Legislative Analyst's Office Analysis of the 2002-03 Budget Bill

Overview

Total state funding for general government is proposed to decrease by about 2 percent in the budget year. The budget proposes reductions in most general government program areas, with the exception of tax relief. The budget shows an increase of $1.3 billion in tax relief expenditures, or 44 percent above the current-year level, due to the way funds were appropriated for the vehicle license fee reduction.

The "General Government" section of the budget contains a number 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 2002-03 Governor's Budget proposes $13.3 billion in state funds for these functions. The proposed budget-year funding is $251 million (1.9 percent) less than estimated 2001-02 expenditures.

Spending by Major Program

There are six major program areas within general government:

• Local government subventions, which include shared revenues and local government
• financing.
• Tax relief.
• Tax collection programs.
• Regulatory programs.
• Energy-related programs.
• State administrative functions.
• State retirement and employment.

We describe these program areas below and Figure 1 shows the estimated 2001-02 and proposed 2002-03 expenditures by program area.

Local Government Subventions

The local government subvention program--proposed to total $2.8 billion in 2002-03--(1) distributes state-collected revenue (primarily from the VLF and gas tax) to local government agencies and (2) provides local governments additional funding for specified programs.

The Governor's budget proposes to subvene to local governments $2.4 billion in shared revenues (virtually all from special funds). This compares to the current-year total of $3.3 billion, due to the way funds were appropriated for the VLF reduction. Another $385 million in local assistance (all General Fund) is proposed for the Citizens' Option for Public Safety program ($233 million) and other local government programs.

Tax Relief

The state provides local tax relief--both as subventions to local governments and as direct payments to eligible taxpayers--through a number of different programs. The Governor's budget proposes more than $4.4 billion for tax relief appropriations in 2002-03. The two largest are the VLF reduction ($3.7 billion) and the homeowner's exemption ($410 million) programs. The Governor's budget shows an increase of $1.3 billion from 2001-02 due to the way funds were appropriated for the VLF reduction.

Tax Collection Programs

The Franchise Tax Board (FTB) and the Board of Equalization (BOE) are the state's two major revenue collection agencies. The FTB is responsible primarily for collection and administration of the state's personal income tax (PIT) and the bank and corporation tax (BCT). In addition, it assists in the collection of various types of nontax delinquencies, including child support payments and vehicle-related assessments. The BOE is responsible primarily for administration and collection of the sales and use tax (SUT), as well as excise taxes on fuel, cigarettes, and alcoholic beverages.

Expenditures. The budget proposes total funding of $632 million for these two agencies in 2002-03, down roughly $5 million (about three-quarters of one percent) from the current year. This includes funding FTB's General Fund-related tax collection activities at $373 million, representing an increase of about 2 percent from 2001-02. Proposed funding for BOE's General Fund-related tax collection activities is $165 million, representing a decrease of about 3 percent from the current-year level.

Estimated Tax Collections. The budget estimates that 2002-03 state tax collections will be approximately $48.5 billion for FTB and $33.9 billion for BOE, or $82.4 billion in total. Roughly $73.4 billion of this represents General Fund revenues, including 55 percent from the PIT, 30 percent from the SUT, and 8 percent from the BCT.

Regulatory Activities

A total of 20 departments are responsible for providing regulatory oversight of various consumer and business issues. These agencies protect the consumer and promote business development while regulating various aspects of licensee, business, and employment practices. The groups regulated range from individuals licensed to practice different occupations to large corporations licensed to conduct business in the state. Most of these departments are funded from special funds that receive revenues from regulatory and license fees. Included in this group are the Departments of Consumer Affairs (DCA), Industrial Relations, Food and Agriculture, Financial Institutions, Insurance, Corporations, and the California Public Utilities Commission (CPUC).

The budget proposes total state-funded expenditures of $2.4 billion to support activities by the regulatory agencies. This amount includes $290 million from the General Fund and $2.1 billion from special funds. The proposed expenditures are $410 million, or 14 percent, less than estimated current-year expenditures. The reduction includes (1) a drop of $330 million in CPUC expenditures due mainly to one-time energy-related expenditures in the current year, and (2) a total reduction of $77 million in various DCA expenditures.

Energy Activities

Several agencies play a role in implementing and managing the state's energy-related policies. These entities include:

• The California Energy Commission (CEC), which is the state's primary policy and planning agency in the energy area.
• The Electricity Oversight Board (EOB), which among other responsibilities monitors
• the state's electricity market.
• The California Power Authority (CPA), a relatively new entity created during the state's 2001 electricity crisis, to finance new electricity generation and assure an adequate electricity supply for the state.
• The California Energy Resources Scheduling (CERS) division within the Department of Water Resources, which currently purchases electricity for the state on behalf of the state's three largest investor-owned utilities. (Its expenditures to purchase electricity, which are off-budget, total an estimated $7.6 billion in the current year and a projected $5.1 billion in 2002-03.)

In addition to the energy agencies listed above, CPUC is involved with various energy-related regulatory activities. However, because it also is involved in regulating many other industries, CPUC is included under the regulatory category for purposes of this overview. The Division of Oil, Gas, and Geothermal Resources (DOGGR) located in the Department of Conservation is also involved in various energy-related regulatory activities, including oil drilling activities. This program is discussed in the "Resources" section of this Analysis.

The Governor's budget proposes to expend $260 million in 2002-03 on energy-related activities (excluding $41 million for such activities by CPUC, roughly $14 million by DOGGR, and the off-budget electricity expenditures by CERS). This is a decline of $155 million, or 37 percent, from the current year. This reduction reflects a large number of one-time current-year expenditures in CEC's budget intended to reduce electricity demand and augment electricity supply in response to the 2001 energy crisis. In addition, CERS required a significant amount of one-time expenditures in the current year to get its electricity purchasing operations started.

State Administrative Functions

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 (Departments of General Services and Information Technology) 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 $1.1 billion in state funds to support these functions in 2002-03. This is a decrease of $202 million, or 15 percent, from current-year expenditures. The decrease is primarily due to the proposed reductions in local assistance for (1) professional services and energy management under the Department of General Services ($79 million) and (2) various housing programs under the Department of Housing and Community Development ($58 million).

State Retirement Programs

The state contributes to the retirement systems for all state employees and public school teachers. Retirement-related expenditures account for a significant part of state spending on an annual basis. Contributions are made from the General Fund and various special funds. In 2002-03, state expenditures for public employee retirement-related costs (excluding University of California costs) will total $2 billion, including $1.6 billion from the General Fund.

Figure 2 summarizes the General Fund costs for various retirement programs in the budget year. 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 (PERS). The PERS is the retirement system for most state employees. As shown in Figure 2, the budget projects General Fund expenditures of $58 million for PERS in 2002-03. This is significantly less than the amount of contributions in the current year. This is because the administration has negotiated with PERS to reduce the payments for the current and budget years in order to lower total state General Fund expenditures in exchange for additional retiree benefits. (Please see the discussion of the agreement in the "Crosscutting Issues" section of this chapter.) 

State Teachers' Retirement System (STRS). The STRS is the retirement system for teachers in public K-12 schools and community colleges. The STRS receives contributions from teachers and their employers. These contributions, however, have historically been insufficient to provide for the cost of basic retirement benefits (which were increased 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 $933 million. The budget, however, proposes to postpone a portion of the payment for this shortfall. Specifically, the administration is in negotiations with STRS to defer paying nine quarters of contributions in order to reduce total state General Fund expenditures. In exchange, the state would provide additional benefits to STRS members. At the time this analysis was prepared, the agreement had not been finalized and the additional benefits were yet to be determined. (Please see the discussion of the agreement in the "Crosscutting Issues" section of this chapter.)

Health and Dental Premiums. The budget also includes $554 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 about $68 million more than estimated current-year expenditures, reflecting an increase in the number of retirees. The PERS is currently negotiating the health premium 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.

Employee Compensation

There are about 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). As of January 1, 2002, the Legislature has approved MOUs for nine of the state's 21 collective bargaining units, most of which are effective through June 2003. (The MOUs for six bargaining units are currently under consideration by the Legislature, and the administration has not reached agreement with the remaining six units.) Major provisions in these MOUs included (1) an increase in employees' take-home pay by reducing employee retirement contributions and (2) the state paying for a portion of health insurance premium increases.

The Governor's budget proposes $210 million, including $130 million from the General Fund, for the cost of employee compensation adjustments in 2002-03. This includes additional health benefit costs and travel reimbursements negotiated as part of the new MOUs.