Analysis of the 2004-05 Budget Bill Legislative Analyst's Office February 2004

Overview

Total state funding for general government is proposed to increase by about 26 percent in the budget year. This sizable increase is primarily due to (1) the local government backfill for the vehicle license fee reduction being in effect for the entire budget year and (2) increases in employee compensation and retirement costs.

The "General Government" section of the budget contains a number of programs and departments with a wide range of responsibilities and functions. For instance, these programs and departments provide financial assistance to local governments, protect consumers, provide services to state agencies, ensure fair employment practices, and collect revenue to fund state operations. The 2004-05 Governor's Budget proposes $12.5 billion in state funds for these functions. The proposed budget-year funding is $2.6 billion (26 percent) more than estimated 2003-04 expenditures.

Spending by Major Program

There are three major program areas within general government:

• State administrative functions, which includes a broad range of state departments.
• Tax relief and local government payments.
• State employee compensation, which funds many of the costs of current and former employees.

We describe these program areas below, and Figure 1 shows the estimated 2003-04 and proposed 2004-05 expenditures (combined General Fund and special funds) by program area.

State Administration

Within general government, there are about 50 departments and agencies that serve a wide range of functions. Departments provide services to the public, regulate businesses, collect tax revenues, and serve other state entities. For most state departments, the Governor has proposed continuing their level of 2003-04 expenditures in the budget year. Spending is proposed to increase about 1 percent to $3 billion, with General Fund spending declining by 2.4 percent to $1.6 billion.

Government Services. A number of departments provide government services to the public. These services include housing assistance, coordination of emergency responses, and assistance to veterans. Among the major developments for these departments are:

• The transfer of a number of programs formerly administered by the Office of Criminal Justice Planning (OCJP) to the Office of Emergency Services. The 2003-04 budget eliminated OCJP.
• The proposed elimination of the Office of the Inspector General for Veterans' Affairs, which is responsible for reviewing the state's programs for veterans.
• The Governor's budget continues reductions to the state's economic development and arts programs included in the 2003-04 budget.

Regulatory. Many 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. Among the Governor's proposals in this area are:

• Increased spending of $4.3 million (various special funds) in the Departments of Financial Institutions and Corporations to implement the provisions of recent financial privacy legislation (Chapter 241, Statutes of 2003 [SB 1, Speier]).
• The continued shift of the costs of administering the workers' compensation system from the General Fund to industry assessments.

Tax Collection. 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 and the corporation tax. 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, as well as excise taxes on fuel, cigarettes, and alcoholic beverages. The budget proposes total funding of $685 million ($636 million General Fund) for these two agencies in 2004-05, up roughly $9 million (1.4 percent) from the current year.

Services to Other Departments. Some state departments exist primarily to provide support for other departments. For instance, the Department of General Services provides guidance to state departments on purchasing and real estate decisions. The Department of Finance acts as the state's fiscal oversight agency. The Stephen P. Teale and Health and Human Services Data Centers provide most state departments with computer services. As a part of the 2003-04 budget plan, these two data centers are scheduled to consolidate their operations beginning in 2004-05.

Tax Relief and Local Government Payments

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 state makes additional payments to local governments for the distribution of state-collected revenue (primarily from the vehicle license fee [VLF] and gas tax) and to provide funding for specified programs. The Governor's budget proposes to increase General Fund payments in this area from $3.7 billion to $5.0 billion (an increase of 36 percent). This sizable increase is due to increased local subventions related to the VLF reduction, as discussed below. The Governor's proposal to shift $1.3 billion in property taxes from local governments to school districts is reflected in the education section of the budget. (Please see our discussion of this proposal in Part V of the Perspectives and Issues.)

VLF Reduction. The VLF is an annual fee levied on the depreciated value of registered vehicles in the state, with revenues going to cities and counties. Beginning in 1999, the Legislature reduced the VLF rate from 2 percent down to 0.65 percent, with a General Fund backfill compensating local governments for the reduced VLF revenues. Actions by the previous administration reversed these VLF reductions for 2003-04 and reduced the corresponding VLF backfill. Subsequent actions by the current administration restored the VLF reductions—as well as the General Fund backfill—for 2003-04 (partial year) and 2004-05. The budget calls for General Fund backfill payments of $4.1 billion—an amount equal to the full VLF reduction.

State Employment and Retirement

Revised Employment Agreements. There are about 167,000 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.

In order to generate budget savings in 2003-04, the Legislature approved administration-negotiated agreements for 14 of the state's 21 bargaining units. These agreements deferred scheduled July 1, 2003 salary increases in exchange for additional benefits. In particular, the administration agreed to (1) pay 80 percent of health insurance costs effective January 1, 2004; (2) allow employees to accrue one additional vacation day per month (approximately equivalent to the deferred 5 percent salary increase for most employees); and (3) in some cases, continue the suspension of employees' retirement contributions to maintain take-home pay at current levels. These agreements (and similar arrangements with related exempt employees) will generate an estimated net savings of $391 million ($160 million General Fund) in 2003-04, but increase costs by $517 million ($210 General Fund) in the budget year.

Funding Proposed for Increased Costs. The proposed budget proposes to appropriate $875 million ($464 million General Fund) to fund these revised agreements, as well as the budget-year costs of multiyear agreements with the California Highway Patrol and California Correctional Peace Officers Association (total costs of $295 million, of which $247 million is from the General Fund).

Retirement Payments. The state contributes to the retirement for (1) all state employees through the Public Employees' Retirement System (PERS) and (2) public school teachers through the State Teachers' Retirement System. Retirement-related expenditures (from the General Fund and various special funds) account for a significant part of state spending on an annual basis. In 2004-05, General Fund expenditures for public employee retirement-related costs (excluding University of California costs) will total almost $4 billion, as shown in Figure 2. As discussed below, the Governor proposes to fund over $900 million of this amount through the issuance of a pension obligation bond.

Governor's Retirement Proposal. The administration is proposing major changes in retirement payments, for an estimated General Fund benefit of $950 million in 2004-05. The major components are:

• Issuing a pension obligation bond to cover a portion of the state's contributions to PERS—generating $929 million in 2004-05 General Fund savings. The 2003-04 budget included plans for a $1.9 billion bond, but a recent Superior Court decision ruled that the state cannot sell these types of bonds without voter approval.
• Increasing the percentage of salary that state employees contribute to retirement. The budget assumes $14 million in General Fund savings from increasing employee contributions by 1 percent. This would require renegotiating with the state's collective bargaining units.
• Rolling back retirement benefits for new employees to those in place prior to Chapter 555, Statutes of 1999 (SB 400, Ortiz). This would generate long-term savings as more employees are hired, but only an estimated $6 million in General Fund savings in 2004-05.

Please see the discussion of this retirement proposal in the "Crosscutting Issues" section of this chapter.

Health and Dental Premiums. The budget also includes $856 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 an increase of $153 million (22 percent) from estimated current-year expenditures, largely due to continued double-digit growth in health insurance premiums.