BILL ANALYSIS                                                                                                                                                                                                    




                   Senate Appropriations Committee Fiscal Summary
                           Senator Christine Kehoe, Chair

                                           1699 (Hernandez)
          
          Hearing Date:  07/15/2010           Amended: As Introduced
          Consultant:  Maureen Ortiz      Policy Vote: P.E.&R. 4-1
          _________________________________________________________________ 
          ____
          BILL SUMMARY:   AB 1699, 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.
          _________________________________________________________________ 
          ____
                            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
          _________________________________________________________________ 
          ____

          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.  This would only occur if the state were in a  
          positive cash flow position. 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 

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          AB 1699 (Hernandez)


          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.

          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 1699 will save potentially  










          hundreds of thousands 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 1699 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 

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          AB 1699 (Hernandez)


          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 
          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."

          More recently, Governor Schwarzenegger has ordered the  
          Controller to reduce state employees' pay to the federal minimum  
          wage, excluding employees who are members of bargaining units  
          that have reached tentative agreements with the state.  The  
          issue is currently part of dueling lawsuits and has yet to be  
          finally decided by the courts.

          AB 1699 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 1699 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. 

          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 790 (Hernandez) currently pending on the Senate  
          Floor.