Budget · Taxes · Work, Income & Poverty · Child Care & Preschool · Health & Human Services · Criminal Justice · January 5, 2016 · By Budget Center

Later this week, Governor Jerry Brown will release his proposed budget for 2016-17, the state fiscal year that begins this coming July 1. The Budget Center will put out our “first look” analysis in the days following the budget’s release, and we’ll provide in-depth research, analysis, and commentary throughout the budget deliberations and beyond. (In order to get our latest information, keep reading this blog and also sign up for our email updates if you haven’t already done so.)

As a way of highlighting some of the key issues that we expect to shape this year’s budget debate, here are five things that we’re looking for in the Governor’s proposal.

1. State Revenue Projections

The issue:

The Administration has underestimated state revenues by billions of dollars in each fiscal year since 2012-13, and so far 2015-16 (the current budget year) looks to be no exception. As of November 2015, revenues from the state’s “big three” taxes — personal income, corporate income, and sales taxes — were a combined $653 million above the Administration’s projections. Moreover, the nonpartisan Legislative Analyst’s Office (LAO) anticipates that for the entire 2015-16 fiscal year, “big three” General Fund revenues will turn out to be $3.6 billion higher than what was projected last summer in the enacted budget, which relied on the Governor’s revenue forecast. As we’ve discussed before, low projections have consequences. If a healthier, but still cautious, revenue stream is reasonably projected, state policymakers can use the additional funds to strike a better balance among building up the state’s reserves, allocating for one-time uses, and investing in Californians’ futures. Overly conservative revenue projections leave dollars on the table that could otherwise be invested in services that promote broader and sustainable economic growth.

We’re watching for: updated economic and revenue forecasts.

How will the Administration’s revenue projections compare to those from the LAO? What share of General Fund revenues will go toward fulfilling the Proposition 98 minimum school funding guarantee? How much will go toward meeting Proposition 2 rainy day fund and debt payment requirements? How much room will there be for other state priorities, including building back support for critical public services that are still operating at or not much above recession-era levels of funding?

2. The Pending Expiration of the Managed Care Organization (MCO) Tax

The issue:

A state tax on health plans that currently reduces — or “offsets” — state spending on Medi-Cal by $1.1 billion expires on July 1. Without an extension, the offset will end, leaving a $1 billion-plus General Fund shortfall in the 2016-17 state budget. Despite the high stakes, state policymakers and health plans have not been able to reach an agreement on extending this tax. This is partly because — due to new federal guidelines — the tax must be restructured in a way that will cause some MCOs to see a hit to their bottom lines. (Currently, MCOs are held harmless from the tax through a complex financing mechanism involving federal funds.) This financial impact has caused at least some health plans to oppose extending the tax.

We’re watching for: how Governor Brown will address the looming $1 billion-plus General Fund shortfall.

The Governor could try a “carrot” approach once again, calling on legislators to pass a revised MCO tax and pledging, in return, to support certain funding and policy changes for which lawmakers have been pressing. By assuming the MCO tax would be extended, the Governor would eliminate the $1 billion-plus funding gap, at least on paper. There’s also the “stick” approach — closing the shortfall with more than $1 billion in spending cuts aimed at putting maximum pressure on lawmakers in order to reach the two-thirds supermajorities needed to pass a new MCO tax. Finally, the Governor could simply give up on the MCO tax and fill the budget hole with General Fund dollars, adding more than $1 billion in new annual state spending obligations. This approach seems the least likely to win the Governor’s support.

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