Analysis of the 2006-07 Budget Bill Legislative Analyst's Office February 2006

Employment Development Department (7100)

The Employment Development Department (EDD) is responsible for administering the Unemployment Insurance (UI) and Disability Insurance (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 department also, with the assistance of the State Workforce Investment Board (WIB), administers the federal Workforce Investment Act Program, which provides employment and training services. Both state and local WIBs partner with EDD’s Employment and Employment Related Services Program to provide services to the job seeking public. Through a network of one-stop service centers, this partnership (1) facilitates job matching services to meet the needs of businesses and job seekers; and (2) provides individualized training and services to laid-off, long term unemployed or underemployed individuals, and youth.

The budget proposes expenditures totaling $10.8 billion from all funds for support of EDD in 2006-07. This is a decrease of $307 million or 2.8 percent below current-year estimated expenditures. The decrease is primarily the result of revised estimates of UI and DI benefits for the budget year. The budget proposes $24.7 million from the General Fund in 2006-07, which is an increase of $2.5 million (11 percent) compared to the current year. 

Workforce Investment Act (WIA) Discretionary Funds

The 2006-07 Budget Bill provides broad categories for the proposed expenditure of federal WIA discretionary funds. We provide details on specific initiatives within these categories so that the legislature can determine if they are consistent with legislative priorities.

Background. The federal Workforce Investment Act (WIA) of 1998 replaced the Job Training Partnership Act, which provided employment and training services to unemployed and disadvantaged workers. The goal of WIA is to strengthen coordination among various employment, education, and training programs. Pursuant to federal law, 85 percent of WIA funds (an estimated $447.6 million in 2006-07) are allocated to local WIBs. The remaining 15 percent of WIA funds ($67.1 million) is available for discretionary purposes such as administration, statewide initiatives, and competitive grants for employment and training programs. The federal law states that all WIA funds “shall be subject to appropriation by the state Legislature.” Accordingly, we present below the Governor’s proposed expenditure plan for these funds so that the Legislature may review and ensure that it is consistent 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, administration and program services comprise $31.9 million. These are for ongoing administration of all WIA programs. In contrast, a total of $35.2 million is proposed for discretionary grants in three program categories. Although the specific grant programs within these categories have not changed significantly from past years, we provide more detail for each category to facilitate legislative oversight.

Growth Industries-High Wage/High Skill Job Training. In the past, programs funded in this area have primarily focused on providing training, support, and placement in employment in the construction trades and the automotive technology and repair industry. A separate initiative in biotechnology has funded grants to provide training in coordination with a biotechnology firm and for emergency medical technicians.

Industries With a Statewide Need. This area has funded programs aimed at training in the health fields, especially for nursing, in each year since 2001-02. Our review of programs funded under this category indicates that many are collaboratives headed by local WIBs. The CalWORKs agencies and community-based organizations assist in recruitment, while public or private training schools provide skills training. Labor unions or private industry may provide on-site skill training, internship, or employment opportunities. The programs usually utilize a case management approach, providing counseling, or funding for ancillary needs to encourage successful completion by trainees.

Removing Barriers for Special Needs Populations. Funds identified for “special needs populations” target offenders, veterans, youth, and low wage earners. Recent grants in this area have provided services to populations with significant barriers to employment; such as the homeless, recent immigrants or refugees, those with chemical dependency, limited English skills, or out of school youth with no connection to the workforce. Most programs couple job training with other types of social services to meet the needs of these populations.

Whether to continue any of these programs is a policy decision for the Legislature.

Proposal to Fund Veteran’s Services Lacks Justification

The Governor’s budget proposes to use $1.5 million from the Employment Developement Department Contingent Fund to increase staffing levels for employment services to veterans. We recommend rejecting this proposal because it does not provide sufficient justification for the higher staffing level. Because excess contingent funds are transferred to the General Fund, rejecting this Contingent Fund expenditure proposal will result in General Fund savings of $1.5 million. (Reduce Item 7100-001-0185 by $1,500,000.)

Background. The state receives federal funding for the Veteran’s Employment and Training Services (VETS) program based on a formula that utilizes unemployment rates and number of veterans. The VETS program consists of specialized staff within EDD’s Job Services division who provide case management services to veterans to assist them in finding employment. The federal funding for the current year for this program is $19.3 million. This funding level represents a slight increase from the $18.4 million allocated in 2004-05. According to EDD, increased state costs, mostly for salaries and benefits, make the current federal funding allocation insufficient to maintain the 2004-05 staffing level for this program in the current year. As a result, EDD states that staffing will be reduced in the current year by 19 positions, to 191.

Governor’s Budget Proposes Using Contingent Fund to Restore Staffing. The budget proposes to use $1.5 million from EDD’s Contingent Fund to restore funding in the budget year for the 19 positions. The proposal seeks to fund these positions with Contingent Fund for three years.

The Contingent Fund is comprised of penalties and interest levied against employers for insufficient tax or unemployment insurance withholding for employees. Any amount that remains in the Contingent Fund at the close of the fiscal year is transferred to the General Fund. In other words, using Contingent Fund for this budget proposal results in a General Fund cost.

Governor’s Proposal Lacks Justification for Staffing. This proposal requests funds to restore staffing of the VETS program to 210 positions, the level in 2004-05. However, the department provides no specific justification for this desired staffing level. Presumably, because the VETS program is a case management service, a loss of staff would increase the ratio of cases per staff member. However, the administration has not provided evidence that such an increase in caseloads has occurred or that a corresponding impact to service quality would result from the current lower staffing levels.

We also find that the proposal overbudgets for the 19 positions, requesting all positions at the highest step of the salary scale. Typically, salaries are budgeted at no higher than midrange unless there are extenuating circumstances. If these positions were budgeted at the midlevel of the salary scale, the revised funding requirement would be $1.2 million.

Analyst’s Recommendation. We recommend rejecting the proposal to use Contingent Fund for the VETS program because the department has not provided sufficient justification for the higher staffing level. This action will save $1.5 million in General Fund.

Other Options for Funding Veteran Services. In previous years, the legislature has identified services to veterans as a policy priority. Specifically, in 2001-02, the legislature directed WIA discretionary funds to the VETS program when federal funding was reduced. The Governor’s budget has included this funding ever since. If the legislature wishes to direct additional funds towards the VETS programs, it could redirect from any of the program proposals outlined in the WIA discretionary funds schedule discussed previously. If the legislature chooses to redirect WIA funds, we recommend reducing the funding from $1.5 million to $1.2 million to reflect midrange salaries.