LAO Analysis of the 1997-98 Budget Bill
General Government Overview
- Spending by Major Program
- Shared Revenues
- Tax Relief
- Local Government Financing
- Regulatory Activities
- Tax Collection Programs
- State Administrative Functions
- State Retirement Programs
- Employee Compensation
of New Department of Information Technology (DOIT) Has Been Mixed
- Because the department was established in 1995, it is too
early to determine conclusively how well the department
is performing. However, its performance to date in meeting its statutory responsibilities has been mixed
to State Telecommunications Raises Questions
- The Department of General Services and the DOIT have
proposed the divestiture of the state's telecommunications operations.
- We raise several concerns about the administration's
proposal. Given the dependence of state operations on
telecommunications, it is essential that the proposal be
on a sound footing.
to Modify State Computer Programs
- For the Year 2000 Will Likely Be Substantial.
- The state will face a significant challenge to modify its
computer programs to accommodate the year 2000
change, because most programs were written to accommodate only years beginning with "19."
- The DOIT has been providing guidance to departments
faced with making the conversion.
- The statewide costs of conversion are unknown, but will
likely exceed $50 million.
in Performance of
- Office of Emergency Services (OES) Are Slow.
- The ability of OES to carry out its disaster recovery and
hazard mitigation responsibilities continues to be hampered by internal shortcomings.
- The Legislature should consider whether these functions
ought to be transferred to another state agency.
Should Reconsider the COPS Program
- The COPS program is not an ideal structure for furthering state public safety objectives, or for providing local
- We recommend that the Legislature use the proposed
$100 million (General Fund) of COPS funds to: (1) Augment spending for other state-local public safety programs and (2) provide general purpose fiscal relief to
Act Should Be Amended to
- Provide Legislative Oversight.
- The Lottery Commission budget for administration of the
lottery is over $300 million annually. The commission
spends these funds without external review by either the
administration or the Legislature.
- Recently, the commission's spending on administration
has been about the statutory maximum of 16 percent of
lottery revenues. If the commission spends less than
16 percent of revenues, the difference is available for
- Given recent concerns about some of the commission's
administrative expenditures and their impact on education funding, the Legislature should amend the Lottery
Act to provide accountability through legislative and
executive branch oversight.
Funding for general government is proposed to increase slightly in the
budget year, primarily because of increases in Motor Vehicle License
Fund apportionments to local governments.
This section includes a variety of programs and departments with a
wide range of responsibilities and functions. The purpose of state
funding for these programs includes providing financial assistance to
local governments, protecting consumers, promoting business development, providing services to state agencies, ensuring fair employment
practices, and collecting revenues to fund state activities. The budget
proposes total expenditures for general government of $7.3 billion in
1997-98, an increase of $202 million, or 2.8 percent, above estimated
current-year expenditures. The bulk of the increase--$124 million--is
attributable to increases in Motor Vehicle License Fund apportionments to local governments.
Spending by Major Program
There are seven major program areas within general government:
- Shared revenues (state-collected revenues distributed to local
- Tax relief.
- Local government financing.
- Regulatory programs (including both consumer and business-related activities).
- Tax collection programs.
- State administrative functions.
- State retirement and employment.
We describe these program areas below.
The largest general government program is the shared revenues
program, which distributes state-collected revenue (primarily from
vehicle license fees and gas taxes) to local government agencies. The
budget includes $3.6 billion for shared revenues, an increase of
$148 million, or 4.3 percent, above the current-year amount. The increase in spending primarily results from an increase in the Motor
Vehicle License Fund apportionments to local governments as a result
of growth in the fee revenues collected.
The state provides local property tax relief, both as subventions to
local governments and as direct payments to eligible taxpayers,
through seven different programs. The two largest are the Homeowners' Property Tax Relief (homeowners' exemption) and the Renters' Tax
Relief (renters' credit) programs. The Governor's budget proposes an
expenditure of $405 million on the homeowners' exemption program
in 1997-98, which comprises most of the $476 million budgeted for tax
The renters' credit provides a refundable tax credit to Californians
who rent their principal place of residence as of March 1 each year. The
renters' credit program was suspended from 1993 through 1996 as one
of many spending reductions enacted to address the state's budgetary
problems. The program was reinstated beginning on January 1, 1997.
The Governor's budget, however, proposes eliminating this program
effective January 1, 1997. The estimated cost of this program in 1997-98
if it were not altered or discontinued would be approximately
Local Government Financing
The Governor's budget proposes to subvene $110 million (General
Fund) to cities and counties. Almost all of this amount ($100 million)
would go for continuation of the Governor's COPS program enacted
last year of funds available; $75 million would be distributed to cities
and counties for police and sheriffs' patrol services. The remainder
would be allocated to district attorneys and jail services provided by
sheriffs. (For a discussion of the COPS program, please see The 1997-98
Budget: Perspectives and Issues.)
Consumer Activities. Several special fund agencies, including the
Department of Consumer Affairs (DCA), Board of Chiropractic Examiners, the Board of Osteopathic Examiners, and the Office of Real
Estate Appraisers, are responsible for promoting consumer protection
by regulating more than two million practitioners in some 180 professions and businesses. The budget includes about $309 million
($303 million for DCA) for these consumer regulatory activities in
1997-98. This is $7 million, or 2 percent, less than estimated current-year
expenditures. This decrease is due mainly to the reduction of one-time
costs in the current year for enforcement expenditures related to the
reform of the cemetery industry.
Business Activities. Sixteen state agencies regulate various business
activities, from health insurance to horse racing. The purpose of these
agencies is to promote business development while regulating various
aspects of business and employment practices. Chief among them are
the Department of Industrial Relations, the Department of Food and
Agriculture, and the Department of Insurance. Other regulatory bodies
include the Horse Racing Board, the Department of Fair Employment
and Housing, and the Energy Commission. The budget proposes about
$796 million for these activities in 1997-98. This is an increase of about
$25 million, or 3 percent, over estimated currently-year expenditures.
The largest increase is an additional $50 million for the Energy Commission.
Tax Collection Programs
Expenditures. The Franchise Tax Board (FTB) and the Board of
Equalization (BOE) are the largest revenue collection agencies in the
state. Together, both boards collect the state's personal and business
income taxes, sales tax, and special use taxes. The budget proposes
$650 million for these tax programs in 1997-98. This is a net reduction
of $6 million (about 1 percent) from estimated current-year expenditures. This net decrease is the result of several large augmentations
(such as merit salary increases and workload adjustments), offset by
supervisor reductions at the BOE and reductions in one-time payments
to computer system vendors.
Both FTB and BOE have initiated several large-scale information
technology projects to automate various tax collection functions. While
early results indicate improvements in revenue generation, some projects have experienced implementation delays and cost overruns.
Revenues. The estimated combined General Fund collections under
both boards is projected to be almost $50 billion in 1997-98. This is an
increase of nearly $2 billion over estimated current-year revenues.
Almost half of General Fund revenues ($24 billion) comes from personal income taxes.
State Administrative Functions
There are more than 30 departments and agencies that provide a
wide range of administrative services. These services range from oversight and support of other departments (such as the Department of
General Services, the Department of Information Technology, and
Office of Administrative Law), to economic development (such as the
Trade and Commerce Agency), to various specialized services provided
to individuals and communities (such as the Office of Emergency
Services, Military Department, and Department of Veterans Affairs).
The budget proposes a total of $930 million to support these functions in 1997-98. This is an increase of $38 million, or 4.3 percent, above
current-year expenditures. The budgets of most of the departments in
this category are proposed to remain flat or increase only slightly in the
budget year. The most significant budget-year increases are for the
Department of General Services ($9 million, or 6.6 percent), Board of
Control ($7 million, or 9.1 percent), and the California Science Center
(formerly known as the Museum of Science and Industry--$6 million,
or 73 percent).
State Retirement Programs
Retirement-related expenditures account for a significant part of
state spending for the budget year. In 1997-98, state expenditures for
various costs associated with public employee retirement (excluding
University of California costs and nongovernmental cost funds) will
total approximately $3.1 billion, including almost $2.2 billion from the
General Fund. As summarized in Figure 1, the General Fund provides
for employer contributions and/or various other payments to four
retirement systems. In addition, the state (1) makes Social Security and
Medicare contributions for most state employees and (2) contributes to
the payment of premiums for health and dental benefit plans for retired state employees.
Public Employees' Retirement System. The Public Employees' Retirement System (PERS) is the retirement system for most state employees.
The budget projects General Fund expenditures of $588 million for
PERS in 1997-98. This amount is based on the 1995-96 employee payroll, pursuant to Chapter 71, Statutes 1993 (SB 240, Committee on Budget and Fiscal Review). Under the provisions of that legislation, General Fund contributions are made two fiscal years in arrears. The PERS
costs that state agencies will incur in 1997-98--about $680 million--will
not show up as a General Fund payment until 1999-00.
General Fund Costs
For Retirement Programsa
|Public Employees' Retirement
|State Teachers' Retirement
|Social Security and Medicareb
|Health and Dental Benefits for Annuitants
|a Excludes costs for University of California employees.|
|b Legislative Analyst's Office estimate based on 1996 costs.|
As a result of a lawsuit filed by the PERS, the Superior Court in
Sacramento County has ordered the state to immediately pay all deferred payments and to resume sending state funds to the PERS on a
current, rather than a deferred, basis. The state has appealed this decision and the budget assumes that the state will prevail on the appeal.
If the state loses the appeal, the General Fund impact would be about
$1.1 billion in 1997-98.
State Teachers' Retirement System. The State Teachers' Retirement
System (STRS) is the retirement system for teachers in public K-12
schools and community colleges. The STRS receives contributions
from teachers and their employers. These contributions, however, are
insufficient to provide for the cost of basic retirement benefits and the
protection of retirees' purchasing power. These shortfalls are covered
by annual transfers from the General Fund. These transfers are expected to increase by $39 million, from $883 million in the current year
to $932 million in the budget year. The increase is due to an expected
increase in teacher payrolls, which is the key factor in the statutory
Health and Dental Premiums. The budget also includes $279 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 $10.7 million more than estimated current-year
expenditures, which reflects an increase in the number of retirees. The
PERS is currently negotiating the health and dental premiums rates for
the second half of the budget year. These negotiations may result in a
change in the estimated General Fund cost for the budget year.
The collective bargaining memoranda of understanding (MOU) that
govern pay, benefits, and other working conditions for over 150,000
rank-and-file state employees (other than higher education) expired
June 30, 1995. Since then, the MOU negotiations have been completed
for only one of the 21 bargaining unit--the highway patrol officers.
This MOU, however, expires on June 30, 1997. The budget does not
include funds for new compensation increases for any state employees
(other than higher education).
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