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Governor Unveils FY 2014-15 May Revise

Minor, But Positive, Adjustments for Programs of City Interest

May 13, 2014
Gov. Jerry Brown took to the podium earlier today to release his much anticipated FY 2014-15 May Revise budget proposal. Despite the improved fiscal picture, Governor Brown called on the Legislature to “follow a policy of restraint going forward.”
Among the highlights for cities is a modest boost in funds for front-line law enforcement funding to $40 million, a proposal to begin to repay pre-2004 owed local government mandates, additional augmentations to drought relief programs and some modest changes to the Governor’s Infrastructure Finance District proposal.

The state’s financial picture has continued on an upward trend with billions in additional revenues generated by the passage of Proposition 30 in 2012 as well as an uptick in capital gains tax receipts. The State Controller estimates that state revenue receipts have exceeded the Governor’s January revenue budget estimates by $2.17 billion, which has considerably improved the state’s fiscal outlook for FY 2014-15.
In response to calls for increased spending on various state programs, the Governor once again stressed legislative fiscal restraint in order to avoid the boom-and-bust budget cycles that plagued the state for decades. “First, you have a desire, then someone tells you how to turn that desire into a need, and then after a while the need gets turned into a right, then the right gets turned into a law, then sometimes the law turns into a lawsuit,” said the Governor.
He stressed that the government needs to manage the needs of competing interests going forward and find creative ways to satisfy these needs with the money available. He said that revenues must be conserved since other legal funding obligations, such as those under Proposition 98 and pension liabilities, may take precedent.
While state revenues have increased, so have ongoing expenditures. More than 1 million additional people (total of four million) are expected to sign up for California’s expansion of Medi-Cal under the federal Affordable Care Act. This is projected to cost an additional $1.2 billion per year more than estimated in January. Increased costs for state pension obligations based on recent changes in CalPERS estimates of longer life expectancy will result in an addition $1 billion in ongoing state costs phased in over three years. The state will also face increased costs for contributing to a new plan the Governor announced today to address deficits in teacher retirement funds.  
Such discipline may not be welcomed by the Legislature, however, which has been moving budget proposals to restore funds to existing programs, or enact new programs such as universal preschool. While the Governor has ultimate veto power over such spending enhancements, the May Revise budget proposal is now in the hands of the Legislature. The budget must be reviewed and finalized before it is sent package back to the Governor to meet the June 15 Constitutional deadline.
A Revised Rainy Day Fund
Over the last decade there have been several attempts to create a state reserve fund to better prepare the state for fiscal downturns. Voters approved Prop. 58 in 2004 to require the state to adopt a balanced budget and to direct 3 percent of annual revenues into a Rainy Day Fund, but dire budget conditions and various loopholes revealed that Prop. 58 had little effect. To address this, under former Speaker John A. Pérez (D-Los Angeles) Assembly Democrats, released a  Rainy Day Fund proposal building an $8 billion reserve by FY 2016-17 late last year. The Governor released his own proposal in January.  
Acknowledging the need for a sustainable rainy day fund, Gov. Jerry Brown called a special legislative session in early April to explore and create a new proposal. On May 8, the Governor, along with legislative leaders from both houses, unveiled a bipartisan rainy day fund agreement. This new plan is expected to replace the current rainy day fund constitutional amendment, ACA 4, currently on the November 2014 statewide ballot.
The new proposal, as outlined in the May Revise would: 
  • Allocate 1.5 percent of annual GF to the Rainy Day Fund.
  • Increase deposits when capital gains revenues rise to more than 8 percent of GF tax revenues, an increase from the Governor’s January proposal of 6.5 percent. Create a Prop. 98 reserve, where spikes in funding would be saved for future years, smoothing out school spending (without impacting the guaranteed level of funding under Prop 98 and not begin to operate until the existing obligations to schools are repaid).
  • Double the maximum size of the reserve from 5 to 10 percent of revenues.
  • Require half of each year’s deposits for the next 15 years to be used for supplemental payments to the Wall of Debt other long-term liabilities. After that time, at least half of each year’s deposit would be saved, with the remainder used for supplemental debt payments or savings.
  • Allow transfers to be suspended and withdrawals to be made from the Rainy Day Fund when needed during recessions within prescribed limits.
  • Require in the Constitution that the state provide a multiyear budget forecast to help better manage the state’s long term finances.
As with previous “rainy day” efforts, this latest one will need to be carefully monitored as to its effectiveness in establishing a true and reliable state reserve fund that would help avoid some of the “boom and bust” turmoil experienced in the past.
Infrastructure Finance Districts (IFD)
The May Revise includes several changes to the January budget proposal to revise existing Infrastructure Finance District (IFD) Law. Under the updated proposal, current IFD law would remain available to all cities and counties, and the Governor’s IFD proposal would now become Enhanced Infrastructure Financing Districts (Enhanced IFD) Law. The Governor’s goal is to make Enhanced IFD’s more useable that the current IFD law, including lowering the existing statutory two-thirds voter approval requirement to create a district to 55 percent.  In brief, the Governor’s proposal would:
  • Expand the types of projects that Enhanced IFDs can fund.
  • Allow cities and counties to create new Enhanced IFDs and to issue related debt, subject to 55 percent voter approval.
  • Allow Enhanced IFD projects to overlap with former Redevelopment Agency (RDA) project areas.
  • Maintain current IFD prohibition on the diversion of property tax revenues from K-14 schools and requires entities seeking Enhanced IFD creation to garner approval of the city that would be contributing revenue to the Enhanced IFD.
However, in order to enjoy these Enhanced IFD powers, the Governor’s proposal comes with several caveats relating to redevelopment dissolution. These requirements include:
  • Demonstrating that a city has remitted all of the unencumbered cash assets of its former RDA to the affected taxing entity — also known as a Receipt of a Finding of Completion from the Department of Finance;
  • Compliance with all State Controller’s Office RDA audit findings; and
  • Conclusion of any outstanding legal issues between the successor agency, the city that created the RDA and the state.
In addition, the May Revise would:
  • Allow funds received by cities and counties from the Vehicle License Fee Swap to be securitized to fund Enhanced IFDs. (The League will be seeking more information on this concept.)
  • Clarify that entities participating in an Enhanced IFD can seek voter approval to levy new fees or assessments to support projects identified in an Enhanced IFD project plan.
  • Make affordable housing projects eligible for Enhanced IFD funding.
  • Require that any low- or moderate-income housing that is removed as part of an Enhanced IFD be replaced (as is already required by current IFD law).
  • Require long-term affordability covenants for affordable housing created or replaced as part of an Enhance IFD project plan: 55 years for rental units and 45 years for owner-occupied units. 
The Governor does not propose significant changes to his original January transportation budget proposal. 
The January budget proposal included an appropriation of $850 million from Cap-and-Trade revenues, $600 million of which would go to transportation.
The $600 million is broken down as follows: 
  • $100 million to local governments to support implementation of sustainable communities strategies required by SB 375 (Chapter 728, Statutes of 2008). The grant program will coordinated by the Strategic Growth Council, and disadvantaged communities and projects that reduce greenhouse gas (GHG) emissions will be prioritized.
  • $200 million for low carbon transportation programs. This money will support the Governor’s goal to deploy 1.5 million zero-emissions vehicles by 2025 (mainly through rebates) and for supporting research and development.
  • $250 million for the construction of the initial segment of High-Speed Rail (HSR) in the Central Valley.
  • $50 million for a competitive grant program for existing rail operators for capital improvements to integrate rail systems and provide connectivity to the HSR system. 
For additional details on Cap-and-Trade funding, please see Environmental Quality.
In addition to the Cap-and-Trade revenues, the budget proposal included $351 million in GF loan repayments, including $100 million to cities and counties for preservation of local streets and roads that will be allocated using existing highway user tax formulas. The May Revise includes additional contract resources to advance 22 highway projects associated with this funding. 
Environmental Quality
The May Revise reduces the proposed budget allocation of Prop. 39 funds by $10.5 million for a total allocation of $352.5 million for energy efficiency projects to K-12 and community colleges.
The $352.5 million is broken down as follows:
  • $307 million and $37.5 million to K-12 and community college districts, respectfully, for energy efficiency project grants.
  • $5 million to the California Conservation Corps for continued technical assistance to K‑12 school districts.
  • $3 million to the Workforce Investment Board for continued implementation of the job‑training program.
The May Revise does not alter the January budget proposal to include an appropriation of $850 million from Cap-and-Trade revenues, $250 million of which would go to energy efficiency and clean energy, natural resources, and waste diversion.
Allocations of particular note within the $250 million are as follows:
  • $80 million for energy efficiency upgrades/weatherization and renewable energy projects in low‑income dwellings within disadvantaged communities.
  • $20 million for the Department of Water Resources for water and infrastructure efficiency projects that also result in energy savings. This proposal will provide additional funding for grants that support water use efficiency projects, such as leak loss detection and repair projects that have a demonstrated ability to reduce GHG emissions. The proposal also supports efficiency upgrades at two State Water Project facilities, Thermalitio and Hyatt, which will result in more efficient generation of clean power and improved system reliability.
  • $30 million for the Department of Fish and Wildlife to implement projects that provide carbon sequestration benefits, including restoration of wetlands (including those in the Delta), coastal watersheds and mountain meadows.
  • $50 million for the Department of Forestry and Fire Protection to support urban forests in disadvantaged communities and forest health restoration and reforestation projects that reduce wildfire risk and increase carbon sequestration.
  • $30 million for the Department of Resources, Recycling, and Recovery to provide financial incentives for capital investments that expand waste management infrastructure, with a priority in disadvantaged communities. Investment in new or expanded clean composting and anaerobic digestion facilities is necessary to divert more materials from landfills, a significant source of methane emissions.
For additional details on Cap-and-Trade funding, please see Transportation.
Emergency Drought Response
Building upon the work of the interagency Drought Taskforce and urgency legislation passed in February, which allocated $687 million in drought relief, the May Revise includes the following one time allocations to further assist with the worsening drought:
  • Department of Forestry and Fire Protection: An increase of $53.8 million General Fund and $12.2 million other funds to expand firefighter surge capacity, retain seasonal firefighters beyond the budgeted fire season, provide additional defensible space inspectors, and enhance air attack capabilities to suppress wildfires. Of these additional resources, $10 million is available to support local grants for fire prevention projects or public education efforts that benefit owners of habitable structures in state responsibility areas.
  • Department of Water Resources: An increase of $18.1 million General Fund to comprehensively assess current surface and groundwater conditions, expedite water transfers, provide technical guidance to local water agencies, and provide additional public outreach through the Save Our Water campaign.
  • Department of Social Services: An increase of $5 million General Fund to provide food assistance for communities most impacted by the drought.
  • Office of Emergency Services: An increase of $4.4 million General Fund for the State Operations Center to continue to provide local communities with technical guidance and disaster recovery support related to the drought.
  • Department of General Services: An increase of $5.4 million special funds to implement water efficiency and conservation measures in state‑owned facilities.
  • State Water Resources Control Board: An increase of $4.3 million General Fund to continue enforcement of drought‑related water rights and water curtailment actions.
Groundwater Management
The May Revise builds upon the Water Action Plan and actions proposed in the Governor’s January budget, which proposed to allocate $618.7 million. The significant changes are as follows:
  • Sustainable Groundwater Management Program: An increase of $2.5 million General Fund in FY2014-15 and $5 million annually for four additional years to support local groundwater management efforts, including:
    • Planning and Oversight: Assess the status of groundwater basins; develop groundwater basin sustainability metrics; track development and implementation of groundwater monitoring programs by local agencies; and review and assess groundwater plans developed by local agencies.
    • Local and Regional Technical Assistance: Offer technical assistance, including guidance and tools for local and regional agencies related to: collecting and reporting local groundwater data, preparing and updating groundwater management plans, assessing the status of local groundwater basins, establishing appropriate and effective groundwater governance, preparing local groundwater basin water budgets to determine sustainable yield, and forming governance structures for managing groundwater basins.
Public Safety
Front-Line Public Safety Funding for Cities: Proposes to increase the original $27.5 million in local public safety grants for cities by $12.5 million to a total of $40 million.
Prop. 172 Allocations of Sales and Use Tax — Law Enforcement: Gross tax receipts for the Law Enforcement Account have seen and $18 million increase in the current year, and a $10.6 million increase in FY 2014-15 (The California Police Chiefs estimate that 7 percent of this amount, or $742,000, will go to cities, based on the Prop. 172 (1993) formula that created the account) 
Trial Court Funding
After several years of severe budget cuts and tension with the Administration, the May Revise includes an augmentation of $86.3 million for trial court workload obligations. The Administration plans a similar 5 percent increase in FY 2015-16. This will cover staff costs related to security requirements triggered by new trial court construction.   
In addition, the proposal outlines a two-year strategy to stabilize court funding
  • $42.8 million for trial court employee benefit costs (this factors in a reduction in pension cost expenditures by an estimated amount spent by trial courts on employee contributions).
  • Trial Courts will have three years to meet the standard for equal sharing of pension costs with employees imposed by the Public Employees’ Pension Reform Act (PEPRA).
  • $30.9 million in General Fund monies to backfill anticipated losses in trial court revenues from fees. This arises from a projected shortfall in two types of fee revenue:
    1. Court-specific fees charged for a service (ex: photocopies) — this will not be backfilled by state as it is not part of the allocation from the Trial Court Trust Fund
    2. Fees comprising a significant part of base trial court funding –— these funds will be backfilled.
  • $2.1 million General Fund and $152,000 from other funds to address increased rent costs for the California Supreme Court, Courts of Appeal, and the Administrative Office of the Courts.
California Department of Corrections
The federal three-judge panel overseeing the prison system has granted the state a two-year extension to meet the population cap of 137.5 percent of design capacity.  Feb. 28, 2016 is the new deadline. This extension  provides the state more time to:
  • Reduce the prison population without endangering public safety.
  • Invest in rehabilitation services in ways that will reduce recidivism (mental health services, job training, housing assistance).
Recidivism Reduction: The May Revise provides an additional $9 million for a total of $49 million for the development of re-entry centers, which will improve placement of inmates as they return to the community.  The focus of these efforts will be inmates who are six to 12 months from their release date and provide case management services, mental health services, employment services, and assistance securing ID cards, housing, and enrollment in Medi-Cal/CalWORKS.
Funding Increase for County Probation: County Probation Departments will receive $11.3 augmentation to help manage increase in Post Release Community Supervision population portion of their caseloads. This is due to the increase in the rate at which non-violent, non-serious second-strike offenders in prison can accumulate good time credits. The May Revise increases this rate from 20 percent to 33.3 percent of an inmate’s sentence. Another factor in this increase is the removal of the Division of Parole from the Post Release Community Supervision equation.  Initially inmates were released under parole supervision, and at some point transferred to counties. The May Revise anticipates all supervision to occur under County Probation.
Community Correctional Facilities (CCF):  There is an estimated $107 million remaining from monies allocated to Corrections under last year’s SB 105 (Realignment follow-up legislation). This is due to inmates not being transferred to the CCFs as quickly as anticipated.
Employment Relations
The May Revise makes no changes to the January budget proposal to consolidate all public works and prevailing wage enforcement activities within a single unit within the Department of Industrial Relations. This would be funded by a new registration fee on contractors who choose to work on public works projects. The program would total $11.4 million with 83 positions, an increase of 20 positions over prior enforcement levels.
State Pensions
The May Revise included several provisions that reflect the state’s increasing costs of its pension obligations, including the recent increases in life expectancy assumptions of state retirees. Due to increased life expectancy, $1 billion will be phased in over a three year period. Estimated costs for FY 2014-15 will be $430 million ($254 million General Fund).  
In related actions, there are several examples where the state is seeking to leverage increased contributions by employees, including for teacher and trial courts employee costs.
  • CalSTRS: Proposal includes participation and shared responsibility from all stakeholders: state, school districts, and teachers. The state will fully phase in its contribution increase over three years going from 3 percent in FY 2013-14 to 6.3 percent in FY  2016-17. Within three years, teachers will have a contribution increase from 8 percent to 10.25 percent of pay. Over a seven year phase-in, schools districts will increase their contributions from 8.25 percent to 19.1 percent of payroll. This proposal is expected to eliminate the unfunded liability in 30 years.
  • Trial Courts: The Governor’s augmentation to trial court funding discusses the increase in retirement, retire healthcare, and health care costs for employees within the trial courts. It is noted that “trial courts generally have little control over these costs with one exception — the amount each employee pays toward retirement”. The proposal directs $42.8 million to help cover part of the employee costs the courts are facing, but commits to increased funding provided there is progress towards the courts meeting the Public Employees’ Pension Reform Act (PEPRA) standard of equal sharing of pension costs for all employees.
State Mandate Repayment
The state is required to reimburse local agencies and school districts for new or higher level of service mandates. Currently the state owes $900 million to local agencies for mandate debt that is supposed to be repaid by FY 2020-21. The May Revise repays $100 million of the $900 million owed to local government for pre-2004 mandate reimbursements. Of this 25 percent of this would go to cities and would be appropriated based off the percentage of debt owed. The remaining amount would go to counties (73 percent) and special districts (2 percent). These amounts are allocated with he Administration’s expectation that it will be directed toward improving public safety and the implementation of the 2011 Realignment. 
Community Care Licensing
The January Budget contained $7.5 million and 71.5 positions for quality enhancement and program improvement in Community Care Licensing.  A specialized complaint hotline will assist in acquiring information and dispatching incoming complaints to regional offices.  The May Revise makes no adjustments to this item.

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