The 2017-18 Budget

Control Section 4.11—Position Transparency

Oversight of State Workforce Essential for Budget Oversight. The state’s costs for employee compensation are determined by the number of people employed by the state and the salaries and level of benefits the state provides these employees. A significant share of the state’s budget pays for salaries and benefits of state workers. Specifically, in 2015‑16 the state spent about $12 billion General Fund to pay for salary and benefit costs for roughly 200,000 full-time equivalent (FTE) state employees (not including higher education state employees). This level of spending constituted about 10 percent of total General Fund spending in 2015‑16. In at least the near future, costs for employee health, retiree health, and pension benefits are expected to be among the fastest growing costs in the state budget. Approving or rejecting departmental requests for additional position authority—the number of FTE employees departments may employ to administer state programs—is fundamental to the Legislature overseeing and controlling a department’s budget. In order for the Legislature to effectively oversee state operations and expenditures, it is essential for information about the number of positions in state government to be easily understood, transparent, and—to the extent possible—accurate. Often, unfortunately, this is not the case, as we discuss in this post.

Common for Departments to Have Vacant Positions . . . Each year, departments’ costs of doing business increase. These costs include (1) inflationary cost increases for operating expenses and equipment (rent, postage, fuel, etc.) and (2) merit salary adjustments that departments must provide to eligible employees every year. Departments generally do not receive augmentations to pay for these rising costs. In many cases—as we discussed in 2015—departments hold authorized positions vacant and redirect funds associated with vacant positions to pay for these rising costs. In addition to positions held vacant for purposes of freeing up funds, departments typically have vacancies resulting from natural turnover among staff.

. . . Creating Challenges for Oversight. Because positions frequently are held vacant for strategic reasons, it can be difficult for the Legislature to evaluate a department’s resource needs. In the past, the Legislature has used different tools to understand and control the number of vacant positions at departments. For example, the budget used to assume that about 5 percent of a department’s authorized positions would be vacant at any one time due to natural turnover. At least in recent years, departments typically have had much more than 5 percent of their authorized positions vacant at any one time. Because this assumption no longer accurately reflected reality, it was removed from the budget in 2012 through a statewide budget exercise. In another example, the Government Code used to require the State Controller’s Office (SCO) to abolish certain authorized positions in departments that were vacant for six consecutive months. (Under this process, a department’s expenditure authority was not affected by any position authority being abolished.) As we indicated in 2008 and 2015, this law was ineffective as most chronically vacant positions were not eliminated. The law was repealed as part of the 2015‑16 budget package.

2015‑16 Budget Adopted New Process Beginning for 2016‑17 Budget. In tandem with proposing the repeal of the SCO process discussed above, the administration proposed a new process in developing the Governor’s budget to account for vacant positions in state government. This new process was intended to allow the Legislature to know—as best as possible—the number of filled positions in a department. Control Section 4.11 of the 2015‑16 Budget Act directed the Department of Finance (DOF) to conduct a biennial review of departmental budgets to determine—over the preceding three years—departments’ average (1) number of filled positions and (2) amount of money spent on personnel versus other operating expenses. As directed in the control section, the results of this reconciliation process were shown in documents accompanying the Governor’s 2016‑17 budget plan.

DOF Methodology for Reconciliation. As DOF has explained to us, the default methodology of the 2015 reconciliation (1) used data from Schedule 7A (also known as the Salaries and Wages Supplement) for the years 2014‑15, 2013‑14, and 2012‑13 to determine the “three-year rolling average” of actual filled positions and expenditures and (2) adjusted the 2015‑16 authorized positions and expenditures to equal the three-year rolling average. DOF indicates that it gave its analysts discretion to deviate from this default methodology if—based on their knowledge of a department’s operations—they thought the default methodology would incorrectly estimate a department’s filled positions in 2015‑16. The Governor’s 2016‑17 budget documents displayed an adjustment—not really explained in the department’s budget documents—labeled “Budget Position Transparency” that listed adjustments made to departments’ displayed positions and expenditures under the DOF’s process. In theory, the adjustment resulted in the budget display showing the historically filled positions for a department and the amount of money a department spent on these positions. The adjusted 2015‑16 staffing levels were used to estimate the 2016‑17 and 2017‑18 (in the 2017‑18 budget proposal) staffing levels shown in the budget documents.

2017‑18 Budget Assumes DOF Conducts Same Analysis. Under Control Section 4.11, the Governor’s proposed 2017‑18 budget directs DOF to perform its reconciliation of filled positions and expenditures in 2017. The proposed language specifies that “this analysis will be performed again as part of the 2018‑19 Governor’s budget process.”

LAO Comments

“Budget Position Transparency” Process Lacks Transparency. We have not been able to conduct an exhaustive review of the results of the 2015 DOF Control Section 4.11 reconciliation. We have found, however, a number of instances where DOF deviated from the default methodology. We reviewed 14 departments of varying sizes that, in total, represent about one-half of the state’s workforce. Of the departments we reviewed, we found only four where it was clear that DOF followed the default methodology. The budget position transparency adjustments DOF made to the other ten departments were significantly different—by between 2 percent and 27 percent of authorized positions—from the adjustments that would have been made using the default methodology, according to our rough estimates. DOF submitted no documentation to the Legislature as part of the 2016‑17 budget identifying that a different methodology was used for certain departments or explaining the methodology used in these cases. As such, the exercise obviously did not improve transparency very much.

Reasonable to Use Different Methodologies, but Provide Explanation. In many cases, it might not make sense to use historical averages of filled positions to estimate current-year staffing levels. While developing the 2018‑19 budget, DOF arguably should have the flexibility to use its insights into state departments and programs to inform its estimate of the number of filled positions in 2017‑18. In fact, we would note that in the ten cases where DOF deviated from the default DOF methodology, it seems that whatever methodology DOF used was—on average—more accurate than the default methodology in estimating the number of filled positions in 2015‑16. That being said, an exercise aimed at enhancing transparency obviously should be transparent. Each department’s budget display in the Governor’s 2018‑19 budget should inform the Legislature how DOF derived the displayed position authority.

LAO Recommendation

Amend Budget Bill Language to Enhance Oversight. The administration will need to determine how it will estimate the number of filled positions it reports in the 2018‑19 Governor’s budget. We recognize that any estimate will be imperfect due to the fluid nature of the workforce and other limitations. We also recognize that the administration might need to use different methodologies for different departments. However, to allow for legislative and public oversight of the state’s workforce, the administration should provide greater context to the adjustments it reports in the 2018‑19 Governor’s budget than was provided following the last reconciliation process. The Legislature should not put stock in the reported staffing levels without first knowing the methodology used by the administration to derive these adjustments for each department. We recommend that the Legislature amend the proposed budget bill language for Control Section 4.11 to allow for greater legislative and public oversight of the state workforce and budget. Specifically, we recommend the following changes:

SEC 4.11. To promote greater transparency in how departments develop their support budgets, which include personal services and operating expenses and equipment, as defined in Section 3.00, the Department of Finance shall perform a biennial process for reconciling department budgets as it concerns the aforementioned categories. This reconciliation process was last completed and included as part of the 2016–17 Governor’s Budget process; therefore, no adjustments are required for the 2017–18 budget process. This reconciliation process shall analysis will be performed again as part of the 2018‑19 Governor’s Budget process. As part of the 2018‑19 Governor’s Budget submitted to the Legislature on or before January 10, 2018, the administration shall provide to the Chair of the Senate and Assembly committees considering the budget, as well as the Legislative Analyst’s Office, a description for each and every department of (1) total number of authorized positions and corresponding expenditure authority in 2016‑17, 2015‑16, and 2014‑15, (2) the number of filled positions and corresponding actual expenditures in 2016‑17, 2015‑16, and 2014‑15, (3) the adjustment being made to the budget display as a result of the reconciliation process, and (4) the methodology used to derive the reported adjustment. The Legislature also requests that the Department of Finance include this information on its state budget website, to the extent it deems feasible.

Future Legislative Review. The key objective of our recommendation above is to have DOF show its work in listing position vacancies in the annual budget document next year. Once DOF develops a transparent process for this exercise, the Legislature will be better equipped in future years to consider if this process meets its needs in budgeting for personnel resources each year. We encourage the Legislature to continue this conversation in future years to ensure that that the personnel information displayed in the budget is useful.