Legislative Analyst's Office

Analysis of the 2000-01 Budget Bill

The Department of Finance (DOF) advises the Governor on the fiscal condition of the state; assists in developing the Governor's budget and legislative programs; evaluates the operation of the state's programs; and provides economic, financial, and demographic information. In addition, the department oversees the operation of the state's accounting and fiscal reporting systems.

The Governor's budget proposes expenditures of $36.4 million to support the activities of DOF in 2000-01. This is an increase of $1.5 mil-lion, or 4.4 percent, above estimated current-year expenditures. The principal reason for the increase is the department's plan to establish 23 new positions, many of which would be established in the middle of the budget year, to accommodate additional workload.

Department Should Advise Legislature on Magnitude of Underfunding Problem

In recent years, the state has required departments to absorb price and cost increases and unallocated reductions. Among the consequences of this policy is a large number of positions deliberately held vacant by departments in order to generate savings to cover the additional costs. We recommend that the Department of Finance report at the time of the May Revision on the magnitude of this underfunding and strategies it would propose to address the situation.

Different Treatment of State Departments for No Apparent Reason.

Our review of the Governor's proposed spending plan for 2000-01 found that the budgets of five departments--the Departments of Fair Employment and Housing, Industrial Relations, and Justice; the State Library; and the State Treasurer's Office--include augmentations to offset higher rental costs set by the Department of General Services for state-owned buildings. In our analyses of these five departments, we recommend that the funding requests be denied because we can find no analytical basis for granting an augmentation to these departments when other departments did not receive similar increases.

Requiring Departments to Absorb Cost Increases. In our view, the funding for rent increases is indicative of a larger problem with the state budget. That is, for a number of years, departments have not been provided with funds to cover price and cost increases.

For many years and through several administrations, departments have been forced to absorb a number of increases without augmentations to their budgets. These include: (1) costs for operating expenses and equipment that are higher because of the effects of inflation; (2) merit salary adjustments that all departments provide to eligible employees each year; and (3) "unallocated reductions" in which departmental budgets are reduced, but no accompanying changes are made to modify or reduce workload or program responsibilities. Many of these actions were taken to help the state address budget shortfalls.

Initially, absorbing these additional costs was not a problem for many departments because they were able to make their operations more efficient and redirect the savings. Over time, however, departments have had difficulty absorbing the costs and have resorted to other measures, such as simply not carrying out all of the responsibilities given to them in statute.

Many Positions Held Vacant. In addition, some departments have historically had to deliberately hold positions vacant to generate "salary savings" to cover costs that they have had to absorb. As of December 31, 1999, about 15 percent of all state positions were vacant. In some departments, the figure was much higher (for example, the Department of Mental Health had a 23 percent vacancy rate). Although the current strength of the state's economy and the tight job market is undoubtedly resulting in some positions going unfilled, it is also likely that substantial numbers of positions are not being filled in order to balance departmental budgets.

A high staff vacancy rate in a department may mean that it is not able to carry-out its program responsibilities because of lack of staff. This is a problem for the Legislature as it reviews individual budgets. It is also a problem given that the Governor's budget requests almost 6,000 additional positions for 2000-01, some of which would be for departments that currently have many positions unfilled.

Fiscal Situation Gives State Opportunity to Reassess Approach.

Given the state's positive fiscal condition for the current and budget years, this is an opportune time to (1) assess the consequences of the policies of requiring departments to absorb price and cost increases and (2) reevaluate the high vacancy rates in many state departments.

We believe that such an assessment should be done across-the-board. Depending on the findings, the Governor and Legislature could decide which departments, if any, should receive additional funding, based on their priorities and the severity of the underfunding.

Given DOF's fiscal oversight role for the administration, it is in the best position to undertake such an assessment. For this reason, we recommend that the department report to the Legislature during budget hearings on the magnitude of the underfunding and strategies it would proposed to address the situation.


The Military Department is responsible for the command and management of the California Army and Air National Guard and four other related programs. To support the operations of a force of 23,000, the department maintains a headquarters complex in Sacramento, 127 armories, 33 equipment maintenance facilities, and 10 air bases throughout the state.

The missions of the National Guard are to provide combat-ready forces to the federal government at the direction of the President, to contribute emergency public safety support at the direction of the Governor, and to otherwise assist the community as directed.

The 2000-01 Governor's Budget proposes expenditures of $526 million by the department. Of that sum, $485 million would come from the federal government, although only $34.9 million in federal funds would be appropriated through the budget bill. The budget bill would also authorize the expenditure of $39.6 million from the state General Fund for the department, an increase of $14.5 million, or 58 percent, in the budget year. The balance of the request ($2.3 million) is from reimbursements and a special fund.

Juvenile Boot Camp Program Not Justified

We recommend the Legislature deny the request for $9.2 million from the General Fund to support Turning Point Academy, a juvenile boot camp, because (1) juvenile boot camps have been found to be ineffective, (2) the proposal is costly on a per-student basis and not well defined, and
(3) the department lacks experience in working with a serious juvenile offender population. (Reduce Item 8940-001-0001 by $9.2 million.)

The budget proposes $9.2 million from the General Fund to establish "Turning Point Academy," a year-long residential military boot camp for serious juvenile offenders. These offenders would be students, age 15 to 17, who have been expelled from school for "zero tolerance" offenses-- weapons possession, selling a controlled substance, or sexual assault and battery. According to the administration, the purpose of the program is to provide an alternative sanction to committing these offenders to the California Youth Authority (CYA).

According to the proposal, the program would begin with 20 students and increase by 20 students every two weeks. By January 2001, the program would be operating at full capacity, employing 103 military and 28 civilian educational staff to provide services to 160 students. Program activities would include educational services at Cuesta College (San Luis Obispo County), intense physical training, and substance abuse avoidance.

We have a number of concerns with this proposal.

Research Finds Juvenile Boot Camps Not Effective for Reducing Delinquency. Juvenile boot camp programs have repeatedly been found to be ineffective at reducing delinquency in numerous rigorous evaluations. Following program completion, boot camp participants have often been rearrested at a higher rate than participants in comparison treatment programs. A report released by the U.S. Department of Justice indicated that boot camps may fail to produce better outcomes than alternative treatment programs because boot camps place an emphasis on intense physical training, which may not address offender rehabilitation needs.

High Cost Per Student. The cost to treat each student in the academy, in the budget year, is about $58,000. In contrast, the annual cost to treat a similar offender in the CYA is about $36,000, and the annual cost to treat the most violent and emotionally disturbed CYA ward is about $45,000. The academy's higher cost per student might be justified if more services were provided than an offender might receive in an intensive or specialized program like those operated by CYA. However, the proposal indicates that offenders in the academy will not have access to specialized mental health, group counseling, drug treatment, or aftercare services that are available to CYA wards.

No Experience in Treating Juvenile Offenders. Although the Military Department currently operates several youth programs, these programs often require that participating youth be drug free, not on probation or parole for offenses other than juvenile status offenses, and not convicted of any felonies. For example, the department's Challenge Youth Program targets high school dropouts with no criminal history. Thus, the department is unlikely to have staff experienced with developing a program that can effectively meet the treatment needs of the target population of serious juvenile offenders.

Proposal Lacks Important Detail. The proposal indicates that trailer bill legislation will be proposed to address various issues. One of the more important issues concerns creation of a legal process by which juveniles will enter, proceed through, and exit the program.

Information about key program components is necessary for evaluating the proposal, but such details are currently unavailable. Furthermore, the proposal fails to address several issues that are important in the design of any juvenile offender rehabilitation program, including:

Alternative Already Exists. It is not clear why this new program is necessary. The proposal contains no evidence that existing alternatives to deal with zero-tolerance offenders, such as alternative schools, are failing.

Analyst's Recommendation. For these reasons, we recommend the Legislature deny this proposal, for a General Fund savings of $9.2 mil-lion.

Funding for Oakland Military Institute (OMI) Not Justified

We recommend the Legislature reject the request for $1.3 million from the General Fund to establish the Oakland Military Institute because the program will be eligible for sufficient charter school funds through the State Department of Education. (Reduce Item 8940-001-0001 by $1.3 million.)

The budget proposes $1.3 million from the General Fund to establish the OMI. The majority of the cost would support 11 administrative and 6 instructor/mentor positions, with the remainder for operating expenses.

The OMI Proposal. The OMI is proposed as a joint effort of the Military Department, the City of Oakland, and the Oakland Unified School District to establish a military charter school for Oakland students in grades 7 to 12. Funds to support charter schools (both Proposition 98 and federal monies) are available from the State Department of Education (SDE). The funds requested in this budget proposal would be in addition to any charter school funds allocated by the SDE.

According to the administration, the program objective is to promote the academic achievement of disadvantaged students through the use of a strictly structured and disciplined environment. In addition to the standard state curriculum, students would receive instruction in military subjects, such as military customs, physical training, drill, and map reading. The OMI would start with a cadet class of 162 students and expand by one class per year for six years, until it serves 972 cadets in grades 7 through
12. The program expects to graduate at least 100 cadets annually.

Military personnel would be responsible for administration of the OMI, including activities such as budgeting, program management, policy development, and coordinating campus security. In addition to these duties, military staff would escort students to and from the school, provide instruction in military subjects, and serve as classroom mentors. The Oakland Unified School District would provide instructional staffing, books, and educational supplies; and the City of Oakland would provide facilities, furniture, and computers.

We have the following concerns with the proposal.

Existing Fund Sources Should Support Charter School Costs. The OMI is eligible for up to $300,000 in federally-funded charter school planning and implementation grants from the SDE. These funds have generally been used for charter school startup costs such as procuring facilities, equipment, and administrative staff. In addition, SDE would provide a standard annual allocation of about $6,000 per student (Proposition 98) to pay for costs such as ongoing administration, teacher salaries, educational supplies, and general operating expenses.

Funds provided through the SDE, both charter school grants and per student allocations, should be sufficient to pay for the standard costs for OMI facilities, administration, teachers, books, and supplies. Thus, it is not clear whether the city or school district would expend any of its own funds to support OMI.

No Clear Rationale for Additional Subsidy to OMI. The OMI plans to provide a specialized military curriculum. Thus, the proposal requests additional staff to provide military instruction, mentoring, and support related to security and school safety. Funds provided by SDE may be insufficient to pay for these costs.

We note that currently there are 220 charter schools in California and more schools are being established each year, most of which offer a specialized curriculum which differs from that of traditional public schools. The administration has not advanced any rationale for why this one proposed charter school--OMI--should receive an additional General Fund subsidy not provided to any other charter school in the state.

Effectiveness of Military-Style Schools Unsupported. There is no supporting evidence that military-style programs reduce dropout rates among disadvantaged students or facilitate their college enrollment. In addition, the Military Department has no experience in operating a military academy, thus making the academy's effectiveness less likely. Finally, OMI does not have a well-defined evaluation plan and no funds have been allocated in the budget for evaluation.

The OMI Will Have Increasing Long-Term Costs. Since the program plans to increase the number of cadets each year, the annual cost when the program is fully operational would be higher than the request currently before the Legislature, due to the increase in supervising military staff. At the time this analysis was prepared, the department was unable to provide a projection of program costs over the six-year phase-in period. Although the budget proposal is not for multiyear funding, the Military Department is likely to request additional General Fund support to implement the proposed six-year plan. Based on the first-year request, we estimate that the cost will increase by at least $250,000 annually.

Analyst's Recommendation. We recommend the Legislature deny the request for $1.3 million from the General Fund because funding to support basic charter school functions is already available from SDE. In addition, the unproven effectiveness of military educational programs does not justify the additional state subsidy to support the OMI. We note that this recommendation to deny funding to the Military Department for OMI does not preclude the Oakland Unified School District and the City of Oakland from using existing charter school fund sources and other sources (including local funds and private donations) to establish and operate an alternative charter school. Under this approach, for example, the school district could reimburse the Military Department for desired services.

Additional Support for California Cadet Corps Not Justified

We recommend the Legislature delete $1.5 million proposed for enhancements of the California Cadet Corps because the proposed augmentation to this existing elective activity has not been justified. (Reduce Item 8940-001-0001 by $1.5 million.)

Background. The California Cadet Corps is an educational program administered by the Military Department that currently serves 6,500 students in 61 public schools. The objective of the program is to reduce dropout rates and juvenile delinquency by increasing student discipline through military activities. The program is an elective activity which is not part of the state-mandated educational curriculum, but students may receive academic credit for military instruction in lieu of physical education. Program activities include instruction in military subjects such as leadership, first aid, drill, and military customs. Instruction at each school is provided by a credentialed teacher, who is appointed as Commandant of Cadets by the Adjutant General and is an employee of the school district.

In addition to the school-based program, selected students attend a ten-day training seminar that includes instruction in military subjects, physical fitness, record keeping, and outdoor living. Program expenses (such as educational materials) are paid for through the local school districts with the amount of funds provided based on average daily attendance allocations from the SDE. Currently, the program does not receive any funding through the Military Department.

Budget Proposal. The budget proposes $1.5 million from the General Fund for enhancements for the California Cadet Corps. Most of these funds would cover the costs uniforms for the 6,500 cadets and 6 military administrative positions, with the remainder for drill competition, camp, and training seminar expenses.

We have the following concerns with this proposal.

Schools Already Receive Funds for Elective Curriculum. Extracurricular activity expenses are generally the responsibility of the local school district. Each district allocates funds from its own budget to support expenses associated with such extracurricular activities such as sports teams, clubs, and the California Cadet Corps. Local Cadet Corps programs already receive funding from the SDE for military instruction. The majority of the proposed funds would be for uniforms and for activities which are not part of the school-based program. If these expenses are of a high enough priority, the local school districts could allocate funds to them.

No Evidence That Military-Style Programs Are Effective. Although this program has been in operation since 1911, no formal evaluation of the program's effectiveness in reducing juvenile delinquency or improving academic performance has been conducted.

Analyst's Recommendation. For the reasons stated above, we recom-mend that the Legislature reject the budget request for $1.5 million to enhance the California Cadet Corps program operations.

State Should Seek Federal Funding for Military Funeral Honors

We recommend the Legislature approve a one-time allocation of $1.3 million from the General Fund to implement the federal mandate for military funeral honors and direct the administration to seek federal funding for future years.

Background. The U.S. Department of Defense Authorization Act of 1999 states that a veteran is entitled to a military funeral and such a funeral must be performed upon request by the National Guard. Military funeral services have traditionally been provided by volunteers from all military services, but the military base closures which occurred during the past few years have reduced the personnel available to perform these services. In California, about 6,000 requests for military funeral honors are made annually. Due to the demographics of the veteran population, the number of funeral requests is expected to increase annually in the near future.

With current resources, the Military Department and Veteran Service Organizations have been able to meet about 4 percent of the demand for military funeral services. The Military Department expects to receive a share of federal funds appropriated for this purpose, but the amount will not exceed $80,000 annually.

Budget Request. In order to meet the demand for military funerals, the Governor's budget requests $1.3 million to establish 27 temporary help positions which would serve as a State Honor Guard and provide military honors at veteran funerals. Regional teams would be located in areas with dense veteran populations and daily funeral requirements. The funds would provide base pay and travel reimbursements to Guard members.

A Federal Responsibility. The provision of military funeral honors is a federal responsibility and should be paid for with federal funds. However, since the federal government did not allocate sufficient funds for this purpose, we recommend that the Legislature approve this budget request to fund military funeral honors for one year.

In addition, we recommend the adoption of supplemental report language instructing the Military Department, in partnership with the administration and the National Guard Bureau, to explore alternative federal funds to implement the military funeral mandate. The following language is consistent with this recommendation:

The Military Department, in consultation with the administration, the National Guard Bureau, and its counterparts in other states, shall seek to obtain federal funds to implement requirements of federal law that entitle veterans to military funerals. The department shall report to the Legislature on December 1, 2000, on its progress in obtaining permanent federal funds.


The mission of the Department of Housing and Community Development (HCD) is to help promote and expand housing opportunities for all Californians. As part of this mission, the department is responsible for implementing and enforcing building standards. The department also administers a variety of housing finance, economic development, and rehabilitation programs. In addition, the department provides policy advice and statewide guidance on housing issues.

The budget proposes expenditures of $268 million for 2000-01. This is a 26 percent increase from estimated current-year expenditures. The proposed General Fund appropriation of $117 million is a 194 percent increase over the current year and accounts for 44 percent of the department's proposed funding. This growth in General Fund spending results largely from two proposals for one-time spending from the Governor--$50 million for the California Teachers Homebuyers Assistance Program and $26 million for the Child Care Facilities Financing Program (both of which are discussed below). Federal funds account for $108 mil-lion, primarily for the Community Development Block Grant and Home Investment Partnership Act programs. A number of state special funds provide the remainder of the department's funding. The department has a proposed staffing level of 475 personnel-years.

Below, we review the Governor's proposals for teacher recruitment, child care facilities, and funding for homeless shelters.

Teacher Housing Incentive Funds Will Not Achieve Objective Effectively

The budget proposes $50 million in one-time spending for the creation of the California Teachers Homebuyers Assistance Program. We recommend deleting this appropriation and instead using the funds, in combination with other teacher recruitment funds, for local school district block grants. (Delete Item 2240-108-0001.)

Governor's Proposal. The budget proposes the creation of the California Teachers Homebuyers Assistance Program, with a one-time appropriation of $50 million. The program is designed to address problems with the recruitment and retention of teachers in low-performing schools. The funds would be used by the department to contract with the California Housing Finance Agency (CHFA) to administer the program. Teach-ers working in low-performing schools would be eligible for a $10,000 loan towards the purchase of a home. For those teachers that remained in the school for five years, the entire loan would be forgiven. For those teachers leaving their position before the end of five years, a pro rated portion of the loan would be forgiven, with the remainder due to be re-paid (at 3 percent annual interest). The CHFA intends to spend $2.5 mil-lion of the $50 million appropriation in administrative costs over the course of the five-year loan period.

Proposal Mistargets Recipients. While we agree with the administration that low-performing schools face serious problems recruiting and retaining quality teachers, this proposal mistargets recipients. Specifically, we have the following concerns with the proposal:

Overly Broad Definition of Low Performance. Under the Governor's proposal, any school scoring below the 50 th percentile on the state's "Academic Performance Index" would be considered "low-performing." Thus, by definition, half of the state's schools would be eligible sites for the housing incentives. This definition of "low-performance" is overly broad and has no relationship to the nature of the problem that the proposal seeks to address. The most definitive available study of teacher recruitment and retention problems in California's low-performing schools--recently released by the Center for the Future of Teaching and Learning--concluded that serious teacher recruitment problems are concentrated in approximately 20 percent of the state's schools. The administration's proposal goes far beyond that target level.

Local Flexibility Would Improve Recruitment. A state-directed recruitment program for teachers would be unable to adapt to the wide variation in local circumstances. Therefore, we recommend that the Legislature use any funds it intends to spend on teacher recruitment on block grants to school districts. Local districts would be able to use these funds in the manner they determine most effective in recruiting and retaining teachers. We also recommend that recruitment dollars be more targeted to the most troubled schools. Please see the Education chapter of this Analysis for additional information on our recommendation to provide block grants for teacher recruitment.

Child Care Program Unable to Spend Budgeted Funds

The budget proposes $26 million in one-time spending for the Child Care Facilities Financing Program's Direct Loan Program. We recommend reducing this amount to $5 million to better reflect the amount of funds that the program can realistically distribute. (Reduce Item 2240-109-0001 by $21 million.)

Funds Still Available From 1997-98. The Child Care Facilities Financing Program was created by Chapter 270, Statutes of 1997 (AB 1542, Ducheny) and funded with $7 million in one-time funds through the 1997-98 budget. The funds were split into three programs:

Due to administrative delays in implementing these programs, funds are still available in each of the programs:

The direct loans, as well as the guaranties, are made by the Trade and Commerce Agency's (TCA) Small Business Development Corporations through an interagency agreement with HCD.

New Augmentation Proposed. The budget proposes a one-time augmentation to the direct loan program of $26 million. Of this amount, the budget proposes to spend $1 million on administrative costs, split between HCD and TCA. The department would expect to loan these additional funds over a 30-month period.

Concerns With the Proposal. We have two major concerns with the administration's proposal:

$25 million in loan funds over the next two and a half years, it is clear that the program has no need for this level of funding in the budget year. Over the past year in which funds have been available for lending, the level of applications has been extremely modest.

Reduced Appropriation Recommended. Accordingly, if the Legislature considers child care facilities a funding priority, we recommend providing a $5 million appropriation--sufficient funding for the budget year. Once these funds are expended, the department could seek additional funding from the Legislature. At that point, the Legislature would have better information as to the level of demand for the program and the program's administrative capacity. Accordingly, we recommend reducing the proposed appropriation by $21 million. Current law has established a precedent that 3 percent of the appropriation is available for administrative expenses, which we feel is an appropriate level to encourage the involved parties to streamline the program's structure.

Homeless Funds Should Be Combined Into Single Program

To increase the effectiveness of homeless funding, we recommend that $773,000 in cold weather homeless funds be combined with the existing $2 million in homeless funding for a single program allocation. (Delete Provision 1 of Item 2240-105-0001.)

Current-Year Cold Weather Funding Unused. The Emergency Housing Assistance Program (EHAP) is a grant program that provides funds to local governments and nonprofit organizations to support shelters and services for the homeless. As has been the case in recent years, the budget proposes an appropriation of $2 million to fund EHAP local assistance grants. The 1999-00 budget passed by the Legislature included a $1.365 million augmentation for EHAP, which the Governor vetoed. Sub-sequent legislation (Chapter 793, Statutes of 1999 [AB 612, Jackson]) appropriated the same level of vetoed funds to both HCD ($773,000) and the Military Department ($592,000) for the funding of cold weather shelter facilities. Funding in the Military Department's budget was designated for the use of National Guard armories as homeless shelters in those counties which have available armories. For those counties without an available armory, funding was made available through HCD to each county government for alternative sites. Of the 22 counties eligible for HCD allocations from this cold weather funding, 7 counties--totaling 48 percent of the allocation--declined to accept the funding.

Governor Proposes to Continue Funding. The Governor's budget proposes the continuation of this $1.365 million in cold weather funding on a permanent basis. For the $773,000 included in HCD's budget, converting Chapter 793's appropriation into a permanent program presents two major problems.

Combine Funding. Rather than continue to fund homeless services through two separate allocations, we recommend combining the dollars and distributing them through the normal EHAP allocation. This would
(1) allow each county to use its allocation most effectively and (2) eliminate unnecessary restrictions and contracts. If, however, the Legislature chooses to continue funding the use of the National Guard armories for homeless services, then the cold weather allocations for counties without armories could simply be added to their normal EHAP allocations.


The Trade and Commerce Agency, created in 1992, is the state's primary economic development entity for promoting the establishment, retention, and expansion of business, employment, and international trade in California. It promotes tourism and foreign investment as well. The agency also has been designated as the entity leading the state's efforts in defense conversion.

The budget proposes expenditures of $318.9 million from various funds, including $81.7 million from the General Fund, for the agency in 2000-01. The total budget is $150.2 million, or 89 percent, more than estimated current-year expenditures. This increase is due primarily to the carryover of $222.4 million in the Infrastructure Bank for local infrastructure projects that is expected to be spent in 2000-01 rather than the current year. Proposals for the budget year total $35 million and include the "New Economy Initiative," loan and grant programs, and resources for the agency's Web site and regional offices.


We recommend that the Legislature delete $7.7 million of the $14.7 million (General Fund) request for the "New Economy Initiative" because some proposals are conceptual and the agency has not demonstrated the need for others. Further, we withhold recommendation on $1.2 million for the Manufacturing Technology Program pending receipt and review of the final report on the agency's operation of of this program as required by the 1999-00 Budget Act and updated funding information. (Delete $665,000 from Item 2920-001-0001 and $7,000,000 from Item 2920-101-0001.)

The Governor's budget proposes $14.7 million (General Fund) for a "New Economy Initiative"--$13.7 million for local assistance and $1 mil-lion for state operations. Figure 1 shows the three components of the proposal. Of the $13.7 million requested for local assistance, $6.7 million, or 49 percent, is to continue or augment existing programs.

Figure 1
New Economy Initiative
(In Thousands)
Proposed Amount
Information Technology and E-Commerce
  • Next Generation Internet Network. State match for establishing a center to develop software applications to take advantage of high-speed Internet network infrastructure.
  • E-Commerce in Rural Areas. Eight $250,000 grants to rural communities to improve access to e-commerce for small- and medium-sized businesses.
Air and Space Industry
  • Aerospace Retention/Joint Strike Fighter Competition. Compete for aerospace-related projects ($250,000 for two years only).
  • Space Commerce. One-time funding to continue Space Flight and Highway to Space Grant programs and activities to attract VentureStar development.
  • Supplier Database. Maintain database (assembled by Southern California Edison) of California companies that supply defense- and space-related activities (two years only).
  • California Technology Investment Partnership Program. Increase number of matching grant awards for existing program.
  • Manufacturing Technology Program. Increase state support to maintain $33 million program level.
Agency Support $156
Total $14,731

Information Technology and E-Commerce

This component includes the Next Generation Internet Network and the E-Commerce in Rural Economic Regions Demonstration Project.

The Next Generation Internet Network is a proposal from a nonprofit organization under consideration by the federal government for funding. The still-developing proposal would establish nonprofit centers in five high-tech areas nationwide, including Los Angeles and San Jose/ Silicon Valley, to support joint projects between companies and universities to develop software applications for the general market that take advantage of the capabilities of high-speed Internet network infrastructure. According to the agency, the $5 million request is to fund part of one center. The agency has indicated that there are federal funds for which the agency also can compete, but the agency has not yet applied for these funds. In the absence of federal funding, the agency believes that the nonprofit group involved with the proposal would provide additional funds.

The E-Commerce in Rural Economic Regions Demonstration Project proposal includes $2.1 million for one position and eight $250,000 grants to rural communities to improve access to e-commerce for small-and medium-sized businesses. Projects could include developing a telecommunications plan to identify hardware needs, resolving rural network problems, technology application, and training and development programs.

At this time, these two proposals are more conceptual in nature and are not supported by any definitive information. For example:

This proposal lacks criteria for evaluating applications.

Given the lack of details for these projects, as well as the lack of specific outcomes, we recommend deleting the $7.1 million request.

Air and Space Industry

This component includes the aerospace retention and Joint Strike Fighter activities, a space commerce package, and a supplier database project.

The aerospace retention and Joint Strike Fighter activities are allocated $358,000 and one position for an ongoing effort to lobby the federal government and contractors to locate the assembly, testing, and other work related to the Joint Strike Fighter project and other U.S. Department of Defense contracts in California. It is not clear why more staff is needed for these efforts since the agency has its Red Team program to attract and retain large investments and the Governor has an office in Washington,
D.C. If this proposal is a priority, the agency should direct existing resources to these efforts. Consequently, we recommend the Legislature delete the proposal.

The supplier database project would take over from Southern California Edison (SCE) a database compiled by SCE of California companies that supply goods and services to the state's aerospace manufacturing industry. The budget proposes $213,000 and one position to maintain and analyze the database for two years. It is not clear why the state should maintain a list of suppliers, what statewide purpose it would serve, and what would happen with the database after two years. In addition, this proposal raises the question of whether the state should have similar databases for other industries. Consequently, we recommend that the Legislature delete the proposal.


This component includes the California Technology Investment Part-nership and the Manufacturing Technology Program.

The Manufacturing Technology Program (MTP) funds three centers that provide consulting services and technical assistance to small-and medium-sized manufacturers. In addition to the $6.7 million in state funding for the program, the centers also receive federal funds, fees paid by clients, and in-kind services. Federal funding for each center decreases over six years from one-half federal support to one-third. The proposed $1.2 million augmentation would pick up part of the federal support scheduled to end in the budget year.

The 1999-00 Budget Act required the agency by September 1, 1999 to (1) develop a small manufacturers competitiveness strategy and specific program goals for MTP and (2) take control of the program from the centers. In September, the agency advised the Legislature that it would submit a final report in April 2000. In addition, at the time this analysis was written, the agency had not provided updated information on budget-year funding for each center. As a result, we withhold recommendation on the $1.2 million request, pending receipt and review of the finalized competitiveness strategy and the funding information noted above.


Small Business Loan Guarantee Program

We recommend the Legislature delete the request for $3 million (General Fund) for the Small Business Loan Guarantee Program because
(1) an annual General Fund appropriation to pay for bad loans creates a poor incentive for selecting good loans and (2) the authorizing legislation directs the program to be self-sufficient. (Delete $3 million from Item 2920-011-0001.)

The Small Business Loan Guarantee Program guarantees bank loans made to small businesses that otherwise would not receive the loans. Current law specifies that the program should (1) have a maximum ratio of 4-to-1 for guaranteed loans to reserve funds and (2) be self-supporting (that is, not dependent on the General Fund). The program currently has reserves of approximately $33 million and is leveraged at a ratio of 2.8-to-1. In 1998-99, the program guaranteed 731 loans. Eight Financial Development Corporations (FDCs) around the state administer the program. Program operations are funded by a $2 million annual appropriation from the General Fund, fees paid by borrowers, and interest earned on the reserve. Because these resources have not covered all operating expenses, some ongoing costs are funded from the reserve fund as well.

The budget proposes $3 million from the General Fund to pay program operating costs (including about $1.8 million in loan losses each year) and end the current practice of using reserve funds to cover expenditures, as described above. The Supplemental Report of the 1999-00 Budget Act required the agency to submit a report on the program by January 1, 2000 to address the following:

At the time this analysis was written, the agency had not submitted this report to the Legislature. The Legislature required this report to address concerns regarding the program's structure--in particular, the pay-for-performance provisions of the FDC contracts and the poor incentive created by an annual General Fund appropriation to cover loan defaults, both of which remove the cost of bad loan decisions from the FDCs. Because the General Fund augmentation creates the wrong incentive and because the statutory direction is that the program should not be dependent for monies on the General Fund, we recommend the Legislature delete the request.

Replacement of Underground Storage Tanks

We recommend that the Legislature approve for one year only (instead of the two years requested) the $5 million proposal to provide grants to businesses to replace underground gasoline storage tanks because (1) the two-year grant effort cannot exceed an estimated $7.5 million and
(2) this preserves the legislative oversight specified in statute to appropriate grant funds needed for the program.

Chapter 812, Statutes of 1999 (SB 989, Sher) established new environ-mental standards for underground gasoline storage tanks and authorized the agency to use existing funds for grants or loans to small businesses to replace underground storage tanks. Chapter 812 specifies that grants are subject to legislative appropriation and cannot exceed 33 percent of total funds awarded (grants and loans) to comply with the new standards. While tanks within 1,000 feet of public drinking water wells must be in compliance by July 1, 2001, most businesses have until December 31, 2003 to comply. The agency estimates that $22.5 million will be needed over the next two years to address tanks not in compliance. Based on the 33 per-cent limit, only $7.5 million in grant funds would be available.

The agency, however, is requesting $5 million in grant funds in each of the next two years--for a total of $10 million. This exceeds the $7.5 mil-lion estimate of grants allowable by $2.5 million. We recommend that the Legislature approve the $5 million proposal for one year only. This accommodates the possibility that grant demand might be skewed toward the first year of the program, while preserving the Legislature's over-sight role specified in Chapter 812 to appropriate grant funds needed for 2001-02.

Biomass-to-Energy Incentive Grant Program

We recommend that the Legislature delete the $10 million (General Fund) proposal for a biomass-to-energy grant program because the proposed program duplicates the Energy Commission's Renewables Program and has no defined criteria for awarding the funds. (Delete $10 million from Item 2920-101-0001.)

The budget proposes a one-time $10 million (General Fund) appropriation for an incentive payment program to subsidize biomass facilities that convert agricultural waste into electricity. Grants would be awarded to air quality management districts, based on criteria yet to be established. The districts would make the incentive payments to the facilities, also based on criteria yet to be determined. The agency intends to promote legislation to create a tax incentive in future years.

The Renewables Program in the Energy Commission already subsidizes biomass facilities based on criteria developed to implement the program. In view of this existing program, it is not clear what the benefits would be to establish a similar program in the agency.


The California Arts Council carries on a range of activities in order to further the arts in California. The council's enabling legislation directs it to (1) encourage artistic awareness and expression, (2) assist local groups in the development of arts programs, (3) promote the employment of artists in both the public and private sectors, (4) provide for the exhibition of artworks in public buildings, and (5) ensure the fullest expression of artistic potential. In carrying out this mandate, the Arts Council has focused its efforts on the development of competitive grant programs to support artists and organizations in various disciplines. In addition, in recent years the Legislature and Governor have also included funds in the Arts Council's budget for distribution to specific museums and other cultural institutions.

The Governor's budget proposes expenditures of $54 million, mostly General Fund, for support of the council in 2000-01. This amount represents an increase of $2.2 million, or 4.4 percent, above estimated current-year expenditures. This increase is somewhat misleading, however, because the 1999-00 budget included one-time grants to museums and cultural institutions that mask the impact of a 2000-01 proposal to create a $10.1 million Arts in Education Program. This proposal represents a 50 per-cent increase to the council's ongoing programs. The Governor's budget also includes a one-time $10 million augmentation for an Urban Public Park at the Performing Arts Center of Los Angeles County.

New Arts in Education Program Poses Questions

The Governor's budget proposes $10.1 million for the creation of an Arts in Education Program which would augment existing grant programs and establish a new Adopt-A-School Program. Whether the Legislature wishes to approve the augmentation for the existing programs is a matter of policy preferences and priorities for General Fund resources.

We withhold recommendation on $1.5 million proposed for the new "Adopt-A-School" Program, pending receipt and review of program details and clarification from the council as to how funds will be spent.

As indicated earlier, the budget includes $10.1 million from the General Fund for an Arts in Education Program. This amount includes $8.5 million to augment existing council programs and $1.5 million for a new Adopt-A-School Program. In addition, the budget proposes $125,000 and two new positions for administration of the programs.

Augmentation for Existing Programs. The budget proposes to distribute $8.5 million to existing grant programs as follows: (1) $3.5 million for Artists in Residence, (2) $2.5 million for Organizational Support,
(3) $1 million for Performing Arts Touring and Presenting, (4) $500,000 for California Challenge, and (5) $1 million for State-Local Partnership. Using these programs, the new funds would be allocated to increase grants to those artists and organizations that serve K-12 students. The proposal would provide a substantial boost in funding for the council's existing grant programs, ranging from 25 percent in the Organizational Support program to more than 80 percent in the Performing Arts Touring and Presenting program.

Our review indicates that the augmentation is consistent with the Arts Council's overall mission to expand resources for the arts. We believe that the council's existing grant allocation process, which distributes monies based on merit using a competitive process with peer review panels, is appropriate and well-equipped to distribute additional grant funds. In addition, we think that the existing process contains adequate mechanisms to protect the state's interests by ensuring a degree of state oversight and accountability from the grantees.

Ultimately, however, we believe that whether the Legislature wishes to approve an increase in funding of this magnitude is really a matter of the Legislature's policy preferences and its priorities for the use of new General Fund resources.

New Adopt-A-School Program. The new Adopt-A-School Program would receive $1.5 million and be established in 2000-01. According to the council, the art, corporate, and nonprofit sectors will be encouraged to "adopt" a school to work on arts education projects of mutual interest. At the time this analysis was prepared, the Arts Council had yet to fully develop this program and was unable to provide information on how the $1.5 million will be allocated. For this reason, we withhold recommendation on the Adopt-A-School Program, pending receipt and review of a detailed program and expenditure plan.

Funding for Urban Public Park Not Justified

We recommend a General Fund reduction of $10 million for the Urban Public Park at the Performing Arts Center of Los Angeles because funding it as an arts project is not appropriate. If the Legislature wishes to support projects such as this, it should establish a new grant program that would allow this and other similar projects to compete for state funds. (Delete Item 8260-103-0001)

The 1999-00 Budget Act provided a one-time appropriation of $5 mil-lion for the Performing Arts Center of Los Angeles County to oversee the construction of Phase I of the Urban Public Park. Phase I of the Urban Public Park is the public gardens surrounding the Walt Disney Concert Hall. The Governor's budget requests an additional $10 million to be used for Phase II, which will turn the existing concrete Music Center plaza into an urban public park and festival site, providing a setting for outdoor performances and festivals and space for retail businesses.

We have several concerns with this proposal. First, the Arts Council was able to provide little information about the plans for this project. The only information available about Phase II is that it includes garden spaces, landscaping, artistic lighting and paving, water features, colorful banners, and outdoor seating.

Second, based on the description provided, it appears that Phase II is not really an art project consistent with the council's existing programs, which promote artistic services to the public, but rather an urban renewal or park and recreation project. As such, funding from other sources, such as funds for state or local parks projects, may be more appropriate.

For these reasons, we find that the proposal is not justified and recommend that it be deleted.

Even if it is determined that Phase II should be considered an arts project, we note that earmarking funds for a particular project is inconsistent with the Arts Council's funding process which disperses awards on a competitive grant basis. If the Legislature wishes to fund these types of projects, it should create a new grant program within the Arts Council. This would allow the council to establish guidelines and directions for applicants and a competitive peer review process to determine how grant funds are expended, which would provide more accountability. This process would require submission of a comprehensive description of the Phase II plans, allow for a complete analysis of the merits of such a project, and permit it to be considered alongside other potentially meritorious projects that may be submitted by other arts organizations throughout the state.


The Department of Personnel Administration (DPA) manages the nonmerit aspects of the state's personnel system. (The State Personnel Board manages the merit aspects.) The Ralph C. Dills Act provides for collective bargaining for most state employees. Under this act, DPA is responsible for (1) reviewing existing terms and conditions of employment subject to negotiation, (2) developing management's negotiating positions, (3) representing management in collective bargaining negotiations, and (4) administering negotiated memoranda of understanding (MOUs). The DPA also is responsible for the compensation and terms and conditions of employment of managers and other state employees not represented in the collective bargaining process.

The budget proposes a realignment of the department to create a Policy and Operations Division. No new funding or positions are requested for this reorganization. The new division will absorb (1) the Classification and Compensation Division (38.9 positions) and (2) 16 positions from the Administration Division, including activities related to policy development, development of a new state payroll and personnel system, drug testing, and communications.

The budget proposes total expenditures of $47 million for support of the department in 2000-01. The principal funding sources are:

The proposed expenditures for DPA support are $8.7 million, or 23 percent, more than estimated current-year expenditures. This change includes (1) a $9.1 million General Fund increase to annualize the current-year cost of the new Rural Health Subsidy Program; (2) proposed expenditure increases of $0.9 million for administration of the rural health subsidy program, benefits administration analysis and workload, legal review of DPA contracting, and salary and benefit costing; and (3) $0.4 mil-lion for various employee and budget adjustments. These increases are offset by reductions of (1) $1.7 million in one-time expenditures related to the restructuring of Savings Plus deferred compensation program fees, a performance audit of the state's workers' compensation contract, and costs associated with the new MOUs.

Rural Health Subsidy Program

We withhold recommendation on (1) $18.3 million (General Fund) proposed in the Governor's budget for the 2000-01 cost of the Rural Health Subsidy Program and (2) $463,000 (General Fund) requested to implement the program, pending receipt of information from the Department of Personnel Administration (DPA) on current-year and projected budget-year eligibility, enrollment, and program costs. This information should be submitted to the Legislature prior to hearings on DPA's budget.

The DPA requests $18,763,000 from the General Fund for the rural health subsidy program established by Chapter 743, Statutes of 1999 (SB 514, Chesbro). This amount includes $18.3 million for benefit payments and $463,000 to administer the program, including two five-year limited-term positions and $315,000 for a contract with a third party to administer the program. Under the proposal, DPA staff would develop the program policies and procedures, answer questions about the program from other state departments and individuals, enroll employees and retirees, handle appeals, and oversee the contract. The third-party administrator would verify claims eligibility, authorize reimbursements, keep account records, send account information to enrollees, and provide customer service staff for inquiries related to program administration.

Program Established by Statute and Collective Bargaining. Effective January 1, 2000, Chapter 743 established a program to subsidize health care costs for state employees and retirees who live in rural areas without a health maintenance organization (HMO) option for health insurance (see Figure 1, next page). These individuals live in areas (1) that are not in the service territory of any HMOs approved by the Public Employees' Retirement System (PERS) or (2) where the PERS-approved HMOs are not accepting new enrollees. This program reimburses out-of-pocket health care costs that would normally be covered by a PERS-approved HMO, such as deductibles and coinsurance payments, as well as a portion of health insurance premiums in specified circumstances. The annual cost to cover the maximum reimbursable amounts (discussed below) for each eligible employee and retiree is to be paid by the General Fund, with reimbursements from special funds for employees and retirees whose salaries or pensions are paid from special funds.

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Chapter 743 provides for reimbursement up to an amount agreed upon through collective bargaining for represented employees. The new MOUs establish a two-tiered system of reimbursements. Under this system, a separate account is to be established for each of the state's 21 bargaining units. The amount deposited in each account would be $1,500 times the number of eligible employees represented under the account. Under the first tier, an employee may receive annual reimbursements of up to $1,500. An employee who receives this maximum but has further claimable expenses can be reimbursed above the $1,500 under the second tier if funds remain in his or her bargaining unit account at the end of the year. (This would occur, for instance, if not all the eligible employees in the bargaining unit received the $1,500 maximum reimbursement.) If the total expenses claimed for this secondary reimbursement exceed available funds in the bargaining unit account, then the employee will receive a proportionate payment. Any funds remaining in an account at the end of the year will roll over to the next year and be available in addition to the $1,500 per eligible employee deposited into the account for that next year. The DPA established the same two-tiered system and a separate account for nonrepresented employees.

Separate accounts for Medicare and non-Medicare retirees will be funded in the same manner as the employee accounts--the maximum reimbursement (discussed below) times the number of eligible retirees. However, retirees do not have the secondary reimbursement option, even though funds remaining at the end of the year roll over, as with the employee accounts. Retirees not enrolled in Medicare may be reimbursed for deductibles only, up to $250 per year for an individual or up to $500 per year for two-or three-party enrollment. Retirees who are enrolled in Medicare Part B will automatically be reimbursed for the cost of their Part B premium, which is $45.50 per month or $546 per year.

Number of Eligible Individuals Unclear. Based on information provided by PERS regarding the number of retirees living in zip codes without a PERS-approved HMO and the State Controller regarding the number of state employees living in these zip codes, the Department of Finance (DOF) estimates the program benefits will cost $9.1 million in the current-year and $18.3 million in 2000-01. However, DPA has informed us that the department is still working with PERS to firmly establish the number of eligible retirees. Thus, when this Analysis was written, it was unclear how many people are eligible for this program. The number of eligible individuals affects not only the direct program costs but also the administrative costs because the proposed contract with the third-party administrator is based on a per person fee.

As a result, we withhold recommendation on the entire request, pending receipt of information from DPA on current-year and projected budget-year eligibility, enrollment, and program costs. This information should be submitted to the Legislature prior to hearings on DPA's budget.

Current-Year Costs. In addition, DOF has indicated that trailer bill legislation will be required to appropriate an estimated $9.1 million (General Fund) for the current-year cost of the program. The concerns outlined above for the amount requested for 2000-01 apply to this proposed amount as well. As a result, the Legislature should have the same data (discussed above) for the current year when considering this legislation.

Statute Requires Requested Positions to Be Permanent. In addition, the two positions requested are proposed as five-year limited-term to extend through the program's January 1, 2005 sunset date. Government Code Section 19080.4 specifies that limited-term positions cannot exceed two years. Therefore, if the Legislature approves positions with this funding request, the positions should be permanent to comply with existing law.

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