|
Analysis of the 2004-05 Budget BillLegislative Analyst's Office
|
The Department of General Services (DGS) is responsible for providing a broad range of support services to state departments and performing management and oversight activities related to these services. It provides these services through three programs: statewide support, building regulation, and real estate services. Virtually all of DGS costs are reimbursed through fees charged to client departments.
The Governor's budget proposes total expenditures of $874 million from various funds (including $3 million from the General Fund for department administration) to support DGS activities in 2004-05.
The Department of General Services (DGS) has not decreased service fees as required by the 2003-04 Budget Act. We recommend that the Legislature adopt budget bill language that requires DGS to implement operational efficiencies and reduce fees.
The DGS has authority to establish the fees its charges client departments. To calculate fees, DGS projects the operating expenses for each of its internal organizations. The DGS then uses this information to develop the fees it will charge departments in order to recover those expenses. When DGS experiences unforeseen cost increases, the fees are reevaluated to determine if the increased costs can be absorbed within the existing fee structure. The budget proposes to continue DGS service fees at their 2002-03 levels.
2003-04 Fee Reductions Approved by the Legislature. With significant budget reductions expected in 2003-04 and 2004-05, DGS client departments will have limited budget flexibility and capability to pay for service fees. Consequently, it is important for service entities such as DGS—whose budget is based on reimbursements from other departments—to be implementing efficiencies to reduce costs to departments. Consistent with this approach, DGS proposed a decrease in DGS expenditure authority of $17 million and 23 positions for the 2003-04 budget. The DGS stated in the request that it would pursue current-year efficiencies that would result in fee reductions to departments. According to DGS, this expenditure authority reduction was intended to result in 3 percent to 5 percent fee reductions to departments. The Legislature approved this proposal.
Fees Were Not Reduced in 2003-04. Even though DGS proposed and agreed to reduce current-year fees, DGS service fees have not been reduced. According to DGS, it was unable to reduce its fees because (1) the administration chose to transfer $13 million in proposed General Fund expenditures to the Service Revolving Fund (SRF) and (2) DGS was unable to absorb its $14 million increase in employee retirement costs. Because these costs are expected to be ongoing, DGS does not expect to decrease its service fees in the budget year.
Increased DGS Costs Were Anticipated. In our review, we found that the $27 million in cost increases should have been anticipated throughout the budget process. Like the fee proposal, the proposal to shift General Fund costs to the SRF was made as part of the 2003-04 Governor's Budget in January. Likewise, retirement cost estimates changed only marginally from January to the budget's enactment. If DGS was unable to implement the proposed fee reduction and absorb the cost increases, it should have modified its proposal as part of the May Revision.
Fees Should Be Lowered and Fee Setting Policy Revised. Since DGS agreed to lower its fees in 2003-04 and changes to the DGS budget should have been anticipated, we recommend that the Legislature direct DGS to lower its service fees by at least 3 percent. Most departments have been required to reduce expenses by much greater percentages over the past few years. In addition, we recommend that the Legislature adopt the following budget bill language to ensure these reductions are implemented:
Upon approval by the Department of Finance on or before September 1, 2004, the Department of General Services shall submit to the Chairperson of the Joint Legislative Budget Committee a revised fee schedule that reflects operational efficiencies and reduces fees to client departments.
The budget proposes an ongoing $100 million ($50 million General Fund) savings resulting from the renegotiation of state contracts and leases. Since the Department of General Services appears to have overstated savings achieved to date, we recommend that the administration provide revised savings amounts for 2003-04 and 2004-05.
Control Section 5.50 of the 2003-04 Budget Act and associated statutory language provide the administration new authority to renegotiate state contracts and building leases. Specifically, Control Section 5.50 encourages DGS to renegotiate contracts and leases in order to achieve savings. It also allows: (1) the Department of Finance to reduce department budgets to reflect those savings and (2) departments to keep up to 15 percent of the savings. Control Section 5.50 was expected to achieve $100 million ($50 million General Fund) in savings not accounted for elsewhere in the budget. The budget proposes an ongoing $100 million ($50 million General Fund) savings as a result of these renegotiated contracts. The proposed budget, however, does not include Control Section 5.50 language.
Minimal Savings Have Been Achieved to Date. According to DGS, as of January 2004, it has renegotiated several contracts resulting in a total savings of $32 million (all funds). The administration has not been able to break these savings into General Fund and non-General Fund dollars. The DGS states that it has achieved savings of $15 million from renegotiated leases and $17 million from renegotiated contracts.
Some Savings Overstated and Already Included in Department Budgets. Our review indicates that DGS does not take into consideration savings already included in the 2003-04 Budget Act. The DGS information overstates the additional savings by about $16 million. For example, DGS states that it achieved savings of $12 million in 2003-04 by renegotiating a contract for the support of the Department of Social Services' Child Welfare Services/Case Management System (CWS/CMS). Our review found that the CWS/CMS contract was renegotiated in 2002-03, and the Legislature approved two 2003-04 May Revision requests to reduce department appropriations to reflect this renegotiation. (These amounts differ from what DGS is currently reporting. We are unable to reconcile the differences.) We also found that $4 million of the $15 million in renegotiated leases was achieved in 2002-03. It appears that the lease reductions were reflected in 2003-04 department budgets. Finally, for the amounts that can legitimately be counted towards Control Section 5.50 savings in 2003-04, it is unclear whether departments have already built the savings into their 2004-05 budgets by reducing their baselines. If so, the savings assumed by the budget would be "double-counted"—both in department budgets and as a lump sum contract savings item.
Administration Should Provide Revised Savings Amount. Since it appears that DGS has achieved minimal savings to date and has not taken into consideration amounts already included in the 2003-04 Budget Act, the estimate of $100 million in ongoing savings appears unrealistic. During budget hearings, we recommend that the administration provide revised savings amounts for 2003-04 and 2004-05.
We recommend the Legislature approve $3 million and two positions, on a two-year limited-term basis, to address workload related to disposing of property owned by the Youth and Adult Correctional Agency.
The Governor's budget proposes a $3 million augmentation from the Property Acquisition Law (PAL) Account to fund efforts by the Asset Planning and Enhancement (APE) branch to dispose of properties owned by the Youth and Adult Correctional Agency (YACA). The PAL is a special account in the General Fund that consists of revenue derived from proceeds from the sale or rental of state property. These funds are available to DGS for costs incurred for surplus property while it is under DGS control. In other words, PAL reimburses all DGS costs incurred for the improvement and sale of surplus property. Of the amount requested, $237,000 will be used to fund two permanent full-time positions and $2.8 million will be used for consultant services to conduct environmental reviews, market analysis, advertising, contract negotiations, and escrow closure on the properties.
We understand that the requested augmentation is related to the administration's proposal to evaluate and recommend future facility closures for both the Department of Corrections and the Youth Authority. The Youth Authority already has announced plans to close two facilities by March of this year, and the Governor's budget proposes the closure of the Fred C. Nelles Youth Correctional Facility Camp and an unidentified youth correction camp in 2004-05.
According to APE, its existing staff is fully engaged in efforts to dispose of properties already identified in the 2003 Surplus Property Report. Consequently, to the extent the administration has identified new Youth Authority properties for disposal, APE states that it needs two additional Senior Real Estate Officers.
However, because it is not known if any additional YACA facilities will be proposed for closure, there is not sufficient workload to justify these positions on an ongoing basis. Consequently, we recommend approval of the two positions on a two-year limited-term basis.