Four-Term Governor Jerry Brown: One Last Budget

By Steve Coony, Managing Director, Government and Regulatory

This week, California Governor Jerry Brown, beginning the final year of his unprecedented four terms as governor, unveiled his 16th and last state budget proposal, which projects a $6.1 billion surplus, mostly a result of $4.7 billion in additional revenue. Most of the new revenues come from personal income tax returns fueled by capital gains from the stock markets, and the Governor made it a point to renew his warning that California’s tax structure is overly reliant on economic good news for higher-income taxpayers, and that the picture might not be so rosy for the new governor California voters will elect next November. His budget projections estimate that even a modest downturn in the business cycle—which is long overdue—could result in the loss of $20 billion in annual state revenues and could plunge the budget into deep deficit. Asked what advice he has for his successor, Governor Brown smiled and said, “What’s out there is darkness, uncertainty, decline and recession. So good luck, baby!”

In addition to concerns about the business cycle, California’s finances could be affected by changes at the federal level, including the impact of recently enacted tax reform measures and the lingering possibility that Congress may enact entitlement program rollbacks, including Medicare and Medicaid cuts in 2018. Any major changes by Congress and the President could result in state adverse impacts ranging into the tens of billions of dollars annually.

Nevertheless, Governor Brown’s January proposal for a 2018–19 state budget is very good news in the short term for nearly every category of state spending. Overall, state General Fund spending would increase 4.1%, moving from this year’s $126.5 billion to $131.4 billion in 2018–19, with the highest new priority an extra $3.5 billion contribution to the state’s Rainy Day Fund. At a level of $13.5 billion, the proposal would take the state’s contingency fund to the voter-enacted target—10% of General Fund spending—for the first time in history.

Here are other significant highlights:

K–12 Education

• Provides a total General Fund spending level of $78.3 billion in 2018–19—up from $74.6 billion this year and an all-time high.
• Projects ongoing per-pupil spending from all sources to be $15,654 in 2017–18 and $16,085 in 2018–19, up 66% since 2011–12.

Higher Education

• University of California
  Provides a 3% base increase for operations—$92.1 million in new funding. The administration states it will continue to monitor UC’s progress toward implementing recommendations made last year by the state auditor to improve Office of the President budgeting and operations, and will determine in May whether UC has met these objectives.
• California State University
  Similar to the case with UC, provides a $92.1 million General Fund increase. The administration states that it expects CSU to use this funding to improve graduation rates.
• California Community Colleges
  Earmarks $46 million from the General Fund to support the California College Promise, which will waive fees for all first-time, full-time community college students.

Health and Human Services

The budget includes $155.7 billion ($37.4 billion General Fund and $118.3 billion other funds) for all health and human services programs. Since 2011, there have been many changes in the programs that provide a safety net for California’s vulnerable children, adults and seniors. The provision of healthcare was expanded significantly, increasing the number of individuals receiving coverage through Medi-Cal and CHIP from 8.5 million to nearly 13.5 million. This increase includes the expansion of full medical coverage to undocumented children. In addition, 1.3 million people receive medical coverage through Covered California. More than one in three California residents now receive services from one of the state programs, and two-thirds of those are children.

Many of the program reductions from the Great Recession have been restored, including most optional benefits in the Medi-Cal program, such as dental benefits for adults and enteral nutrition, as well as funding for the Department of Social Services to increase the frequency of licensed community care facility inspections. Targeted increases have also been made to provide cost-of-living increases for CalWORKs and the Supplemental Security Income/State Supplementary Payment (SSI/SSP). In addition, the CalWORKs maximum family grant rule was repealed.

Medi-Cal

• Medi-Cal General Fund spending is projected to increase 11%, from $19.5 billion in 2017 to $21.6 billion in 2018–19. The budget assumes that caseload will decrease approximately 0.5% from 2016–17 to 2017–18 and will increase 0.05 percent from 2017–18 to 2018–19.
• Proposition 56 (2016 tobacco tax) revenue is estimated at $1.3 billion in 2018–19. The Governor proposes $850.9 million in Proposition 56 revenue for healthcare treatment expenditures, including $649.9 million in 2018–19, an increase of $232.8 million from the 2017 budget, for supplemental payments and rate increases. The increase includes approximately $163 million for physician supplemental payments and $70 million for dental payments—doubling the amounts currently available—to improve provider rates and the availability of patient care.
• Proposes to restrict—and effectively eliminate—the use of federal 340B Drug Pricing Program reimbursements within the Medi-Cal program, effective July 1, 2019.

Department of State Hospitals

• Includes $117.3 million to further develop the state/county partnership to address the growing number of Incompetent to Stand Trial (IST) commitments referred to the department. Proposes that $100 million from the General Fund will be available over three years for community alternatives, to increase diversion of mentally ill offenders and decrease county IST referrals to state hospitals.

Department of Social Services

• Includes $26.7 million for a voluntary Home Visiting pilot program, starting in 2018–19 and extending until the end of the 2021 calendar year, with a total of $158.5 million in one-time federal funds reserved for the pilot’s cost. The goal of the pilot program is to help young families reach self-sufficiency by improving family engagement practices, supporting healthy development of young children living in poverty and preparing parents for employment.

Natural Resources and Environmental Protection

Ecosystem Restoration and Climate Resiliency

• Proposes $221 million in new spending for river recreation, creek and waterway improvements, Salton Sea restoration, climate adaptation and resiliency, coastal protection, and California Conservation Corps restoration and rehabilitation projects throughout the state.

Water Action Plan

• Proposes $63 million for the State Water Board for safe drinking water projects and $99 million for the Department of Water Resources and the Natural Resources Agency for flood management projects.
• Proposes $146 million for the Department of Water Resources and the State Water Board for the Sustainable Groundwater Management Act, including $61 million to support groundwater sustainability agencies, and $84 million to prevent or reduce contamination of groundwater that serves as a source of drinking water.

State and Local Park Improvements

• Proposes $464 million for the Department of Parks and Recreation and the Natural Resources Agency for local and regional grant programs for neighborhood parks and greenway trails.

Department of Forestry and Fire Protection

• Proposes $2.3 billion, including $1.4 billion from the General Fund, and 7,014.5 positions for resource management and wildland fire protection services, including funding for replacement helicopters and air tankers.

Cap and Trade

• The Governor announced that his plan for allocating $1.25 billion in cap and trade dollars available for expenditure in 2018–19 will be released as part of his annual State of the State Address, scheduled for January 24.

Transportation

• The budget includes $4.6 billion in new funding from the passage of SB 1 (Beall, Chapter 5, Statutes of 2017), also known as the Road Repair and Accountability Act of 2017. This amount is in addition to the $2.8 billion SB 1 provides in 2017–18. SB 1 provides about $55 billion over 10 years in new funding to address critical deferred maintenance needs of the state’s roadway system.

Department of Corrections and Rehabilitation

• Includes total funding of $12 billion ($11.7 billion General Fund and $313 million other funds) for the Department of Corrections and Rehabilitation (CDCR).

Judges and the Courts

• Includes total funding of $4.2 billion for the Judicial Branch, including $2.2 billion to support trial court operations.
• Provides $150 million to improve and modernize trial court operations and increase access.
• Proposes to fund completion of 10 courthouse projects throughout the state from lease revenue bonds estimated at $1 billion to be issued over the next two years.

Next Steps/Timeline

Following the Governor’s budget release, identical budget bills are submitted for consideration by each house of the Legislature. Next steps include Legislative Budget Subcommittee hearings and an analysis of the budget by the Legislative Analyst’s Office, followed by subcommittee and full committee hearings in both houses over the next four months.

By May 15, using updated revenue and expenditure estimates, the Governor will submit an amended budget proposal called the “May Revise,” which usually signals the start of public scrutiny and hearings as well as private negotiations between the houses, among the various political and policy coalitions and advocates, and between the Governor and the leaders of the Legislature.

The state constitution requires that the final budget bill be passed by majority vote of each house of the Legislature by midnight on June 15, 2018, and signed into law by the Governor by midnight on June 30, 2018.