Legislative Analyst's Office Analysis of the 2002-03 Budget Bill

Public Employees' Retirement System Deferral

The Legislature's action regarding the budget's proposal to defer employer contributions to the Public Employees' Retirement System (PERS) has important implications for the Legislature's efforts to craft a K-14 education budget.

As part of the administration's proposal to address the state's budget problem, the budget proposes to defer employer contributions to the Public Employees' Retirement System (PERS). In the "Crosscutting" section of the "General Government" chapter of this Analysis, we recommend that the Legislature reject the proposed deferral. In this part of the Analysis, we describe how rejection of the Governor's PERS proposal would affect the Legislature's efforts in crafting its K-14 education budget.

Background

The Governor's budget proposes to defer employer contributions to PERS. This deferral includes contributions under the "school employer" rate and therefore affects nearly all school districts, county offices of education, and community college districts. These agencies contribute to PERS at the school employer rate on behalf of their PERS-covered employees (generally, noncertificated and/or noninstructional staff). Due to relatively good actuarial performance of this PERS account, the school employer rate has been zero percent of covered payroll since 1997-98. (Some school employers, such as the Los Angeles Unified School District, have separate contracted rates with PERS that are not affected by the proposed deferral.)

The PERS deferral would, among other things, postpone an anticipated increase in the school employer rate. Without the deferral, PERS estimates that the rate would increase to 1.72 percent in 2002-03. However, deferral of the school employer rate increase would not create direct savings for school districts or county offices because current state law offsets revenue limit payments based on changes in school employer contributions. We describe this revenue limit offset in detail below.

How the PERS Offset to Revenue Limits Works

The PERS offset is an Education Code provision that affects almost all K-12 agencies by changing revenue limit payments on the basis of changes in PERS contributions. Through a complex series of calculations, this provision reduces each district's (or county office's) revenue limit payments to the extent that PERS contribution rates are less today than they were in the 1982-83 fiscal year. (Community college districts do not have a similar offset in their apportionments.) In effect, current law "passes through" to the state all savings or costs that otherwise would accrue to K-12 agencies from annual changes in the school employer rate. Savings create "room" within the Proposition 98 guarantee for the state to spend money on other K-14 education programs, particularly categorical programs. Costs from a rising contribution rate, on the other hand, create a need to reduce funding for categorical programs if the Legislature is trying to stay within a given guarantee level.

What if the PERS Deferral Is Not Enacted?

For several reasons we discuss in this Analysis, we think enacting the PERS deferral would not be in the state's financial interest. Rejection of the Governor's proposal to defer PERS expenditures, however, does have important implications for the Legislature's efforts to craft a budget for K-14 education programs.

In the absence of the PERS deferral, we estimate K-12 employers and community college districts would have to pay $113 million and $12 million, respectively, to PERS in 2002-03. Figure 1 shows how the increase in K-12 PERS contributions would create a corresponding increase in General Fund payments for K-12 revenue limit apportionments due to the PERS offset. This increase in revenue limits has several implications, depending on the level of the Proposition 98 guarantee for 2002-03 and the level at which the Legislature chooses to appropriate funds for Proposition 98, as discussed below.

If the 2002-03 Proposition 98 Appropriation Level Stays at Budget's Estimate. Assuming rejection of the budget's PERS deferral, under the PERS offset law K-12 agencies would (1) pay $113 million to PERS and (2) receive $113 million more in revenue limit apportionments. If we further assume the 2002-03 Proposition 98 guarantee stays at the level estimated in January's budget proposal and that the Legislature appropriates funds at this level, K-12 agencies would experience no additional cost. (Community college districts, however, would have an additional estimated cost of $12 million that would not be passed through to the state.) As a consequence of the increase in K-12 revenue limit funding, the Legislature would need to reduce funding for other Proposition 98 programs proposed in the budget by $113 million in order to avoid "over-appropriating" the guarantee. Figure 2 illustrates this effect.

If the 2002-03 Proposition 98 Guarantee Increases in Spring. The situation is quite different if the 2002-03 Proposition 98 guarantee increases in the spring. (Please see the K-14 Education Priorities section of this chapter for a discussion of Proposition 98 guarantee issues.) In this case, depending on how much the Proposition 98 guarantee increases and on whether the Legislature appropriates funding at this higher level, the Legislature could provide $113 million more in revenue limit funding without having to make a corresponding reduction to other Proposition 98 programs proposed in the budget. The Legislature also could choose to allocate more funds to community colleges in recognition of their increased PERS cost.

Summary. To summarize, rejection of the PERS deferral, which we recommend in this Analysis, presents the Legislature with two scenarios for crafting a K-14 education budget. First, if the Proposition 98 guarantee remains at the budgeted level, the Legislature effectively must reduce Proposition 98 categorical programs by about $113 million. Second, if the guarantee increases substantially in the spring, the Legislature would be less constrained and would not have to reduce categorical programs.