SPECIAL EDITION -- FY98 ADMINISTRATION BUDGET REVIEW
While it is still too early to determine the full impact of every proposal on California, especially with regard to issues for which full details were not provided, the following attempts to assess the
President's FY98 Budget proposals from a California perspective. The following analysis was
prepared after only a few hours of analyzing more than two thousand pages of budget documents ...
thus this information is preliminary at best. Apologies for omissions, as there surely will be many.

Following is a preliminary evaluation of major federal programs and how they may impact
California:

IMMIGRATION AND NATURALIZATION SERVICE
Incarceration Reimbursement -- The budget again proposes $500 million in budget authority
to reimburse the states for the costs of incarcerating undocumented criminal immigrants. ($350
million would be funded under the State Criminal Alien Assistance Program, and $150 million under
the Violent Offender Incarceration and Truth in Sentencing programs.) In late 1996, INS distributed
$495 million to the states. Of that amount, California received about $265 million, or about 54% of
the total funding. California estimates that it spent about $511 million to incarcerate about 200,000
undocumented criminal aliens last year.
Border Control -- As last year, the budget calls for a substantial increase in the INS budget to
continue border control efforts. The President is requesting $3.6 billion for the agency, an increase of
13% over FY97 and 41% over 1996. Funding for an additional 500 border patrol agents is requested,
which would bring the total border patrol force to 7,359 agents in FY98. The budget also calls for
$73.8 million to fund border facility construction; $66 million to fund the deportation of denied
asylum applicants; $317 million for improved border controls; and $116 million for detention and
deportation proceedings.

WELFARE
The President's budget proposes an additional $1.7 billion to ease the restrictions placed on
the eligibility of legal immigrants for Supplemental Security Income payments and food stamps.
Under the welfare reform law passed last year, all legal immigrants currently residing in the United
States are due to be dropped from the SSI rolls beginning shortly. The budget proposes that
immigrants who became disabled after entering the United States would remain eligible for SSI
payments. The California Department of Health Services estimated in July of last year that about
260,000 legal immigrants in California received SSI. Although the actual number of California
immigrants who became disabled after entering the country is not currently available, it is likely that a
substantial number may remain
eligible for SSI if the President's proposal were passed.
Currently, refugees and asylees are not banned from receiving SSI for their first five years in
the United States. The Administration's budget would extend this period to seven years. This
extension could apply to as many as 312,000 refugees living in California.
Additionally, legal immigrants were denied food stamps under the welfare law. The budget
calls for delaying the implementation of this ban until September 1997, in order to give immigrants
more time to become naturalized U.S. citizens.

FDA
Under the President's proposal, the Food & Drug Administration would see a 7% increase
(6% for oversight of medical devices, 11% for pharmaceuticals) to $1.06 billion. In addition to food
safety duties, the FDA reviews and approves drugs and medical devices for use in the U.S. If used
wisely, additional funds could improve and speed the approval process. California is home to one
third of the nation's biomedical industry.

MEDICAID
Medicaid (called Medi-Cal in California) uses $100 billion federal dollars to reimburse states
for providing health care for the poor. The President's budget would cut $22 billion from Medicaid
in part due to the imposition of a "per capita cap" on spending (based on "spending per beneficiary in
a base year, increased by an annual growth limit").
Unfortunately, the budget did not elaborate on whether the cap would be imposed on a state-
by-state basis, or nationwide. It also did not provide details regarding growth or base year.
If imposed on a state-by-state basis, a per capita cap could be the most damaging piece of the
President's budget, from a California perspective. A per capita cap on Medicaid receipts on a state-
by-state basis would permanently lock in California's current small share of Medicaid receipts.
Moreover, it would force California to subsidize new Medicaid patients in other states at a rate as
much as triple what would be received for each new California patient. Rather than a per capita cap,
progress toward per capita parity -- allocating funds instead based on numbers of patients served --
would be more equitable than the per capita cap scheme.
In FY95, California received $8.8 billion of the $88.8 billion spent on Medicaid by the
federal government nationwide -- a relatively small share for a state with more than 14% of the
nation's Medicaid patients. A comparison will explain why: While California serves nearly twice as
many indigent patients as New York, it receives less than 10% of federal Medicaid funds compared
to New York's 13%. New York spends three times as much to care for each patient as does
California. Because it is a matching program, states which elect to spend more state money get more
federal money. California elects to spend less money per poor patient (per capita) and thereby
foregoes some additional federal dollars. While this is equitable as a federal incentive, the system
breaks down when a per capita cap is imposed state-by-state.
According to the GAO, the per capita cap concept would favor states which already provide
high levels of medical service to a relatively narrow range of patients -- since a cap would provide
more federal funds only if Medicaid enrollment increases, such states could simply expand coverage
and take advantage of their high matching rate. Because California now serves a broad range of
patients -- and thus a lower level of service to each patient -- our potential for growth would be
severely limited. According to GAO, California ranks 51st (of 50 states plus D.C.) in richness of
services provided yet 6th in breadth of patient coverage.
To impose a per capita cap, based on an arbitrary base year, would punish states like
California for having been efficient and inclusive, and would reward high-spending states which don't
yet cover as many patients. The President's plan could mean that New York would get as much as
$6,000 from the federal government for each new patient it adds to its Medicaid rolls, where
California could receive only $2,000 for its next additional enrollee.

TAXATION PROPOSALS
R&D Tax Credit -- The budget proposes to extend for one more year (from 5/31/97 to
5/31/98) the tax credit for Research and Experimentation (a.k.a. research & development). It is
disappointing that the proposal does not propose a permanent extension, nor retroactively apply the
credit for the troublesome '95-'96 lapse. Nevertheless, a one-year extension would be beneficial to
California, which has a high concentration of research-intensive companies.
Orphan Drug Tax Credit -- The budget proposes to extend for one year the 50% tax credit
for clinical testing of certain drugs, which would benefit California's large biomedical industry.
Foreign Sales Corporation Benefits for Intangibles -- The budget proposal would extend
FSC benefits to licenses of computer software and other high-tech "intangibles" for reproduction
abroad. California has a very high concentration of such companies, and this proposal would work to
their benefit.
Per Child Tax Credit -- The President's budget proposes a tax credit for children under age
13 at $300 per year for 1997-99, and $500 per year afterward. The concept is similar to a credit
previously proposed by Republican Congressional leaders, though this credit would be phased out for
taxpayers with incomes between $60,000 and $75,000. California is a relatively high percentage of
children would suggest that the state might benefit from the credit, while the fact that the state's
incomes remain somewhat above average (ranked 12th in 1995) despite the recent recession would
mitigate this advantage.
Capital Gains Exclusion on Home Sales -- The budget proposes to exclude from capital
gains taxation up to $500,000 of gain on the sale of a taxpayer's principal residence, up from the
current $125,000 (the exclusion would be only $250,000 for single taxpayers). Because California's
real estate values tend to be considerably above the national average, increasing the limitation could
auger better for California than for other states. Precise details regarding the proposal were not
provided yet, however.
Tax Credit for Employing Welfare Recipients -- The budget proposes a tax credit of up to
$5,000 for companies who give a job to welfare recipients. California is home to 20% of the nation's
welfare recipients.

FEDERAL RESEARCH AND DEVELOPMENT SPENDING
California is by far the largest recipient of federal research and development expenditures. A
study by the National Science Foundation determined that 22.6% of federal R&D funds are spent in
California. Unfortunately, the President's budget proposes essentially level funding for federal R&D
-- proposing $72.7 billion, compared to $72.8 billion in FY97 and $70.3 billion in FY96. A 4%
increase in civilian R&D spending (from $33.1B to $34.3B) would be offset by a 3% decline in
defense R&D spending (from $39.7B to $38.3B). On the positive side, California receives a large
share of basic research, which would rise 2% on both the defense and civilian sides.

BAY-DELTA
President's proposal honors the bipartisan commitment the President and Congress made
last fall under H.R. 4126, by funding $143.3 million in the first of three installments of matching
funds. The state funding comes from November's passage of Proposition 204, the Clean, Safe,
Reliable Water Supply Act, and is intended to develop a long-term solution to the environmental,
water quality, water supply and system vulnerability problems of the San Francisco Bay and Delta.

NASA
Between 20% and 30% of the total NASA budget makes its way into California --
predominantly through the awarding of contracts for spacecraft development and operational costs at
NASA's two California based research centers and one laboratory. The total proposed NASA budget
is scheduled to decrease by $209 million (from $13.7 billion to $13.5 billion). In real dollar terms,
the reduction would be approximately $500 million.
NASA Centers and Labs -- Funding for each of the three California NASA labs facilities
would be raised. The Ames Research Center is scheduled to receive an increase in their total
operations budget by $40,778,000; the Dryden Flight Research Center is scheduled to receive an
increase in their total operations budget by $13.5 million; and the Jet Propulsion Laboratory at Caltech
in Pasadena would be scheduled to receive an increase in their total operations budget by $42.6
million.
Human Space Flight -- Funding for the space station would remain nearly level, slipping
$27 million from $2.149 billion in FY97 to $2.121 billion in FY98. The space shuttle program
would see a similiar slide, from $3.151 billion to $2.978 billion. Both the space shuttle and space
station programs are significant to California.
Space Sciences -- The President's budget proposal would raise space sciences funding from
$1.97 billion to $2.04 billion.
Mission to Planet Earth (MTPE) -- Overall funding for the Mission to Planet Earth
program, which focuses on earth environmental changes and which has significant California
components, would rise from $1.36 billion to $1.42 billion under the Administration proposal.
Components of the MTPE project which would see the increase are the Earth Observing System
(EOS) and launch services; other components would decline.
NASA Technology Advanced Space Transportation -- The Reusable Launch Vehicle, or X-
33, is scheduled to receive an increase of funding of $85 million over last years budget. The X-33 is
being produced by Lockheed Martin's Skunkworks plant in Palmdale, in conjunction with Boeing's
Rocketdyne division.

DEFENSE
The President's budget for FY98 would reduce defense spending nearly $7 billion, from
$254.3 in FY97 to $247.5 billion in FY98, not counting inflation. The budget includes $42.6 billion
for procurement for weaponry modernization, a level one third below the level that the Joint Chiefs of
Staff had requested. The military share of federal outlays would fall from 15.6% in FY97 sharply
downward to 14.7% in FY98 under the proposed plan. By comparison, the military share of federal
outlays during the 1980s averaged about 25%. (When budget authority rather than outlays are
examined, the military share of the budget is roughly 50%, down from more than 60% in the 1980s.)
California remains a defense procurement hub, particularly in the aerospace arena, so the proposed
reduction would again hit California economically. The 104th Congress last year added more than $5
billion for upgraded weapons procurement.

ENERGY
The proposed budget shows an increase in Department of Energy funding of $2.7 billion,
from $16.5 billion to $19.2 billion. Most of this increase ($2.3 billion) however would be due to a
shift in the financing of DOE construction from a year-by-year basis to an "up-front" basis. Several
energy program areas of importance to California appear slated for reductions, however.
The President's budget would again reduce the magnetic fusion program, from $231 million
to $225 million. A significant portion of fusion research is conducted in California. The budget
documents did express support for the California-centric DIII-D and ITER programs. Solar and
renewable energy programs would grow from $266 million to $343 million under the proposed
budget plan.
While anecdotal reports indicate that the National Ignition Facility which is under
construction at the Lawrence Livermore National Laboratory is safe, the overall nuclear weapons
Stockpile Stewardship heading in the budget appears slated for a reduction, from $1.66 B to $1.44 B.
The High energy physics request would reduce funding from $670 million to $624 million,
though it expresses support for Stanford's linear lollider, and would fund a detector for the B-Factory.

EDUCATION
The President's budget began to flesh out some of the myriad education proposals outlined
in his State of the Union message earlier this week. More details are expected later this month. The
budget would authorize $4 billion in new spending on existing K-12 education, postsecondary
education, Head Start and training/employment programs (an increase from $32 billion to $36 billion)
and would also propose and additional $6 billion in tax credits, school construction funds, and
challenge grants. Also proposed would be nearly $3 billion in additional loans for education.
The Title One (education for the disadvantaged) program would grow to $8 billion under the
president's plan, and Head Start would increase to $4.3 billion. Education technology, which did not
even exist in FY96, is proposed to grow to $545 million in FY98. The budget would increase
bilingual education by 27% to $200 million and immigrant education by 50% to $150 million.
California is a significant recipient of both programs. The $5 billion proposed for school facilities
construction would be subsidize bond interest payments. However, California is limited in its ability
to pass bond measures because of high voter approval thresholds.
Under the Job Training Partnership Act, the President's budget proposes to increase funding
of the Adult Training Grants by $169 million. If California averages its five year share of roughly
14% of funding from the program, the state would receive an additional estimated $23,660,000 from
the program. Under the Employment and Training Assistance (Dislocated Workers) program, the
President proposes an $87 million increase for Dislocated Workers Assistance. Assuming
California's average share of 14%, California could increase its share of funding from the program by
$12,180,000 if the President's proposals are implemented. Combined, these two Labor Department
programs are proposed to grow $233 million to $2.4 billion in 1998.

TRANSPORTATION
The Intermodal Surface Transportation Efficiency Act (ISTEA), which authorized most of
the surface transportation programs between 1992-1997, is scheduled to expire later this year. With a
few modifications, the President's Budget maintains the federal transportation system ISTEA set into
place. The Budget proposes over $25 billion in obligations for FY1998. Given the current
reauthorization process currently underway in Congress, it is likely that the federal transportation
system will undergo significant changes not contemplated by this budget proposal.

FEDERAL HIGHWAY ADMINISTRATION -- The President's Budget calls for the continuation
of the major federal-aid highway programs including: the Surface Transportation Program, the
National Highway System, Interstate Maintenance, the Bridge Program and the Congestion
Mitigation and Air Quality Improvement Program. Proposed FY1998 obligations for these and the
other highway programs will total $19.7 billion dollars, a decrease of 2.4% from estimated FY1997
obligations. This reduction is due largely to cuts in the Surface Transportation Program and
demonstration programs. The budget also proposes that State Infrastructure Banks and other surface
transportation programs which were previously funded by the General Funds, be funded instead by
the Highway Trust Fund. The following are some budget issues of particular interest to California:
Donor State Bonuses -- Of particular interest to California is the President's decision to zero
out funding for Donor State Bonuses. The bonus is a formula equity tool which apportions funds to
states that will contribute more to the Highway Trust Fund than they will receive in allocations. In
FY1996, FHWA apportioned nearly $102 million to California in a donor state bonus, 23.5% of the
money that went to states for that purpose. DOT officials have indicated that they will outline other
equity factors in their ISTEA reauthorization proposal due out later this month.
Congestion Mitigation and Air Quality Improvement (CMAQ) -- The President's Budget
proposes a $169 million increase for CMAQ, the federal program that directs funds toward
transportation projects which improve ambient air quality. Given the fact that California received
14.9% of federal CMAQ dollars in Fiscal Year 1996, Clinton's emphasis on air quality programs is
good news for the state.
Demonstration Projects -- The President's FY1998 Budget calls for a $279 million cut in
surface transportation demonstration projects. The General Accounting Office estimates, however,
California received only approximately 5.7% of federal dollars for such projects.
Emergency Relief -- Given the recent flooding in California, all federal disaster programs
have immediate relevance for the state. The FHWA program, which funds the reconstruction of
federal-aid highways and bridges damaged in natural disasters, will be cut from $287 million to $100
million in the President's Budget. This figure is misleading, however, because the reduction comes
in the context of an overall $5.8 billion Presidential request in contingent funds which can be used for
this and other federal relief programs.
State Infrastructure Banks -- In 1996, California was named one of ten states that will test
the use of State Infrastructure Banks (SIBs) as a method for financing transportation projects. The
SIBs, enacted as part of the National Highway System Designation Act, are designed to support bond
financed programs and to leverage state, local and private sources of capital to increase investment in
the nation's surface transportation infrastructure. The President has proposed $150 million for this
program in FY 1998.

FEDERAL TRANSIT ADMINISTRATION -- The President's Budget proposes nearly $4.4 billion
in obligations for FTA programs, representing a reduction of 21% from FY1998 levels. The bulk of
the reduction comes from cuts to the formula and discretionary grant programs. These two
programs, which in combination accounted for $5.2 billion in FY1997 obligations, would collapse
into one budget category with $3.4 billion in FY1998 obligations. The budget includes a policy
proposal which fund all FTA programs through the Mass Transit Account of the Highway Trust
Fund. Shifts away from federal transit funding could seriously disadvantage California's share of all
federal transportation funding. Unlike California's modest shares in highway programs (ranging
from 3.9%-10.3% in FY95, the latest year available), the state claims high percentages of federal
transit dollars (program shares ranged from 15.1% - 20.8% in FY95).

FEDERAL EMERGENCY MANAGEMENT AGENCY
In recent years, federal disaster relief programs have played a vital role in the economy of
California. The President's FY1998 Budget advances a new funding approach for federal disaster
assistance. In the past, FEMA has received a base funding level which, in the event of a
Presidentially declared emergency or natural disaster, was supplemented by emergency
appropriations from Congress. This financing mechanism resulted in Congressional emergency
disaster relief was being appropriated outside of the pre-existing budget framework. In an effort to
increase national readiness and flexibility with respect to disasters and emergencies, the President has
proposed a new structure. As a base appropriation, FEMA will receive $2.3 billion in FY1998, a
decrease of $2.2 billion from FY1997 levels. This reduction is compensated for by a $5.8 billion
request in contingency funding for FY1998. The contingency figure is calculated as the average
annual emergency spending from 1991-1997. The base programs will have access to the proposed
contingency fund once all current appropriations have been obligated, and a presidential decision has
been made to make funds available. This funding approach is meant to allow federal flexibility in
disaster response without dedicating specific dollar figures to particular programs.
Flood Relief and Coastal Protection -- The President proposes $44.7 million for immediate
flood relief and levee upgrades along 13 miles of the American and Sacramento Rivers and another
$7 million along the San Mateo Creek. In addition, $2.5 million has been proposed for appropriation
for construction in Humboldt Harbor and another $200,000 for the San Lorenz River. Provided
approval by Congress, the early allocation of money in the President's budget will allow the Army
Corps of Engineers to begin immediate reconstruction of the recently flood ravaged levees.

COMMERCE DEPARTMENT -- Two technology programs at the Commerce Department would
be increased under the proposed budget. The Advanced Technology Program, for whose funds
California has competed well but which has faced budget difficulties, would grow from $225 million
to $275 million. And manufacturing extension partnerships would grow from $95 million to $129
million.

CONSUMER PRICE INDEX -- The budget proposes an additional $17.5 million for an
examination of the CPI. The CPI has been in the news recently since a congressionally-appointed
commission concluded that the index overstates inflation, and Fed Chairman Alan Greenspan agreed.
If extra funds are in fact allocated to the Bureau of Labor Statistics for data improvement, another
subject worth considering would be development of state-by-state figures for cost-of-living. At
present, BLS calculates a CPI only for the for 29 metropolitan areas and for the nation as a whole.
_____________

The California Institute is a 501(c)(3) nonprofit corporation conceived by the state's bipartisan elected
representatives, and created and sustained with the support of the state's business, labor, and
academic communities. The Institute seeks to identify issues critical to the economic health of
California, to coordinate the development of research data pertaining to these issues, and to
communicate this policy research information to the California Congressional Delegation in a
bipartisan manner.

Volume 4, Bulletin 4 -- February 6, 1997