Mental-health fund rakes in unexpected $890 million

Mental-health services in California are poised to receive an unexpected
windfall–on the order of hundreds of millions of dollars–as a new fund
dedicated to serving the mentally ill is flush with cash, raising $890
million above estimates in the last two years.

The new money, which is a whooping 57 percent above original projections,
comes from Proposition 63, approved by voters in 2004. The measure levied a
1 percent tax hike for those making more than $1 million in order to expand
services for mentally ill seniors, children and homeless.

“I am thrilled,” says former Assemblyman Darrell Steinberg, who authored the
legislation to place Proposition 63 on the ballot. “When you consider 40
years where mental health and the mentally ill have often been left behind,
I am glad the number is higher rather than lower.”

Projected by the nonpartisan Legislative Analyst’s Office (LAO) in 2004 to
raise $750 million in the 2005-06 fiscal year and $800 million this year,
the mental-health fund is now expected to rake in $1.18 billion last year
and another $1.25 billion this year, according to the latest numbers
produced by the Department of Finance.

The same high-income earners that have fueled California’s overall surge in
revenues–the state pulled in $7.5 billion more than expected in the current
budget–are the driving force behind the unanticipated boost for the
mental-health fund.

“Income at the top end of the distribution has soared over the last two
years and given that the Proposition 63 tax is a tax on the top tier that
fund has particularly benefited,” says Brad Williams, the director of fiscal
forecasting at the LAO.

Carol Hood, deputy director of the Department of Mental Health, says the
administration believes the revenues are a one-time boon and notes that even
the revised numbers are still estimates.

“We won’t know the final amount until 15 months after the end of a calendar
year,” says Hood. “This amount can go up and down.”

The influx of money has left the mental-health-services world with two
unique challenges. The first is that although money is pouring in, there is
not yet an existing infrastructure to properly spend the funds on helpful

“We have had so many years of cuts that we lost much of our management
infrastructure. So when you expand quickly, it is difficult,” says Hood.
“This is quite a challenge.”

The second problem is that Proposition 63 specifies that the new funds must
be used exclusively for creating and expanding new programs. That has left
current core mental-services programs at the county level facing cuts, while
those same counties rush to create innovative programs.

“We cannot use Mental Health Services Act to backfill programs previously
funded by the county,” says Hood. “Many counties are facing reductions at
the same time they are trying to expand quickly.”

Between the lack of infrastructure and the inability to fund existing
programs, much of the money raised is simply sitting in the bank.
“It goes into the Mental Health Services Fund and sits there collecting
interest,” says Hood of much of the estimated $2.7 billion already

Because Proposition 63 only draws money from the wealthiest of the
wealthy–those earning more than $1 million a year–the windfall effect has
been even more pronounced than for the state overall.

For example, in 2004 the LAO estimated that the general-fund revenues in
2006-07 would be $86 billion, while in reality tax receipts have climbed
closer to $94.4 billion, a 9.7 percent increase.

But Proposition 63 revenues in 2006-07 are projected at $1.25 billion,
compared to an estimated $800 million in 2004, a 57 percent increase.

“We’ve had a couple of very good years and for taxpayers at the top end,
extraordinarily good years,” says Williams.

The tax revenues from top-earners are notoriously volatile, as much of their
revenue is not derived from steady salaries but from stock options and
capital gains that vary from year to year. Steinberg, who chairs the
16-member Mental Health Services Oversight and Accountability Commission
that approves project funding, says the commission will keep a “prudent
reserve” to compensate for down-turns in the economy.

“We recognize, and recognized from the beginning, the volatility of the tax
on million-dollar earners,” says Steinberg. “There will be a time when the
revenue is less and we need to prepare for that time to make sure we are
never suspending services.”

Steinberg says the commission will keep a reserve equal to 50 percent of the
previous year’s appropriations to compensate for any downturns. But for now
the commission is basking in the good revenues.

“We will take advantage of every dollar that allows us to build anew a
system that helps people,” he said.

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