Major Issues

General Government

Legislature Needs Update on Status of Smog Check Program

Many elements of the Smog Check program have been delayed and other elements have not been implemented. Consequently, it is uncertain whether the program is still on track for meeting the requirements of the State Implementation Plan as agreed to by the state and the federal Environmental Protection Agency.

We recommend the Legislature not approve the $71 million requested for the Smog Check program until the Department of Consumer Affairs reports on the status of the program (see page G-35 to G-42).

Expiration of Information Technology Oversight Agency Provides Opportunities

The law that created the Department of Information Technology (DOIT) will expire at the end of the budget year. Although DOIT has not met all of the Legislature's expectations, we believe that it has played a useful role in information technology oversight, policy development, and planning. Thus, we recommend the enactment of legislation to extend the life of the department.

While considering legislation to extend DOIT, we recommend that the Legislature consider a number of issues that could improve the operations of the department and state information technology generally (see page G-72 to G-75).

Employee Compensation

Most employee bargaining units have been in negotiations with the state for new memoranda of understanding (MOUs) since 1995. The Legislature has approved MOUs in the current year for four bargaining units, and a fifth unit has an MOU pending before the Legislature.

The Governor's budget includes (1) $168 million ($64 million General Fund) for the annual cost of any salary increases approved in the current year for employees in the 16 bargaining units without MOUs and (2) $190 million ($100 million General Fund) for any budget-year salary increases that are agreed upon in collective bargaining negotiations with all 21 bargaining units.

Salary increases will depend on collective bargaining. However, the proposed amount could, as an example, cover a 3 percent increase in the current year for those currently in collective bargaining and 2 percent in the budget year for all employees (see page G-124 to G-127).

Citizens' Option for Public Safety Program Should Be


The Governor's proposal to modify and make permanent the Citizens' Option for Public Safety (COPS) program does not remedy the program's problems and will only exacerbate them.

We recommend that the Legislature reject the Governor's proposal and instead consider the COPS monies in the larger context of state resources provided to restore the fiscal health of local governments. We suggest that any local government relief funds be used to transform California's system of local government finance into one that reflects modern needs and preferences of communities (see page G-131 to G-134).


General Government

Total funding for general government is proposed to increase in the budget year. The General Fund portion of the budget is proposed to increase substantially, while the special fund portion is proposed to decrease slightly. The increase in support from the General Fund is primarily a result of large increases in (1) tax relief payments to local governments to offset the revenue loss caused by the cut in the vehicle license fee ($523 million) and (2) the annual payment to the State Teachers' Retirement System, largely to pay for the costs of new benefits ($641 million).

The General Government section of the budget contains a variety of programs and departments with a wide range of responsibilities and functions. These programs and departments provide financial assistance to local governments, protect consumers, promote business development, provide services to state agencies, ensure fair employment practices, and collect revenue to fund state operations. The 1999-00 Governor's Budget proposes $9.4 billion to fund these functions, not including federal funds. The proposed budget-year funding is $797 million more than estimated 1998-99 expenditures.

Spending by Major Program

There are seven major program areas within general government:

We describe these program areas below and Figure 1 shows the estimated 1998-99 and proposed 1999-00 budget expenditures by program area.
Figure 1
General Government Spending
1998-99 and 1999-00

(In Millions)

Program 1998-99 1999-00 Difference
Shared revenue $3,459.5 $3,255.4 -$204.1
Tax Relief 1,022.5 1,618.4 595.9
Local government financing 176.9 111.2 -65.7
Regulatory programs 1,299.6 1,280.8 -18.8
Tax collection programs 574.0 568.4 -5.6
State administration programs 965.2 908.3 -56.9
Retirement and employment 1,090.5 1,642.4 551.9
Totals $8,588.2 $9,384.9 $796.7

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 $3.3 billion for shared revenues (virtually all from special funds), a decrease of $204 million, or 5.9 percent, below the current-year amount. This decrease is related to the recently enacted 25 percent reduction in the vehicle license fee (VLF). This tax cut did not affect the amount of funds received by local governments. It did, however, shift some of the funding for these local allocations from shared revenues to the General Fund.

Tax Relief

The state provides local property tax relief, both as subventions to local governments and as direct payments to eligible taxpayers, through eight different programs. The two largest are the VLF Offset and the Homeowners' Property Tax Relief (homeowners' exemption) programs. The Governor's budget proposes an expenditure of $1.1 billion on the VLF offset in 1999-00, which comprises most of the $1.6 billion budgeted for tax relief.

Local Government Financing

The Governor's budget proposes to subvene $111 million (all General Fund) to cities and counties. Almost all of this amount ($100 million) would go for continuation of the Citizens' Option for Public Safety, a program created in 1996-97 that distributes money on a per capita basis to local governments for criminal justice services.

Regulatory Activities

A total of 21 agencies are responsible for providing regulatory oversight of various consumer and business issues. Most of these departments are funded from special funds that receive revenue from those subject to regulation. Included in this total are the Departments of Consumer Affairs, Industrial Relations, Food and Agriculture, Financial Institutions, and Corporations, as well as the Public Utilities Commission.

The total proposed expenditures for all regulatory activities in the budget year are $1.3 billion. This includes approximately $1 billion from special funds and $246 million from the General Fund. Total expenditures in this category are $19 million, or 1.5 percent, less than the estimated current-year expenditures. The four largest agencies in terms of overall proposed budget expenditures are the Department of Consumer Affairs, $332 million ($761,000 General Fund); the Energy Commission, $214 million (all special funds); the Department of Industrial Relations, $186 million ($144 million General Fund); and the Department of Food and Agriculture, $185 million ($70 million General Fund).

These regulatory agencies protect the consumer and promote business development while regulating various aspects of licensee, business, and employment practices. The groups regulated range from individual licensees to large corporations.

Tax Collection Programs

Expenditures. The Franchise Tax Board and the Board of Equalization 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 $568 million for these tax programs in 1999-00. This is a decrease of $5.7 million, or 1 percent, from estimated current-year expenditures.

Revenues. The Governor's budget estimates combined General Fund collections by both boards will be $57.2 billion in 1999-00. This is an increase of $4 billion above the administration's estimate of current-year revenues. Half of all General Fund revenues ($30.2 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 the 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, the Military Department, and the Department of Veterans Affairs).

The budget proposes a total of $908 million to support these functions in 1999-00. This is a decrease of $57 million, or 5.9 percent, from current-year expenditures.

State Retirement Programs

Retirement-related expenditures account for a significant part of state spending for the budget year. In 1999-00, state expenditures for various costs associated with public employee retirement (excluding University of California costs) will total $2.6 billion, including $2.1 billion from the General Fund. As summarized in Figure 2, the General Fund provides for employer contributions and/or various other payments to four retirement systems. In addition, the state (1) contributes to the payment of premiums for health and dental benefit plans for retired state employees and (2) makes Social Security and Medicare contributions for most state employees.

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, have historically been insufficient to provide for the cost of basic retirement benefits, the protection of retirees' purchasing power, and to cover past unfunded liabilities. These shortfalls have been covered by annual transfers from the General Fund.

Figure 2
General Fund Costs

For Retirement Programsa


(In Millions)

State Retirement Plans
State Teachers' Retirement $934
Public Employees' Retirementb 408
Judges' Retirement 85
Defined Contribution Planc 24
Legislators' Retirement 1
Subtotal ($1,452)
Other Retirement Benefits
Health and Dental Benefits for Annuitants $347
Social Security and Medicared 307
Subtotal ($654)
Total $2,106
a Excludes costs for University of California employees.
b Includes 2 percent "pick up" for Bargaining Unit 8 employees' retirement contribution.
c New program established for Bargaining Unit 6.
d Legislative Analyst's Office estimate based on 1997-98 costs.

The state's General Fund payment to STRS will increase $641 million in the budget year. This is because:

The legislation enacted in 1998 (Chapter 967, Statutes of 1998 [AB 2804, Committee on Public Employees, Retirement, and Social Security]) provided that the portion of the state's annual payment to STRS that is used to reduce its underfunded status would be eliminated if there were no longer any shortfall. The budget assumes that the actuarial valuation of STRS called for by the Legislature in the 1998-99 Budget Act and due by April 1, 1999 will determine that there is no longer a need to pay these costs. This results in a General Fund savings of $85.5 million in 1999-00. At its January 1999 meeting, the STRS board took action to authorize this actuarial valuation.
Figure 3
Enhanced Benefits for Members of

The State Teachers' Retirement System

Chapter 966, Statutes of 1998 (AB 1150, Prenter)
  • Increases retirement allowances by incrementally raising the age factor from 2 percent of final compensation per year of service at age 60 to a maximum of 2.4 percent at age 63.
Chapter 1006, Statutes of 1998 (AB 1102, Knox)
  • Increases the per-year-of-service factor by an additional two-tenths of 1 percent of final compensation (not to exceed 2.4 percent) for members who have 30 or more years of service credits.
  • Grants credit for unused sick leave for purposes of calculating retirement benefits.
  • Establishes, as a vested right, purchasing power protection of up to 75 percent of the initial monthly retirement benefit.
Chapter 967, Statutes of 1998 (AB 2804, Committee on Public

Employees, Retirement, and Social Security)

  • Establishes a financing mechanism to pay for the benefits included in AB 1102 and AB 1150.

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 $408 million for PERS in 1999-00. Until 1997-98, General Fund contributions were made two fiscal years in arrears, pursuant to the provisions of Chapter 71, Statutes of 1993 (SB 240, Committee on Budget and Fiscal Review). As a result of a lawsuit filed by PERS, the Superior Court in Sacramento County ordered the state to pay all deferred payments plus interest and to resume sending state funds to PERS on a current, rather than a deferred, basis. The state paid $1.2 billion in deferred contributions in 1997-98 and related interest of $333 million in the current year.

Health and Dental Premiums. The budget also includes $347 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 $29.6 million more than estimated current-year expenditures, reflecting 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

There are over 150,000 rank-and-file state employees (other than higher education) covered under state collective bargaining law. The pay, benefits, and working conditions for these employees are typically spelled out in memoranda of understanding (MOUs). The MOUs for most of the state's 21 bargaining units expired on June 30, 1995. In the current year, the Legislature has approved MOUs for four bargaining units covering 1998-99. In addition, the California Highway Patrol has reached an agreement for the current year, but it has not yet been approved by the Legislature. The remaining groups are still in negotiations.

The Governor's budget includes $358 million ($164 million General Fund and $194 million from other funds) to provide increased compensation to state employees (other than employees in higher education). The $358 million consists of (1) $168 million ($64 million General Fund) for the annual cost of any increases in employee compensation that are approved in the current year for employees currently in collective bargaining negotiations and (2) $190 million ($100 million General Fund) for employee compensation changes that may be agreed to through collective bargaining and become effective in the budget year. Actual salary increases provided to employees by these funds are dependent on the terms of negotiated agreements. As an example, however, the $168 million amount could cover the annual cost of an average pay increase of 3 percent for those currently in collective bargaining. The $190 million that would be available for changes in the budget year could provide an additional salary increase of 2 percent for all employees.

Return to 1999-00 Budget Analysis General Government Table of Contents
Return to 1999-00 Budget Analysis Table of Contents
Return to LAO Home Page