The Senate and Assembly Committees on Budget and Fiscal Review each held informational hearings on the Governor’s 2018-2019 Proposed Budget, providing a general overview for the public. These hearings kick off the 2018 budget committee process in the Legislature.
The proposed state budget includes $131.7 billion in general fund spending compared to last year’s budget of about $125 billion. Both Amy Costa, the Chief Deputy Director of the Department of Finance (DOF) and Mac Taylor, the Legislative Analyst, acknowledged this number is due to higher revenues. The Legislative Analyst also said legislators have important decisions to make to ensure that the significantly higher discretionary funding reflects the Legislature’s priorities.
In her opening remarks, Senator Holly J. Mitchell, Chair of the Senate Budget Committee, said the budget process, is one that “is fundamentally a democratic one, [with] the ways that the money flows reflecting the collective values of our state.”
“I’m encouraged by our Governor’s proposals to fund critical public services in early care and education, K-12 Local Control Formula Funding, Medi-Cal provider rate increases, and court funding…but there is more we can do for the most vulnerable among us,” continued Mitchell, citing that “public services, our social safety net, education, healthcare, transportation and flood infrastructure” continue to be under-resourced.
Assemblymember Phil Ting, Chair of the Assembly Budget Committee, praised the Department of Finance for fully funding the Rainy Day Fund, along with investments in education, small-business, and transportation funding.
Panel Overview of the 2018-2019 Proposed Budget
DOF’s Amy Costa began by giving an overview of the proposals in the Governor’s Budget, and by commending the progress made since 2011, with the state eliminating a $20 billion annual shortfall, and the passing and signing of timely budgets for seven consecutive years.
According to DOF, major components of the Governor’s proposed budget include a one-time surplus of $6.1 billion dollars, Prop. 98 minimum guarantees, filling the Rainy Day Fund to the full constitutional target of 10% of tax revenues, a new proposal for an online community college, $180 million for an extension of the Cal Competes Program – including $20 million for small businesses – and funding for the first full year of transportation funding for SB 1, totaling $7.4 billion in funding for the measure.
CHIP, Federal Actions and the State Budget
During the Senate Overview hearing, Costa spoke about the implications of federal reauthorization (or lack thereof) of the Children’s Health Insurance Program (CHIP), whose total funding is dependent on the federal government’s authorized reimbursement rate.
When the Governor’s proposed budget was released, and during the Senate Overview hearing, Congress had not yet acted on a longer-term CHIP funding plan. [CHIP was reauthorized on Monday.] If CHIP had not been reauthorized, the state would have needed to come up with hundreds of millions of dollars to fund coverage for children – and likely would have had to cut in other areas as a result. A closer look at CHIP funding can be found on our blog.
In the Assembly’s overview hearing, Assemblymember Jim Wood asked about the implications of CHIP reauthorization. The Governor’s proposed budget assumed the state would contribute 35 percent of the program’s cost, with Congress funding the historical federal share of 65 percent. Congress reauthorized CHIP funding through 2022-2023, with a 12 percent state share through 2018-2019, increasing to 35 percent for the 2020-2021 fiscal year.
For the upcoming budget year, this means the state will have lower costs compared to what was assumed in the Governor’s proposed budget. As a result, the LAO anticipates the Governor’s May Revision to reflect $900 million in lower General Fund expenditures – one-time savings that can be allocated for other purposes.
DOF also indicated that federal cost sharing on other health entitlement programs will have implications in the budget, and cautioned that while the budget assumed continued economic growth, the current economic recovery would match the state’s longest recovery in history, the economic recovery of 1991. If the state were to enter into a recession, the state estimates a $20 billion dollar annual loss in the budget, for a total of $70 billion across several fiscal years.
Governor’s Budget Prepares for a Rainy Day and Natural Disasters
Over the last several months, Costa continued, the state has weathered several major natural disasters that required emergency response, in part due to a very healthy fund for emergency costs. Costa also provided an overview on funds to help the state prepare for unexpended expenditures. The Governor’s budget proposes putting an extra $3.5 billion dollar into the Rainy Day Fund, bringing its total to $13.5 billion and meeting the constitutional target of 10% of the State Budget. The Governor is also proposing $2.3 billion towards the State Fund for Economic Uncertainty. However, DOF also cautioned the Legislature to consider the state’s debts and liabilities which are now at $6 billion.
Finally, DOF concluded their overview by reviewing other major funding proposals. With Prop.98 funding up $2.1 billion dollars from the prior year, totaling $78.3 billion, per pupil spending is now at $11,614 dollars per pupil.
Legislative Analyst Emphasizes Increased Discretionary Spending
Mac Taylor, the Legislative Analyst, began his overview with high-level remarks about the overall structure of the budget, advising the Legislature that although the Governor has placed a high priority in preparing for the future, the LAO estimates that the Legislature has $7 billion in surplus dollars that they must decide how to spend.
The Governor proposes using four-fifths of the surplus dollars on building reserves. Taylor went on to say that building reserves is the “most cautious thing you can do,” but also offered that we are in the midst of a rare, healthy economic time. “Budget times don’t get much better than this. We are in a good setting, where you can both meet commitments to existing programs, and build reserves,” said Taylor.
However, the LAO cautioned legislators about uncertainty in both the federal and state tax systems, particularly because federal tax reform adds to already uncertain revenue estimates for the state. Taylor provided an example with Proposition 55, which extends income tax increases on high-income taxpayers through 2030. The volatility of capital gains taxes can contribute to uncertainty about revenues.
Taylor also advised that many of the decisions about spending will come down to how much the Legislature wants to prepare for a recession, and to be mindful of interactions between reserve funds and what the Governor and Legislature are allowed to allocate monies towards – for example, if you max out the Rainy Day Fund, leftover dollars must be spent on infrastructure.
During the Assembly Overview hearing, the Legislative Analyst acknowledged that a 10% reserve is a good target to achieve in the Rainy Day Fund. The Legislature could decide to not allocate to Governor’s proposed $3.5B towards the Rainy Day Fund, in order to have more discretion to use it for its own funding priorities.
After the Legislative Analyst’s overview, the committee moved on to questions from Legislators, with Senator Mitchell asking the panelists to comment on the implications of federal tax reform. Amy Costa began by saying that the changes are “hard to understand in nature just yet, but that we do know that tax reforms will impact individual taxpayer behavior. We may not fully realize the implications until people file [for taxes] in 2019.”
Proposition 55, Proposition 56, and Medi-Cal Funding
Both Senators Mitchell and Skinner had questions about Proposition 55 (2016), which extended tax increases on high-income earners, and gives the Director of Finance significant discretion to determine how much should be allocated to Medi-Cal. The Administration could increase Medi-Cal spending by up to $2 billion annually, beginning in 2018-2019 with Proposition 55 monies. Both Senators Mitchell and Skinner asked why the Governor did not use Prop. 55 revenues to increase Medi-Cal spending. Senator Skinner noted that access to care has been an issue for beneficiaries.
The Department maintained that Proposition 55 gives DOF discretion to decide how much money will go to Medi-Cal. The Department pointed to the Governor’s proposed increases for provider payments in Medi-Cal through Proposition 56 dollars, as an existing investment in Medi-Cal.
The Governor is proposing to increase supplemental payments to Medi-Cal providers, allocating an additional $163 million and $70 million for physician and dental payments, respectively. The proposal also extends the duration of the payments from two years to three years.
Senator Pan also asked about the status of Proposition 56 provider payments, asking whether the Department has obtained federal approval to make the supplemental payments. The Department said they received approval for all supplemental payments, except for managed care payments. The Department committed to getting back to Senator Pan on the exact status of approval for managed care payments.
With several members of the full budget committee questioning the Administration’s lack of investment in the Medi-Cal program through voter-passed proposition dollars, Senator Mitchell closed the discussion by responding that the Legislature will have ongoing questions for the Administration on how Proposition 55 dollars are used. Health Access will continue to monitor provider rate increases through Proposition 56 to ensure higher provider rates actually result in increased access to care for Medi-Cal beneficiaries.
Senator Pan moved on to funding for graduate medical education and the $50 million dollars allocated towards residency training for doctors in underserved areas through last year’s budget, and was critical of the administration’s decision to have the funds go towards the University of California, and not specifically towards graduate medical education programs, as Pan asserts the voters intended. As Chair of the Senate Budget Subcommittee on Health and Human Services, Senator Pan said he will be taking a closer look at this issue through the subcommittee process.
The Budget Chair concluded by thanking the panel, and looking ahead to February, when budget sub-committees conduct oversight hearings. Budget subcommittee hearings will begin in March.
As the state budget process moves forward in February, Health Access will fight to protect funding for critical programs both at the federal and state level. We will continue urging California’s Congressional delegation to oppose the proposed massive federal cuts to Medicaid and Medicare. In Sacramento, we will work with the Legislature and the Governor to make critical investments to cover our remaining uninsured and improve affordability for low and middle income Californians.