7
A State View—California

In a study of formula allocation programs, states are of interest both as recipients of federal funds and as distributors of their own funds to cities, counties, and other jurisdictions. In order to obtain an admittedly limited but nevertheless useful view of these state roles, the panel focused on the State of California. The first section of this chapter explains how California distributes federal program funds, using examples from 7 of the top 11 federal programs (see Table 1-1). The second section describes methods used to allocate funds in selected state-funded aid programs.

ALLOCATION OF FEDERALLY PROVIDED FUNDS

Distribution of federal funds within a state is, to a large degree, controlled by the federal program agencies. In some programs, funds flow to the state and are disbursed through the state agency that administers the program. Sometimes a single federal program may be administered by more than one branch of a state agency or by more than one state agency. In a few programs, for example Title I education, the federal government allocates funds directly to substate entities, with only minor discretion allowed.

  • The federal Medical Assistance Program (Medicaid) is implemented through state regulations and administered by the California Department of Health Services. There are no issues of suballocating funds within the



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Statistical Issues in Allocating Funds by Formula 7 A State View—California In a study of formula allocation programs, states are of interest both as recipients of federal funds and as distributors of their own funds to cities, counties, and other jurisdictions. In order to obtain an admittedly limited but nevertheless useful view of these state roles, the panel focused on the State of California. The first section of this chapter explains how California distributes federal program funds, using examples from 7 of the top 11 federal programs (see Table 1-1). The second section describes methods used to allocate funds in selected state-funded aid programs. ALLOCATION OF FEDERALLY PROVIDED FUNDS Distribution of federal funds within a state is, to a large degree, controlled by the federal program agencies. In some programs, funds flow to the state and are disbursed through the state agency that administers the program. Sometimes a single federal program may be administered by more than one branch of a state agency or by more than one state agency. In a few programs, for example Title I education, the federal government allocates funds directly to substate entities, with only minor discretion allowed. The federal Medical Assistance Program (Medicaid) is implemented through state regulations and administered by the California Department of Health Services. There are no issues of suballocating funds within the

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Statistical Issues in Allocating Funds by Formula state. The state is billed by and reimburses providers for services to eligible recipients. States are reimbursed 75 percent of the program’s administrative costs, and there is a 50 percent match of the state’s general fund expenditures to pay service providers. The program has no cap or ceiling. Administrators of state Medicaid programs are in continuous communication through various stakeholder advisory groups, such as the Medicaid Management Information System and associated subcommittees. This interaction fosters information exchange and the identification of best practices for program administration. Federal-Aid Highway funds are administered by the California Department of Transportation. Working with local governments, the state has responsibility for identifying and prioritizing projects with a minimum horizon of three years for inclusion in a state transportation improvement program document. There is an iterative process between the state and regional planning organizations for projects in urbanized areas. Federal funds generally represent 80 percent of the project cost, although the percentage is higher for some projects, such as traffic signalization. The Federal Assistance Award Data System third-quarter report for 2000 shows nearly 800 action records (one for each project) in California. The largest was $30 million for widening a San Jose highway. All state departments of transportation belong to the American Association of State Highway and Transportation Officials. This group, collaborating through working groups and committees, influences national standards and policies and recommends positions on legislation. Temporary Assistance for Needy Families (TANF) is provided through California Work Opportunity and Responsibility to Kids (CalWORKs). The state plan, designed to help CalWORKs recipients find employment and/or acquire job skills necessary to obtain employment, was developed in consultation with local governments and private-sector organizations and approved by the secretary of the U.S. Department of Health and Human Services. The program is supervised by the California Department of Social Services and administered by county welfare departments. The departments of social services, child support services, and health services, and the Office of Criminal Justice Planning have authority to make rules and regulations that ensure universal access and uniform eligibility criteria for the program. Other state agencies, such as the Department of Education, the Employment Development Department, and the Community Colleges Chancellor’s Office, are involved in education and employment aspects of the program.

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Statistical Issues in Allocating Funds by Formula The Department of Social Services distributes funds to county welfare departments for the activities associated with providing benefit payments, required work activities, and supportive services. Over half of the fiscal year CalWORKs funds are distributed in a single allocation check that provides counties with the flexibility to use funds interchangeably for eligible recipients. There are four components in the $1.7 billion single allocation for FY 2001-2002: eligibility administration (22 percent), welfare-to-work employment services (42 percent), Cal Learn assistance for teen parents (2 percent), and child care support (34 percent). Stage One Child Care funds, representing 34 percent of the single allocation for child care support, cover care during the period beginning with a family’s entry into the CalWORKs program until six months later, or when the financial situation is stable. Almost $575 million was allocated in 2000-2001 based on the following formula: Thirty percent of the funds was distributed based on a percentage of total payments during the most recent three state fiscal year quarters (June 2000 through March 2001). Seventy percent was allocated using each county’s number of children through age 12 on aid multiplied by the cost per child in child care for that county. In FY 2001-2002, child care funds were reduced by 1.74 percent, and each county’s allocation was reduced by the same percentage. The counties were guaranteed their adjusted actual expenditures for the most recent quarters. Child care reserve funds may also be available to meet child care needs that exceed the counties’ allocations. Title I of the Elementary and Secondary Education Act serves approximately 4,800 schools (58 percent) in 833 (83 percent) of California’s school districts. Funds received by the districts are allocated to their member schools based on the number of low-income students according to school lunch program data on free or reduced price meals and/or CalWORKS data. The state’s school districts receive a total annual appropriation of almost $1 billion (State Controller’s Office, State of California, 2002). Prior to 1999-2000, the State of California Title I Office received the federal funds and allocated them among school districts, based on the number of disadvantaged students, estimated from approvals to participate in free and reduced price meal programs. It was possible for a school district

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Statistical Issues in Allocating Funds by Formula to receive fewer funds compared with a previous year if growth in the number of poor students in other districts was greater. Once a school district received its allocation, the district decided how to distribute funds among its schools. A district could decide to allocate the limited Title I funds to schools with the highest percentage of disadvantaged students, allocating no funds to schools with a low percentage of eligible students. Special Education, Grants to States, providing federal funds through the Individuals with Disabilities Education Act to support the expense of educating students with disabilities, is administered by the California Department of Education. States are required to allocate funds to Special Education Local Plan Areas (SELPAs), employing the same formula used to determine awards to the states. The formula has three components: the base amount, the population amount, and the poverty amount. States must uniformly apply the best available data on the numbers of children enrolled in public and private elementary and secondary schools and the numbers of children living in poverty. The California Department of Education uses data from its enrollment accounting system for the population amount. The poverty amount is based on free and reduced price meal participation data collected by CalWORKS. The California Budget Act further establishes three separate program grants based on age and institutional grouping to each SELPAs subgrant. The local assistance entitlements grant is allocated for students 5 to 21 years old. The state institutions grant supports the special education needs of those in state special schools, California Youth Authority facilities, and Department of Developmental Services facilities. The preschool local entitlements grant provides funding for special education and services to preschool children aged 3 through 5 with disabilities. State program directors receive information, technical assistance, and communication support from the U.S. Department of Education and the National Association of the State Directors of Special Education. The department maintains regional technical assistance resource centers in addition to funding several centers for the study of topical areas in special education. The maximum amount that can be held for administration varies by state, and states have a fair amount of latitude in the use of program funds in the area of administration. Some states, like California, allocate funds to local education areas that could be held for administration. California has over 100 SELPAs defined by demographic and geographic criteria.

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Statistical Issues in Allocating Funds by Formula California’s State Children’s Health Insurance Program (SCHIP) is a state and federally funded health coverage program for children with family incomes above the level eligible for no cost Medi-Cal and below 250 percent of the federal poverty income guidelines. For California, 65 percent of the program funds are federal and 35 percent are state. The state’s Healthy Families Program currently serves more than half a million children. The governor and the secretary of the U.S. Department of Health and Human Services recently announced approval of the state’s request for a waiver to expand the program’s coverage to custodial parents, legal guardians, and family caregivers. This could increase SCHIP coverage to an additional 300,000 low-income families. States have the option to provide coverage by expanding their Medicaid programs, establishing separate new programs, or a combination of the two. California opted to use the combined approach. Federally organized SCHIP technical advisory groups and the National Academy for State Health Policy disseminate program information and provide state participants with conferencing and communication opportunities. Community Development Block Grants (CDBG), Nonentitlement Grants are distributed by the U.S. Department of Housing and Urban Development (HUD) to participating states based on a statutory formula that includes population, poverty, overcrowded housing, and age of housing. States must ensure that at least 70 percent of the grant funds are used for activities that benefit low- and moderate-income persons. At least 51 percent of the grant funds must be used for housing. The California Department of Housing and Community Development administers this program to approximately 180 small cities, rural counties, nonrecognized Indian tribes, and rancherias (rural American Indian settlements) in the state. Eligible localities include cities with populations less than 50,000 and counties with populations less than 200,000 that do not receive CDBG funds directly from HUD. The current $46.1 million grant to California is disbursed to eligible jurisdictions through several allocations: general, American Indian, colonias (distressed non-entitlement jurisdictions within 150 miles of the California-Mexico border), economic development, and planning and technical assistance. State regulations mandate certain set-aside amounts: 5 percent for activities benefiting the residents of colonias, 1.25 percent for grants on behalf of nonrecognized tribes and rancherias, and 30 percent for economic

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Statistical Issues in Allocating Funds by Formula development activities. Regulations also mandate how the economic development dollars are to be allocated: 10 percent are made available for planning and technical assistance on a continuous basis. Funding decisions are based on a first-come, first-served basis, with the application of eligibility threshold criteria. Separate funds available for the California Community Economic Enterprise Fund component are used to provide capital or infrastructure assistance to businesses that create private-sector jobs for low- and very-low-income persons. The allocation is based on prior years’ demand and is announced annually. The general allocation, the largest component at $25 million, receives the funds remaining after the mandated set-asides are satisfied and contains two funding mechanisms. As in the economic development component, 10 percent is set aside for planning and technical assistance grants, also on a continuing, first-come, first-served basis. Remaining funds are allocated through a once-yearly process of application review for a broad variety of CDBG-eligible activities, such as housing rehabilitation, public facilities, new construction, community facilities, public services, and economic development activities. STATE-FUNDED PROGRAMS California counties and school districts receive substantial revenues from state and federal government agencies. In FY 1998-1999 the counties reported revenues of $38.4 billion. The state was the primary external source of revenue, providing 31 percent of their financing. Federal agency contributions represented an additional 19 percent of total county finances (State Controller’s Office, State of California, 2001). The state was the largest contributor to public school districts. Of the schools’ FY 1997-1998 revenues of $35.4 billion, 53 percent were provided from state aid, state lottery, and other state funds. Local revenues (31 percent), other financing sources (8 percent), and the federal government (slightly less than 8 percent) supplied the remaining school funding (State Controller’s Office, State of California, 2000b). The state, counties, and school districts receive a large share of revenues from intergovernmental sources. Some of these transactions are based on formula allocations. The State Controller’s Office accounts for and controls disbursement of all state funds and issues warrants in payment of the state’s bills, including lottery prizes. The Controller’s Office annually disburses formula-based payments for 36 programs, including 4 payments that

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Statistical Issues in Allocating Funds by Formula allocate federal dollars. We describe several programs that highlight the use of formulas in the allocation of California’s state aid funds. Monthly Motor Vehicle License Fees ($3.6 billion in FY 2000-2001). The motor vehicle license fee (VLF) is a fee on the ownership of a registered vehicle in California in lieu of a personal property tax on vehicles. It represents a discretionary revenue source and a major source of funding for state and local health and welfare programs. The formula for allocating the VLF funds is: 81.25 percent is paid to cities and county unincorporated areas based on population. 18.75 percent is paid to counties. Each year $180.9 million is paid based on revenue received in the 1982-1983 fiscal year pursuant to former Government Code sections. The amount remaining is paid to counties based on population. Monthly Health and Welfare Realignment Allocation ($3.2 billion in FY 2000-2001). The Health and Welfare Realignment Program was created in the early 1990s to transfer financial responsibility from the state to local governments for many public and mental health programs; there have been a couple of amendments since that time. Funding is provided to all counties and four cities through a portion of the state’s sales tax and motor vehicle license fees. Funds are deposited to the local revenue fund, which has accounts for sales tax, vehicle license fee, vehicle license collection, sales tax growth, and vehicle license fee growth. The sales tax account has subaccounts for mental health, social services, and health. The sales tax growth account has subaccounts titled caseload, base restoration, indigent health equity, community health equity, mental health equity, state hospital mental health equity, county medical services, general growth, and special equity. The amount allocated for each year becomes the base amount for the following year. Revenue is multiplied by the county ratio, specified in code, for each of the subaccounts listed above. The subaccount amounts are summed to determine the total allocation amount. Any additional revenue is considered growth and is allocated on the basis of different formulas specified in legislation.

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Statistical Issues in Allocating Funds by Formula Monthly Half-Cent Sales Tax for Public Safety ($2.3 billion in FY 2000-2001). Funds are allocated to counties for public safety services that include, but are not limited to, sheriffs, police, fire protection, county district attorneys, county corrections, and ocean lifeguards. Public safety services do not include courts. Payments are made to each county in proportion to its share of the total taxable sales in all qualified counties during the most recent calendar year for which the State Board of Equalization has reported sales. Quarterly Lottery Apportionments ($1.1 billion in FY 2000-2001). The voters of California passed the Lottery Initiative (Proposition 37) in the November 1984 election to provide additional funds for public education in grades K-14 and higher education. The Lottery Act mandates that public education must receive at least 34 percent of the sales revenues each year. The schools also receive unclaimed prize money, interest income, and any administrative savings at the end of each year. Lottery revenues are disbursed quarterly through counties to school districts based on the number of full-time students, measured by average daily attendance, enrolled in each district. Monthly Highway Users Tax ($1.035 billion in FY 2000-2001). Monies in the highway users tax account in the transportation tax fund are appropriated for research, planning, construction, improvement, maintenance, and operation of public streets and highways; research and planning for exclusive public mass transit guideways; construction and improvement of exclusive public mass transit guideways; and payment of principal and interest on voter-approved bonds issued for these purposes. Several California Streets and Highways Code sections designate basic formulas to be used to allocate funds to counties and cities. Some funds are paid only to counties based on six separate calculations. In addition to a fixed amount for engineering and administration expense and a portion of the annual amounts available for snow removal and heavy rainfall and storm damage, three formulas allocate funds based on the county percentage of registered vehicles and maintained miles of roads. Some funds are paid to counties and cities. The county payment amount is determined by calculating the greater factor of the legislated amount of $1,000,000 times the county’s percentage of prior year’s amounts from other sections of the law or

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Statistical Issues in Allocating Funds by Formula the legislated amount of $750,000 times the county percentage of registered vehicles plus the legislated amount of $250,000 times the county percentage of maintained mileage. The greater factor for each county is divided by the sum of all counties’ greatest amounts and multiplied by a specified apportionment amount. The city payment amount is the apportionment amount divided by the total population of the state times the population of each city. Additional sections provide different fixed amounts to counties and cities with the balance of funds distributed to counties based on percentage of registered vehicles’ assessed valuation outside the cities. Cities receive other funds based either on population or a fixed amount plus an amount based on population. Traffic Congestion Relief Program ($400 million in FY 2001-2002). Monies to relieve traffic congestion are allocated 50 percent to cities and 50 percent to counties. The 50 percent distributed to counties is based 75 percent on the county proportion of the number of fee-paid and exempt vehicles registered in the state. 25 percent on the county proportion of miles of maintained county roads in the state. The 50 percent disbursed to cities is in proportion to the city population compared with the total population of all the cities in the state. Homeowners’ Property Tax Relief ($398.4 million in FY 2000-2001). The state constitution grants a homeowner’s property tax exemption that results in revenue loss to the counties. Counties submit revenue losses to the state and payment is prorated to all counties based on the proportion of county property tax exemptions to total property tax exemptions. Citizens’ Option for Public Safety (COPS) Program ($242.6 million in FY 2000-2001). The COPS program is a public safety program to hire more sworn peace officers at the local level. Payment to counties is based on population with a minimum $100,000 grant for each recipient. The county auditor allocates monies and interest with the requirement that they be used as follows:

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Statistical Issues in Allocating Funds by Formula 5.15 percent for county jail construction and operation. 5.15 percent to the district attorney for criminal prosecution. 39.70 percent to the county and the cities within the county; in the case of five counties with districts that encompass more than one county, specific districts are named and allocations are determined either in accordance with the relative population of the cities within the county and the unincorporated area of the county, as specified in the most recent January estimate of the population, and as adjusted to provide a grant of at least $100,000 to each law enforcement jurisdiction. 50 percent to the county to implement a comprehensive multi-agency juvenile justice plan. Local Government Fiscal Relief ($212 million in FY 2000-2001). In fiscal year 2000-2001, $212 million was distributed for a one-time discretionary relief to local governments. The allocation formula was: $100 million among cities, counties, and special districts according to their relative 1999-2000 educational revenue augmentation fund (ERAF) contributions. $100 million among cities based on population and counties based on population in unincorporated areas. $10 million to counties based on total county population. $2 million to independent recreation and park districts and independent library districts based on their relative ERAF contributions. Quarterly State Transit Assistance ($115.8 million in FY 2000-2001). The transit assistance funds are paid to transit districts and commissions. Half are allocated on the basis of population and half are allocated based on prior year revenues of the transit district in relation to all districts in the state. California Law Enforcement Equipment Program High Technology Grants ($75 million in FY 2000-2001). Funds are intended for grants to local enforcement agencies for the purchase of high-technology equipment. Each city, county, and specified district is guaranteed a minimum allocation amount. For 2000-2001 the minimum was $100,000; for 2001-2002, the minimum was $30,000. The balance of any remaining funds will be allocated to county sheriffs and local police chiefs in accordance with the

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Statistical Issues in Allocating Funds by Formula proportion of the state’s total population that resides in each county and city based on the most recent January population estimate developed by the Department of Finance. Revenue and Taxation Code Section 11005.7 ($50 million in FY 2000-2001). This section provided $25 million to cities and $25 million to counties based on population. This is a source of general revenue to local governments. More than 80 percent of the state’s population resides in incorporated cities. CONCLUDING OBSERVATIONS The California experience shows that many of the principles and practices associated with allocation of federal funds by formula apply at the state level. When there is discretion in determining within-state distribution of federal funds, the state agencies develop guidelines and procedures. For several of the federal programs, state program administrators have formed organizations that enable them to share information about their procedures and experiences and to provide feedback to the federal program agencies and, in some instances, to advocate changes in legislation or regulations. California allocates substantial state funds through a wide variety of formula-based programs. Formulas are similar to those used at the federal level with some modifications and innovations to address local conditions. Some aspects of particular interest are: Estimates of total population by area play a somewhat larger role than they do in federal programs. State funds are distributed based on current estimates of population by county and city provided annually by the California Department of Finance. The state prepares independent population estimates with the view that they are more timely and accurate than those produced by the federal government. When data on school-age children in low-income families are needed, California uses counts of students approved to receive free and reduced-price lunches served under the National School Lunch Program. As at the federal level, there is at least one state program in which the shares are specified in legislation (see the section on Local Government Fiscal Relief above).

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Statistical Issues in Allocating Funds by Formula Unlike the federal government, (since the end of the General Revenue Sharing program) California has several state aid programs for which uses of funds by the recipients are totally discretionary or are restricted to very broad program areas.