BILL ANALYSIS Ó SENATE COMMITTEE ON BUDGET AND FISCAL REVIEW Mark Leno, Chair Bill No: AB 1497 Author: Committee on Budget As Amended: June 25, 2012 Consultant: Keely Martin Bosler/Mark Ibele Fiscal: Yes Hearing Date: June 25, 2012 Subject: Budget Act of 2012. Summary: This bill amends certain provisions of AB 1464, the 2012-13 Budget Act. Background: On May 14, the Governor released his May Revision for budget year 2012-13. The Governor indicated the General Fund deficit was $16.7 billion for the two-year period ending June 30, 2013, representing an increase in the deficit of $6.5 billion since the Governor's initial budget proposal in January. This included a $1 billion reserve. The deficit increased due to a reduced revenue outlook, higher costs to fund schools, and decisions made by the federal government and courts to block previously-approved budget cuts. This budget relies heavily on the Governor's May Revision framework that was predicated primarily on expenditure reductions, as well as passage of a tax initiative on the November 2012 ballot, and additional "trigger" reductions if the initiative is not successful. Since the passage of the Budget Bill on June 15 there have been additional changes within the overall budget framework. This budget includes $7.9 billion in expenditure cuts, $6.0 billion in additional revenues, and $2.5 billion in other solutions for a total of $16.5 billion in solutions. The budget amendments included in this bill and the accompanying trailer bills will result in approximately $91.5 billion in expenditures and an available reserve of around $788 million in the 2012-13 budget year. Proposed Law: Overall, this budget adopts the Governor's May Revision framework, with the additional changes since the passage of the Budget Bill on June 15. The budget -1- solution continues to largely hinge on expenditure reductions, the tax initiative, and 'trigger' cuts. Some one-time solutions such as additional special fund borrowing have been eliminated in favor of additional expenditure reductions and the continuation of revenue shifts to the General Fund. In addition, the proposal to use property tax "pass-through" payments to offset Proposition 98 expenditures was rejected, and the budget adopts additional solutions through the use of mortgage settlement moneys. The bullets below delineate the major changes to the budget plan since June 15. CalWORKs: The proposed budget maintains the reduction of approximately $430 million from the June 15 plan, versus the Governor's $880 million reduction, and makes significant program alterations. Notably, the budget includes no grant cuts. Under the proposal, the current array of welfare-to-work services would be prospectively available for eligible adults for up to 24 months, but "useable" anytime during the 48-month lifetime time limit. Participants would be able to access the remaining 24 months of the 48-month limit if meeting specified, stricter federal work requirements. In addition, counties could extend services for up to 20 percent of those who reach the 24-month time limit, under specified circumstances that indicate satisfactory progress toward employment. There are also changes in the earned income disregard to encourage work participation. Additionally, the budget includes a transfer of federal TANF funding to the California Student Aid Commission for Cal Grants and a corresponding increase of General Fund resources for specified CalWORKs child-only cases. Child Care: The Governor proposed major reductions to the state's subsidized child care programs, totaling $452 million. From the Legislature's June 15 budget plan, there would be an additional across the board reduction equal to about $80 million (versus the $50 million previously included), resulting in a reduction in the number of available slots. In addition, the revised plan calls for the suspension of cost of living adjustments in both 2013-14 and 2014-15. -2- Cal Grants: The Governor proposed a total of $292 million in cuts to the Cal Grant higher education student financial assistance program. The budget plan adopts a total of $53 million in cuts to Cal Grants by accepting the Governor's proposal setting stricter limitations on eligibility for Cal Grants based on institutions' graduation and loan default rates. In a departure from the Governor's plan, the budget reduces new Cal Grant awards beginning in 2013-14 -- by 17 percent (in two steps over two years) for non-profits and for-profit institutions that are accredited by the Western Association of Schools and Colleges, and by 59 percent for all other for-profit institutions. In addition, beginning in 2013-14, there would be no renewal awards for returning students choosing to remain at institutions that do not meet graduation or loan default thresholds. Other Alterations: The revised plan maintains restoration of amounts for other proposed cuts to the AIDS Drug Assistance Program and community health clinics. The revised plan would allow for a slower phase-in for the transition to Medi-Cal next year of the Healthy Families program and would require the Administration and health plans to demonstrate 'readiness' prior to this transition. In addition, the budget provides $18 million in mortgage settlement money for enforcement and counseling, provides $50 million for charter school growth funding, and includes funding for routine High-Speed Rail Authority staffing and planning functions. If the tax measure passes, the plan would provide $50 million to community colleges. This plan relies on the Department of Finance revenue estimates, and is predicated on the passage of the Governor's tax proposal. The Governor's tax proposal is a Constitutional amendment that would raise the personal income tax and the sales and use tax on a temporary basis. Together, the proposed increase in the two taxes is expected to raise an additional $8.4 billion through the budget year, representing $2.9 billion to schools and community colleges and $5.5 billion for General Fund -3- benefit. The measure would also permanently dedicate revenues to local governments to pay for public safety programs realigned in 2011. The plan assumes the state will receive $8.4 billion in additional personal income tax and sales tax revenue from the Governor's tax initiative on the November ballot, of which $5.5 billion will be used to balance the budget. (The remaining $2.9 billion will grow the Proposition 98 guarantee for schools.) In the event that the voters do not approve the Governor's tax proposal in November, the Legislature's joint plan, like the Governor's, includes a series of trigger cuts. These cuts are detailed below: 2012-13 Trigger Cuts (in millions) ---------------------------------------------------------- |Program Area | May | | | Revision | | | Amount | |-----------------------------------------------+----------| |K-14 Education (Proposition 98) | $5,356.0| |-----------------------------------------------+----------| |University of California | 250.0| |-----------------------------------------------+----------| |California State University | 250.0| |-----------------------------------------------+----------| |Developmental Services | 50.0| |-----------------------------------------------+----------| |Local Public Safety Grants | 20.0| |-----------------------------------------------+----------| |Department of Forestry and Fire Protection | 10.6| |-----------------------------------------------+----------| |Flood Control | 6.6| |-----------------------------------------------+----------| |Local Water Safety Patrol | 5.6| |-----------------------------------------------+----------| |Public Safety-Fish & Game, Lifeguards and | 6.0| |Rangers, Dept. of Justice | | |-----------------------------------------------+----------| |Total |$5,954.8 | ---------------------------------------------------------- Fiscal Effect: The fiscal impact of the contents of this -4- and associated trailer bills is to achieve $16.5 billion in budget solutions. As of the May Revision, the Governor estimated that the state had a deficit of $16.7 billion, which includes a $1 billion reserve. This budget would result in approximately $91.5 billion in expenditures and approximately a $788 million reserve. Support: Unknown Opposed: Unknown Comments: The bill amends the Budget Bill adopted by the Legislature on June 15, 2012. Overall, this version of the budget prioritizes K-12 education, higher education, and public safety. Significant reductions were made in the health and human services areas, but in many cases, alternative cuts were found that mitigate the harshest of these reductions. Most areas of the budget saw significant expenditure reductions. The overall budget solution is distributed among expenditure reductions (48 percent), revenue increases (37 percent), and other solutions (15 percent). This plan includes $8.0 billion in expenditure reductions by adopting the vast majority of the Governor's proposed cuts. The plan leads to an improved fiscal position for the state in the out-years, with almost 80 percent of the solutions ongoing or multi-year. -5-