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Realignment Funding 101

Realignment Funding 101. A presentation for the California Association of Public Authorities by Karen Keeslar July 26, 2006. This Presentation Will Cover:. The Road to Realignment IHSS Funding Prior to Realignment IHSS Budget Situation in 1991 California Fiscal Situation in 1991

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Realignment Funding 101

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  1. Realignment Funding 101 A presentation for the California Association of Public Authorities by Karen Keeslar July 26, 2006

  2. This Presentation Will Cover: • The Road to Realignment • IHSS Funding Prior to Realignment • IHSS Budget Situation in 1991 • California Fiscal Situation in 1991 • The Original Realignment Proposal • LAO Principles for Realignment • CSAC Principles for Realignment • Legislative Principles for Realignment

  3. Realignment Adopted • Programs Transferred • County Share-of-Cost Changes • New Revenues & Expenditures • The Realignment Maze • Original Concept • Local Revenue Fund • County Local Health & Welfare Trust Fund • County Matching Requirements • Netting • Base Allocations, Growth Accounts & the Caseload Subaccount

  4. Transfers Between Accounts • Poison Pills • Proposed Constitutional Amendment • IHSS Realignment Negotiations • Final IHSS Realignment Changes • PCSP & Enactment of Public Authority Statutes • Realignment Legislative History

  5. The Road to Realignment Began… • On June 6, 1978, with the passage of Proposition 13, which: • Limited general property tax rate to 1 percent and limited increases in assessed value after property is bought or constructed. • Made the legislature responsible for dividing property tax among local entities. • Established requirement of two-third vote for Legislature to increase taxes. • Established requirement of two-third voter approval for new local special taxes. By the end of the 1980’s many counties were on the verge of fiscal collapse.

  6. Counties on the Fiscal Fault Line • The 1990/91 state budget hit the counties hard – totaling more than $781 million: • $175 million cut from county health funding • $75.5 million cut from county mental health funding • $101 million cut from county administered programs for welfare recipients (the old GAIN program) • $60.7 million cut from Trial Court Funding • $54.8 million cut from Child Welfare Services

  7. IHSS Funding Prior to Realignment The January 1991/92 state budget proposed $747 million in expenditures for IHSS. • This included an increase of $71 million, or ten percent, above the estimated IHSS expenditures for 1990/91. • IHSS expenditures grew at a rapid pace through the 1980’s. • Increased costs were attributed to: • An increase in the minimum wage from $3.72 to $4.25 per hour. • Increases in both caseload and average hours per case. • Increased costs of workers’ compensation (these costs grew by 41% in one year.)

  8. SB 412 Changes in IHSS Funding • The county share-of-cost for IHSS was frozen with the enactment of SB 412 (Chapter 1438, Statutes of 1987) at the 1987/88 level of $19.257 million. • SB 412 required the state to cover any IHSS shortfall through a state budget deficiency appropriation. • The measure eliminated counties’ authority to reduce the level of IHSS services if their State appropriation was insufficient to cover program costs.

  9. The IHSS Budget Situation in 1991 Governor Wilson’s January 1991 proposed state budget revealed that the IHSS program would be facing a deficiency in FY 91/92.

  10. The Governor’s IHSS Budget Proposal for FY 91/92 Governor Wilson’s Budget Summary for FY 91/92 indicated that the Administration would propose legislation to cap IHSS expenditures at the annual Budget Act appropriation for the program. • The proposed legislation would allow counties to reduce services to recipients on a priority basis when anticipated expenditures exceed the annual IHSS appropriation. This is similar to the legislation adopted in 1981 (SB 633, Chapter 69, Statutes of 1981) which capped IHSS expenditures at the Budget Act appropriation and permitted counties to make program reductions in the following priority order: • Reduce the frequency of nonessential services. • Eliminate nonessential services • Terminate or deny eligibility to individuals requiring only domestic services. • Terminate or deny eligibility to persons who would not require institutionalization in the absence of services • Reduce, on a per capita basis, the cost of services authorized.

  11. California Fiscal Situation in 1991 • As a result of a national recession, California faced the worse budget shortfall in our state’s history. • The January 1991 budget deficit was estimated to be $7 billion. • In late March 1991, Governor Wilson announced that the projected deficit had grown to $12.6 billion. • The May Revision to the budget estimated the shortfall to be $14.3 billion. • Thus, in crafting a state budget for 1991-92, the Legislature and the administration faced a budget funding gap equivalent to one-third of the state’s General Fund workload budget.

  12. The Original 1991 Realignment Proposal • Governor Wilson’s January ’91 budget proposed to transfer funding responsibility for three existing programs and provide the counties with a revenue source: • $942 million in State funding would be eliminated for: • County Mental Health programs • AB 8 County Health Services • Local Health Services • County revenues would be increased by $942 million through an increase in state-levied alcohol taxes and Vehicle License Fees (VLF.

  13. LAO Analysis: The State/County Partnership • In February 1991, the LAO released their analysis of Governor Wilson’s realignment proposal. The LAO provided the first set of principles to consider in reform of the state/county relationship: • Determine who will exercise program control • Link program control and funding • Pay attention to incentives • Cost cost-effectiveness • Address physical capacity • Provide for fiscal capacity

  14. CSAC Realignment Principles CSAC worked with CAOs and county affiliates and adopted twelve realignment principles on March 27, 1991. • Any transfer or program realignment proposal should be designed to help both the state and counties maximize their service delivery responsibilities and solve their cyclical and structural budget crises; • The revenues projected in the base year should be a least as great as the state’s expenditures for the programs transferred and cover both direct and indirect costs. • The revenue provided for program transfers must have a growth rate equal to or greater than the anticipated growth in the transferred programs. If the revenue growth in uncertain, there should be a “trigger” mechanism to ensure that program expenditure growth does not exceed available designated revenues.

  15. 4. Counties and the state should jointly develop program eligibility guidelines and scope of services which can be supported by the designated revenues in order to provide a minimum level of services among all counties. • The designated revenue sources provided for program transfers must be levied statewide and allocated on the basis of programs transferred. Any excess funding from the designated revenue source in the base year, and any subsequent growth in revenue sources, shall be allocated in a matter which strives to achieve equity funding among counties (equity to be defined). The designated revenue sources may require implementation by county governing boards. These designated revenue sources shall not require a local vote. • The state’s responsibilities for a county maintenance of effort, in any given year, must be limited to the amount of state dollars expended for the program in that year.

  16. Federal maintenance of efforts should remain the responsibility of the state. • Counties must have the flexibility to manage the programs within the revenue base made available. • County and state overhead costs should be reduced and minimized in order to allow more dollars to be spent on services. • In addition to designated state-revenue to funds program transfers, counties should be given flexibility to raise local revenues for local discretionary use. • There should be protection against the state being able to add requirements in future years, without adequate funds, to those programs which have been transferred. • Programs should be transferred to counties in a manner which allows counties to maintain or maximize federal dollar contributions.

  17. The Legislature’s Realignment Principles adopted April 25, 1991 • Realignment should assure continued receipt of federal funds and should allow the State to obtain additional federal funds where available. • Counties should have appropriate fiscal incentives to service clients in a programmatically appropriate manner. • Realignment should assure that the State does not assume financial responsibility for clients transferred by counties to other state programs. • Small rural counties’ fiscal exposure should be minimized. These counties should be authorized to contract with the state or establish risk pools.

  18. State Administrative responsibilities should be limited to the development and oversight of guidelines regarding program performance outcomes. This should include uniform, simplified, and consolidated data reporting requirements. Counties, by approval of the Boards of Supervisors representing a majority of counties and a majority of the population, shall adopt standards for eligibility and the scope of services which will provide for a minimum level of services among all counties. • Individual counties should have sufficient flexibility to broaden eligibility and/or determine additional benefit levels by action of the Board of Supervisors. • Funds provided for Realignment shall be dedicated to health and welfare programs.

  19. Realignment should minimize State exposure to existing and future mandate claims. • Counties should have sufficient fiscal capacity, through new revenues and/or new revenue authority, to assume program responsibilities from the State. • In the first year, individual counties should be held harmless from net reductions. Future growth in new county revenues may be used to address equity issues.

  20. AB 758 AB 948 AB 1288 Realignment Adopted The Legislature adopted significant changes to the State/County relationship with a realignment package that was significantly expanded from the original proposal by Governor Wilson. The realignment passed by the Legislature included three major components: • Program transfers from the state to the counties • Changes in state/county cost-sharing ratios for certain social services and health programs, and • An increase in the state sales tax and the VLF earmarked for supporting the increased financial obligations of counties.

  21. New Revenues & Expenditures Estimated New County Expenditures For program transfers & changes in sharing ratios. $2,212 billion Estimated Additional Revenues to Counties • State Sales Tax = $1,422 billion • Vehicle License Fee = $769 million

  22. Understanding the Realignment Maze The process of developing the legislation was complex due to: • the nature of the state/county relationship, • extreme cash flow problems at both the state and county level, • the intricacy of creating new deposits of realignment revenues, • the challenge of creating transfer authority that would not jeopardize federal funds, • ensuring accountability for the state’s Local Revenue Fund and the counties’ Health & Welfare Trust Fund. The realignment structure is a complicated maze of accounts and subaccounts – each with their own underlying complexity.

  23. The original concept

  24. The State’s Local Revenue Fund Accounts and Subaccounts per AB 1288

  25. Mental Health Social Services Health The County’s Local Health & Welfare Trust Fund • As a condition of receiving realignment revenues, each county is required to establish a Local Health & Welfare Trust Fund with three accounts.(Welfare & Institutions Code 17600.10) • AB 1288 mandates that realignment revenues can only be used for indigent health, mental health, social services, and juvenile justice programs. (Welfare & Institutions Code 17609)

  26. The mandated Hard-Dollar Match was $1.1 billion The Original County Matching Requirements – Problems with AB 1288 • AB 1288 required counties to make specific deposits of revenues into the Local Health & Welfare Trust Fund even if counties has not actually received these revenues from the State. The AB 1288 statutes were enacted in expectation that counties would receive an even distribution of realignment revenues on a month-to-month basis. The requirements of AB 1288 immediately created problems for counties. • PROBLEM #1: The estimates were based on a full year of the new revenues from increased Sales Tax and VLF. • PROBLEM #2: The recession continued to impact the economy and actual receipts were much lower than the original estimates for the two revenue sources.

  27. AB 1491 Solved Some Problems SOLUTION: Enactment of AB 1491 (Chapter 611, Statutes of 1991) corrected the situation by specifying that counties must deposit realignment revenue as the funds are actually received by counties from the State. Another important provisions of AB 1491: • The allocation schedules for each account within the State’s Local Revenue Fund was modified following input from the counties in order to correctly establish health, mental health & social service “base” allocations. • Allowed counties to use the portion of realignment revenues originally attributed to the “Stabilization Fund” for discretionary (non-realignment) expenditures. The Stabilization Funds were $15 million per year for specified counties and those funds were folded into the distribution of funds from the Social Services Account. (County Stabilization Funds were established pursuant to Government Code 16265 through 16265.7)

  28. Understanding the Social Services Account – Description of “Netting” The Social Services Account is a “netted” account. • This captures information about new program savings that were attributed to reducing the county share-of-cost for realigned programs, as well as • New or increased county shares-of cost that were established by realignment.

  29. How “Netting” Impacts County Funding for IHSS The statutory realignment base is $2,212 billion, divided between the three subaccounts, as displayed. The Social Services Subaccount Base is $522.4 million. That means that realignment funds from the Social Services Account pays for the “net” new cost to counties for IHSS of $233,134,462. NOTE: Values are from FY 91/92

  30. The Personal Care Services Program (PCSP) was implemented on April 1, 1993, which added the new federal revenues to the IHSS program for the last quarter of fiscal year 1992/93 and for each full fiscal year thereafter. The county savings from PCSP are further “netted” to determine the actual county share-of-cost funded from the realignment. PCSP Revenues Further Complicated the “Netting” of IHSS Original IHSS County Cost Under Realignment $252,391,067 Minus pre-realignment County IHSS Share $19,256,605 Minus County Savings from PCSP Revenues $72,987,034 "Net" IHSS County Share of Cost Funded by Realignment $160,147,428

  31. Realignment Shortfall (In Millions) • When AB 1288 was enacted, the VLF and sales tax increases were projected to raise $2,212 billion – which would have fully offset anticipated county costs under realignment for 91/92 and generated growth revenues to begin making “equity payments” in subsequent years. • Due to the lingering recession, actual realignment revenues fell $245.43 million below the original 91/92 estimates.

  32. The Old Definition of County “Base” Allocations The 1991 realignment legislation established each county’s share of the amount of revenues collected in the current year as the county’s “base” allocation. • All revenues in excess of this amount would be deposited in the Sales Tax Growth Account and VLF Growth Account and then distributed to counties according to the legislation’s growth allocation provisions. • Given that realignment revenues fell substantially short of the projected base amounts, every county would have sustained a permanent cut in health and mental health programs. • As a result of the “base” definition, realignment “growth” revenues would be allocated according to equity and general growth provisions. While some counties would receive enough money from those subaccounts to restore full funding to their local realignment accounts, others would suffer a permanent reduction.

  33. Passage of SB 463 Changes Realignment Structure With the passage of SB 463 (Chapter 100, Statutes of 1993), a process was established for counties to receive realignment growth revenues to restore the full $2,212 billion base as originally estimated in 1991. • Basic Conditions of Growth Allocations: • Growth funds are distributed when the total amount of funds available for distribution in a fiscal year is greater than the amount of funds available for distribution in the prior fiscal year. • Growth funds are considered “growth funds” for only one fiscal year. • Growth funds allocated in a fiscal year are folded into the base allocation for each funded account in the subsequent fiscal year.

  34. The new “Base” Definition SB 463 established each county’s base as being their original share of the estimated $2,212 billion in realignment revenues. • Each county’s base amount then changes each year to reflect new realignment revenues from each of the Growth Subaccounts. • Hence, a county’s total realignment allocation for each year equals the prior year “base” allocation plus all funds received from the Growth Subaccounts. • A new county “base” amount is changed with every year’s distribution of Growth Subaccount Revenues.

  35. SB 463 Realignment Structure

  36. SB 463 Allocations of Growth Revenues After fully funding the Caseload Subaccount, any remaining funds in the Sales Tax Growth Accounts and all VLF Growth Funds are allocated to specified subaccounts. • Allocations to these subaccounts are not permitted until the prior year base allocations and Caseload Subaccounts are fully paid. • Funds owed to the Caseload Subaccount can carry over from year-to-year building obligations for Growth Fund distributions that deny growth revenues from going into Health and Mental Health.

  37. The Caseload Subaccount The Caseload Subaccount has the first draw on Sales Tax Growth Account revenues and provides funds to repay counties for the net changes in cost-sharing ratios for: • CalWorks • IHSS • CCS • Adoptions Assistance • Foster Care The payments from the Caseload Subaccount are calculated based on annual changes in caseload costs and made a year in arrears. The payments to each county are the net of all changes in caseload costs when compared to their costs under pre-realignment cost-sharing ratios. • CSAC reports that counties are currently owed $169.2 million for 2003-04 and 2004-05 for social services caseload growth.

  38. Health Mental Health Social Services Transfer of Funds Between Trust Fund Accounts Counties are permitted to transfer funds between the accounts to reflect local needs and priorities. (Welfare & Institutions Code 17600.20) • This transfer authority may not exceed (but may be less than) ten percent of the amount deposited in the account from which the funds are to be reallocated for that fiscal year. • Transfers up to ten percent may be made between any of the accounts for any reason, as determined by the county Board of Supervisors. • The State does not have any authority to disallow or disprove of transfers made by the Board of Supervisors.

  39. Health Health Mental Health Mental Health Social Services Social Services More About Transfer Authority Counties may reallocate up to twenty percent from the Health Account to the Social Services Account if caseload expenditures demands exceed the amount of realignment revenue growth made available for net caseload increases. NOTE: Counties requested authority to transfer more than ten percent out of the Mental Health Account into the other accounts. Federal maintenance of effort requirements for the Alcohol & Drug/Mental Health Block Grant (ADAMH) revealed that this additional transfer authority could have jeopardized receipt of those federal funds. Hence, the ability to transfer funds in excess of ten percent was originally restricted to the Health Account and those higher transfers could only be made to the Social Services Account.

  40. Health Mental Health Social Services Transfer Authority Changed Due to PCSP With the county “savings” attributed to new federal PCSP funds, the counties were granted additional authority to transfer up to twenty percent of the funds out of the Social Services Account to the Health or Mental Health Account. This additional transfer authority was enacted in SB 463. • There were also changes in the ability to transfer funds from the Health Account. Prior to SB 463, counties could transfer up to ten percent from the Health Account into the Social Services Account if revenues were insufficient to cover mandated caseload costs. • SB 463 required counties to transfer the full ten percent from both the Health and Mental Health Account before they could transfer any additional funds out of the Health Account.

  41. Health Mental Health Social Services Process Required to Transfer Funds Counties are required to provide documentation regarding the use of transfers. • Decisions and documentation must: • Be made at a regularly scheduled public hearing of the Board of Supervisors. • Establish that the decision to transfer funds was based on the most cost-effective use of available resources to maximize client outcome. • If a county transfers more than ten percent from its Health Account, it must document that the net social services caseload has increased beyond the revenue growth in the Social Services Account.

  42. Poison Pill Provisions • When the realignment statutes were negotiated, it was unclear whether the legality of constitutionality of any of the components would be challenged. Therefore, there were four “poison pills” included in AB 1288 that would make the components of realignment inoperative under specified circumstances. • If any of these poison pill provisions were to take effect, the affected statute would become inoperative within three months, with the precise timing dependent on the particular provision.

  43. Vehicle License Fee Poison Pill • VLF Constitutional Issues.Although local entities receive their realignment VLF allocations as general purpose revenues, the realignment statute requires that each entity must then deposit an equal amount of revenues into their health and mental health accounts. Section 15 of Article XI of the State Constitution requires VLF revenues to be subvened to cities and counties. If a final appellate court decision finds that the realignment provisions related to VLF deposits violate the Constitution, the VLF tax increase from 1991 would be repealed. • This amendment was also sponsored by the Administration and was enacted in AB 1288 in Section 210 (a) as an uncodified statute.

  44. Proposition 98 (Education)Poison Pill • Similarly, if a final appellate court decision finds that revenues from the half-cent realignment sales tax are subject to Proposition 98’s education funding guarantee, this portion of the sales tax would be repealed. • This poison pill was enacted by Section 211 of AB 1288.

  45. State Mandates Poison Pill • Reimbursable Mandate Claims.If, as a result of the realignment provisions, (1) the Commission on State Mandates adopts a statewide cost estimate of more than $1 million or (2) an appellate court makes a final determination that upholds a reimbursable mandate, the general provisions regarding realignment would become inoperative. • This poison pill was sponsored by the Administration and supported by many Senate and Assembly Republicans as a strong disincentive to the Legislature and other interest groups against adding new mandates to the realigned programs. In addition, this was intended to discourage counties from filing claims for reimbursement without first exhausting other means to finance realigned programs. • The State Mandates Poison Pill was enacted in Section 209 (a) of AB 1288 as uncodified language.

  46. Indigent Health Care Poison Pill • Court Cases Related to Medically Indigent Adults.If a final appellate court decision finds that the 1982 legislation that transferred responsibility from the state to counties for providing services to medically indigent adults constitutes a reimbursable state mandate, the VLF increase would be repealed. • This provision was sponsored by the Administration in response to the potential of state financial liability to provide counties with additional funding for indigent health care as the Appellate Court decision required in Kinlaw. The Supreme Court ultimately ruled against the plaintiffs in the Kinlaw case. However, the counties of Los Angeles, San Diego and San Bernardino were in the processing of seeking additional indigent health care funds through the courts for mandates imposed pursuant to Chapters 328 1594 of 1982 (which transferred responsibility for adult indigent health care to the counties). • This poison pill was enacted in AB 1288 in Section 210 (b).

  47. ACA 35 • Continuous appropriation of realignment revenues • Limit county liability to received realignment revenues • Exempt realignment revenues from Prop 98 • Dedicate ½ cent Sales Tax & VLF (realignment piece) to the Local Revenue Fund Constitutional Amendment Rejected CSAC sponsored ACA 35 to ensure stability of the designated realignment revenues. Governor Wilson indicated conceptual support, “A constitutional amendment will be added to the ballot in 1992 to provide assurance of a dedicated funding source of Vehicle License Fund (VLF) and sales tax dollars to realigned programs. Realignment is consistent with Governor Wilson’s philosophy that better, more efficient and more responsible government resides at the local level. This constitutional amendment was not approved by the legislature.

  48. IHSS Changes Proposed in Realignment Negotiations The idea of including IHSS in realignment was seen as a way to potentially avoid the certainty of state budget cuts to the program. One of the workgroups formed by the legislature’s conference committee on realignment was charged with developing a proposal to realign IHSS. Here is their proposal to the realignment conference committee.

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