Analysis of the 2007-08 Budget Bill: General Government

Overview

Total state funding for general government is proposed to increase by about 4 percent in the budget year. This increase primarily is due to the growth of employee compensation and retirement costs, partially offset by a one-time reduction in mandate payments to local governments.

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, regulate businesses, provide services to state agencies, enforce fair employment practices, and collect revenue to fund state operations. The 2007-08 Governor’s Budget proposes $7.6 billion in state expenditures (combined General Fund and special funds) for these functions. The proposed budget-year funding is $323 million (4.4 percent) more than estimated 2006-07 expenditures.

Spending by Major Program

There are three major program areas within general government:

• State administrative functions, which include a broad range of state departments.

• Tax relief and local government payments.

• State employee compensation, which includes increased salary and benefit costs for current and former employees.

We describe these program areas below, and Figure 1 shows the estimated 2006-07 and proposed 2007-08 expenditures 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. As described below, the Governor has proposed increased levels of expenditures in the budget year for some state departments.

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. The Department of Veterans Affairs (DVA) is the fastest growing department in this area, with a proposed increase in General Fund spending of $24 million. Among the administration’s proposals for DVA are updated information technology (IT) systems and equipment replacement.

Regulatory Activities. Many departments are responsible for providing regulatory oversight of various consumer and business activities. These agencies promote business development while regulating various aspects of licensee, business, and employment practices. The groups regulated range from individuals licensed to practice specified 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.

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 $806 million ($736 million General Fund) for these two agencies in 2007-08, down $39 million (5 percent) from the current year. This decrease is due largely to a decline in FTB expenditures for the California Child Support Automation System.

Services to Other Departments. Some state departments exist primarily to provide support for other departments. For instance, the Department of General Services assists state departments on purchasing and real estate decisions. The Department of Finance (DOF) acts as the state’s fiscal oversight agency. Among the Governor’s proposals are:

• The continued implementation of a new state payroll system at the State Controller’s Office. The project will cost $40 million in 2007-08.

• The expansion of efforts to develop a new state fiscal system by DOF. The proposed project would cost $38 million in 2007-08 and $1.3 billion over the next decade.

• The reorganization of the state’s governance of IT issues, including the funding of the State Chief Information Officer for the first time ($8 million).

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 major programs in this area are homeowners’ property tax relief, various tax assistance programs for senior citizens, and open space property tax subventions. The state also makes payments to local governments for other programs, such as to reimburse local governments for state-mandated costs and to provide grants for public safety. The Governor’s budget proposes to decrease General Fund payments in this area from $1.4 billion to $1 billion. This large decrease reflects (1) the administration’s proposal to fund state mandates one year after local agencies incur costs and (2) the state’s pre-payment of 2007-08 costs to retire its mandate backlog.

State Employment and Retirement

State Employee Compensation. The Governor’s budget would increase state employee compensation—including salaries and expenditures for benefits such as health insurance and retirement—by an estimated $1.2 billion in 2007-08. (A portion of these funds are provided in individual departmental budgets.) The vast majority of the funds address costs related to current labor agreements, court orders, and arbitration decisions. Nineteen of the state’s 21 bargaining units—all except correctional officers and attorneys—have labor agreements that remain in effect until at least the end of 2007-08. Most of these agreements would provide employees with a general salary increase in 2007-08 based on inflation. Any costs associated with new agreements with the remaining two units would require additional spending.

Retirement Costs. The state contributes to the retirement of (1) state employees through the California Public Employees’ Retirement System (CalPERS) and (2) public school teachers through the California State Teachers’ Retirement System (CalSTRS). Retirement-related expenditures (from the General Fund and various special funds) account for a significant part of annual state spending. In 2007-08, as shown in Figure 2, General Fund expenditures for public employee retirement-related costs (excluding payroll taxes for employees’ Social Security and Medicare benefits) are projected to exceed $4 billion for the first time. General Fund costs

for each of the major state retirement programs—CalPERS retirement (pension) benefits, CalPERS’ retiree health program, and CalSTRS pension benefits—are expected to increase by 8 percent or more in 2007-08 due to the growth of state and school district payrolls and (in the case of the retiree health program) rising health care premiums. The 2007-08 budget package assumes the issuance of pension obligation bonds, with a net benefit to the state’s General Fund of $525 million. Legal challenges have delayed the issuance of the bonds, and it is uncertain whether they can be issued during the budget year, if ever. In addition, the Governor’s budget proposes to reduce the state’s contributions to CalSTRS by $75 million on an ongoing basis by changing state law related to teachers’ benefits. The budget includes no funds to address the possible legal liability associated with $500 million that the state did not pay to CalSTRS on a one-time basis in 2003-04.

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