Proposed Reductions to State Operations

This post provides our office’s initial assessment of the Governor’s May Revision proposals to (1) administratively establish a new ongoing unallocated 7.95 percent reduction to state operation expenditures and (2) make the 2024-25 unallocated reduction to state operation expenditures related to vacant positions ongoing (it was approved as “one time” as part of the Legislature’s early action package).

LAO Bottom Line. Between the two proposals, the administration proposes that the Legislature delegate responsibility to the Governor to determine how to permanently reduce state operations by roughly 10 percent. Any resulting reductions would be made based on the Governor’s priorities and not necessarily the Legislature’s priorities. As we describe below, while we think there is merit to the Department of Finance (DOF) finding operational efficiencies, we think there is a high risk that the level of savings assumed from these two unallocated reductions will not fully materialize in 2024-25. To the extent that savings do not materialize, this proposal would create a larger future budget challenge.

In January, Governor Proposed One-Time Reduction to Reduce State Operations Costs Based on Vacant Positions. As part of the Governor’s proposed budget in January, the administration assumed that state operations would be reduced in 2024-25 by $1.5 billion ($762.5 million General Fund). We issued our analysis of this proposal in March 2024. The proposed reduction was proposed to be established in the budget bill under Control Section 4.12. The proposed control section did not identify a dollar amount for the reduction. Instead, the language indicated that “each item of appropriation” in the budget except the university systems, the Legislature, and the Judicial Branch “shall be adjusted, as appropriate, to achieve savings associated with vacant positions.” The language specified that the Director of DOF shall determine the adjustments made to each item and that DOF “shall make the final determination of the budgetary and accounting transactions to ensure proper implementation of this section.” At the time of the January proposal, the reduction was unallocated and proposed to be in effect for one year with funding levels restored beginning in 2025-26. Because the reduction was unallocated, the assumed savings were reflected in the statewide budget Item 9901—an item that contains budget adjustments that are not attributed to specific departments or programs. The proposal was adopted as part of the early action agreement.

Governor’s May Revision Proposal

New Ongoing 7.95 Percent Reduction to State Operations. The May Revision includes a new proposed $2.2 billion unallocated reduction in 2024-25 and $2.8 billion ongoing beginning in 2025-26 to reduce General Fund state operations costs by 7.95 percent. The proposed reduction would be established under Control Section 4.05. The control section excludes the Legislature but specifies that all other state entities (including university systems and the Judicial Branch) would be subject to reductions achieved through “operational efficiencies and other cost-reduction measures including, but not limited to, reorganizations, eliminations of boards and commissions, rate changes, contract reductions, elimination of excess positions, and the cancellation or postponement of information technology projects.” The control section specifies that the reductions would be determined by the Director of DOF and that DOF would be responsible for determining the budgetary and accounting transactions to ensure proper implementation of reorganizations and eliminations. While the language that the administration proposes does not exempt any Executive Branch state operation from the exercise, the administration has said in hearings that 24-hour operations (for example, prisons or state hospitals) would be excluded from the reductions.

May Revision Modifies January Proposal to Make Reductions Related to Vacant Positions Ongoing. The May Revision proposes to change the adopted early action to reduce state operation expenditures related to vacant positions by $762.5 million General Fund so that (1) the position authority that is associated with the reduced funding would also be eliminated and (2) the reductions would be ongoing.

LAO Comments

Combined, Governor Proposes a 10 Percent Ongoing Reduction to State Operations. As proposed, the reductions made under each proposal would be determined through two distinct administrative exercises after the start of the 2024-25 fiscal year where DOF would work with departments to identify reductions. Together, the two proposals represent a large unallocated cut to state operations—totaling to about a 10 percent permanent reduction in state operations.

Finding Efficiencies in State Government a Good Endeavor, but Proposal Suggests Very High Level of Inefficiencies in State Government. As we indicated in our March analysis, a statewide exercise led by DOF to identify budgetary inefficiencies is a worthy endeavor. While such an exercise could be beneficial in any year, it seems particularly important to minimize unnecessary or duplicative spending when the state faces a budget problem. However, the proposal presumes a high level of inefficiency in state government by asserting that $1 in every $10 of state operations expenditures can be eliminated without affecting state services.

Difficult to Achieve Savings Without Affecting State Employees. Employee compensation is a significant portion of state operation expenditures. In some departments, more than 80 percent of state operation expenditures are for state employee salaries and benefits. Although the administration has not yet articulated a clear strategy for how savings of this magnitude would be achieved, it is our current understanding from the administration that the proposed reductions would be done in a way that does not affect current employees. It would be difficult for the state to achieve the full level of assumed savings without affecting state employees, especially at departments where employee compensation represents the bulk of state operations expenditures. One likely outcome of the proposed reduction could be that departments stop hiring new employees and stop filling positions made vacant from turnover—raising the vacancy rate.

Proposed Process Excludes the Legislature. Under the administration’s proposal, the Legislature would have no role in determining how to allocate reductions. Instead, the reductions would be made through an internal administrative process. As a result, any reductions would reflect the administration’s priorities. The proposed process gives no deference to legislative priorities. Further, the proposal has no clear mechanism to inform the Legislature of any reductions made through the administrative exercises.

Magnitude of Reduction Likely Would Result in Erosion of State Services. The administration asserts that the reductions would not affect service levels for departments subject to the reduction. We encourage the Legislature to be skeptical of this claim. It seems highly unlikely to us that permanently reducing roughly $1 in every $10 spent on state operations would have no effect on services.

Unclear How to Reconcile State Operation Reductions Alongside Budget Change Proposals for Increased State Operations and Positions. The $2.8 billion General Fund ongoing savings resulting from the proposed 7.95 percent reduction assumed in the May Revision was calculated based on a reduction relative to the level of spending proposed in the Governor’s January budget. As part of the May Revision, the Governor proposes new increases to state expenditures and position authority to implement enacted legislation and other new activities. The incongruity of the administration working to make large unallocated reductions to state operations while also incorporating newly approved expenditure and position authority is difficult to reconcile. Money is fungible, if the Legislature were to approve both the unallocated reductions and the proposed budget augmentations to fund new activities, what assurances can the administration provide that the newly approved funding and position authority would be used to implement the new activities and not, instead, used to backfill reductions established through the administrative exercises?

Proposed Process to Achieve 10 Percent Reduction Starts Late and Seems Inefficient. It is our understanding that DOF would not start the process to work with departments to identify savings until the fall. Waiting until the state fiscal year has started could result in an erosion of the expected savings. Additionally, it seems inefficient for DOF and all state departments to simultaneously complete two distinct unallocated reduction budget exercises. While one of the exercises is proposed to be driven by vacant positions, the ultimate goal of both exercises is the same: permanently reduce General Fund state operations costs. It would be more efficient to consolidate the two exercises into one.

High Risk That Assumed Savings Would Not Materialize in Full in 2024-25. Unallocated cuts can be difficult to achieve in full. This especially is true when the reductions are determined through a collaborative process that allows for departments to be exempt from any reductions or receive a lower level of reduction. Moreover, the proposed unallocated reduction is very large. The administration would not begin to identify reductions until after the start of the fiscal year. This creates a high risk that the savings will not materialize in full in 2024-25. To the extent that savings do not materialize, this proposal would create a larger future budget challenge. While this proposal may help the state reach a balanced budget “on paper,” in reality, the unrealized savings would flow into the 2025-26 budget process and add to any fiscal challenges the Legislature is facing that year.