The 2025-26 Budget

State Departments’ Operational Efficiencies
(Control Sections 4.05 and 4.12)

Introduction

The 2024-25 budget package included two control sections—Control Section 4.05 and Control Section 4.12—that aimed to identify and implement efficiencies across nearly all state entities to produce ongoing budgetary savings without adverse effects on state services. Both control sections established statewide administrative exercises led by the Department of Finance (DOF) to (1) identify efficiencies and (2) eliminate vacant positions and related funding. As we discussed in our March 2024 analysis, May 2024 analysis, and part of our 2024-25 spending plan series, the budget assumed that these two exercises combined would (1) result in General Fund savings totaling $2.9 billion ($200 million of which was assumed from the universities) in 2024-25 and $3.6 billion ($774 million of which was assumed from the universities) in 2025-26 and ongoing and (2) reduce the number of vacant positions by about 10,000. As we discuss in this analysis, the 2025-26 Governor’s Budget now assumes that a lower level of savings and positions reduction will be achieved in 2024-25 and ongoing. The comments, analysis, and recommendations portions of this analysis generally pertain to the effects on state departments and excludes the effects on the universities. For more information about the effects on the universities, please refer to our separate analyses related to the universities. This analysis does not address assumed reductions to trial court local assistance as those reductions are outside of either control section—refer to our analysis of trial courts for information about those reductions.

2024-25 Budget

The 2024-25 budget included two control sections aimed at reducing General Fund state operations expenditures through efficiencies. We discuss the two control sections below. In total, the 2024-25 budget assumed the savings from these control sections would reduce state expenditures by $3.7 billion ($2.9 billion General Fund) in 2024-25 and $4.3 billion ($3.6 billion General Fund) ongoing beginning in 2025-26. In total, these savings represent roughly 10 percent of General Fund state operations expenditures for affected departments in 2024-25.

Control Section 4.05. The enacted budget assumed General Fund savings of $2.2 billion in 2024-25 and $2.8 billion ongoing beginning in 2025-26 to reduce General Fund state operations expenditures by up to 7.95 percent. Although the budget assumed this level of savings could be achieved, it did not actually reduce departmental budgets by this amount. Instead, the reduction was made to the overall budget totals and remained “unallocated” to departments. The control section applied to almost all of state government, including the university systems and the state operations of the judicial branch (local assistance funding for trial courts was reduced by a similar amount outside of the control sections). Only the Legislature and Legislative Counsel Bureau were excluded from the language of the control section. Under the control section, the assumed General Fund savings would be 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 specified that the savings would be allocated by DOF and that DOF would be responsible for determining the budgetary and accounting transactions to ensure proper implementation of reorganizations and eliminations.

Reporting Requirements of Control Section 4.05. The control section included specific requirements for the administration to report information to the Legislature. Specifically, (1) on or before October 1, 2024, DOF would notify the Joint Legislative Budget Committee (JLBC) what direction, if any, had been issued to affected state entities and the criteria DOF would use to assess savings identified by state entities; (2) in the event that a reduction to a particular program, department, or agency exceeded 7.95 percent, DOF would notify JLBC 30 days prior to the reduction being implemented; and (3) on or before January 10, 2025, DOF would notify JLBC “how the reduction in state operations expenditures was achieved” by reporting by department and program the funding source and magnitude of any changes to departments’ budgets pursuant to the control section.

Control Section 4.12. The enacted 2024-25 budget assumed savings of $1.5 billion ($762.5 million General Fund) resulting from about 10,000 authorized positions being vacant in 2024-25. The control section applied to all state entities except the Legislature, Legislative Counsel, universities, and judicial branch. Like Control Section 4.05, Control Section 4.12 did not distribute savings or reduced position authority to departments. Instead, the reductions were made to the whole budget and were unallocated to departments. The budget specified that DOF would propose, as part of the Governor’s 2025-26 budget proposal, the permanent elimination of vacant positions and associated funding to make the assumed savings ongoing beginning in 2025-26.

Reporting Requirements of Control Section 4.12. The control section required DOF to report specific information to the JLBC and to the exclusive bargaining representatives of the state’s 21 collective bargaining units on January 10, 2025. Specifically, for each position proposed to be eliminated in 2025-26, DOF was required to report (1) the department and program associated with the eliminated position, (2) the job classification of the eliminated position, (3) the savings associated with the eliminated position, and (4) the total amount of savings associated with the eliminated positions.

Governor’s 2025-26 Budget

In this section, we discuss (1) what is assumed in the Governor’s proposed 2025-26 budget under Control Section 4.05 and 4.12 and (2) the report that the administration submitted to the Legislature as part of the January 10 budget proposal to identify the assumed savings under these two control sections.

Lower Savings Statewide Than Was Assumed in 2024-25… The administration assumes that the administrative exercises conducted pursuant to Control Section 4.05 and 4.12 resulted in lower savings than was assumed as part of the 2024-25 budget. In both cases, the savings resulting from the control sections remain unallocated under the Governor’s proposal. Figure 1 compares the savings that were assumed in the 2024-25 budget with the savings that the administration identified in its report to the Legislature. As we discuss in our analysis, The 2025-26 Budget: Higher Education Overview, the universities have greater control over their budgets than state departments. For example, the universities have greater control over their (1) revenues through tuition and (2) expenditures through setting employee compensation policies—whether through collective bargaining or otherwise—independent from the state’s policies. These fundamental differences in authority make it difficult to compare the effects of the identified savings on the universities with the effects on state departments. As such, the remainder of this analysis will discuss effects on state departments, excluding the universities—refer to the other analysis for information about the effects on the universities.

…Especially Across State Departments. The administration identified significantly lower General Fund savings across state departments relative to what was assumed in the 2024-25 budget. The administration indicates that it identified about $800 million General Fund savings in 2024-25 and less than $700 million ongoing General Fund savings beginning in 2025-26 across state departments—less than one-fourth of the $2.8 billion in ongoing General Fund savings across state departments that was assumed in the 2024-25 budget. Across all funding sources, the administration identified $1.7 billion in ongoing savings resulting from the two control sections. Of this total, the administration indicates that it was able to identify more non-General Fund savings than General Fund savings—with the General Fund representing 43 percent of the total identified savings—far below the 2024-25 budget assumption that 78 percent of the savings from state departments would benefit the General Fund. The administration also assumes that about 6,400 vacant positions would be eliminated, compared with the 10,000 assumed in the 2024-25 budget. The funding associated with these 6,400 vacant positions are more heavily funded from non-General Fund sources than the 2024-25 budget assumed. Whereas the 2024-25 budget assumed that one-half of the funding associated with eliminated positions would be from the General Fund, the administration indicates that 37 percent of the funding associated with the identified positions is from the General Fund.

Report Submitted to Legislature Lists Departments and Assumed Savings at High Level. The administration submitted a letter to the JLBC on January 10 that included a two-page list organized by department that identified the “General Fund,” “Other Funds,” and “Total” savings identified in 2024-25 and 2025-26 pursuant to Control Section 4.05 and Control Section 4.12 for each state department, including the universities. (The report also included local assistance savings to trial courts; however, these savings were not part of either control section and is not included in this analysis.) The report did not indicate which specific programs or funding sources were affected by the identified savings. The report also included the number of positions identified for elimination; however, it provided no information as to which classifications or which programs were affected by the vacant position elimination. The California Department of Forestry and Fire Protection (CalFire) was included in the list of identified savings; however, a footnote indicated that CalFire would be exempted from the exercise and that savings would not be achieved for that department in light of the fires in Southern California.

LAO Analysis and Comments

We analyze and provide comments regarding the implementation of Control Sections 4.05 and 4.12 under the Governor’s proposed 2025-26 budget in the section below. Seeking efficiencies in state government always is a worthwhile effort. We find that the assumed level of savings in the proposed budget generally is more reasonable than the savings target that was included in the 2024-25 budget. That being said, the very limited information that has been shared with the Legislature to date makes it very difficult to assess the viability of the assumed savings and raises concerns that the administration will not be able to achieve the full level of savings assumed, especially in the current year.

Efficiencies in State Government

Finding Efficiencies in State Government a Good Endeavor. Control Sections 4.05 and 4.12 put forward a worthy goal for DOF to lead a statewide effort to identify budgetary inefficiencies in state operations. Such an exercise is a meritorious endeavor in any year; however, it is particularly important to minimize unnecessary or duplicative spending when the state faces a budget problem.

Governor’s Proposal Reflects Significantly Lower—Perhaps More Reasonable—Savings From Efficiencies in Most State Departments. The report to the JLBC shows that most state departments are expected to achieve much lower levels of General Fund state operations savings than assumed in the 2024-25 budget. The identified ongoing savings represent 2.4 percent of the $28.6 billion General Fund state operations expenditures associated with the affected departments in 2024-25. Given the exercises did not aim to reduce program service levels, achieving 2.4 percent in savings seems more reasonable than the roughly 10 percent target assumed in the budget.

Not Clear What Efficiencies Would Result in Identified Savings. We have tried to get information from some of the larger departments to better understand what types of operational changes are being implemented to achieve the identified savings. As we discuss in greater detail later, we have received limited information thus far. From the little information we have received, it seems that there may be variation in how the departments approached the exercise. Some seem to have identified true efficiencies—for example, identifying federal funds that could replace state General Fund expenditures—rather than indicating they are reducing services. Others have stated that they are unable to provide any detail at this time. Ultimately, our communications with the administration reveal that many of the details of how departments will implement the efficiencies are still under development. Moreover, whether there would be impacts on services is unknown at this time.

Lack of Information on Savings Provided to Legislature

List From Administration Does Not Fully Meet Reporting Requirements. The list of identified savings that the administration provided to the Legislature provides very high-level information and does not fully meet the reporting requirements specified under the control sections for the January 10 reports. (We note that the Control Section 4.05 October 1, 2024 reporting requirement was satisfied by the administration providing to the JLBC the instructions it sent departments in Budget Letter 24-24. The JLBC has not been notified of any departments with identified savings exceeding 7.95 percent.) There is no information about specific funding sources, affected programs, or affected job classifications as is required by the control sections.

Very Limited Information Available About How Savings Would Be Achieved From DOF… When compared with the amount of information that departments must submit to justify even small increases in their budgets (for example, the level of detail provided in budget change proposals), the two-page list to explain a multibillion-dollar adjustment to the budget that affects virtually all departments is insufficient to adequately inform the Legislature of the action. Moreover, discussions with DOF did not provide us much additional information about identified savings. DOF indicated that more information would be available in the spring, and suggested that we should ask individual departments for specific information about the actions they took to achieve the savings and the potential effects of the savings.

…Or Departments. We sent inquiries to some of the largest departments to better understand how the identified savings might be implemented. While a couple of departments provided us relatively detailed information—for example, indicating that the savings would be achieved though hiring freezes, leveraging more federal funds, reducing general expenses (printing costs, travel, and/or discretionary training), or moving to supply more administrative services in-house—the most common response we received from departments was that DOF was working on the proposal and that more information would be available in the spring. Below, we discuss the current information gaps that we have identified and provide some of the limited information that we did receive from departments.

Limited Information From Asking Departments Directly

Cause of Variation in Savings Across Departments Unknown. When excluding the universities, the identified 2024-25 statewide savings under Control Section 4.05 is around 2 percent of 2024-25 General Fund state operations expenditures; however, there is significant variation among these departments. Some departments are identified as having no identified General Fund savings (for example, Department of Technology and the State Auditor), others are around the statewide average of 2 percent (for example, California Department of Corrections and Rehabilitation, Department of Finance, and Secretary of State), others are identified at or near the full 7.95 percent savings target (for example, the Agricultural Labor Relations Board, California Air Resources Board, and Department of Health Care Access and Information), and a handful appear to possibly exceed the 7.95 percent savings target (for example, the Tahoe Conservancy and the Citizens Compensation Commission). The rationale for the variation in the size of the savings is unclear. On the one hand, it could be that some departments were able to identify more efficiencies than others. On the other hand, because little information is available about the identified savings, it seems that departments are still working to find ways to achieve their identified level of savings making it difficult to assess whether any variation is connected to real, identified efficiencies.

Implementation of Current-Year Savings Efforts Underway. Many of the departments we communicated with indicated that they have begun implementing at least some of the operational changes that would be necessary to achieve the identified savings in the current fiscal year. However, other departments indicated that they could not share with us any information about current-year implementation of the identified savings at this time and that more information would be submitted to the Legislature in the spring.

Necessary Statutory, Regulatory, or Fee Changes Unknown. It is not known, but possible, that changes in law—whether in statute, regulations, fee structure, or other—are necessary to achieve some of the identified savings. This raises important implementation timing and oversight questions in the instances of savings being achieved in the current year. When we asked departments, they reported to us either that they did not anticipate changes were necessary or that they were reviewing whether any change would be necessary. In instances where savings have been implemented before necessary changes in law are enacted, it is unclear under what authority the savings have been implemented. In instances where savings have not yet been implemented and changes in law are required, it is unclear that there is sufficient time in the fiscal year for the changes in law to be enacted and for the savings to be implemented.

Lack of Information Raises Uncertainty Whether Administration Will Achieve the Identified Efficiencies Savings. In the few departments that provided relatively more detailed information, it appeared that many departments identified actual efficiencies—that is, the savings would not affect services. In some cases, however, responses suggested that how efficiencies would be achieved was still under development. In these cases, impacts to service levels seems possible. Moreover, in some cases, the savings that departments have identified for 2024-25 cannot be repeated in the future. For example, multiple departments identified that the savings they identified in 2024-25 were one time in nature (contributing to the decline in savings from 2024-25 to 2025-26). In some of these cases, how the identified out-year reductions will be maintained is yet to be determined. The lack of information raises uncertainty that the identified savings necessarily are the result of identified efficiencies and whether the lower spending levels will be achieved fully in the current year or ongoing.

Assumed Savings

Exempting Departments Likely to Further Erode Assumed Savings. The list of identified savings reported to the Legislature indicated that, due to recent wildfire activity in Southern California, CalFire is now exempt from the exercise and that no savings were expected from that department. It is our understanding that other departments currently included in the report also might become exempt from the exercise due to concerns about the state’s ability to achieve savings while responding to the fires. The suggestion that these departments cannot maintain service levels while reducing their expenditures by the levels identified as efficiency savings in the report to the Legislature raises concerns that the identified savings are not true efficiencies but rather constitute cuts that could negatively affect current service levels. The report had identified about $40 million General Fund in savings from CalFire (about 6 percent of the total identified General Fund savings). Because these savings were initially included in the Governor’s January proposal, this and any other savings or eliminated positions in the report associated with departments now exempted from the exercises would further erode the savings that were originally assumed in 2024-25.

Large Share of Assumed Total Savings From Unspecified “Other Funds.” Why non-General Fund sources reflect a majority of the identified savings is unclear. Further, with the report provided to the Legislature not identifying non-General Fund funding sources beyond labeling them “other funds,” it is not clear whether this category includes just special funds or other non-General Fund state funding sources or even nonstate sources, for example, federal funds. The administration should provide justification for any reduction to nonstate funds. (For example, lower federal funds reasonably could occur in instances where there are matching requirements that directly tie the amount of federal funds the state receives to the amount of state funds spent.)

Proposed Savings in Special Fund Expenditures Should Be Accompanied by Discussion of Effects on Charges. A special fund is created to fund a specific purpose and is supported by taxes and fees levied on payors who receive the service supported by the fund. The administration reports that it identified $1 billion in reduced non-General Fund expenditures. We would expect any discussion of savings benefitting special funds to include a discussion of the effect, if any, lower spending from these special funds has on fees and other revenues that support the affected special funds. Based on our communications with departments, it seems that any such analysis currently is not available.

LAO Recommendations

Given the lack of information available to the Legislature, in this section we lay out our recommendation that the Legislature use the subcommittee process to solicit information from departments and to make its final determination regarding the savings assumed in the budget and the overall structure of Control Sections 4.05 and 4.12 after the administration has submitted its final report of identified savings.

Use Subcommittee Process to Provide Oversight of Identified Savings… We recommend that the Legislature use the subcommittee process to gain more clarity and increase transparency around the identified savings for each department. Similar to how a proposed budget augmentation requires justification, a budgetary reduction or savings identification also requires justification and explanation to ensure that legislative priorities are maintained. The purpose of these discussions would be to understand how the department plans to achieve the identified savings and whether the identified lower spending level is the result of efficiency gains or whether it could affect services. If services would be affected by the lower spending levels, the Legislature could use the discussion to understand if the effects on services are consistent with legislative priorities.

…Before May Revision. The administration has not provided a specific time line for its additional report on efficiencies. As such, the administration may not provide additional information until its May Revision proposal (or later). Waiting until May to understand departments plans would provide the Legislature limited time to assess the proposed savings. As such, the subcommittee hearings before May Revision could be an opportunity for the Legislature to make clear its priorities for each department as the administration determines the final savings it intends to present in the spring. The hearings also can be used to set expectations of DOF so that the Legislature can hold DOF accountable whenever it identifies the specific savings by funding source and program.

Ask Each Department Questions to Better Understand Identified Savings and Their Effects. We recommend the discussions in subcommittee hearings focus on five broad categories: (1) understanding the methodology used by the administration to arrive at the identified savings, (2) any potential effects on programs and services, (3) the effects on state law, (4) the effects on the state workforce, and (5) the implications of reducing non-General Fund sources through the exercise. In Figure 2, we present questions that the subcommittees could use to direct the conversation through each of these categories. The overarching goals of these questions—and the discussion broadly—is to ensure that the Legislature is comfortable that the effects of the identified savings are consistent with Legislative priorities and intent.

Be Prepared for Final Details to Arrive Late in the Budget Process. The administration has made clear that more information on the specific actions taken to achieve the savings will be shared in the spring. The administration has not committed to a specific date, but we suspect this most likely means that the final report could be included as part of the Governor’s May Revision proposal. There likely will be insufficient time for the subcommittees to discuss each identified saving with departments between May 14 (when the May Revision is released) and June 15 (when the Legislature approves a budget). Using the subcommittee process before the May Revision to discuss the above questions with departments will better position the Legislature to understand whether the final reported savings are consistent with legislative priorities. Additionally, having an accounting of all the actions a department is planning to take to achieve the identified savings will give the Legislature a tool to hold the administration accountable. In other words, the Legislature will know what to expect and will not be caught off guard when hearing about those actions going forward. If the final report includes actions that significantly deviate from what is discussed in the subcommittee process, the Legislature could use May Revision hearings to understand the differences.

Need for Additional Reporting Requirements on the Administration Remains Unclear. If the Legislature is satisfied that the administration’s final reported savings pursuant to the control sections are consistent with legislative priorities, it is possible that the Legislature will want to take no action to modify what the administration proposes. However, if the administration continues to provide little or no information about how the reductions will be implemented or if the Legislature disagrees with the identified reductions, the Legislature could choose to adopt budget bill language—either as a control section or under specific budget items—intended to provide further guidance to the administration or to impose new reporting and oversight requirements.

Conclusion

Identifying opportunities to achieve efficiencies in state government is a worthy undertaking. The Governor’s proposed 2025-26 budget likely assumes a more reasonable level of savings resulting from efficiencies than what was assumed in the 2024-25 budget. That being said, the administration has provided the Legislature little detail to understand the assumed savings and their possible effects on state programs and services. We recommend that the Legislature use the subcommittee process to solicit information in order to better understand what is assumed in the budget, to ensure that any identified lower levels of spending assumed in the budget are consistent with legislative priorities, and to hold the administration accountable to the savings it says it can achieve. The administration might not submit the final report of assumed savings and their effects on programs and departments until late in the budget process. Conducting oversight of the process before that report is submitted to the Legislature will put the Legislature in a better position to respond to the report and preserve legislative priorities.