Governor’s Budget Update: Health Costs Explode, Reserve Requirements Clamp Down

Loren Kaye
President of the California Foundation for Commerce and Education

The Governor yesterday doubled down on his pledge to reduce state debt while releasing his annual update of the proposed state budget.

While the Governor choked off requests for programmatic spending with one hand, by the other hand he doled out more than a billion dollars to cover rapid growth in the state’s health care program for the poor.

New revenues continue to roll into state coffers – adding another $2.4 billion to an already flush budget, mostly from higher income taxpayers. But rather than spending the new taxes on new programs, the Governor has limited his largesse to paying current obligations and clearing out old debts. He also warned that the economic recovery will, some day, run out of gas.

The biggest revelation was the acceleration of the state’s single most expensive outlay – the Medi-Cal program providing health care for poor Californians. The Governor announced that the optional expansion of this program under the Affordable Care Act has resulted in a stunning increase of more than a million additional people with coverage under Covered California (the state’s Exchange provider) and Medi-Cal, combined.

According to the Administration, Medi-Cal will enroll 11.5 million residents in 2014-15 – or about three in ten Californians. Even though the federal government will pay for most of the costs of newly-eligible enrollees, about 800,000 Californians have enrolled in Medi-Cal under the old rules (they had been eligible all along), meaning California is on the hook for about $1.2 billion in new spending on Medi-Cal.

For legislative Democrats and interest group advocates who eye the windfall revenues for more programs and services for California – this is where the money goes.

At the same time, the Governor was steadfast in his commitment to pay down state budgetary debt and build up the rainy day reserve.

The Administration proposes paying down slightly more budgetary debt than originally planned, and remained insistent on setting aside three percent of revenues from spending – half of the $3.2 billion will remain in the budget reserve and half will be used to pay off the ten-year-old general obligation budget debt.

The Governor, with the assent of Legislative leadership, hopes to institutionalize this behavior by presenting a Rainy Day Reserve proposal to voters in November. Strengthened through negotiations with Republican leaders, this proposal would make deposits into the reserve whenever capital gains revenues rise above eight percent of general tax revenues. In addition, 1.5% of revenues would be automatically set aside into the reserve each year. For the next 15 years, half of each year’s deposits would be kept in reserve and half would be used to further reduce budget debt or other long-term liabilities, like unfunded pension or health care liabilities. From 2030 on, the entire amount would be kept in reserve. Funds could be withdrawn from the reserve only for emergencies or if the economy takes a downturn.

Finally, the most welcome news from the May Revision was the Administration’s long-awaited and specific proposal to address the unfunded liability in the State Teachers Retirement System – estimated at $74.4 billion.

The Governor proposes to phase in a three-way increase in contributions to stabilize and reduce this liability over 30 years. Under the plan, teachers’ contributions would increase from eight percent to 10.25% of pay; school contributions would increase from 8.25% to 19.1% of payroll, and the state would pay 6.3% of payroll, up from three percent today, for a grand total of contributions of more than 35% of payroll. Sticker shock? Maybe, but this is what happens when a problem is ignored for too many years.

The Legislature must approve the budget proposal by June 15.

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