LAO Analysis of the 1997-98 Budget Bill
General Government Overview

  1. Overview
    1. Spending by Major Program
      1. Shared Revenues
      2. Tax Relief
      3. Local Government Financing
      4. Regulatory Activities
      5. Tax Collection Programs
      6. State Administrative Functions
      7. State Retirement Programs
      8. Employee Compensation

Major Issues

General Government

Performance of New Department of Information Technology (DOIT) Has Been Mixed

Approach to State Telecommunications Raises Questions

Cost to Modify State Computer Programs

Improvements in Performance of

Legislature Should Reconsider the COPS Program

Lottery Act Should Be Amended to


General Government

Funding for general government is proposed to increase slightly in the budget year, primarily because of increases in Motor Vehicle License Fund apportionments to local governments.

This section includes a variety of programs and departments with a wide range of responsibilities and functions. The purpose of state funding for these programs includes providing financial assistance to local governments, protecting consumers, promoting business development, providing services to state agencies, ensuring fair employment practices, and collecting revenues to fund state activities. The budget proposes total expenditures for general government of $7.3 billion in 1997-98, an increase of $202 million, or 2.8 percent, above estimated current-year expenditures. The bulk of the increase--$124 million--is attributable to increases in Motor Vehicle License Fund apportionments to local governments.

Spending by Major Program

There are seven major program areas within general government:

We describe these program areas below.

Shared Revenues

The largest general government program is the shared revenues program, which distributes state-collected revenue (primarily from vehicle license fees and gas taxes) to local government agencies. The budget includes $3.6 billion for shared revenues, an increase of $148 million, or 4.3 percent, above the current-year amount. The increase in spending primarily results from an increase in the Motor Vehicle License Fund apportionments to local governments as a result of growth in the fee revenues collected.

Tax Relief

The state provides local property tax relief, both as subventions to local governments and as direct payments to eligible taxpayers, through seven different programs. The two largest are the Homeowners' Property Tax Relief (homeowners' exemption) and the Renters' Tax Relief (renters' credit) programs. The Governor's budget proposes an expenditure of $405 million on the homeowners' exemption program in 1997-98, which comprises most of the $476 million budgeted for tax relief.

The renters' credit provides a refundable tax credit to Californians who rent their principal place of residence as of March 1 each year. The renters' credit program was suspended from 1993 through 1996 as one of many spending reductions enacted to address the state's budgetary problems. The program was reinstated beginning on January 1, 1997. The Governor's budget, however, proposes eliminating this program effective January 1, 1997. The estimated cost of this program in 1997-98 if it were not altered or discontinued would be approximately $525 million.

Local Government Financing

The Governor's budget proposes to subvene $110 million (General Fund) to cities and counties. Almost all of this amount ($100 million) would go for continuation of the Governor's COPS program enacted last year of funds available; $75 million would be distributed to cities and counties for police and sheriffs' patrol services. The remainder would be allocated to district attorneys and jail services provided by sheriffs. (For a discussion of the COPS program, please see The 1997-98 Budget: Perspectives and Issues.)

Regulatory Activities

Consumer Activities. Several special fund agencies, including the Department of Consumer Affairs (DCA), Board of Chiropractic Examiners, the Board of Osteopathic Examiners, and the Office of Real Estate Appraisers, are responsible for promoting consumer protection by regulating more than two million practitioners in some 180 professions and businesses. The budget includes about $309 million ($303 million for DCA) for these consumer regulatory activities in 1997-98. This is $7 million, or 2 percent, less than estimated current-year expenditures. This decrease is due mainly to the reduction of one-time costs in the current year for enforcement expenditures related to the reform of the cemetery industry.

Business Activities. Sixteen state agencies regulate various business activities, from health insurance to horse racing. The purpose of these agencies is to promote business development while regulating various aspects of business and employment practices. Chief among them are the Department of Industrial Relations, the Department of Food and Agriculture, and the Department of Insurance. Other regulatory bodies include the Horse Racing Board, the Department of Fair Employment and Housing, and the Energy Commission. The budget proposes about $796 million for these activities in 1997-98. This is an increase of about $25 million, or 3 percent, over estimated currently-year expenditures. The largest increase is an additional $50 million for the Energy Commission.

Tax Collection Programs

Expenditures. The Franchise Tax Board (FTB) and the Board of Equalization (BOE) are the largest revenue collection agencies in the state. Together, both boards collect the state's personal and business income taxes, sales tax, and special use taxes. The budget proposes $650 million for these tax programs in 1997-98. This is a net reduction of $6 million (about 1 percent) from estimated current-year expenditures. This net decrease is the result of several large augmentations (such as merit salary increases and workload adjustments), offset by supervisor reductions at the BOE and reductions in one-time payments to computer system vendors.

Both FTB and BOE have initiated several large-scale information technology projects to automate various tax collection functions. While early results indicate improvements in revenue generation, some projects have experienced implementation delays and cost overruns.

Revenues. The estimated combined General Fund collections under both boards is projected to be almost $50 billion in 1997-98. This is an increase of nearly $2 billion over estimated current-year revenues. Almost half of General Fund revenues ($24 billion) comes from personal income taxes.

State Administrative Functions

There are more than 30 departments and agencies that provide a wide range of administrative services. These services range from oversight and support of other departments (such as the Department of General Services, the Department of Information Technology, and Office of Administrative Law), to economic development (such as the Trade and Commerce Agency), to various specialized services provided to individuals and communities (such as the Office of Emergency Services, Military Department, and Department of Veterans Affairs).

The budget proposes a total of $930 million to support these functions in 1997-98. This is an increase of $38 million, or 4.3 percent, above current-year expenditures. The budgets of most of the departments in this category are proposed to remain flat or increase only slightly in the budget year. The most significant budget-year increases are for the Department of General Services ($9 million, or 6.6 percent), Board of Control ($7 million, or 9.1 percent), and the California Science Center (formerly known as the Museum of Science and Industry--$6 million, or 73 percent).

State Retirement Programs

Retirement-related expenditures account for a significant part of state spending for the budget year. In 1997-98, state expenditures for various costs associated with public employee retirement (excluding University of California costs and nongovernmental cost funds) will total approximately $3.1 billion, including almost $2.2 billion from the General Fund. As summarized in Figure 1, the General Fund provides for employer contributions and/or various other payments to four retirement systems. In addition, the state (1) makes Social Security and Medicare contributions for most state employees and (2) contributes to the payment of premiums for health and dental benefit plans for retired state employees.

Public Employees' Retirement System. The Public Employees' Retirement System (PERS) is the retirement system for most state employees. The budget projects General Fund expenditures of $588 million for PERS in 1997-98. This amount is based on the 1995-96 employee payroll, pursuant to Chapter 71, Statutes 1993 (SB 240, Committee on Budget and Fiscal Review). Under the provisions of that legislation, General Fund contributions are made two fiscal years in arrears. The PERS costs that state agencies will incur in 1997-98--about $680 million--will not show up as a General Fund payment until 1999-00.
Figure 1

General Fund Costs

For Retirement Programsa

(In Millions)
Program 1997-98
Public Employees' Retirement $588
State Teachers' Retirement 971
Judges' Retirement 61
Legislators' Retirement 1
Social Security and Medicareb 290
Health and Dental Benefits for Annuitants 279
Total $2,190
a Excludes costs for University of California employees.
b Legislative Analyst's Office estimate based on 1996 costs.

As a result of a lawsuit filed by the PERS, the Superior Court in Sacramento County has ordered the state to immediately pay all deferred payments and to resume sending state funds to the PERS on a current, rather than a deferred, basis. The state has appealed this decision and the budget assumes that the state will prevail on the appeal. If the state loses the appeal, the General Fund impact would be about $1.1 billion in 1997-98.

State Teachers' Retirement System. The State Teachers' Retirement System (STRS) is the retirement system for teachers in public K-12 schools and community colleges. The STRS receives contributions from teachers and their employers. These contributions, however, are insufficient to provide for the cost of basic retirement benefits and the protection of retirees' purchasing power. These shortfalls are covered by annual transfers from the General Fund. These transfers are expected to increase by $39 million, from $883 million in the current year to $932 million in the budget year. The increase is due to an expected increase in teacher payrolls, which is the key factor in the statutory funding formulas.

Health and Dental Premiums. The budget also includes $279 million from the General Fund to pay the state share of health and dental insurance premiums for retired state employees and their qualifying beneficiaries. This is $10.7 million more than estimated current-year expenditures, which reflects an increase in the number of retirees. The PERS is currently negotiating the health and dental premiums rates for the second half of the budget year. These negotiations may result in a change in the estimated General Fund cost for the budget year.

Employee Compensation

The collective bargaining memoranda of understanding (MOU) that govern pay, benefits, and other working conditions for over 150,000 rank-and-file state employees (other than higher education) expired June 30, 1995. Since then, the MOU negotiations have been completed for only one of the 21 bargaining unit--the highway patrol officers. This MOU, however, expires on June 30, 1997. The budget does not include funds for new compensation increases for any state employees (other than higher education).

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