The 2014-15 Budget: State Worker Salary, Health Benefit, and Pension Costs

The 2014-15 Budget: State Worker Salary, Health Benefit, and Pension Costs MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • MARCH 4, 2014 2014-15 BUDGET 2 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET EXECUTIVE SUMMARY The budget proposes $24 billion (about $12 billion General Fund) to pay salary and benefit costs for state workers in 2014-15, up from an estimated $23.5 billion ($11.6 billion General Fund) in the current year. The increased costs reflect a general salary increase (GSI) of at least 2 percent for most state workers, rising health and pension benefit costs, and proposed increases in the number of state positions. Recent decisions made by the California Public Employees’ Retirement System (CalPERS) will further increase these costs in 2014-15 by about $430 million ($250 million General Fund). In this report, we provide an overview of the state workforce, current collective bargaining agreements, and state employee compensation costs in 2014-15. We also discuss historical trends regarding state employee compensation costs and state worker take-home pay. We find that over the last two decades, after adjusting for inflation and state worker cost for health and retirement benefits, state worker take-home pay has remained largely flat while state costs per employee have grown significantly. In addition, assuming the number of state workers does not decline significantly, we expect the state’s employee compensation costs to increase for the foreseeable future. Graphic Sign Off Secretary THE STATE WORKFORCE Analyst MPA Deputy The state employs about 350,000 people. While conduct of inmates at one of the state’s correctional the number of state employees has increased over facilities. The number of state workers employed by the past 20 years, the ratio of state employees to each state entity varies widely: the smallest employ California residents has remained relatively stable a single part-time state worker while the largest at about nine state employees per 1,000 residents. As Figure 1 shows, about one-third of the state’s Figure 1 employees work for one of the two state university Three-Fifths of State Employees systems. Most of the remaining state employees— Are Noneducation State Workers about 215,000—work for one of the agencies or departments under the executive branch of Higher state government that administers non-higher Education education state programs and policies. These noneducation executive branch state employees typically are referred to as “state workers.” State workers perform many functions across state government. Classifications range from public safety officers to medical, legal, financial, Judicial and other professionals to service workers and Noneducation Legislative tradespeople. The largest classification of state State Workers workers is correctional officer, supervising the www.lao.ca.goAvR TLWegOislRatKiv e# A1n4a0ly0s8t1’s Office 3 Template_LAOReport_sm.ait Graphic Sign Off Secretary Analyst MPA Deputy 2014-15 BUDGET departments employ tens of thousands of state Figure 2 workers. Figure 2 illustrates that more than half Five Departments Employ of state workers work for one of the five largest More Than Half of State Workers departments—Department of Corrections and Rehabilitation, Department of Transportation Corrections and Rehabilitation (Caltrans), California Highway Patrol, Department of State Hospitals (DSH), and Department of Motor Vehicles (DMV). Compensation for Most State Workers Subject Other to Collective Bargaining. About 85 percent of state workers are rank-and-file employees whose Caltrans compensation is established through collective bargaining between employees and the Governor. State Hospitals Highway Patrol Rank-and-file employees are organized into 21 Motor Vehicles bargaining units. At the bargaining table, these units are represented by unions and the Governor compensation for excluded state workers—subject is represented by the Department of Human to legislative apApRroTpWriaOtioRnK. A #s 1a4 r0es0u8lt1 of the Resources. The product of these negotiations current MOUs and the administration’s decisions is a contract known as a memorandum of Template_LAOReport_sm.ait regarding excluded employees, most state workers understanding (MOU) and is subject to ratification are scheduled to receive a pay increase in the by the Legislature. Most of the state’s bargaining Governor’s proposed 2014-15 budget. Figure 3 units have active MOUs with the state but three shows which state workers are scheduled to receive bargaining units are working under an expired pay increases under the proposal as well as the contract (scientists, attorneys, and stationary current status of MOUs with rank-and-file state engineers). The remaining 15 percent of state workers. (For more details about specific provisions workers, primarily managers and supervisors, are of current MOUs, visit our website.) We discuss the excluded from the collective bargaining process. proposed 2014-15 salary increases in greater detail The Governor has broad authority to establish later in this report. SALARY COSTS Budget Assumes Pay Increase for Most notable because it will be the first GSI for most State Workers. The largest component of a classifications since 2007-08. (Over this time typical state worker’s compensation is salary, period, however, state workers did receive accounting for about two-thirds of the state’s pay increases for being at the top step of their employee compensation costs. In 2014-15, the classification and for working specific jobs.) The Governor proposes salaries will cost $16 billion size of the proposed 2014-15 GSI is consistent with (about $8 billion General Fund)—including current MOUs and varies by bargaining unit. For costs associated with pay increases for most most state workers, the MOUs provide that their state workers. The 2014-15 pay increase is GSI could be delayed until 2015-16 if the Director 4 Legislative Analyst’s Office www.lao.ca.gov Graphic Sign Off 2014-15 BUDGET Secretary Analyst of Finance determines in May 2014 that there are constitutional obligations.” Some supervisorial and MPA not sufficient revenues to pay for the pay increases managerial classifications are proposed to receive Deputy while also fully funding “existing statutory and larger pay increases to address concerns of salary Figure 3 Most State Workers Have Active Contracts That Include Pay Increases 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Highway Patrol 4% 6.2% TBD TBD TBD TBD Fire Local 1000a, Psychiatric Most Technicians, and 2% 2.5% Physicians Other Health and Social 1.5% 1.5% Services Professionals Park Rangers 3% Maintenance Workersa $1,200 3% Professional Engineers 3.3% Correctional Officers 4% Attorneys, Scientists, Stationary Engineers Managers and Most Supervisors 2% General Salary Increase One-Time Bonus Remaining Term of MOU a Assumes Department of Finance determines there are sufficient revenues in May 2014. TBD = to be determined; Local 1000 = Service Employees International Union, Local 1000; and MOU = memorandum of understanding. www.lao.ca.gov Legislative Analyst’s Office 5 ARTWORK #140081 Template_LAOReport_large.ait 2014-15 BUDGET compaction (we discuss salary compaction in call for a pay increase in 2014-15, (2) their current greater detail later in this report). MOU provides a one-time bonus in 2014-15 instead Some Bargaining Units Not Scheduled to of a GSI, or (3) they are working under an expired Receive GSI. The Governor’s proposed budget does MOU. Based on the Governor’s proposal, Figure 4 not provide a GSI for some bargaining units in shows the share of state workers expected to receive 2014-15. These state workers are excluded from the a GSI in 2014-15. GSI because either (1) their current MOU does not PENSION AND HEALTH BENEFITS In addition to salary, state workers typically benefits (estimated toG brea apbohuitc $ 1S.6i gbinlli oOn fGfeneral receive non-salary benefits as part of their Fund in 2014-15) and to compensate injured workers Secretary compensation. In 2014-15, proposed state costs is not included in this estimate. (As we discuss later Analyst for non-salary benefits equal about 48 percent of in this report, the state’s 2014-15 pension benefit MPA its salary costs. Two benefits—pension and health costs will increase significantly after CalPERS adopts Deputy benefits—account for most of these costs. The its final rates later this spring.) This section of the remainder reflects payments for Social Security, report discusses pension and health benefit costs as Medicare, and other benefits. The money the state proposed in the Governor’s budget. pays each year towards retired state worker health CalPERS Role. Although decisions about (1) the scope of employee health and pension benefits Figure 4 Budget Includes General Salary Increase (GSI) for and (2) how these costs Most State Workersa are shared between the employer and employee are determined by the Legislature and through the collective bargaining process, CalPERS plays an important role in determining the state’s costs About 2 Percent GSI for these benefits. Pension Benefits. Most state workers are enrolled in defined benefit pension plans administered by CalPERS. Pensions provide state workers with 4 Percent or No GSI 6.2 Percent GSI a specified benefit for life upon retirement. Retirees’ a Assumes Department of Finance determines there are sufficient revenues in May 2014. pensions are based on their 6 Legislative Analyst’s Office www.lao.ca.gov ARTWORK #140081 Template_LAOReport_mid.ait 2014-15 BUDGET final salary levels near the end of their careers, the unfunded liabilities and (2) health insurance number of years they served with the state, and the premiums outpacing inflation. type of job they had while employed by the state. Increased Contributions to Pension Fund As fiduciary, the CalPERS board adopts policies Necessary. The budget proposes $3.5 billion to ensure there is sufficient money to pay for ($1.8 billion General Fund) for the state to make members’ future benefits, including determining contributions to CalPERS in 2014-15 for state the amount of money that must be contributed each worker pension benefits. (In addition, the state year to prefund the plan and adopting investment will contribute about $480 million General strategies. Pension benefits are funded with Fund to CalPERS for California State University contributions made by the worker during his or her employees’ pension benefits.) At the time the career (paying a specified percentage of monthly Governor proposed his 2014-15 budget plan, the pay established in MOUs and statute) and the state state projected that its contribution rates for most (paying the balance of necessary contributions). pension plans would increase from those paid If the CalPERS board determines that there is an in 2013-14. For example, as of that time the state unfunded liability—insufficient funds to make was expected to pay about 21.4 percent of pay for future payments for earned benefits—the state employees in the State Miscellaneous Tier 1 plan must provide the funds necessary to ensure that (the state pension plan with the most members) future benefits are paid. As a result, the state’s in 2014-15—an increase from the 21.2 percent the contributions tend to fluctuate more each year state contributes in 2013-14 for these employees. (depending primarily on investment returns) than These rate increases (and similar increases in state worker contributions, which tend to change recent years) reflect CalPERS’ determination that a little year to year. larger amount of money must be contributed to the Health Benefits. The state offers state workers pension system to address its unfunded liabilities. health benefits for the employee and his or her Recently, through the collective bargaining process dependents and allows them to choose among a and legislation, the state mitigated some of these variety of health plans. For most state workers, increased costs by requiring workers to pay a the state pays a percentage of a weighted average larger share of the contributions necessary to fund of these plans’ monthly health premiums—the benefits earned in a given year—the “normal cost.” exact amount the state contributes varies by In addition, the state adopted less generous pension bargaining unit and is established in MOUs and benefits for future employees that will reduce state statute. CalPERS manages the state’s health plans costs in the future. Despite these changes, the and negotiates insurance premiums with health state’s costs for workers’ pension benefits continue care providers. The state’s costs change each year to increase due to unfunded liabilities related to: depending on these negotiations. • Investment Losses. Like many investors, CalPERS experienced significant Costs for Both Benefits on the Rise investment losses during the economic The state’s costs for state worker pension and downturns at the beginning and end of the health benefits have increased steadily for the past last decade. The loss of funds created an decade or so. The rising costs of these two benefits unfunded liability to pay for past earned are largely attributed to (1) significant pension benefits. www.lao.ca.gov Legislative Analyst’s Office 7 2014-15 BUDGET • Actuarial Assumptions. The CalPERS health premium costs. Since the mid-to-late 1990s, board adopts assumptions and policies health insurance premiums have increased each used to determine the amount of money year at a pace exceeding inflation. To absorb these necessary to be contributed each year. rising costs, many employers have chosen to shift These assumptions and policies include premium costs onto employees, reduce the levels of how to calculate additional contributions benefits available to employees, and/or reduce other necessary to make up for past investment elements of compensation. losses or other unfunded liabilities (known The health premiums negotiated by CalPERS as “smoothing” policies) and economic also have increased at a rate exceeding inflation and demographic assumptions—including during this period. In some years, CalPERS has how much money CalPERS investments used one-time options to negotiate premium will gain in a given year and how long growth below 5 percent from the prior year; retirees are expected to live. Over the last however, in other years, the average health few years, CalPERS has made changes premium has grown by as much as 10 percent from to its smoothing and investment return the prior year. The state has made efforts to reduce assumptions that affected the calculation of these costs by shifting a larger share of premium the state’s unfunded liabilities and resulted costs onto employees through the collective in CalPERS approving higher contribution bargaining process and legislation. In addition, rates. (Later in this report, we discuss CalPERS has established a number of initiatives in CalPERS’ recent changes to mortality an effort to contain the costs of providing medical actuarial assumptions.) services to members. In 2014-15, the Governor’s budget assumes that the state’s health benefit costs Health Premiums More Expensive. In the will increase by about $100 million and total more United States, it is common for employers in both than $2 billion (about $1 billion General Fund). the private and public sectors to pay a portion of PROPOSED NEW POSITIONS Reduced Staffing Levels Created Savings in 2012-13. (As we discuss in our March 2013 report, Past Budgets. In addition to increasing employees’ After Furloughs: State Workers’ Leave Balances, share of health and pension benefit costs, the state some of the short-term savings from furloughs budget in recent years has contained employee resulted in long-term liabilities that must eventually compensation costs by directly or indirectly be paid by the state in the form of higher leave reducing the number of state workers. The state balances carried by state workers.) has achieved this by reducing the number of Higher 2014-15 Personnel Costs From Net (1) hours worked by state workers through various Increase in Staffing. The budget proposes to furlough programs and (2) positions by holding increase positions for some state departments open vacant positions, eliminating other positions, and decrease positions for others. On net, the and initiating layoffs in certain departments. The administration proposes that the state increase its furlough programs alone reduced state costs by workforce by almost 1,600 positions across state approximately $5 billion between 2008-09 and government (less than 1 percent growth). Despite 8 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET it being a relatively modest growth in positions, at the Department of Veterans Affairs reflect increasing the number of state workers directly the ramp-up of staffing levels at new veterans increases the state’s employee compensation homes in Redding, Fresno, and the greater Los costs. We estimate that roughly $170 million of Angeles area. Some of these new positions reflect the proposed 2014-15 budget is attributable to the a proposal to convert contracted personnel at increase in the number of state workers. Most of veterans homes to state workers. Some of the the proposed personnel cost increase is proposed to proposed position changes reflect transferring be funded with non-General Fund resources. positions from one department to another. 2014-15 Position Growth Isolated to Specific (The Employment Development Department Program Expansions. Figure 5 lists the state has developed a plan to increase its position departments with a change of at least 50 positions authority by a few hundred positions more than requested in 2014-15. The position changes are was presented in the Governor’s budget—and requested either to administer a program already presented in Figure 5—to address concerns about established by the Legislature or as part of a customer service at the department. This proposal broader proposal to be deliberated during this likely will be part of budget discussions in the budget cycle. As can be seen from the figure, spring.) the majority of the proposed new positions are for a few departments. The requested positions Figure 5 at DMV are limited 2014-15 Budget: Major Position Changes term to support the implementation of Net Change in Positions Chapter 524, Statutes Departments Adding 50 or More Positions of 2013 (AB 60, Alejo), Motor Vehicles 818 State Hospitals 362 which requires the DMV Veterans Affairs 357 to accept driver license State Water Resources Control Board 354 applications from persons Social Services 181 Health Care Services 143 unable to provide proof Consumer Affairs 122 of legal presence in the Forestry and Fire Protection 77 United States starting Fish and Wildlife 75 Conservation 65 January 1, 2015. Most of Air Resources Board 65 the positions requested Departments Eliminating 50 or More Positions for DSH are associated with the administration’s Developmental Services -439 Employment Developmenta -322 proposal to activate new Public Health -254 beds to accommodate State Compensation Insurance Fund -244 additional patients in Corrections and Rehabilitation -191 Managed Risk Medical Insurance Board -57 state hospitals. The a Does not reflect recent administration plan to increase Employment Development Department staffing by requested positions a few hundred positions. www.lao.ca.gov Legislative Analyst’s Office 9 2014-15 BUDGET NEW PENSION ASSUMPTIONS NOT YET REFLECTED IN BUDGET As a standing policy, the CalPERS board will have the greatest effect on contributions to reviews its economic and demographic actuarial retirement plans for highway patrol officers (and to assumptions every four years in an “experience a lesser extent, peace officers/firefighters) because study” prepared by CalPERS staff. The experience these employees are more likely to be male and study compares the actuarial assumptions CalPERS have the opportunity to retire earlier in life. In a uses to calculate contribution rates with what letter dated February 5, 2014—in anticipation of actually happened. Based on the study, the board the February 18 meeting—the Governor requested decides whether it needs to adopt new actuarial that the board (1) implement the necessary assumptions that better reflect experience. The increases to the state’s contribution to normal most recent study was released in January 2014 cost immediately and (2) phase in the unfunded and analyzed the pension system’s experience liability rate increases within three years. CalPERS between 1997-98 to 2011-12. Compared with adopted the Governor’s proposal for state pension existing CalPERS assumptions, the study found contributions, but a longer phase in for local that (1) retirees live longer; (2) state workers—most CalPERS employees. notably, highway patrol officers and peace officers/ 2014-15 State Contributions Likely Will be firefighters—retire earlier; and (3) senior employees Higher Than Assumed in Budget Proposal. The receive higher pay. new assumptions were not reflected in the CalPERS New Assumptions Increase Contribution contribution rates used to develop the Governor’s Rates. At its February 18, 2014 meeting, the January budget proposal. Figure 6 shows the CalPERS board adopted new assumptions rates used for budget planning and CalPERS’ based on the experience study findings. The estimated 2014-15 rates that incorporate the revised new assumptions, in turn, result in increased demographic assumptions. (CalPERS will formally contribution rates, with the longer assumed adopt new rates incorporating these assumptions life expectancy having the greatest effect on in late spring.) These estimated contribution contribution rates. The board’s new assumptions rates suggest that the state will need to contribute affect CalPERS calculations of the normal cost approximately $430 million ($250 million General and unfunded liabilities. The new assumptions Fund) more in 2014-15 than the budget assumes. The administration is Figure 6 expected to update these Estimated Changes in State CalPERS Contribution Rates costs in the May Revision. After the rate increases 2014-15 2016-17 Assumed in Estimated Estimated have been implemented Pension Plan Budget New Rate New Rate fully in 2016-17, the California Highway Patrol 36.4% 42.7% 50.4% state’s contribution Peace Officer/Fire Fighter 31.3 35.6 40.5 rates are expected to State Miscellaneous Tier 1 21.4 23.4 28.2 range from 19.5 percent State Safety 18.0 19.2 19.5 CalPERS = California Public Employees’ Retirement System. to 50.4 percent of pay, 10 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET depending on the pension plan and assuming Chapter 296 requires affected local government that payroll growth and other actuarial factors employees’ share of normal cost to be adjusted, but materialize consistent with current assumptions. there is no comparable requirement regarding state Cost Increases Interact With Recent Pension employees. According to the CalPERS meeting Law. Chapter 296, Statutes of 2012 (AB 340, materials, the total estimated normal cost will Furutani), established a standard whereby increase by more than 1 percent for two state public employees hired after January 1, 2013 pay pension plans: State California Highway Patrol 50 percent of the normal cost. Under the normal and State Peace Officer/Fire Fighter. Any increase cost rates reflected in the budget, most state in state employee contributions to maintain the workers pay roughly 50 percent of these costs. standard must be established either through In the event that total contributions towards the collective bargaining or legislation. normal cost change by more than 1 percent of pay, Graphic Sign Off STATE PERSONNEL COSTS OVER PAST 20 YEARS Secretary Analyst MPA State’s Costs Have Grown. In 1993-94, have greatly increased the state’s compensation Deputy there were about 190,000 state workers. Due to costs on a per-employee basis since the beginning the increase in number of state workers as well of the last decade. Figure 7 shows how the state’s as the rising cost to provide benefits, the state’s salary, retirement (including Social Security personnel costs have grown a great deal over and Medicare), and health benefit costs on a the past two decades. The bulk of state personnel Figure 7 costs go to pay for salary, Inflation-Adjusted State Costs Up, retirement (including Social But Real Take-Home Pay for Employees Flata Security and Medicare), Projected and health benefits. After $120,000 adjusting for inflation, these State’s Salary, Retirement, and Health Costs Per Employee costs increased by about 100,000 40 percent between 1993-94 80,000 to 2012-13. Despite the state’s 60,000 policies to contain employee compensation costs for Average Employee Take-Home Pay After 40,000 Employee Retirement and Health Contributions much of the past decade through furloughs, other 20,000 staff reductions, and shifting benefit costs onto employees, the fiscal 1995-96 2000-01 2005-06 2010-11 2014-15 pressure from rising pension a Reflects 2012-13 inflation-adjusted dollars. and health benefit costs www.lao.ca.gov Legislative Analyst’s Office 11 ARTWORK #140081 Template_LAOReport_mid.ait 2014-15 BUDGET per-employee basis have changed over the past [including Social Security and Medicare] and two decades, after adjusting for inflation. Between health benefits) has been relatively flat over much 1993-94 and 2012-13, these costs increased by of the past 20 years. The average state worker’s 24 percent (from about $77,000 per employee to take-home pay even declined somewhat during about $96,000 per employee). After the scheduled the end of the last decade as state workers picked pay increases and CalPERS rate increases in up larger shares of their benefit costs while being 2014-15 go into effect, we estimate that the state’s furloughed. Our review indicates that these costs per employee will be more than 30 percent findings apply to most state workers and are not higher than they were in 1993-94 at more than the result of significant changes in the composition $100,000 per employee. of the state workforce. As Figure 7 shows, on an State Workers’ Take-Home Pay Largely inflation-adjusted basis, we expect the average state Flat. The average state worker’s inflation-adjusted worker’s take-home pay to return to its pre-2007-08 take-home pay (defined here as the employee’s levels in 2014-15. salary after paying contributions to retirement COMMENTS ON 2014-15 AND BEYOND For the reasons that we discuss below, state To date, there has not been a consistent employee compensation costs likely will continue or coordinated process for the administration to increase beyond 2014-15. to analyze compaction issues and inform the Scheduled Rank-and-File Salary Increases. Legislature where such problems exist. The Pursuant to the current MOUs, most state proposed 2014-15 budget attempts to address employees will receive a pay increase in 2015-16. In compaction by (1) extending 2014-15 pay increases addition, depending on the outcome of an annual to managerial and supervisorial employees and salary survey, highway patrol officers could receive (2) providing larger pay increases for a select group a salary increase every year through 2017-18. of classifications the administration has identified Management Pay Increases. The administration as being affected by compaction. Although these has broad authority over supervisory and actions seem appropriate, compaction likely managerial salaries. Statewide, these salaries total also exists in other classifications. To address about $4 billion ($2 billion General Fund). When compaction, the administration would need to rank-and-file employees negotiate pay increases, review managerial and supervisorial classifications managerial employees do not automatically receive and propose pay increases for affected managerial a comparable increase in pay. When rank-and-file state workers beyond what is proposed in the pay increases faster than managerial pay—as has 2014-15 budget. been the case for some classifications—“salary Pension and Health Benefit Costs Rising. compaction” can result. Salary compaction can The state should expect pension contributions to be a problem when the differential between continue increasing for the next several years as management and rank-and-file is too small to create CalPERS (1) continues to be affected by earlier an incentive for employees to accept the additional market losses and (2) phases in higher rates based responsibilities of being a manager. on the new actuarial assumptions. In addition, 12 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET health premium costs likely will continue to salary costs in 2014-15 could increase should outpace inflation for the foreseeable future. the Legislature ratify addenda to existing MOUs Future Labor Agreements. Currently, the state providing pay increases to firefighters or other is bargaining with the three bargaining units with bargaining units not scheduled to receive pay expired contracts. If the state reaches an agreement increases in 2014-15. Beyond 2014-15, the MOUs with these bargaining units that includes terms for a large portion of the workforce will expire similar to many of the other MOUs, the state will within the next year or two. The outcome of these incur additional costs to provide these employees collective bargaining negotiations will affect the compensation increases in 2014-15. In addition, state’s compensation costs in 2015-16 and beyond. www.lao.ca.gov Legislative Analyst’s Office 13 2014-15 BUDGET 14 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET www.lao.ca.gov Legislative Analyst’s Office 15 2014-15 BUDGET 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. 16 Legislative Analyst’s Office www.lao.ca.gov