|Budget Issue:||Proposed $69 million cut directed at CSU is unjustified.|
|Program:||CSU Pension Cost "True Up"|
|Finding or Recommendation:||Recommend that the Legislature reject the Governor's proposal to, as the administration puts it, "true up" prior-year allocations to CSU under a technical budget control section related to pension costs. Recommend adoption of budget bill language expressing legislative intent that a better process be developed for future allocations to CSU of this type.|
The Governor proposes that the amount allocated for 2011-12 General Fund expenses under Control Section 3.60 of the budget act be lowered by $69.2 million to recapture what the administration believes was an overallocation of funds to the California State University (CSU) system in 2009-10. We find that the arguments of both the administration and CSU are inadequate to settle the issue of whether the amount of the 2009-10 allocation to CSU under this control section was correct. Moreover, since retirement funds for CSU and other departments are blended together with other operating funds, there is no “pot of money” from 2009-10 left available for the state to easily “sweep” for the benefit of the state General Fund. Accordingly, the $69.2 million at issue would, if eliminated from CSU’s budget, have a real programmatic effect for the university in 2011-12.
We recommend that the Legislature reject the administration’s proposal and adopt instead budget bill language (BBL) expressing legislative intent that a better Control Section 3.60 process be developed for CSU in the future.
Control Section 3.60. Control Section 3.60 is the budget bill’s mechanism for holding departmental budgets harmless in the event of increases in employer CalPERS contribution rates and achieving budgetary benefit for the state when CalPERS rates decline. Specifically, Control Section 3.60 lists the state’s annual pension contribution rates determined by CalPERS and says, “The Director of Finance may adjust amounts in any appropriation item, or in any category thereof, as a result of changes from amounts budgeted for employer contributions for [the] 2011-12 fiscal year retirement benefits to achieve the [state contribution rate] percentages” specified in the control section. What this means is that during each fiscal year, the Department of Finance (DOF) coordinates a process through one of its budget letters that leads to an estimate of how much more or less each department must pay that year due to changes in retirement contribution rates. Departmental budgets then are increased or decreased by DOF to reflect these changes. Each year, the budget package (specifically, Schedule 9 of the budget plan) contains an estimate of the overall General Fund and special fund increases or decreases likely to result from the Control Section 3.60 adjustments.
State Budgets for Employee Costs, By Necessity, Provide Departments With Some Flexibility.The state’s university systems, such as CSU, are different from most state departments in that they have significant autonomy in their budgeting processes, and they receive funding in line items of the annual budget act that their university boards allocate to campuses. But even state departments that are more directly under the funding control of the Legislature and the Governor have significant flexibility in managing their personnel funds. This is by necessity since various operating factors for a department cannot be known precisely in advance—such as, how many employees will retire in a given year, how many new hires will join and when, and what expenses will come in higher or lower than expectations. Accordingly, when the state augments departments’ budgets for higher personnel expenses (through Item 9800 of the budget) or for higher pension costs (through this control section), these augmented funds are not segregated in a specific account available just for employee or pension expenses. Rather, these funds are placed in a department’s general pot of operating money from each state fund, and in effect, the funds hold the department’s operating budget harmless due to that fiscal year's incremental employee and pension cost changes.
In the final analysis, for the typical state department, the Legislature—through the budget process—has total control over how much the department can spend. If, for example, pension costs rise at a fast rate, this increase is budgeted through Control Section 3.60 and in order to keep the budget in balance, the Legislature may have to choose to reduce the base budget of various departments. This process is designed to give departments the flexibility they need to operate while, at the same time, ensuring that the Legislature considers the effects of budget reductions on each department. Decisions to balance the budget are made through departmental base budget items, such as CSU’s line items in the budget. Control Section 3.60, by contrast, should be viewed as a purely technical “bookkeeping” budget item—routing to each department the funds necessary to pay mandatory pension contribution costs.
Administration Believes CSU Got Too Much From Control Section 3.60 in 2009-10. As described above, Control Section 3.60 funds are administered through an annual budget letter process. Using CSU’s responses to its 2008-09 and 2009-10 budget letters concerning Control Section 3.60 and data received from CalPERS on CSU’s actual pension contributions for each of those fiscal years, DOF constructed a calculation that it believes shows that CSU had $69.2 million more in its base budget for retirement contributions in 2009-10 than it actually spent. In DOF’s apparent view, the budget letter process resulted in an estimate in early 2009-10 that CSU was going to spend $430 million on CalPERS contributions that fiscal year and that led DOF to allocate CSU an additional $7.4 million of funds in that year. By contrast, CalPERS reports that the system actually contributed only $361 million in 2009-10—$69 million less than DOF’s budget letter process indicated at the time.
CSU Counters That DOF Selectively Interprets the Data. To counter the DOF argument, CSU officials have explained to legislative staff their view that DOF selectively chooses to examine Control Section 3.60 allocations only for 2008-09 and 2009-10. According to CSU, a more long-term view of the trends of these allocations produces a very different result. Instead of using 2008-09 as the base year of this calculation, like DOF, CSU instead goes all the way back to 1999-00. By looking at the incremental trend of positive and negative allocations to CSU through Control Section 3.60, CSU claims that its “state-funded” portion of CalPERS contributions amounted to only $350 million by 2009-10—$5.4 million more than it says it then paid from CSU General Funds.
CSU Counters That DOF Is Trying to Cut the University Twice. Perhaps more importantly, CSU points out that the reason its retirement contributions dropped in 2009-10 was its implementation of a furlough program, developed as part of the response to unallocated budget reductions the Legislature made in the university’s line items. In other words, CSU argues, DOF wants to cut the university through Control Section 3.60 after the General Fund already received the benefit of the same cuts in prior years’ budgets through CSU’s line items.
Neither DOF Nor CSU’s Data Arguments Are Persuasive. In our view, the seemingly complicated mathematical bout between CSU and DOF should be awarded to neither party. The only way one could solve the argument would be to go to the beginning of CSU’s retirement plans—more than a half century ago—and track the annual trend of state allocations and deductions for retirement costs. The choice of any other base year—be it 1999-00 (as CSU chooses) or 2008-09 (as DOF chooses)—is arbitrary. Because records do not exist for such a long-term calculation, this particular numerical argument seems to us pointless.
Important to Understand Exactly What Control Section 3.60 Is Meant to Do. Control Section 3.60 is meant to hold departmental budgets harmless in years when pension contribution rates increase and deliver state budgetary benefit in years when these rates decline. In essence, Control Section 3.60 involves an annual estimate—and just that: an estimate—of the annual change in retirement costs, and it implicitly assumes that in prior years, the amount allocated or deducted from departmental budgets through the control section was accurate. There is a practical reason for this assumption: specifically, that employee and retirement funds are not segregated in a specific account, so that they are spent each year along with the rest of a department’s operating budget. To retroactively sweep departmental funds for a prior years’ elevated estimate under Control Section 3.60 makes little sense because, in general, there are no funds left to be swept. If there was a prior-year overestimate under Control Section 3.60, the overestimated allocation from the state budget was spent during that prior year to operate departmental programs. Any such overallocated money, in short, is gone.
A Real Cut Clothed As a Technical Discussion. We believe that DOF deserves credit for examining prior-year Control Section 3.60 allocations critically. Nevertheless, if the administration wants to address the perceived overallocation of prior-year funds to CSU through the control section, the appropriate place to do so would be by proposing a $69 million additional reduction in CSU’s General Fund appropriation for 2011-12. This is because sweeping CSU’s 2009-10 funds would have a real programmatic impact on the university in 2011-12. Decisions as weighty as those concerning a $69 million cut to a university system should never occur in the context of this control section. Control Section 3.60 is a purely technical budget item.
Recommend Rejecting Administration’s Proposed $69 Million Cut. Because the administration, in our view, cannot justify its mathematical argument and because of the significance of this reduction to CSU, we recommend that the Legislature reject the proposed $69.2 million reduction in Control Section 3.60 funds for 2011-12. Should the administration wish to reduce CSU’s budget by $69.2 million, it may propose such a reduction for CSU’s General Fund budget item, including its ideas for how the university should respond to the reduction in terms of programs, employee costs, and university operations.
Recommend BBL Expressing Legislative Intent for an Improved Process. All parties seem to agree that DOF’s current Control Section 3.60 allocation process for CSU needs improvement in order to prevent such misunderstandings from happening in the future. Accordingly, we recommend adoption of the following BBL (for one year only) related to this issue: “It is the intent of the Legislature that the Department of Finance develop and implement a revised process, in consultation with the California State University, that allows the Director of Finance to more accurately adjust the university’s appropriation amounts for employer pension contributions beginning in the 2011-12 fiscal year, as allowed in subdivision (a). The Director of Finance shall submit a brief description of the revised process to the Chairperson of the Joint Legislative Budget Committee and the Chancellor of the California State University on or before January 10, 2012."