Legislative Analyst's Office Analysis of the 2001-02 Budget Bill

Public Employees' Retirement System (1900)

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 (PERF) is about $170 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 2001-02 expenditures for PERS of $286 million, an increase of $1.4 million, or less than 1 percent, over estimated current-year expenditures. However, the PERS Board will approve the 2001-02 PERS budget in the spring. Thus, the budget amount reflects a continuation of existing activities and does not include any new spending proposals for 2001-02.

Cost Allocation Plan Reveals High Overhead Costs

We recommend that prior to budget hearings the Public Employees' Retirement System advise the Legislature on (1) what actions it will take to ensure that Public Employees' Contingency Reserve Fund expenditures to administer the state's health benefits program do not continue to exceed annual revenues and (2) the effect of reducing the 0.5 percent charge the state pays into the fund in order to reduce fund reserves.

The PERS requests $2.9 million from the Public Employees' Contingency Reserve Fund (CRF) for administration of the state's health benefits program. As adopted in Control Section 4.20 of the annual budget act, the state pays an amount equal to 0.5 percent of health insurance premiums into CRF to support PERS' costs. According to the Governor's budget, this amounts to $11.8 million in 2001-02.

Our review of PERS' budget-year spending request indicates that its overhead expenditures are 39 percent of total health administration costs. By comparison, overhead costs of 15 percent to 20 percent are more the norm for other state agencies.

While we support the concept of proportionately allocating overhead costs to department funds to accurately account for all their costs, PERS' overhead costs are very high. Moreover, this proposal would cause CRF expenditures to slightly exceed revenue from the 0.5 percent charge. As a result, we recommend that prior to budget hearings PERS advise the Legislature on what actions it will take to (1) control overhead costs and
(2) ensure that CRF expenditures to administer the state's health benefits program do not continue to exceed annual revenues.

We also note that the CRF fund balance is relatively high. The proposal would leave a fund balance of $10.8 million (89 percent of budget-year expenditures) at the end of the budget year. Consequently, we also recommend that prior to budget hearings PERS advise the Legislature on the effect of reducing the 0.5 percent charge the state pays into CRF to reduce the reserves.