After Furloughs: State Workers' Leave Balances

After Furloughs: State Workers’ Leave Balances MAC TAylor • le g i s lA Ti v e A n Al y sT • M ArCh 14, 2013 An LAO RepOR t 2 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t ExEcutivE SummAry Over the last five years, the state has reduced state workers’ pay in exchange for giving them additional time off. This report examines whether state employees took this additional time off—or whether, after accounting for changes in use of vacation and other time, they worked about as many days as they did before. LAO Findings Furloughs Increased Allowed Time Off by 50 Percent. The time off policies (“furloughs”) greatly increased the average state worker’s allowed time off and—over the course of the five years— reduced his or her pay by about $21,000. The average employee received 79 furlough days, increasing his or her available time off by 50 percent during this period. Vacation Balances Increased, Cap Did Not Contain Growth. State workers used most of their furlough days, but significantly decreased their use of vacation and annual leave days. As a result, the average employee’s vacation/annual leave balance increased by 16 days between 2008 and 2012. The state’s primary tool for limiting its leave balance liabilities—a cap on the amount of vacation and annual leave hours an employee may have—was not effective at containing leave balances. In January 2013, more than 23,700 employees’ leave balances exceeded the cap. Separation Payments at Historic Levels. Employees with leave balances may “cash out” or “burn off” their leave as they separate from state service. Payments to separating employees are now at historic levels, nearly $270 million in 2011-12. Leave Liabilities at Historic Highs. Furloughs reduced state employee compensation costs by about $5 billion between 2008-09 and 2012-13. Probably nearly $1 billion of these furlough savings was not long-term savings. Instead, the state must pay employees this money as they retire or otherwise leave state service. As of June 2012, the state’s liability to pay employee leave balances totaled $3.9 billion (about $2.1 billion General Fund) and was growing. This leave balance liability— equivalent to about 27 percent of the state’s salary costs—is higher than most other public and private employers. Options for Legislative consideration The state’s large balance of unfunded leave liabilities can pose fiscal stress on departments, reduce budget transparency, strain management-employee relations, and negatively affect public trust in state employee management. For these reasons, we recommend the Legislature consider options to reduce the state’s leave balance liabilities (or at least take actions containing their future growth), including imposing a “use it or lose it” policy on future accruals of leave, requiring departments to actively implement the state’s leave cap policy, and instituting a leave buyback program. www.lao.ca.gov Legislative Analyst’s Office 3 An LAO RepOR t 4 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t intrOductiOn Over the last five years, in response to severe was concern that state employees might not take off state budget difficulties, the state has given all the additional time provided under furloughs. most employees time off from work in exchange This, in turn, would result in state workers carrying for reduced pay. The time-off policy began as larger balances of unused vacation time and annual administratively imposed furloughs and was leave—triggering increased state costs when the replaced by the collectively bargained “Personal employees separate from state service. Leave Program” (PLP). Because furloughs and PLP This report provides an overview of state are functionally the same policy, we refer to them leave and furlough policies and then examines the as furloughs in this report. effect of the recent furloughs on leave balances. California state workers historically have not The second part of the report discusses whether used all of the time off they earn in a year. Thus, at large leave balances are a problem for the state and the time the furlough policies were adopted, there reviews the state’s options for reducing them or containing their growth. BAckgrOund S e l B tate mployee eave enefitS State Employees receive a variety of Paid days Off Paid Time Off Is an Important Part of Employee Compensation. Research indicates that About 215,000 people work for a California employees across the public and private sectors state department or agency (excluding the state’s in the United States highly value paid time off public universities). Figure 1 (see next page) shows and that employees who take time off are happier the major departments where these “executive and more productive. As a result, the state of branch” employees work. State workers receive a California and most other employers provide paid variety of days off in an ordinary year, including time off as part of their compensation packages to state holidays, professional development days recruit and retain employees. The state’s employee (PDD), and personal holidays. These days off compensation package includes salary, pension, are established in memoranda of understanding health, and leave benefits. (MOUs) or statute. Employees may use PDD and State Offers Relatively Generous Leave personal holidays for any purpose and at any time Benefits. Based on surveys of other employers in during the year, subject to management approval. the United States, the state of California appears to Vacation or Annual Leave. In addition to offer employees more paid days off each year than holidays and PDD leave, state employees may the average employer. The state’s relatively generous choose whether to earn vacation or annual leave. leave benefits—in addition to its pension and health As Figure 2 (see next page) shows, vacation and benefits—likely make the state’s compensation annual leave are earned on a monthly basis at package more competitive in recruiting and rates determined by the employee’s seniority. If an retaining staff who otherwise could receive higher employee chooses to earn vacation leave, he or she salaries working for different employers. accrues 12 days of sick leave each year in addition www.lao.ca.gov Legislative Analyst’s Office 5 Graphic Sign Off Secretary Analyst Director Deputy An LAO RepOR t Figure 1 Nearly Three-Fifths of State Employees Work in Seven Departments Corrections and Rehabilitation Other Transportation California Highway Patrol Developmental Services State Hospitals Motor Vehicles Employment Development to vacation. While vacation may be used for any Leave Can Be “Banked,” “Cashed Out,” or purpose, sick leave may only be used for limited “Burned Off.” Different rules apply to the different purposes. Employees whAo eRarn TannWual OleaveR, K #1typ3es0 of 0lea0ve.5 As shown in Figure 3, most paid conversely, do not earn sick leave—they use annual days off—as well as leave days provided under leave for vacation and sick days. the furlough programs or earned by working on holidays or overtime—may be banked and used in future years. In addition, most leave may be burned Figure 2 off, a term that means that the employee collects a Number of Vacation or Annual Leave salary and benefits while not working in the period Days Earned Each Year Increases just before he or she separates from state service. With Senioritya Finally, as an alternative to burning off leave, Employee May employees may cash out leave that is considered Choose to Receive: “compensable”—primarily, vacation, annual Annual Years of Service Vacationb Leave leave, and holiday and overtime credit. When an Less than 3 10.5 16.5 employee separates from state service, he or she 3 to 10 15.0 21.0 receives a separation payment for any unused 10 to 15 18.0 24.0 compensable leave. Separation payments are 15 to 20 19.5 25.5 More than 20 21.0 27.0 calculated by multiplying the number of unused a Managers, supervisors, firefighters, and highway patrol officers compensable leave hours by the separating generally accrue more leave each month. b Employees who choose to take vacation leave also receive employee’s final salary at an hourly rate. Other 12 days of sick leave each year. 6 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t days—such as furlough days and sick leave—are Departments Leave Positions Vacant or considered “non-compensable.” When an employee Redirect Funds to Cover Costs. To cover these separates from state service, he or she does not costs, departments typically leave positions vacant receive compensation for unused non-compensable and/or redirect funds from other parts of their days. (In the case of sick leave, however, an budgets. Depending on the amount of unused leave employee retiring from state service can apply associated with employees separating from state unused sick leave towards his or her service credit service in any year, this approach can negatively for purposes of calculating pension benefits.) affect a department’s (1) productivity (by causing it to leave many positions vacant or filled with unused Leave creates Liabilities absent staff members) or (2) ability to carry out its Direct Costs, Overtime, and Productivity obligations within budgeted resources. Losses. Under current law, virtually all unused caps on Leave Balances leave poses some form of liability for employers when an employee separates from employment. Many Employers Limit Accumulation of Specifically, employers, including the state, incur: Unused Vacation and Annual Leave Days. To minimize the financial risks associated with • Costs when the employee cashes out large leave balances, many public and private compensable leave. organizations adopt leave policies that limit the • Productivity losses when employees burn number of unused vacation/annual leave days off leave. employees may carry over from one year to the next. It is common for these limits to be between • Additional costs if the employer pays 20 days and 40 days of leave, meaning these caps another employee to cover for workers typically prevent vacation/annual leave balance burning off leave. These costs sometimes liabilities from exceeding between 8 percent and accrue to employees as overtime wages—in 15 percent of an employee’s annual salary costs. which per-hour costs are higher than for Many large public employers that we reviewed the typical hour worked. imposed a cap on the amount of vacation/annual Certain Costs Tracked in Financial leave employees may carry over. For example, the Statements. As a result, the state—like most public federal government limits most employee vacation/ employers—tracks these liabilities and reports annual leave balances to 30 days, New York State compensable leave balances in its annual Figure 3 financial statements. The Rules Governing the Major Types of State Employee Leave state, however, does not Leavea Banked? Burn Off? Cash Out? set aside funds to pay Vacation Yes Yes Yes these costs, but requires Annual Leave Yes Yes Yes departments to pay them Holidays No Yes No Holiday and Overtime Credit Yes Yes Yes on a pay-as-you-go basis Professional Development Days No Yes No as state workers separate Sick Leave Yes No No from employment. Furlough Yes Yes No a Some state employees are eligible for additional types of leave. www.lao.ca.gov Legislative Analyst’s Office 7 An LAO RepOR t limits these balances to 40 days, and Texas limits State Frequently Uses Them. The state of balances to between 23 days (for employees with California has used furloughs in 8 of the last less than two years of service) and 67 days (for 30 fiscal years (1992-93, 1993-94, 2003-04, and those with more than 35 years of service). Here in 2008-09 through 2012-13), typically reducing state California, the city of Los Angeles limits balances employee pay by about 5 percent and increasing to the amount of vacation an employee earns employee allowed time off. The state also realizes over two years, the county of Los Angeles limits other savings from furloughs because the pay cuts balances to 40 days, and San Francisco limits indirectly reduce its costs for employee benefits that balances to between 40 days (for those with up to are determined as a percentage of employee pay, five years of service) and 50 days (for those with such as contributions to Medicare, Social Security, more than 15 years of service). and pensions. California, however, typically has State Policy Caps Vacation and Annual Leave chosen to apply its furlough policies in a manner Balances. The state of California caps the amount that does not affect employees’ pension and other of vacation/annual leave that most state workers benefits—or the amount of vacation and other leave may accumulate at 640 hours (80 days). The two that employees earn. significant exceptions to this rule pertain to the Recently, State Has Imposed Five Years of following nonmanagerial groups. Furloughs. The state began its recent series of furloughs in February 2009. The current furlough • California Highway Patrol (CHP) program is scheduled to end July 2013. Between Officers. The CHP officers may accumulate February 2009 and July 2013, there have been only up to 816 hours (102 days) of leave. four months during which no state employee was • Correctional Officers. These officers’ cap furloughed (July 2010 and April, May, and June was 640 hours, but the cap was eliminated 2012). Throughout this five-year period, furloughed in their most recent MOU. state employees received one, two, or three days of furlough each month, generally corresponding The state’s leave balance caps—established in with 4.62 percent, 9.24 percent, or 13.86 percent regulations, statute, and MOUs—are the state’s cuts in pay, respectively. Figure 4 shows that as a main tools to manage state employees’ leave result of this policy, the state reduced its employee balances. When an employee approaches or exceeds compensation costs by about $5 billion between the caps, managers are supposed to work with the employee to develop a plan to ensure that the employee is able to take time off to keep his or her Figure 4 leave balances below the applicable cap. Savings From Furloughs and Personal Leave Programs f urloughS (In Millions) Many Employers Use Furloughs. When facing Fiscal General Other Year Fund Funds Totals fiscal challenges, many employers—in state, federal, 2008-09 $322 $268 $590 local government, and the private sector—have 2009-10 1,185 982 2,167 used furloughs as a way of maintaining their 2010-11 601 519 1,120 workforce while reducing employee compensation 2011-12 183 153 335 2012-13 373 445 818 costs. Furloughs typically reduce workers’ pay by Totals $2,663 $2,367 $5,030 reducing the amount of time they work. 8 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t February 2009 and July 2013. Of this $5 billion, is significant variation in the number of furlough about $2.7 billion of savings accrued to the days employees received. In addition, during financially troubled General Fund. Furloughs, this period, furloughs for some employees were however, also were applied to employees supported “self directed,” meaning that employees could in whole or part by other funds for administrative choose when to use their furlough day, subject to reasons and to prevent employee migration from management approval. In other cases, furloughs General Fund departments. were compulsory on specified days, commonly Furlough Policies Varied Considerably. At called “Furlough Fridays.” For details on when each various points in time, certain classifications, employee group was furloughed and background bargaining units, and departments have been on how the furlough policy was administered exempt from the furlough policy. As a result, there during this period, please refer to the appendix. LAO FindingS To assess the effect of furloughs on state For Average Worker, Allowed Time Off employee leave balances, we reviewed summary data Increased by 50 Percent During Last Five Years. regarding state compensable leave balances over the To put the number of furlough days in Figure 6 into last few decades, met with selected departments, perspective, it is helpful to compare them with the and examined department level leave balance data number of paid days off an average state worker between September 30, 2008 (the earliest date for receives in the absence of furloughs. Specifically, which detailed information was available) and the average state employee earns 32 paid days off June 30, 2012. Figure 5 summarizes the key findings each year—18 vacation days and 14 days for state from our review. and personal holidays and PDD. The average worker Furloughs greatly increased Employees’ received 79 furlough days between 2008-09 and Allowed time Off 2012-13, averaging 16 days per year. The state’s Most state employees received a significant furlough policy, therefore, increased the average number of days off in exchange for reduced pay employee’s total amount of available time off by during the recent furlough period. Figure 6 (see 50 percent. This large increase in time off decreased next page) illustrates how many furlough days an the amount of time available to complete state work employee received if the employee had been subject products. It is important to note that, in many cases, to the policies for their entire duration. As can be this significant increase in available time off and seen from the figure, the number of furlough days Figure 5 given to employees varies Major Findings significantly by employee • Furloughs greatly increased employees’ available time off. group. • State workers used most of their furlough days, but decreased their use of vacation and annual leave days. • The state’s cap on leave balances was not effective. • Leave liabilities and payments to separating employees are now at historic levels. • Some furlough savings create long-term liabilities. www.lao.ca.gov Legislative Analyst’s Office 9 An LAO RepOR t decrease in work time occurred without the state Workers in Some Small Departments formally adjusting expectations for state department Used Less. Viewed in terms of balances of productivity. unused furlough days per employee, some of the state’s smallest departments reported the State Workers used most of largest balances. In fact, employees in two of the their Furlough days state’s smallest departments—the Santa Monica Prison Workers, However, Used Less of Mountains Conservancy and Commission on Theirs. As of June 2012 (the latest data we State Mandates—reported having about 14 and 9 reviewed), state employees had used about unused furlough days per employee, respectively. 95 percent of their furlough days and had, on Staff from the commission and other small average, three unused furlough days banked. The departments with whom we discussed our key exceptions were employees of the California findings indicated that the limited number of Department of Corrections and Rehabilitation staff in their departments made it difficult for any (CDCR) and certain small departments. employee to take time off for lengthy periods. Specifically, while CDCR employees make up less Employees decreased use of than 30 percent of the state’s workforce, these vacation and Annual Leave employees account for nearly two-thirds of the state’s balance of unused furlough days. This is not Leave balances grow when employees do not use entirely surprising given that CDCR employees all of the days off that they earn. Larger leave balances (1) received the greatest number of furlough days, result in higher long-term liabilities for the state. (2) work at 24-hour facilities where giving one Prior to 2008-09, the average employee’s vacation/ employee time off often requires paying another annual leave balance grew by about 2 percent overtime, and (3) had greater flexibility to bank annually. During the first four years of furloughs, in furlough days under self-directed furloughs rather contrast, our review indicates that that the average than Furlough Fridays. employees’ vacation/annual leave balance grew by about 11 percent annually. This higher level of growth is equivalent to the average employee banking about Figure 6 4 days of vacation/annual Employee Groups Received Different Numbers of Days Off leave each year during the 2008-09 Through 2012-13 furlough period. Furlough and Personal Growth in Balances Employee Groupa Leave Program (PLP) Days Caused by Use of Furlough Correctional officers, engineers, attorneys, park 94 Days First. This growth rangers, scientists, and stationary engineers Employees represented by SEIU (Local 1000) 79 in vacation/annual leave Managers and supervisors 79 balances—at the same Heavy equipment mechanics, maintenance 70 time that employees used workers, physicians, psychiatric technicians, and health and social services professionals most of their furlough Firefighters 20 days—stems from Highway patrol 12 a employee decisions to There is variation within employee groups because some departments and classifications were excluded from furlough or PLP policies. use furlough days first, 10 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t before using vacation/annual leave days. This action than 10,000 other state employees whose vacation/ is consistent with the administration’s policy that annual leave balances exceeded the cap. During management approve the use of furlough days before labor negotiations that year, the Schwarzenegger other types of leave. We note that employees also administration characterized these leave balances have a personal financial incentive to use furlough as “a huge unfunded liability for the State” and days before vacation/annual leave. This is because proposed actions to strengthen the effectiveness of separating employees have the option of burning off the cap. These changes, however, were not included in or cashing out unused vacation/annual leave—but any of the ratified MOUs. may only burn off unused furlough days. By using Recently, Cap Seemed Totally Ineffective. furlough days instead of vacation/annual leave days, During the furlough period, we found no evidence employees significantly increased the state’s leave that the cap had an effect on containing state balance liabilities. employee leave balances. Instead, the number of Also Reflects Departmental Workload Issues. nonmanagerial correctional officers over the cap The decreased use of vacation/annual leave also quadrupled to more than 3,700 by March 2011, when may reflect the difficulties many departments the state eliminated the cap for these workers. The experienced completing their workload with reduced number of other employees over the cap also grew staffing levels. There is significant evidence, for quickly from more than 10,000 in 2005 to nearly example, of departments denying or discouraging 24,000 by January 2013. employee requests to take time off due to workload Department staff with whom we spoke suggested pressures. In addition, there is evidence of managers that they took few, if any, steps to counsel employees authorizing employees to take time off, but then reaching the cap or to modify workload to allow rescinding the authorized use of leave, citing employees to take more time off. In some cases, operational needs. Actions by management to deny supervisorial staff do not appear to receive regular the use of time off, in turn, appear to have created reports of their staff’s leave balances. We also note some tension in the workplace. We note, for example, that there does not appear to be any concerted or that many of the 2012 MOU addenda that established consistent effort by state control agencies to enforce the collectively bargained furlough program, the PLP, the cap. provide that an employee’s authorized use of PLP Leave Liabilities now at Historic Levels days cannot be rescinded more than twice even for operational needs. Vacation/Annual Leave Balances Were High Before Furloughs Started. During the 1980s and State’s cap on Leave Balances is not Effective early 1990s, the state’s vacation/annual leave balances Ineffective Leave Cap Not a New Issue. As were about 22 days per employee. Leave balances discussed earlier in this report, the state’s main policy of this size represent more than 8 percent of the tool to limit state leave balance liabilities is a cap on employer’s annual salary cost. As discussed earlier in unused vacation/annual leave. For many years, there this report, most other employers limit the maximum has been concern about the effectiveness of the cap vacation/annual leave balance for any single on a statewide basis. We note, for example, that in employee to be between 8 percent and 15 percent of 2005—a year without major budgetary constraints salary costs. Thus, it is possible that the state’s average and workforce reductions—there were more than leave balance of 8 percent was somewhat similar to 900 nonmanagerial correctional officers and more other employers’ liabilities during this period. www.lao.ca.gov Legislative Analyst’s Office 11 An LAO RepOR t Later in the 1990s and early 2000s, however, considerably higher than the maximum range of the average state employee vacation/annual leave vacation/annual leave balances allowable by most balance grew, partly as a result of personnel policy other employers and, as Figure 7 shows, over twice changes—such as extending the annual leave the level in 1984. program (which offers a greater number of leave The state’s total compensable leave liabilities, days) to all state employees (instead of limiting it to however, actually are higher than those shown in managers) and the furloughs of the early 1990s and Figure 7. This is because, in addition to vacation/ 2003-04. annual leave, the state must reimburse separating Shortly before the most recent series of employees for unused holiday credit, overtime, furloughs, the average state worker had 35 days of and certain other types of compensable leave banked vacation/annual leave. The state’s liability balances. When all forms of compensable leave from this unused vacation/annual leave was about are included, the state’s leave balaGncrea lpiabhiilicty Sini gn Off $1.9 billion, or about 14 percent of state salary costs. June 2012 was $3.9 billion (about $2.1 billion of Secretary Vacation/Annual Leave Balances Grew which is attributable to the state’s General Fund). Analyst Rapidly After Furloughs. After furloughs started, This $3.9 billion amount is about $1 billion higher Director employees began using furlough days instead of than the state’s total compensable leave balance Deputy vacation/annual leave days. By June 2012, the before furloughs. (Data limitations prevent us from average state employee’s vacation/annual leave discussing the changes over the decades in the state’s balance grew from 35 days to more than 53 days. total compensable leave balances.) The state’s liability from vacation/annual leave CDCR Accounts for One-Third of Leave in 2012 was about $3 billion. This is equal to Balance Liabilities. Figure 8 shows the distribution more than 20 percent of state employees’ salaries, of the state’s $3.9 billion liability across departments. Figure 7 State Liabilities for Unused Vacation and Annual Leave Time at 30-Year High State Leave Balance Liabilities as a Percentage of State Salary Costs 22% 20 18 16 14 12 10 8 6 4 2 1984 1989 1994 1999 2004 2009 12 Legislative Analyst’s Office www.lao.ca.gov ARTWORK #130005 An LAO RepOR t As shown in the figure, CDCR employees account pays the employee’s full separation payment— for about one-third of these liabilities, but CHP regardless of where the employee accrued the leave officers have by far the largest number of banked balance. Departments typically are not budgeted to compensable leave days compared with the average make these separation payments, but are expected employee at other major departments. We provide to absorb them within existing resources. additional information regarding compensable leave In some cases, because workers have retired balance liabilities on our website. with extensive unused leave balances, separation $3.9 Billion Total Liability Likely to Grow. payments have been large—sometimes hundreds Going forward, we expect this $3.9 billion liability of thousands of dollars. These large payments, in to grow because (1) most state employees will turn, have evoked controversy in news reports— receive a 3 percent to 5 percent pay increase in particularly in cases when the employee received July 2013, increasing the cost to cash out their payments equal to many months of leave accrued in leave balances, (2) most state employees have been excess of the state leave cap. furloughed for 12 months following June 2012, Separation Payments at Highest Levels (3) employees have some banked furlough and in 30 Years. The amount of money that state other non-compensable days that they are likely to departments have paid in separation payments has use in lieu of compensable leave, driving up their increased significantly in recent years to the highest compensable leave balances, and (4) state employees levels in 30 years. In 2011-12, state departments paid historically have not used all of their leave time $270 million in separation payments—two-thirds earned in a year even in the absence of furloughs. more than they did during the year before For these reasons, we estimate that the state’s furloughs. This sudden increase in separation compensable leave balance will exceed $4 billion by payments is due to an increase in retirement rates the start of 2013-14 and continue to grow in the Figure 8 foreseeable future. This Leave Balances by Department as of June 30, 2012 growth will be moderated Banked Compensable Liability From somewhat by a likely Leave Days Per Compensable Leave increase in the number of Department Employee (Millions) Corrections and Rehabilitation 72 $1,237.4 state employees retiring. Transportation 60 385.2 California Highway Patrol 91 314.5 Payments to Separating Mental Health 51 154.8 Employees now at Employment Development 39 89.6 Historic Highs Developmental Services 69 89.0 Justice 52 70.6 Affected Departments State Compensation Insurance Fund 55 69.2 Motor Vehicles 34 60.1 Typically “Absorb” Social Services 50 50.5 Costs. Under state Board of Equalization 42 49.5 budget practices, when Parks and Recreation 42 46.6 General Services 47 40.9 an employee separates Industrial Relations 51 38.6 from state service, the Fish and Game 53 37.7 department that last All other 53 1,142.0 employed the individual Totals 59 $3,876.2 www.lao.ca.gov Legislative Analyst’s Office 13 An LAO RepOR t and the rapid growth in employee compensable Our analysis indicates that roughly leave balances. Some departments have requested $1 billion—more than $500 million General budgetary augmentations to cover these costs. As Fund—of the state’s $5 billion in furlough savings in the case with the state’s overall leave balance, we has been carried into future years as a liability expect separation payments to remain at high levels from larger leave balances. The state will pay these for at least the next few years. liabilities when the employees separate from state service. We note the state also may have incurred Some Furlough Savings Shifted other costs due to the furlough policy, such as costs to Future years increased overtime expenses or costs to pay Roughly $1 Billion of Savings Carried Into growth in the state’s unfunded pension liabilities. Future as a Liability. While employers implement These costs are not included in our $1 billion furloughs to achieve employee compensation estimate. savings, furloughs generally do not yield real About $4,000 Owed to Average Employee. savings unless workers actually take the time off. Viewed from the perspective of an average state Specifically, if an employer reduces a worker’s employee, the five years of furloughs reduced his pay but the employee works the same amount of or her $69,000 annual salary by a total of $21,000. time, the employer’s leave balance liability usually The worker took off most of the furlough days, grows. The employer then must pay the employee but banked some vacation days. The value of when the worker separates from service. Furlough this increased leave is roughly $4,000 today and policies that reduce employees’ pay—without will grow, over time, as the employee’s salary reducing their hours worked—shift compensation increases. If the employee does not use this time costs to future years when the employer must in the course of his or her career, the state will make larger separation payments. pay the employee for this leave when the worker separates from state service. rEASOnS FOr tHE StAtE tO rEducE LEAvE BALAncES The state’s liabilities associated with unused on many factors. We note, for example, that leave are large. Based on trends over the last California had relatively high employee leave 30 years, these liabilities likely will continue to balances for most of the 1990s and early 2000s. grow. This, in turn, prompts the question: Should During this time, departments periodically the state take actions to reduce employee leave requested midyear appropriations to cover balances or contain their future growth? separation payments, but the state’s leave balances No “Right” Level of Employee Leave did not appear to pose a major fiscal problem. Balances. Our review indicates that there is no That said, for the reasons discussed below, we single right level of employee leave balances. think the Legislature should take steps to reduce Whether large leave balances pose fiscal or the state’s leave balances—or at least contain their operational stress on a department depends future growth. 14 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t reduces Budget transparency to its need to seek midyear supplemental appropriations and its delay of special repairs and How Departments Absorb Costs Often Not other essential activities, actions that can increase Known. Through the annual budget process, the future CDCR operating costs. Legislature appropriates money and authorizes positions for departments to achieve specified Strains management-Employee relations legislative priorities. Once the Legislature approves Hard to Allow Employees to Take All the budget package, however, departments modify Allowed Leave Days. Through the recent furlough their financial and operational plans to reflect the programs, the state reduced employees’ pay with pressures related to separating employees’ leave the promise of giving them commensurate time off. balances, including making separation payments, In some cases, however, workload considerations holding positions vacant, and allowing staff to be caused management to deny state workers’ requests absent. These changes generally are not reported for time off—or led to workers not requesting the to the Legislature. Thus, it is not possible for the time off. In these cases, because workers do not Legislature to determine what priorities are not receive the benefit promised by management on a being fulfilled due to the pressures associated with timely basis, furloughs can negatively affect labor separating employee leave balances. relations. Longer term, strained labor relations imposes Fiscal and Operational can impair the state’s productivity and the level Stress on Some departments of service provided to the public. In addition, the state’s reputation as an employer can be weakened, Can Negatively Affect Departmental affecting its ability to recruit and retain desired Performance. The lack of budgetary transparency talent from the labor market. also makes it difficult for the Legislature to determine the extent of fiscal and operational stress may Weaken Public confidence in that these liabilities impose on state departments. management of State Workforce In our discussions with departments, we found Large Differences Between State and Other that some perceive their ability to carry out their Employers. The public entrusts government to responsibilities has been negatively affected by effectively and efficiently manage resources and large leave balances. For example, the Fair Political the workers it hires. In assessing government’s Practices Commission advises us that it kept its management of its employees, residents and the executive director position unoccupied for nearly media typically compare government’s personnel eight months because the former executive director policies with those used in the private sector. When separated from the commission with leave balances residents and the media find public sector personnel approaching 70 percent of his salary. The separating policies that appear to be more generous than those employee burned off about two months of leave in the private sector, questions often arise as to before separating from the commission with a whether government is spending public resources separation payment worth over half of his salary. wisely. Similarly, CDCR indicates that it made separation The state’s personnel policies have led to large payments totaling $300 million between 2009-10 differences between the benefits offered to state and and 2011-12 and projects it will make more than private sector workers when they separate from their $100 million in separation payments in 2012-13. employment. Specifically, compared with private The CDCR indicates that these costs contributed www.lao.ca.gov Legislative Analyst’s Office 15 An LAO RepOR t sector employees, many state workers (1) receive did not reduce employee work time to levels that larger separation payments and (2) collect salaries would prevent rapid growth in leave balance and earn benefits (including more leave time) for liabilities. In addition, the state has not enforced its longer periods while burning off accumulated primary policy to contain these future costs—the leave. The magnitude of the benefits provided to cap on accumulated vacation/annual leave. Looking state workers is partly due to reasons that are not forward, having state leave policies that are more likely to encourage public confidence in the state’s similar to other employers—and enforced—may management of its workforce. Specifically, as give the public greater confidence that the state is administered by the state, the furlough program effectively and efficiently managing its resources. OPtiOnS FOr tHE LEgiSLAturE In this section of the report, we discuss options (2) cash out the unused leave. Below, we discuss available to the Legislature to reduce existing two options available to the Legislature to reduce leave balances and contain their future growth. existing leave balance liabilities. These options Most of the options involve difficult decisions would reduce the state’s long-term liabilities, but and trade-offs—such as those between incurring would reduce productivity or costs in the short near- and long-term state costs, and paying for term. employee leave benefits versus other forms of Focus Attention on departments compensation. In addition, many of the options With Large Leave Balances could have unintended consequences by modifying employee behavior. There is no perfect option. There are many approaches the Legislature Each option has limitations, and no one option can could take to focus attention on departments resolve all of the concerns discussed in the section with large leave balances. Below, we outline one above. In fact, some of the options could address approach the Legislature could use in the current some of the concerns while worsening others—for budget cycle. example, reduce liabilities but further erode public Spring 2013: Establish Targets for Reducing confidence. Leave Balances . . . Each department has unique circumstances that led to its employees o r e ptionS to educe xiSting accumulating large leave balances. To better l B eave alanceS understand why employees have large leave Options Limited Due to Contract Law. balances and what steps the state could take The state is limited in what it can do to reduce to reduce these liabilities, legislative budget or existing leave balances. Current law establishes oversight committees could hold hearings with that employees have a vested, contractual right to representatives from the Human Resources earned compensable leave. This means that once Department (CalHR), Department of Finance, an employee earns compensable time off, the state and a representative sample of departments with cannot take it away without due compensation. large employee leave balances. To establish a The state must compensate employees for any baseline assessment of all departments and help compensable leave that is already earned by the committees identify which departments should allowing employees to (1) take the time off or attend the hearings, the State Controller’s Office 16 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t could report on the number of employees in each employer costs in the short run, it reduces the department with leave balances over a threshold employer’s outstanding long-term liabilities. amount, such as 640 hours, and the current value State Has Offered Buybacks in the Past. While of this leave. The purpose of the legislative hearings the state has offered leave buybacks in the past, would be to (1) identify why these departments’ CalHR indicates that it has approved only one leave employees have large leave balances and (2) buyback program in the past ten years. Typically, establish reasonable targets for reducing these leave buyback programs are limited to (1) specified balances by spring 2014 and future years. employees, (2) a period of time during which . . . But Give Special Consideration to eligible employees may cash out leave, and (3) a Departments With 24-Hour Operations. In maximum number of hours that an employee may developing these leave reduction targets, we cash out. The last authorized leave buyback was recommend the Legislature be realistic about available primarily to managers and supervisors departments with 24-hour operations. Specifically, between April and June 2007. Eligible employees unless the state provides more funding for staff could cash out up to 40 hours of compensable leave. at these departments or changes their workload A department, however, could choose to further requirements, it is likely that these departments limit the number of hours employees cashed out if will incur increased overtime costs to give their departmental funds were limited. As discussed in employees more time off. We also note that, press reports, in 2011, the Department of Parks and in some cases, paying overtime so that other Recreation instituted a buyback program for which employees can use leave costs the state more than it did not have authorization. The department allowing workers to cash out their leave (either at cashed out about $270,000 of employee leave under the end of their career or through an authorized this unauthorized program. buyback program). The Legislature could use the Buyback Program Would Increase Short-Term hearings to explore options specifically oriented Costs, but Reduce Long-Term Liabilities. The towards these departments. Legislature could direct the administration to Spring 2014: Assess Departments’ authorize a leave buyback program. A buyback Progress. During the 2014-15 budget cycle and program could be administratively established in subsequent years, CalHR could provide the for managers and supervisors, but probably Legislature an assessment of the state’s progress in would need to be collectively bargained for reducing employee leave liabilities. Additionally, rank-and-file employees. Depending on how departments could report their individual many employees were eligible to participate in progress at achieving the targets established by the a buyback program and how many hours they Legislature. could cash out, a buyback program could result in significant up-front costs. For example, a institute Buyback Program buyback program that cashed out all leave in excess Many public and private sector employers offer of the existing cap would cost the state about leave buyback programs to reduce leave balance $270 million (or $330 million if nonmanagerial liabilities. A buyback program gives employees correctional officers were included). To control the opportunity to cash out some of their existing these costs, the Legislature would need to provide compensable leave balances at their current salary the administration guidance as to the design of level. While a leave buyback program increases the buyback program. The Legislature also would www.lao.ca.gov Legislative Analyst’s Office 17 An LAO RepOR t need to make decisions about how to fund it. For they earn, but minimize the state’s liabilities from example, the Legislature could augment individual compensable leave balances. Such a cap could departmental budgets to provide funding for the take many different forms. Most of the other expected costs or establish a separate item in the states we looked at have some form of a strict budget to pay these costs for all departments. cap on the amount of vacation/annual leave that Regardless of the funding mechanism, the costs employees may accumulate. Below, we describe associated with a buyback program would reduce the key elements of a cap that we think would be the Legislature’s ability to provide resources to reasonable. other programs in the state budget. Obviously, Establish an Accrual Limit. The limit should because of the up-front cost of a buyback program, allow employees to have flexibility to take time such a program would be easiest during years off during the year but also be low enough to without significant budgetary constraints. minimize the state’s liabilities. Most of the states that we looked at limit the amount of vacation/ o c g ptionS to ontain rowth in annual leave that a state employee could carry f l B uture eave alanceS year-over-year to about 40 days. This is half of the Significant Flexibility for the State. The limit established by the cap that currently applies to Legislature has a greater degree of flexibility to most California state employees. implement options that contain future unfunded Specify No Vested Right to Leave Above Cap. liabilities from employee leave balances—ranging Employees could continue to accrue a certain from changing budgeting practices to changing amount of time off each month based on vacation/ leave policies. Because employees only have a vested annual leave accrual schedules; however, employees right to earned leave, the Legislature can change would have no vested right to any time off received leave benefits on a prospective basis. Prospective in excess of the cap. For example, if the Legislature benefit changes could be administratively imposed adopts an 80-day cap, an employee with 80 days on managers and supervisors, but probably would of banked leave would still earn his or her normal need to be bargained for rank-and-file employees. vacation days, but these days would need to be Because 19 of the state’s 21 MOUs with state used before the end of the year. The employee could workers expire in July 2013, the administration only carry up to 80 days of leave year over year. For could incorporate mechanisms to contain leave reasons we discussed earlier, we note that it may be balance growth in labor agreements submitted difficult for employees at 24-hour facilities to use all to the Legislature for ratification. We note, of the vacation/annual leave that they accrue in a however, that any action that reduces prospective year. For these employees, the Legislature may wish leave benefits likely would put pressure on the to set a higher cap or take other actions to contain state to augment other components of employee long-term liabilities, such as establish regular leave compensation—salary, pension, and health buyback programs. benefits. Plan carefully Before giving new create a use it or Lose it cap on Leave Accruals Furloughs or more time Off The Legislature could create a strict cap on Inevitably, at some time in the future, the prospective leave accruals. The cap could give Legislature will consider proposals to furlough employees the opportunity to use the time off employees or give them additional holidays or 18 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t other paid time off. Our review indicates that any separation payments in the future. The Legislature additional time off—paid or not paid—can result could minimize this potential fiscal effect by in higher employee leave balances and larger state specifying that employees have no vested right to liabilities. Below, we explain some actions that the new day. That is, it must be used in the same the Legislature could take to minimize the effects year given and included within a strict cap on leave of additional days off on future leave balance accruals (discussed above). liabilities. cash Out Leave When Employees When Considering Future Furlough transfer departments Proposals. Furloughs are a common tool used by employers to reduce employee compensation Under current law, employees may not cash costs. To achieve savings, the employer reduces its out their leave when transferring from one workers’ pay but increases their amount of time department to another. Further, when an employee off. Administering furloughs on specified days by separates from state service, the department of shutting down operations, like Furlough Fridays, last employment is responsible for paying the helps contain the growth in leave balances because employee’s entire separation payment. As a result, it forces employees to work fewer hours. Some of if an employee accrues a large leave balance while the state’s largest departments, including CDCR working at Department A and then works one year and CHP, have 24-hour operations, however, and at Department B before retiring, Department B cannot shut down. Thus, extending a furlough must pay the employee’s entire separation payment. program to include their workers does not change This can create significant budgeting problems for the amount of staff hours worked and, instead, Department B. To ensure that state departments increases state leave balance liabilities. In these realize the fiscal effects of their leave management cases, the Legislature has limited options. It can: policies, the Legislature could allow employees to cash out leave amounts above a certain threshold • Exempt workers in these departments from when transferring to a new departmental employer. the furlough—an action that reduces by These early cash outs also would (1) reduce future more than 60 percent state General Fund state liabilities and (2) provide more timely savings from the furlough. compensation to employees for leave they were not • Reduce departmental workload or able to use. requirements so that these departments Prefund Liabilities can operate with fewer workers—an action that would be difficult to implement in The state does not prefund leave balance many cases due to federal, state, and other liabilities but instead makes separation payments requirements. on a pay-as-you-go basis. The Legislature could explore the option of prefunding leave balance When Considering Proposals for Additional liabilities. To prefund these liabilities, the Paid Days Off. In general, giving state employees Legislature would put money aside in a trust additional paid days off augments their fund—perhaps in the range of hundreds of millions compensation package without increasing state dollars each year initially—that would be invested. costs in the short term. If the employees do not use The state’s contributions and any growth in the the additional paid days off, however, state leave fund from investments would be used to pay future balance liabilities grow and the state makes higher www.lao.ca.gov Legislative Analyst’s Office 19 An LAO RepOR t separation payments. Annual contributions to this off each year. If the state were to reduce the amount fund could be distributed across departments— of time off included in the compensation package, similar to how the state prefunds employee pension employees likely would use a higher share of their benefit costs. Because liabilities from leave balances compensable leave days in a given year. This would are constantly changing—employees receive result in lower leave balance liabilities in the future, pay increases, the size of the workforce changes, but, as discussed earlier, likely would increase employees take off varying amounts of time year pressure on the state to increase other forms of to year, and so on—the amount that the state employee compensation. contributes on an annual basis would need to be Evaluate Workload and Staffing Levels at determined through an actuarial valuation that departments With High Leave Balances takes into account various assumptions. While prefunding these benefits increases the state’s costs Persistently high leave balances may indicate in the short run, it would significantly reduce the that employees at a department do not take time state’s costs associated with separation payments in off due to high workload. After furloughs end in the long run. July 2013 and the state workforce normalizes, the legislative budget subcommittees may wish to reduce number of days Off examine departments with high leave balances to Available to Employees determine whether additional staffing resources or The state’s employee compensation package changes in statutory duties may be merited. provides employees a generous number of paid days cOncLuSiOn Most employers have fiscal liabilities related to directly or indirectly have negative effects on the vacation and other leave that their employees have state, including: imposing fiscal and operational earned, but not used. These leave balance liabilities stress on departments, reducing transparency in must be paid when an employee retires or separates state budgeting, straining management-employee from employment. relations, and weakening public trust in state The state of California has carried large leave government. For these reasons, we recommend the balance liabilities for decades. The last five years Legislature take steps towards reducing the state’s of state employee furloughs, however, have pushed leave balances—or at least containing their future its leave balances to unusually high levels. Our growth. In this report, we describe several options review indicates that that the state’s leave balances the Legislature could take to help achieve this goal. 20 Legislative Analyst’s Office www.lao.ca.gov Graphic Sign Off Secretary Analyst Director ARTWORAnK L A#O1 R3e0pO0R0t5 Deputy APPEndix 1: FivE yEArS OF StAtE EmPLOyEE WOrk And PAy rEductiOnS (2008-09 tO 2012-13) Figure A-1 2008-09: Furloughs Began One Shape = One Day Per Month Off and a 4.62 Percent Pay Reduction July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June Correctional Officers and Engineers Employees Represented by SEIU (Local 1000) and Managers Maintenance Workers and Health Professionals Firefighters Highway Patrol Officers In February 2009, the Legislature amended the 2008-09 budget to reduce funding for state employee compensation, and directed the Schwarzenegger administration to achieve these savings through collective bargaining or administrative actions. Through executive order, Governor Schwarzenegger directed that state employees be furloughed two days per month. Employees at 24-hour facilities were allowed to select their days off, a policy known as “self-directed furloughs.” Other state employees initially were required to take off designated Fridays, but then allowed to take self-directed furloughs. Some departments, including California Highway Patrol, were not furloughed. Beginning in June, the Department of Forestry and Fire Protection also was exempted from furloughs. www.lao.ca.gov Legislative Analyst’s Office 21 Graphic Sign Off Secretary Analyst Director Deputy ARTWORK #130005 An LAO RepOR t Figure A-2 2009-10: Furloughs Increased to Three Days Per Month One Shape = One Day Per Month Off and a 4.62 Percent Pay Reduction July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June Correctional Officers and Engineers Employees Represented by SEIU (Local 1000) and Managers Maintenance Workers and Health Professionals Firefighters Highway Patrol Officers The 2009-10 budget included reductions in funding for state employee compensation and directed the Schwarzenegger administration to achieve these savings through collective bargaining or administrative actions. Through executive order, Governor Schwarzenegger directed that most state employees be furloughed three days per month. Most state offices were closed three Fridays each month for the year. Employees at 24-hour facilities continued to have self-directed furloughs. 22 Legislative Analyst’s Office www.lao.ca.gov Graphic Sign Off Secretary Analyst Director ARTWORK #130005 Deputy An LAO RepOR t Figure A-3 2010-11: Furloughs Replaced by Personal Leave Program One Shape = One Day Per Month Off and a 4.62 Percent Pay Reduction July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June Correctional Officers and Engineers Employees Represented by SEIU (Local 1000) and Managers Maintenance Workers and Health Professionals Firefighters Highway Patrol Officers The 2010-11 budget included reductions to state employee compensation costs and directed the administration to achieve these savings through collective bargaining or administrative actions. Through executive order, Governor Schwarzenegger directed that most state employees be furloughed three days per month until their bargaining units agreed to new memoranda of understanding (MOUs). Initially, most employees—except those working in 24-hour facilities—were required to take off specified Fridays. In November 2010, the administration authorized all employees to take self-directed furloughs. During the fiscal year, all employee bargaining units agreed to new MOUs. Most of the MOUs provided that the employees would receive one self-directed, unpaid day off monthly for 12 months. The administration also extended this policy—known as the Personal Leave Program—to managers and supervisors. In October 2010, the California Supreme Court ruled that (1) the Legislature must authorize any furloughs and (2) the budget language that had been used to reduce employee compensation costs tacitly approved the administration’s furlough programs. www.lao.ca.gov Legislative Analyst’s Office 23 Graphic Sign Off Secretary Analyst ARTWORK #130005 Director Deputy An LAO RepOR t Figure A-4 2011-12: Personal Leave Program Expired One Shape = One Day Per Month Off and a 4.62 Percent Pay Reduction July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June Correctional Officers and Engineers Employees Represented by SEIU (Local 1000) and Managers Maintenance Workers and Health Professionals Firefighters Highway Patrol Officers Each bargaining unit’s Personal Leave Program expired 12 months after the bargaining unit agreed to a new memorandum of understanding. 24 Legislative Analyst’s Office www.lao.ca.gov Graphic Sign Off Secretary Analyst ARTWORK #130005 Director Deputy An LAO RepOR t Figure A-5 2012-13: Personal Leave Program and Furloughs Began Again One Shape = One Day Per Month Off and a 4.62 Percent Pay Reduction July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June Correctional Officers and Engineers Employees Represented by SEIU (Local 1000) and Managers Maintenance Workers and Health Professionals Firefighters Highway Patrol Officers The 2012-13 budget included reductions in funding for state employee compensation and authorized the Brown administration to achieve these savings through collective bargaining agreements, furloughs, and the use of existing administrative authority over managers and supervisors. Nineteen of the state’s 21 bargaining units agreed—in addenda to their memoranda of understanding— to receive one self-directed, unpaid day off per month, a policy referred to as the Personal Leave Program. This policy was extended to managers and supervisors. The administration imposed one day per month, self-directed furloughs on the two remaining bargaining units. Thus, for the 12 months of 2012-13, all state employees were subject to one self-directed unpaid day off per month. www.lao.ca.gov Legislative Analyst’s Office 25 An LAO RepOR t 26 Legislative Analyst’s Office www.lao.ca.gov An LAO RepOR t www.lao.ca.gov Legislative Analyst’s Office 27 An LAO RepOR t LAO Publications This report was prepared by Nick Schroeder and reviewed by Marianne O’Malley. The Legislative Analyst’s Office (LAO) is a nonpartisan office that 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 website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 28 Legislative Analyst’s Office www.lao.ca.gov