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Governor Schwarzenegger?s proposed California state budget includes $3.1 billion in health and human services program spending cuts to help overcome the state's $15 billion shortfall. Compared to the 2003-2004 budget, this proposal relies much more heavily on borrowing, less on spending cuts and includes no tax increases. Although the proposal moderately increases overall health spending, key programs would be sharply cut back. The legislature is not likely to approve all the proposed cuts.
This survey is the third covering the ongoing California budget crisis, and covers the beginning of Arnold Schwarzenegger's tenure as governor and the development and introduction of his 2004-2005
budget proposal. This proposal is now being debated and amended in the state legislature, and will assume its final form and be signed into law by July 1, 2004.
Governor Arnold Schwarzenegger's proposed state budget calls for $3.1 billion in spending cuts from state health and human services (HHS) programs to help balance the budget and overcome a 15 billion dollar state deficit (1) in fiscal year 2004-2005. More than a third of these cuts ($1.1 billion) come from the state's Medi-Cal program, which provides free medical insurance to the needy. Specific proposed HHS cuts include reductions in Medi-Cal provider reimbursement rates, enrollment caps on various state health programs (this portion of the proposal has already been rejected by the state legislature), establishment of higher premiums and/or co pays on selected state health programs, eliminating several preventative and public health programs, assumed savings from unspecified future reform-based solutions, and other program reductions. Affected by the cuts to state health services will be low-income children and adults, elderly and disabled individuals, health care providers, hospitals and health care centers.
As compared to the budget from FY 2003-2004 developed under former governor Gray Davis, the proposed 2004-2005 budget relies much more heavily on borrowing, less on spending cuts and included no tax increases. Although the proposed budget calls for an approximately 5.5% increase in aggregate spending on HHS, many health programs would be hit hard by the proposed spending cuts (19.4% of the budget's total proposed spending cuts come from HHS programs). A reliance on borrowing and one-time solutions allows the governor's proposal to balance the budget without raising taxes and with fewer painful spending cuts than the previous year.
However, the proposal fails to address the underlying structural gap between state revenues and expenditures. This failure to solve the structural gap means that the state will continue to face large budget deficits in the years ahead, and that the health budget will continue to face uncertainty and likely deeper cuts in the years to come. Today's cuts in preventative health services will almost surely mean higher health care costs in the future, an expense that the already stressed health budget will be ill-equipped to handle.
(1) Subsequent estimates of the state deficit that include shortfalls from the current year have put the current deficit at 17 billion. Numbers from the California Budget Project and the Legislative Analysts Office. The California Health Care Foundation, using a different calculation method, puts the state deficit at 26 billion.
Overcome the state of California's accumulated budget deficit and produce a balanced 2004-2005 budget without increasing taxes. Survey specifically focuses on cuts to health programs to help achieve this goal.
State must balance its budget in order to pay its bills. State law requires a balanced budget by June 30 or the legislature may not go into recess.
Low-income children and adults, elderly and disabled individuals,, Health care providers, hospitals/health care centers.
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In November of 2003 Arnold Schwarzenegger's new Republican administration replaced Democrat Gray Davis after an unprecedented "recall" election dominated by the state
budget crisis. The incoming administration inherited a state budget that, despite a long and bitter budget battle the previous budget cycle, remained drastically out of balance. The magnitude
and nature of the state's fiscal problems at the outset of the Schwarzenegger administration set the stage for the governor's eventual budget proposal for 2004-2005. Before releasing his
proposal to solve this budget shortfall, however, the new governor took two steps which changed the background conditions: He rescinded the Vehicle License Fee increase, which meant the state had to
compensate cities and counties for the $4.2 billion in lost revenue, and he asked voters to approve a $15 billion "deficit recovery" bond to be issued by the state to cover accumulated debt and
The magnitude and nature of the budget deficit meant that the governor's options for balancing the 2004-2005 budget were limited. When he assumed office in November, the governor was faced with an approximately 26 billion-dollar budget shortfall due to accumulated debt and an ongoing structural gap between state revenue and expenditures. This structural gap arose when state revenue tax revenue, especially those associated with stock options and capital gains, plunged sharply after the dot-com bust and the post 9/11 national economic downturn that began in 2001. Contributing to the revenue shortfall was the fact that the state had cut taxes significantly throughout the boom of the 1990's, (returning much of the excess revenue to the taxpayers rather than putting it in a reserve), leaving the state's tax rate was very low by 2001. A further loss of revenue came when the federal government also began phasing out the estate tax, which had been shared by the federal and state governments.
During the prosperous 1990s, when Californians were earning and spending more, state revenue (even with the lower tax rates) could keep pace with state expenditures as spending increased due to population growth, inflation and rising program costs. Spending on health programs grew significantly due to expanded enrollment eligibility and rising health care costs, driven in large part by prescription drug spending. When the economy crashed, state revenues dropped well below state expenditures. This structural imbalance left state lawmakers with two politically unpopular choices: raise state taxes on people already suffering from the economic crisis, or cut state spending on established social programs, which become increasingly relied upon in a weak economy. Because program cuts and tax increases are both politically unpopular and highly contentious, lawmakers often also turn to borrowing and one-time solutions to put off making the difficult political choices required to bring revenues and expenditures into balance.
Before trying to balance the state budget, the incoming governor, as one of his first executive acts, revoked the Vehicle License Fee (VLF). In so doing, Schwarzenegger made good on a campaign promise and also increased state financial obligations by approximately $4.2 billion for the coming fiscal year (the VLF is earmarked for county and city governments, so the state must reimburse them for $4.2 billion in lost revenue).
Based on the results of an independent audit commissioned by the administration, the governor then asked the legislature approve and to place on the ballot before the voters a $15 billion dollar "fiscal recovery" bond. The bond was to be issued by the state and used to retire the state deficit for the medium term in order to give the state time to "get its fiscal house in order". Because they require repayment over a long period, bonds are generally only issued to support durable projects. However, the Governor was able to convince the democrat-controlled legislature to agree to the fiscal recovery bonds, and the bond issue was placed before voters as two companion measures on the March primary election ballot. The two measures covered the bond legislation, along with an accompanying measure to amend the state constitution to allow the state to issue bonds to cover operating expenses (a $10 billion dollar bond approved by the 2003-4 legislature to cover state deficit costs is being challenged in court on the grounds that it is unconstitutional. The governor's 15 billion dollar bond will replace this $10 billion dollar one). The governor's 2004-5 budget proposal, released in January 2004, assumed (ultimately correctly) that voters would pass the ballot measures.
The assumed available state funds from the sale of the bonds enabled the governor to balance the budget for 2004-2005 (including reimbursing counties for the lost VLF monies) without raising taxes and with fewer program cuts than would otherwise have been possible
 In October 2003, California conducted the first recall election in the state's history, removing sitting governor Gray Davis in the first year of his term, and replacing him with candidate Arnold Schwarzenegger.
Arnold Schwarzenegger?s new Republican administration replaced Democrat Gray Davis in November 2003 after an unprecedented ?recall? election dominated by the state budget crisis
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The 2004-2005 budget proposal, introduced in January by the Governor with the assistance of the Department of Finance, was driven in large part by the magnitude of the state deficit (accumulated
and current-year debt). The array of options available to the governor to bring state revenues and expenditures into balance was limited for a number of reasons:
1.) The governor had made Campaign promises to avoid raising taxes
2.) Various pressures to avoid deep spending cuts, especially in education and to local governments (including campaign promises, lobbying by affected groups and the fact that the legislature was controlled by democrats)
To help him determine the magnitude of the fiscal problems facing the state, and to decide how to solve them given the constraints named above, the governor brought in an independent consultant with a long history of helping governor's slash state spending and balance budgets without raising taxes. Together, the governor and the department of finance (lead by the budget consultant) were able to craft a budget that used extensive borrowing, cost shifts, and other tools to balance the budget without raising taxes and with fewer spending reductions than the previous year.
During the course of the 2003 recall election campaign, Schwarzenegger promised to balance the budget without raising taxes, in keeping with his pro-business, anti-big government stance. This meant that increasing state revenue through tax increases was not an option.
The governor's power to balance the budget through unpopular spending cuts was also somewhat constrained, however. First, Schwarzenegger also promised during his campaign to avoid, if possible, painful cuts to education and local government funding. Second, The governor knew that democrats, who traditionally oppose spending cuts in social programs, controlled the state legislature. Third, state spending cuts for federally sponsored health and human services programs such as Medi-Cal and Healthy Families mean the loss of federal matching fund. Because the traditional methods of bringing revenues and expenditures into balance (raising taxes or cutting spending) were to a greater or lesser degree unavailable, the governor had to look for other ways to balance the budget.
Immediately upon election in October, Schwarzenegger brought in a consultant to conduct an audit of the state's finances and to provide suggestions for balancing the budget without raising taxes and to look for areas of waste where cuts could be made without (to the extent possible) breaking campaign promises or angering the democrat-controlled legislature. The consultant was Donna Arduin, a budget specialist who has worked with republican governors from New York, Michigan, and most recently Florida. Ms. Arduin, (who was appointed as the state's director of finance when Schwarzenegger was inaugurated) has a reputation as a strong fiscal conservative who has helped governors craft state budgets that slash both taxes and state spending.
Ms. Arduin's audit began in October, immediately after Schwarzenegger won the recall election. The preliminary results of the audit, released just before the governor was inaugurated in November, concluded that the state was in worse financial shape than the governor had originally thought and that state overspending was the root cause.
Once he was inaugurated, the governor used the preliminary findings from the audit, suggestions from Ms. Arduin (who had been appointed Director of the Department of Finance (DOF)) and figures from the DOF to generate a list of proposed mid-year spending reductions. The legislature did not act on these spending reductions, however, they were reborn essentially intact as the spending reductions in the 2004-2005 budget proposal.
When it was released in January, the Governor's 2004-2005 budget proposal made good on campaign promises to balance the budget without raising taxes, using instead borrowing, spending reductions, cost transfers and accounting shifts, and fee increases and increases in other revenues to produce $16 billion dollars worth of "solutions" to balance the budget.
Central to these "solutions" was the assumption, (ultimately correct) that voters would approve the $15 bond measure, allowing the state to generate $12.3 billion in additional revenues. This bond revenue would be used to pay for the approximately $9.2 billion dollar budget shortfall from the 2002-2003 budget cycle. Approximately $1.9 billion additional dollars would be used to pay for employee retirement contributions instead of issuing the pension obligation bonds that were part of the 2003-2004 final budget). The remainder would pay for operating expenses in 2003-4 and 2004-5, including funds for loan repayment, employee compensation and contributions to the state reserve fund.
An additional $5.9 billion worth of the 2004-2005 "solutions" came from spending cuts in state programs. 19.4% of the proposed cuts come from health and human services programs, including $1.1 billion in cuts from Medi-Cal, the state's Medicaid program, which will translate into lost federal matching funds for the state.
Many of these proposed cuts were proposed as part of last year's budget, or have been tried in other states. The 2003-4 budget included a 5% cut in reimbursement rates for Medi-Cal providers; however, a federal court blocked these cuts, saying it would unfairly restrict access because fewer doctors would be willing to see Medi-Cal patients. Several other states, including Florida and Illinois, have imposed enrollment caps on social programs, and nearly all have resulted in long waiting lists, are expensive to administer, and have generated variable cost savings.
Nearly every constituent group is affected by the overall budgeting processes, but the principle stakeholders in the health care budget debate include seniors, the disabled, and low income or
medically needy recipients of state health services, immigrants, persons living with HIV and AIDS, health care providers for Medi-Cal and in long-term care facilities, taxpayers present and future,
and the Governor himself.
None of the groups have accepted the proposal as final, and will continue to fight cuts throughout the budget process. Indeed, some of these groups have already had some success pressuring the legislative subcommittee's on health to reject some provisions, notably, helping to convince the subcommittee's to reject the proposed enrollment caps on health programs.
A number of non-partisan groups have produced analyses of the budget, including the California Budget Project and the California Health Care Foundation, which express concern over the effects of the governor's proposed cuts in health and human services programs.
The Legislative Analyst's Office has also produced an extensive analysis, along with alternative solutions.
Stakeholder positions are sketched below:
won the recall election on promises that he would balance the budget without raising taxes. Although the legislature may reject many of his spending cuts, the governor will use his considerable political muscle (and his veto power) to pressure lawmakers to find alternative spending reductions or revenue increases that do not involve increasing taxes.
After the governor's proposal was introduced in January 2004, it was turned into a legislative budget bill, and introduced simultaneously into the state senate and the state assembly. In
each house it will be reviewed and amended by the senate budget committee and the various budget subcommittees, which consider specific areas such as health. In the coming months, the senate
and the assembly will vote on versions of the budget bill, a joint committee will work with the governor to reconcile the two versions, and the joint version will be reintroduced in the two houses
for a second vote. At that time, "trailer bills", or those laws that will be necessary to enact the budget, will also be drafted and passed. Finally, by June 15, the Legislature is
constitutionally obligated to sign and pass on to the governor a final version of the budget. The governor then has until June 30 to veto or sign the budget (in recent years, these dates have
often been missed).
Until the January release, the process of constructing the budget was mainly internal - the governor's department of finance, lead by Ms. Arduin, developed a comprehensive fiscal picture for the state based on the audit, consider the written requests for spending changes (to accommodate new programs, changing caseloads, etc.) from each of the state's nearly 200 departments, and the governor and his advisors review all of this information and use it to craft the budget proposal. Ordinarily, this budget process (which is similar each year) begins the April before the January release date. However, because Schwarzenegger did not take office until mid November, this administration's budget process has been somewhat abbreviated.
In February, once the budget bills had been introduced into the legislature, the Legislative Analyst Office (LAO) prepares a comprehensive review of the entire proposal to guide lawmakers in their deliberations. The LAO is a state-funded, non-partisan research group that prepares policy and fiscal analysis on state legislation. This year, the LAO came up with state revenue numbers that were less optimistic than those prepared by the governor's department of finance, and expressed deep reservations about the feasibility of several of the governor's cost-cutting proposals. They recommended that the legislature reject the proposed enrollment caps, among other recommended changes, although they called the proposal a good place to start.
In May, the Department of Finance (DOF) will release revised revenue figures (the "May Revise"), based on the totaling of the April tax receipts (due to the unpredictable incomes of many of the state's largest taxpayers, expected and actual income tax receipts are often very different). Depending on the size of the DOF revisions, they my inspire the governor and the DOF to submit minor or major changes to the budget committees, and will also be considered by legislators as they debate the bill.
Lobbyists and advocates have a chance to weigh in on the budget proposal during subcommittee hearings. Legislators on the various budget subcommittees will also have to power to introduce and lobby for amendments to the budget before it is called to a vote. Although the legislature and the heads of the budget subcommittees are firmly controlled by democrats (who are traditionally more inclined to support of health and human services programs), the final budget requires a 2/3 vote, meaning that budget proposals will also have to appeal to republican lawmakers (who traditionally advocate for smaller government and tax cuts, and therefore are less willing to advocate for human services programs).
Finally, with his personal political muscle and his ultimate veto power, the governor, with his opposition to new taxes, will likely resist any attempts to levy further revenue for the state through taxation.
Once it is adopted in the end of June, the 2004-5 budget will affect every one of the nearly 200 state departments and agencies. However, before it is adopted, it will undergo months of
debate and modification within the legislature. Focusing on health care, it is the health and human services committees that will oversee most of the amendments to this area of the budget
(although the full house, and the governor, will need to accept or reject the changes). Democrats, who are likely to oppose spending cuts where possible, chair these committees. Lobbyists and
advocates for every group affected by the proposal are able to testify at these hearings and lobby legislators. The budget subcommittees on health in the state assembly and the senate have
already rejected the governor's proposed enrollment caps and the proposed re-structuring of the Healthy Families Program.
Extremely important in the deliberations is the LAO analysis of the governor's proposal, and their suggestions for revisions. After the May Revise tax revenue figures are in, the Department of Finance and the Governor will likely suggest further revisions to the proposal.
When the budget is ultimately approved in June, adoption will involved state and county administrative resources, health care providers and the California Department of Health and Human Services. As the final budget will become state law, departments have no choice but to comply.
The state department of finance will conduct an evaluation of the implementation of the state budget when it prepares its analysis for the budget for the next fiscal year. The legislative analyst's office will also look at Independent budget watchdog groups like the California Budget Project will also provide analysis of the budget and its implications, as will health policy groups like the Kaiser Family Foundation and the California health care foundation.
Although under the governor's 2004-2005 budget proposal aggregate health spending will increase by approximately 5%, many key health programs face deep cuts. These budget cuts are projected
to deepen in the next budget year, if program and eligibility reductions included in the budget are fully developed and implemented.
Analysts have expressed grave doubts about the fairness, wisdom and legality of the governor's proposed spending cuts in health programs, and also question the budget's heavy reliance on borrowing and future solutions. Even if fully enacted as proposed, the governor's proposal would still leave the state with a 7 billion dollar deficit in 2005-2006, and with an approximately $5 billion deficit through 2008-2009. State programs with the most at stake in the debate include Medi-Cal, Healthy Families, state health assistance programs for immigrants, persons with HIV/AIDS and others threatened with enrollment caps, and long-term care programs.
The budget debates in the democrat-controlled legislature promises to be a contentious one. Already, legislative budget subcommittees in the senate and the assembly have rejected the governor's proposed enrollment caps, and other cuts appear to be at risk of rejection.
The non-partisan Legislative analyst's office has proposed a number of alternative's to the governor's proposed spending and cost reductions in state health programs, including, for example: consolidating programs such as Medi-Cal and Healthy Families, providing coordinated care to the elderly and the disabled, shifting responsibility for health coverage for some beneficiaries to counties, increase premiums for Healthy Families program, dividing Medi-Cal eligible people into different categories with different benefit levels, and other proposals. Although it is too early to know if the legislature will incorporate these into the final budget plan, they illustrate the wide range of changes that the legislature could make to the governor's final proposal.
Under the governor's proposal, more than a third of the $3.1 billion in cuts to the department of Health and Human Services would come from Medi-Cal, the state's Medicaid program. Medi-Cal spending has increased substantially in the past 10 years, driven primarily by a 70% increase in cost of care (due in large part to increased spending on prescription drugs) and a 20% increase in enrollment (due to growing population and expanded eligibility). Today nearly one in five Californian's is covered by Medi-Cal, and caseloads are budgeted to continue to grow under the governor's proposal, rising to approximately 6.8 million people in 2004-2005. The rising costs of the program are of great concern to state officials; especially since federal Medicaid law requires the state to enroll all that are eligible.
The governor's proposal to cut spending for Medi-Cal called for enrollment caps for certain Medi-Cal beneficiaries (this proposal was rejected by the legislature), a 10% cut in reimbursement rates for Medi-Cal providers and for hospitalization costs, and $400 million in savings from unspecified reforms (likely eligibility and benefits reductions) in 2005-2006. When considering the impact of these spending cuts, it is also important to remember that when spending is reduced for federally sponsored programs like Medi-Cal and Healthy Families, the state loses the corresponding federal matching funds, magnifying the magnitude of the state budget cuts on the on program spending.
The cut in provider reimbursement rates is projected to save the state $462 million in 2004-2005. However, further reducing California's already low Medi-Cal physician reimbursement rates would reduce access to and quality of care for Medi-Cal recipients. Already, 56% of Medi-Cal beneficiaries report difficulties finding a nearby doctor who will accept Medi-Cal patients, and in urban areas there are just 46 primary care physicians per 100,000/population that accept Medi-Cal (the federal government recommends between 60 and 80/100,000 population; California overall has 70 physicians per 100,000/population). Reducing rates paid to providers would cause more doctors to limit or eliminate their Medi-Cal practice, making it even harder for Medi-Cal recipients to be seen.
Studies have also demonstrated that the rate at which doctors are paid influences the quality of care, further reason to assume that reducing provider reimbursement rates will negatively impact care. A federal court blocked last years attempted rate reduction on the grounds that it would unfairly limit access, and physicians have promised to challenge this further rate reduction if it goes through the legislature.
It is difficult to make a judgment about the $400 million in savings that are budgeted to result from unspecified reforms to Medi-Cal in 2005-2006, as the specifics of the reforms have not been announced. Several of the suggested reforms (e.g. imposing co-payments for Medi-Cal, reducing benefits, forcing people to join managed care plans, etc.) were proposed in some form during the 2003-2004 budget negotiations, and were rejected.
Any reforms would almost certainly be some combination of reduced benefits and enrollment eligibility, which would have the effect of reducing the number of Californians who have health insurance. The state already has one of the nation's highest rates of uninsured, a number that will grow. Higher numbers of uninsured mean more people will be forced to seek care from expensive emergency rooms or other acute care settings. The federal government must approve any major changes in Medi-Cal benefits or eligibility, and reductions in state Medi-Cal spending will reduce federal matching funds that are drawn down.
Another program targeted for cost-cutting reforms is Healthy Families, the state's child health insurance program. Proposed reforms, to be implemented in 2005-2006, would establish a two-tiered benefits structure, with higher co-pays for optional services like dental and vision for some beneficiaries. These reforms will increase administrative complexity (and presumably costs) and may result in declining enrollment.
Immigrants would be especially hard hit if the governor's proposal was enacted. Although proposed enrollment caps in Medi-Cal and Healthy Families for legal and illegal immigrants have been rejected by the legislature, the governor proposal to transfer funds for all health and social service programs for immigrants to the counties in the form of block grants remains under consideration. Advocates doubt that counties have the capacity to absorb these funds, and worry that the counties will have to cut services to pay for increased local administrative costs.
Long-term care services in California would also suffer under the governor's proposal, especially the state's In-Home Supportive Services (that allows many disabled beneficiaries to live independently instead of in care facilities), adult day health care programs, and nursing home staffing levels (due to cuts in the Wage Adjustment Program).
In sum, although the governor's proposal actually moderately increases spending for health in aggregate, many health programs have been sharply cut back, and deeper cuts are budgeted for the future. Many of the Governor's proposed spending cuts will be challenged in the legislature. Assuming the governor maintains his opposition to tax increases, however, even if certain of the governor's proposals are rejected, alternative cuts will have to be made in health programs. California state health programs should also expect further cuts in the coming years, as the yearly budget battles and state deficits continue, and the supply of short-term solutions grows smaller.
The Legislative Analysts Office: www.lao.ca.gov/
The Department of Finance: www.dof.ca.gov/HTML/BUD_DOCS/Bud_link.htm
The California Budget Project: www.cbp.org/
The California Health Care Foundation: www.chcf.org
Sarah Weston, Institute for Global Health, UCSF; Carol Medlin, Institute for Global Health, UCSF