In Charles Dickens’ early and dark novel, Oliver Twist, an orphan is condemned to the poorhouse and forced to labor for an undertaker. He escapes to London only to be recruited into a gang of child pickpockets. The book presents an unrelenting view of poverty and the social ills that come with it. Dickens’ much later novel, Great Expectations, in contrast, sets out a more hopeful view of what could happen if a poor orphan got a little help, set a course for himself, and chose good over evil. The new proposed budget presented by the Governor to the Legislature in May, after April tax revenues were tallied, generally dubbed “The May Revise”, presented the same sort of choices for the Governor and the Legislature, with the choice greatly dependent on whose revenue projections would gain acceptance.
In January of this year, after years of budget agony, the state experienced the first bump in revenue in recent history: $4 billion dollars more than expected in the month of January, alone. The influx of new taxes continued throughout the next few months, such that revenues by the end of April were expected to accrue at least $4.6 billion over the Governor’s January expectations.
The question facing decisionmakers in the May Revision of the budget: how to allocate the extra cash. The answer from Gov. Brown: I want to make sure there’s nothing for you to allocate–we’re really still in poverty, so damp down those great expectations. In fact, he insisted, to the bewilderment of onlookers, on reducing those expectations.
When More Leads To Less
In the proposed January budget, the Administration had projected personal income growth of about 4.3% over that of 2012-13. However, the Governor reduced that projection in the May Revise to a growth factor of only 2.2%. The Governor explained this change by saying that he had failed to take account of the expiration of the payroll tax reduction, as well as the continuing lack of a federal budget, which would deeply affect the state.
The May Revise also accrued Prop 30 (the new tax measures) revenues to the year that tax liabilities were incurred, rather than the current year (2012-2013 at the time of the May Revise), as well as reducing projections of sales and corporation tax revenues in that year. Revenues in the budget year (2013-14) were also revised downward from January citing lowered expectations about revenue from personal income tax, sales tax and the corporation tax, positing that a large portion of increased revenues in 2012-13 were a one-time occurrence due to changes in federal tax rates.
Thus, in a counterintuitive move, the May Revise presented a smaller, not a larger budget. The overall resources projected to become available dropped from $99.3 billion to $98 billion, with total expenditures dropping from $97.6 billion to $96.3 billion, but with an increased reserve (from $1 billion to $1.1 billion).
In Addition to Reduced Expectations, Manipulate Prop 98
Prop. 98 is the initiative that set a floor on the monies required to be allocated to schools in grades K-12 and Community Colleges. The initiative contained a number of formulas for determining what percentage of the overall budget must go to education and, last year, the Governor and the Legislature agreed to an interpretation that would require payment of a “maintenance factor” on top of the regular Prop 98 calculation. For years, the state had not fully funded the Prop 98 guarantee and this new interpretation of Prop 98 meant the beginning of a method of repayment, such that 90 cents of each additional dollar in revenue (over budget) would go to Prop 98.
In the May Revise, the Governor predicted that, adhering to this interpretation of the maintenance factor requirement, as well as the use of accrual accounting methods, 103% of every additional dollar would go to Prop 98. By setting this formula in place, the Administration guaranteed more to schools, less to allocate elsewhere.
The Natural Result: More For Schools, Smaller Restoration for Social Services
Over the course of 2012-13 and 2013-14, the Governor, even with the low revenue projection, allocated $1046 more per K-12 student than before. However, by limiting the revenue side of the budget, when, in all likelihood, more would be coming in, the Governor guaranteed there would be even more money for schools, but no real restoration of monies cut earlier from social services, healthcare, etc.
Others speculate that the Governor wanted to guarantee that there would be no deficit surprises and no fiscal issues dogging him into his next election cycle in 2014.
Other Changes in the May Revise
The Administration must also prepare, in this budget, for implementation of the federal Affordable Care Act’s optional Medicaid expansion. The Governor’s approach increases health care coverage to low-income individuals, not currently eligible for Medi-Cal. These individuals are currently served mainly through the indigent health care and clinic programs run by individual counties. The May Revise proposes that, over time, the state take on more responsibility for health care and counties take on more financial responsibility for human services programs. This will be a new phase of “realignment” which, for now, only affects jails and prisons.
Theoretically, at least in May, the counties were to see a reduction of about $300 million in indigent health care costs related to Medi-Cal expansion which would pay for a larger share of CalWORKS (our welfare-to-work program) as well as child care. That number is to increase to 1.3 billion by 2015-16, primarily due to federal contributions.
Legislative Analyst: Fan of Great Expectations
The Legislative Analyst, as usual, made his own projections of tax revenues for the budget year and came up with some dramatically different numbers, which were accepted by the Senate and the Assembly in their initial takes on the May Revise: $3.2 billion more than the Governor. The increased revenue would, as with the Governor’s budget, result in more Prop 98 monies, but would also make it possible to direct additional monies to child care services, which had been removed from Prop 98 in last year’s budget. Most importantly, the difference in projections allowed the Senate and the Assembly to propose greater funding for CalWORKS, mental health, higher education (CSU and UC are not part of Prop 98 funding), and court funding.
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