LAO says gov’s cuts will come with legal battles

The Legislature’s nonpartisan fiscal adviser says the total $2.7 billion in cuts in Gov. Schwarzenegger’s budget plan involving state employees may be too deep to implement without a serious struggle.

The governor’s proposal for the 2010-11 budget includes shifting a portion of pension contributions from the state to employees, cutting personnel costs and making across-the-board salary reductions.

These cuts would take the place of the furlough program, which is set to expire by July.  Heavily contested, the furloughs were “credited with over $2.5 billion of state savings over the 2008–09 and 2009–10 fiscal years, most of which has been credited to the General Fund,” according to the Legislative Analyst’s Office.  

The 5 percent pension shift from the state to employees, LAO says, would be a risky move because it wants to take away benefits from current employees.  New employees, on the other hand, have contract flexibility and can in the future be signed with the pension shift to save costs.  

And the ‘unallocated’ 5 percent reductions aren’t as widely spread as they seem, because departments can only cut from personnel costs, not departmental costs.  

“Initiating unallocated reductions provides departments with some flexibility in achieving desired cost savings. Applying unallocated reductions only to personnel costs, as the Governor proposes, and not to departmental costs for operating expenses and equipment (OE&E) limits the flexibility departments may have in achieving savings,” the LAO said.
Additionally, the 5 percent reductions departments have been charged with extend past the general fund.

The LAO states that, “it is unclear, however, why the administration chooses to implement the 5 percent unallocated cuts to parts of personnel budgets not funded by General Fund.”

“The administration has not put forward a credible rationale why unallocated reductions should be extended to personnel expenses funded by special funds, federal funds, or other nongovernmental funds.”

Restricting cuts strictly to personnel department’s puts undue pressure on the state prison system, which is still struggling with cuts from last years budget.

In respect the salary reductions, “the budget assumes $945 million, $530 million General Fund, in savings through a 5 percent across–the–board reduction in employee salaries — effective July 1, 2010 after the expiration of the Governor’s furlough order.”  

The LAO is skeptical about the amount of savings, stating that, “under the current budget climate… it is virtually impossible for the administration and state employee unions to reach the level of savings assumed in the Governor’s budget through bargaining.”

In the bargaining process, the governor has little to give and is in a position of weakness in his last term in office.    

“The administration could implement its salary reduction for excluded and exempt employees without further legislative action. Certain exempt appointees, including departmental directors, have salaries that are governed by statute.”

“In statute and in practice, the Legislature has delegated the general authority to establish salary and benefit schedules for essentially all excluded and exempt employees (which include managers, supervisors, appointees, and staff that have human resources duties) to the Department of Personnel Administration (DPA).”

While salary reductions offer the greatest legislative flexibility, the Legislature should still consider varying employee pay reductions by employee group instead of across the board cuts.

“The Legislature could reduce pay disproportionately for those groups of employees where the labor market impacts would be less pronounced,” the LAO says, but “any reduction in pay should be applied equally across all employees in a given classification.”

Possible suggestions include giving priority to positions with staffing problems caused by uncompetitive compensation such as scientific positions, trying temporary pay cuts, and, despite it’s limitations, giving collective bargaining a try.

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