Legislative Analyst's Office
Analysis of the 2001-02 Budget Bill
Total funding for general government is proposed to increase by 3 percent in the budget year. The budget does not include funds for increases in employee compensations that may result from collective bargaining for new memoranda of understanding or for increases in the state's contributions to employee retirement programs.
The "General Government" section of the budget contains a variety of programs and departments with a wide range of responsibilities and functions. These programs and departments provide financial assistance to local governments, protect consumers, promote business development, provide services to state agencies, ensure fair employment practices, and collect revenue to fund state operations. The 2001-02 Governor's Budget proposes $13.5 billion to fund these functions not including federal funds. The proposed budget-year funding is $418 million more than estimated 2000-01 expenditures.
There are six major program areas within general government:
We describe these program areas below and Figure 1 shows the estimated 2000-01 and proposed 2001-02 budget expenditures by program area. The large increase in local government subventions and the large decrease in tax relief are related to the implementation of additional vehicle license fee (VLF) relief enacted last year.
| General Government Spending|
By Program Area
| 2000-01 Through 2001-02|
|Local government subventions||
The largest general government program is the local government subvention program, proposed to total $5.5 billion in 2001-02. This program: (1) distributes state-collected revenue (primarily from VLFs and gas taxes) to local government agencies and (2) provides local governments additional funding for specified programs.
The Governor's budget proposes to subvene $4.8 billion in shared revenues (virtually all from special funds). This compares to the current-year total of $2.4 billion, which was significantly reduced in 2000-01 due to the way additional VLF relief was enacted last year. Another $673 million in local assistance (all General Fund) is proposed for local government general purpose relief ($250 million), the Citizen's Option for Public Safety program ($242 million), and other local government programs.
The state provides local tax reliefboth as subventions to local governments and as direct payments to eligible taxpayersthrough a number of different programs. The Governor's budget proposes more than $3.1 billion for tax relief appropriations in 2001-02. The two largest are the VLF reduction and the Homeowners' Property Tax Relief (homeowners' exemption) programs. The Governor's budget shows a reduction of $1.6 billion from 2000-01 due to (1) the way additional VLF relief was enacted last year and (2) a one-time increase in senior citizen property tax relief in the current year.
A total of 22 departments are responsible for providing regulatory oversight of various consumer and business issues. These regulatory agencies protect the consumer and promote business development while regulating various aspects of licensee, business, and employment practices. The groups regulated range from individual licensees to large corporations. Most of these departments are funded from special funds that receive revenue from those subject to regulation. Included in this total are the Departments of Consumer Affairs, Industrial Relations, Food and Agriculture, Financial Institutions, and Corporations, as well as the Public Utilities Commission.
The total proposed expenditures for all regulatory activities in the budget year are $1.4 billion. This includes approximately $1.1 billion from special funds and $328 million from the General Fund. Total expenditures in this category are $109 million, or over 7 percent, below estimated current-year expenditures. The four largest agencies in terms of overall proposed expenditures are the Department of Consumer Affairs, $343 million ($2.8 million General Fund); the Department of Industrial Relations, $227 million ($175 million General Fund); the Energy Commission, $195 million ($17 million General Fund); and the Department of Food and Agriculture, $179 million ($98 million General Fund).
Expenditures. The Franchise Tax Board and the Board of Equalization are the largest revenue collection agencies in the state. Between them, the boards collect the state's personal and business income taxes, sales tax, and special use taxes. The budget proposes $618 million for these tax programs in 2001-02, an increase of $4 million, or 0.7 percent, over estimated current-year expenditures.
Revenues. The Governor's budget estimates that combined General Fund collections by both boards will be $77 billion in 2001-02. More than half of all General Fund revenues ($44.8 billion) come from personal income taxes.
There are more than 30 departments and agencies that provide a wide range of administrative services. These services range from oversight and support of other departments (Department of General Services, Department of Information Technology, and Office of Administrative Law), to economic development (Technology, Trade and Commerce Agency), to various specialized services provided to individuals and communities (Office of Emergency Services, the Military Department, and the Department of Veterans Affairs).
The budget proposes a total of $1.5 billion to support these functions in 2001-02. This is a decrease of $175 million, or 11 percent, from current-year expenditures. The decrease is primarily due to a reduction in one-time appropriations for local assistance under the Department of Housing and Community Development.
Retirement-related expenditures account for a significant part of state spending for the budget year. In 2001-02, state expenditures for various costs associated with public employee retirement (excluding University of California costs) will total $2.3 billion, including $1.9 billion from the General Fund. As summarized in Figure 2, the General Fund provides for employer contributions and/or various other payments to four retirement systems. In addition, the state (1) contributes to the payment of premiums for health and dental benefit plans for retired state employees and (2) makes Social Security and Medicare contributions for most state employees.
Public Employees' Retirement System. The Public Employees' Retirement System (PERS) is the retirement system for most state employees. The budget projects General Fund expenditures of $78 million for PERS in 2001-02. However, we believe this amount is understated because the state's costs will more than likely increase in 2001-02 because of enhanced retirement benefits for all state employees that became effective January 1, 2000. Under the legislation that enhanced the benefitsChapter 555, Statutes of 1999 (SB 400, Ortiz)PERS was required to modify certain actuarial valuation methods in order to recognize excess assets more quickly. As a result, the state's costs for the new benefits were partially offset, and the budget year is the first year that PERS fully recognizes the increased liability in setting the state employer contribution rates. Based on the estimated state employee salary level, we estimate that each percentage point increase in the state's overall contribution rate increases General Fund retirement costs approximately $55 million.
State Teachers' Retirement System. The State Teachers' Retirement System (STRS) is the retirement system for teachers in public K-12 schools and community colleges. The STRS receives contributions from teachers and their employers. However, these contributions have historically been insufficient to provide for the cost of basic retirement benefits (which were enhanced by 1998 and 2000 legislation), the protection of retirees' purchasing power, and past unfunded liabilities (the system no longer has an unfunded liability). These shortfalls have been covered by annual transfers from the General Fund. In the budget year, the shortfalls are expected to total $874 millionabout $29 million less than the current year. This decrease results from a reduction in the state's annual percentage contribution to STRS, as changed by 2000 legislation, offset by increased contributions due to statewide teacher salary increases and purchasing power protection.
| General Fund Costs|
For Retirement Programs a
|State Retirement Plans|
|State Teachers' Retirement||
|Public Employees' Retirement||
|Defined Contribution Plansb||
|Other Retirement Benefits|
|Health and Dental Benefits for Annuitants||
|Social Security and Medicarec||
|a Excludes costs for University of California employees.|
|b Programs for Bargaining Unit 6 and excluded employees.|
|c Legislative Analyst's Office estimate based on 1999-00 costs.|
Health and Dental Premiums. The budget also includes $431 million from the General Fund to pay the state share of health and dental insurance premiums for retired state employees and their qualifying beneficiaries. This is $21 million more than estimated current-year expenditures, reflecting an increase in the number of retirees. The PERS is currently negotiating the health premiums rates for the second half of the budget year. These negotiations may result in a change in the estimated General Fund cost for the budget year.
There are nearly 176,000 rank-and-file state employees (not including those in higher education) covered under state collective bargaining law. The pay, benefits, and working conditions for these employees are typically spelled out in memoranda of understanding (MOUs). In September 1999, the Legislature approved MOUs for all of the state's 21 collective bargaining units that are effective through June 30, 2001. Major compensation provisions in these MOUs included 4 percent salary increases effective on July 1, 1999 and September 1, 2000, and increased retirement benefits (provided in Chapter 555).
The Governor's budget does not include any budget-year funding for employee compensation. However, the Department of Personnel Administration will begin collective bargaining negotiations to replace the expiring MOUs this spring. Consequently, we anticipate the state will face some increases in employee compensation costs in 2001-02. Based on the estimated state employee salary level, we estimate that each 1 percent salary increase for state employees increases General Fund costs approximately $55 million.