A significant portion of state government expenditures is for compensation of state employees. The Governor's budget projects $15.7 bil-lion in salary and wage expenditures for more than 304,000 authorized personnel-years in 2000-01 (including $5.0 billion and nearly 96,000 personnel-years in higher education). Including benefits (such as contributions to retirement and health insurance), estimated employee compensation expenditures are projected to exceed $18 billion for the budget year.
We withhold recommendation on $60 million ($30 million General Fund) requested for as yet unspecified employee compensation adjustments until the specific compensation proposals and the costs associated with each proposal are available for legislative review.
State Civil Service Employees. In September 1999, the Legislature approved memoranda of understanding (MOUs) for all of the state's 21 collective bargaining units. (This does not include employees in higher education.) These agreements replace the MOUs that expired June 30, 1999 and are effective for a two-year period beginning July 1, 1999. The new MOUs provide a 4 percent general salary increase retroactive to July 1, 1999 and another 4 percent effective September 1, 2000. For employees not covered by collective bargaining (such as managers and supervisors), the Department of Personnel Administration (DPA) approved a compensation package similar to that approved in the MOUs. Figure 1 shows a history of general salary increases for state civil service employees and the consumer price indices for the United States and California since 1981-82.
|State General Salary Increases|
|1981-82 Through 2000-01|
|Fiscal Year||State General Salary Increases||Consumer Price Index|
|a Legislative Analyst's Office estimate of consumer price indices.|
Funding for the current-year costs of the new MOUs was included in Chapter 776, Statutes of 1999 (SB 339, Burton). The budget-year costs of the agreements (with the exception noted below) are included in each department's budget in the 2000-01 Budget Bill.
The Governor's budget includes $60 million ($30 million General Fund, $20 million special funds, and $10 million nongovernmental cost funds) to provide unspecified additional employee compensation adjustments. According to the Department of Finance, these adjustments are to address pay issues (such as recruitment and retention pay differentials) that (1) are referenced in the new MOUs but not yet resolved or (2) were not part of the new MOUs. We withhold recommendation on the $60 mil-lion requested until the specific proposals, and the associated cost for each, are available for legislative review.
Employees in Higher Education. In higher education, the Governor's budget proposes $110 million for the University of California and $116 mil-lion for the California State University for employee compensation to provide salary and benefit increases to faculty and staff. Figure 2 shows how these amounts will be allocated.
|Higher Education Salary and Benefit Increases 2000-01 Governor's Budget|
|University of California|
|Merit salary increases||$39.0|
|Average 2 percent cost-of-living increase (effective 10/01/00)||35.2|
|Full-year cost of 1999-00 salary/benefit increases||14.1|
|Health and dental benefit cost increases||10.6|
|1 percent parity increase for faculty(effective 10/01/00)||6.7|
|Market adjustment increases for agricultural and information technology staff(effective10/01/00)||4.1|
|California State University|
|5 percent compensation pool (effective 7/01/00)||$94.3|
|Full-year cost of 1998-99 and 1999-00 salary/benefit increases||12.9|
|Health and dental benefit cost increases||9.0|
The state provides tax relief--both as subventions to local governments and as direct payments to eligible taxpayers--through a number of programs contained within this budget item. The budget proposes total relief of $2.3 billion, of which almost $566 million is appropriated through the budget bill.
Of the items appropriated in the budget bill, the homeowners' exemption is the largest. This provision, which is required by the State Constitution, grants a $7,000 property tax exemption on the assessed value of owner-occupied dwellings, and requires the state to reimburse local governments for the resulting reduction in property tax revenues. The exemption reduces the typical homeowner's taxes by about $75 annually. The Governor's budget proposes an expenditure of $409 million on this program in 2000-01. This is an increase of $8 million, or 2 percent, which reflects the expected growth in the number of homeowners claiming the exemption.
The largest program of tax relief is the Vehicle License Fee (VLF) Offset, which is continuously appropriated and therefore does not appear in the budget bill. The VLF is an annual fee on the ownership of a registered vehicle in California, levied in place of taxing vehicles as personal property. The revenues are distributed to cities and counties. As part of the 1998 budget agreement, the VLF was permanently cut by 25 percent, with the potential of additional reductions beginning in January 2001 if specific revenue levels (or "triggers") are reached. As part of the 1999 budget agreement, the cumulative reduction was increased to 35 percent for calendar year 2000 only, without affecting the previously agreed to triggers. We are currently projecting that the first trigger will be reached in the budget year--continuing the 35 percent reduction for calendar year 2001.
For all VLF reductions, cities and counties continue to receive the same amount of revenues as under prior law, with the reduced VLF amounts replaced by General Fund spending. This spending, known as the VLF "backfill," is reflected in the tax relief budget item. The Governor's budget shows $1.712 billion for the offset in 2000-01. This is an increase of $362 million from 1999-00, which reflects the full-year fiscal impact of the 35 percent reduction. Our estimate of the budget-year expenditures for the VLF Offset is $82 million higher than the administration, due largely to higher projected growth of VLF revenues in the current year. Since the offset is continuously appropriated, any higher-than-expected expenditures would be reflected in a lower General Fund reserve amount.
Under our current revenue projections, we would expect that each of the maximum attainable trigger reductions will be reached through 2003-04, resulting in a permanent reduction of 67.5 percent. As a result, under our forecast, the offset cost would total more than $4 billion by 2003-04. Under current law, the future VLF percentage reductions would be lowered slightly to account for other tax relief that the Legislature has passed after 1998 (in order to keep total tax relief constant). Figure 1 shows the projected VLF backfill expenditures, as well as the corresponding VLF reduction percentages.
|Vehicle License Fee (VLF) Backfill Projected Reductions and Costsa|
|(Dollars in Billions)|
|VLF Reduction||Calendar Year|
|VLF Backfill||Fiscal Year|
|a Legislative Analyst's Office estimates of future costs.|
|b Reflects tax reductions passed in 1999. Under the Governor's proposal, the VLF reductions would be 46.5 percent in 2002 and 67.5 percent in 2003, with slightly higher backfill costs in 2001-02 through 2003-04.|
The administration proposes deleting the provision which lowers the VLF reduction percentages in cases of additional tax relief. As a result, under the
administration's proposal, any other tax relief passed by the Legislature after 1998 would not lower the future VLF reduction percentages, thereby
increasing the level of total tax relief. Thus, in evaluating the Governor's proposal, the Legislature will face the basic issue of whether new tax relief
proposals should be in lieu of VLF tax relief or in addition to VLF tax relief.
This budget item contains funding for local governments for four purposes:
We recommend the Legislature reject the Governor's proposed augmentation for the Citizens' Option for Public Safety program because the proposal contains a number of flaws. With regard to the base funding for the program, we recommend that the Legislature consider a number of modifications to the funding structure that would better target the funds, and adopt budget bill or trailer bill language to require law enforcement agencies to report on their use of the funds as a condition of receipt of such funds.
Background. In 1996, the Legislature enacted Chapter 134, Statutes of 1996 (AB 3229, Brulte), which created the COPS program. Under this program, counties and cities receive state funds, on a population basis, to augment public safety expenditures. The Legislature has provided $100 million for the program each year since 1996-97, for a total of $400 mil-lion through the current year. Under the terms of Chapter 134, the $100 million of COPS funds is allocated as follows:
Chapter 289, Statutes of 1997 (AB 1584, Prenter) clarified the reporting requirements of the program and required the State Controller to compile a summary report on the allocation and expenditure of the COPS funds. This report, which covers 1996-97 and 1997-98, was released in October 1999. Statutory authorization for the program expires at the end of the current-fiscal year.
The Governor's Proposal. The Governor's budget proposes to increase the General Fund allocation to the COPS program to $121.3 million and extend the program for five years to July 2005. The budget bill appropriates $100 million and adds a new provision that would allow the Department of Finance to augment the item by $21.3 million.
Under the Governor's proposal, the current $100 million will continue to be allocated as it has been previously. The additional $21.3 mil-lion would be added to the existing money for front line law enforcement and distributed to those local law enforcement agencies that would otherwise receive an allocation of less than $100,000. As a consequence of this proposal, all police and sheriff's departments would receive a COPS allocation of at least $100,000. Allocations to jails, local correctional departments, and district attorneys would not increase as a result of the total increase in program funding.
We have a number of concerns regarding the proposed augmentation which raise questions about the likely effectiveness of this proposal.
We estimate that the jurisdictions that would benefit from the increase in funding are those cities and counties with populations of 45,000 persons or less, and 15 of the potential beneficiaries are jurisdictions with less than 1,000 persons. Given that the state's worst crime problems are generally located in the larger urban areas, it is not clear that providing additional state monies to these very small jurisdictions will provide the maximum return in terms of public safety.
For all of these reasons, we recommend that the Legislature reject the Governor's augmentation proposal and delete the proposed budget bill provision.
Analyst's Concerns With the Existing COPS Program. In addition to the problems in the Governor's proposed augmentation, there are several deficiencies in the existing program that should be addressed.
What Should the Legislature Do? Although the COPS program has been in operation for four years and has provided $400 million in local fiscal relief to law enforcement agencies, there is little information available about how well the program has worked or what the impact of augmenting public safety expenditures has been.
In the past, we have recommended that the Legislature make these funds more generally available for local fiscal relief. However, the Legislature has chosen to direct the money for local law enforcement purposes. The expiration of the COPS program at the end of the current year provides an opportunity for the Legislature to evaluate the current funding structure and consider changes which could increase the effectiveness of this program if it is extended for an additional five years.
Consider a Variety of Modifications, Including Better Targeting. Based on our review of the Governor's proposal and the existing COPS program, we recommend that the Legislature consider modifying the program in several ways. Specifically, we suggest that, at a minimum, the Legislature modify the allocation formula so that the money is better targeted to those jurisdictions with the most significant crime problems. This could be accomplished in a number of ways. For example, funding could be distributed so that all jurisdictions receive a minimum base funding level, regardless of population, with the remainder of the COPS monies allocated based on a formula that takes account of the relative crime problems across the state, such as each jurisdiction's average crime rate over a given period of time. An alternative approach would not provide a minimum base funding level. Rather, a portion of the total COPS fund could be distributed on a population basis and the remaining portion distributed based on each jurisdiction's average crime rate over a given period of time.
Increase Accountability and Oversight. Whether or not changes are made to the funding structure, we believe that additional accountability and oversight is needed in this program. We think that one way to accomplish this would be to require jurisdictions to file expenditure reports, as was intended by Chapter 289, as a condition of receiving the funds. In our view, this would not be an additional administrative burden on any jurisdiction. Thus, we recommend that the Legislature adopt the following language with respect to the program, either in budget bill Item 9210-101-0001, or in a budget trailer bill:
Each jurisdiction shall receive their respective allocation from the Supplemental Law Enforcement Services Fund when the State Controller has certified that the respective jurisdiction has filed a complete expenditure report for the prior reporting period. Jurisdictions that fail to receive certification by September 1, 2001 shall forfeit their allocation. Jurisdictions shall forfeit the unexpended balance of their allocation, as of June 1, 2001. Any funds forfeited pursuant to this provision shall revert back to the General Fund.
We recommend that the Legislature not extend the sunset of the Property Tax Administration Loan Program and instead consider alternatives that would provide a long-term structural improvement to the property tax system.
Background. Counties are the level of government with the primary responsibility for assessing property and collecting property tax revenues, totaling over $20 billion annually. County assessor offices assess the value of property, and then county tax collectors and auditors collect the revenues and allocate them among local governments. It is estimated that $400 million is spent annually on the property tax administration system.
In the early 1990s, county assessor offices suffered two financial strains:
Since the property tax shifts reduced the share of each property tax dollar collected that goes to a county, counties experienced a decline in the financial incentive to invest in the property tax administration system. Although cities and special districts are required to pay for their share of property tax administration costs, school districts are not. As a result, counties pay more than 70 percent of property tax administration costs, yet they now receive less than 20 percent of the revenues.
Loan Program to Sunset. Although the property tax is a local tax it nevertheless benefits the state, as a result of California's education financing system. Under this system, increases in property taxes generally translate into reductions in the required state contribution for education. Recognizing the fiscal strains facing counties and the state interest in a well-administered property tax system, the Legislature created the Property Tax Administration Loan Program by enacting Chapter 914, Statutes of 1995 (AB 818, Vasconcellos). This program was later extended through 2000-01 by Chapter 420, Statutes of 1997 (AB 719, Torlakson). The legislation appropriates $60 million each year for loans to counties for additional spending on property tax administration. These loans may be forgiven if counties can demonstrate that they have generated or preserved sufficient revenues for schools to offset the costs of the loans. In recent years, 47 counties have participated in the program, with all the loans being forgiven (totaling $51 million in 1998-99). The Department of Finance is responsible for administering the program and determining whether to forgive the loans. Under current law, the program will sunset at the end of 2000-01. The Governor has proposed to modify and extend the program, but has yet to offer a specific proposal.
Short-Term Benefits but Long-Term Concerns. The program was designed as a short-term solution to the growth of assessor workload backlogs. In this regard, the program has been relatively successful. By both increasing property tax revenues to governments and helping to ensure that taxpayers receive a fair assessment, the program has strengthened the property tax administration system. Work backlogs in most counties have been significantly reduced. However, extension of the program is not the most effective method for achieving a stable and efficient property tax administration system in the long term. Below, we discuss a number of the problems with the program.
Options for a Permanent Solution. Continuing the property tax administration loan program could be considered in two contexts: (1) improving the property tax administration infrastructure and (2) providing general fiscal relief to counties. Based on which of these goals is a higher priority, the Legislature could implement one of the following options in place of extending the sunset of the loan program. We believe each of these options would offer a better long-term approach.
State Share of Growth Cost. One option would be for the state to pay for the schools' pro rata share (about 52 percent) of all growth in property tax administration expenditures. Counties would be required to continue to maintain their baseline spending on property tax administration with the costs shared along their current ratios. However, increases in administration costs would be paid for by all of the entities benefitting from property taxes--according to their share of the benefits. Counties would, therefore, make future decisions about whether to spend additional dollars on property tax administration knowing that the benefits of such investments would be commensurate with their costs. If statewide property tax administration costs increased by 5 percent, this option would cost the state about $10 million annually. This option is discussed in more detail in The 1997-98 Budget: Perspectives and Issues (please see pages 215 to 226).
This control section specifies the contribution rates for the various retirement classes of state employees in the Public Employees' Retirement System (PERS). The section also authorizes the Department of Finance to adjust any appropriation in the budget bill as required to conform with changes in these rates. In addition, the section requires the State Controller to offset these contributions with any surplus funds in the employer accounts of the retirement trust fund.
The state overpaid the Public Employees' Retirement System (PERS) $18 million ($10 million General Fund) in the current year. We recommend the Legislature adopt budget bill language requiring PERS to credit this amount plus interest to the state's retirement payments due in the budget year, thereby making these funds available for the Legislature's priorities in the budget.
Chapter 555, Statutes of 1999 (SB 400, Ortiz) provided retirement benefit enhancements to state employees. Coupled with these enhancements, Chapter 555 required PERS to change two actuarial valuation methods to recognize excess assets more quickly. These changes partially offset the state's costs related to the new benefits and reduced the state's retirement costs in the current year and in 2000-01. (After 2000-01, the state's costs will be higher than would have been the case prior to adopting the new benefits.) To account for this reduced cost in the current year, the Legislature adopted Chapter 800, Statutes of 1999 (AB 232, Alquist) to change the contribution rates included in the 1999-00 Budget Act. These rate changes and projected rates are shown in Figure 1. As shown in the figure, the state owes about $300 million less for current-year retirement contributions than it would have otherwise owed under the rates approved in the 1999-00 Budget Act.
The state pays its retirement contributions one quarter in arrears. For the current year, the state made the first-quarter (that is, July through September 1999) payment of $129 million to PERS at the beginning of October. This payment was made before Chapter 800 became law and was based on the higher rates included in the 1999-00 Budget Act. The PERS subsequently notified the state that based on the reduced rates, the state's total contribution for 1999-00 is $111 million. Consequently, according to PERS, with the October payment the state has overpaid PERS $18 million for the entire year.
This overpayment plus interest should be credited to the state's retirement contribution payments for the budget year. (The first payment is due in October
2000.) Using an average interest rate of 5.25 percent for the Pooled Money Investment Account, we estimate PERS should credit $21 million ($11 million
General Fund) toward the October 2000 payment. We recommend that the Legislature adopt language in Control Section
3.60 requiring PERS to credit the state's 2000-01 retirement contribution payments as described above. This credit increases the amount available for appropriation by the Legislature by $21 million ($11 million General Fund). This amount would be in addition to reductions in the state's contribution that should occur through lower contribution rates in 2000-01 as discussed below.
We withhold recommendation on 2000-01 state contribution rates for retirement benefits pending (1) final determination of the actual rates to be applied in the budget year and (2) receipt and review of information regarding the actuarial assumptions underlying the rates.
Budget-Year Rates Not Yet Determined. The PERS projects that state costs will decline again in the budget year. The lower rates result from PERS changes in actuarial calculations that were coupled to the recent enhancements in state retirement benefits. (As shown in Figure 1 on page 192, however, state costs are expected to increase by more than $350 mil-lion in 2001-02--the first year that PERS recognizes the increased liability for the new benefits.)
When this Analysis was prepared, a final determination of the 2000-01 rates had not been made. The condition of the Public Employees' Retirement Fund as of June 30, 1999 is one factor that will determine the 2000-01 state retirement contribution rates. Given the positive performance of the stock market through that date and the actuarial changes noted above, we expect the downward trend in the state's contribution rates to continue. (As an example, if the state's average contribution rate fell 1 per-cent, the General Fund savings would be about $40 million.)
Consequently, we withhold recommendation pending final determination of 2000-01 rates and receipt and review of information from PERS regarding the actuarial assumptions underlying the determined rates. This information is typically available in March or April.
|PERS Contribution Rates and State Costs
|Class||1998-99 Budget Act||Budget Act||Revised (a)||Projected b||Projected b|
|Highway Patrol||13.54||13.35 13.35||13.35||19.94|
|State Costs |
|General Fund c||$421||$255||$87||$57||$256|
|Special funds c||345||209||72||46||210|
|a Chapter 800, Statutes of 1999 (AB 232, Alquist) amended the rates approved in the 1999-00 Budget Act.|
|b Information provided by the Public Employees' Retirement System.|
|c Legislative Analyst's Office estimate of cost distribution between General Fund and special funds based on information provided by the Department of Finance.|
We withhold recommendation on this control section pending discussions with the Department of Finance on how to clarify the appropriate use of this delegated expenditure authority.
Through Control Section 27.00, the Legislature delegates to the administration the ability to spend money not specifically authorized in the budget act. It authorizes departments to spend at rates which will result in deficiencies by the end of the fiscal year. The Legislature still has to appropriate monies later on to fund the deficiencies, but at that time it usually has no practical option but to provide the funding.
Purpose of the Section. The basic reason for the Legislature to delegate this authority to the administration is to deal with certain unforseen circumstances, especially when the Legislature is not in session (primarily the fall). For example, a department could learn shortly after the start of the fiscal year that due to an unanticipated event (say, a court order or a natural disaster), it needs to spend at a higher rate than the budget act assumed. In this case, Section 27.00 allows the department to incur a deficiency after notifying the Legislature.
Concerns With Recent Submittals. This past December, the Department of Finance (DOF) submitted several Section 27.00 proposals to the Legislature which--in our view--were inappropriate uses of this control section:
Given the importance of this control section, we believe it is critical to clarify the language of Section 27.00 so that the Legislature is delegating only the
authority it determines is appropriate. We will be talking further with DOF to provide alternate language for the Legislature's consideration. Accordingly,
we withhold recommendation on the sections at this time.
The Department of Veterans Affairs (DVA) provides services to California veterans and their dependents, and to eligible members of the California
National Guard. The principal activities of the DVA include:
(1) providing home and farm loans to qualifying veterans using the proceeds from the sale of general obligation and revenue bonds; (2) assisting eligible veterans and their dependents to obtain federal and state benefits by providing claims representation, subventions to county veterans service offices, and direct educational assistance to qualifying dependents; and (3) operating veterans' homes in Yountville, Barstow, and beginning this year, Chula Vista, with several levels of medical care, rehabilitation services, and residential services.
The budget proposes total expenditures of $341 million for DVA in 2000-01. This is $7.9 million, or 2.4 percent, more than the estimated current-year expenditures. Total expenditures from the General Fund during the budget year would be $65 million, which is $7.8 million, or 14 per-cent, more than the estimated current-year level.
This increase in the budget reflects the final staffing and funding for the activation of the new veterans' home in Chula Vista, along with significant new staffing and funding to address quality of care issues at Yountville and Barstow. Other DVA spending remains largely unchanged.
The changing health care needs of the state's veteran population and the expansion of the state's role as an operator of nursing homes for veterans have created significant challenges for the Department of Veteran Affairs. Because of deficiencies in the operations of the two existing homes, the budget proposes a significant increase in staffing for the homes in the budget year.
Aging Veteran Population. The DVA has provided home and farm loans, education and information services, and domicile and health care for several generations of California veterans. However, the changing demographics of California's veterans and their needs is presenting new challenges for the department. These changes are being driven predominantly by two groups of veterans: a World War II generation well advanced in years and a maturing Vietnam War generation approaching their early retirement years.
California's World War II veterans began moving into the Yountville Veterans Home in significant numbers in the late 1980s. Over the years, however, this population continues to move from independent residential living and domiciliary care within the home, where staffing requirements are low, into residential care facilities for the elderly and skilled nursing facilities, where the staffing requirements are higher. The Yountville and Barstow homes have had to make adjustments to their levels of care in order to accommodate more residents in the more staff-intensive levels.
Vietnam veterans, many with medical needs, have already begun to arrive at the veterans' homes, and although they share many of the basic characteristics of previous generations, these vets bring with them a unique set of health and social problems. Meeting these needs places substantial demands on DVA resources.
Increasing Role in Veteran Nursing Home Care. In recent years, DVA's mission has increasingly focused on nursing home operations. Currently, more than 84 percent of the department's total staff is dedicated to nursing home care. In addition, staffing for the homes has increased 93 per-cent since 1993-94 while staffing for other DVA programs and administration has declined by 12 percent.
In addition to the Yountville home, which can accommodate 1,125 residents in five levels of care, the Legislature has authorized four separate 400-bed facilities in Southern California. The first of these facilities was opened in Barstow in San Bernardino County in February 1996. A second southern California home in Chula Vista is now in the final stages of staffing and is scheduled to open by April 1, 2000. Chapter 91, Statutes of 1997 (SB 584, O'Connell) provides that additional veterans' homes are to be established in the future in Lancaster (Los Angeles County) and in Saticoy (Ventura County).
Serious Problems Cited at Homes. Both the Yountville and Barstow homes have had a number of difficulties in recent years, in part because of
management problems and difficulties in hiring health care workers. A 1997 review of the Yountville home by the Bureau of State Audits pointed out
serious deficiencies with overall staff utilization and the mix of beds for each level of care. In addition, reviews of the homes in recent years by the
Department of Health Services (DHS) and follow-up actions by the
U.S. Health Care Financing Administration have pointed out problems with the quality of care for patients, in part because of inadequate and poorly trained staff.
Although the Legislature has provided virtually all the resources requested by DVA in recent years to address issues raised in these reviews (and, in some years, even more than the department requested), problems of quality care and staffing remain unresolved.
Budget Proposes Substantial Increase in Positions. The proposed budget includes an augmentation for 129 new positions to address problems regarding quality of care and to implement new programs to recruit and retain staff. The requests fall into five broad areas:
Figure 1 shows the requested positions by type and location.
|Department of Veterans Affairs
New Positions Requested
|Training and quality assurance||--||7.0||--||2.0||9.0|
|Information technology, insurance, and reimbursements||8.5||2.0||3.0||3.0||16.5|
|Facilities and maintenance||29.0||20.0||--||--||49.0|
|Elimination of salary savings||21.6||6.2||--||--||27.8|
Our review found that several adjustments need to be made to the Governor's proposed augmentation, which we discuss below.
We recommend that the Department of Veterans Affairs submit a revised proposal at the time of the May Revision that fully accounts for additional federal funds and insurance reimbursements resulting from the homes' new information system and that the state's General Fund costs of operating the homes be adjusted accordingly.
The VHIS computer projects were designed to assist the homes in claiming federal funds and insurance reimbursements to offset the state's costs of operating the homes. The Feasibility Study Report justifying the projects estimated that they would generate $1.5 million in increased home revenues from federal funds and reimbursements in the first year of implementation (originally to be 1995-96, but actually 1999-00 due to delays) and $6.9 million in the second year (2000-01).
Our review indicates that this level of federal funds and reimbursements has not fully materialized. As a result, the General Fund will bear a larger share of the operating costs of the homes than it should. The DVA advises that it is currently implementing program modules that will allow the department to recover previously unrealized federal funds and reimbursements.
For this reason, we recommend that the department submit a revised proposal at the time of the May Revision that fully accounts for the additional federal funds and reimbursements resulting from implementation of the VHIS system. At a minimum, we believe that the budget request for $372,000 for additional staff to enhance the operation of the system should be offset by federal funds and reimbursements rather than paid for entirely from the General Fund.
We recommend that the budget's proposal to assume no salary savings for the home be rejected because it does not recognize the reality of staff turnover, for a General Fund reduction of $1.4 million. (Reduce Items 8960-011-0001 by $1.1 million and 8965-001-0001 by $319,000.)
Background. Each year, departments incur "salary savings." These savings result from two factors. First, departments experience vacancies in authorized positions because of delays in hiring staff for new positions, as well as filling existing positions, vacant due to staff turnover. Second, new staff are generally hired at salaries that are lower than the amounts budgeted for departing employees.
Generally, most departments experience a salary savings that is equivalent to about 5 percent of their personal services budget. In some cases, however, departments may deliberately hold positions vacant and generate a larger amount of salary savings in order to spend the money for some other purpose, such as to pay for merit salary adjustments or price increases which were not funded.
Budget Proposal. The budget proposes $1.4 million from the General Fund and 27.8 positions aimed at fully staffing all critical health care positions at the Yountville and Barstow homes. This proposal would essentially fund the positions at 105 percent of their costs and, thus, assumes no salary savings.
This budget proposal anchors its justification around "position vacancies" and salary savings but provides no justification based upon workload. We find no evidence that the department would be required to keep positions vacant in order to meet salary savings requirements. In our view, salary savings occur naturally because it is virtually impossible to keep all positions filled all of the time and, inevitably, new employees will fill positions at lower salaries than departing employees. Funding the positions at 105 percent of their costs does not recognize this and is an inappropriate way to develop a budget.
We would note that the budget proposes $4.5 million to reduce position vacancies by offering substantial salary inducements, student loan repayment assistance, and assistance in home purchases. These actions will help reduce the number of vacancies at the homes.
For these reasons, we recommend that the Legislature deny the proposal, for a General Fund savings of $1.4 million ($1.1 million at Yountville and $319,000 at Barstow).
We recommend that funding proposed for new positions be reduced by $965,000 to reflect a more realistic hiring schedule. (Reduce Item 8960-011-0001 by $473,000, Item 8965-001-0001 by $408,000, and Item 8966-001-0001 by $84,000.)
The budget provides full-year funding for all of the new positions, which essentially means that the department assumes that all of the positions will come on board on July 1, 2000. Even with the recruitment proposals included in the budget, we think that this assumption is unrealistic given the substantial amount of time it takes to recruit and hire new staff, especially health care professionals.
We think that the amount requested should be adjusted to assume that the positions will be phased in over a slightly longer period. A more realistic assumption, in our view, would be that positions will be filled by September 2000. This would not mean that the department could not fill the positions until September, but rather that they will be filled, on average, by September, with some positions being filled as early as July and some as late as December.
Thus, in order to account for this more realistic hiring schedule, we recommend a total reduction of $965,000 ($473,000 for Yountville, $408,000 for Barstow, and $84,000 for Chula Vista).
We withhold recommendation on $2.4 million proposed for renovations to the chapel and cemetery at the Yountville home, pending receipt and review of information about the scope, costs, and timetable for the project.
The budget proposes $2.4 million for renovations and repairs to the chapel and cemetery at the Yountville home. Although we do not question the need for the renovations, our review of this proposal found that it lacks adequate information on the scope, costs, and timetable for the project. For this reason, we withhold recommendation, pending receipt of this additional information.
We recommend that the Department of Veterans Affairs report during budget hearings on (1) the reasons for the continuing increase in the overhead costs of the Cal-Vet Loan program and (2) steps it is taking to reduce those costs.
In our January 1998 report, Rethinking the Cal-Vet Loan Program, we reviewed the status of the Cal-Vet program and outlined a proposal to phase out additional Cal-Vet lending activity and to direct surplus Cal-Vet funds to programs that will benefit both aging war veterans and state taxpayers. We noted that far fewer veterans than in the past need home loans, but that these veterans have a growing need for medical care, nursing home care, Alzheimer's treatment, and other types of state assistance. We concluded that it was time to rethink the state's approach to veterans' assistance given the changes which have occurred in recent times.
Our review indicates that no significant changes have occurred since we first advised the Legislature of the condition of the program. The total number of loans in the Cal-Vet home loan portfolio declined by 2,647 loans (a reduction of 7.4 percent) in 1998-99, continuing a trend of the past two decades. Near the end of 1999, this decline, at least momentarily, seems to have flattened out. It is too soon, however, to conclude that the number of loans in the Cal-Vet portfolio has stopped shrinking.
Loan Overhead Costs Continue to Climb. Equally as troubling as the decline in the Cal-Vet loan portfolio is the continued escalating overhead costs to service these loans. Total program administration expenses increased from $25.6 million for 1998-99 to $28.2 million in 1999-00, resulting in the overhead cost per loan increasing to $814. Figure 2 (see next page) shows the trend in the overhead costs over the past ten years.
We are particularly concerned about this trend because discussions at a meeting of the California Veterans Board in November 1999 appear to indicate that DVA is considering adding a substantial number of additional staff to the Cal-Vet program, which would likely drive overhead costs even higher.
Although funding for the Cal-Vet program is not appropriated in the annual budget bill, we nevertheless believe that it is important for the Legislature to provide oversight of the program and to obtain an explanation from DVA on (1) the reasons for the continuing increase in the program's overhead costs and (2) steps it is taking to reduce those costs. We recommend that the department report to the Legislature during budget hearings on these issues.
We note that the Bureau of State Audits is conducting an audit of the Cal-Vet program, which it anticipates completing by the spring.
The Public Employees' Retirement System (PERS) administers the retirement benefit program for state employees (excluding the University of California) and the health benefits program for employees and annuitants. The current value of the Public Employees' Retirement Fund is about $160 billion. As a result of Proposition 162, which was approved by voters in November 1992, PERS has authority to spend funds to administer the retirement program for state employees without appropriation by the Legislature. However, because the health benefits program is separate from the retirement program, the Legislature does approve the budget for the health program. The entire PERS budget, however, is included in the budget bill as an informational item, with budget bill language that requires PERS to report specified budget information to the Legislature.
The Governor's budget shows 2000-01 expenditures for PERS of $272 million, an increase of $1.8 million, or less than 1 percent, over estimated current-year expenditures. However, the PERS Board will approve the 2000-01 PERS budget in the spring. Thus, the budget amount reflects a continuation of existing activities and does not include any new spending proposals for 2000-01.
As noted above, the passage of Proposition 162 in November 1992 gave PERS authority to spend funds for administration of the retirement program for state employees without legislative appropriation. Figure 1 (see next page) shows expenditures and staffing levels from three years prior to Proposition 162 through 2000-01. In 1992-93, the year voters approved Proposition 162, investment operations expenditures--mostly external investment advisors--jumped from $6 million in 1991-92 to $45 million. The next year, investment expenditures nearly doubled again to $86 million. In the current year, investment spending is projected to be $85 million.
Similarly, spending for non-investment-related operations has increased from $50 million in 1991-92 to $186 million in the current year, an increase of 272 percent. Staffing has followed a similar course, rising from 802 personnel-years (PYs) in 1991-92 to 1,481 PYs in the current year, an 85 percent increase. In comparison, the State Teachers' Retirement System (STRS) employment grew by 29 percent and all other state employment, including higher education, increased by 16 percent in the same time frame.
|Public Employees' Retirement System (PERS)
|(Dollars in Millions)|
|a Voters approved Proposition 162, which granted PERS authority to spend funds without appropriations by the Legislature, in November 1992.|
|b Does not include any new spending proposals.|
Information Technology Oversight
We recommend that the Public Employees' Retirement System explain to the Legislature during budget hearings (1) how it exercises oversight and control of its information technology projects and (2) why it does not submit its projects to the Department of Information Technology and the Department of Finance to take advantage of their expertise and the external accountability provided by their review processes.
To promote independent oversight of information technology (IT) projects, most departments are required to submit IT project proposals to the Department of Information Technology (DOIT) and the Department of Finance (DOF) for review and approval. This external oversight is designed to decrease project risk and increase the cost-effectiveness and efficiency of IT projects. Because of Proposition 162, PERS is not required to submit IT projects to DOIT or DOF for review and approval. Nothing precludes PERS from voluntarily doing so, however. We noted in our analysis of STRS that STRS has established an internal review process for proposed projects. The PERS, on the other hand, has indicated that it has no written internal procedures to review proposed IT projects. Nor does PERS exercise options for external independent oversight (such as, submitting its projects to DOIT and DOF or to a private entity for review).
Given this lack of internal and external oversight, it is not clear how PERS exercises sufficient control over its projects. Therefore, we recom-mend that
PERS explain to the Legislature during budget hearings
(1) how it exercises oversight and control of its IT projects and (2) why it does not submit its projects to DOIT and DOF to take advantage of their expertise and the external accountability provided by their review processes.
The State Teachers' Retirement System (STRS) administers the retirement benefit program for public school teachers from kindergarten through the community college system. As a result of Proposition 162, which was approved by voters in November 1992, STRS has authority to spend funds to administer the teachers' retirement program without appropriation by the Legislature. Thus, the budget bill does not include items of appropriation. Instead, the STRS budget is presented as an informational item with budget bill language that requires STRS to report specified budget information to the Legislature. This informational item and budget language give the Legislature a degree of oversight of the STRS budget and activities.
The Governor's budget shows budget-year spending for STRS of $54 mil-lion, a $2.2 million, or 4.3 percent, increase in expenditures in 2000-01. This includes (1) $6.1 million in information technology (IT) projects, including funding for the State Teachers' Automation Redesign Team (START), proposed to begin operation in July 2000; and (2) $2 million for a variety of other augmentations. These increases are partially offset by reductions in one-time expenditures in the current year, primarily for IT projects.
Even though STRS is not dependent on legislative appropriations for its budget, STRS continues to submit budget change proposals for re-view by the Legislature during the budget process. We believe this cooperative approach to the budget process best serves the Legislature's and STRS' interests, and we encourage STRS to continue this practice.
Given the number of information technology-related projects the State Teachers' Retirement System (STRS) proposes, we recommend that STRS explain to the Legislature during budget hearings why it does not submit its projects to the Department of Information Technology and the Department of Finance to take advantage of their expertise and the external accountability provided by their review processes.
Figure 1 summarizes STRS' proposed augmentations for IT projects. As noted above, funding for these proposals totals $6.1 million. The proposals include a number of ongoing initiatives, such as:
|State Teachers' Retirement System Information Technology Proposals|
|State Teachers' Automation Redesign Team (START)|
|Overtime and temporary help for implementation||$250|
|"Backfilling" positions temporarily redirected to START||422|
|Programming changes to implement benefit changes||600|
|Design changes postponed until after implementation||1,300|
|Implement and support e-commerce technology||$164|
|Research and implement emerging technologies||89|
|Support for intranet system||181|
|Support for new e-mail system||73|
|Support for Web site||111|
|Imaging project to automate files for retrieval||2,557|
|Computer upgrades and leasing pilot project||182|
|Automate file backup process||148|
In addition to these numerous proposed IT-related projects, STRS plans to bring its multiyear START project online in July 2000. As a result, STRS proposes $2.6 million for costs associated with implementing the new system. These include overtime and temporary help, "backfilling" to cover the work of positions previously redirected to work on START, and implementing system changes to account for new benefits, other legislative changes, and necessary design changes postponed until after implementation.
To promote meaningful oversight of IT projects, most departments are required to submit IT project proposals to DOIT and the Department of Finance (DOF) for review and approval. This external review is designed to decrease project risk and increase the cost-effectiveness and efficiency of IT projects. Because of Proposition 162, STRS is not required to submit IT projects to DOIT or DOF for review and approval. Nothing precludes STRS from voluntarily doing so, however.
The STRS has instead established its own internal review process for proposed projects. Given the number of IT-related projects STRS proposes, we
recommend that STRS explain to the Legislature during budget hearings why it does not submit its projects to DOIT and DOF to take advantage of their
expertise and the external accountability provided by their review processes.
This appropriation provides for the state's contribution toward health and dental insurance premiums for annuitants of the Judges', Legislators', District Agricultural Employees', and Public Employees' Retirement Systems, as well as specified annuitants of the State Teachers' Retirement System. The program provides annuitants the option of selecting from 20 state-approved health plans (depending on where an annuitant lives).
We withhold recommendation on the $386.9 million General Fund request for annuitant benefits pending final determination of health insurance premium rates for calendar year 2001.
The budget proposes total expenditures of $386.9 million from the General Fund for health and dental benefits for annuitants in 2000-01. This is $39.6 million, or 11.4 percent, more than estimated expenditures for this purpose in the current year. This increase reflects expected growth in the number of annuitants and a dental insurance premium increase. It does not include any changes in health insurance premiums that would go into effect January 1, 2001. Figure 1 (see next page) displays General Fund expenditures for annuitant health and dental benefits for the three fiscal years starting with 1998-99. Although these costs are initially paid from the General Fund, the state recovers a portion of these costs from special funds (about 33 percent) through pro rata charges.
The actual amounts needed in the budget year are dependent on negotiations over health insurance premiums currently underway between the Public Employees' Retirement System and providers. These negotiated premium rates--which will cover the 2001 calendar year--should be available for review during legislative budget hearings. Pending receipt of the new rates, we withhold recommendation on the amount requested under this item.
|Health and Dental Benefits For Annuitants