Berkeley will assisting with the development of regulations that are necessary to ensure the safe operation of these vehicles.
Transportation Agency: Per the Governor’s 2012 Reorganization Plan No. 2, the state will establish a Transportation Agency on July 1, to oversee and coordinate seven departments and other entities. The budget proposal includes funding for the transition and staffing of this new agency.
Legislative Response to the Governor’s Budget Proposal
The overall legislative response to the budget has been positive. Democrats are breathing a sigh of relief following multiple years of deep cuts to the programs they value the most. Republicans voice support for continued efforts to keep the state’s fiscal house in order. Democrats and Republicans alike are applauding the Governor’s move to reinvest in education, although some have voiced that the $2.7 billion in new funding for K-12 and community colleges is not enough. Like previous years, there continue to be some concerns raised over continued cuts to the judicial system and calls for the Governor to focus more on job creation and economic investments.
The Governor’s State of the State Address is scheduled for Jan. 24 at 9 a.m. when a fuller explanation of his policy agenda can be expected.
The League will continue to analyze the Governor’s budget proposal and provide additional information to cities as necessary.