The 2010-11 Budget: The Governor's Employee Compensation Proposals

POLICY BRIEF The 2010–11 Budget: The Governor’s Employee Compensation Proposals MAC TAylor • l e g i s l A T i v e A n A l y s T • JAnuAry 27, 2010 This report discusses some key issues across-the-board salary reduction for employees. facing the Legislature in the employee These proposals would result in $2.5 billion in compensation area of the budget. In savings ($1.4 billion General Fund). 2009-10, the state has achieved significant sav- We believe that employee compensation ings due to the Governor’s furlough program, reductions are necessary due to the magnitude of which is being challenged in many court cases. the budget problem. Nevertheless, some of the For 2010-11, the Governor proposes various administration’s proposals would face legal chal- measures to reduce state personnel costs, in- lenges or otherwise may be difficult to imple- cluding shifting pension contribution costs from ment. Consequently, we recommend that the the state to employees, unallocated reductions Legislature focus efforts to reduce compensation in personnel budgets of departments, and an costs on pay reduction options. Background The state workforce consists of approximately About two-thirds of this $10 billion in state 356,000 personnel years (PYs). (A PY is roughly personnel costs funded by the General Fund are equivalent to one full-time equivalent employee.) within the California Department of Corrections Total state payroll, including university personnel, and Rehabilitation (CDCR). is now roughly $24 billion per year. The state’s Governor Proposes $2.7 Billion in Employee two university systems employ just over one- Compensation Cost Reductions. The Governor’s third of total PYs. Excluding university employ- furlough program is set to expire at the end of ees, around $10 billion of General Fund expen- 2009-10. In its place the administration proposes ditures—about 12 percent of the budget in the $2.7 billion ($1.5 billion General Fund) in 2010-11 2009-10 Budget Act—relate to state personnel compensation cost reductions, as shown in costs, including payroll and state contributions to Figure 1 (see next page). Of this $2.7 billion total, employee pensions, health, and other benefits. $2.5 billion ($1.4 billion General Fund) relates to what the administration terms its “5/5/5” package: An lAo reporT · Shifting a por- Figure 1 tion of pension Governor’s Major Employee Compensation Proposals contributions (In Millions) from the state to Overall General Fund employees. Savings Savings 5/5/5 Proposal · Unallocated Pension contribution rate shift $724 $406 reductions in Unallocated department personnel reduction 802 450 personnel costs. Salary reduction 945 530 Subtotals ($2,472) ($1,385) · Across-the-board Other Proposal Health benefit administration change $217 $153 salary reductions. Totals $2,689 $1,538 In addition, the Governor proposes moving health benefit administration another state department to achieve savings in for state employees out of the California Pub- health benefit costs. We discuss and comment lic Employees’ Retirement System (CalPERS) to on these proposals in more detail below. 5/5/5 EmployEE compEnsation proposal S P C r larly if the shift is accomplished through the legisla- hifting enSion ontribution ateS tive process, instead of through collective bargain- Proposal ing. Courts have repeatedly negated attempts to Increase Employee Pension Contributions create substantial savings from altering pension by 5 Percent of Pay. The budget assumes leg- payments for current employees without offering islative action to increase employees’ pension comparable offsetting benefits in exchange. contributions to CalPERS by 5 percent of pay- roll—resulting, for example, in Miscellaneous Tier Options for Consideration 1 employees paying approximately 10 percent of Pension Reform for New Employees. Unlike their pay to the system and correctional officers obligations for current employees, the Legislature and California Highway Patrol (CHP) officers pay- has much greater flexibility in defining benefits ing approximately 13 percent, as shown in Figure for future employees. The Legislature could make 2. This would reduce state pension contributions any change it wishes in benefits or pension con- by an equal amount: $724 million ($406 million tributions of state employees hired in the future. General Fund). Recommendation LAO Comments Reject Pension Contribution Shift. In light of Pension Contribution Shift Is Very Risky. There the other risky elements of the Governor’s budget are serious concerns about the the legal viability of package and the need to pass a credible, balanced the Governor’s proposed 5 percent shift in pension budget, we recommend the Legislature reject the contributions from the state to employees—particu- administration’s pension contribution proposal. 2 Legislative Analyst’s Office www.lao.ca.gov An lAo reporT u r attrition to fund their programs within existing nalloCated eduCtionS in P C appropriations. It is unclear, therefore, if and how erSonnel oStS departments would achieve these additional pro- Proposal posed reductions, and, if they do achieve them, Unallocated Reductions of 5 Percent. The what state priorities will be stressed and which budget includes what the administration de- activities will be sacrificed. Further, unallocated scribes as a “workforce cap”—an unallocated reductions effectively remove the Legislature reduction in personnel costs to be achieved from the decision-making process—leaving de- through a 5 percent increase in salary savings. partments to make reductions based solely upon Each department would determine how to meet the administration’s priorities rather than the its particular personnel savings target. Most of Legislature’s priorities. the savings is expected to be achieved through …Especially Corrections. As mentioned attrition and vacancies. Constitutional offices above, personnel costs in CDCR represent a are not included in this reduction. The budget as- majority of such spending funded by the General sumes $802 million ($450 million General Fund) Fund (not including university personnel). We from this unallocated reduction. estimate that CDCR’s budget would be reduced by about $300 million under this unallocated LAO Comments reduction proposal. These savings would be in Unallocated Reductions Create Difficul- addition to the $1.1 billion in other corrections ties for Department Operations… Generally, solutions proposed by the Governor. Moreover, unallocated reductions result in varying impacts this department already is struggling to imple- to public services offered by departments. The ment cuts in the 2009-10 budget package. state’s current-year budget already relies on Without major changes in sentencing policy, significant unspecified reductions, where de- operations of the Receiver, or other operational partments are using savings from vacancies and changes, we do not believe CDCR would be Figure 2 able to implement an Pension Contribution Rates unallocated reduction of Employee Ratea State Employer Rateb this magnitude. Current Governor’s Current Governor’s Unallocated Reduc- Policy Proposal Policy Proposal tions Only for Person- Miscellaneous Tier 1 5% 10% 17.5% 13.3% nel Costs? Initiating Miscellaneous Tier 2 — 5 17.4 13.0 Industrial 5 10 17.6 13.8 unallocated reductions Safety 8 13 18.3 14.7 provides departments Peace Officers and 8 13 26.4 22.1 Firefightersc with some flexibility in Highway Patrol 8 13 29.2 25.1 achieving desired cost a Approximate. savings. Applying unal- b Estimated rates for 2010-11, as stated in Control Section 3.60 of the proposed 2010-11 Budget Bill.. located reductions only c The state pays a portion of some employees’ contributions. to personnel costs, as www.lao.ca.gov Legislative Analyst’s Office 3 An lAo reporT the Governor proposes, and not to departmen- carefully analyze the operations of each program tal costs for operating expenses and equipment and department (including OE&E expenses), and (OE&E) limits the flexibility departments may either eliminate or reduce the scope of programs, have in achieving savings. Savings from OE&E which often would necessitate reductions in the budgets might be achieved through delaying or size of the state workforce. In particular, because reducing costs in equipment, supplies, training, CDCR likely would be expected to generate a travel, postage, personal services contracts, or majority of the General Fund unallocated reduc- other operating expenses. In some cases, seeking tions under this proposal and the difficulties reductions in personnel costs but not in OE&E CDCR has experienced in implementing current may create unintended incentives for depart- savings strategies, it is imperative that the Legis- ments to seek personal services contracts to lature consider the specfic policies and opera- complete workload. tions of CDCR if it wants to reduce General Fund Unallocated Reductions for Special Funds costs of this department’s workforce. Without and Federal Funds? There are many cases in specific changes in prison policies and opera- state government where pay and benefit changes tions, achieving savings through unallocated need to be implemented uniformly across clas- reductions for CDCR would prove illusory. sifications and across departments, regardless No Unallocated Reductions for Special and of fund source (that is, whether the employee is Federal Funds. The administration has not put paid from the General Fund or other funds). For forward a credible rationale why unallocated example, pay and benefit changes typically need reductions should be extended to personnel ex- to be implemented uniformly to avoid incen- penses funded by special funds, federal funds, or tives for employees in the same classifications other nongovernmental funds. If the Legislature to migrate to better-paying departments, while chooses to implement unallocated personnel re- leaving lower-paying departments struggling to ductions, we believe that it should do so only for refill those positions. It is unclear, however, why General Fund personnel budgets in departments. the administration chooses to implement the S r alary eduCtionS 5 percent unallocated cuts to parts of person- nel budgets not funded by General Fund. The Proposal administration’s rationale communicated to our 5 Percent Salary Reduction. The budget as- office—that the overall size of state government sumes $945 million ($530 million General Fund) is too large—is arbitrary and not based on any in savings through a 5 percent across-the-board reviews of specific program workloads or per- reduction in employee salaries—effective sonnel effectiveness. July 1, 2010 (after the expiration of the Gover- nor’s furlough order). Recommendations Administration’s 5/5/10 Trigger Proposal. In Avoid Unallocated Reductions, Particularly the event that the federal government fails to pro- for CDCR. We recommend that the Legislature vide the targeted amount of funding or flexibil- avoid making unallocated reductions for de- ity measures that is the basis of the Governor’s partments. If the Legislature feels that it should budget, the administration proposes an addi- reduce the size of the workforce, we recommend tional 5 percent salary decrease. This additional that the Legislature weigh its own priorities, decrease would produce savings of $907 million 4 Legislative Analyst’s Office www.lao.ca.gov An lAo reporT ($508 million General Fund). (This estimate is tiations with unions representing the state’s col- slightly less than the figures in the section above lective bargaining units. The Dills Act was crafted because the salary base would be lower after to be consistent with the Legislature’s constitu- the implementation of the base 5/5/5 proposal.) tional “power of the purse.” Specifically, the act Reflecting the total 10 percent salary reduction, provides that any provision of a memorandum of the administration calls its trigger proposal the understanding (MOU) requiring the expenditure “5/5/10” proposal. of funds may not become effective unless ap- proved by the Legislature in the annual budget LAO Comments act, thus reserving ultimately for the Legislature Legislature Has Broad Powers in Setting the authority to set salary levels. Also, generally Employee Compensation Policy. The Legisla- when MOUs expire, the “evergreen” provision of ture possesses broad powers—through budget the Dills Act extends the provisions of the most appropriations, oversight, and legislation—to recent contract until a new contract is approved. determine salary levels and benefits for state Currently, only one bargaining unit—CHP of- employees and to review the application of these ficers—has an agreement that has not expired (it policies. is set to expire in July 2010). Governor Has Broad Discretion for Ex- …But Process Dysfunctional in Unprece- cluded and Exempt Employees. In statute and dented Budget Climate. Under the current bud- in practice, the Legislature has delegated the get climate, with state employee unions at odds general authority to establish salary and benefit with the Governor (as discussed in the box on schedules for essentially all excluded and exempt page 6 discussing the furlough policy), and given employees (which include managers, supervisors, the unprecedented level of personnel cost cuts appointees, and staff that have human resources sought by the administration, it is virtually impos- duties) to the Department of Personnel Admin- sible for the administration and state employee istration (DPA). In other words, the administra- unions to reach the level of savings assumed in tion could implement its salary reduction for the Governor’s budget through bargaining. Fac- excluded and exempt employees without further tors contributing to this difficult climate include: legislative action. (Certain exempt appointees, · The State Has Little to Give. Collec- including departmental directors, have salaries tive bargaining is a process of give and that are governed by statute.) In recent years, take. In order to gain terms and condi- however, the state generally has tried to guard tions such as those sought by the ad- against “compaction” problems—that is salaries ministration, the state usually must give for supervisors and managers that overlap with bargaining units something of roughly senior rank-and-file employees—by targeting a equal value—which could include salary minimum pay differential between these groups increases, health contribution increases, of 5 percent. pension increases, layoff and grievance Dills Act Governs Collective Bargaining processes changes, and other workplace Process for Represented Employees… The policy changes. With about a $20 billion Legislature passed the Ralph C. Dills Act, which budget deficit, the state has little of value governs collective bargaining, in 1977. Under the it can give now. With years of structural Dills Act, DPA represents the Governor in nego- budget problems looming, the state is www.lao.ca.gov Legislative Analyst’s Office 5 An lAo reporT unlikely to have anything of comparable Options for Consideration value to give in the near future. Further- We present below alternative options and rec- more, with substantial unfunded liabilities ommendations for reducing state payroll costs. in the pension system and health retiree Vary Employee Pay Reductions by Employee system, the state cannot afford to give Group. While it would be a laborious task, the anything substantial over the longer term. Legislature should consider varying the size of With so little to give now or in the future, pay level reductions by bargaining unit or clas- it is unlikely that the administration will sification for represented employees. This would be able to bargain for the level of person- give the Legislature some ability to prioritize nel savings that the Governor is seeking. those positions with important staffing problems. In our view, important staffing issues that may · Last Year of Governor’s Term Puts Ad- warrant some protection include those affecting ministration in Poor Position. In the last at least two distinct groups: year of his term, the Governor is in a poor negotiating position with state employee · Groups of employees within programs unions. There is a great incentive for bar- where problems in filling positions can gaining units to resist making concessions clearly be attributed to uncompetitive if they think they may have better bargain- compensation levels (such as certain ing prospects with the next Governor. scientific classifications). Salary Reduction Offers Greatest Legislative · Groups of employees in programs that Flexibility. Under the Dills Act, the Legislature are under federal consent degree for has reserved for itself its constitutional powers staffing problems (including certain to appropriate funds and, therefore, the right to doctors and nurses in the state’s mental set salary levels for represented employees at the health facilities). level it desires. In addition, because the ever- Conversely, the Legislature could reduce pay green law that extends provisions of an expired disproportionately for those groups of employees MOU is statutory, the Legislature may change, where the labor market impacts would be less amend, or temporarily waive that law along with pronounced—for example, where such groups any other conflicting statutes. are currently compensated at higher levels than f l r o b r urlough awSuitS emain an minouS udget iSk There have been several dozen lawsuits challenging the Governor’s authority to implement his furlough program in 2008-09 and 2009-10. The furlough program is credited with over $2.5 billion of state savings over those two fiscal years, most of which has been credited to the General Fund. If the state ultimately loses these lawsuits, it might have to pay several hundred million to billions of dollars in back pay and penalties. Because the administration is likely to appeal the decisions to the California Supreme Court, final judgment may be delayed until 2011-12 or later. Therefore, the ramifications of the furlough cases and other recent employee compensation actions add further downside risk to the budget in future years. 6 Legislative Analyst’s Office www.lao.ca.gov An lAo reporT comparable other government or private-sector instead could consider temporary salary reduc- employees. We note that any reduction in pay tions. One option would be to gradually increase should be applied equally across all employees salaries to pre-furlough (or somewhat reduced) in a given classification. Implementing a policy levels. This would allow the Legislature to avoid that results in different pay for employees in the steep increases in costs over a one-year period. same classification would create strong incen- Similarly, the Legislature could consider varying the tives for workers to move across departments for expiration of salary reductions by classification or better pay, and, thus, create unintended difficul- bargaining unit depending on its priorities. ties for some departments. Recommendations Possible to Try Using Collective Bargaining. We described above the inherent limitations of Pursue Salary Reductions for Rank-and-File collective bargaining in today’s fiscal environ- and Excluded Employees. We believe that reduc- ment. Despite these limits, the Legislature may tions in employee compensation will be neces- wish to give the bargaining process a window sary given the state’s fiscal condition. Because of to provide input into the difficult task of reduc- the practical and legal barriers to the Governor’s ing employee compensation. For instance, the proposed pension and unallocated reduction Legislature could adopt across-the-board sal- proposals, reducing employee pay is the most ary reductions but provide the administration viable option available to the Legislature. As dis- and bargaining units with some time to develop cussed above, the Legislature has several options alternatives. The outcome of negotiations might to ensure such reductions reflect its priorities to lead to something similar to this year’s furlough the greatest extent possible. In many respects, program—where employees are at least getting the total amount of salary reductions that the some compensation (in the form of time off) in Legislature will need to target will depend on the exchange for state savings. The Legislature would other choices that the Legislature makes in put- still be able to review any bargained agreements ting together a budget package. to ensure that they were consistent with legisla- The administration has much broader discre- tive priorities. Such an approach would need tion in setting compensation for excluded and to be adopted relatively soon to allow sufficient exempt employees. If the Legislature pursues salary time for bargaining prior to the start of the fiscal reductions, we recommend that it set a salary year. (A similar collective bargaining option was reduction target for those employees and allow included in the 2003-04 budget package.) the administration to implement the reductions as Pay Cuts May Be Permanent or Temporary. it sees fit. This would allow the administration to The administration’s proposals appear to envision focus resources to management classifications with the 5/5/5 cuts as ongoing solutions. The Legislature the most severe recruitment and retention issues. othEr EmployEE compEnsation proposals Employee Health Benefit Administration ment of health benefit programs for state em- ployees and retirees out of CalPERS to “another Administration Advances Last Year’s Propos- authorized entity of the state” (presumably DPA al Again. The Governor’s budget proposal would or perhaps a newly formed department). The allow the administration to move the manage- www.lao.ca.gov Legislative Analyst’s Office 7 An lAo reporT administration assumes that this would produce and costs. Exploring a move of health benefit savings of $217 million ($153 million General programs from CalPERS to DPA makes sense, Fund) in 2010-11. The Legislature determines as we first observed in 1985. We are skeptical, policies for health benefit programs for state em- however, that a transition of the administration of ployees and retirees and gives the responsibilities health plans involving hundreds of thousands of for managing these programs to CalPERS. employees can be achieved in a one-year time- Proposal Worth Considering, but Unlikely frame. Furthermore, the administration assumes to Produce 2010-11 Savings. As we wrote large cost savings that would, by necessity, in- about an identical proposal the 2009-10 Budget volve large “cost-shifting” (through increased co- Analysis Series: General Government (see page payments, deductibles, or similar charges) from GG-9), by delegating the administration of health the state to employees and retirees. The Gover- benefits—which the state itself bargains for—to nor’s proposal provides no meaningful detail on a semi-independent entity, the Legislature has what changes would be implemented in health diminished its ability and that of the adminis- plans to achieve these considerable savings. tration to direct state personnel health policies LAO Publications This report was prepared by Diego Martín, and reviewed by Jason Dickerson. The legislative Analyst’s office (lAo) is a nonpartisan office which provides fiscal and policy information and advice to the legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the lAo’s internet site at www.lao.ca.gov. The lAo is located at 925 l street, suite 1000, sacramento, CA 95814. 8 Legislative Analyst’s Office www.lao.ca.gov