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

Department of Finance (8860)

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 system.

The Governor's budget proposes expenditures of $40.5 million ($30.5 million General Fund and $10 million reimbursements) to support the activities of DOF in 2001-02. This is an increase of $1.2 million from the General Fund, or 4 percent, above estimated current-year expenditures to accommodate workload growth.

Information Technology Innovation Grant Program Has Not Started

We recommend that the Department of Finance report at budget hearings on progress made in issuing grant application guidelines, forming the Information Technology Innovation Council, and identifying and funding innovative information technology projects.

The 2000-01 Budget Act appropriated $10 million from the General Fund for allocation through 2003 for innovative information technology (IT) projects. At the time this analysis was prepared, DOF had not allocated any of these funds. The administration, however, does expect allocations to be made in the budget year.

Background. The Information Technology Innovation Activities budget item supports the grant program established by Chapter 608, Statutes of 2000 (AB 2817, Honda). The intent of this program is to provide one-time funding to departments for innovative IT projects as defined by guidelines issued by the Information Technology Innovation Council. Departments have up to three years (2000-01 through 2002-03) to expend allocated funds. Projects needing additional funds above the initial allocation are required to address those funding needs through the annual budget process.

Chapter 608 required a number of steps to occur within three months of its enactment. First, the Department of Information Technology and the DOF were required to issue guidelines for grant applications. Second, the Information Technology Innovation Council, composed of two members of the Governor's Office, two Agency Secretaries, the State Chief Information Officer, the Director of DOF, a member of the Assembly, and a member of the Senate, is required to evaluate and rank grant proposals based on the issued guidelines. Third, DOF is required to award grants as recommended by the council from funds appropriated in the annual budget act. Chapter 608 states approved grants can be funded 30 days after written notification is provided to the Legislature. At the time this analysis was prepared, none of these steps were completed.

The DOF Should Report at Budget Hearings. We recommend that DOF report at budget hearings on the progress it has made in implementing Chapter 608.

Departmental Funding Issues Continue

We recommend that the Department of Finance report during budget hearings on the extent to which the proposed 2001-02 budget has reduced the need for departments to hold positions vacant to cover unbudgeted costs.

Background. For many years and through several administrations, departments have had to absorb a number of cost increases without receiving corresponding increases to their budgets. These include (1) inflationary cost increases for operating expenses and equipment; (2) merit salary adjustments (MSAs) that departments must 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. One strategy used by departments to cover such costs is to deliberately hold positions vacant in order to generate "salary savings."

The DOF Directed to Examine Reasons for High Vacancy Rate. In spring 2000, the Legislature expressed concern that the state had a 15 percent vacancy rate at the same time the administration was proposing almost 6,000 new positions. Since it appeared that the state was unable to fill its existing positions, the Legislature directed DOF to (1) examine the vacancy issue further and (2) present recommendations during the May Revision on steps the administration could take to resolve the state's vacancy issue.

To meet this directive, DOF examined the budgets of 29 departments. During the May Revision of 2000, DOF presented its findings, which are summarized in Figure 1. As indicated in this figure, DOF found that about half of the positions reported vacant (47 percent) were used to meet budgeted salary savings (that is, to reflect normal employee turnover and hiring delays). Most of the remaining positions, however, were left vacant to generate "savings " to cover anticipated costs for which the departments had not received funds. These included primarily personnel-related salary costs such as actual salaries that were higher than originally approved (20 percent). The reminder included staff overtime costs (15 percent), shortfalls for federal funds that did not materialize (11 percent), and other purposes (9 percent).

As a result of its investigation, DOF proposed the elimination of 1,736 positions in 2000-01.

The DOF Conducts Second Vacancy Report. Between July and October 2000, DOF conducted a second vacancy study which examined budgets in 50 departments. The findings from the second DOF study, also summarized in Figure 1, were presented to the Legislature in January 2001.

The data confirmed the earlier findings that departments are meeting their day-to-day operating needs—such as paying employee salaries and covering federal fund shortfalls—by holding positions vacant. In addition, the DOF reported it would abolish an additional 837 vacant positions in 2001-02.

The DOF Has Taken Some Steps to Address Vacancy and Under-Funding Issues. As a result of the Legislature's focus on this issue, the DOF has eliminated positions (as discussed earlier) and taken some steps to fund activities that previously had been unfunded. For example, DOF has allowed departments to budget new positions at midstep instead of first step, where appropriate. Others, such as the Department of Social Services, have received funding for MSAs in the proposed 2001-02 budget plan. The administration has also funded department costs for various salary adjustments resulting from collective bargaining agreements. These are positive steps that should reduce pressure on some departments to leave positions vacant for budget balancing purposes. We would note, however, these steps have been selectively applied, making it difficult for the Legislature to ascertain how much "forced" salary savings for budgetary purposes remains.

What Additional Steps Can the Administration Take? We believe there are additional steps the administration could take to address the vacancy and under-funding issues. Some of these may require additional funds —such as paying for MSAs—and some will not. In the latter category, for example, the administration could develop statewide strategies for addressing the "hard-to-recruit" vacancy problem. This would require the State Personnel Board, the Department of Personnel Administration, and other affected departments to take joint action to recruit for certain state positions. Implementation of measures such as these would improve the integrity of the state's budgetary process so that funds appropriated for a particular purpose are in fact spent for that purpose.

Analyst's Recommendation. As noted above, about half of the vacant departmental positions reported by DOF were used to meet salary savings requirements. Departments, however, left the remaining positions vacant to generate savings and cover costs for which they did not receive sufficient funds.

The steps undertaken by DOF to address this under-funding of departmental costs have been limited and selective. Consequently, it is not possible to determine the extent to which these steps have addressed departmental funding requirements on a statewide basis, thereby reducing the need to leave positions vacant. Therefore, we recommend that DOF report at budget hearings on the extent to which it has reduced the need for departments to hold positions vacant to cover unbudgeted costs. Specifically, the department should identify:

• The departments which received funds in the 2001-02 budget proposal specifically for the purpose of reducing the number of positions they hold vacant to cover unfunded costs.
• The extent to which those funds will address the problem.
• Steps the administration proposes to take in the future to reduce the level of "forced" salary savings. In addition, if DOF proposes to address these issues on a department-by-department basis, it should identify the criteria it would use to adjust departmental budgets.