The 2024-25 Budget
Summary
The Governor’s 2024‑25 budget proposal includes three proposedbudgetary changes for state employee compensation. Specifically, theGovernor proposes to (1)use vacancy rates to identify one-timeunallocated spending reductions across state departments through abudget exercise, (2)eliminate the telework stipend established undercurrent labor agreements, and (3)defer June 2025 payroll by one day toreduce state payroll costs in 2024‑25 by one month’s payroll.
Savings From Vacancies Not Likely to Materialize in Fullin 2024‑25. We think there is merit in an exercise led bythe Department of Finance (DOF) to identify inefficiencies in the statebudget; however, we do not think that the proposed reduction willachieve the level of savings assumed in the budget for 2024‑25. Instead,we think that such an exercise should be used to identify specificongoing and one-time reductions to be included in the Governor’s 2025‑26budget proposal in January 2025. If the Legislature wishes to include anacross-the-board reduction in the budget for 2024‑25, we think an up to1.5percent across-the-board reduction in General Fund state operatingcosts would be more likely to achieve savings than the proposal. Werecognize that such an action would have shortfalls (for example, theLegislature would play no direct role in determining how reductions areapplied); however, we think it would be simpler and have a greaterlikelihood of achieving a larger share of the assumed savings in 2024‑25while the administration identifies specific reductions to propose forthe 2025‑26 budget.
Eliminating Telework Stipend Now Seems DisproportionatelyDifficult for Modest Savings. The assumed General Fundsavings under the proposal is modest—$26million in 2024‑25. Forreference, the state budget assumes that its existing labor agreementswith state employees will increase state costs in 2024‑25 by$1.3billion ($676million General Fund). The state established newlabor agreements with most state workers in 2023. None of these laboragreements included changes to the state’s existing telework stipend.Eliminating the telework stipend either through collective bargaining orthrough unilateral action likely would result in diffiult laborrelations and an erosion to any savings.
Recommend Legislature Approve PayrollDeferral. We recognize that deferring the June 2025payroll by one month in the state’s accounting reports can beadministratively complex and is not preferred budget practice. Given themagnitude of the state’s budget problem, however, we think that thebenefits of deferring the June 2025 payroll outweigh the shortcomings ofthe accounting maneuver.
Introduction
In this analysis, we provide the Legislature our key questions andrecommendations related to the administration’s proposed budgetarychanges for state employee compensation. (For our analysis of issuesrelated to pension payments under Proposition2 [2014], see our reportThe 2024‑25Budget: Proposition2 Debt Payment Proposals.) Specifically,this analysis looks at the Governor’s 2024‑25 budget proposals to(1)use vacancy rates to identify one-time unallocated spendingreductions across state departments, (2)eliminate the telework stipendestablished under current labor agreements, and (3)defer June 2025payroll by one day to reduce state payroll costs in 2024‑25 by onemonth’s payroll. The analysis is structured to discuss each of theseproposals in turn.
UnallocatedReduction to Departments’ Personal Services Budget
Background
Legislature Approves Position Authority for Departmentsto Accomplish Specific Tasks. State employee jobs areorganized into thousands of state civil service classifications thatestablish the minimum qualifications, duties, and compensation for thejobs. When the administration submits budget proposals to theLegislature, the requested funding levels often are built on assumptionsabout the number of new state employees that need to be hired intospecified job classifications in order to accomplish a particular newworkload. The Legislature then determines whether it agrees with theadministration that (1)the proposed new workload is consistent withLegislative priorities and (2)the requested mix of state employees isappropriate to accomplish the new workload.
Positions Typically Funded at Mid-Step of SalaryRanges. Each state job classification includes a salaryrange within which a department may pay an employee who is hired in thatjob classification. The salaries for job classifications are a rangewith a bottom step being the lowest possible salary for theclassification and a top step being the highest possible salary for theclassification. The state budget most often establishes funding levelsfor new position authority on the assumption that the position will befilled by an employee at the mid-step of the job classification’s salaryrange. This budgeting approach is intended to reflect the anticipatedaverage employee salary. Through a combination of career advancement andturnover, the employee filling a particular position might be at thebottom step, the top step, or anywhere in between.
Salary and Benefit Funding Associated With ApprovedPositions Constitute Significant Portion of State OperationsCosts. State operations budgets for departments areidentified as expenditures towards “personal services” and “operatingexpenses and equipment.” The costs to pay for state employee salariesand benefits are reflected in the personal services portion of thebudget. The costs to pay for computers, office spaces, utilities, andother non-personnel operating expenses are identified in the operatingexpenses and equipment portion of the operations budget. Personalservices constitute a large portion of the state budget. Specifically,we estimate that the Governor’s budget assumes that salaries andsalary-driven benefits for the roughly 250,000 full-time-equivalentstate employees will be roughly $40billion (roughly $20billion GeneralFund) in 2024‑25 when state operations is assumed to total about$83billion ($47billion General Fund).
Historically, Position Authority Seen as Primary Tool toAlign Workforce With Program Needs. With state employeecompensation constituting a significant portion of state operationscosts, legislative oversight of the state workforce is fundamental toeffective oversight of the state’s overall budget. The purpose ofposition authority is to impose limits on the number of people the statecan hire as a way to ensure that employee compensation costs align withauthorized workloads. Accordingly, the Legislature’s role of approvingposition authority historically has been seen as a key tool inlegislative oversight of the state budget by aiming to establish anefficient state workforce level.
Consistent Large Numbers of VacantPosition. Departments reasonably have some level of vacantpositions as there is always turnover in a workforce and it takes timeto fill vacant positions. When a position is vacant or filled by anemployee at a pay level lower than the department’s budget assumes, thedepartment captures “salary savings.” Salary savings means that theappropriation for salaries is higher than needed, thus freeing up fundsto be used elsewhere in a department’s budget—for example, to pay forover time, salary costs above the mid-step, or rising rent. For at leastthe past 20 years, the statewide vacancy rate consistently has beenabove 10percent. In recent years, the vacancy rate has increasedsignificantly to, at times, more than 20percent. As of February 2024,the vacancy rate currently is about 20percent with 47,920 vacantfull-time-equivalent positions of the 243,829 established positions. (Aswe discuss below, the size of the workforce and the number of vacantpositions fluctuates throughout the year.)
Many Reasons for Positions to Be Vacant. Aswe discuss below, there are a variety of reasons as to why a departmentmight have vacant positions.
Rising Costs. For decades, the statehas not provided systematic, regular adjustments to state departmentbudgets to reflect rising costs of doing business including rising rent,fuel, leave cash outs, or overtime costs. Departments have had to findways to pay for these rising costs. Intentionally holding positionsvacant in order to generate salary savings is one common strategy usedby departments to pay for rising costs of doing business.
Turnover. There is always turnover in aworkforce as employees promote, separate, or otherwise vacate positions.Vacancies due to turnover typically are positions that departmentsintend to fill.
Timing. Vacancy rates fluctuatethroughout a year. Accordingly, a department’s vacancy rate might behigher or lower depending on when they report their vacancy rate. Forexample, if a department receives a large number of new positions in anew fiscal year, the department will report a high vacancy rate in Julyand for the several months that it can take to fill the positions.Similarly, a department with a seasonal workforce might report highervacancy rates as it ramps up (or ramps down) seasonal staffinglevels.
Noncompetitive Compensation. In somecases, a department might want to fill a vacant position and have thefunding to pay for the compensation established by the classificationbut is unable to fill the position because the compensation that thedepartment is able to offer is not competitive enough in the labormarket to attract qualified candidates. Compensation is established atthe state level through administrative policy, law, and collectivebargaining. Individual departments have very limited ability to affectthe compensation they provide employees directly. This issue isparticularly common among high-demand jobs (for example, nursing staff)or in high-cost-of-living regions of the state.
Challenging Working Conditions. Thenature or location of a state job might make it difficult to fill. Forexample, a prison in a very rural part of the state might havechallenges filling medical staff positions.
Past Efforts to Control Position Vacancies HeldDepartment Funding Harmless. There have been a number ofefforts over the decades to either reduce the number of vacant positionsin state government or to at least provide greater transparency into howdepartments use position authority. These efforts have ranged fromprogrammatic reviews targeting specific departments to broad statewidepolicies that affect all state departments. We highlight the effortsundertaken in the past decade below.
State Law to Eliminate Chronically VacantPositions. The Government Code used to include languagerequiring the State Controller’s Office (SCO) to abolish certainauthorized positions that were vacant for six consecutive months. Underthis process, a department’s expenditure authority was not affected byany position authority being abolished. As we indicated in 2008and 2015and the State Auditor indicated in 2002, thislaw was ineffective as most chronically vacant positions were nevereliminated and departments found ways to preserve their positionauthority. The law was repealed as part of the 2015‑16 budgetpackage.
Biennial Review of Vacant Positions. Atthe same time that the SCO process discussed above was eliminated, the2015‑16 budget incorporated a new “budget position transparency”administrative process under Control Section 4.11 that directed DOF toconduct a biennial review of departmental budgets to determine—over thepreceding three years—departments’ average (1)number of filledpositions and (2)amount of money spent on personnel versus otheroperating expenses. In our 2017 analysis ofthis process, we concluded that the budget position transparency processlacked transparency. The Legislature amended Control Section 4.11 to endthis review beginning in 2021‑22.
Annual Reporting of Vacancy Rates.Beginning in 2021‑22, Control Section 4.11 requires DOF to submit to theLegislature each year (1)the percentage of vacant positions for eachdepartment by month, (2)the total authorized positions for eachdepartment, and (3)the average percentage of vacant positionsthroughout the year for each department. The purpose of this report isto promote greater transparency in how departments use positionauthority. DOF uses SCO data to produce the reportthat is posted each year on DOF’s website along with other budgetreferences.
Number of Filled Positions Has Grown Significantly inRecent Years… The state workforce has grown significantlyover the past several years. Specifically, using data reported in thestate budget, the number of state employees grew by more than 11percentfrom 226,000 state employees in 2011‑12 to more than 251,000 stateemployees in 2022‑23. For reference, using data maintained by the U.S.Census, the per capita number of state employees (excluding K-14 andhigher education employees) in California in 2022 was just below theU.S. average with 7 state employees per 1,000 population in Californiacompared with 7.3 state employees per 1,000 population nationally.
…But Number of Vacant Positions Has GrownFaster. With the expansion and growth of state programs,the number of authorized positions in state government has grownsignificantly in recent years. A number of these new authorizedpositions were filled—resulting in the growth in the number of stateemployees discussed above—but the number of vacant positions has grownfaster than the number of authorized positions. Comparing payroll datafrom December 2015 with data from December 2023, the number ofestablished positions grew 11.5percent while the number of vacantpositions grew 52percent. As a result, the vacancy rate in December2015 was 13percent and the vacancy rate in December 2023 was21percent.
Governor’s Proposal
One-Year Unallocated Reduction of $1.5Billion($762.5Million General Fund) Across DepartmentalOperations. The Governor’s proposed budget assumes thatstate operations are reduced by $1.5billion ($762.5million GeneralFund) in 2024‑25. This reduction is identified in the budget summarydocument as a “state vacant position funding sweep.” The proposedreduction is established in the budget bill under Control Section 4.12.The control section does not identify a dollar amount for the reduction.Instead, the budget bill language indicates that “each item ofappropriation” in the budget except the university systems, theLegislature, and the Judicial Branch “shall be adjusted, as appropriate,to achieve savings associated with vacant positions.” The languagespecifies that the Director of Finance shall determine the adjustmentsmade to each item and that DOF “shall make the final determination ofthe budgetary and accounting transactions to ensure properimplementation of this section.” The reduction would be unallocated andwould only be in effect for one year with funding levels restoredbeginning in 2025‑26. Because the reduction is unallocated, the assumedsavings are reflected in the statewide budget Item 9901—an item thatcontains budget adjustments that are not attributed to specificdepartments or programs.
Assumed Magnitude of Budget Reductions Calculated UsingVacancy Rates. The reduction assumed by the administrationwas derived by assuming savings from estimated salary and benefit costsassociated with one-half of all vacant positions in departments with(1)more than 100 authorized positions and (2)a vacancy rate above10percent. This amount was reduced further by (1)excluding theCalifornia Department of Corrections and Rehabilitation (CDCR) andCalifornia Department of Forestry and Fire Protection (CalFire) from thecalculation out of consideration of safety mandates (for example,positions that must be filled at all times) that likely would limitthese departments’ abilities to reduce personal services costs and(2)assuming that there would be erosion to the maximum possible savingsof 15percent.
Actual Amount of Budget Reductions to Be DeterminedThrough Undefined Administrative Budget Exercise in2024‑25. Under the proposal, DOF would submit instructionsto departments at some point after July 1, 2024 to serve as theframework for a budget exercise that would identify reductions indepartmental budgets. The specifics of the budget exercise are not knownat this time. The administration indicates that the instructions arecurrently being developed. While specifics are not known, theadministration indicates that it intends to work with every departmentto identify possible reductions and also possible exemptions to thereductions.
LAO Comments
Few Details as to Criteria That Would Be Used to IdentifyReductions. There is very little information available asto how reductions ultimately would be determined and the extent to whichvacancy rates would be used to target reductions. Further, though theywere excluded from the methodology to estimate the assumed savings inthe budget, it is not clear that CDCR and CalFire necessarily would beexempt from the exercise to actually identify cuts as Control Section4.12 establishes no such exemption and the administration indicated thatit anticipates that it would include all departments in the initialexercise. It seems that the administration intends to work with eachdepartment on a case-by-case basis to identify reductions and todetermine whether departments should be exempt from making reductions.This case-by-case approach very likely would result in differing levelsof savings across departments. As a result, some departments wouldreceive disproportionately larger reductions than others. Withoutdetails as to how the reductions would be determined, the criteria thatwould be used to give one program or department priority over another isnot known. While the administration frames this proposal as a sweep offunding associated with vacant positions, we encourage the Legislatureto, instead, view the proposal as an undefined and unallocated reductionto departmental operations.
Administration Assigns No Role to Legislature inDetermining How to Allocate Reductions. Under theadministration’s proposal, the Legislature would have no role indetermining how to allocate reductions. Instead, the reductions would bemade through an internal administrative process. As a result, thechoices would reflect the administration’s priorities. The process asproposed gives no deference to legislative authority or priorities.
Savings Likely Will Not Materialize at LevelsAssumed. Unallocated cuts can be difficult to achieve infull. This especially is true when the reductions are determined througha collaborative process that allows for departments to be exempt fromany reductions or receive a lower level of reduction. Moreover, theproposed unallocated reduction is large. The General Fund portion isroughly 4percent of the 2023‑24 General Fund salary and salary-drivenbenefit costs—the Personal LeaveProgram that state employees agreed to in 2020‑21 reduced thestate’s salary and salary-driven benefit costs by 4.62percent. Giventhe administration would not begin to identify reductions until afterthe start of the fiscal year in which reductions are assumed to occur,achieving the full amount of savings seems even more unlikely.
Data on Which Proposal Is Premised Has at Least OneGlitch. The vacancy data used by the administration toestimate the savings assumed in the budget are maintained by SCO. Whilethese data are the best available for statewide vacancies and positionauthority, we did identify one significant glitch in the data when wespot checked them. Specifically, the data suggest that the Secretary ofState (SOS) has a vacancy rate of 49percent. In fact, however, in2022‑23, the average monthly vacancy rate for SOS was 27percent. TheSCO and SOS reported that the 49percent vacancy rate was not correctand that it was the result of internal processing issues at SCO. The SCOstated that this example is the only instance of the problem; however,we cannot independently confirm that the rest of the data are accurate.While vacancy rates may not ultimately drive the level of savings,errors in the data (1)undermine the methodology that underpins theassumed level of savings and (2)could misguide the administration as itseeks to target departments for reductions.
Administration Seeks to Minimize Disruption to StateServices and Operations. From our conversations with theadministration, we understand that the administration wants to implementreductions under the proposal in such a way as to minimize disruptionsto state services and operations. In essence, the administration isseeking to identify inefficiencies in the state budget. That said, underthe proposal, any reductions made would only be in effect for 2024‑25and would be reinstated in future years. Under any circ*mstance, butespecially given the severity of the state’s budget problem, we questionthe value of reinstating any of these funds if their reduction does notaffect state services or operations.
Identifying Inefficiencies in State Government a WorthyEndeavor, but Proposal Raises Questions for Legislature toConsider. A statewide exercise led by DOF to identifybudgetary inefficiencies is a worthy endeavor. While such an exercisecould be beneficial in any year, it seems particularly important tominimize unnecessary or duplicative spending when the state faces abudget problem. However, for the reasons we discussed above, we havedoubts that the proposed approach would result in the assumed level ofsavings or that it would sufficiently consider legislative priorities.Because of these concerns, we highlight questions below for budgetcommittees to consider asking the administration.
Why did the administration choose vacant positions as the metricto identify savings?
What confidence does the administration have in its assumed levelof savings under the proposal?
How long does the administration assume it will take tothoroughly work with departments to identify savings?
What factors will the administration use to determine reductionsin departments? Will some departments receive proportionately largerreductions than others?
In the event that the assumed level of savings are not achievedthrough the exercise, will the administration propose larger reductionsto departments’ budgets?
Will the administration make reductions under this proposal ifsuch cuts negatively affect departmental operations?
Will the administration make reductions under this proposal ifservices would be affected?
How will the administration notify the Legislature whatreductions are made in the state budget?
Should reductions made under this proposal that would notnegatively affect departmental operations or services be ongoingreductions rather than one time?
How frequently, and through what process, does the administrationwork with departments to identify potential operational savings andinefficiencies beyond this proposal?
Proposed Budget Exercise Could Be Used to IdentifySpecific Cuts to Present to Legislature in January 2025.While we have doubts that the proposed exercise could produce savings atthe level assumed in 2024‑25, we think the process could be helpful toidentify targeted one-time and ongoing reductions to be incorporated aspart of the administration’s proposed 2025‑26 budget. The Legislaturecould direct the administration to use the proposed process to identifyspecific reductions for legislative consideration as part of the 2025‑26budget. Any such targeted reductions should be aimed at addressingongoing inefficiencies in the state budget; however, the exercise couldalso lead to the administration identifying programmatic reductions orconsolidations for legislative consideration.
If Across-the-Board Administrative Savings in 2024‑25 AreDesired, Legislature May Consider a Different Approach. Aswe indicated above, we do not think the level of savings assumed in thebudget resulting from the proposed unallocated reduction are likely tomaterialize in the budget year. We think that the proposed budgetexercise should, instead, be used to identify targeted budget cuts thatcan be incorporated into the 2025‑26 budget. If the Legislature wants toachieve savings in state operations across the board in 2024‑25, werecommend that the Legislature consider the trade-offs of a simplerapproach: a smaller, specified reduction in General Fund stateoperations across all departments. For example, in 2023‑24, 1percent ofthe General Fund state operations costs constituted $572.6million.Accordingly, similar savings as assumed by the Governor’s proposal couldbe achieved in 2024‑25 with less than a 1.5percent across-the-boardtemporary reduction to 2023‑24 General Fund state operation spendinglevels. There are shortcomings to this approach. For example, theLegislature would not be involved in the specific decisions of howreductions are applied to departmental budgets and some departmentsmight have more or less capacity to absorb such a temporary reduction.However, we think such an approach would be a more effective interimsolution to reduce costs in 2024‑25 while the administration identifiesspecific one-time and ongoing reductions to include in its 2025‑26budget proposal.
Elimination of Remote WorkStipend
Background
Many State Employees Began Working Remotely in2020. The nature of some state jobs—for example, a highwaypatrol officer or correctional officer—require a state employee to bephysically in a particular location (whether in a state office or in thefield). Accordingly, many state employees were required to reportphysically to work during the COVID-19 pandemic. Other state employeeshave jobs that allowed them to work remotely beginning in 2020 inresponse to the restrictions in place in response to the pandemic. Theshare of the state workforce that has worked remotely has fluctuatedsince 2020. As of December 2023, the Department of General Services(DGS) reports that 46percent of state workers telework at least aportion of their week (37percent of state workers telework more than50percent of their time). Under state policy, each teleworking employeemust complete a teleworkagreement that, among other things, delineates the employee’steleworking schedule. Of the approximately 100,000 employees eligible totelework in December 2023, DGS data indicate that 49percent worked inoffice (meaning, not remotely) zero or one days per week.
Teleworking Stipend Established in 2021 and 2022 ThroughCollective Bargaining Process. The Ralph C. Dills Act(Dills Act) establishes collective bargaining for state employees. Underthe Dills Act, there are different types of labor agreements that thestate and employee representatives enter into. The most significant ofthese types of agreements is a memorandum of understanding (MOU). TheMOU is the labor contract that establishes the vast majority of workingconditions and terms of employment for state employees. (Pursuant tostate law, our office produces analyses ofMOUs when they are submitted to the Legislature for consideration.)Other types of labor agreements are addenda to the MOU, including a typeof agreement referred to as a side letter. A side letter is a laboragreement that addresses a specific issue beyond what is included in theMOU. (State law does not require our office to produce an analysis of aside letter.) Across 2021 and 2022, the state and 17 of the state’s 21bargaining units entered into side letters establishing a stipend forteleworking state employees. (The units that did not establish such aside letter included Units 5 [highway patrol], 6 [correctionalofficers], 8 [firefighters], and 18 [psychiatric technicians]). Theagreements can be found on the Department of Human Resources’ (CalHR’s)website.The telework stipend side letters established PayDifferential 453. Under the pay differential, employees who teleworkmore than 50percent of their time receive $50 per month and employeeswho telework more than 0percent but less than 50percent of their timereceived $25 per month. The side letter agreements specified that afterthe side letter went into effect, “no reimbursem*nt claims will beauthorized for utilities, phone, cable/internet, or other teleworkincurred costs.”
State Ratified New MOUs With Most of Workforce in2023. In 2023, the Governor (represented by CalHR)negotiated and the Legislature ratified new MOUs with most of thestate’s workforce, including 14 of the 17 bargaining units withestablished telework stipend side letter agreements (in the case of Unit10 [professional scientists], the Legislature ratified a new MOU but theunion membership rejected the agreement). None of these new or proposedMOUs altered the telework stipend.
In 2024, Administration Shifting Towards More HybridState Workforce. Since January 2024, a number of statedepartments have announced that they are shifting to a hybrid workforcerequiring state employees to report to a worksite a specified number ofdays per week. CalHR confirmed to us that leaders within the executivebranch are moving towards a two or three day in-person hybridschedule.
Proposal
Eliminate Telework Stipend for Annual Savings of$52Million ($26Million General Fund). Beginning in2024‑25, the Governor’s budget proposes eliminating the telework stipend(Pay Differential 453) established under the side letters. The budgetsummary indicates that the state will attempt to negotiate with eachbargaining unit to eliminate the stipend. Under the proposal, thestipends would be eliminated beginning with the July 2024 payperiod.
LAO Comments
Eliminating Benefit Likely Would Require Trade-Off ThatWould Erode Savings. The telework stipend was establishedthrough the collective bargaining process. The benefit certainly is notthe largest benefit earned by state employees, but at up to $600 peryear per employee, it reasonably has become an expected part of stateemployees’ compensation. State law has required our office to reviewlabor agreements since the enactment of Chapter499 of 2005 (SB621,Speier). As regular observers of the collective bargaining process overthe past couple of decades, we would expect there to be some sort ofoffsetting trade-off through the collective bargaining process—perhapsnot immediately, but maybe when the current MOUs expire—that erodes thestate’s savings from eliminating the stipend. The trade-off might notfully eliminate the savings, but it likely would substantially erode thesavings.
Any Future Reimbursem*nts of Telework Costs Would ErodeAny Savings. The side letter agreements explicitly statethat upon ratification, no reimbursem*nt claims will be authorized forcosts incurred for telework—essentially establishing the stipend in lieuof reimbursem*nt. Although some state departments are moving moreemployees to hybrid work schedules—increasing in-office work—teleworkwill continue. The administration indicated that it does not anticipatethat the state would reimburse employees for incurred telework costs ifthe telework stipend established by the side letters were eliminated;however, the administration also specified that reimbursem*nt oftelework-related expenses is a matter subject to the collectivebargaining process. If the parties could not reach agreement to end thestipend and the Governor instead sought to eliminate the stipendunilaterally, it is possible that state employee unions would sue thestate. To the extent that the state is required to reimburse teleworkingemployees for incurred telework costs—either as the result of laboragreements or court orders—any savings from eliminating the teleworkstipend would erode.
Implementing Proposal Seems Disproportionately Difficultfor Modest Savings. The Governor proposes openingnegotiations with all 17 of the affected bargaining units to achieve$26million General Fund savings. This figure represents less thanone-quarter of 1percent of the state’s General Fund payroll costsassociated with these bargaining units and the associated excludedemployees. While the cost of the telework stipend is small, based onanecdotal evidence, the ability to work remotely has been very popularamong state workers and increasing in-office work poses challenges. Thissuggests that bargaining might be difficult and that the parties mightnot come to an agreement. Imposing the elimination of the stipend—if noagreement is reached—would have negative downstream effects on laborrelations. Given all of this, implementing the Governor’s proposal seemsdisproportionately difficult relative to the modest savings that wouldbe achieved.
Proposal Raises Questions for LegislativeConsideration. We raise questions below that the budgetcommittees could consider when they hear the administration’sproposal.
What are the administration’s goals regarding hybridwork?
How do those goals vary by department andclassification?
How could hybrid work be implemented to improve recruitment andretention?
What aspects, if any, of the hybrid workforce and the proposedelimination of the telework stipend will be determined through thecollective bargaining process?
In the absence of a telework stipend, what obligation, if any,does the state have to reimburse state employees for costs incurredwhile working remotely?
Deferral of June 2025Payroll
Background
State Deferred June Payroll in 2009‑10. Thestate pays its employees monthly. In response to a severe budget deficitproblem, the 2009‑10 budget package included an ongoing one-monthdeferral of state payroll from late June to early July, providingone-time savings for the state by only paying 11 months of payroll inthe 2009‑10 fiscal year. This action was only reflected in the state’saccounting reports—it did not affect when paychecks were actually issuedto state employees. On an ongoing basis, the state’s budget documentsstill reflected 12 months of payroll, but rather than reflecting payrollfor June of the last month of the fiscal year, they reflected June ofthe previous fiscal year. (For budgetary purposes, the state onlyrecognized the deferral in the General Fund, not other funds’statements.)
State Undid Deferral in 2019‑20. The stateundid the payroll deferral in 2019‑20. To undo the payroll deferral, thestate’s accounting reports reflected the state paying 13 months ofpayroll in one fiscal year. This resulted in a one-time budgetary costof hundreds of millions of dollars. Ongoing, the state’s accountingreports reflected only 12 months of payroll in the fiscal year.
Proposal
Defer June 2025 Payroll to July. TheGovernor proposes deferring the June 2025 payroll to July. Similar tohow the 2009‑10 payroll deferral operated, this would result in thestate paying 11 months of payroll in 2024‑25 and, beginning in 2025‑26,state accounting reports in future fiscal years would include Junepayroll from the preceding fiscal year through May of the current fiscalyear. This action would reduce the state’s reported payroll costs in2024‑25 by one month of payroll estimated to be $3.2billion($1.6billion General Fund).
LAO Comments
Undoing the 2009‑10 Payroll Deferral Created aReserve-Like Benefit to the State. As we discussed in 2019, when thestate undid the 2009‑10 payroll deferral, it created a reserve-likebenefit to the state in the sense that the payroll deferral could beredone at some future date to help address a future budget problem.
Cost to Undo Proposed Deferral in the Future Will GrowWith Payroll. The payroll deferral is a one-time budgetsolution. When the state undoes a payroll deferral, state accountingreports reflect 13 months of payroll paid in one fiscal year. This meansthat the cost to undo the payroll deferral is equivalent to one month ofpayroll in the future. Payroll grows by two factors: compensation levelsand the number of state employees. In theory, payroll could decrease;however, payroll is expected to increase into the future. (For example,the California Public Employees’ Retirement System assumes that statepayroll grows by 2.8percent each year.) Because of this, the longer theLegislature waits to undo a payroll deferral, the costlier it likelywill be.
Undoing and Redoing Payroll DeferralsComplex. Undoing deferrals and then taking the actionagain in the future results in more administrative complexity than otherbudgetary solutions like using reserves. For example, the 2009‑10payroll deferral increased workload for the SCO when the state took theaction to do and undo the deferral. Further, because budgetary savingsfrom a payroll deferral are the result of an accounting maneuver and notthe result of actual reduced state expenditures, a payroll deferral addsa layer of complexity to an already complex state budget.
LAO Recommendations
Approve Proposal. Given the magnitude ofthe state’s budget problem, the benefits of deferring the June 2025payroll outweigh the shortcomings of the accounting maneuver.
