HomeMy WebLinkAbout15 GOVERNOR'S PROPOSED BUDGET INCLUDING REDEVELOPMENT AGENCY ELIMINATION• AGENDA REPORT Agenda Item 15
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Finance Director ~~'~'1
MEETING DATE: FEBRUARY 1, 2011
TO: HONORABLE MAYOR AND COUNCIL MEMBERS
AND TUSTIN REDEVELOPMENT AGENCY BOARD MEMBERS
VIA: DAVID C. BIGGS, CITY MANAGER & RDA EXECUTIVE DIRECTOR
FROM: CHRISTINE SHINGLETON, ASSISTANT CITY MANAGER
SUBJECT: GOVERNOR'S PROPOSED BUDGET INCLUDING REDEVELOPMENT
AGENCY ELIMINATION
SUMMARY
Governor Brown has released a 2010-11 Budget proposal, which includes the proposed
elimination of redevelopment agencies.
RECOMMENDATION
It is recommended that the Tustin City Council and Tustin Community Redevelopment
Agency oppose on record the Governor's proposal to eliminate redevelopment
agencies, and authorize the transmittal of correspondence opposing the proposal and
participate, as needed, at the state level in opposition activities. Additional impacts of
the budget proposal as it would financially impact the City should continue to be
monitored and the Mayor and City staff shall be authorized to take whatever advocacy
positions necessary to minimize impacts on the City.
FISCAL IMPACT
The proposal would affect all Tax Increment and Low and Moderate Income Housing
Funds and the Redevelopment Agency's ability to finance all future capital and public
improvements, affordable housing, and other redevelopment projects within the City.
BACKGROUND/DISCUSSION
On January 10, 2011, Governor Brown released his 2010-11 Budget proposal. An
overview by the Legislative Analyst's Office (LAO) is attached. The proposal offers
$26.4 billion in "solutions" and allows fora $1 billion reserve. The proposal is expected
to go to the State Legislature in March, however, the Assembly Budget Committee has
City Council /Agency Report
February 1, 2011
Redevelopment Elimination
Page 2
already begun meeting and there is discussion and a recommendation from the LAO
advocating adoption of urgency legislation. Since the budget proposal also includes
new taxes, or at least an extension of taxes due to expire, adoption of the budget would
require a 2/3rds majority vote in both the Assembly and Senate to pass. If the
necessary approvals cannot be obtained, strategy discussions have already begun to
determine how the budget could be adopted with a simple majority under the provisions
of the recently approved Proposition 25, with the tax increase component perhaps put
on the ballot by the legislature through a budget trailer bill process that many are
arguing would only require a majority vote.
Perhaps the most significant impact of the Budget proposal is the Governor's intention
to do away with local redevelopment agencies by July 1, 2011. However, an additional
component of the budget proposal impacts state services such as fire, community-
based corrections, management of low level offenders, mental health services, foster
care and adult protective services to local government. Although the budget does not
include much detail, the county is the likely entity to be given responsibility for these
additional services. A shift of program responsibilities from the state to the county could
have financial implications for the City or have other community impacts, particularly if
offenders have to serve their terms in county facilities and/or on probation rather than in
a state facility.
While staff continue to monitor and learn more about the Governor's proposed budget
and are exploring options to minimize the impacts, in many cases there is not yet
adequate detail to fully understand the implications on the City. Initial review of the
budget reveals the following potential impacts:
Public Safety
Public safety programs and funding, including law enforcement, corrections and
emergency response are a major piece in the realignment of services and programs
from the state to local agencies.
COPS (Citizen's Option for Public Safety)/Booking Fees. The Governor's budget
proposes to support public safety programs by providing a direct allocation of COPS,
Booking Fee remediation, and specific county level programs. It proposes to allocate to
these programs $420 million that will be backfilled with realignment plan funding-if
approved by the voters. Funding would include:
• $107 million for COPS programs, under the current distribution formula based on
population with a $100,000 minimum.
City Council /Agency Report
February 1, 2011
Redevelopment Elimination
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• $35 million for booking fee subventions, meeting the minimum threshold required to
eliminate the need for sheriffs to charge police departments for booking arrestees in
county facilities.
If voters pass the five year extension of taxes proposed, the City would be impacted as
follows:
• COPS funding: The City is slated to receive $100,000 in FY 2010-11 for
reimbursement of the City's crime analyst position.
• Booking Fees: The impact of eliminating booking fees does not currently affect
Orange County. The City currently books approximately 1,400 persons per year at
the Orange County Jail. Based on a conversation between the Orange County
Sheriff's Department and Chief Jordan, the County currently does not plan on
charging booking fees to the City. It is unknown at this time whether that position
could change in the future depending on the level of state funding.
Corrections. It is also proposed that there be a major shift of corrections programs
from the state to the counties in three levels: incarceration of short term, low offenders
and parole violators; adult parolee supervisions; and all remaining state Department of
Juvenile Justice wards. The state would maintain funding responsibilities through a
direct allocation to the counties, but authorize county probation and sheriff departments
to determine how these dollars will be spent.
There is no start date for this realignment yet and would impact prospective inmates
only, allowing time for county facilities and administrative systems to prepare for the
additional population. Moving the specified inmates and parolee populations to county
supervision appears to be intended to coincide with other proposed state to county
shifts, which would provide for rehabilitation type services including substance abuse
and mental health treatment.
Emergency Response/Fire Suppression Services. Certain emergency response
services for areas currently served by the California Department of Forestry and Fire
Protection (CAL Fire) are proposed to be shifted to local agencies. CAL Fire is charged
with assessing which areas should be transferred to local jurisdictions (primarily
counties) for fire suppression and emergency medical response services. OCFA is
currently reviewing the impacts on its members and contract cities should this measure
be adopted.
City Council /Agency Report
February 1, 2011
Redevelopment Elimination
Page 4
Elimination of all Enterprise Zone Programs
The Governor's budget proposal proposes to eliminate all of California's enterprise
zones.
The City of Tustin is one of five designated Local Agency Military Base Recovery Act
(LAMBRA) zones in California. The LAMBRA designation is designed to provide
assistance to certain types and sizes of industries locating at the former military base
and provides tax incentives that are similar to an Enterprise Zone which are binding for
8 years after the conveyance of the last property to Tustin by the Department of the
Navy. While there has not yet been business development at Tustin Legacy that could
take advantage of the LAMBRA tax incentives or credits, those credits are extremely
helpful to business attraction and include:
• Up to 100% Net Operating Loss (NOL) carry-forward. This incentive has been suspended by the legislature
for the 2008 and 2009 taxable years;
• NOL may be carried forward for 15 years;
• Firms may earn $37,440 state tax credit over afive-year period for each qualified employee hired. In the
first year of employment, businesses may reduce their state income tax by up to half the amount of the
wages paid to one or more employees;
• Firms may earn sales tax credits on purchases of $20 million per year of qualified machinery and machinery
parts;
• There is up-front expensing of certain depreciable property permitted at the rate of up to $400,000 annually;
• Unused tax credits may be applied to future tax years, stretching out benefit of the initial investment.
Redevelopment Elimination
Perhaps the most significant impact to Tustin from the Governor's budget would be his
proposal to revise state laws to dissolve the state's 425 redevelopment agencies, in the
following manner:
Statutory elimination of redevelopment agencie
projects (estimated at $2.2 billion) and direct $1.
in 2011-12, $840 million to Medi-Cal and $860
$1.1 billion to schools and other local ag
redevelopment agency "pass through". Ther
distribution to schools, cities, and counties, acc
current property tax.
s that protect obligations for existing
7 billion to the state's General Fund
million for trial costs, and allocate
encies pursuant to any required
e will be $210 million left over for
ording to their proportionate share of
Even without any future growth taken into consideration, the Agency is estimated to
have a capacity to earn approximately $270 million dollars of tax increment through
the effective time frames remaining within each of the Agency's redevelopment
City Council /Agency Report
February 1, 2011
Redevelopment Elimination
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projects. Development of the Tustin Legacy project has the potential to increase this
capacity by an additional $500 million dollars or more.
• In subsequent budget years, after deducting for existing debt obligations, the
remaining tax increment property tax will go to the other local governments in a
county, including cities, counties, and schools, except that:
o The additional K-14 district property tax would augment existing state funding
and would be distributed to the districts throughout the county based on
enrollment.
o There will be a $50 million exception in the amount currently going to enterprise
special districts which are fee supported-this will go to counties.
As it relates to the MCAS Tustin Redevelopment Project Area, there is significant
concern with the fact that the City would receive only a small percentage of the 1
property tax revenue (3.12%) as compared to other cities in Orange County due to
the smaller share of property taxes assigned to the property under a tax share
agreement that was required by the County when the property was originally
annexed to the City in the early 1970's.
• Redevelopment agencies' housing set aside fund balances will be shifted to local
housing authorities.
It is not yet clear whether the City would be able to establish a local housing
authority or whether the Agency's housing funds would be shifted to the county
housing authority.
• A constitutional amendment to provide for 55% voter approval for local, limited tax
increases, and bonding against local revenues for economic development projects
similar to those currently funded through redevelopment.
This proposal would not assist the City in replacing any lost tax increment. In fact, it
would be inconsistent with the original intention, particularly in developing the Tustin
Legacy project. It was the policy position of the City Council that the project and
residents in the Tustin Legacy project pay their own way and not be a burden on the
rest of the City.
• Existing agencies will be required to cease creation of new obligations. The local
governmental entity will be required to designate a successor agency to be
responsible for retiring current redevelopment debt obligations in accordance with
existing payment schedules.
City Council /Agency Report
February 1, 2011
Redevelopment Elimination
Page 6
There is always the potential that the state will not recognize as "existing debt
obligations" or contractual obligations current working capital and administrative
service agreements or public improvement agreements between the City and
Agency which are currently of record and contained on the Agency's Statement of
Indebtedness filed with the County on an annual basis. A significant portion of
redevelopment indebtedness statewide for which tax increment is received is debt
owed by redevelopment agencies to their cities. The state could attempt to adopt
legislation that impairs a contract between state created entitles such as the Agency
and the City. The Agency is, therefore, exploring options that would be available to
protect receipt of future tax increment.
The Agency may also be required to dispose of any other real estate assets it owns
to any successor agency.
The LAO recognizes that developing the statutory measures to implement the
elimination of redevelopment agencies is a complex proposal that will require
considerable work by the legislature. During this time--potentially weeks or months--it is
possible that redevelopment agencies could take actions to increase their bonded
indebtedness and contractual obligations. In so doing, these new financial obligations
could constrain the state's ability to redirect redevelopment revenues and to realize the
state savings and local benefits anticipated in the administrative proposal. Accordingly,
the LAO is recommending that the Legislature pass urgency legislation as soon as
possible prohibiting redevelopment agencies--during this period of legislative review--
from taking actions that increase their debt. Specifically, the urgency legislation is
anticipated to prohibit redevelopment agencies from:
• Taking on any new debt that would be included on their Statement of Indebtedness--
the statement that indentifies redevelopment agency debt and makes the agency
eligible for property tax revenues, or:
• Creating, amending, or extending any redevelopment project areas. This approach
would preserve the Legislature's options as it reviews the administration's proposal,
but would not have a lasting effect on redevelopment agencies if the Legislature
elects not to adopt it.
The Governor's proposal to eliminate or curtail redevelopment is short-sighted public
policy that will damage the economy and bring little budget relief to the state. The
proposal to eliminate redevelopment:
• Will not provide expected budget relief to the state or local government after
bond issues and contractual obligations are repaid.
City Council /Agency Report
February 1, 2011
Redevelopment Elimination
Page 7
• Will destroy billions of dollars in local economic activity and hundreds of
thousands of jobs.
• Will kill the state's leading program to provide affordable housing. Re-
development is the second largest funder of affordable housing, behind only the
federal government.
• Will harm our efforts to grow responsibility by focusing on urban and infill
development to comply with state law and implement AB 32 and SB 375.
Shutting down redevelopment agencies is also a clear violation of multiple state
constitutional provisions, including Article XVI, Section 16 which requires tax increment
to be paid to redevelopment agencies (not a successor agency) to repay the public cost
of redevelopment projects and Article XIII, Section 25.5 (Proposition 22-passed by 61
of the voters in November, 2010) which explicitly prohibits the state from taking tax
increment from redevelopment agencies.
The Governor's proposal would also have the unintended consequence of negatively
financially impacting key redevelopment projects at former military bases. In fact, the
State Legislature adopted Chapter 4.5 (Sections 33492 through 33498.2 of the
California Redevelopment Law) to establish specific legislative relief and standards for
redevelopment areas created for former military bases recognizing the unique
characteristics of former military bases in California and intending to:
• Provide a means of mitigating the economic and social degradation that is faced by communities, the
jurisdictions of which provide military bases that have been ordered to be closed and realigned by the
Federal Base Closure Commission.
• Enable redevelopment agencies to place in a project area portions of military bases that were
previously developed, but that cannot be utilized in their present condition because of, in whole or in
part, substandard infrastructure and buildings that do not meet state building standards. It was not the
intent of the Legislature.
• Declare that extraordinary measures must be taken to mitigate the effects of the federal government's
efforts to reduce the number of military bases throughout the country.
Infill projects, which include not only the closed former Marine Corps Air Station-Tustin
("Tustin Legacy") but also other important former closed military base projects such as,
but not limited to, the former Marine Corps Air Station EI Toro (Heritage Fields and the
Great Park), March Air Force Base, the Alameda NAS, Fort Ord, Treasure Island,
Hunters Point Shipyard, San Diego NAS, and George AFB are public-private
partnerships that leverage millions of dollars in private capital so that shuttered and
blighted areas can gain much needed jobs, affordable housing, parks, and open space.
City Council /Agency Report
February 1, 2011
Redevelopment Elimination
Page 8
These former military bases were in non-productive uses which were exempt from
property taxes while they were in federal ownership, so there was no loss of revenues
to local cities and schools. It is only the redevelopment agency authorities under state
law that have put these properties back into productive use, and resulted in significant
local revenues to cities, schools, other local taxing agencies and the redevelopment
agencies that recycle increased tax increment revenues back into revitalizing these
former military bases.
The state's tax increment proposal would further stall our own redevelopment projects in
all three of the City's redevelopment project areas (the Town Center Project, the South
Central Project and the MCAS Tustin Project). The proposal will postpone build-out of
the Tustin Legacy project and the ultimate generation of approximately $8.8 million in
tax revenue annually to local governments, school districts, and the other local taxing
agencies who, prior to the closure of the base, did not see one dime of revenue from the
site. This $8.8 million figure does not include the delay in the City's receipt of future
sales, property and transient occupancy taxes.
Tustin, and its private partners, have poured millions of dollars in investment into the
community-based planning processes for the former MCAS Tustin since 1991, well
before even the creation of the MCAS Tustin Redevelopment Project in 2003. The City
and its Redevelopment Agency have a realistic expectation that the investment that has
been made in redevelopment of the facility will be recovered locally and also used to
generate additional redevelopment activities and job creation. The state's tax increment
grab would deliver a devastating blow and delay further redevelopment activities at the
former base.
If the state inadvisably moves forward with this raid on local redevelopment funds, the
former MCAS Tustin along with former military bases included within adopted
redevelopment Project Areas should be specifically exempted so that these economic
engines under development can come online as soon as possible.
• Former military bases have unique challenges compared to more typical urban infill
redevelopment areas, requiring massive upfront construction of new public
infrastructure before any meaningful redevelopment can take place.
• Former military bases also have a unique challenge related to economic
development. The loss of a military base is an enormous economic blow to the local
and regional economy, and the goal of military base redevelopment is to reverse that
impact.
• These twin challenges of infrastructure and economic development have generally
led to the common employment of a model for redevelopment that must rely on
bonding of the tax increment to carry out major infrastructure improvements on the
former bases.
City Council /Agency Report
February 1, 2011
Redevelopment Elimination
Page 9
• The fact that military base redevelopment areas generally anticipate bonding up to
100% of the available tax increment means that these areas will not have this tool
available to them under the Governor's proposal to eliminate redevelopment.
The proposal will affect both military bases currently being redeveloped, where
bonding has already occurred, as well as military bases currently in entitlement that
expect to be underwritten and which need additional bonding capacity as build-out
occurs. Without bonding tools currently available to redevelopment agencies and
the support of private capital underwriting, many of the military base redevelopment
projects may be rendered financially infeasible and be forced to delay
implementation.
While it is unwise, in general, to sacrifice future economic development by paying the
state's immediate obligations with redevelopment funds, it is particularly onerous to take
those funds critical to military base reuse projects.
The League of California Cities and CRA are recommending a statewide advocacy
campaign to stop the Governor's proposal and are asking cities to:
1. Support and sign a Coalition Letter to the Governor and Legislature to be signed by
all local elected officials.
2. Participate in documenting projects that will be slowed down or impacted due to the
elimination of redevelopment.
3. Assist in press conferences and media outreach.
4. Take actions necessary in an effort to protect existing program activities.
The Council and Redevelopment Agency's support in opposing this latest proposal from
the Governor and signing onto all coalition activities is strongly recommended. As part
of this effort, the Mayor will be sending correspondence on behalf of the City to the
Governor and all State Legislators consistent with the positions approved by the Council
as part of this action. It is important that Tustin make its own case and that the state
recognize, in particular, the unique characteristics associated with former military bases
and those communities that have acquired these blighted and antiquated former military
facilities. A critical assumption in the City's original acquisition of the site from the
Department of the Navy, and our continuing refinement of the business plan for the
Tustin Legacy project, was that redevelopment revenues would be available for
implementation activities. All former closed military bases that have been included
within a Redevelopment Project Area should be exempted from any proposal to
eliminate redevelopment.
City Council /Agency Report
February 1, 2011
Redevelopment Elimination
Page 10
~~
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Christine A. Shingleton %
Assistant City Manag
Approved for Forwarding By:
G
David C. Biggs
City Manager
Attachments: LAO Overview of Governor's Budget
League of California Cities Opposition Materials
California Redevelopment Association Opposition Materials
Proposed Letter to Governor
y
Mac Taylor
Legislative Analyst
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2011-12 BUDGET
.'~ ~ 1
Executive Summary ..................................................................................................3
Overview ...................................................................................................................5
Economics, Revenue Projections, and Tax Proposals ..........................................10
State-Local Realignment ........................................................................................16
Redevelopment ......................................................................................................20
Expenditure Proposals ...........................................................................................22
2 Legislative Analyst's Office www.lao.ca.gov
2011-12 BUDGET
$25.4 Billion Budget Problem Identified by Administration
Administration s Estimate Seems Reasonable. The administration's budget proposal identifies
a $25.4 billion budget problem that the Legislature and the Governor must address between now
and the time they agree on a 2011-12 budget package. Our initial assessment is that this estimate
is reasonable. The $25.4 billion problem consists of an $8.2 billion deficit that would remain at the
end of 2010-11 absent additional budgetary action, as well as an estimated $17.2 billion gap between
current-law revenues and expenditures in 2011-12.
Reasons for the Budget Shortfall. As we discussed in our November 2010 report, California's
Fiscal Outlook, the major reasons for this budget problem are the inability of the state to achieve
previous budget solutions in several program areas, the expiration of various one-time and tempo-
rarybudget solutions approved in recent years, and the failure of California to obtain significant
additional federal funding for key programs. A weak economic recovery continues, meaning that
elected leaders cannot rely on the economy to solve this huge budget problem.
Governor's Plan: Realignment, June Election, and Expenditure Cuts
Realignment and Voter-Approved Tax Increases Are Key Elements. Two significant and inter-
relatedthemes run through the Governor's budget proposal: (1) his plan to submit a proposed exten-
sion of the four temporary tax increases adopted in February 2009 to voters in a June 2011 special
election and (2) his plan to restructure the state-local relationship in the delivery of services (by
shifting funding and responsibility to local governments for those services).
Expenditure Reductions Touch Nearly Every Area of State Funding. The Governor's budget
includes many significant ongoing program reductions, posing very difficult decisions for the
Legislature. His proposals touch nearly every area of the state budget-often (as in Medi-Cal) with
proposed reductions similar to ones suggested by the prior Governor and rejected by the Legislature.
While the Governor's revenue proposals result in a $2 billion increase in the Proposition 98
minimum funding guarantee for schools above its current-law level, his budget would result in a
small programmatic funding decline for K-12 and more significant reductions for community
colleges and child care programs.
Plan Would Improve Budget Situation Considerably
Administration Estimates $1 Billion Reserve atEnd of 2011-12. The administration estimates
that the Governor's plan would cut the 2010-11 deficit in half and leave the state with a $1 billion
reserve at the end of 2011-12. The plan relies on legislative approval of statutory changes necessary to
achieve budget solutions by March 1.
Administration Says Plan Would Eliminate Deficit for at Least a Few Years. The administra-
tion projects that the Governor's proposed budget package would eliminate California's budget
deficit for at least the next three years and leave the state with a surplus during that period, albeit a
very small one in some years. The Governor proposes that voters approve only five-year extensions
of temporary taxes, some of which would be used to fund realigned local services. At this time, it is
unclear how the Governor plans to replace the proposed temporary taxes when they expire at the
end of this five-year period.
www.lao.ca.gov Legislative Analyst's Office 3
2011-12 BUDGET
LAO Comments
Governor's Proposal Is a Good Starting Point. The state faces another huge budget deficit. In
light of this dire circumstance, the Governor's proposal includes reductions in nearly every area of
the state budget and a package of revenue proposals that merit serious legislative consideration. We
think the Governor's package is a good starting point for legislative deliberations.
Focuses on Multiyear and Ongoing Solutions. We credit the Governor's efforts to craft a budget
plan that is heavily focused on multiyear and ongoing solutions. As such, his proposal shows great
promise to make substantial improvements in the state's budgetary health-both in the short run
and over the long term. the administration, in fact, estimates that its plan would eliminate the
state's deficit-at least for the next three fiscal years. Our early assessment of the outyear effects of
the Governor's budget is somewhat less favorable than the administration's. Nevertheless, its adop-
tion would go a long way toward eliminating the state's persistent budget gap.
Governor Puts Some Bold Ideas on the Table. The Governor's proposals to "realign" state and
local program responsibilities and change local economic development efforts have much merit.
His realignment proposal would shift $5.9 billion in state program costs to counties and provide a
comparable amount of funds to support these new county commitments. We believe that this type
of decentralization of program delivery and authority could promote innovation, efficiency, and
responsiveness to local conditions. The Governor also puts forward dramatic changes in the area of
local economic development by proposing the elimination of redevelopment agencies. We think this
makes sense, as the state's costs associated with redevelopment have grown markedly over the years
even though there is no reliable evidence that the program improves overall economic performance
in the state.
Still...Some Significant Risks in the Governor's Plan. The Legislature should favor budget
solutions that have a strong likelihood of actually achieving budgeted savings or revenue increases.
As such, there is significant work ahead to fill in the details of some of the Governor's ambitious,
complex budget proposals-especially the realignment and redevelopment proposals, which involve
many legal, financial, and policy issues. Acting to pass key budget legislation by March 1, as the
Governor proposes, would be helpful even if a special election were not called. Early budget actions
give departments more time to implement spending reductions. If it adopts the Governor's timeline
and special election approach, the Legislature would have the opportunity in the months after
March 1 to review routine budget proposals for departments, adopt clean-up legislation to clarify
elements of this complex budget package, and consider alternative budget-balancing solutions in
case voters reject the June ballot measures. In total, around $12 billion of the Governor's proposed
budget solutions (tax extensions and changes to Proposition 10) are dependent upon voter approval
in June.
Conclusion
California's elected leaders need to take big steps toward restoring the state government to fiscal
solvency and rebuilding the trust of California's residents in state government. The Legislature's
most important function is its control of the state budget. In drafting a 2011-12 budget plan, the
Legislature will have to make difficult decisions on both its spending and tax commitments, but it
also has the opportunity to reorder state and local government functions to improve the delivery of
public services. In the coming weeks, we will work to provide additional guidance on the Governor's
proposals and, where appropriate, offer alternatives to them.
4 Legislative Analyst's Office www.lao.ca.gov
2011-12 BUDGET
77~e Governor released his proposed 2011-12
budget package on January 10, 2011, one week after
his inauguration. This report is our office's initial
reaction to this package. In the coming weeks,
as more information becomes available from the
administration, we will provide further analysis to
assist the Legislature in its budget deliberations.
Administration Estimates a
$25.4 Billion Shortfall
Failed Budget Solutions and Expiring
Measures Contribute to the Shortfall. Based on
a review of current-law General Fund revenues
and program spending, the 2011-12 Governor's
Budget estimates that, without corrective action by
the Legislature and the Governor, the state would
end 2011-12 with a $25.4 billion deficit. Under
the administration's estimates, the Legislature
and the Governor would need to identify at least
$25.4 billion of General Fund budget solutions
between now and the time that they adopt the
2011-12 Budget Act. Specifically, the administra-
tion estimates that the General Fund will end
2010-11 with a deficit of $8.2 billion (as opposed
to the $1.5 billion reserve balance assumed when
the October 2010 budget package was adopted).
For 2011-12, the Governor estimates that the
gap between expenditures and revenues will be
$17.2 billion.
Our office also pegged the size of the 2011-12
budget problem at $25.4 billion in our November
2010 report, California's Fiscal Outlook. As we
discussed in that report, the reasons for this year's
state budget shortfall include the inability of the
state to achieve previous budget solutions in several
program areas, the expiration of various one-time
and temporary budget solutions approved in recent
years, and the inability of the state to obtain signifi-
cant additional federal funding for key programs.
Governor Proposes $26.4 Billion of General
Fund Solutions. In total, the Governor proposes a
total of 526.4 billion in budget solutions. If adopted
and achieved in full, the Governor's budget plan
would leave the state with a reserve of around
$1 billion at the end of 2011-12.
How the Budget Addresses the Shortfall
A Mix of Expenditure Reductions and Tax
Increases. Figure 1 (see next page) shows our
office's categorization of the $26.4 billion in pro-
posed budget solutions. The Governor proposes to
reduce current-law General Fund state expendi-
tures by $12.5 billion, as summarized in Figure 1.
(These expenditure-related solutions include both
reductions in services and benefits and use of other
funding sources in lieu of the General Fund.) The
Governor proposes a total of S14 billion in new rev-
enues, of which $3 billion is attributed to 2010-11.
The additional revenues to be deposited in the
General Fund would result in a $2 billion increase
in the Proposition 98 minimum funding guarantee
for schools and community colleges. (The adminis-
tration scores its revenue package at $12 billion over
two years: the $14 billion described above, less the
$2 billion increase in the Proposition 98 guarantee.
Figure 1 categorizes the Proposition 98 change
separately from the revenue package.) The remain-
ing $1.9 billion in solutions comes from borrowing
from special funds and other sources. We discuss
the significant proposals in the Governor's budget
in more detail later in this report.
Realignment and Voter-Approved Revenues
Are Key Elements. Two significant and inter-
related themes run through the Governor's budget
package: (1) his plan to submit a proposed exten-
sion of the four temporary tax increases adopted in
February 2009 to voters in a June 2011 special elec-
tion and (2) his plan to restructure the state-local
www.lao.ca.gov Legislative Analyst's Office 5
2011-12 BUDGET
relationship in the delivery of services (by shifting increases proposed for the June special election
funding and responsibility to local governments ballot (the 1 percentage point sales tax increase
for those services). Two of the temporary tax and the 0.5 percentage point increase in the vehicle
Figure 1
t. t OI~iarll r®O y fh rlr~Or
(General Fund Benefit, in Billions)
2010-t1 2011-12 Totals
Expenditure-Related Solutions
Shift redevelopment funds to Medi-Cal and trial courts
Reduce benefits and provider payments and charge copayments in Medi-Cal
Impose time limits, grant reductions, and service cuts for CaIWORKs
Reduce UC and CSU budgets
Use Proposition 10 reserves and some ongoing revenues for children's programs
Fund transportation debt costs primarily using weight fees
Use Proposition 63 funds to support community mental health services
Reduce developmental center and regional center spending
Shift some adult and all juvenile offenders to local jurisdictions
Reduce IHSS hours of service, limit domestic services, and tighten eligibility
Reduce state employee salary and medical costs
Suspend, defer, or repeal state mandates
Reduce SSI/SSP grants for individuals to the federal minimum
Adopt unallocated funding reduction for the courts
Reduce Receiver's inmate medical care budget
Achieve efficiencies in state operations
Reduce other spending
Subtotalsa
Revenue Solutions
General Fund Revenue Solutions
Extend the 0.25 percentage point personal income tax surcharge for five years
Extend reduction in dependent exemption credit for five years
Make single sales factor mandatory for multistate firms
Repeal enterprise zone tax credits
Adopt other revenue measures
Subtotals
Local Realignment Revenue Solutions
Extend 0.5 percentage point vehicle license fee increase for five years
Extend 1 percentage point state sales tax increase for five years
Subtotals
Total Revenue Solutions
Borrowing and Transfers
Loans, transfers, and loan extensions from special funds
Borrow from Disability Insurance Fund for UI interest payments
Other loans and transfers
- $1.7 $1.7
- 1.7 1.7
- 1.5 1.5
- 1.0 1.0
- 1.0 1.0
$0.3 0.8 1.0
- 0.9 0.9
- 0.8 0.8
- 0.6 0.6
- 0.5 0.5
- 0.4 0.4
- 0.3 0.3
- 0.2 0.2
- 0.2 0.2
0.1 0.2 0.2
- 0.2 0.2
- 0.3 0.3
($0.4) ($12.1) ($12.5)
$1.2 $2.1 $3.3
0.7 1.2 2.0
0.5 0.9 1.4
0.3 0.6 0.9
0.4 0.1 0.5
($3.2) ($4.9) ($8.1)
$1.4 $1.4
- 4.5 4.5
(-) ($5.9) ($5.9)
($3.2) ($10.9) ($14.0)
$0.5 $0.9 $1.4
- 0.4 0.4
- 0.1 0.1
Subtotals ($0.5) ($1.4) ($1.9)
Increase Proposition 98 Guarantee Due to Revenue Proposals - -$2.0 -$2.0
.. r _ ... : , .~
a Subtotal may not add due to rounding.
IHSS = In-Home Supportive Services; UI =Unemployment Insurance.
6 Legislative Analyst's Office www.lao.ca.gov
2011-12 BUDGET
license fee (VLF]) would be dedicated to funding
the realignment of programs from the state to local
entities. the Governor also proposes a significant
change to the way that local redevelopment activi-
ties are funded.
Most Solutions Extend Beyond the Budget
Year. Apart from the temporary borrowing of
$1.9 billion, the vast majority of the proposed
budget solutions are intended to last beyond the
budget year. In the case of the temporary tax
increases, they would be in effect for five years.
General Fund Condition
Solutions Estimated to Leave State With
$1 Billion Reserve at End of 2011-12. Figure 2 shows
the administration's estimates of the General Fund
Eliminate the Deficit for at Least a Few Years. The
administration projects that the proposed budget
solutions would eliminate the state's budget deficits
for the next three years and leave the state with
a surplus, albeit a very small one in some years,
through this period. (Specifically, the administra-
tion estimates that the General Fund would have
an operating surplus of $15 million in 2012-13,
$2.4 billion in 2013-14, and $7 million for 2014-15.)
At this time, it is unclear how the Governor plans
to replace the proposed temporary taxes-which
are to be used to fund ongoing realigned local
services-when they expire at the end of five years.
Absent a plan to replace these taxes, there could be
a substantial fiscal "cliff" for the General Fund after
the five-year period.
condition under the Governor's proposals. the esti-
mateddeficit at the end of 2010-11 would be cut in
half to about $4.1 billion. In 2011-12, revenues would
decline 4.8 percent to $89.7 billion, while expendi-
tures would decline 8.2 percent to S84.6 billion. The
state would have an operating surplus of $5.1 billion,
offsetting the carry-in deficit and leaving a $1 billion
reserve at the end of 2011-12.
Administration Says Its Solutions Would
Proposed Accelerated Budget Timeline
Administration Proposes Trailer Bills-Not
Budget Act-by March 1. the administration has
proposed an accelerated budget process with a
target date of March I to have all of the enabling
legislation necessary to implement the budget
solutions in place. It is our understanding that the
administration does not propose to have a budget
act passed by March 1, but
rather only "trailer bills"
Figure 2 (the legislation that makes
~~~®tg~ ~~~ the statutory changes
r~r ~ ~47rlii~lOr1 required to implement
(Dollars in Millions) budgetary solutions or
Proposed for 2011-12 to place items on the
Actual Proposed Percent
special election ballot).
2009-10 2010-11 Amount Change
This approach would
Prior-year fund balance -$5,147 -$5,343 -$3,357
Revenues and transfers 87,041 94,194 89,696 _4,8~~o allow the Legislature and
Total resources available $81,894 $88,851 $86,339 the administration to
Expenditures $87,237 $92,208 $84,614 -8.2% put in place the budget
Ending fund balance -$5,343 -$3,357 $1,725 solutions required to
Encumbrances $770 $770 $770 address the budget deficit
,,, _ s..« .....~.~ _ . _ ...~ ~~ ' .'~~~ ?~~ ~....Wr_,~.,~ ~.,~~~<_~ in March and then final-
a Special fund for economic uncertainties. iZe action On the budget
www.lao.ca.gov Legislative Analyst's Office 7
2011-12 BUDGET
bill-presumably in June-prior to the Legislature's
June 15 constitutional deadline for adopting a
balanced budget. In the view of the administra-
tion, this would allow for the incorporation of
any updated May Revision forecasts, as well as the
results of the special election.
Most or all of the trailer bills passed by March
under the administration's approach seemingly
would require atwo-thirds vote of each house of
the Legislature. 'This is because Proposition 25
(approved by voters in November 2010) appears to
require passage of a budget act to designate trailer
bills needing only a majority vote.
June Special Election. It is our understanding
that the Governor proposes to put two ballot
measures before the voters in a June special
election: (1) a constitutional measure to extend the
temporary tax increases by another five years and
to dedicate two of these revenues to realignment
and (2) a measure to change Proposition 10 to allow
the funds to be used in the Medi-Cal Program.
(In addition, two measures have already qualified
for the next statewide ballot through the initia-
tive process: a measure to change the term limits
currently in place for legislators and a measure to
increase cigarette taxes to fund additional cancer
research.) We understand the Governor will ask
that a separate measure be placed on a future
election ballot to allow new mechanisms for
funding redevelopment at the local level.
LAO COMMENTS
The Governor's Package Is a
Good Starting Point
Reasonable Estimate of the Size of the Budget
Problem. Our initial assessment is that the
Governor's budget provides a reasonable estimate
of the size of the budget problem the Legislature
and the Governor must address between now and
the time they agree to a 2011-12 budget package.
Most, but not all, budget solutions also appear to be
scored reasonably, assuming that they are enacted
on the Governor's accelerated budget legislation
deadline. (We discuss our reactions to specific
budget proposals throughout this report.)
Expenditure Reductions Touch Nearly Every
Area of State Funding. The Governor's budget
includes many significant ongoing program
reductions, posing very difficult decisions for the
Legislature. His proposals touch nearly every area
of the state budget-often (as in Medi-Cal) with
proposed reductions similar to ones suggested by
the prior Governor and rejected by the Legislature.
While the Governor's revenue proposals result in a
$2 billion increase in the Proposition 98 minimum
funding guarantee for schools above its current-law
level, his budget would result in a small program-
maticfunding decline for K-12 and more significant
reductions for community colleges and child care
programs.
Tax Package Includes Sorne Sound, Policy-
Based Proposals. The Governor's plan includes
several tax proposals that we have previously
recommended, including adoption of mandatory
single sales factor apportionment for multistate and
multinational fines and elimination of enterprise
zone tax credits. As we describe later in this report,
the proposed extension of the temporary increases
in income and sales tax rates poses more difficult
issues, but we think the Governor's proposed tax
extensions merit serious consideration.
Focuses on Multiyear and Ongoing Solutions.
We credit the Governor's efforts to craft a budget
plan that is heavily focused on multiyear and
ongoing solutions. As such, his proposal shows
great promise to make substantial improvements
in the state's budgetary health-both in the short
run and over the long term. The administration,
in fact, estimates that its plan would eliminate the
state's deficit-at least for the next three fiscal years.
8 Legislative Analyst's Office www.lao.ca.gov
2011-12 BUDGET
Our early assessment of the out-year effects of the
Governor's budget is somewhat less favorable than
the administration's. Nevertheless, its adoption
would go a long way toward eliminating the state's
persistent budget gap.
Governor Puts Some Bold Ideas on the Table
Restructuring the State-Local Relationship.
The Governor's budget includes a major "realign-
ment" of state and local program responsibilities.
It would shift $5.9 billion in state program costs
to counties and provide a comparable amount of
funds to support these new county commitments.
We believe there is much merit in the proposal
as decentralizing program delivery and authority
could promote program innovation, efficiency, and
responsiveness to local conditions.
Overhauling Redevelopment. The budget
also puts forward dramatic changes in the area
of local economic development, by proposing the
elimination of redevelopment agencies. We~think
this makes sense, as the state's costs associated with
redevelopment have grown markedly over the years
even though there is no reliable evidence that this
program improves overall economic performance
in the state.
StiII...Some Significant Risks in the
Governor's Plan
Realignment and Redevelopment Proposals
Pose Challenges. While the proposals on realign-
ment and redevelopment have great promise, both
will require considerable work by the Legislature
to sort through many legal, financial, and policy
issues. Implementing these complex proposals in
away that ensures the programmatic benefits and
budgetary solutions will be challenging-especially
given the short time frame laid out in the budget
plan.
Many Details Still Need to Be Worked Out. As
some of the solutions proposed by the Governor are
complex and cut across many aspects of govern-
ment, it is unsurprising that just one week into the
new administration's term, there are areas where
specific implementation and practical details are
missing. For example, the budget does not indicate
specifically how much of the proposed savings in
the Department of Developmental Services (DDS)
would be achieved. This lack of detail should not
preclude a prompt beginning to legislative consid-
eration of any proposal. Nevertheless, the imple-
mentation details-the administration's approach
to navigating the legal and practical complexities
of many proposals-will determine the level of risk
and the corresponding likelihood of successful
implementation. As we have stated previously, we
suggest that the Legislature favor budget solutions
that have a strong likelihood of actually achieving
budgeted savings or revenue increases.
Some Savings Estimates Are Optimistic. As
we discuss in detail later in this report, our initial
review of the Governor's budget suggests that in
some key program areas, the administration's esti-
mated savings are optimistic. these areas include
some proposals in corrections, state employee
health plans, and In-Home Supportive Services
(IHSS). In addition, the budget plan includes
$200 million of unallocated reductions to state
operations for efficiency purposes. In some cases,
the administration has not provided significant
detail yet on how the savings from these proposals
would be achieved. Historically, such lack of detail
often has been associated with budget actions
that fail to produce the desired level of savings.
Proposed budget solutions of over $1 billion could
be affected, based on our very early review.
Much Would Depend on the Outcome of
the June Special Election. Under the Governor's
proposals, around $12 billion of the proposed
budget solutions (tax extensions and changes to
Proposition 10) will depend on voter approval in
the June special election. If the voters reject some
www.lao.ca.gov Legislative Analyst's Office 9
2011-12 BUDGET
or all of these solutions, the Legislature would need proposals for departments, adopt clean-up legisla-
to promptly enact additional cuts or alternative tion needed to clarify elements of this complex
revenue solutions prior to the start of the new fiscal budget package, and consider alternative budget-
year in July. balancing solutions in case voters reject the June
Legislature Needs to Act Quickly
Accelerated Timeline. If the Legislature accepts
the administration's proposed approach for a
June special election, the proposed timeline-to
adopt key budget-balancing statutory measures by
March 1-has significant advantages. Aside from
the timing requirements for the special election
and the desire to provide voters a clear idea of the
Legislature's path to balancing the budget, many of
the Governor's proposals will require lead time to
plan and implement. Given the proposed acceler-
atedbudget process, the Legislature will need to
work quickly with the administration to develop
details on each of the proposals and to develop
well-crafted legislation on how the solutions are to
be implemented. If the Legislature chooses different
solutions than those presented by the Governor, a
similarly accelerated timeline may still be needed
to maximize the opportunity to realize the full
amount of budgeted solutions. In the months
following March 1, the Legislature would have
the opportunity to review routine budget change
ballot measures.
The Legislature Faces Many Critical Decisions
in the Coming Weeks. If the Legislature chooses
the Governor's proposal as a starting point, there
are still a number of critical questions to be
addressed, such as the Legislature's preferred mix
of spending cuts and revenue increases, the amount
of authority to be devolved to the administration in
the form of unallocated or unspecified reductions
in some departmental budgets, and what actions
(if any) to put before the voters in a June special
election. Also, although the Governor's proposal
contains many new ideas, there are a significant
number (such as those proposed in Medi-Cal)
that the Legislature has previously considered and
rejected. The Legislature will need to consider if a
change of approach to these proposals is appropri-
ate at this tiYne or whether there are alternative
actions that it prefers. In the coming weeks, we
will work to provide additional guidance on the
Governor's proposals and, where appropriate, offer
alternatives to them.
The Governor's budget package includes the
administration's forecast of national and state
ECONOMIC AND REVENUE FORECAST
Economic Forecast
economic activity and state revenues-including
its tax increase and other revenue proposals. (We
refer to the forecast of state revenues without the
Governor's revenue proposals as the "current-law"
revenue forecast.) This section first discusses the
economic and current-law revenue forecast of the
administration. Next, it describes the Governor's
major revenue proposals.
Current Modest Recovery Forecasted to
Continue. The administration's new economic fore-
cast assumes continuation of the currently modest
economic recovery, including ongoing actions of
the Federal Reserve-through its support of low
interest rates and a policy known as "quantitative
easing"-to support the recovery. As shown in
10 Legislative Analyst's Office www.lao.ca.gov
2011-12 BUDGET
Figure 3, the administration's January 2011 eco-
nomic forecast is more pessimistic than our office's
May 2010 forecast, upon which the revenue esti-
mates in the October 2010 state budget were based.
the budget's 2011 forecast reflects the economy's
generally disappointing performance in 2010 and
is quite consistent with the economic forecast our
office released in our November 2010 publication,
California's Fiscal Outlook.
Economic Forecast for 2011 May Be Too
Pessimistic. In December 2010, Congress enacted
a major tax and unemployment benefits measure.
Among other actions, this federal measure extended
federal income tax cuts adopted during the prior
presidential administration, as well as long-term
unemployment insurance benefits. These actions
appear to be reflected in the administration's new
economic forecast. The administration notes,
however, that its forecast does not consider the
new payroll tax relief, one component of the recent
federal legislation. This omission occurred because
much of the administration's work on the forecast
had to be completed prior to passage of the federal
legislation. As shown in Figure 3, the most recent
U.S. economic forecast of IHS Global Tnsight, a
national forecasting firm, projects significantly more
robust growth in 2011 due in part to the federal tax
measure. Currently, our office's national economic
outlook aligns more with that of IHS Global Insight.
Accordingly, there appears to be some upside for
the national economy in 2011. Since California's
economy generally rises or fall with the U.S.
economy, this upside has the potential to affect state
revenues positively in 2010-11 and 2011-12.
2012: Modest Recovery and Continued High
Unemployment. For 2012, as Figure 3 shows, the
administration's new national economic forecast
tracks closely with that of IHS Global Insight. The
feared "double-dip" recession now seems quite
unlikely. bike our office's recent outyear forecasts,
however, the administration's forecast assumes that
the economic recovery will continue to be modest
and the state unemployment rate will remain above
10 percent for a prolonged period. Weak housing
markets and the depressed level of home building
also should remain major drags on the California
Figure 3
01tarir~~ 0~-'~.r~~~~~°' ~r~~rnic rajcior~ ifiF~ c~r~ 'ocas~s
2011 2012
Governor's Governor's
LAO Budget IHS Global LAO Budget IHS Global
Forecast- Forecast- Insight- Forecast- Forecast- Insight-
May 2010a January 2011 January 2011 May 2010 January 2011 January 2011
United States
Percent change in
Real Gross Domestic Product 3.0% 2.2% 3.2% 3.1% 2.9% 2.9%
Employment 2.0 1.0 1.4 2.7 1.8 2.0
California
Percent change in:
Personal income 4.4 3.8 NA 4.4 4.0 NA
Employment 0.9 1.5 NA 1.5 2.5 NA
Housing permits (thousands) 70 74 NA 93 122 NA
Unemployment rate (percent) 11.9 12.1 NA 10.9 11.3 NA
a The assumptions for state revenue adopted in October 2010 in the 2010-11 Budget Act wer e derived from our office's May 2010 economic and
revenue forecast.
NA =Not applicable. IHS Global Insight does not produce state-level forecast information of this type.
www.lao.ca.gov Legislative Analyst's Office 11
2011-12 BUDGET
economy. All of these factors are likely to depress . Various technical adjustments, including
consumer confidence and, therefore, the willing- updated assumptions concerning accruals
ness and ability of individuals and firms to spend of revenues to particular fiscal years.
and invest for some time. California's elected 'The bulk of the remainder of the decrease in
leaders cannot count on the near-term budgetary
problems of state and local governments to be
solved by a rebounding economy.
Current-Law Revenue Forecast
2010-ll current-law revenues probably results
largely from the new economic forecast. It appears
that these forecast-related differences represent a
relatively small portion of the $3.5 billion decrease.
2011-12. In the current-law revenue forecast
Current-law revenue forecasts project receipts
of taxes and other revenues, without incorporating
proposed tax changes. The administration develops
a current-law revenue forecast as part of its budget
development process.
2010-11. The administration now forecasts
current-law General Fund revenues and transfers
of $90.7 billion in 2010-11. 7 his is up by $3.7 billion
(4.2 percent) from 2009-10 revenues, but down by
$3.5 billion (3.7 percent) from the revenue forecast
adopted with passage of the state budget in October
2010. This $3.5 billion decrease from the 2010-11
budget act assumptions-including a $1.7 billion
decreased assumption for personal income tax
(PIT) revenues-includes:
• A $782 million decrease due to recent federal
for 2011-12, General Fund revenues and transfers
drop from forecasted 2010-11 levels by $7.2 billion
(7.9 percent) to a total of $83.5 billion. This decline
reflects the scheduled expiration in current law of
temporary increases in sales and use taxes (SUT),
PIT, and VLF that were adopted by the Legislature
in February 2009.
'Ihe administration's SUT estimate for 2011-12
is $1.3 billion lower than our November 2010 state
budget forecast, but $1.1 billion of this difference
results from the administration's treatment of
the 2010 "fuel tax swap" in its forecast. 1-he swap
eliminated General Fund sales taxes on gasoline,
but our November forecast assumed the swap
would end in November 2011 due to the passage
of Proposition 26. By contrast, the administration
tax changes resulting in the loss of all planned makes no such assumption in its current-law fore-
estate tax revenues in 2011 and 2012
• About $400 million of decreased state
revenue in 2010-11 due to expected
changes in taxpayer behavior as a result
of the recent federal tax legislation. The
Governor's budget proposal assumes that
taxpayers delayed realizing some capital
gains, dividend, and other income from
2010 to later due to the extension of lower
tax rates for these items.
• Around a $400 million decrease resulting
from Proposition 22's prohibition of the
state borrowing of funds from certain
cast. Furthermore, the Governor's budget package
proposes that the Legislature "re-enact" the swap
with atwo-thirds vote. Accordingly, if one excludes
the fuel tax swap, the administration's current-law
forecast is very similar to our November forecast
for SUT.
LAO Comments
Eldministration sEconomic Forecast May Be
Too Pessimistic for 2011. As described above, the
effects of the recent federal tax legislation, among
other factors, cause us to be somewhat more opti-
misticthan the administration about the course
of the national economy in 2011. The various
transportation accounts.
12 Legislative Analyst's Office www.lao.ca.gov
2011-12 BUDGET
federal tax cuts, including the payroll tax, and the
extended unemployment benefits seem likely to
have a stronger near-term stimulative effect on
economic activity than reflected in the Governor's
budget forecast. this, in turn, should promote
stronger economic activity in California in 2011.
As shown in Figure 3, the administration's forecast
for U.S. gross domestic product growth in 2011 is
about 1 percentage point below that of some other
forecasters. As a rule of thumb, a 1 percentage point
increase in national economic growth translates
roughly to similar growth in the state economy and
revenues.
Initial Impression: Revenue Forecast Is
Reasonable. For 2009-10, 2010-11, and 2011-12
combined, our initial assessment is that the admin-
gains by taxpayers-an increase of 29 percent in
2011 and 24 percent in 2012. the huge amount of
accumulated capital losses by investors resulting
from the implosion of financial, housing, and other
asset markets in recent years makes it particularly
difficult to rely on such positive capital gains
assumptions for purposes of budgetary planning.
Moreover, an enormous stock of corporate net
operating losses-carried forward from prior years,
but unable to be used by firms through tax year
2011 due to provisions included in recent budgets-
makes us somewhat cautious about the 2011-12
baseline CT forecast as well.
GOVERNORS REVENUE PROPOSALS
The key feature of the Governor's revenue
istration's revenue forecast is reasonable. Our early proposals is his request that the Legislature place
impression is that there is somewhat more potential before voters in June 2011 measures that would
for an "up side" to the revenue forecast than a
"down side."
In 2010-11, monthly "agency cash" revenues
from the General Fund's "Big Three" taxes (PIT,
SUT, and corporation tax [CT]) are about $1 billion
above the administration's monthly forecast
through December 2010. Recently, PIT withhold-
ing-largely derived from wages and salaries-has
been running more than 10 percent above the
same months from 2009. Sales taxes also have been
performing reasonably well We are optimistic that
these trends will continue for the rest of the fiscal
year. Balancing this optimism, however, is the weak
performance to date of CT revenues-$355 million
(8.9 percent) below the 2010-11 forecast through
December-and our uncertainty that estimated
PIT payments will meet monthly targets over the
next six months.
extend for five years the four temporary tax
increases approved in February 2009:
• A 0.25 percentage point increase in each of
the state's basic marginal rates for the PIT,
which would be extended to apply to tax
years 2011, 2012, 2013, 2014, and 2015.
• An extension (as above, for tax years 2011
through 2015) of the temporary reduction
of the PIT dependent exemption credit to
the same level as the personal exemption
credit. (For the 2010 tax year, the personal
exemption credit was $99. Prior to the
temporary tax increases, the dependent
exemption credit was $309.)
• An extension of the 1 percent SUT rate
increase for fiscal years 2011-12 through
2015-16. This would maintain the state
For 2011-12, our initial impression is that the
current-law revenue forecast appears reasonable.
While the administration's overall economic fore-
cast is cautious, the budget package also assumes
the resumption of significant growth in net capital
General Fund's share of the total tax rate at
6 percent.
• An extension of the 0.5 percent VLF
increase for fiscal years 2011-12 through
www.lao.ca.gov Legislative Analyst's Office 13
2011-12 BUDGET
2015-16, maintaining the rate at
1.15 percent.
Increased Revenues for General Fund and
Proposed Local Realignment Funds
$9.6 Billion More Revenues and Transfers
for General Fund Over Two Years. As shown in
Figure 4, the Governor's budget package would
increase General Fund revenues and transfers by
$9.6 billion over 2010-11 and 2011-12 combined.
Of this $9.6 billion, about $5.2 billion ($1.9 billion
in 2010-11 and $3.3 billion in 2011-12) consists of
revenue from the proposed extension of the two
temporary PIT increases described above. The
Governor also proposes that the Legislature enact
two measures that would primarily increase CT rev-
enues, but also would increase payments by certain
PIT filers. These two measures would: (1) replace the
optional single sales factor method for apportioning
a multistate or multinational firm's taxable income
to California with an apportionment method that
would require companies to use the single sales
factor method and (2) eliminate tax credits for
certain investments made in enterprise zones.
Combined, these two proposals would increase
General Fund revenues by $811 million in 2010-11
and $1.5 billion in 2011-12. The administration's
General Fund estimates also assume $1.4 billion of
new loans, transfers, or loan extensions from state
special funds over the two fiscal years, a $362 million
loan to the General Fund from the Unemployment
Compensation Disability Fund to pay the state's
unemployment insurance loan interest obligations
to the federal government, and several other smaller
revenue measures.
$5.9 Billion for Proposed Local Realignment
Funds in 2011-12. Under the Governor's pro-
posal, voter approval to extend the temporary tax
increases also would provide $5.9 billion of SUT
and VLF funds for the proposed local govern-
ment realignment funds-outside of the General
Fund-in 2011-12. Over the five-year extension,
Figure 4
rrtar' I'ra Irla~ise >~rta t ~rf~t
Tnf b 9. lia€~ C~vr Trnra Va~°
(In Billions)
2010-11 2011-12
Administration's Total Administration's Total
Current-Law Governor's Forecasted Current-Law Governor's Forecasted
Forecast Proposals Revenues Forecast Proposalsa Revenues
Personal Income Tax $45.5 $2.3 $47.8 $46.2 $3.6 $49.7
Sales and Use Tax 26.7 - 26.7 24.1 - 24.1
Corporation Tax 10.8 0.7 11.5 9.7 1.2 11.0
Subtotals, "Big Three" ($83.0) ($3.0) ($86.0) ($79.9) ($4.8) ($84.8)
Insurance Tax $1.8 - $1.8 $2.0 - $2.0
Vehicle license feeb 1.5 - 1.5 0.2 - 0.2
Sales of fixed assets 1.2 - 1.2 - - -
Otherrevenues 2.3 - 2.3 2.2 $0.1 2.3
Net transfers and loans 1.0 $0.5 1.4 -0.8 1.2 0.5
Total Revenues and $90.7 $3.5 $94.2 $83.5 $6.1 $89.7
Transfers
a Does not include proposed $4.5 billion o f increased sales and use tax and S1.4 billion of vehicle license fee revenue, which would be deposited to local real ignment funds-
not the General Fund.
b Revenues for 2011-12 consist of late receipts of prior years' fees payable to the General Fund
14 Legislative Analyst's Office www.lao.ca.gov
2011-12 BUDGET
these amounts would be expected to grow. The
administration's forecast assumes that the SUT and
VLF amounts grow to $7.3 billion in 2014-15.
Estimates on Budget Proposals Incorporate
New Accrual Method. Generally, the state oper-
ates under an "accrual" accounting system that
requires recognition of revenues and expenditures
to the fiscal year in which they are realized. The
administration's budget package estimates 2010-11
and 2011-12 revenues from its PIT and CT proposals
with a new budgetary accrual technique that accrues
a portion of final payments to the prior fiscal year.
Such final payments previously have been accrued to
the same fiscal year in which they are received. The
new accrual method increases estimated General
Fund revenues in 2010-11 and 2011-12 (combined)
by $860 million. 13y changing year-over-year revenue
growth, this method may affect calculation of the
Proposition 98 minimum funding guarantee. there
maybe legitimate accounting reasons to adopt the
new approach, but additional justification from the
administration is needed.
Large Elements of Governor's Tax Proposals
Are Saund, Policy-Based Proposals. In prior pub-
lications and legislative testimony, we have voiced
support for enactment of several of the Governor's
key revenue proposals:
• Adoption of a mandatory single sales factor
apportionment method for the income of
multistate and multinational firms.
• Elimination of enterprise zone tax credits.
• Reduction of the PIT dependent exemption
credit to the same level as the personal
exemption credit.
• Adoption of a VLF rate of around
1 percent-similar to the base tax rate for
other property.
We recommend that the legislature either
approve these proposals and enact them into law
or, as the Governor suggests for the temporary tax
measures, submit a request to voters to approve the
increases.
LAO Comments
Basing Budget Plan on June 2010 Election
Obviously Carries Some Risk. With atwo-thirds
vote of each house, the Legislature would have
the option of approving extensions of the tem-
porary tax increases without resorting to a vote
of the people. The Governor, however, proposes
submitting the temporary tax increase measures
to voters. These proposed temporary tax increases
provide over $11 billion of the Governor's proposed
$26 billion in budget solutions. The proximity of
the proposed early June 2010 special election date
with the Legislature's June 15 deadline for enacting
a balanced budget highlights the risks inherent in
this approach. Should voters reject the measure,
the Legislature would have to ensure that alternate
budget-balancing measures were promptly put into
place.
Temporary PIT and SUT Rate Increases
Merit Consideration. 'Ihe proposed extension
of the temporary increases in the PIT and SUT
rates poses more difficult issues. The current rates
are some of the highest in the nation, and the
continuation of the rates would affect the work
and investment decisions of many individuals and
firms. On the other hand, as temporary increases,
they would have less negative impacts on economic
planning and decision making than permanent
ones. More importantly, adoption of the proposed
temporary tax extensions would "buy time" for the
Legislature to develop additional ongoing solutions
in future years while delaying additional cuts on
top of the billions of dollars in permanent spend-
ing reductions already proposed by the Governor.
Accordingly, we think that the Governor's proposed
tax extensions (or something similar) merit serious
consideration.
www.lao.ca.gov Legislative Analyst's Office 15
2011-12 BUDGET
-~
m a ~ _
Major Proposals
Major Realignment of State-Local Programs.
A centerpiece of the Governor's budget proposal
is a major realignment of program duties, similar
to the plan enacted by the state in 1991. In short,
the Governor's plan raises $5.9 billion in taxes,
and shifts $5.9 billion to counties to implement
increased program obligations. To enable counties
to manage their increased fiscal responsibilities,
the administration proposes giving them increased
authority over the realigned programs.
Although much of the Governor's proposal
makes sense, certain key elements-including the
extent of county program authority and the meth-
odologyfor allocating funds-still are under devel-
opment. As such, the Legislature will have much
work to do in reviewing the proposal, shaping it to
meet its policy objectives, and potentially placing a
funding measure before the state's voters in June.
Proposed Revenues. Under the plan, the
state's voters would decide whether to extend by
five years two tax increases due to expire on
June 30, 2011: a one cent sales tax and the
0.5 percent VLF General Fund rate. If the voters
approve these tax extensions, the revenues would
be dedicated to implementing the realignment
plan. After the taxes expire in 2016, the state would
be responsible for providing local governments
with replacement revenues, but these revenues are
not specified in the plan. If voters do not approve
the proposed tax extensions, the realignment plan
would not be implemented. The administration
indicates, however, that it would continue with
its plans to shift to counties the responsibility for
certain lower-level adult and juvenile offenders. the
administration indicates that it did not include the
$5.9 billion realignment revenues in its calculation
of Proposition 98's minimum funding guarantee
because the new realignment revenues would be
allocated to counties, not the state.
Multiyear Approach. Parts of the administl-a-
tion's proposed realignment are phased in over
time. For example, the community supervision
responsibilities sent to counties would expand over
time as more state inmates were released from
prison. The administration estimates that counties
would be responsible for about 18,500 parolees in
the budget year, growing to 66,900 upon full imple-
mentation in 2014-15. In addition, the Department
of Forestry and Fire Protection (CalFire) would
continue to provide fire protection and medical
emergency response until local governments
assumed these responsibilities. During the first
years of this realignment plan, therefore, some of
the realignment revenues would be allocated to the
state to pay for its costs to continue operating the
realigned programs.
The administration also indicates that it plans
to propose in the future a second realignment
("Phase 2") mainly involving health care and social
services.
Key Issues
Concept of Re-Sorting Program
Responsibilities Makes Sense. Several times over
the last 20 years, the Legislature has achieved
notable policy improvements by reviewing state-
local program responsibilities and taking action to
realign program and funding responsibility to the
level of government likely to achieve the best out-
comes. In 1991, for example, the Legislature shifted
state mental health responsibilities to counties,
giving counties a more reliable funding stream and
the authority to develop innovative and less costly
approaches to providing services. While implemen-
tation of realignment proposals has been complex,
the net result of these changes is that California
16 Legislative Analyst's Office www.lao.ca.gov
2011-12 BUDGET
state and local governments have better ability to
implement their programs successfully.
Could the state improve other program out-
comes by further realigning state-local responsibili-
ties? If so, which programs should the state control
and which should local government control? While
there is no single "right" answer to these questions,
we find that programs tend to be more effectively
controlled by local government if (1) the program is
closely related to other local government programs,
(2) program innovation and experimentation are
desired, and (3) responsiveness to local needs and
priorities is important. In addition, assigning full
control over program governance and financing
to a single level of government has the benefit of
reducing fragmentation of government programs
and focusing accountability for program outcomes.
The Legislature will need to carefully assess
these issues in crafting realignment proposals, as
once implemented, they can be very difficult to
modify. (The nearby box lists LAO reports that
provide a more extensive discussion of program
realignment.)
Most of the Programs in the Administration's
Plan Make Sense. Figure 5 (see next page) summa-
rizes our initial review of the programs proposed
for inclusion in the administration's realignment
plan. Most of the programs we list in the first group
("Programs Suited for Realignment") are ones that
this office previously has proposed for realignment
to local government. In our view, decentralized
program delivery and authority could promote
program innovation, efficiency, and responsiveness
to local conditions, and these potential program
benefits outweigh whatever benefits are realized
from the programs being uniformly administered
at the state level.
Very few programs in this first group, however,
could be realigned without addressing some sig-
nificantlegal or policy issues. Most notably, in the
case of the administration's plan to realign Child
Welfare Services, the Legislature would need to
address how a decentralized system could work
with a federal government that sets regulations,
oversees program performance, and assesses state
penalties when performance is inadequate.
LAO REALIGNMENT REPORTS
Over the years,
our office has pub- Report Years
lished numerous
Parole Realignment and the 2008-09 Budgef 2008
reports (see list) on
Realignment and the 2003-04 Budget 2003
the subject of state
and local program Realignment Revisited: An Evaluation of the 1991 Experiment 2001
In State-County Relations
realigmnents. With The Governor's 1995-96 State-County Realignment Proposal 1995
one exception, all of Making Government Make Sense: Applying the Concept 1993
the reports were pub- In 1993-94
lished in "Part V" of Making Government Make Sense: A More Rational Structure 1993
the Perspectives and For State and Local Government
Issues in February
of the year shown. Making Government Make Sense: Applying the Concept in 1993-94 was published
separately in May 1993. These reports are available on our website: www.lao.ca.gov.
www.lao.ca.gov Legislative Analyst's Office 17
2011-12 BUDGET
In addition, one program in this first group-
AB 3632 Services-merits realignment, but not
in the manner proposed by the administration.
Instead, schools should have prograintnatic and
financial responsibility for this program providing
mental health services to special education pupils.
While schools may wish to contract with county
mental health departments to provide these pro-
grams, the primary fiscal and program responsibil-
ity should reside with schools.
appropriate because it would consolidate related
pots of money for behavioral (substance abuse and
mental health) services. These changes could allow
counties to spend these funds more flexibly and
better coordinate mental health services with other
county-run programs, such as a realigned drug
and alcohol treatment system and rehabilitation
programs for criminal offenders. At the same time,
however, we note that federal health care reform
expands the number of persons eligible to receive
Realigning Some Programs Merits Careful Medi-Cal mental health services beginning in 2014.
Review. The second group of programs in Consolidating behavioral health programs with
Figure 5-the Early and Periodic Screening, counties could limit the state's options for better
Diagnosis and Treattent Program (EPSDT), coordinating mental health services with other
Mental Health Managed
Care, Substance Abuse Figure 5
Treatment, and Existing 11i CQ ~afnS tfit ~l° eali rt?
Community Mental Initial iw t Gvrn~r" ~ -~ Bali mm~t Ian
Health Services-merit
careful legislative con-
sideration for several
reasons. First, the adinin-
istration proposes to use
Proposition 63 funds to
pay the first year costs of
the three of these pro-
grams (EPSDT, Mental
Health Managed Care,
and AB 3632), a use of this
measure's funds that may
not be permissible.
Second, realigning
EPSDT, Mental Health
Managed Care, and
Substance Abuse
Treatment raises questions
regarding program flex-
ibilityand the implemen-
tation of federal health
care reform. Realigning
these programs appears
(In Millions)
2011-12 2014-15
Programs Suited for Realignment
Fire and Emergency Response Activities $250 $250
Local Public Safety Programs 506 506
Local Jurisdiction for Lower-Level Offenders and Parole 1,802 908
Violatorsa
Adult Parole to the Countiesa 741 410
Juvenile Justice Programs 258 242
Adult Protective Services 55 55
AB 3632 Servicesb - 104
Foster Care and Child Welfare Services 1,605 1,605
Program Meriting Consideration
Substance Abuse Treatment 184 184
Early and Periodic Screening, Diagnosis and Treatment - 579
Programb
Mental Health Managed Careb - 184
Existing Community Mental Health Services - 1,077
Program Not Suited for Realignment
Court Security 530 530
Unallocated Revenue Growth - 621
Totals (Administration Estimates) $5,931 $7,255
1% Sales Tax $4,549 $5,567
0.5% Vehicle License Fee 1,382 1,688
Total Revenues (Administration Estimates) $5,931 S7,255
a Costs decline by 2014-15 as state reimbursements end. Funding in 2014-15 assumes this program is
fully county operated and at lower costs.
b First-year costs for this program are paid from Proposition 63 resources.
18 Legislative Analyst's Office www,lao.ca.gov
2011-12 BUDGET
Medi-Cal services across the state. Thus, although
this office previously has recommended realigning
most behavioral health programs to counties, we
recommend the Legislature consider these factors
before including these programs in the realignment
plan.
Finally, the last program in this category
includes all mental health services funded under
the 1991 realignment plan. The administration
proposes to include these programs within its 2011
realignment plan-and allow use of the mental
health funds from the 1991 realignment plan for
other purposes. Because very few details regard-
ing this change are available, we cannot assess the
merits of this component of the plan.
Court Security Shift Is Problematic. While
the state is now responsible for the operations of
the trial courts, current law requires that security
for the trial courts generally be provided by county
sheriffs at a cost to the state. Under the administra-
tion's realignment plan, state funding to pay for
security for trial courts would be shifted to counties
and state General Fund support in the judicial
budget for court security would be reduced by a
commensurate amount. In our view, this approach
does not make sense. While control of funding
for court security would be shifted to counties,
the state judicial system would continue to be
responsible for the overall operation of the courts.
Absent financial control, the courts would have dif-
ficulty ensuring that the sheriffs provided sufficient
security measures. We believe a better and more
cost-effective approach would be to (1) clarify that
the state is responsible for trial court security and
(2) adopt a separate state law change authorizing
the state to use competitive bidding by various
private or public entities, including sheriffs, for the
provision of these security services.
Need to Address Local Concerns. Given the
requirements of the California Constitution and
voter-approved measures, enacting realignment
would require achieving a broad consensus among
many parties. Achieving this broad consensus
within the timeframe to prepare a measure for the
June ballot will be difficult Counties are likely to
have many questions about the source of revenues
to replace the sales tax and VLF in five years, the
extent of program authority that will be transferred
to counties, the initial program funding levels,
the potential for future state increases in county
program requirements, and whether the rate of
realignment revenue growth will match the rate of
program growth.
Fiscal Estimates Require Further Review.
Although most of the administration's estimates
regarding the fiscal impact of the proposed
realignment programs appear reasonable, some
of the estimates require further examination. For
example, our preliminary review indicates that the
administration maybe double counting certain
savings associated with shifting adult and juvenile
offenders to counties. That is, the administration
scores the same savings twice-in the realigmnent
plan and as part of the department's budget. Our
preliminary review also indicates that the realign-
ment plan understates the cost of the AB 3632
program by up to about $200 million.
Alternatives
Could the Legislature Change the Mix of
Programs? There is no perfect list of programs
to realign. The Legislature could modify the
Governor's proposed list of programs to meet its
policy objectives. In considering alternative pro-
grams for inclusion in realignment, we recommend
the Legislature:
• Focus on programs where innovation,
responsiveness to community interests, and
efficiency are paramount.
• Avoid programs where statewide unifor-
mity is important, where statewide benefits
www.lao.ca.gov Legislative Analyst's Office 19
2011-12 BUDGET
are the overriding concern, or where the avoid adding programs to the realignment package
primary purpose of the program is income that are inconsistent with the concept of realign-
redistribution. ment-or programs over which the Legislature is
Our initial review suggests that there are
other programs to consider for realignment. For
example, the Legislature could consider realign-
ing pharmaceutical costs for Medi-Cal patients
receiving specialty mental health services to the
counties, thereby ensuring that all costs for provid-
ing services to patients are consolidated. It could
also consider going back to the voters to allow
the permanent realignment of all Proposition 63
funding to counties, along with increased flexibility
in the use of these funds. Finally, the Legislature
could consider realigning funding and responsibil-
ity to the counties to provide treatment to persons
determined by the courts to be incompetent to
stand trial for criminal offenses. We will continue
to explore these and other options.
Could the Legislature Change the Scale of
Realignment? Realignment, implemented cor-
rectly, can improve the management and delivery
of programs. For this reason, we believe the
Legislature's decision to realign a program should
focus on program policy objectives-not simply on
raising a specific amount of revenues. To that end,
we recommend that the Legislature begin its work
by identifying programs that would benefit from
realignment. Should the Legislature determine that
it wishes to raise more revenues than it wishes to
realign programs, we recommend the Legislature
unwilling to grant counties greater control.
Conversely, should the Legislature determine
that it wishes to raise fetiver revenues than it wishes
to realign programs, we recommend the Legislature
avoid deleting programs from the realignment
package. Instead the Legislature could finance the
realignment plan, in part, by redirecting existing
state or local revenues.
Is it Possible to Implement Realignment
Without Raising Taxes? While realignment often is
associated with tax increases, it need not be imple-
mented that way. Although it would be difficult in
light of the state's fiscal difficulties, the Legislature
could enact realignment by earmarking a portion
of existing state revenues as the dedicated revenues
for realignment.
Addressing Legal Complexities in State
Ballot Measure. The administration's plan will
require considerable work by the Legislature to
sort through many legal, financial, and policy
issues. Certain voter-approved measures also
will constrain the Legislature's authority to shift
program responsibilities to counties and redirect
the use of mental health funds. For example,
Proposition 63 may not permit the proposed shifts
in mental health funds. In addition to requesting
voter approval for any proposed tax increase, the
Legislature also may wish to request voter approval
of these elements of the realignment plan.
Major Proposals
Shift Responsibility for Local Economic
Development. The administration proposes a sub-
stantive shift in responsibility for local economic
development programs. "Ihe budget phases out
state authorization for two economic development
programs: redevelopment (discussed below) and
enterprise zones (discussed previously). To give
communities greater capacity to promote economic
development, the administration indicates that it
will support a constitutional amendment to allow
local voters to approve tax increases and general
obligation bonds for these purposes by a 55 percent
majority.
20 Legislative Analyst's Office www.lao.ca.gov
2011-12 BUDGET
Phase Out Redevelopment. For more than 50
years, state law has authorized cities and counties
to create redevelopment agencies. The administra-
tion proposes to revise these laws to (1) dissolve the
state's 425 redevelopment agencies and (2) transfer
their revenues (primarily, over $5 billion of annual
property tax revenues) to local successor agencies.
The successor agencies would use these funds to
retire redevelopment debts and contractual obliga-
tions and make other payments described below.
"[he successor agencies also would shift any unspent
redevelopment housing funds to local housing
authorities to use for low- and moderate-income
• the additional K-14 district property
taxes would augment their existing
state funding (not offset state education
spending) and would be distributed to
districts throughout the county based
on enrollment.
• The property taxes that otherwise
would be distributed to enterprise
special districts would be allocated
instead to counties. (These districts
primarily are fee-financed water and
waste disposal districts.)
housing.
Use of Funds in First Year. In 2011-12, the
successor agencies would use the redevelopment
revenues to:
• Pay redevelopment debts and obliga-
tions, estimated by the administration
to cost $2.2 billion.
• Offset $1.7 billion of state Medi-
cal ($840 million) and trial court
($860 million) costs.
• Allocate $1.1 billion to schools and
other local agencies pursuant to
current laws that require redevelop-
ment agencies to "pass through" some
of their funds to affected local agencies.
• Distribute $210 million to cities, coun-
ties, and special districts in proportion
to these agencies' current shares of the
property tax.
Use of Funds in Future Years. Beginning in
2012-13, any property tax revenues remaining after
the successor agencies pay redevelopment debt
would be distributed to other local governments in
the county. Distributions of these revenues generally
would follow provisions in existing law, except that:
Key Issues
Proposal Has Merit ...Shifting responsibility
for local economic development to local govern-
ments makes sense. Local communities are in the
best position to determine the types of programs
and assistance needed to promote development
in their communities. Ending state-assisted local
economic development programs like redevelop-
ment also makes sense. Redevelopment projects
divert property taxes from K-l4 districts, increasing
state education costs by billions of dollars annually.
the state's costs associated with redevelopment
has grown markedly over the last couple decades,
yet we find no reliable evidence that this program
improves overall economic development in
California. Finally, recent passage of Proposition 22
limits the Legislature's authority to modify the
scope of redevelopment to reduce its costs on the
state or local agencies.
...But Faces Considerable Implementation
Issues. The administration's plan will require
considerable work by the Legislature to sort
through many legal, financial, and policy issues.
Several voter-approved constitutional measures, for
example, constrain the state's authority to redirect
redevelopment funds, use property tax revenues to
pay for state programs, or impose increased costs
www.lao.ca.gov Legislative Analyst's Office 21
2011-12 BUDGET
on local agencies. In addition, the administration's
plan does not address many related issues, such
as clarifying the future financial responsibility for
low- and moderate-income housing (currently, a
redevelopment program).
Redevelopment Debt Costs May Be
Understated. Although the administration's
approach to estimating the annual cost of redevelop-
ment debt is reasonable, their assumptions regarding
debt terms, interest rates, and other factors err on
the side of understating debt costs. Our initial review
indicates that the annual cost to pay these debts
could be $1 billion or more higher than the admin-
istration assumes. If our initial review is correct, this
would reduce the funds available for other purposes.
For example, the Legislature may not be able to use
$1.7 billion of these revenues for state programs and
make $1.1 billion in pass-through payments to local
governments.
Rationale for Increased School Funding Not
Clear. The rationale for providing school districts
with property tax revenues in addition to their
existing property taxes is not clear. 11ze administra-
tion's proposal does not devolve more responsibili-
ties to school districts. The distribution of these
additional school property tax revenues would be
uneven throughout the state, with schools in 15
counties (where there is little or no redevelopment)
not getting additional property taxes and schools
in counties (where there is extensive redevelop-
ment activity) receiving significant sums. The
distribution of these new property tax revenues
further complicates an already complicated school
finance system.
Need to Pause New Redevelopment Activities.
Developing the statutory measures to implement
this important, but complex, proposal will take
considerable work by the Legislature. During this
time-potentially several weeks or months-it is
possible that redevelopment agencies could take
actions that increase their bonded indebtedness
and contractual obligations. If so, these new finan-
cial obligations could constrain the state's ability to
redirect redevelopment revenues and to realize the
state savings and local benefits anticipated in the
administration's proposal. Accordingly, we recom-
mendthat the Legislature pass urgency legislation
as soon as possible prohibiting redevelopment
agencies-during this period of legislative review-
from taking actions that increase their debt.
Specifically, the urgency legislation would prohibit
redevelopment agencies from (1) taking on any new
debt that would be included on their Statement of
Indebtedness-the statement that identifies redevel-
opment agency debt and makes the agency eligible
for property tax revenues, or (2) creating, amending,
or extending any redevelopment project areas. This
approach would preserve the Legislature's options as
it reviews the administration's proposal, but would
not have a lasting effect on redevelopment agencies if
the Legislature elects not to adopt it.
~ ..
PROPOSITION 98
Major Proposals
Proposition 98 funds K-12 education, child care,
the California Community Colleges (CCC), and
various other state agencies (including the state special
schools and juvenile justice). The Governor's budget
reduces total Proposition 98 spending by less than
l percent from the current year to the budget year. As
shown in Figure 6, K-12 funding would change neg-
ligibly from 2010-11 to 2011-12. By comparison, CCC
funding would be reduced $361 million or 6.3 percent.
The Governor's Proposition 98 plan includes no cost-
of-living-adjustments but funds enrollment growth for
22 Legislative Analyst's Office www.lao.ca.gov
2011-12 BUDGET
K-12 education (0.22 percent) and CCC (1.9 percent).
Below, we discuss Proposition 98 K-14 and child care
issues in more detail. In the higher education section,
we discuss various other community college issues
(such as student fees) in more detail.
Assumes Tax Package Adopted, Funds
Minimum Guarantee. The Governor's proposal
funds Proposition 98 at the minimum guarantee
in 2011-12. The proposed spending level assumes
adoption of the Governor's tax plan to raise
$4.8 billion in additional state General Pund rev-
enues, primarily from the extension of higher per-
sonal income tax rates. These additional revenues
increase the Proposition 98 minimum guarantee
by $2 billion in 2011-12. Absent these additional
revenues, the minimum guarantee would have
fallen year over year whereas, with the additional
revenues, the guarantee stays virtually flat. (The
Governor's proposals to maintain higher rates for
the sales tax and the vehicle license fee would not
increase the Proposition 98 minimum guarantee
since those revenues would flow directly to local
govermnents for realignment.)
K-12 Programmatic Funding Declines Slightly
Year Over Year. Under the Governor's plan, K-12
Figure 6
ro of®t~ dun i
programmatic funding per student decreases by
about $100 or 1.4 percent from 2010-11 to 2011-12.
Most of the decline in K-12 per student funding is
attributable to the loss of federal stimulus funding
(though many districts reserved a significant
portion of their federal education jobs funding
for 2011-12, thereby mitigating the cliff effect).
As shown in Figure 7 (see next page), K-12 per
student programmatic funding in 2011-12 would be
6.4 percent lower than the 2007-08 level.
Figure 8 (see page 25) lists the budget's major
Proposition 98 spending proposals for 2011-12, the
most significant of which are discussed in more
detail below.
Proposes Large New Deferrals. The most
substantial component of the Governor's
Proposition 98 plan consists of 52.2 billion in new
inter-year deferrals from 2011-12 to 2012-13-
$2.1 billion from K-12 revenue limit payments
and $129 million from CCC apportionment pay-
ments. Although the administration has not yet
determined from which months K-12 revenue limit
payments would be deferred, it has indicated that
deferrals likely would not be repaid until September
or October of 2012. For community colleges, the
(Dollars in Millions)
K-12 Education
General Fund
Local property tax revenue
Subtotals
California Community Colleges
General Fund
Local property tax revenue
Subtotals
Other Agencies
Totals, Proposition 98
General Fund
Local property tax revenue
2009-10 2010-11 2011-12 Change From 2010-11
Final Revised Proposed Amount Percent
$31,732 $32,239 $32,401 $162 0.5%
12,328 11,557 11,406 -152 -1.3
($44,060) ($43,796) ($43,807) ($11) (-)
$3,721 $3,885 $3,542 -$343 -8.8%
2,000 1,892 1,873 -19 -1.0
($5,721) ($5,777) ($5,415) (-$361) (-$6.3%)
$93 $85 $78 -$7 -8.7%
$49,874 $49,658 $49,300 -$358 -0.7%
$35,546 $36,209 $36,021 -$188 -0.5%
14,327 13,449 13,279 -170 -1.3
www.lao.ca.gov Legislative Analyst's Office 23
2011-12 BUDGET
deferral would be made from apportionment pay-
ments otherwise made in January through May
of 2012 and also would likely not be repaid until
September or October of 2012. (In addition to
the inter-year deferrals, the Governor proposes to
continue intea-year deferrals to help with the state's
cash flow problems. The Governor's intra-year
deferral plan would delay $2.5 billion in K-12 pay-
ments and $200 million in CCC apportionments
beginning in July 2011, reflecting the same magni-
tude as the 2010-11 intra-year deferrals.)
Significantly Reduces Child Care Funding.
The Governor proposes to achieve $750 million
in Proposition 98 child care savings by making
four major policy changes: (1) reducing child
care subsidies by about 35 percent; (2) reducing
income eligibility for subsidized child care from
75 percent to 60 percent of state median income
(SMI), (3) eliminating subsidized child care for
ll- and 12-year olds, and (4) reducing California
Work Opportunity and Responsibility to Kids
(Ca1WORKs) Stage 2 caseload based on Ca1WORKs
reform proposals (discussed later in the report).
With regard to the 35 percent rate reduction, the
administration proposes providing local agencies
discretion over how to translate lower subsidies
into reduced payments to child care providers,
with the expectation that child care slots and
days of service remain the same. The savings
resulting from these proposals would be offset by
a $256 million increase to the Ca1WORKs Stage 3
program-reflecting a proposed restoration of an
earlier budget act veto. After accounting for various
other federal and state adjustments, the Governor's
2011-12 proposal would reduce total funding for
Proposition 98-supported child care programs by
about $652 million (29 percent) and child care slots
by about 9,900 (3 percent) compared to 2010-11.
Proposes Various Other Changes. 'Ihe
Governor proposes a $400 million reduction to
community college apportionments. In addition,
the Governor reduces Proposition 98 funding for
the Division of Juvenile Facilities by $8.7 million
to reflect athree-year phase-out linked with his
Figure 7
- grar"1~ tic l~ci~l1 a
(Dollars in Millions Unless Otherwise Specified)
2007-08
Final 2008-09
Final 2009-10
Final 2010-11
Revised 2011-12
Proposed
Programmatic Funding
K-12 ongoing fundingb $48,883 $43,215 $40,717 $42,945 $43,131
New payment deferrals - 2,904 1,679 1,719 2,063
Settle-up payments - 1,101 - 267 -
Public Transportation Account 99 619 - - -
Freed-up restricted reserves - 1,100 1,100 - -
ARRAfunding~ - 1,192 3,575 1,192 -
Federal education jobs funding° - - - 421 781
Totals $48,982 $50,130 $47,070 $46,544 $45,975
Per-Pupil Programmatic Funding
K-12 attendance 5,947,758 5,957,111 5,933,761 5,951,826 5,964,800
K-12 per-pupil funding (in dollars) $8,235 $8,415 $7,933 $7,820 $7,708
Percent Change From 2007-08 - 2.2% -3.7% -5.0% -6.4%
a Excludes federal funds not associated with stimulus package, lottery, and various other local funding sources.
b Includes ongoing Proposition 98 funding, Proposition 98 accounting adjustments, and funding for the Quality Education Investment Act.
~ Reflects LAO estimates of funds spent in each year.
24 Legislative Analyst's Office www.lao.ca.gov
2011-12 BUDGET
realignment proposal and provides no funding
authority for the state's student and teacher
data systems pending a comprehensive review
of the two projects. In contrast to the proposed
reductions, the Governor proposes two notable
K-12 augmentations. First, the Governor provides
$90 million to cover the ongoing cost of about
35 K-14 mandates. Though this is the same level
of support as provided in the current year, the
state used one-time funds in 2010-11. Second, the
Governor provides $43 million in ongoing funding
(and $11 million in one-time funding) for the
Emergency Repair Program. This program provides
grants tolow-performing schools to pay for school
facility repairs that are needed for public health or
safety reasons. (In response to a lawsuit, the state
adopted statute specifying that it would provide a
total of $800 million for the program. To date, the
state has provided $338 million.)
Extends Flexibility Provisions Two Years. the
Governor's plan also includes atwo-year extension
Figure 8
acct' fro®itic~n 8 enin Chan ea
2011-12 (In Millions)
Proposed Changes Amount
Backfill prior-year one-time K-14 actions
Fund K-12 revenue limit cost increases
Make various other K-14 adjustments
Fund ongoing K-14 mandates
Fund Emergency Repair Program
Defer K-12 revenue limit payments
Eliminate Special Disabilities Adjustment
Make technical reduction to Economic Impact Aid
Phase out Department of Juvenile Facilities funding
Restore CaIWORKs Stage 3 child care veto
Reduce child care subsidies by 35 percent
Reduce child care income eligibility ceiling to 60 percent of SMI
Eliminate child care eligibility for 11-and 12-year olds
Reflect Stage 2 child care savings from CaIWORKs reforms
Reduce CCC apportionments
Defer CCC apportionment payments
Total Changes
SMI =state median income.
of existing K-14 fiscal relief options. For both school
districts and community colleges, the Governor
proposes to extend "categorical flexibility" from
2012-13 through 2014-15. (With this flexibility,
school districts can use the funding associated with
about 40 categorical programs for any educational
purpose and community colleges can use the
funding associated with about a dozen programs
for any categorical-program purpose.) For school
districts, the plan also would extend the existing
K-3 Class Size Reduction (CSR) rules from 2011-12
through 2013-14. (These rules apply more modest
funding reductions to K-3 classes that exceed 20
students.) Additionally, for school districts, the
Governor proposes extending for two years the
existing statutory provisions that reduce routine
maintenance requirements, suspend deferred
maintenance requirements, postpone instructional
materials purchases, and lower unrestricted budget
reserve requirements.
Eliminates the O~"ice of the Secretary of
Education (OSE). To help
streamline the state's K-12
$2,167
470
96
90
43
-2,064
-74
-54
-9
256
-577
-79
-59
-34
-400
-129
-358
governance structure, the
Governor's budget elimi-
nates OSE. Eliminating
OSE would result in
non-Proposition 98
General Fund net savings
of roughly $400,000 in
the current year and
$1.6 million in the budget
year.
Key Issues
Magnitude of Cuts
in Each Area Could Be
Reexamined. In building
his plan, the Governor
reflected his priori-
ties-largely to insu]ate
www.lao.ca.gov Legislative Analyst's Office 25
2011-12 BUDGET
school districts from further cuts while notably
reducing the state's child care programs and requir-
ing asignificant cut to the community colleges. In
building its Proposition 98 package, the Legislature
has many factors to consider, such as the different
populations, needs, programmatic quality, and
public benefits of K-12 education, community
colleges, and child care. After weighing the asso-
ciated trade-offs, the Legislature may want to
consider distributing Proposition 98 reductions
differently among the three areas.
Further Reliance on Deferral Raises
Important Questions. The state's reliance on
deferrals over the past several years has placed
a large cash flow burden on school districts and
community colleges. At existing levels, 16 percent
of 2010-11 Proposition 98 program will be paid in
2011-12. Under the Governor's proposal, 20 percent
of 2011-12 Proposition 98 program would be paid
in 2012-13. Nonetheless, adopting deferrals would
help mitigate the reductions that districts and
community colleges otherwise would need to make
in 2011-12. We are concerned, however, that addi-
tional deferrals would continue the deterioration of
school district and community college fiscal health
and could result in the need for state emergency
loans to avoid insolvency. These deferrals would
be especially problematic if, as indicated by the
administration, they are not paid until the fall of
2012 (all existing deferrals are paid by August).
the intra-year deferrals further exacerbate the
situation-in essence deferring already-deferred
payments until even later in the next fiscal year.
Combined, the inter-year and intra-year deferrals
could result in school districts and community col-
leges facing significant cash flow difficulties in the
summer and fall of 2012.
Approach to Child Care Reductions Has Some
Merit, Some Serious Flaws. We believe two of the
Governor's child care proposals merit consideration
whereas we have serious concerns with one of the
proposals. Specifically, we think the Governor's
proposal to lower the income eligibility ceiling to
60 percent of SMI is reasonable in that it targets
services for the neediest families. Similarly, the pro-
posal to lower the age limit merits consideration.
While we know of no other state that limits sub-
sidizedchild care to children 10 or younger (most
states set maximum age at 12 or 13), California
funds an extensive before and after school program
in which slots could be prioritized for displaced ll-
and 12-year olds. We have serious implementation
concerns, however, with the proposed 35 percent
across-the-board rate reduction. This proposal
would result in a substantial reduction to provider
rates that are already below federal guidelines,
and it raises questions as to what quality of care
such low payments would be able to purchase.
Furthermore, ceding authority to local organiza-
tions (which are inmost cases not public agencies)
to implement the reduction by adjusting provider
rates and family copayments in different ways likely
would lead to further inconsistencies in the avail-
ability and quality of care.
Some Savings Potentially Unachievable. We
believe that up to $128 million of the Governor's
anticipated Proposition 98 savings cannot be
realized. Specifically, the Governor assumes a
$54 million technical reduction to the Economic
Impact Aid (EIA) program given the program
has not spent all budgeted funds in recent years.
However, the state already has made substantial
downward adjustments to F.IA base funding
amounts in recent years, and newly released data
indicate very little of the 2010-ll appropriation will
go unused. Combined with the projected growth
in K-12 enrollment, this information suggests
the Governor's estimates are overly optimistic.
Additionally, the Governor assumes $74 million
in savings due to the sunset of one component of
the state's special education program known as the
Special Disabilities Adjustment We believe making
26 Legislative Analyst's Office www.lao.ca.gov
2011-12 BUDGET
this reduction could violate federal maintenance-
of--effort (MOE) requirements, in which case the
state would need to continue providing the same
amount of funding for some other special educa-
tion purpose.
Alternatives for Legislative Consideration
Other Child Care Options Could Be Better
Than Across-the-Board Reduction. After contem-
platingthe desired mix of Proposition 98 reduc-
tions, the Legislature could consider a different
combination of policy changes to realize child care
savings. In making these changes, we recommend
using the guiding principle of prioritizing services
for the most needy families and children. The
Governor's proposals to reduce income and age
eligibility ceilings meet this criterion. "1'o generate
additional savings, the Legislature could further
reduce eligibility below the proposed 60 percent
of SMI and age ten. Other options the Legislature
could consider in lieu of reducing subsidies by
35 percent include: more moderate, statewide
reductions to provider rate ceilings for licensed
and/or license exempt providers; increasing paren-
tal fees; and reducing the amount agencies receive
for program administration and parental support.
Could Go Further in Providing More
Flexibility, Improving School Finance System.
While extending the flexibility provisions by two
years provides additional fiscal relief to districts,
the Governor's plan misses soiree opportunities to
further expand flexibility. For example, as recom-
mendedlast year, we continue to recommend the
state extend flexibility to three of the state's largest
stand-alone K-12 categorical programs-K-3 CSR,
Home-to-School Transportation, and After School
Safety and Education. We also continue to recom-
mend consolidating career technical education
programs and removing certain restrictions related
to contracting out for noninstructional services
as well as priority and pay for substitute teaching
positions. Additionally, we continue to recommend
linking categorical "flex" funding to average daily
attendance, thereby assuring that the associated
funding remains connected to students. We also
think the Governor and Legislature could make
more significant strides toward improving the K-12
school finance system by not merely extending the
sunset for the existing flexibility provisions but by
thinking about how to strategically redesign the
state's K-12 school finance system such that it better
serves districts and the public in both the short and
long term.
HIGHER EDUCATION
Major Proposals
Sizable General Fund Reductions for All
Segments. The Governor's budget includes unallo-
cated $500 million General Fund reductions for the
University of California (UC) and the California
State University (CSU). The Governor intends that
these reductions be achieved primarily by reduc-
inginstructional cost. The budget also includes a
$400 million reduction in general purpose "appor-
tionment" funding for the community colleges, and
proposes unspecified changes in funding formulas.
Tuition Increases for All Segmerrts. The UC
and CSU have already approved tuition increases
of 8 percent and 10 percent, respectively, for the
2011-12 academic year. Total tuition revenue for
the universities is estimated to increase by about
$400 million, supporting core programs and
campus-based financial aid. The Governor
proposes to increase community college fees from
$26 per unit to $36 per unit, generating about
$110 million in additional revenue that would in
effect fund enrollment growth of almost 23,000
full-time equivalent (FTE) students.
Full Funding for Financial Aid Programs.
Unlike his predecessor, the Governor proposes no
reductions in existing financial aid programs. "lhe
budget proposal includes augmentations to fully cover
www.lao.ca.gov Legislative Analyst's Office 27
2011-12 BUDGET
fee increases in the Cal Grant programs, and assumes
full fee waivers at the community colleges covering
more than one-half of all credit FTE students.
Major Financial Aid Fund Shift. The
Governor's proposal would shift $947 million in
Cal Grant costs from the General Fund to federal
Temporary Assistance for Needy Families (TANF)
funds. This fund swap would have no net effect
on total funding for Cal Grants. As discussed
later in the report, the TANF funds would be
provided through an interagency agreement with
the Department of Social Services, whose TANF
funding would be freed up by the Governor's pro-
posed cuts in CalWORKs.
Key Issues
University Cuts Needed, but Volatility an
Issue. Volatility in public funding is one of the
persistent challenges universities confront in man-
aging their operations. The universities received
a double-digit General Fund augmentation in the
current year, followed by the Governor's even larger
proposed reduction for 2011-12. Efforts should be
made to smooth out these peaks and valleys, while
still achieving needed General Fund savings.
Unclear How Segments Would Acco»-modate
General Fund Cuts. Although the administration
intends that the segments' General Fund reductions
he achieved primarily through cost reductions and
increased efficiency, the proposed budget package
includes no language that would ensure such an
outcome. In the past, the segments have responded
to unallocated cuts in a variety of ways, including
midyear tuition increases, enrollment reductions,
and furloughs, as well as some efforts at increased
efficiency.
Alternatives for Legislative Consideration
Shift Part of Universities' Cuts to Current
Year. Rather than impose a $500 million cut
for each university in the budget year, the
Legislature may wish to achieve part of that
savings by reducing the universities' current-year
augmentations. Such an approach would smooth
out the volatility of augmentations and cuts that
would otherwise result. Evidence suggests that the
universities were already preparing for smaller
current-year augmentations prior to enactment
of the budget in October. This alternative would
bring the universities' current-year funding
more into line with those contingency plans, and
would preserve more funding for the segments
to provide education services in the budget year.
This would allow additional time for the state
to seek alternative savings for the future, or for
the segments to align their out-year costs with
projected funding levels.
Ensure Reductions Meet Legislature's
Expectations. The Legislature could amend the
budget package to specify how the segments
accommodate General Fund reductions. For
example, it could specify the number of PTF,
students it expects the universities to enroll and
the maximum tuition levels the universities
should charge. To ensure compliance, General
Fund appropriations could be tied to the meeting
of these expectations. Similarly, the Legislature
could specify whether it will permit CCC to reduce
overall funded enrollment, and how it expects cam-
puses to prioritize course enrollment. For example,
the Legislature could limit the total number of
taxpayer-subsidized credit units that students may
earn at a community college.
Develop Longer-Term Fee Strategy for
Community Colleges. The Governor's proposal
to increase community college fees makes sense,
because California's fees are by far the lowest in the
country, and existing financial aid programs shield
low- and moderate-income students from paying
fees. Moreover, federal tax credit programs ensure
that most fee-paying students will be reimbursed
for the fees they pay, up to about $60 per unit. For
this reason, the Legislature could increase fees
28 Legislative Analyst's Office www.lao.ca.gov
2011-12 BUDGET
beyond the $36 per unit proposed by the Governor
as a way of leveraging more federal funds to
support CCC programs.
CASH ASSISTANCE
Major Proposals
SSI/SSP Grant Reduction. Effective June 1,
2010, the budget for the Supplemental Security
Income/State Supplementary Program (SSI/SSP)
proposes to reduce the maximum grant for indi-
viduals to the minimum required by federal law
(from $845 per month to $830 per month). The
revised grant would be approximately 92 percent
of the 2010 federal poverty guideline. This proposal
would result in General Fund savings of $15 million
in 2010-11 and $177 million in 2011-12.
CaIWORKs Grant Reduction. The Governor
proposes to reduce Ca1WORKs grants by 13 percent
effective June 1, 2011, resulting in General Fund
savings of $14 million in 2010-11 and $405 million
in 2011-12. For a family of three, this proposal
would reduce maximum monthly grants from $694
to $604 in high-cost counties and from $661 to
$575 in low-cost counties.
Repeal of July 2011 Changes. In 2009 the
Legislature enacted a series of changes to sanc-
tion policies, time limits, and eligibility rules for
Ca1WORKs. The Governor's budget proposes to
delete these changes, resulting in a cost of about
$135 million.
in which the adult was meeting federal participa-
tion requirements would be allowed to receive aid
beyond 48 months. This proposal would result in
savings of 5833 million.
Continuation of Block Grant Reductions
While Repealing Participation Exemptions. For
2009-10 and 2010-11, the Legislature reduced the
county block grants for welfare-to-work services
and child care by approximately $375 million each
year. To help counties prioritize resources given
this reduction in funding for Ca1WORKs services,
budget legislation exempted families with a child
under age two, or with two or more children under
the age of six, from work participation require-
ments. Prior budget legislation also provided
that, for any month for which a recipient has been
excused from work participation requirements due
to lack of support services, the case does not count
toward the state's time limit for their receipt of cash
aid. "I11e Governor's budget proposes to continue a
reduction of $377 million in county block grants
while repealing the exemptions.
Figure 9 lists the proposed solutions for SSI/SSP
and CaIWORKs, totaling $1.7 billion.
Figure 9
~ rat rat~l°
jr QU90t°IS
(General Fund Benefit, in Millions)
Program/Solution 2010-11 2011-12_
Establishment of a 48-Month Time Limit. In
lieu of the 2009 Ca1WORKs changes, the budget
proposes, effective July 1, 2011, to establish a
48-month time limit, applied retroactively, on
the receipt of CaIWORKs cash assistance for all
recipients. This would apply to both adults and
children, with narrow exceptions. Previous months
of cash aid would count toward the 48-month limit,
including months in which a recipient had been
exempted from participation requirements or was
temporarily disabled. However, children in families
SSI/SSP
Reduce grants to the federal $15 $177
minimum
CaIWORKs
Establish 48 month-time limit
Reduce grants by 13 percent
Reduce county block grants
Repeal July 2011 sanctions
and time limits
Reduce age eligibility for
child care
Subtotals (CaIWORKs)
Totals
- 833
14 405
- 377
- -135
- 34
($141 ($1.5141
$29 $1,691
www.lao.ca.gov Legislative Analyst's Office 29
2011-12 BUDGET
Key Issues
Minimal Budget Risk and No Loss of Federal
Funds. The Governor's proposals warrant serious
consideration by the Legislature, given that they
provide $1.7 billion in budgetary savings that the
state is likely to achieve with no loss of federal
funds. This is because the Ca1WORKs federal block
grant is fixed at $3.7 billion, and the federal portion
of the SSI/SSP grant is not affected by the level of
state supplementation. Due to the CaIWORKs MOE
requirement, about $530 million of the General
Fund savings is achieved within the Ca1WORKs
budget and about $950 million is achieved by trans-
ferring freed-up TANF funds (from the proposed
programmatic reductions) to the Student Aid
Commission to offset General Fund costs there.
Balancing the Need for CaIWORKs Savings
With Program Goals. The Legislature can control
costs in Ca1WORKs through changes in eligibility
rules, grant levels, and the availability ofwelfare-
to-work services to assist recipients in becoming
self-sufficient. the Governor's proposals impact
all three areas. In considering these proposals, the
Legislature faces a difficult balancing act. On the
one hand, the Legislature must achieve savings
because of the state's budget deficit. On the other
hand, the policy goal of the Legislature in creating
the Ca1WORKs program has been to (1) maintain
a safety net for low-income families with chil-
dren who cannot support themselves financially
(especially during a deep recession); (2) encourage
Ca1WORKs recipients to transition to self-suffi-
ciency through work, education, and training; and
(3) preserve a county delivery system committed to
these goals. As it evaluates the Governor's budget
reduction proposals, the Legislature should con-
sider the trade-offs involved among these factors.
Grant Reduction: Pros and Cons. The grant
reduction proposal has some merit in that it
achieves significant budgetary savings while
retaining some level of income maintenance for
low-income families. Moreover, an increase in
CalFresh benefits (formerly known as Food Stamps)
partially offsets (about 22 percent) the grant reduc-
tion. For a family of three in a high-cost county,
the combined grant and CalFresh benefits would
drop from $1,155 to about S1,090 per month, or
about 71 percent of the federal poverty level (FPL).
However, we also note that the state has never
reduced grants by more than 6 percent before. The
proposed grant package would be the lowest level in
decades relative to the FPL.
Block Grant Reduction Problematic Without
County Flexibility. As noted earlier, the previously
enacted two-year reduction in county welfare-
to-work block grant funds was accompanied by
additional exemptions from work participation
requirements, which allowed counties to manage
the reduction in funding. The Legislature should
consider adopting similar work participation
exemptions, or some other mechanism to allow
counties more flexibility, if it adopts the proposed
reduction in funding for these CaIWORKs services.
The Impacts of the Proposed 48-Month Time
Limit. The proposed 48-month time limit presents
very difficult issues for the Legislature. Historically,
the Ca1WORKs program has provided a safety net
for children even when the parents have exhausted
their allowable five years of assistance. Moreover,
in the past, the Legislature explicitly provided that
months when a family did not receive welfare-to-
workservices would not count toward their time
limit. Under this proposal, about 115,000 families
and 234,000 children would lose all benefits. They
would be eligible for General Assistance, potentially
resulting in a cost shift to counties in the hundreds
of millions annually.
Research by the Public Policy Institute of
California (PPIC) (focusing on a period when the
economy was healthier) suggests that time limits
with complete family benefit terminations do not
significantly increase overall poverty rates among
30 Legislative Analyst's Office www.lao.ca.gov
2011-12 BUDGET
children of single mothers. The PPIC study also sug-
gested,however, that while enforcement of tighter
time limits for aid would motivate some families to
obtain work and move out of poverty, some families
would likely end up poorer due to such a change.
This study did not address retroactive application of
time limits as the Governor proposes.
Alternatives for Legislative Consideration
Modifying the Earned Income Disregard.
Under current law, California "disregards" (does
not count) the first $225 of income and 50 percent
of each dollar earned beyond $225 when calculating
a family's monthly grant. This policy provides a
work incentive for families. Savings in the range
of $200 million annually could be achieved by
simplifying the disregard to a flat 50 percent of all
income earned.
Prospective and or Phased Implementation. If
the Legislature wants to pursue a family benefit ter-
mination time limit, it could elect to adopt it pro-
spectively, allowing current recipients some time to
work their way off cash aid before hitting the time
limit. Similarly, because the state has never reduced
grants by more than 6 percent, the Legislature
could phase in the 13 percent over two years. While
these approaches would reduce the benefit to the
General Fund from the Governor's proposal, they
would still achieve a measure of savings that would
grow over time.
Further Reductions to Welfare-to-Work
Services. Another potential budget solution would
be to increase the Governor's proposed reduction to
county block grants in accordance with increased
county flexibility or exemptions.
IN-HOME SUPPORTIVE SERVICES
Major Proposals
Additional Reduction in Hours for Services.
The Governor's budget proposes to reduce autho-
rizedhours for all IHSS recipients by 8.4 percent
to achieve state savings of $128 million in 2011-12.
Zhis across-the-board reduction would be in addi-
tion to a 3.6 percent reduction enacted as part of
the 2010-11 budget. The budget assumes that an
appeals process would allow 21,000 recipients to
receive a full restoration of hours and 62,000 recipi-
ents to receive a partial restoration of hours.
Elimination of Domestic Services for
Recipients in Shared Living Environments. Under
current law, domestic services are reduced some-
whatbased on the number of persons in the house-
hold. The Governor's budget proposes to eliminate,
with certain exceptions, domestic and related care
services for recipients who live with others to save
$237 million in 2011-12. Domestic and related care
services include housework, meal preparation, meal
clean-up, laundry, shopping, and errands.
Eliminate All Services for Recipients Without
a Physician s Certificate. Lastly, the Governor
proposes to eliminate from IHSS recipients who
do not have certification by a physician that they
need these services to prevent their placement in
an institution, such as a nursing home. The budget
assumes that 43,000 recipients (10 percent) will
lose IHSS eligibility and that the state would save
$121 million in the budget year.
Figure 10 (see next page) lists the proposed
solutions for IHSS totaling almost $0.5 billion.
Key Issues
Legal Risks Exist. Any time services are
reduced or eliminated, there is some risk of litiga-
tion asserting that the change puts recipients at risk
of institutional placement, which could violate the
U.S. Americans with Disabilities Act. The Governor
has proposed several measures, such as the appeals
process to restore domestic hours, to limit legal
risks associated with these proposals. On the other
hand, recent litigation in Washington State sug-
geststhat there is some legal risk for the proposals
to eliminate domestic and related care services for
www.lao.ca.gov Legislative Analyst's Office 31
2011-12 BUDGET
wish to reconsider reduc-
Figure 10
Its-I-~ae SU~pOCt1VE' S~'PV[C8 s ing state participation
Oi' SalutiOns f®r 2011-12 in IHSS provider wages
as part of the 2011-12
(General Fund Benefit, in Millions)
budget plan. A reduction
Solution Amount
from $12.10 to $10.10, for
Additional reduction in hours for services $128 example, could save about
Eliminate domestic services in shared living environments 237
Eliminate all services for recipients without a physician's certificate 121 $100 million annually. To
Total $486 address some of the con-
cerns of the federal court,
recipients who live with other persons. the wage reduction could
Savings Estimates May Be Overstated. Some
savings estimates, such as the one related to the
adoption of physician certification requirements,
appear to be overstated.
High-Hour Recipients Lose Most. When
snaking reductions to the IHSS program, we have
generally recommended an approach in the past
of targeting reduction to those least likely to enter
a skilled nursing facility. However, the proposed
across-the-board reduction in service hours results
be reenacted in a way that allows a reduction down
to $10.10 contingent on the results of a state study
now under way to determine the potential impact
on the supply of available providers.
PROPOSITION ~ O EARLY CHILDHOOD
DEVELOPMENT PROGRAMS
Major Proposal
Ballot Measure. Proposition 10, enacted by
the California voters in the November 1998 elec-
in the greatest loss of hours for recipients who are
assessed to need the most hours. We have proposed
that the Legislature begin to move toward a system
that would better target services to those most at
risk of institutionalization.
Alternatives for Legislative Consideration
Reduce State Participation in Provider Wages
Pursuant to a Study. The state, together with
counties, provides funding to support the wages
paid to IHSS workers. The federal courts enjoined
California from implementing a 2009-10 reduc-
tion in state participation in wages from $12.10
to $10.10. The court ruled that the state should
have conducted a study of the impacts of a wage
reduction on the supply of available providers. In
the meantime, this case has been appealed to the
U.S. Supreme Court, and the Legislature adopted a
statute that postpones the wage reduction.
tion, imposed a 50-cent increase in excise taxes on
cigarettes and other tobacco products to fund early
childhood development programs. The Governor's
budget proposes to place a measure before voters
in a June 2011 special election to allow the use of
Proposition 10 funds for Medi-Cal coverage for
children in a way that would reduce state General
Fund costs. Specifically, the proposed ballot
measure would (1) sweep $1 billion on a one-time
basis from state and local commissions' fund
reserves to pay for Medi-Cal services for children
up to age five and (2) redirect on an ongoing
basis 50 percent of state and local commissions'
future revenues to fund various state children's
programs. This proposal would result in General
pund savings of $1 billion in 2011-12 and approxi-
mately $215 million in 2012-13. This amount would
decline gradually in the out-years in accordance
with an ongoing trend of declining tobacco product
Despite these prior actions, the Legislature may consumption.
32 Legislative Analyst's Office www.lao.ca.gov
2011-12 BUDGET
Key Issues
Amount Available for Sweep Uncertain. The
administration has cited 2009 data as the basis for
its conclusion that $1 billion in Proposition 10 state
and local commission fund reserves are available to
be swept. Under this proposal, the actual amount
available for the one-time sweep would depend on
the commissions' fund balances as of June 30, 2011.
Governance of Proposition 10 Funds.
Although the state and local commissions provide
some important services to young children, they
are in accordance with their priorities, which may
differ significantly from the Legislature's priorities,
especially in times of fiscal distress. Moreover,
the commissions have separate staff and govern-
ing boards. Eliminating the commissions would
remove this layer of bureaucracy.
Alternatives for Legislative Consideration
Governor's Proposal Could Be Modified. The
Legislature could go further than the Governor's
proposal by seeking elimination of the state and
local commissions and use those funds to pay for
General Fund-supported children's programs.
Alternatively, the Legislature could use these
revenues as part of any realignment of health and
social services programs. rlhese options would also
require voter approval.
MEDI-CAL
hospital fee for additional General Fund relief of
$160 million in the current year. In addition, the
budget plan proposes to achieve almost S1.7 billion
in General Fund savings in the Medi-Cal Program.
This would he achieved through a combination of
copayments, caps on benefit utilization, elimination
of benefits, and payment reductions to certain pro-
viders, as shown in Figure 11 (see next page).
Governor Pursues Provider Rate Reductions.
The spending plan assumes that the courts will rule
in favor of the state regarding prior rate reductions
and let it go forward with a 10 percent rate reduc-
tion to certain types of Medi-Cal providers, for
savings of X537 million to the General Fund. The
administration anticipates that the U.S. Supreme
Court will decide to hear the state's appeals of
lower-court rulings that enjoined these prior
budget reductions bymid-January 2011 and will
rule by July 1, 2011. In addition to the favorable
court outcome, the spending plan also assumes that
net savings of $172 million General Fund can be
achieved by reducing certain long-term care pay-
ments by 10 percent.
Governor Proposes copayments, Hard Caps,
and Benefit Eliminations. The governor proposes
to achieve almost $1 billion in General Fund
savings in Medi-Cal through the imposition of
copayments, caps on the utilization of certain ben-
efits, and the elimination of certain benefits, such
as Adult Day Health Care (ADHC).
Major Proposals
Governor Proposes Alternative Funding
Sources and Reductions. 71-ie Governor's
spending plan shifts $1 billion in funding from
Proposition 10 and $840 million in local redevelop-
mentagency funds to offset state Medi-Cal costs.
(We discuss these proposals in more detail in
earlier sections of this report.) The Governor also
proposes atwo-quarter extension of the existing
Key Issues
Merit in the Governor's Approach. Given the
state's difficult fiscal condition and the significant
growth that would otherwise occur in the General
Fund budget of the Medi-Cal Program, we believe
the Legislature should carefully consider the
Governor's proposals for budget reductions in
Medi-Cal as well as other alternatives to achieve
savings. We note that the administration's options
www.lao.ca.gov Legislative Analyst's Office 33
2011-12 BUDGET
to control costs in Medi-Cal through reductions there is a significant risk that the courts will
in eligibility are limited by requirements imposed rule against the state in regard to the previously
by the federal Affordable Care Act (also known as enacted provider payment reductions. If so, the
health care reform). While some savings could be state would lose significant savings assumed in the
achieved by scaling back eligibility for state-only
benefits, other major eligibility reductions that
could save hundreds of millions of dollars are not
permissible because of the federal legislation.
Some Medi-Cal Budgetary Savings Risky or
Overstated. In recent years, the Legislature has
adopted a number of different measures to contain
costs in the Medi-Cal Program that have been
blocked as a result of legal challenges. Given prior
court injunctions in recent years, for example,
2011-12 budget plan. The newly proposed payment
reduction for long-term care facilities also could
be subject to legal challenge. Furthermore, federal
approval maybe required in order to implement
several of the Governor's proposals, including rate
reductions. Recent actions by federal Medicaid
authorities suggest that the reductions proposed in
the Governor's budget could receive close scrutiny.
We caution that some of the Governor's savings
estimates maybe somewhat overstated because
Figure 11
~ ~ .,£~1-B Pr®rBl1
~t t ~e~tniions
(General Fund Benefit, in Millions)
2010-11 2011-12
Impose Caps
Physician and clinic visits at ten per year (adults)
Drugs at six prescriptions (adults)
Durable medical equipment at 90'h percentile (adults)
Medical supplies at 90~h percentile (adults)
Hearing aids at 90~h percentile (adults)
Subtotals
Impose Copayments
$5 copayment for visits to physicians and certain clinics
$100 copayment per hospital inpatient day
$3 and $5 pharmacy copayments
$50 copayment for nonemergency emergency room (ER) visits
$50 copayment for emergency ER visits
$5 copayment for dental office visits (adults)
Subtotals
Reduce Benefits
Eliminate Adult Day Health Care services
Limit nutritional supplements
Eliminate selected over-the-counter drugs
Subtotals
Implement Provider Payment Reductions
Assume courts will allow certain provider payment reductions
Impose a 10 percent payment reduction on long-term care facilities
Subtotals
Totals
- $196.5
- 11.0
- 7.4
- 2.0
- 0.5
(-) ($217.4)
- $152.8
- 151.2
- 140.3
- 73.2
- 38.4
$0.2 1.3
($0.2) ($557.2)
$1.5 $176.6
0.5 14.4
0.1 2.2
($2.1) ($193.2)
$9.5 $537.0
- 172.3
($9.5) ($709.3)
$11.8 $1,677.1
34 Legislative Analyst's Office www.lao.ca.gov
2011-12 BUDGET
they do not capture the net effect of the proposal.
For example, savings from the elimination of the
ADHC benefit would be offset by additional costs
in Medi-Cal and other state programs, such as the
DDS.
and service providers and through the implementa-
tion of statewide service standards. the statewide
standards would set guidelines to promote consis-
tency in the array of services provided by RCs and
would be developed with input from stakeholders.
Alternatives for Legislative Consideration
Copayments and Caps on Services Could Be
Modified. In the event that the Legislature does not
wish to adopt in full some of the specific budget
reductions contemplated in the Governor's budget
plans, options are available to the Legislature
that would still achieve some measure of state
savings. For example, the Legislature could imple-
ment copayments for certain Medi-Cal services
in smaller dollar amounts than the copayments
proposed by the governor. Similarly, the Legislature
could adopt the proposed caps on the utilization of
certain benefits, but with allowance for exceptions,
thereby allowing Medi-Cal beneficiaries to access
critical care.
DEPARTMENT OF DEVELOPMENTAL SERVICES
Major Proposals
Major Reductions in Regional Center (RC)
Programs. The governor's budget plan proposes
to achieve $750 million in General Fund savings
in DDS. About $125 million of the savings will
come from alternative funding sources, such as
the continuation of $50 million in funding from
Proposition 10 and three separate proposals to
draw down a combined total of $75 million in
federal funds. Another $92 million in savings
would come from the continuation of a 4.25 percent
reduction to RC operations and provider payments.
The remaining $533 million in savings would be
achieved by a proposal described as increasing the
accountability and transparency for the use of state
funds for the administrative expenditures of RCs
Key Issues
More Information Needed to Assess Whether
Savings Are Achievable. The administration's pro-
posals to achieve savings in the DDS program have
merit in concept, given the significant historical
increases in spending and caseload for community
programs. However, we believe the Legislature
requires additional detail to evaluate the proposal
for $533 million in savings in RC operations and
programs.
HEALTHY FAMILIES PROGRAM
Major Proposals
Plan Would Implement Premium Increases,
Benefit Eliminations, and Copayments. The
Governor's budget plan would achieve $39 million
in General Fund savings in the Healthy Families
Program (HFP) through benefit eliminations,
premium increases, and the implementation of
copayments for certain services. Specifically, the
plan proposes to eliminate the vision benefit and
increase premiums by between 75 percent and
88 percent based upon family income levels. The
plan also would increase copayments for emergency
room visits from Sly to $50 and inpatient hospital
stays from $0 to $100 per day with a maximum of
$200 per stay.
Managed Care Tax Would Be Extended. The
tax assessed on managed care plans provides rev-
enues that are used to fund rate increases in Medi-
cal and provide health coverage in HFP. This tax
expires on June 30, 2011. The budget plan proposes
to make the tax permanent and use the revenues to
fund Medi-Cal and HFP for savings of S97 million.
www.lao.ca.gov Legislative Analyst's Office 35
2011-12 BUDGET
Key Issues
Federal Approval of Tax Measure Uncertain.
We caution that the managed care tax is subject to
federal approval and, based upon our review, there
is some risk that it may not be approved.
Alternatives for Legislative Consideration
Some of the Governor's Proposals for HFP
Could Also Be Modified. Similar to the options
presented under Medi-Cal, the Legislature could
adopt more moderate reductions than the ones
proposed by the Governor, albeit at a reduced
savings level. For example, the Legislature could
adopt lesser premium increases or copayments than
proposed by the administration.
JUDICIAL AND CRIMINAL JUSTICE
Major Proposals
Public Safety Realignment. As we discussed
earlier in this report, the administration proposes
to realign several public safety programs to coun-
ties. These programs include adult parole, jurisdic-
tion of lower-level adult offenders and all juvenile
offenders, court security, and various local public
safety grant programs (such as the Citizens' Option
for Public Safety program and local detention
facility subventions or booking fees).
Redevelopment Fund Shift to Trial Courts. The
Governor's budget proposes to offset $860 million
in trial court costs in 2011-12 with redevelopment
funding. (Please see the "Redevelopment" section
of this report for a more detailed discussion of the
Governor's proposal.)
Revised Corrections Savings. The enacted
2010-11 budget includes an $820 million unal-
located reduction to the Receiver's inmate medical
Similarly, the proposed budget assumes that the
full $200 million from an unallocated inmate
population-related reduction will not be achieved
in either 2010-ll or 2011-12.
Increased Funding for CDCR Salary and
Other Costs. The budget provides an additional
$395 million in General Fund support for the
California Department of Corrections and
Rehabilitation (CDCR) for expenses that the
department indicates have exceeded its budgeted
authority in previous years. These expenses include
correctional officer salaries and wages, overtime
for correctional officers, and costs associated with
transporting and guarding inmates at health care
facilities outside prison walls.
CDCR Workforce Cap Adjustment. As a result
of an unallocated 5 percent reduction to the per-
sonnel budgets of most state departments (referred
to as the workforce cap), the 2010-11 budget
assumed a total of about $292 million in personnel
savings for CDCR. The Governor's budget assumes
that the department will only be able to achieve
$20 million of these savings in the current year.
However, the proposed budget assumes that the full
$292 million in savings will be achieved in 2011-12.
Unallocated Reduction to Trial Courts. The
proposed budget includes an unallocated reduction
of $200 million to the General Fund support budget
of trial courts.
Key Issues
Significant Risk in Fully Achieving Assumed
CDCR Savings. At this time, the administration
has not presented specific plans as to how the
savings related to inmate medical care services and
the workforce cap proposal will be achieved. Given
the absence of such plans, we believe that assuming
services program. The Governor's budget includes
additional funding based on the assumption that
only about $177 million in these savings will be
achieved in 2010-11 and $257 million in 2011-12.
the level of savings contained in the Governor's
budget poses significant risks. For example, in
order to achieve the magnitude of savings proposed
in the imnate medical care budget, the Receiver
36 Legislative Analyst's Office www.lao.ca.gov
2011-12 BUDGET
would need to identify and begin to implement
major operational changes now. Moreover, CDCR's
ability to achieve the workforce cap savings appears
to be limited since the department's personnel
costs are largely tied to the operations of the state
prisons-which must be staffed on a 24-hour basis.
Funding for CDCR Salary and Other Costs
Raises Some Concerns. Although CDCR has
exceeded its budget authority in recent years, the
administration's approach to address the problem
may not be fully justified. For example, the depart-
ment requests an augmentation of $36 million to
its base level of funding for correctional officer
overtime of $104 million, in order to account for
higher costs that have resulted from increases in
correctional officer salaries over the past decade.
However, CDCR reports that it spent a total of
about $416 million on overtime for correctional
officers in 2009-10-over $300 million above the
level for which the department is budgeted. 'This
suggests that much of the requested funding is
related to excessive overtime costs. The department
has not presented a plan to reduce these high costs
on an ongoing basis.
Consider Specific Cost-Savings Options for the
Courts. Although the state's court system-and in
particular the trial courts-have had reductions
in General Fund support in recent years, much of
these reductions have been offset by fund shifts
and revenue from court-related fee increases. As
a result, these reductions have not resulted in
substantial decreases in the total level of funding
for the courts. Thus, the Governor's proposal
to achieve $200 million in court savings merits
legislative consideration. While the administra-
tion has not identified how these savings would be
achieved, we believe that the Legislature should
work with the courts to determine what specific
actions are needed to achieve these, and potentially
even greater, savings, in a way that minimizes
impacts nn access to the courts. For example, the
Legislature could direct the trial courts to imple-
ment electronic court reporting and to utilize com-
petitive bidding to reduce costs for court security.
TRANSPORTATION
Major Proposals
Transportation Funds Would Provide General
Fund Relief. The 2010-I1 Budget Act assumed that
the state would achieve roughly $1.6 billion in
General Fund relief under a fuel tax swap that per-
mitted significant changes in the use of transporta-
tion funds. However, the enactment of Propositions
22 and 26 on the November 2010 ballot could
prevent the state from fully achieving this budget
solution. Proposition 22 restricts the use of certain
transportation funds and Proposition 26 could be
interpreted to repeal the fuel tax swap legislation as
of November 2011.
The Governor's budget proposes to address
these problems in several ways. First, it would
reenact the prior fuel tax swap. The Governor's
package would allow $262 million in vehicle weight
fees to be used to pay transportation debt in the
current year, and permit roughly $800 million in
State Highway Account (SHA) monies (primarily
from weight fees) to pay transportation debt in
2011-12. Also, some transportation funds would
be loaned to the General Fund. Altogether, these
actions would achieve $1.6 billion in General
Fund relief in the current year and 5944 million in
2011-12 under this proposal.
Key Issues
Maximize General Fund Benefit. Our analysis
indicates that these proposals, similar to ones
proposed by the former Governor in the December
2010 special session but not yet adopted, are
reasonable and could achieve the level of savings
proposed. However, as we noted in December, the
proposal does not maximize the use of weight fee
revenues for potential benefit to the General Fund.
www.lao.ca.gov Legislative Analyst's Office 37
2011-12 BUDGET
We believe the amount of General Fund benefit
in the current year could be increased by at least
$50 million and potentially by a similar amount in
the budget year, while still maintaining an adequate
reserve in the SHA.
Alternatives for Legislative Consideration
Develop Comprehensive Fix for the Future.
The Governor's proposal would help to ensure
that transportation funds could be used for
General Fund relief in the future. We believe this
is appropriate. In addition, we think this is a good
time for the Legislature to consider a more com-
prehensive approach that would provide additional
General Fund relief and address other problems
in the current transportation funding system. For
example, we believe the Legislature should examine
the current fragmentation of funding into various
special funds that each allows only limited uses.
We are exploring what steps the Legislature and
the voters could take to allow for more flexible and
effective use of these funds.
STATE OPERATIONS
Major Proposals
Savings From Collective Bargaining and
Administrative Actions. Currently, 6 of the state's
21 employee bargaining units (about 25 percent
of its workforce) are working under expired con-
tracts. The budget assumes that new memoranda
of understanding (MOUs) and/or administrative
actions related to these employees will generate
$308 million in General Fund savings in 2011-12.
"Chis amount is equivalent to a 10 percent salary
reduction for these employees. The current three-
day amonth furlough, in contrast, is equivalent to a
14 percent salary cut.
Health Plan Savings. The state's contribution
to employee health coverage is based on the average
cost of the four health plans with the most enrolled
state employees. Beginning in the 2012 calendar
year, the administration proposes adding a new
health plan that provides somewhat less compre-
hensive coverage at a somewhat reduced cost to
employees electing the plan. Zhe budget assumes
that this plan will attract enough employees so that
the state would realize $72 million in General Fund
savings in the budget year.
Unallocated Cut. The budget includes a
$200 million General Fund unallocated cut to
state operations to be achieved through various
efficiencies.
Key Issues
Erosions of Current-Year Savings. While the
2010-I1 Budget Act assumed $1.5 billion of General
Fund savings in employee compensation costs,
the budget indicates that the state will not realize
more than a third of this amount. The shortfalls
include: $281 million from state departments not
reducing employment costs fully pursuant to the
ongoing state workforce cap, $166 million from
lower-than-anticipated savings associated with the
ratified MOUs and administrative actions, and
$100 million from unrealized operating expenses
and equipment savings. The budget assumes,
however, that the state will realize virtually all of
the workforce cap savings in 2011-12.
Assumed Budget-Year Savings Unrealistic.
'lhe proposed savings associated with health plans
and the unallocated cuts are not realistic. the
new health plan is not likely to attract enough
employees to substantially reduce state costs, and
the state's experience with across-the-board cuts
suggests that they are not likely to generate the
anticipated savings.
Alternatives for Legislative Consideration
Greater Savings From Employees With
Expired Contracts. Given that the state is not
likely to achieve all of the savings associated with
the health plan and unallocated cut proposals, the
38 Legislative Analyst's Office www.lao.ca.gov
2011-12 BUDGET
Legislature and administration could consider
increasing the level of proposed savings associ-
atedwith employees with expired contracts. For
example, approving MOUs or authorizing admin-
istrative actions that continue the current level of
savings associated with these employees (14 percent
of salary costs) could reduce General Fund costs by
over $100 million in 2011-12.
Extend Personal Leave Program. The
Legislature could authorize administrative actions
that extend the one day a month "personal leave
program," beginning November 2011, for employees
represented by Service Employees International
Union Local 1000 and for employees not represented
by a union. (Extending this program to the six other
bargaining units with active MOUs, in contrast, is
not permitted under the terms of their MOUs.)
OTHER PROPOSALS
Debt Service
Proposal: Delaying Spring General Obligation
Bond Sale. The state typically sells general obliga-
tion bonds in the spring and fall, but the admin-
istration plans to eliminate the spring sale in the
current year. 1-his one-time pause in the issuance of
new bonds, combined with the Governor's proposal
to use weight fees and other revenues to cover a
portion of transportation debt-service costs, would
slow the growth of General Fund debt-service obli-
gations. General Fund debt service would increase
in the budget year by approximately $60 million
or 1 percent under the proposal This is a modest
increase compared with earlier projections. (The
previous administration's assumptions included
issuing $7 billion in bonds this spring, which would
have increased debt costs by about $475 million in
2011-12.)
Most Departments Have Sufficient Funds
to Operate Bond Programs Through the Fall.
According to the administration, most depart-
ments have sufficient funds to continue existing
projects and bond programs through the bond
sale in the fall. New projects or local assistance
grants, however, could be delayed depending upon
departments' remaining balances. The Governor's
proposal did not include details on projects or
programs that could be affected by the delay. We
recommend the Legislature request details on the
potential effects of the pause in bond sales in order
to ensure that available funds are directed toward
its highest priorities.
Savings Represent Temporary Solution. Given
the state's fiscal condition, it is reasonable to con-
sider the delay of the spring bond sale. The avoided
debt-service costs would reduce pressure on the
General Fund in 2011-12. Such relief, however, is
temporary. The state still has roughly $50 billion in
authorized but unsold bonds, most of which would
be sold and spent over the next few years under
current practices. The delayed spring sale simply
defers the debt-service costs associated with these
bonds to future years.
Alternative: Permanently Eliminate or Reduce
Some Bond Programs. the planned sale of the
remaining authorized bonds would add more than
$3 billion annually to the state's debt-service obliga-
tions. the Legislature and voters approved many of
these programs when the state was on more sound
fiscal footing. In light of the state's current fiscal
condition, the Legislature may wish to evaluate
whether these programs remain state priorities.
For example, some bond programs support func-
tionsthat are not traditionally state responsibilities
and the Legislature may wish to focus the state's
resources on its core infrastructure responsibilities.
CalFire
Eliminate the Fourth Firefighter on CalFire
Engines. In addition to the proposal to shift some
wildland firefighting responsibility to the local
level, as described in the "State-Local Realignment"
section of this report, the administration proposes
www.lao.ca.gov Legislative Analyst's Office 39
2011-12 BUDGET
$30.7 million in 2011-12 General Fund savings in recommended this approach on the basis that the
CalFire from eliminating the fourth firefighter department has not demonstrated that this level of
on CalFire fire engines, returning to the pre-2003 increased staffing is cost-effective.
level ofper-engine staffing. We have previously
~. ('3
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advice to the Legislature.
To request publications call (916) 445-4656. This report and others, as well as an E-mail subscription service,
are available on the LAO's website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000,
Sacramento, CA 95814.
40 Legislative Analyst's Office www.lao.ca.gov
°~ ~ 1400 K Street, Suite 400 • Sacramento, California 95814
Phone: (916) 658-8200 Fax: (916) 658-8240
www.cacities.org
~ t
{
Honorable Jerry Brown
Governor, State of California
California State Senators
California State Assembly Members
State Capitol
Sacramento, CA 95814
January 18, 2011
Dear Governor Brown and California State Legislators:
RE: Eliminating redevelopment is wrong decision in this economy and fails to offer a real
solution for the state budget
As elected city officials in the State of California, we fully understand that the State's massive budget deficit
will require sacrifice by all Californians. We stand ready to work with the Administration and the Legislature to
pass an honest budget that finally puts California on the road to fiscal health. However, it is important to
ensure that no decisions are made in the frenzy of the upcoming budget deliberations that will make our
financial problems worse.
Unfortunately, the Administration's proposal to abolish redevelopment represents more of the same State
raids of local funds that voters have fought to prevent, and it will jeopardize the State's prospects for an
economic recovery.
The Governor's proposal to eliminate redevelopment agencies is wrong because it:
• Will not provide expected budget relief to the State or local governments after bond and contractual
obligations are repaid;
• Will destroy billions of dollars in local economic activity and hundreds of thousands of jobs;
• Will kill the State's only meaningful programs to provide affordable housing; and
• Will block our efforts in California to grow responsibly by focusing on urban and infill development.
The proposal will not provide budget savings to the State or local governments, and represents
continued State raids of local funds the voters have acted to prevent.
Over the last 10 years, the State has adopted too many budgets based on proposals that are at best
questionable and in some cases illegal. The proposal to eliminate redevelopment agencies isjust another in
along string of proposals that will not deliver the real dollars needed to close the budget gap and put the
State's fiscal house in order.
The measure is completely contrary to Proposition 22, which passed by 61 percent in November 2010, to
protect local government revenues from grabs by the State. The provisions of Prop. 22 clearly prohibit the
redevelopment proposal as it appears in the governor's budget.
Second, redevelopment agencies issue bonds to finance redevelopment activities, which must be repaid with
interest. Redevelopment agencies currently hold more than $20 billion in bonded indebtedness. Under the
federal and state constitutions, these contractual obligations must be met before revenues could be used
under the Governor's proposal to benefit the state's budget deficit.
The bottom line is that this is not a "real" budget proposal. It is a proposal that will once again fall far short of
expectations.
The proposal will kill lobs and economic expansion at the worst possible time.
Eliminating redevelopment will have a direct and lasting negative impact on the California economy and job
creation.
• Redevelopment activities support an average of 304,000 full- and part-time private sectorjobs in a
typical year, including 170,600 construction jobs;
• Redevelopment contributes over $40 billion annually to California's economy in the generation of
goods and services;
• Redevelopment construction activities generate $2 billion in state and local taxes in a typical year;
and
• The success stories of redevelopment are all over California and available for all to see. The
downtown areas of San Diego, Pasadena, Los Angeles and San Jose stand as outstanding
examples of saving blighted neighborhoods and turning them into hubs of economic activity and job
creation.
The proposal is bad for the environment, bad for our state.
Eliminating redevelopment will take away the primary tool local governments have to comply with the
requirements of State law to plan for more compact urban development supported by improved public
transportation opportunities. Redevelopment encourages infill development rather than Greenfield
development and redevelopment agencies have the experience and tools needed to help implement AB 32
and SB 375.
Redevelopment is also the second largest funder of affordable homes after the federal government.
More than 98,000 units of affordable housing have been constructed or rehabilitated through redevelopment
since 1993.
As local officials, we stand ready to assist you in the passage of a responsible budget. However, this
proposal runs completely contrary to the Governor and Legislature's stated goals of realigning state services
to provide more responsibility and funding locally. We strongly urge you to reject this measure and refocus
on proposals that offer real solutions to California's budget problems.
Sincerely,
STOP THE STATE'S REDEVELOPMENT PROPOSAL
...
PROTECT LOCAL JOBS AND THE ECONOMY
As part of its 2011-12 budget proposal, the Administration has proposed permanently shutting
down local redevelopment agencies. This proposal represents more of the same misguided
and illegal State budget raids of local government funds that voters have repeatedly sought to
end. It will bring little financial benefit to the State, but will permanently destroy h undreds of
thousands of jobs, billions in local economic activity and a key local tool to meet the state's infill
land-use objectives. Abroad coalition of mayors, council members, local governments,
business and labor, environmental leaders and affordable housing advocates oppose the
State's attempt to kill local redevelopment. Here's why:
Proposal Represents More of the Same State Raids of Local Funds that
Voters Have Repeatedly and Overwhelmingly Acted to Stop.
^ The proposal to kill redevelopment represents the same old budget tactics of raiding local
government funds to solve the State's budget problems.
^ In November, more than 5.7 million voters, a resounding 60.7%, voted to pass Prop. 22, to
stop the State from taking, borrowing or redirecting local government funds -including local
redevelopment.
Cities and local governments want to work with the State as partners to balance the State
budget and in the important effort to realign services to the local level. But this proposal
creates a toxic environment that city and other local government officials have no choice but
to oppose.
No Financial Gain, Significant Economic Pain.
^ The State's own numbers show that killing redevelopment will bring very little financial relief
for the State. In fact, after this budget year, the State Department of Finance acknowledges
zero State savings from shutting down redevelopment. Redevelopment agencies have more
than $20 billion in bond and other contractual obligations that legally must be repaid before
revenues are available to any other purpose.
^ However, killing redevelopment will cause serious and permanent economic damage
at the local level. Redevelopment activities:
o Support 304,000 lobs annually, including 170,600 construction jobs.
o Contribute over $40 billion annually to California's economy in the generation of
goods and services.
o Generate more than $2 billion in state and local taxes in a typical year.
-- More --
Protect Local Jobs and the Economy -Stop the State's Proposal to Abolish Redevelopment!
1121 L Street, Suite 803, Sacramento, CA 95813.916.443.0872
Proposal Will Wipe Out a Vital Tool to Meet Infill Land-Use Objectives and
to Develop Affordable Housing.
^ Eliminating redevelopment will take away one of the few tools local governments have to
comply with state requirements to plan for more compact urban development supported by
transit-oriented development, housing, jobs and infrastructure. Redevelopment agencies
have the experience and tools needed to help implement the requirements of AB 32 and SB
375.
^ Redevelopment is also the second largest funder of affordable housing, behind only
the federal government. Over 98,000 units of affordable housing have been constructed or
rehabilitated since 1993. Twenty percent of property taxes generated from redevelopment
activities must be spent on affordable housing.
Proposal is Unconstitutional and Politically Unviable.
^ Shutting down redevelopment agencies is a clear violation of multiple State constitutional
provisions, including Article XVI, section 16 which requires tax increment to be paid to
redevelopment agencies to repay the public cost of redevelopment projects and Article X111,
section 25.5 (Proposition 22 -- passed just last November) which explicitly prohibits the
State from taking tax increment from redevelopment agencies.
Additionally, killing redevelopment could violate the U.S. and California constitutions which
prohibit impairment of contracts. Redevelopment agencies have more than $20 billion in
contractual bond obligations, and have entered into tens of thousands of contracts with
banks, developers and bond houses. The Legislature cannot constitutionally abrogate those
contracts or unilaterally substitute a new party to replace the redevelopment agency without
the consent of the other parties to the contract.
^ Jeopardizing these contractual obligations will shake investor confidence and the
creditworthiness of the State and increase state and local bonding and borrowing costs for
years to come.
^ Lastly, the Administration's proposal is simply unviable -shutting down 398 agencies, more
than 700 project areas, hundreds of thousands of jobs and billions of dollars in contracts and
economic commitments is an ill-advised and politically untenable prospect.
Protect Local Jobs and the Economy -Stop the State's Proposal to Abolish Redevelopment!
1121 L Street, Suite 803, Sacramento, CA 95813.916.443.0872
Cal~forn~a Redevelopment Assoc~at~on
..~,.rv,.-~.
~ ~ ~ ~ Redevelopment. Building Better Communities
FOR IMMEDIATE RELEASE January 10, 2011
CONTACT INFORMATION:
Krista Noonan
Director of Communications
knoonan@calredevelop.orR
(916) 448-8760
GOVERNOR'S PROPOSAL ELIMINATING REDEVELOPMENT IS MORE
BUDGET SMOKE AND MIRRORS THAT WILL BRING LITTLE FINANCIAL
BENEFIT TO STATE BUT WILL CAUSE SIGNIFICANT HARM TO
CALIFORNIA'S ECONOMY
SACRAMENTO, CA -Today, Governor Jerry Brown unveiled his proposal to address California's massive
budget deficit by eliminating redevelopment agencies statewide. This proposal was announced just
seconds after the Governor acknowledged that, "...redevelopment has done some important things."
According to California Redevelopment Association Executive Director, John Shirey, "This budget proposal
to eliminate redevelopment is more budget smoke and mirrors that will bring little financial gain for the
State, but will cause widespread and significant economic pain in communities throughout California. It is
another gimmick that will likely result in extensive litigation."
Redevelopment is a vital local government tool in revitalizing blighted communities and bringing them
back to economic vitality by creating jobs, funding affordable housing, building public infrastructure
improvements, and creating commercial opportunities. Further, if redevelopment were eliminated, it will
have a direct and lasting negative impact on the California economy.
The Governor's proposal presents a series of contradictions and inconsistencies. For example, the
Governor made the following statement released this morning, "...We must now return California to fiscal
responsibility and get our state on the road to economic recovery and job growth." However, his budget
proposal contradicts this statement given the fact that redevelopment activities support over 304,000
full- and part-time private sector jobs on an annual basis.
"The State and local governments have very few tools to stimulate the economy, but redevelopment is
the exception," continued Shirey. "Redevelopment isalready alocally-governed service which generates
hundreds of thousands of jobs and puts people to work at a time when unemployment is soaring over 12
percent. Redevelopment contributes tens of billions of dollars to our economy and is responsible for
more than $2 billion instate and local taxes each year. It makes no sense to kill this economic engine."
"Bottom line, the budget proposal to eliminate redevelopment will hurt California and cripple the local
economy in cities and counties statewide. It is not a solution and will not work to solve the State's budget
problems," concluded Shirey.
-- MORE --
1400 K Street, Suite 204, Sacramento, CA 95814-3916
(916)448-8760 • fax (916) 448-9397
www. cal red evel op. org
wgy:q~ California Redevelopment Association
~~~~ Redevelopment. Building Better Communities
FACTS ABOUT REDEVELOPMENT:
• Redevelopment Supports Private Sector Jobs. Redevelopment activities support 304,000 full-
and part-time jobs in a typical year, including 170,600 construction jobs.
• Redevelopment contributes over $40 billion annually to California's economy in the
generation of goods and services. Redevelopment agency activities increase the state's
construction sector output by about $19 billion annually.
• Tax Revenue Contributions. Redevelopment construction activities generate more than $2 billion
in state and local taxes in a typical year.
• Redevelopment funds infrastructure and builds commercial, industrial and residential
developments statewide. In 2007-08, 398 active redevelopment agencies implemented
economic development-related projects in 756 project areas in local jurisdictions. During that
year, $8.28 billion were expended for project-related costs (paying bonds, building construction,
property acquisition, and other activities).
• Redevelopment is aLocally-Governed Program. Redevelopment agencies are locally-based
units of government and managed by elected officials and public agency staff in the city or
county which they represent.
• Infill-Centered Growth. Communities use redevelopment for cleaning up brownfield sites,
building infill projects, and spurring local job creation. Redevelopment encourages infill
development rather than greenfield development. Redevelopment agencies have the experience
and tools needed to help implement the regional Sustainable Communities Strategy plans
required by AB 32/SB 375, and to alter the state's growth patterns.
• Green and Sustainable Development. Redevelopment agencies are actively pursuing green and
sustainable building principles, including implementation of CALGREEN standards.
• Catalyst for change. Redevelopment investments provide the infrastructure improvements that
leverage private investment and breathe new economic life into areas that would otherwise
languish.
• Redevelopment is the largest funder of affordable homes in California after the federal
government. Over 98,000 units of affordable housing have been constructed or rehabilitated
since 1993. Twenty percent of property tax revenues generated from redevelopment activities
must be spent for affordable housing.
-- MORE --
1400 K Street, Suite 204, Sacramento, CA 95814-3916
(916)448-8760 • fax (916) 448-9397
www. calred evelop. org
~~
~~ Cal~forn~a Redevelopment Association
~ ~ ~ ~ Redevelopment. Building Better Communities
The below chart illustrates the usage of redevelopment agency tax increment
revenues on an annual basis:
Annual Redevelopment Agency
Tax Increment Revenue Uses
Community
Improvements &
Infrastructure,
18%
Bond and Other
Debt Payments,
41%
Payments to
Schools, Counties
and Other
Entities, 21%
Source of Data: State Controller, Community Redevelopment Agencies Annual Report,
2007-08, State Total; Table 4; Figure 9; and Figure 16.
ABOUT THE CALIFORNIA REDEVELOPMENT ASSOCIATION:
The California Redevelopment Association (CRA) was established as anot-for-profit organization in 1979.
CRA represents redevelopment agencies and allied firms throughout the state of California in responding
to legislative proposals and administrative regulations, providing member services, conducting training
and professional development events, and providing public information regarding redevelopment law and
activities. CRA is comprised of over 350 redevelopment agencies. In addition, CRA's associate members
include more than 300 private sector companies such as financial institutions, redevelopment consultants,
developers, and law firms that are involved in the redevelopment process. For more information, visit
www.calredeveloa.or~.
###END###
Affordable
Housing Set-
~_Aside, 20%
1400 K Street, Suite 204, Sacramento, CA 95814-3916
(916)448-8760 • fax (916) 448-9397
www. calredevelop. org
~~ ~~ California Redevelopment Association
~~~~.~~q~~r
~ ~ ~ ~ Redevelopment. Building Better Communities
GOVERNOR'S PROPOSAL TO ELIMINATE REDEVELOPMENT
TALKING POINTS
(as of 1/10/11)
• The Governor's proposal to eliminate redevelopment agencies is notthe solution to the
State's budget deficit. It is more budget smoke and mirrors that will bring little financial gain
for the State, but instead, will cause widespread and significant economic pain in communities
throughout California. It is another gimmick that will likely result in extensive litigation.
• The State and local governments have very few mechanisms for economic development, but
redevelopment is the exception.
• Redevelopment is essential for revitalizing blighted communities and bringing them back to
economic vitality by creating jobs, funding affordable housing, building public infrastructure
improvements, and creating commercial opportunities.
• Redevelopment is alocally-governed service which annually generates 304,000 full- and part-
time private sector jobs and puts people to work at a time when unemployment is soaring
over 12 percent.
• The Governor's proposal would eliminate redevelopment agencies and instead create "shell"
organizations which would simply administer existing debt obligations. However, this would
cripple many local economic development programs which are currently in place to improve
and revitalize local communities.
• Eliminating redevelopment means the end of California's Affordable Housing program. This
would be devastating to California's low-income population and for workforce housing
options.
• Since 1993, redevelopment agencies in California have built or rehabilitated over 98,000 units
of affordable housing.
• Redevelopment contributes $40 billion annually to California's economy and generates more
than $2 billion in state and local taxes. It makes no sense to kill this vital economic engine.
• If redevelopment agencies were eliminated, it will have a direct and lasting negative impact
on California's economy.
• Bottom line, the budget proposal to eliminate redevelopment will hurt California and cripple
the local economies in cities and counties statewide. It is not a solution and will not work to
solve the budget problems.
1400 K Street, Suite 204, Sacramento, CA 95814-3916
(916J448-8760 • fax (916J 448-9397
www. calredevelop. org
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As California searches for ways to increase high-quality jobs and promote more sustainable
development patterns, local redevelopment agencies play a powerful role:
Jobs and the Economy:
• Redevelopment Supports Private Sector Jobs. Redevelopment activities support 304,000 full- and
part-time jobs in a typical year, including 170,600 construction jobs.
• Redevelopment contributes over $40 billion annually to California's economy in the generation
of goods and services. Redevelopment agency activities increase the state's construction sector
output by about $19 billion annually.
• Tax Revenue Contributions. Redevelopment construction activities generate more than $2 billion in
state and local taxes in a typical year.
• Redevelopment funds infrastructure and builds commercial, industrial and residential
developments statewide. In 2007-08, 398 active redevelopment agencies implemented economic
development-related projects in 756 project areas in local jurisdictions. During that year, $8.28 billion
were expended for project-related costs (paying bonds, building construction, property acquisition, and
other activities). And, since 1993, redevelopment agencies have built/rehabilitated over 98,000
affordable homes for eligible families.
Benefits of Redevelopment:
• Infill-Centered Growth. Communities use redevelopment for cleaning up brownfield sites, building
Infill projects, and spurring local job creation. Redevelopment encourages Infill development rather
than greenfield development. Redevelopment agencies have the experience and tools needed to help
implement the regional Sustainable Communities Strategy plans required by AB 32/SB 375, and to alter
the state's growth patterns.
• Green and Sustainable Development. Redevelopment agencies are actively pursuing green and
sustainable building principles, including implementation of CALGREEN standards.
• Catalyst for change. Redevelopment investments provide the infrastructure improvements that
leverage private investment and breathe new economic life into areas that would otherwise languish.
• Redevelopment Strengthens Communities. Redevelopment activities revitalize communities by
investing in local infrastructure and community facilities. Property values are increased, thereby
creating more value for schools, businesses, and residents.
• Affordable Housing in the Right Location. Redevelopment is the largest funder of affordable
homes in California after the federal government. Over 98,000 units of affordable housing have been
constructed or rehabilitated since 1993. Twenty percent of property tax revenues generated from
redevelopment activities must be spent for affordable housing.
Where Do Redevelopment Agency Tax Increment Revenues Go?
Redevelopment builds better communities and revitalizes blighted project areas. In addition,
redevelopment activities fuel infrastructure improvement and construction activity, thereby supporting jobs,
generating taxes, increasing property values, and other benefits. The following pie chart shows where
redevelopment tax increment revenues go:
Annual Redevelopment Agency
Tax Increment Revenue Uses
Community Affordable
Improvements & Housing Set-
Infrastructure,~ ~~Aside, 20%
18% -
Bond and Other
Debt Payments,
41%
LPayments to
Schools, Counties
and Other
Entities, 21%
Source of Data: State Controller, Community Redevelopment Agencies Annual Report
2007-08, State Total,• Table 4; Figure 9; and Figure 16.
Office of the City Council
DRAFY
February 1, 2011
The Honorable Jerry Brown
Governor
State of California
State Capitol
Sacramento, CA 95814
Re: Governor's Budget Proposal to Eliminate Redevelopment
Dear Governor Brown:
I am writing regarding your State Budget proposal to eliminate redevelopment, which
contains provisions that will devastate economic redevelopment in the City of Tustin,
particularly as it affects the community's ability to achieve a successful reuse of the
former Marine Corps Air Station-Tustin ("MCAS-Tustin").
As local elected officials, we understand the difficulty of passing a budget in these
difficult times of limited resources and worldwide economic conditions. We in local
government have been forced to make difficult decisions to bring our budget into
balance. However, even in difficult times, the Governor's proposal to eliminate
redevelopment is short-sighted public policy that will damage the economy and bring
little budget relief to the State. Most importantly to the City of Tustin, the proposal to
eliminate redevelopment:
• Will kill or significantly thwart redevelopment at former military bases.
The Governor's proposal to raid local government coffers by eliminating
redevelopment tax increment coming to local redevelopment agencies would have
the unintended consequence of effectively killing a number of key redevelopment
projects at former military bases. These projects include not only the closed former
Tustin Marine Corps Air Station, but also other important former closed and
realigned military bases throughout California such as the Marine Corps Air Station
EI Toro, March Air Force Base, George AFB, Norton AFB the Alameda NAS, Fort
Ord, Treasure Island, Hunters Point Shipyard, McClelland AFB, Mather AFB,
Sacramento Army Depot, San Diego NTC. These former military bases were in non-
productive uses which did not generate any property tax revenue when operating as
active military bases, so there was no loss of revenues to local cities and schools. It
is only the redevelopment agency authorities under state law that will put these
properties back into productive uses, and result in significant local revenues to cities,
schools, other taxing agencies and the redevelopment agencies that recycle tax
increment revenues back into revitalizing these properties. All of these sites are
Mayor Jerry Amante • Mayor Pro Tem John Nielsen • Deborah Gavello • Rebecca "Beckie" Gomez • Al Murray
The Honorable Jerry Brown
February 1, 2011
Page 2
involved in public-private partnerships that are leveraging millions of dollars in
private capital so that the shuttered and blighted areas can gain much needed jobs,
affordable housing, parks, and open space. The reuse of these facilities has already
been negatively impacted by the recent economic environment, but reuse of the
facilities since the federal government's initial decisions to close or realign many of
these former military facilities have critically assumed from day one that
redevelopment tax increment would be an important component of any
implementation program.
In fact, the devastating original economic impact of closure and realignment of
former military bases in California since 1988, resulted in the State Legislature
adopting Chapter 4.5 (Sections 33492 through 33498.2 of the California
Redevelopment Law) to establish specific legislative relief and standards for
redevelopment areas created for former military bases recognizing the economic
impacts of base closures and realignments and the unique characteristics of former
military bases and intending to:
• Provide a means of mitigating the economic and social degradation
that is faced by communities, the jurisdictions of which provide
military bases that have been ordered to be closed and realigned
by the Federal Base Closure Commission.
• Enable redevelopment agencies to place in project area portions of
military bases that were previously developed, but that cannot be
utilized in their present condition because of, in whole or in part,
substandard infrastructure and buildings that do not meet state
building standards. It was not the intent of the Legislature.
• Declare that extraordinary measures must be taken to mitigate the
effects of the federal government's efforts to reduce the number of
military bases throughout the country.
Local governments and their private partners have poured millions of dollars in
investment into the community-based planning processes for these closed military
bases in the last few decades. The State's tax increment grab would deliver a
devastating blow, and possibly keep the lights out indefinitely for several of these
bases on the cusp of revitalization.
If the State inadvisably moves forward with this raid on local redevelopment funds,
former military bases, the former MCAS-Tustin included, within adopted
The Honorable Jerry Brown
February 1, 2011
Page 3
Redevelopment Project Areas should be specifically exempted so that these
economic engines under development can come online as soon as possible.
• Former military bases have unique challenges compared to more typical
urban infill redevelopment areas, requiring massive upfront construction of
new public infrastructure before any meaningful redevelopment can take
place.
• Former military bases also have a unique challenge related to economic
development. The loss of a military base generally represents an
enormous economic blow to the local and regional economy, and the goal
of military base redevelopment is to reverse that impact.
• These twin challenges of infrastructure and economic development have
generally led to the common employment of a model for redevelopment
that relies on bonding of 100% of the tax increment to carry out wholesale
improvements on the former bases.
• The fact that military base redevelopment areas generally bond 100% of
the available tax increment means that these areas do not have currently
available increment funds to pay to the State under the proposed
recapture provision.
• The Governor's budget proposal will affect military bases currently being
redeveloped, where bonding has already occurred, as well as military
bases currently in entitlement that expect to be underwritten and which
need additional bonding capacity as build-out occurs in the near future.
The lack of redevelopment tax increment will render many of the military
base redevelopment projects infeasible, and force their implementation to
be delayed significantly.
In addition, the proposal:
• Will not provide expected budget relief to the State or local governments after
bond issues and contractual obligations are repaid.
Redevelopment agencies issue bonds to finance redevelopment activities which
must be repaid with interest. Under State statutes and the constitution, these and
other contractual obligations must be met before revenues are made available to
any other entities or purposes.
• Will destroy billions of dollars in local economic activity and hundreds of
thousands of jobs at the worst possible time.
The Honorable Jerry Brown
February 1, 2011
Page 4
Eliminating redevelopment will have a direct and lasting negative effect on the
California and Tustin local economies and job creation.
o Redevelopment activities support an average of 304,000 full and part-time
private sector jobs in a typical year, including 170,600 construction jobs.
o Redevelopment contributes over $40 billion annually to California's economy
in the generation of goods and services, including increasing the State's
construction sector output by about $19 billion.
o Redevelopment construction activities generate $2 billion in State and local
taxes in a typical year.
Since 1994, the Tustin Community Redevelopment Agency has generated over
$218 million dollars of building valuation and created over 5,810 permanent jobs in
its South Central Project and Town Center Redevelopment Project Areas. Major
public infrastructure and community facility projects that could not have been
completed without redevelopment resources have included the following:
o Tustin Water Yard and new Water Reservoir
o Tustin Library-a new 32,000 square foot facility
o Tustin City Hall and Police Department Headquarters
o Irvine Boulevard/Newport Avenue major arterial roadway intersection
enhancements
o Major lighting, traffic controls, and storm drains have been installed and/or
upgraded, utilities have been upgraded and placed underground and street
and alley reconstruction projects completed throughout each project area.
o Tustin Family and Youth Center
o Newport Avenue/State Route 55 Northbound Ramp Reconfiguration project
(Phase 1 alone was in excess of $100 million) and Del Amo Avenue
realignment.
The development of the former MCAS-Tustin represents one of the largest
development projects in Southern California. Upon completion, this master planned
community proposes to create over 4,210 dwelling units in Tustin, of which 1,131
units will be for affordable and homeless households, over 200 acres of open space
and parkland, and up to 6.7 million square feet of private commercial development.
Our plan also estimates generation of approximately 24,000 permanent new jobs
and up to 32,700 temporary construction jobs at build-out.
The Honorable Jerry Brown
February 1, 2011
Page 5
Over 1,680 dwelling units have already been built within Tustin at the former MCAS-
Tustin as well as over 1 million square feet of retail space representing over $1.1
billion dollars of valuation. In addition, over $130 million of basic backbone
infrastructure and related capital improvements such as roads, storm drains, traffic
controls, and utilities have been installed to support urban development. An
additional $300 million in infrastructure is in the design phase. Over 2,780 new
permanent jobs and 4,150 temporary construction jobs have been generated at the
former MCAS-Tustin, largely as a result of the Agency's activities over the last 9
years. This early development activity could not have been possible without
redevelopment funds.
• Will kill the State's leading program to provide affordable housing.
After the federal government, over 98,000 units of affordable housing have been
constructed or rehabilitated in the State since 1993. Twenty percent of property tax
increment generated from redevelopment must be spent on affordable housing.
Tustin alone has created over 890 affordable rental units (including the 153 Coventry
Court project at Tustin Legacy currently under construction) and 305 affordable
ownership units.
• Will harm our efforts to grow responsibly by focusing on urban and infill
development and compliance requirements of SB 375, without any relief or
financial resources to guide compliance activities.
Redevelopment funds are locally generated property tax dollars (agencies don't
receive State funding) directed toward community projects and programs by locally-
elected officials with input from citizens. The proposal wipes out the only tool that
local governments have to drive economic growth, build up tax revenues and grow
sustainably. Giving local communities the right to impose additional taxes to support
economic development is completely contrary to the whole purpose of economic
development which is to attract jobs and build affordable housing.
The City of Tustin believes it is unwise, in general, to sacrifice future economic
development in the State by paying the State's immediate obligations with
redevelopment funds. Therefore, the City will strongly oppose any effort to eliminate
redevelopment in our community and urges you to reconsider your proposal. It is
particularly onerous for the State to take those funds critical to military base reuse
projects. Without redevelopment funds, there will simply be no way to fund the many
public subsidies needed to make our reuse plan a reality, particularly funds needed for
The Honorable Jerry Brown
February 1, 2011
Page 6
rebuilding infrastructure, cleaning up contaminated areas, and preparing sites for
affordable housing and job generating uses. Any redevelopment project areas which
include a former closed military bases should not be included in any redevelopment
elimination proposal.
Sincerely,
Jerry Amante
Mayor
cc: California Redevelopment Association
League of California Cities
David Biggs, City Manager
Christine Shingleton, Assistant City Manager