LAO 2003-04 Budget Analysis: General Government

Legislative Analyst's Office

Analysis of the 2003-04 Budget Bill


Total state funding for general government is proposed to decrease by about 30 percent in the budget year. This sizable decrease is primarily due to the Governor's proposals to (1) reduce the vehicle license fee backfill to local governments and (2) borrow the funds to pay the state's retirement contributions. The budget also proposes spending reductions in many general government departments.

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 2003-04 Governor's Budget proposes $8.2 billion in state funds for these functions. The proposed budget-year funding is $3.5 billion (30 percent) less than estimated 2002-03 expenditures.

Spending by Major Program

There are six major program areas within general government:

We describe these program areas below, and Figure 1 shows the estimated 2002-03 and proposed 2003-04 expenditures (combined General Fund and special funds) by program area.

Figure 1

General Government Spending by Program Area

2002-03 and 2003-04 (In Millions)


Estimated 2002-03

Proposed 2003-04


Local government subventions




Tax relief




Tax collection








State administration




Retirement and employment








   Totals may not add due to rounding.

Local Government Subventions

The local government subvention program—proposed to total $2.7 billion in 2003-04—(1) distributes state-collected revenue (primarily from the vehicle license fee [VLF] and gas tax) to local government agencies (referred to as "shared revenues") 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 is approximately the same as the current-year funding level. Another $330 million in local assistance (all General Fund) is proposed for the Citizens' Option for Public Safety/juvenile justice programs ($233 million) and other local government programs.

Tax Relief

The state provides 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 approximately $1.6 billion for tax relief appropriations in 2003-04, representing a significant decrease from the estimated $3.2 billion in 2002-03. The decrease is due to the proposed elimination of the VLF "backfill" to cities and counties of revenues lost when the VLF rate was reduced. This elimination is proposed to begin in February 2003, resulting in a savings of approximately $1.3 billion in the current year. As a result of this proposal, the only remaining backfill would be that related to the 1991 state-local realignment. The two largest tax relief components are the VLF realignment backfill ($987 million) and the homeowners' property tax exemption ($419 million) programs.

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 corporation tax (CT). 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 $602 million (General Fund) for these two agencies in 2003-04, down roughly $15 million (about 2 percent) from the current year. This includes General Fund support for FTB of $403 million, representing a decrease of about 4 percent from 2002-03. Proposed General Fund support for BOE is $199 million (approximately the same as the current-year funding level).

Estimated Tax Collections. The budget estimates that 2003-04 state tax collections will be approximately $43 billion for FTB and $36 billion for BOE—for a total of $79 billion. Roughly $64 billion of this amount represents General Fund revenues, including 53 percent from the PIT, 36 percent from the SUT, and 10 percent from the CT.

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, Industrial Relations, Food and Agriculture, Financial Institutions, Insurance, Corporations, and the California Public Utilities Commission (CPUC).

The budget proposes total state-funded expenditures of $2.3 billion to support activities by the regulatory agencies. This amount includes $170 million from the General Fund and almost $2.2 billion from special funds. The proposed expenditures are $225 million, or 9 percent, less than estimated current-year expenditures. The reduction is largely due to a drop of $215 million in CPUC expenditures attributable to the projected decline in use of services provided by several telecommunication programs.

State Administrative Functions

There are more than two dozen departments and agencies that provide a wide range of administrative services. These services range from oversight and support of other departments (Departments of Finance and General Services [DGS]) to economic development (Technology, Trade, and Commerce Agency [TTCA]) to various specialized services provided to individuals and communities (Office of Emergency Services, Military Department, and Department of Veterans Affairs).

The budget proposes $1 billion in state funds to support these functions in 2003-04. This is an increase of $44 million, or 4 percent, from current-year expenditures. The proposed increase is primarily due to increased housing bond expenditures by the Department of Housing and Community Development ($106 million)—offset by various spending reductions in TTCA ($29 million), DGS ($16 million), and the Arts Council ($8 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 2003-04, proposed General Fund expenditures for public employee retirement-related costs (excluding University of California costs) will total $1.2 billion, as shown in Figure 2. As discussed below, this amount is significantly lower than the current-year level due to the Governor's retirement proposals.

The General Fund provides for employer contributions and/or various other payments to three 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. 

Figure 2

General Fund Costs for Retirement Programs a

(In Millions)


Estimated 2002-03

Proposed 2003-04

State Retirement Plans



State Teachers' Retirement



Public Employees' Retirement


Judges' Retirement



Defined Contribution Plansb






Other Retirement Benefits



Health and Dental Benefits for Annuitants



Social Security and Medicarec





($1,018 )




a Excludes costs for University of California employees.

b State's contribution to supplemental retirement plan for correctional officers and their supervisors and managers.

c Legislative Analyst's Office estimates.

Public Employees' Retirement System (PERS). The PERS is the retirement system for most state employees. As shown in Figure 2, the budget does not include any state retirement contributions for PERS in 2003-04. This is because the Governor proposes to borrow the funds to pay these costs through (1) pension obligation bonds or (2) a loan agreement with PERS. Either of these options would result in the state realizing savings of up to $2.1 billion ($1.1 billion General Fund) in the budget year. (Please see the discussion of the retirement proposal 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 remaining costs have been covered by annual payments from the General Fund. In the budget year, we estimate that these costs will total $1 billion.

As shown in Figure 2, the Governor's budget proposes a state payment of only $55 million. The Governor's mid-year proposal includes a reduction of the $555 million purchasing power protection payment by $500 million. In addition, as with PERS, the Governor's budget proposes payment of the $448 million basic benefits contribution through either pension obligation bonds or a loan from the pension system. This would generate equivalent General Fund savings for the budget year.

Health and Dental Premiums. The budget also includes $660 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 $84 million more than estimated current-year expenditures, largely due to 2003 health insurance premium increases that topped 25 percent. 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 (MOU). Most bargaining units have MOUs that are effective through the start of the budget year. These agreements include a 5 percent salary increase effective on July 1, 2003. However, the California Highway Patrol and California Correctional Peace Officers Association have multiyear agreements that include the first of four annual salary increases in 2003-04.

The costs of these pay increases are not included in the budget. Instead, the Governor's budget proposes an $855 million reduction in employee compensation costs for 2003-04, including $470 million from the General Fund. This is roughly equivalent to an 8 percent salary cut. The Governor has directed the Department of Personnel Administration to negotiate provisions with the employee unions to achieve the identified savings through some combination of pay or benefit cuts, layoffs, or other measures.

Return to General Government Table of Contents, 2003-04 Budget Analysis