Legislative Analyst's Office Analysis of the 2003-04 Budget Bill

Employment Development Department (7100)

The Employment Development Department (EDD) is responsible for administering the Employment and Employment Related Services (EERS), the Unemployment Insurance (UI), and the Disability Insurance (DI) programs. The EERS program (1) refers qualified applicants to potential employers; (2) places job-ready applicants in jobs; and (3) helps youths, welfare recipients, and economically disadvantaged persons find jobs or prepare themselves for employment by participating in employment and training programs. Pursuant to Chapter 859, Statutes of 2002 (SB 1236, Alarcón), which implemented the Governor's Reorganization Plan Number 1, the EDD is part of the new Labor and Workforce Development Agency.

In addition, the department collects taxes and pays benefits under the UI and DI programs. The department collects from employers (1) their UI contributions, (2) the Employment Training Tax, and (3) employee contributions for DI. It also collects personal income tax withholding. In addition, it pays UI and DI benefits to eligible claimants.

The budget proposes expenditures totaling $10.6 billion from all funds for support of EDD in 2003-04. This is a decrease $2.3 billion or 18 percent below current-year estimated expenditures. This decrease primarily results from the expectation that one-time unemployment insurance extended benefits costs incurred during 2002-03 will not occur in 2003-04. The budget proposes $21.6 million from the General Fund in 2003-04 which is a reduction of $1.3 million (5.9 percent) compared to the current year. 

Workforce Investment Act Discretionary Funds

The Governor's budget proposes to use most of the available Workforce Investment Act (WIA) discretionary funds to support existing programs and the Nurses Workforce Initiative.

Background. The federal WIA of 1998 replaced the Job Training Partnership Act, which provided employment and training services. The goal of WIA is to strengthen coordination among various employment, education, and training programs. The 63 member Workforce Investment Board (WIB) advises the Governor on the operations of the state workforce investment system; however, the board's actions are not binding on the Governor.

Pursuant to federal law, 85 percent of WIA funds (an estimated $542 million in 2003-04) are allocated to local WIBs, formerly known as Private Industry Councils. The remaining 15 percent of WIA funds ($81.3 million) is available for discretionary purposes such as administration, statewide initiatives, current employment service programs, or competitive grants. The budget anticipates that $10.9 in unspent funds from 2002-03 will be carried forward to 2003-04, raising the total discretionary funds to $92.2 million for the budget year.

Although federal law and the Governor's budget refer to these 15 percent monies as "Governor's discretionary" funds, this nomenclature is misleading. Section 191 of the WIA states that all WIA funds "shall be subject to appropriation by the State Legislature." Thus, these WIA funds should be considered state discretionary funds rather than Governor's discretionary funds. Accordingly, the Legislature should review the Governor's WIA expenditure plan to ensure its consistency with legislative priorities.

Governor's Proposal. Based on information provided by EDD, Figure 1 shows the Governor's expenditure plan for state discretionary WIA funds. As the figure shows, $2.3 million is proposed for administration, $25.5 million is budgeted for required WIA activities, $11.7 million is for EDD local program services, and $52.7 million is dedicated to various proposed programs. The largest new program is the Nurses Workforce Initiative ($20 million). This is a multiyear program designed to increase the supply of nurses in the workforce through outreach, recruitment, and training activities. Most of the remaining funds would be used to offset General Fund costs in existing programs, backfill for reductions in other federal funding sources, or continue programs originally funded under the Job Training Partnership Act. Whether to continue any of these programs is a policy decision for the Legislature.

Reed Act Funds Available for Benefit Payments and Administrative Improvements

In April 2002, California received a distribution of Reed Act funds of $937 million. These funds may be used for unemployment insurance benefit claims, administrative expenses in the Job Services (JS) and Unemployment Insurance (UI) programs, capital outlay in JS and UI, and certain automation improvements. We review the expenditure plans for these funds.

Background. Pursuant to the Federal Unemployment Tax Act (FUTA), employers pay 0.8 percent of the first $7,000 in wages for each employee in order to finance (1) the administration of the Unemployment Insurance (UI) program, (2) reserves for extended benefits, and (3) state loan funds. (This tax is in addition to unemployment taxes that support benefit payments.) When reserves in the federal accounts for administration, extended benefits, and loans reach statutory caps, the excess is distributed to states based on their share of FUTA taxes paid. These payments are referred to as "Reed Act" distributions.

2002 Distribution. The Job Creation and Worker Assistance Act of 2002 (Public Law 107-147) authorized the distribution of $8 billion in Reed Act funds to the states. In April 2002, California received $936.9 million in these funds. Pursuant to federal law, Reed Act funds are deposited into the Unemployment Trust Fund.

Allowable Uses of Reed Act Funds. There are three primary uses for Reed Act funds. These are payment of UI benefits, administrative costs in the UI and JS programs, and capital expenditures for the UI and JS programs. Capital improvements can be financed with a Reed Act revolving fund, whereby the improvements are paid for up front with Reed Act funds, with the revolving fund being repaid over time. Once repaid, the funds can be used for additional capital improvements. Unless the Legislature specifically appropriates Reed Act funds toward other allowable uses, the funds remain in the Unemployment Trust Fund for purposes of paying UI benefits.

2002-03 Budget Proposals for Reed Act Funds. The Legislature adopted the Governor's May Revision proposal to use $39.1 million in Reed Act funds to support the JS program. This fund shift saved an identical amount of General Fund dollars. In addition, Chapter 4, Statutes of 2002 (SB 2xxx, Alarcón), set aside $600 million in Reed Act funds for the payment of UI benefits.

Governor's Veto. The Legislature appropriated $140.7 million in Reed Act funds to support a variety automation and administrative improvements to the UI system. These included $100 million for updating EDD's single client database, $20 million for the administrative costs of creating an alternative base period for the UI program (this would have expanded UI eligibility), and $7 million to redesign the UI certification system so claimants could certify by phone or the Internet. The Governor vetoed all but $500,000 of these automation improvements. He sustained $500,000 for a review of the Employment Tax System. The Governor's veto message indicated that he may consider the other legislative automation proposals if feasibility study reports are developed.

2003-04 Budget Proposals. The Governor's budget proposes a total of $54 million in Reed Act expenditures. In general, the proposed expenditures are for existing activities, that would otherwise require General Fund support. These include Job Services and UI administration.