BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
790 (Hernandez)
Hearing Date: 3/15/10 Amended: 2/23/10
Consultant: Maureen Ortiz Policy Vote: P.E.&R. 4-1
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BILL SUMMARY: AB 790, an urgency measure, continuously
appropriates sufficient amounts from the General Fund and
various other funds to the Controller for the payment of
compensation and employee benefits to state employees during a
fiscal year where the state budget is not enacted by July 1.
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Fiscal Impact (in thousands)
Major Provisions 2010-11 2011-12 2012-13 Fund
Foregone interest
-------------unknown------------ General
Admin savings (SCO) ----potentially tens of thousands
in savings--- General
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STAFF COMMENTS: This bill may meet the criteria for referral to
the Suspense file. There could be a loss of interest on funds
that would otherwise be generated on payroll money that would be
temporarily saved if an order for minimum wage payments were
instituted. However, it is expected that any loss would be
offset by the state not having to issue payroll warrants and pay
interest on those warrants to state employees. Last year when
the 2009/10 Budget Act was not enacted by July 1, many vendors
were issued warrants in lieu of state payments and were paid
interest at 3.7% for 90 days - even if the warrant was redeemed
early. It should be noted that delayed wage payments could
reduce the state's need to borrow in order to meet its cash
needs.
The total state monthly payroll is approximately $1.2 billion
consisting of civil service employees, CSU, Legislative, and
Judicial employees. However, the exact number of employees who
would be affected by the provisions of this bill is not known
since many are employed by special fund agencies that already
are continuously appropriated, and most members of the Judiciary
are paid through a constitutional appropriation. Those
employees would be paid full salaries whether or not a budget is
in place by the start of a new fiscal year. It is estimated
that the monthly payroll is about $680 million General Fund for
employees who could be forced to receive an hourly minimum wage
payday. However, the calculation of that amount is also
complicated by the fact that the Fair Labor Standards Act (FLSA)
mandates that if an employee works one hour of overtime during a
pay period, that employee is entitled to his or her full salary
for the same entire pay period. It is impossible to project
which employees will work overtime during a given month.
Additionally, to the extent that managers and supervisors are
not paid their salaries, they are treated as hourly employees
for purposes of the FLSA and therefore are also entitled to
overtime pay. If even one hour of overtime was worked, these
managers and supervisors would also have to be paid their full
salaries. For all of these reasons, it is not possible to
accurately estimate the fiscal impact of salaries that would be
temporarily held back if the minimum wage rule were in effect.
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AB 790 (Hernandez)
As far as the question of how this would affect the state's cash
flow, according to the State Controller's Office, the State
General Fund has not been cash positive since July 2007. By way
of illustration, the amount of General Fund receipts for July
2009 were roughly $4.4 billion while disbursements for that same
month were $10.5 billion and beginning General Fund cash was $0
In order to meet the State's obligation for the monthly deficit
of $6.1 billion in June, the State borrowed $6.2 billion from
the special funds. Therefore, it could be argued that there
would not be general fund savings achieved through a minimum
wage program since the State is in a deficit cash position.
Therefore, since disbursements in July outpace revenues by more
than 2 to 1, every penny of general fund cash is needed to pay
all other July expenditures leaving nothing to invest.
Staff also notes that by preventing the SCO from having to pay
state employees minimum wage, AB 790 will save thousands,
potentially millions of dollars in information technology costs
since the current state payment system is not capable of
handling the complications that arise from reducing payroll to
minimum wage for an unidentifiable select subgroup of employees.
Aside from the issue of which employees are to receive minimum
wage as discussed previously in this analysis, it would require
determining the appropriate treatment of multiple deductions for
each employee - some court ordered, and then, after the budget
is enacted, restoring full pay and again determining the
appropriate level of deductions to offset the prior adjustments.
The last time this issue arose, administrative costs were
estimated at nearly $1 million since the existing information
technology system is incapable of handling such calculations,
and most of the tasks would have to be completed manually or
outsourced.
AB 790 provides that if there is a memorandum of understanding
(MOU) in effect, the compensation and contribution for employee
benefits shall be at a rate consistent with the provisions of
that MOU for represented employees. State employees excluded
from collective bargaining shall be provided compensation and
contributions consistent with the rate approved by the
Department of Personnel Administration prior to the commencement
of the fiscal year for which a Budget Act has not been enacted.
If an MOU is not in effect, compensation and contribution for
employee benefits will be at the rate in effect at the
expiration of the last fiscal year for which a budget was
enacted.
In 2005, the California Supreme Court upheld an appellate court
decision ruling that state workers, paid by the hour and who do
not work overtime in a particular pay period, are entitled only
to the federal minimum wage (currently $7.25/hour) if the State
enters a new fiscal year without a budget. Employees are to be
paid in full retroactively when the budget is signed.
In July 2008, Governor Schwarzenegger ordered state workers' pay
to be reduced to minimum wage after the State Budget was not
enacted by July 1 of that year. State Controller John Chiang
refused to cut paychecks to state employees (the federal minimum
wage at the time was $6.55/hour) arguing that it was impossible
to know in
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AB 790 (Hernandez)
advance which employees will receive overtime pay. After a suit
by the Department of Personnel Administration, the court ruled
in favor of the administration stating that, "while state
workers have the ultimate right to their full wages, the law
does not authorize the full pay until the money is appropriated
in the state budget."
AB 790 will continuously appropriate sufficient funds necessary
so that state employees will be compensated in full if and when
a state budget is not enacted by the start of a new fiscal year.
AB 790 additionally authorizes the Department of Finance to
reduce the applicable Budget Act allocations to reflect monies
already paid to state employees under the continuous
appropriation. Pursuant to ABx4 12, Statutes of 2009, Section
12472.5 was added to the Government Code to read:
"Notwithstanding any other law, on and after January 1, 2010,
payments to employees made through the Uniform State Payroll
System for a pay period ending on June 30 of each year shall be
on or after
July 1, provided that employees shall, in any event, be paid
promptly." This language appears to require that any minimum
wage order would have to be implemented effective for the month
of June since the funds would not be appropriated until the new
budget is enacted.
This bill is similar to AB 1125 (Hernandez) which was held on
the Suspense File in the Assembly Appropriations Committee last
year; and to AB 1699 (Hernandez) currently set for hearing next
month in the Assembly PERSS Committee.