By Katie Heidorn and Garrett Hall
Governor Newsom will release the May Revision of the state budget this week on May 14, 2020. Last week, in rare actions, the Department of Finance (DOF) and the Legislative Analyst’s Office (LAO) each released fiscal updates (DOF Fiscal Update and LAO Fiscal Update) prior to the May Revision. Due to the economic downturn caused by the COVID-19 pandemic, DOF predicts an 18 percent unemployment rate, a decline in General Fund revenues of $41.2 billion below January projections, and an overall budget deficit of $54.3 billion ($13.4 billion in the current Fiscal Year (FY) 2019-20 and $40.9 billion in FY 2020-21). The LAO estimates an $18.1 billion to $31.4 billion deficit in FY 2020-21, the severity of which depends on the speed and strength of the state’s economic recovery period.
The Assembly Committee on Budget also prepared for the anticipated need to adopt a budget with sizable reductions to services that were considered priorities for investment over the last decade. The State Senate released its Budget Approach & Economic Recovery document that identifies nearly $100 billion in budget solution options.
Ultimately, the Governor and the Legislature must come together to develop a balanced budget by June 15. This will be a difficult budget process for both the executive and the legislative branches as they work to agree on a consensus deficit amount and a package of budgetary solutions to meet that need.
Five Topics to Watch
1. General Fund Cut/Solutions Proposals and other Budget-Savings Mechanisms
Balanced Budget Requirement: Proposition 58, passed by the voters on March 2, 2004, and also known as Assembly Constitutional Amendment 5 in the Fifth Extraordinary Session (ACA x5 5), requires California to annually enact a balanced budget, restricting California’s General Fund revenues from exceeding General Fund expenditures. In spite of the state’s rainy day fund (the Budget Stabilization Account) and additional reserves (Safety Net Reserve), with current balances of $15.3 billion and $900 million, respectively, producing a balanced budget to send to the Governor by the annual June 15 constitutional deadline will require the Legislature to propose deep cuts, on a scale similar to those enacted during the 2008 Great Recession.
Savings Mechanisms from Great Recession: The state did not “solve” the last recession’s budget deficit in a single, sweeping action. Instead, a variety of savings mechanisms over several fiscal years were employed. See the LAO’s FY 2008-09 (Figures 3, 9, and 10), FY 2009-10 (Figures 4, 11, and 15), FY 2010-11 (Figures 3, 12, and 16), and FY 2011-12 (Figures 3, 12, and 14) budget summary documents for the General Fund cuts/solutions in general and in Health and Human Services, specifically, in those years. These mechanisms included items that we expect to see again, such as, reducing Proposition 98 (school-funding) costs, borrowing from or redirecting special funds, eliminating optional Medi-Cal benefits, and Medi-Cal provider rate cuts. Below is the current distribution of General Fund expenditures from the Governor’s January 10, 2020, Budget.
Differences from January 10, 2020, Budget Proposal:
- Benefit Restoration Trigger Cuts: Some of the benefits that were cut during the last recession were recently restored, but were limited by “trigger language”. These benefits include Proposition 56 Medi-Cal provider payment increases, restoration of the In-Home Supportive Services (IHSS) 7 percent hours reduction, and restoration of Medi-Cal optional benefits, among many others. In his January 10 budget, the Governor had proposed to extend the trigger date 18 months, from December 31, 2021, to July 1, 2023. There will be immense pressure on the Governor and the Legislature to prevent trigger cuts from going into effect.
- CalAIM Suspension: In April, the Department of Health Care Services announced the suspension of the California Advancing and Innovating Medi-Cal (CalAIM) initiative. The January 10 budget had included $345 million General Fund in FY 2020-21 and $645 million in FY 2021-22. The May Revision will likely not include these proposed expenditures.
- Public Option Proposals: The California Health and Human Services Agency was developing proposals to strengthen enrollment, affordability, and choice within Covered California and to leverage Medi-Cal’s network of public plans. Watch to see if the Administration puts forward plans and how COVID-19’s impact on the uninsured and underinsured influences the proposals.
- Office of Health Care Affordability: The Governor proposed a Spring 2020 proposal to establish an office increasing price and quality transparency; watch to see if it is still included in the May Revision. If it is not included, expect to see it back in some form soon.
- Prescription Drug Proposals: The Governor proposed two additional prescription drug programs for Spring 2020: Golden State Drug Pricing Schedule—a single market for drug pricing in California to leverage private business and state and local governments’ purchasing power; and, Generic Contracting Program—establish a California drug label. Since these proposals are meant to lower prescription drug costs, it is possible that the Administration will move them forward.
2. Medi-Cal Enrollment Caseload Projections and Cost
DOF’s Fiscal Update estimates an increase in $7.1 billion in funding needed to support caseload increases for health and human services programs.[i] One study from Health Management Associates projected that with a medium unemployment scenario of 17.5 percent, Medi-Cal enrollment will increase by approximately 2.2 million enrollees. The DOF reported that, since mid-March, California has received 4.2 million unemployment claims and estimates an 18 percent unemployment rate for 2020.[ii]
In addition to increased caseload and the funding needed to support it, there will be pressures on counties to quickly enroll potentially millions of new Medi-Cal members and on the delivery systems to ensure that provider networks can provide access to primary and specialty care, including behavioral health.
3. Medi-Cal Coverage—Expansion or Cuts?
The January budget proposal included $80.5 million ($64.2 million General Fund) to expand Medi-Cal coverage to seniors aged 65 and over, regardless of immigration status, beginning no sooner than January 1, 2021. The amount would increase to around $350 million ($320 million General Fund) in 2022-23 and ongoing. It would build upon Medi-Cal expansions to children and young adults up to age 26, regardless of immigration status. A traditional budget-savings mechanism is to propose to eliminate General Fund-only programs like these; however, since this recession was caused by a global health pandemic, and Governor Newsom is focused on achieving universal health care coverage, watch to see if this and other state-only funded coverage programs are cut, maintained, or, possibly, expanded.
4. Safety Net Hospital, Clinic, and Provider Impacts
The COVID-19 pandemic has put incredible financial pressure on California’s safety net hospitals, clinics, and other providers, who the state relies on to provide care for patients with COVID-19 and other health services, including everything from the cost and logistics of projected surge capacity expansion to purchasing additional personal protective equipment (PPE) for workers.
In testimony at the May 4, 2020, Assembly Budget Subcommittee #1 hearing on the state’s COVID-19 pandemic response, the California Hospital Association stated that hospitals across the state have sustained an average revenue loss of 20 percent to 30 percent, with small and rural hospitals being more acutely impacted[iii]. Chief Executive Officer Carmela Coyle noted that this loss equates to approximately $14 billion in revenue and that they request $1 billion in the current budget year—FY 2019-20—before June 30, 2020, for immediate financial relief[iv]. Similarly, the California Medical Association reported in a summary of its member survey that providers have experienced an average of 64 percent drop in revenues since March 1, 2020,[v] and community health centers are experiencing revenue decreases of 25 percent to 50 percent.[vi] Watch for how Governor Newsom responds to requests for relief from California’s safety net and other providers and whether or not he proposes term safety net financing alternatives.
5. Projected COVID-19 Costs Covered by Medi-Cal for the Uninsured and Underinsured
DHCS announced that a Presumptive Eligibility (PE) program was implemented on April 8, 2020, to allow uninsured and underinsured individuals to access COVID-19 testing and treatment services at no cost. Underinsured individuals refers to individuals with private coverage that does not cover COVID-19 testing and treatment. Qualified providers can enroll eligible individuals and their eligibility period will end on the last day of the month of their 60th day since the application was submitted. With the PE program in place, watch for the projected costs listed in the May Revision and for discussions on how long the policy will be in effect.
[i] Department of Finance, Fiscal Update, May 7, 2020.
[ii] Department of Finance, Fiscal Update.
[iii] California Hospital Association, Carmela Coyle Testifies Before the Legislature, May 4, 2020.
[iv] California Hospital Association, Carmela Coyle Testifies Before the Legislature.
[v] California Medical Association, COVID-19 Physician Financial Health Survey, April 22, 2020.
[vi] California Primary Care Association, California Community Health Centers Hit Hard by COVID-19 Pandemic, March 23, 2020.