California Capitol Hill Bulletin, 5/16/97 Page 1 THE CALIFORNIA INSTITUTE FOR FEDERAL POLICY RESEARCH 419 New Jersey Avenue, SE, Washington, D.C. 20003 voice: 202-546-3700 fax:: 202-546-2390 e-mail: website: California Capitol Hill Bulletin Volume 4, Bulletin 16 -- May 8, 1997 To expand communications between Washington and California, the California Institute provides periodic faxed bulletins regarding current activity on Capitol Hill which directly impacts our state. Bulletins are published weekly during sessions of Congress, and occasionally during other periods. The e-mail edition is made possible in part by a computer server donation from Sun Microsystems. CALIFORNIA DELEGATION AND ITS BIPARTISAN TASK FORCE WIN BATTLE TO KEEP MEDICAID PER CAPITA CAP OUT OF BUDGET AGREEMENT When the skeletal outline of an FY 1998 federal budget agreement was announced, absent was a provision which had been expected, a per capita cap on federal Medicaid spending. The omission of a per capita cap is a significant victory for the California Congressional delegation, its bipartisan task force, and many others in and from the state. A letter opposing the cap from nearly every Californian in Congress was sent shortly before the agreement was struck, and behind-the-scenes meetings with key members and staff helped make the case in the final days. Many of these efforts were the work of the California delegationıs bipartisan task force, led by Reps. David Dreier (San Dimas), Jane Harman (Marina Del Rey), Tom Campbell (Campbell), Gary Condit (Ceres), Zoe Lofgren (San Jose), and Buck McKeon (Santa Clarita). Task Force members had been appointed by delegation chairs Jerry Lewis (Redlands) and Lucille Roybal-Allard (Los Angeles). The per capita cap provision, which had been included in the Presidentıs budget as well as other budget proposals, would have forced 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, the California delegation letter argued that progress toward per capita parity -- allocating Medicaid funds according to numbers of poor persons -- would be a more equitable approach. A per capita cap would penalize California and other states which have controlled excess spending on medical care, and reward inefficient states for their past exorbitance. While California serves nearly twice as many indigent patients as New York, California receives only 10% of federal Medicaid funds compared to New York's 15.6%. California spends about $2,000 per poor patient, compared to the national average which is over $3,000, while New York spends about $6,500. Thus, Medicaidıs federal match means that the federal government pays $1,000 for Californiaıs enrollees, and $3,250 per New Yorkıs. A per capita cap would have locked in those figures permanently. TREATMENT OF MEDICAID DISPROPORTIONATE SHARE HOSPITALS (DSH) PAYMENTS REMAINS AT ISSUE The second half of Californiaıs Medicaid concerns has yet to be fully addressed by the FY 1998 budget agreement announced last week. Though details of the agreement may not be worked out for some time, a significant portion of the remaining savings in Medicaid are likely to come from Medicaidıs ³Disproportionate Share Hospitals² (DSH) program. As originally devised by Congress, DSH payments were to be made to hospitals which serve a disproportionately high share of indigent and uninsured patients. However, California is the only state to have stuck to this original intent. California strictly enforces its targeting of DSH payments -- only hospitals which serve populations at least 25% poor or uninsured are eligible in California -- while many states allow DSH payments to go to nearly any hospital. This abuse of DSH payments by other states has jeopardized the entire program, while California has played by the rules. An April 29 letter to budget negotiators signed by a large portion of the California delegation stated that, ³A policy that rewards states like California that have truly targeted their DSH funds and protects state flexibility is a more equitable policy goal.² At the ³California Day² meeting on Capitol Hill last week, Rep. Brian Bilbray (San Diego) pointed out that all of the DSH funds in question could be saved simply by targeting funds the way Congress originally intended them to be targeted -- the way the California standard already does. In addition, Rep Henry Waxman (Los Angeles) added that considerable cost savings have already been achieved in Medicaid generally, and there is little room left to cut. MATSUI & HERGER CIRCULATING LETTER ON R&D TAX CREDIT Reps. Bob Matsui (Sacramento) and Wally Herger (Marysville) are seeking signatures from California Congressional delegation members on a letter to House Ways and Means Chairman Bill Archer (Texas) supporting a permanent extension of the Research and Experimentation Tax Credit (also called the R&D tax credit). The members hope that the extension can be included in the tax package that will be approved as part of the recent budget agreement. The current tax credit expires on May 31 of this year. It was extended in 1996 after a lapse of over a year. The 1996 extension also included alternative methods of calculating the credit to ensure more effective coverage. In support of the permanent extension, Reps. Herger's and Matsui's letter cites the R&E credit to California's pharmaceutical and electronics industries, stating that those two industries alone have increased research spending from $10.5 billion to $64.2 billion since the credit was first enacted in 1981. Earlier this year Rep. Matsui joined Rep. Nancy Johnson in sponsoring H.R. 947 to permanently extend the credit. Rep. Herger is an original co-sponsor of that bill, as are a bipartisan group of several other Californians. Other members wishing to sign the letter should contact Dave Olander in Rep. Herger's office (225-3076) or Cynthia Johnson in Rep. Matsui's office (225-7163) by Wednesday, May 14. ESHOO CIRCULATING LETTER ON FUNDING OF HIGH ENERGY PHYSICS PROGRAMS Rep. Anna Eshoo (Atherton) is circulating a Dear Colleague letter urging Energy and Water Appropriations Subcommittee Chairman Joe McDade (Pennsylvania) to provide the High Energy Physics (HEP) program with Fiscal Year 1998 funding at least sufficient to compensate for losses due to inflation. FY 1997 HEP funding was $670 million, $40 million under the target level set by a Congressionally-appointed advisory panel. The Administration's FY 1998 request remains at $670 million, which would not account for inflationary increases. The letter argues that in California, ³this proposal will cause a particularly acute problem at the Stanford Linear Accelerator Center (SLAC), requiring cancellation in the final year of an entire experiment involving over 180 scientists and in which Congress has invested $3 million in 1997.² Rep. Eshoo is working with others in the California delegation including Rep. Tom Campbell (Campbell). An inflation increase of 3%, which would constitute a $20 million increase to the HEP program, would allow the Department of Energy to restore funds to avert layoffs at SLAC. Offices wishing to sign the letter should contact Ryan Trapani in Rep. Eshoo's office at 225- 8104. SENATE COMPROMISE ALLOWS CENSUS BUREAU TO CONTINUE SAMPLING PLANS On Wednesday, the Senate agreed to compromise language in an amendment to the emergency spending bill that will enable the Census Bureau to continue to prepare for a 2000 census that employs the use of statistical sampling as part of its framework. The amendment replaced previous Senate bill language which would have prevented sampling altogether. The Census Bureau has proposed the partial use of sampling as a means to correct the historic undercounts of past decennial censuses -- as much as 4 million persons are thought to have been undercounted in the 1990 decennial census nationwide, and 834,000 persons in California alone -- but skeptics of sampling have voiced concerns over the legality and accuracy of sampling. The previous language of the emergency spending bill, inserted by opponents of the Bureau's plan, prohibited the use of any funds in FY 1997 from being used ³to plan or otherwise prepare for the use of sampling in taking the 2000 decennial census² (see Volume 4, Bulletin 15). The compromise amendment offered by Sen. Ernest Hollings (South Carolina) allows the Census Bureau to use appropriations to plan the 2000 census with models including sampling, but would prohibit the Bureau from making any irreversible decisions regarding the use of sampling that would affect the final population numbers. In practical terms, the compromise language has little bearing on the Bureau's plans to institute census dress-rehearsals -- including one in Sacramento in 1998 -- or other programmatic decisions. The original language relating to the 2000 census in the emergency spending bill was so vague as to prohibit even the use of the traditional long form which goes only to 5% of households and is used to ascertain critical demographic and socio-economic information used to implement federal programs. Franklin Raines, Director of the Office of Management and Budget, had warned Senate leaders last week that President Clinton would veto the emergency spending bill -- intended to provide disaster relief to flood ravaged California and the Midwest -- if it contained language that prohibited the effective development of the 2000 census. The House will not take up their version of the emergency spending bill until next week at the earliest. At present, there is no language in the House version that would prohibit the use of sampling. HOUSE INTERNATIONAL RELATIONS HOLDS HEARING ON ENCRYPTION EXPORTS The House International Relations Subcommittee on International Economic Policy and Trade held a hearing Thursday on easing restrictions on the export of encryption software and devices -- which are manufactured by U.S. computer electronics companies to ensure the security of financial and other transactions conducted electronically. The U.S. historically has severely restricted the export of these items because of the potential that terrorists and other criminal groups may use them to cover up their activities. Recently, the Department of Commerce issued a new regulation that opens a two year window for the export of more sophisticated encryption items, as long as they have a key recovery system. The key to unlocking the encrypted material must be kept by a third-party approved by the U.S. government. Should U.S. law enforcement authorities need access to the key, because of suspected criminal activity, a court order would be required, as is currently the case for wiretaps. Among others, the Committee heard from Deputy Director of the National Security Agency, William Crowell; William Reinsch, Undersecretary of Commerce, Bureau of Export Administration; Robert Litt, Deputy Assistant Attorney General, Criminal Division, Department of Justice; and Humphrey Polanen, General Manager, Network Security and Electronic Commerce Group, Sun Microsystems, Inc., on behalf of the Computer and Communications Industry Association. As in the past, the government witnesses defended the need for a U.S. sanctioned key recovery system, which would guarantee law enforcement's access to criminal material if the need arose. Mr. Polanen, on the other hand, argued that the availability of encryption products from foreign sources is already undermining current U.S. policy, and injuring the competitiveness of U.S. companies. He also stated that the U.S. should not dictate the encryption technique to be used, but rather that any key recovery mechanism should be market-driven. Finally, he urged resolution of the issue because without the security provided by sophisticated encryption devices, the Internet will not be able to fulfill its potential as a major vehicle for international commerce. The testimony from the hearing is available on the Committee's Internet homepage at http://www.house.gov/international_relations. SENATE JUDICIARY HOLDS HEARING ON PATENT BILL On Wednesday the Senate Judiciary Committee held a hearing on S. 507, the Omnibus Patent Act of 1997, introduced by the Committee's Chairman, Sen. Orrin Hatch (Utah). The bill, substantially similar to H.R. 400 as it was reported by the House Judiciary Committee, will bring U.S. patent laws into harmony with other industrialized countries. It will require that in most instances patent applications be published 18 months after the original filing date. The bill also converts the U.S. Patent and Trademark Office (PTO) into a government corporation, but does not contain a provision to ensure that all fees collected will be retained for use by the PTO, rather than diverted to the general treasury. Instead, Chairman Hatch in his opening statement revealed that he is working with the Senate Budget Committee to sunset the patent surcharge fees after FY 1998 to ensure that they are not siphoned off for other purposes. He noted that the recent budget agreement envisions an end to the fees after FY 1998. The Committee heard from Rep. Dana Rohrabacher (Fountain Valley), a leading opponent of H.R. 400 in the House. Rep. Rohrabacher urged the Committee to adopt the amendments added on the House floor before passage of the House bill. One of those amendments, offered by Rep. Marcy Kaptur (Ohio), stripped the bill of the 18 month publication requirement. Instead, the House amendment provides that if a patent is not granted within five years, the application will be published if the PTO determines it is in the national interest to do so. Rep. Rohrabacher's testimony to the Senate Committee argued that this amendment it is needed to protect small inventors. However, the high technology companies argue that it will open the door again to "so-called" submarine patents (See Bulletin Vol. 4, No. 7). Bruce Lehman, Assistant Secretary of Commerce and Commissioner of Patent and Trademarks, testified for the Administration. Mr. Lehman testified against the Kaptur amendments added to the House bill, especially the delayed publication requirement. He stated that the automatic exclusions in the amendment could involve up to 35% of annual application filings, because it would preclude the inventing public from knowing, until patent grant, a great portion of some technologies. This would put them in the position of undertaking a great deal of research and development with an "incomplete technological picture." He also stated that the amendment would impose costly and time consuming administrative burdens on the PTO, and allow the threat of submarine patents to continue. The high technology industry is also strongly opposed to the Kaptur amendments. The Committee also heard from a panel of private sector witnesses, including Michael Kirk, Executive Director of the American Intellectual Property Law Association. Copies of the testimony can be obtained from the Senate Judiciary Committee at 224-5225. BUDGET AGREEMENT WOULD HELP ELDERLY AND DISABLED LEGAL IMMIGRANTS The budget agreement, recently negotiated by the White House and the Congressional leadership, proposes to restore Supplemental Security Income payments and Medicaid to legal immigrants. These payments had been eliminated under the welfare reform law enacted in 1997. The agreement envisions providing about $10 billion to restore these benefits. There apparently is still some confusion among the negotiators, however, on whether the restored coverage would be effective for legal immigrants in the U.S. as of August 22, 1996, the date of enactment of the welfare law, or May 2, 1997, the date of agreement on the budget deal. The White House wants the May 2 date to control. The attempt to restore these benefits may not avoid a fight, however. Rep. Bill Archer (Texas), Chairman of the House Ways and Means Committee which has jurisdiction over SSI, opposes the deal, and wants instead to give the states a smaller block grant, probably in the neighborhood of $2 billion, to deal only with the most egregious cases of need. On a related front, the supplemental appropriations bill being considered in the Senate contains $125 million to continue SSI coverage for legal immigrants through the last two months of Fiscal Year 1997. The formula used to allocate the grant, however, is skewed against California. (See Bulletin Vol. 4, Number 15.) Although the provision would give California about between $43 and $48.7 million, Los Angeles County has estimated, based on Social Security Administration numbers, that 165,380 California immigrants will lose about $144.6 million in SSI benefits by the end of the fiscal year; thus the net loss even with the supplemental extension will be in the neighborhood of $95.8 to $101.6 million. California is home to roughly 40% of the nationıs legal immigrants. IDEA BILL MARKED UP IN BOTH HOUSES; CALIFORNIAıS SHARE WILL NOT IMPROVE FOR SEVERAL YEARS; INCARCERATED YOUTH ISSUE REMAINS The House and Senate committees with education jurisdiction held simultaneous sessions Wednesday to mark up identical drafts of the Individuals with Disabilities Education Act (IDEA) reauthorization bill. Proponents expect the bill to move quickly and plan a Presidential signing before the Memorial Day recess. The bill represents a compromise between education committees in the Senate (who wanted to retain the current IDEA formula which disadvantages California) and in the House (who had sought to change the formula for distributing the $3 billion in basic grant funds to an objective formula based on each stateıs population). The compromise bill retains the existing formula until total appropriations for the program reaches $4.9 billion -- which may not be for several years -- and then uses the new formula only to distribute funds in excess of that amount. California now receives only about 10% of federal IDEA funds; the state would receive more than 12% of new funds, once that $4.9 billion trigger level is reached. A nagging problem remains how to deal with IDEAıs application to incarcerated felons aged 18 to 21. According to staff to Governor Pete Wilson, even an amendment inserted in committee (in the Senate by Senator James Jeffords and in the House by Chairman Bill Goodling) still does not resolve the problem. A May 7 letter from Wilson to Jeffords and Goodling detailed the problem and sought full exemption from IDEA requirements. This week, Senator Barbara Boxer introduced a bill to resolve the problem. PENTAGON TO CUT 60,000 MILITARY SERVICEMEMBERS AND 80,000 CIVILIANS According to press reports, the Defense Department plans to significantly reduce military, civilian and reservist rolls over the next several years. A report in Wednesdayıs Washington Post quotes senior Pentagon officials as planning to cut 60,000 active duty military servicemembers (25,000 from the Air Force; 18,000 from the Navy; 15,000 from the Army; and 2,000 from the Marines) 80,000 civilian DOD employees, and 70,000 military reservists (primarily from the Army National Guard). Defense Secretary William Cohen reportedly intends to seek two more base closure rounds, in 1999 and 2001. The cuts would seek to offset efforts to revitalize defense procurement accounts, which have declined in recent years, as well as pay for ongoing operational costs associated with peacekeeping missions. CALIFORNIANS SEEK IMPROVEMENT IN USDA ENVIRONMENTAL PROGRAM FORMULA A letter sent last week to OMB Director Franklin Raines by a large share of California House members seeks to target funds for the U.S. Department of Agricultureıs EQIP (Environmental Quality Incentive Program) to areas with bona fide environmental needs, rather than simply base funding on outdated historical patterns. The program allocates $200 million in federal funds. The letter, spearheaded by Reps. Cal Dooley (Visalia) and Jerry Lewis (Redlands), noted that the proposed formula ³would effectively cut Californiaıs allocation by 50% from $10 million to $5 million.² Because the program is supposedly meant for areas of special environmental sensitivity, various California advocates have sought to have the allocations based solely on environmentally- related formula factors (such as wetlands acreage and erosion potential), rather than also relying on traditional agricultural factors (such as cropland, grazing acreage and livestock numbers). Californiaıs share of the program would be greatly limited by use of such unrelated factors. Further, some reports indicate that the allocation plan may be in part due to a reluctance to move staff of the Natural Resources Conservation Service (NRCS) from one location to another. FCC UNANIMOUSLY APPROVES E-RATE On Wednesday, the Federal Communications Commission unanimously voted to establish an ³e-rate² -- a discounted education rate schools and libraries for telecommunications service -- as part of implementing the Telecommunications Act of 1996. The e-rate offers school districts discounts of 20-90% for telecommunications services based on poverty levels and discounts on inside connections to classrooms and Internet access including installation and maintenance costs. Despite Californiaıs leadership in technology industries, a 1996 survey found that 85% of Californiaıs schools lack on-line access, the third lowest rate in the fifty states. Rep. Zoe Lofgren and various California colleagues wrote the FCC urging support for the provision. PPIC RELEASES REPORT ON CALIFORNIA MPOıS AND FEDERAL TRANSPORTATION POLICY In a recently released report titled Federal Transportation Policy and the Role of Metropolitan Planning Organizations in California, researchers from the Public Policy Institute of California (PPIC) take a close look at the experiences of California MPOs under the Intermodal Surface Transportation Efficiency Act (ISTEA) of 1991. Specifically, authors Paul Lewis and Mary Sprague examine ³recent patterns of MPO decisionmaking regarding the investment of federal transportation funds.² In light of the imminent reauthorization of ISTEA, the report also evaluates the potential California impacts of proposed changes to federal transportation law. For more information or to obtain a copy of the report, contact the PPIC at (415) 291-4400 or access their web page at http://www.ppic.org. CALIFORNIA WORLD TRADE COMMISSION RELEASES REPORT ON NAFTA The California World Trade Commission (WTC) has recently completed a report which assesses the impact of the North American Free Trade Agreement (NAFTA) over the first three years of its implementation. Titled ³NAFTA: A Preliminary Assessment of the Agreementıs Impact on California,² the study evaluates changes in key California industries to determine whether NAFTA has successfully achieved its intended objectives. Acknowledging that NAFTA is ³still only a work in progress," the report nevertheless concludes that the Agreement has been extremely successful for California and the United States as a whole. NAFTA has had a profound effect on both the U.S. and California trading relationships with Mexico and Canada. U.S. trade with Mexico has increased nearly 60% over the past three years, rising from $82 billion in 1993 to $130 billion in 1996. Under the NAFTA Agreement, California exports to Mexico have grown $2.6 billion, topping $9 billion in 1996. Canada continues to be the U.S.ıs number one trading partner, with annual bilateral trade nearing $300 billion. U.S. exports to Canada have increased 32% since the implementation of NAFTA, and the state has experienced a similar surge in its trade status with Canada. In 1996, Californiaıs exports to our northern neighbor increased 14%, bringing total export growth under NAFTA to $3.4 billion. A copy of the WTC report can be obtained at the California Department of Commerce Internet website at http://www.commerce.ca.gov/international/nafta/. On a related note, the U.S. International Trade Commission is currently conducting an investigation on the economic effects of NAFTA over its first three years. To that end, the ITC will hold a public hearing on May 15, 1997 to solicit input for its investigation from all interested parties. The ITC is located at 500 E Street, SW, Washington, D.C. 20436. The Commission will accept written statements until May 22; the fax number is (202) 205-2104. For further information on either the investigation or the hearing, contact the Office of the Secretary at (202) 205-1802 or visit the ITC Internet site at http://www.usitc.gov. AEA RELEASES CALIFORNIA TECHNOLOGY EMPLOYMENT FIGURES Last weekıs Bulletin reported on an American Electronics Association (AEA) study, which analyzed the status of the high technology industry in each of the fifty states. As a supplement to the Cyberstates Report, which highlighted the success of Californiaıs high technology industry, the AEA has issued data showing that in 1996, high-tech employment in California topped 724,000. That figure represents the highest level of the decade. According to the AEA statistics, job growth occurred in every major section within California's high-tech industry in 1996 . The most pronounced growth occurred in the high-tech manufacturing sector where 28,400 jobs were added between 1995 and 1996. Within the manufacturing quarter during this period, the largest gains were posted by the semiconductor industry (5,000+) and the office equipment industry (4,000+). In 1996, the software and computer services sector also posted dramatic job growth, adding more than 26,000 new positions. CALIFORNIA AVERAGE ANNUAL HIGH-TECH EMPLOYMENT, 1990-1996 BY SECTOR 1990 1991 1992 1993 1994 1995 1996 Computers and Office Equipment 102,476 96,211 90,963 87,618 82,846 84,700 88,768 Consumer Electronics 16,367 16,270 15,201 14,945 15,897 16,503 17,742 Communications Equip. 31,914 27,885 28,634 32,790 30,229 32,698 37,989 Electronic Components and Accessories 82,582 76,824 65,249 65,451 65,875 67,629 73,903 Semiconductors 61,033 60,098 56,281 51,798 52,493 58,293 63,306 Defense Electronics 98,554 94,864 81,750 69,786 61,975 56,525 57,893 Industrial Electronics 66,435 62,683 57,720 56,209 55,572 56,172 60,128 Electromedical Equip. 6,303 6,360 7,667 7,672 9,193 9,232 9,634 Photonics 11,032 10,687 10,363 8,013 9,354 8,471 9,211 Total Manufacturing 476,696 451,882 413,828 394,282 383,434 390,223 418,574 Total Telecommunications Svcs. 127,698 119,963 122,126 122,415 122,025 120,646 120,890 Total Software and Computer Svcs. 110,591 111,042 120,628 124,857 134,681 158,480 184,717 Total High-Tech Industry 714,985 682,887 656,582 641,554 640,140 669,349 724,181 CALIFORNIA HOME RESALES INCREASE IN FIRST QUARTER According to a National Association of Realtors (NAR) report released Wednesday, California posted a 6.4% increase in home resales during the first quarter of 1997. That growth stands in stark contrast to the slower than expected 1.8% rate of growth in the West and the 1.4% national average growth. The California growth is particularly surprising considering that California was buffeted by unusually heavy snows early in the year and prolonged rain and flooding. NAR reports can also be accessed on their web page at http://www.realtor.com. Additional information is available from the California Association of Realtors at http://www.car.org.