2012 Health Care Financing Report

October 25, 2012

The Health Care Financing Report examines the state’s budget, health expenditure trends, fiscal future, Proposition 30, and the state of public programs (Medi-Cal, Healthy Families, the Major Risk Medical Insurance Plan, Access for Infants and Mothers, Family PACT, Genetically Handicapped Persons Program).  The full report can be downloaded below.

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The State Budget

California’s Economy

Following a near-paralyzing recession, California is showing signs of economic recovery.  The unemployment rate dropped to under 12.0% in March of 2011 and steadily declined to reach 10.6% in August of 2012, the lowest since March of 2009.[1]  The state has experienced growth in civilian employment for 11 consecutive months, and in 18 of the 20 months prior to June 2012.[2]  Seven categories (construction; trade, transportation and utilities; information; financial activities; professional and business services; educational and health services; and leisure and hospitality) posted job gains over the year, adding 319,600 through September.[3]  Median home prices have increased almost 20% in the last year, with a 30.2% decline in unsold inventory.[4]  Retail sales, particularly online and mail order sales, increased over the last year, and a Reuters/University of Michigan Consumer Sentiment Index showed improved consumer confidence regarding the economy and personal financial situations.[5]  Personal income is projected to increase 3.8% in 2012 (not adjusted for inflation), and 4.5% in 2013.[6]

There are, however, persistent challenges that California faces.  The state unemployment rate, while improving, remains significantly higher than the national rate of 8.1%, and is second worst only to Nevada.  More than one-third of California’s unemployed have been unable to find a job for over one year.[7] This share is almost seven times higher than it was before the recession began in July 2007.[8]  This could impair future economic growth due to difficulties reentering employment that individuals may have stemming from loss of skills and connections.  Prices are increasing at a faster rate than disposable income; savings rates are declining; and despite the loosening of some restrictions in 2011, lending remains a challenge.

Figure 1. California Unemployment Rates, 2006-2012.

Source: State of California Employment Development Department, Labor Market Information Division, “California Seasonal Adjusted Industry Employment & Labor Force by Month (March 2011 Benchmark),” September 21, 2012.

Figure 2. California Long Term Unemployment, 2007-2011.

Source: State of California, Legislative Analyst’s Office, “The 2012-13 Budget: Economic and Revenue Update,” February 27, 2012.

Unsurprisingly, these financial difficulties had a significant impact on the state budget.  The 2012-13 “baseline” revenues are projected to be $46.8 billion short of the revenue forecast[9] in 2007[10] due to the recession. This $46.8 billion shortfall equals the proposed 2012-13 spending for Health and Human Services, Corrections, Higher Education, Resources and Environmental Protection combined.[11]  State revenues, which rely heavily on personal income tax and sales tax, dropped as incomes stagnated and consumer spending waned.  The inflation-adjusted income of the typical California household dropped by $2,602 between 2009 and 2010, the largest single-year decline on record; household incomes in 2010 adjusted for inflation are lower than 1989.

Figure 3. Inflation-Adjusted Income of Typical California Household, 1989-2010 (US Census).

Source: California Budget Project, “Measuring Up: The Social and Economic Context of the Governor’s Proposed 2012-13 Budget,” February 2012.

The improvements in the economy will not translate into immediate, meaningful state revenues due to the lag in tax filing and the depth of the state’s downturn.  Combined with the massive budget deficits of late and significant corporate tax cuts in 2008 and 2009, California’s fiscal health is in a precarious state, making severe across-the-board budget cuts inevitable absent an increase in revenues.

Overview of the State Budget

One of the main goals of the FY2012-13 budget proposal is to reduce the budget deficit, which was cut by $26.6 billion in the previous fiscal year.  This was achieved by 1) realigning public services to local governments (mental health services, substance abuse treatment, juvenile justice realignment, foster care, local public safety programs etc.); and 2) expenditure reductions, with $2 billion in spending cuts in Health and Human Services programs over two years.  The FY2012-13 budget proposes further cuts of $10.3 billion in total funds, $2.0 billion of which are in Health and Human Services. The Governor’s Budget proposes $137.3 billion in expenditures for all agencies – a 5.64% reduction from the 2007-08 spending level.

Total expenditures are expected to increase by almost $8 billion from last fiscal year, with increases in General and Special Funds.  While still $10 billion lower than FY2007-08 expenditures, the projected $6.6 billion increase in General Funds reverses the downward trend from previous years.








% Change

General Funds








Special Funds








Bond Funds
















Table 1. General, Special and Bond Fund Expenditures in Millions, FY2007-08 to FY2012-13.

Sources: State of California, Department of Finance, “Enacted Budget Summary Charts” FY2007-08 to FY2011-12; “Proposed Budget Summary Charts FY2012-13.”

State revenues are expected to increase in FY2012-13, as the two largest sources of tax revenue are anticipated to rise; the proposed budget presumes that personal income tax (46% of total revenues) and sales/use tax (23% of total revenues) will increase by almost 15% to $92 billion from the previous fiscal year.






FY12-13 (Proposed)

% Change

(07-08 to 11-12)

Personal Income Tax








Sales Tax








Corporation Tax








Highway Users Taxes








Motor Vehicle Fees








Insurance Tax








Estate Tax







Liquor tax








Tobacco Taxes
























Table 2. State Revenue Sources (General and Special Funds) in Millions, FY2007-08 to FY2012-13.

Sources: State of California, Department of Finance, Enacted Budgets for FY2008-09 to FY2011-12; Proposed Budget for FY2012-13.

Health and Human Services (HHS) will receive the largest percentage of total expenditures (31%, $42.9 billion), which includes General, Special and Selected Bond Funds.  K-12 education (29%, $39.2 billion), business/transportation/housing (8.2%, $11.3 billion) and corrections and rehabilitation (7.8%, $10.7 billion) are the next largest expenditures by department.

Figure 4. Total Fund Expenditures by Agency, FY2012-13.

Source: State of California, Department of Finance, Proposed Budget for FY2012-13.

Health Expenditures in the State Budget

The FY2012-13 proposed budget allocated $26.4 billion in General Funds to HHS.  This comprises 28.5% of all General Fund expenditures, second only to K-12 education (41.3%, $38.2 billion), which is protected by Proposition 98.

Figure 5. General Fund Expenditures for Health and Human Services Programs in Millions, FY2007-08 to FY2012-13.

Sources: State of California, Department of Finance, Enacted Budgets for FY2006-07 to FY2011-12; Proposed Budget for FY2012-13.

While this budget begins to reverse the decline in HHS spending, the very steep cuts to HHS programs cannot be ignored.  The enacted FY2011-12 budget cut $2.0 billion from Medi-Cal, $861 million from Proposition 63 Community Mental Health Services, $567 million from developmental services and $413 million from In-Home Supportive Services (IHSS) over two years.  In other words, nearly half (48.4%) of the proposed spending reductions in 2011-12 were targeted to HHS programs.

In the FY2012-13 budget proposal, the state looks to streamline services by merging Healthy Families into the Medi-Cal program; shift dual eligible Medi-Cal beneficiaries from fee-for-service into managed care; and complete the elimination the Managed Risk Medical Insurance Board (MRMIB), the Departments of Mental Health (DMH) and Alcohol and Drug Programs (DADP).

Figure 6. Health and Human Services Proposed Spending, All Funds (Including Federal), FY2012-13.

Source: State of California, Department of Finance, Proposed Budget for FY2012-13.

Fiscal Future of California

California is on a path to recovery, but shaking off the full effects of the recession will take years.  Job growth has been slower than anticipated, with the state gaining back just a quarter of the jobs by December 2011 that it lost during the downturn.  Wide job market disparities linger, by region, by sector, by age and by race/ethnicity.[12]  Recent projections by the LAO show the jobless rate remaining above 10% through 2014, and staying well above the pre-recession rate of 5.3% through 2017 (8.5%).

California’s budget problems have been worse than other states, despite the fact that nearly all states have sizeable deficits.  In addition, California is further saddled by tax cuts, one-time “solutions,” and a two-thirds vote requirement for the Legislature to approve any tax measures.  Also, a LAO analysis shows the General Fund revenue forecast being $3 billion less than the administration’s in 2011-12 and $3.5 billion less in 2012-13,[13] making it all the more difficult for the state to balance its budget.

Proposition 30

In an effort to increase General Fund revenue, the Governor has proposed a ballot initiative (Proposition 30) to temporarily increase personal income tax on annual earnings over $250,000 for seven years and sales tax by 0.25% for four years.[14], [15]  The Brown administration anticipates about $6 billion in annual state revenues from 2012-13 through 2016-17.  The large majority of these revenues will be used to pay for K-14 expenses; if the ballot measure fails to pass, $5.4 billion[16] will be cut from K-12 schools and community colleges, $250 million from the UC system and $250 million from the CSU system.  In the absence of additional General Fund revenues, health and human services departments and county health programs will likely feel the effects as well.

Polls find that Proposition 30 has the support of a slight majority of voters.  Two Field Polls[17] in early July and mid September of 2012 showed that support has dipped from 54% to 51% among likely voters.  Another September poll by the Los Angeles Times/USC[18] showed that 54% of voters supported the proposition, a significant decline from 64% in March.  Results from an October poll[19] by the Public Policy Institute of California (PPIC) showed continued decline, with only 48% in favor and 44% against.


[1] United State Department of Labor, Bureau of Labor Statistics, “Local Area Unemployment Statistics – California Statewide” (http://data.bls.gov/timeseries/LASST06000003?data_tool=XGtable)

[2] State of California Employment Development Department, “August 2012 California Employment Highlights,” September 21, 2012.

[3] State of California Employment Development Department, “California’s unemployment rate decreases to 10.2 percent,” October 19, 2012.

[4] California Association of Realtors, “Market @ A Glance,” September 2012.

[5] State of California, Legislative Analyst’s Office, “The 2012-13 Budget: Economic and Revenue Update,” February 27, 2012.

[6] Ibid.

[7] Ibid.

[8] California Budget Project, “Measuring Up: The Social and Economic Context of the Governor’s Proposed 2012-13 Budget,” February 2012.

[9] This baseline is the amount anticipated in the absence of any tax increases.

[10] Before the reality and severity of the recession had hit home in 2007, the revenues were projected to be significantly higher in 2012-13, even without factoring in any tax increases.  The 2007 projected revenues were $46.8 billion less than the more realistic projections made in 2012.

[11] California Budget Project, “Measuring Up: The Social and Economic Context of the Governor’s Proposed 2012-13 Budget,” February 2012.

[12] State of California, Legislative Analyst’s Office, “The 2012-13 Budget: Economic and Revenue Update,” February 27, 2012.

[13] Ibid.

[14] California General Election Official Voter Information Guide 2012, “Prop 30: Temporary Taxes to Fund Education, Guaranteed Local Public Safety Funding, Initiative Constitutional Amendment – Analysis by the Legislative Analyst.”

[15] Proposition 38, a rival tax plan, aims to generate revenue by increasing income tax rates for nearly all Californians for 12 years, with no increase in sales tax rates.  For more information on Proposition 30, refer to: Connolly J, “Proposition 30: Options and Consequences,” July 3, 2012, Insure the Uninsured Project.  For a comparison between the two tax initiatives, refer to: California Budget Project, “How do Propositions 30 and 38 Compare?” October 4, 2012.

[16] This could translate into 15 fewer days of K-12 instruction.

[17] The Field Poll, “California’s Tax Initiatives: Prop 30 (Brown) Leads, But Support Dips to 1% As Undecideds Increase,” September 20, 2012.

[18] USC Dornsife/Los Angeles Times, “Support for Governor’s Tax Initiative Continues to Erode,” September 20, 2012.

[19] Public Policy Institute of California, “Californians and Their Government: Voters Split on Proposition 30 – Propositions 31, 32, 38 Lag,” October 24, 2012.