Summary of LAO Findings and Recommendations on the 2013-14 Budget

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	Program	Budget Issue	LAO Finding Or Recommendation	Last Updated
Go Back	Department of Industrial Relations	Regulatory assessments and related proposals	Reauthorize Occupational Safety and Health Fund (OSHF) and Labor Enforcement and Compliance Fund (LECF) assessments and repeal the high hazard assessment that is deposited in the Targeted Inspection and Consultation Fund (TICF). Reduce OSHF by $9 million and increase TICF by like amount. Contingent on related legislative actions, reduce OSHF authority by $350,000 and four positions.	2-15-13

Detailed Narrative
Background *Division of Occupational Safety and Health ("Cal/OSHA").* Cal/OSHA is responsible for enforcing occupational safety and health standards, investigating occupational injuries, and inspecting and permitting elevators, amusement rides, and passenger tramways. Funding for Cal/OSHA has historically come from the General Fund, several special funds, and federal funds. One special fund source for Cal/OSHA, the TICF, is supported by a special assessment on high hazard employers. TICF funds are used for workplace inspections and safety consultation services for high hazard employers. Cal/OSHA is also supported by the OSHF, which is an employer assessment on an employer’s total workers' compensation insurance premium or on total “indemnity” (workers’ compensation losses) for self-insured employers. Division of Labor Standards Enforcement (LSE). The LSE Division enforces labor laws and investigates employers for issues related to wages, work hours, prevailing wage on public works projects, and discriminatory retaliation in the workplace. Similar to Cal/OSHA, funding for LSE has historically come from General Fund, special fund, and federal fund sources. *Shifting Funding From the General Fund to Regulatory Assessment Revenues in Cal/OSHA and LSE.* In 2008-09, about $24 million of Cal/OSHA's operations and $38 million of LSE’s operations were funded by the General Fund. The 2009-10 budget eliminated General Fund support for Cal/OSHA and increased the assessment and funding in the OSHF to offset the General Fund reduction. The 2009-10 budget package also created an assessment on all employers, for deposit in the newly created LECF, to pay for LSE costs formerly funded from the General Fund. General Fund support for LSE was reduced to $19.6 million in 2009-10 and eliminated entirely in 2010-11 through increased LECF assessments. Both the OSHF and LECF assessments are subject to an annual cap on total revenue collections and a sunset date of July 1, 2013. Governor's Proposal The Governor's 2013-14 budget proposes to: Eliminate the sunset date and increase the annual revenue caps for the OSHF and LECF assessments. Suspend collection of the high hazard assessment in years that the OSHF assessment is collected. Loan $5 million from the TICF for prevailing wage enforcement in the compliance monitoring unit. Eliminate TICF funding for Cal/OSHA and backfill this funding with an offsetting OSHF assessment increase. LAO Analysis *General Fund Cost Pressures if Regulatory Assessments Not Reauthorized.* The OSHF and LECF assessments pay for what would otherwise be General Fund costs in Cal/OSHA and LSE. We consider employer assessments to be an appropriate funding mechanism for Cal/OSHA and LSE on a policy basis because it is appropriate for the costs of regulatory activities to be paid for by the regulated community that creates the societal need for the regulation and benefits from the regulation (such as being issued a permit to operate a business). For most state programs, it has been the policy of the Legislature to fund regulatory activities from fees. If the Legislature does not reauthorize the OSH and LECF assessments, there would be an approximate $80 million General Fund cost pressure in 2013-14 and ongoing. *Simplifying the Administration of Occupational Safety Assessments.* High hazard employers currently pay both the high hazard and OSHF assessments. The administration proposes a statutory change to suspend the high hazard assessment during a period when the OSHF assessment is being collected. (Accordingly, under the administration's proposal, if the Legislature does not reauthorize the OSHF assessment as proposed by the administration, the high hazard assessment would continue to be assessed to raise revenue for Cal/OSHA.) It states as a rationale that this will simplify the assessment process for occupational safety and health operations and eliminate the "double billing" of high hazard employers. The administration's proposal creates greater efficiency in the assessment process, although the proposal has the effect of decreasing assessments on high hazard employers and increasing assessments for all other employers because suspending the high hazard assessment would be accompanied by a commensurate increase in the OSHF assessment (to make the administration’s proposal revenue neutral). However, we note that high hazard employers would continue to pay higher assessments than less hazardous employers under the administration's proposal because OSHF assessments are calculated based upon an employer's workers' compensation premium or total indemnity, and high hazard employers would typically have higher premiums or indemnities. *Unnecessary Fund Shift From TICF to OSHF.* The 2013-14 budget estimates a $13 million fund balance in the TICF (which is net of the $5 million proposed loan for prevailing wage enforcement). Because of the existing fund balance, there is no budgetary need to eliminate TICF funding for Cal/OSHA and backfill the eliminated funding with an increased OSHF assessment in 2013-14 as the administration proposes. TICF funding for Cal/OSHA could continue at its historical level of approximately $9 million in 2013-14. In future years, if the Legislature has suspended or eliminated the high hazard assessment, DIR would likely need to increase OSHF assessments and budget expenditure authority to continue Cal/OSHA operations at current funding levels. *Revenue Caps on the OSHF and LECF Assessments.* Existing law caps the annual revenue collected in the OSHF and LECF at $52 million and $37 million, respectively (as adjusted by any over/under assessments from previous fiscal years). The administration proposes to increase the revenue caps for the OSHF and LECF to $57 million and $46 million, respectively, and allow for adjustment of these revenue limits due to increases in the department's expenditure authority. Therefore, the revenue cap proposed by the administration would only restrict revenue collection above what the department needed given its annual appropriation levels, so it is somewhat unclear what purpose the revenue cap would serve under the administration’s proposed structure. Potential alternative language (similar to what applies to some other regulatory agencies) would specify that the department is only allowed to raise the revenues necessary to fund the reasonable and necessary costs of the program and establish a prudent fund reserve. LAO Recommendations We have the following recommendations for DIR's regulatory assessment-related proposals: We recommend that the Legislature adopt the Governor’s proposal to reauthorize the OSHF and LECF assessments. The OSHF and LECF assessments are an appropriate funding mechanism for Cal/OSHA and LSE division workload and avoid General Fund cost pressures of approximately $80 million. If the Legislature reauthorizes the OSHF assessment, we recommend repealing the high hazard assessment (and not simply suspending the assessment as the Governor proposes) because of the administrative efficiencies achieved through the proposal. If the Legislature does not reauthorize the OSHF assessment, we recommend allowing the high hazard assessment to continue as is under current law so that Cal/OSHA could continue to offset its high hazard employer workload costs through the high hazard assessment. Given the availability of TICF fund balances, we recommend that the Legislature decrease OSHF expenditure authority in 2013-14 by $9 million and increase TICF expenditure authority by a like amount. For consistency with this recommendation, we also recommend that the Legislature direct DIR to reduce the OSHF assessment for 2013-14 by $9 million. If the Legislature reauthorizes the OSHF assessment and repeals the high hazard assessment as we recommend, we also recommend reducing OSHF expenditure authority by an additional $350,000 and four authorized positions. These positions are related to the administration of the high hazard assessment, and this workload would be unnecessary if the assessment were eliminated. (While the Governor has proposed to suspend the assessment, he has not proposed to eliminate the positions to administer the assessment.) We have no issues with the Governor’s proposal to loan $5 million from the TICF for prevailing wage activities in the compliance monitoring unit. The use of revenue caps for the OSHF and LECF assessments is a policy choice for the Legislature. The purpose behind the revenue caps as structured by the administration in its proposal is not clear. There are alternative ways to structure these caps. The Legislature should determine its policy on such caps and structure any cap that it wishes to impose in a way that aligns with its policy objectives.

Detailed Narrative

Background

Division of Occupational Safety and Health ("Cal/OSHA"). Cal/OSHA is responsible for enforcing occupational safety and health standards, investigating occupational injuries, and inspecting and permitting elevators, amusement rides, and passenger tramways. Funding for Cal/OSHA has historically come from the General Fund, several special funds, and federal funds. One special fund source for Cal/OSHA, the TICF, is supported by a special assessment on high hazard employers. TICF funds are used for workplace inspections and safety consultation services for high hazard employers. Cal/OSHA is also supported by the OSHF, which is an employer assessment on an employer’s total workers' compensation insurance premium or on total “indemnity” (workers’ compensation losses) for self-insured employers.

Division of Labor Standards Enforcement (LSE). The LSE Division enforces labor laws and investigates employers for issues related to wages, work hours, prevailing wage on public works projects, and discriminatory retaliation in the workplace. Similar to Cal/OSHA, funding for LSE has historically come from General Fund, special fund, and federal fund sources.

Shifting Funding From the General Fund to Regulatory Assessment Revenues in Cal/OSHA and LSE. In 2008-09, about $24 million of Cal/OSHA's operations and $38 million of LSE’s operations were funded by the General Fund. The 2009-10 budget eliminated General Fund support for Cal/OSHA and increased the assessment and funding in the OSHF to offset the General Fund reduction. The 2009-10 budget package also created an assessment on all employers, for deposit in the newly created LECF, to pay for LSE costs formerly funded from the General Fund. General Fund support for LSE was reduced to $19.6 million in 2009-10 and eliminated entirely in 2010-11 through increased LECF assessments. Both the OSHF and LECF assessments are subject to an annual cap on total revenue collections and a sunset date of July 1, 2013.

Governor's Proposal

The Governor's 2013-14 budget proposes to:

Eliminate the sunset date and increase the annual revenue caps for the OSHF and LECF assessments.
Suspend collection of the high hazard assessment in years that the OSHF assessment is collected.
Loan $5 million from the TICF for prevailing wage enforcement in the compliance monitoring unit.
Eliminate TICF funding for Cal/OSHA and backfill this funding with an offsetting OSHF assessment increase.

LAO Analysis

General Fund Cost Pressures if Regulatory Assessments Not Reauthorized. The OSHF and LECF assessments pay for what would otherwise be General Fund costs in Cal/OSHA and LSE. We consider employer assessments to be an appropriate funding mechanism for Cal/OSHA and LSE on a policy basis because it is appropriate for the costs of regulatory activities to be paid for by the regulated community that creates the societal need for the regulation and benefits from the regulation (such as being issued a permit to operate a business). For most state programs, it has been the policy of the Legislature to fund regulatory activities from fees. If the Legislature does not reauthorize the OSH and LECF assessments, there would be an approximate $80 million General Fund cost pressure in 2013-14 and ongoing.

Simplifying the Administration of Occupational Safety Assessments. High hazard employers currently pay both the high hazard and OSHF assessments. The administration proposes a statutory change to suspend the high hazard assessment during a period when the OSHF assessment is being collected. (Accordingly, under the administration's proposal, if the Legislature does not reauthorize the OSHF assessment as proposed by the administration, the high hazard assessment would continue to be assessed to raise revenue for Cal/OSHA.) It states as a rationale that this will simplify the assessment process for occupational safety and health operations and eliminate the "double billing" of high hazard employers. The administration's proposal creates greater efficiency in the assessment process, although the proposal has the effect of decreasing assessments on high hazard employers and increasing assessments for all other employers because suspending the high hazard assessment would be accompanied by a commensurate increase in the OSHF assessment (to make the administration’s proposal revenue neutral). However, we note that high hazard employers would continue to pay higher assessments than less hazardous employers under the administration's proposal because OSHF assessments are calculated based upon an employer's workers' compensation premium or total indemnity, and high hazard employers would typically have higher premiums or indemnities.

Unnecessary Fund Shift From TICF to OSHF. The 2013-14 budget estimates a $13 million fund balance in the TICF (which is net of the $5 million proposed loan for prevailing wage enforcement). Because of the existing fund balance, there is no budgetary need to eliminate TICF funding for Cal/OSHA and backfill the eliminated funding with an increased OSHF assessment in 2013-14 as the administration proposes. TICF funding for Cal/OSHA could continue at its historical level of approximately $9 million in 2013-14. In future years, if the Legislature has suspended or eliminated the high hazard assessment, DIR would likely need to increase OSHF assessments and budget expenditure authority to continue Cal/OSHA operations at current funding levels.

Revenue Caps on the OSHF and LECF Assessments. Existing law caps the annual revenue collected in the OSHF and LECF at $52 million and $37 million, respectively (as adjusted by any over/under assessments from previous fiscal years). The administration proposes to increase the revenue caps for the OSHF and LECF to $57 million and $46 million, respectively, and allow for adjustment of these revenue limits due to increases in the department's expenditure authority. Therefore, the revenue cap proposed by the administration would only restrict revenue collection above what the department needed given its annual appropriation levels, so it is somewhat unclear what purpose the revenue cap would serve under the administration’s proposed structure. Potential alternative language (similar to what applies to some other regulatory agencies) would specify that the department is only allowed to raise the revenues necessary to fund the reasonable and necessary costs of the program and establish a prudent fund reserve.

LAO Recommendations

We have the following recommendations for DIR's regulatory assessment-related proposals:

We recommend that the Legislature adopt the Governor’s proposal to reauthorize the OSHF and LECF assessments. The OSHF and LECF assessments are an appropriate funding mechanism for Cal/OSHA and LSE division workload and avoid General Fund cost pressures of approximately $80 million.
If the Legislature reauthorizes the OSHF assessment, we recommend repealing the high hazard assessment (and not simply suspending the assessment as the Governor proposes) because of the administrative efficiencies achieved through the proposal. If the Legislature does not reauthorize the OSHF assessment, we recommend allowing the high hazard assessment to continue as is under current law so that Cal/OSHA could continue to offset its high hazard employer workload costs through the high hazard assessment.
Given the availability of TICF fund balances, we recommend that the Legislature decrease OSHF expenditure authority in 2013-14 by $9 million and increase TICF expenditure authority by a like amount. For consistency with this recommendation, we also recommend that the Legislature direct DIR to reduce the OSHF assessment for 2013-14 by $9 million.
If the Legislature reauthorizes the OSHF assessment and repeals the high hazard assessment as we recommend, we also recommend reducing OSHF expenditure authority by an additional $350,000 and four authorized positions. These positions are related to the administration of the high hazard assessment, and this workload would be unnecessary if the assessment were eliminated. (While the Governor has proposed to suspend the assessment, he has not proposed to eliminate the positions to administer the assessment.)
We have no issues with the Governor’s proposal to loan $5 million from the TICF for prevailing wage activities in the compliance monitoring unit.
The use of revenue caps for the OSHF and LECF assessments is a policy choice for the Legislature. The purpose behind the revenue caps as structured by the administration in its proposal is not clear. There are alternative ways to structure these caps. The Legislature should determine its policy on such caps and structure any cap that it wishes to impose in a way that aligns with its policy objectives.