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

Department of Industrial Relations (7350)

The Department of Industrial Relations (DIR) administers several types of activities to protect the workforce from work-related injuries or deaths, improve working conditions, and ensure that workers are paid as required by law. The DIR’s largest unit is the Division of Workers’ Compensation (DWC), which regulates most aspects of the workers’ compensation system.

The budget proposes $347 million in spending authority for DIR in 2006-07, up $3 million, or 0.8 percent, from estimated 2005-06 expenditures. The General Fund provides $63 million, or 18 percent, of DIR’s proposed funding in 2006-07. As recently as 2001-02, the General Fund paid for about two-thirds of DIR costs. Chapter 635, Statutes of 2003 (AB 227, Vargas), shifted costs of the workers’ compensation program to employer assessments, which are deposited into the Workers’ Compensation Administration Revolving Fund. In 2006-07, under the budget proposal, this revolving fund would spend $157 million, up $3 million, or 1.8 percent, from estimated 2005-06 spending levels.

The Legislature has authorized significant expansion of DWC since 2003-04 so that the division can implement the changes to the workers’ compensation system approved in 2003 and 2004. The number of authorized positions has been expanded by about 250 to the current total of 1,169. Progress in filling positions has been slow, and as of November 30, 2005, DWC had more than 180 vacancies (16 percent of authorized staffing).

Recommend Transferring Unused Fund Balance to General Fund

The administration proposes trailer bill language to transfer the $507,000 fund balance of the dormant Workplace Health and Safety Revolving Fund to the Workers’ Compensation Administration Revolving Fund. We recommend amending the language to transfer the balance to the General Fund instead.

Background. In 1989, the Legislature created the Workplace Health and Safety Revolving Fund and directed DIR to deposit into the fund civil and administrative penalties against workers’ compensation insurers, self-insured employers, and others for failure to comply with the workers’ compensation system. The fund paid for activities of the Commission on Health and Safety and Workers’ Compensation. Chapter 6, Statutes of 2002 (AB 749, Calderon), redirects the civil and administrative penalties previously deposited to the Workplace Health and Safety Revolving Fund to the larger Workers’ Compensation Administration Revolving Fund, which became the primary source of funds for DWC. Chapter 6 provides that commission activities previously funded from the Workplace Health and Safety Revolving Fund are now funded from the larger revolving fund.

Recommend Transferring Unused Fund Balance to General Fund. The administration proposes trailer bill language to transfer the remaining $507,000 fund balance of the dormant Workplace Health and Safety Revolving Fund to the Workers’ Compensation Administration Revolving Fund. The larger revolving fund currently has sufficient funding. Even with $3.8 million in DWC requests to pay for increased facilities, personnel, and security costs, DIR projects that the Workers’ Compensation Administration Revolving Fund will maintain a $65 million fund balance at the end of 2006-07-43 percent of revenues (without an increase in employer assessments or other workers’ compensation fees). Moreover, the fund balance of the Workplace Health and Safety Revolving Fund was accumulated during the years in which the General Fund provided the bulk of DWC funding. The monies are derived from penalties, making them eligible for transfer to the General Fund. Given the state’s fiscal condition, we recommend amending the administration’s trailer bill language to transfer the unused balance of the Workplace Health and Safety Revolving Fund to the General Fund.