Legislative Analyst's Office, December 6, 1999

State Employee Compensation: The Recently Approved Package

The Legislature and the administration took several actions in September to enhance state employees' salaries and benefits. The Legislature approved memoranda of understanding (MOUs) for all of the state's 21 collective bargaining units, which represent approximately 164,000 state employees (see Figure 1). These agreements replace the MOUs that expired June 30, 1999. In addition, the Department of Personnel Administration (DPA) approved a compensation package similar to that approved in the MOUs for employees not covered by collective bargaining (such as managers and supervisors).

Terms of New MOUs

The new MOUs are effective for a two-year period beginning July 1, 1999. The employee compensation portions of the MOUs vary by bargaining unit; however, the MOUs provide all represented employees with:

A 4 percent salary increase retroactive to July 1, 1999 and another 4 percent effective September 1, 2000.

• Increased state contributions for health benefits.
• Increased retirement benefits (subject to separate legislative actionChapter 555, Statutes of 1999 [SB 400, Ortiz]).

The MOUs include numerous other provisions that are unique to particular bargaining units. Figure 2 shows the additional salary adjustments granted on top of the basic 4 percent granted all employees in the current year. These increases range from 1 percent to 20 percent and cover about 15,000 of the 164,000 represented state employees.

Figure 3 shows other provisions bargained in certain units. The most common (1) provide more flexibility for the employee to choose to receive compensating time off (CTO) for overtime and (2) count sick leave time off as hours worked for determining when overtime begins.

To partially offset the state's costs for certain retirement benefit increases (discussed below), the MOUs for bargaining units with employees in the Safety, Police Officer/Firefighter, and Highway Patrol plans increase the employee share of retirement contributions effective July 1, 2001:

• Safety--from 6 percent to 8 percent.
• Police Officer/Firefighter (Units 6 and 8)increased employee contribution by 2 percent.
• Highway Patrol--from 0 percent to 1.5 percent.

Other retirement provisions in the MOUs include a state "pick-up" of $12 of Units 4 and 15 employee's monthly contribution from January 1 to August 31, 2000 and crediting accumulated education leave toward retirement for employees in Units 3 and 21.

Health Benefits

Basic Program. The state provides health insurance benefits under several programs. For most state employees, the state pays the premium cost for employees' health, dental, and vision insurance up to a maximum monthly amount. These payments vary based on the number of individuals covered for the employee and the health provider the employee selects. For each type of insurance, if the premium exceeds the maximum state contribution, the employee pays the difference.

Consolidated Benefits Program. Some represented employees--Units 8, 16, 18, and 19as well as most nonrepresented employees are in a Consolidated Benefits (CoBen) program. In this program, the state pays a monthly combined maximum for health, dental, and vision insurance premiums. Employees can choose whether to enroll in the health and dental insurance programs, but vision insurance is automatic and cannot be declined. If the total cost of the employee's insurance premiums exceeds the maximum state contribution, the employee pays the difference. If the total cost is less, the employee is paid the difference as taxable income.

Unit 13 Program. For employees in Unit 13, the state pays a single maximum amount, regardless of the number of parties covered, for health, dental, and vision premiums. In this case, if the combined cost is less than the state maximum, the state saves the difference.

Figure 4 (see page 6) summarizes the changes in state contributions for insurance premiums under the new MOUs and by administrative action for nonrepresented employees. The MOU for Unit 6 also requires the state to contribute $1 million effective July 1, 1999 and another $1 million effective July 1, 2000 to the California Correctional Peace Officers' Association Health Benefits Trust Fund for increased vision benefits.

Rural Areas Program. In addition to the changes shown in Figure 4, Chapter 743, Statutes of 1999 (SB 514, Chesbro) establishes a program to subsidize health care costs for state employees in rural areas that are not in the service territory of any HMOs approved by the Public Employees' Retirement System (PERS). This program will reimburse health premium costs, as well as out-of-pocket expenses that would normally be covered by a PERS-approved HMO (such as copayment charges), up to an amount agreed upon through collective bargaining. The new MOUs set this maximum amount at $1,500 annually.

Retirement Benefits

Chapter 555 enhances retirement benefits for all state employees (see Figure 5 on page 7). As the figure indicates, the benefit increases occur by granting employees a greater retirement "factor" at a given age (for example, 2 percent of compensation for each year of service at age 55).

Under Chapter 555, the improved benefits become effective January 1, 2000 subject to three conditions. One condition is that the new benefits for represented employees must be agreed to in collective bargaining. This condition was met in each of the new MOUs. Another condition is that nonrepresented employees receive the new benefits only if approved by DPA. This approval was granted October 21, 1999. The third condition required the PERS board to approve the changes to the actuarial valuation methods that the board committed to when it proposed enhanced benefits earlier this year. At its October meeting, the board approved the changes, which include (1) modifying the June 30, 1998 valuation using 95 percent (rather than 90 percent) of the market value of state employer assets and (2) reducing from 30 years to 20 years the amortization of the June 30, 1998 excess assets beginning July 1, 1999.

In addition to these benefit improvements, Chapter 555 allows employees in Miscellaneous or Industrial Second Tier retirement plans to switch to First Tier plans. This option also provides these employees the opportunity to "buy back" First Tier coverage for prior service under the Second Tier plan. In addition, employees in the Modified First Tier retirement programan intermediate plan approved in 1998 for Miscellaneous and Industrial employees in Units 8, 16, and 19who opted out of the Second Tier retirement program will automatically move into First Tier plans with service since 1998 credited as First Tier service. Chapter 555 also increases the maximum retirement benefit for Highway Patrol employees in Unit 5 and Peace Officer/Firefighter employees in Units 6, 7, and 8 to 90 percent of final compensation. (The current limit is 80 percent for Unit 7 employees and 85 percent for employees in Units 5, 6, and 8.)

Cost of Compensation Package

The state employee compensation package includes MOUs, DPA-approved provisions for nonrepresented employees, and enhanced retirement benefits. As shown in Figure 6 (see page 8) , the estimated net cost of $286 million in the current year increases to nearly $1.3 billion in 2001-02 when all full-year costs are recognized. The costs of various major components are discussed below.

MOUs

The MOUs include provisions that become effective in 1999-00 and in 2000-01. The DPA estimates that the 1999-00 provisions will cost about $453 million (all funds) in the current year. According to DPA, the provisions effective beginning in 2000-01primarily the 4 percent salary increase effective September 1, 2000will cost an additional $275 million (all funds) in 2000-01. As summarized in Figure 6, the annualized cost of the MOUs will total $799 million (all funds) beginning in 2001-02.

Additional costs not accounted for in these figures include (1) counting sick leave time off as hours worked for determining when overtime pay begins; (2) expanding employee flexibility to choose CTO or cash payment for overtime in Units 12, 13, 14, and 18; and (3) allowing Unit 7, 8, 16, 18, and 19 employees to keep the balance of their CoBen allowance that they do not spend on health care coverages.

Retirement Benefits

The most notable additional cost of the compensation package is that associated with the retirement package, which includes benefit increases for current employees and a one-time cost-of-living adjustment (COLA) of varying amounts for current retirees. Based on information provided by PERS, we estimate that the total cost of the retirement package will be 4.22 percent of payroll beginning in 2001-02the first year that PERS recognizes the increased liability in setting the state employer contribution rates. This amounts to about $420 million in 2001-02 (see Figure 6) and will grow with payroll.

Coupled with the benefit increases, PERS agreed to change the two actuarial valuation methods discussed above, but only if the increases were adopted. (PERS could have made these changes independent of the improved benefits.) Beginning this year, these valuation changes recognize excess assets more quickly, thereby partially offsetting the state's costs that result from the benefit improvements. As shown in Figure 6, we estimate that the valuation changes result in savings of $304 million this year, gradually declining to $215 million by 2001-02. However, 2001-02 is the first year that PERS includes the new benefits in its calculations to determine the state's contribution. Thus, beginning in 2001-02, the state will incur a net cost increase of about $205 million. Figure 7 shows the changes in the state's retirement contribution rates due to the benefit enhancements and actuarial changes. Based on these rates, the increased cost to the state, as a result of the benefit enhancements, grows to around $280 million in 2004-05 and then declines and levels off at about $260 million by 2008-09.

Nonrepresented Employee
Salary Increases

Salary increases for employees not covered by collective bargaining have been partially addressed by administrative action. In September, DPA approved for these employees (primarily managers and supervisors) the general salary increase included in the new MOUs4 percent retroactive to July 1, 1999 and another 4 percent effective September 1, 2000with additional increases of 1 percent to 16.5 percent for about one-third of nonrepresented employees in particular classes. In general, these additional increases parallel similar increases given to represented employees these employees supervise to maintain a salary differential of about 10 percent.

Funding

As noted in Figure 6, the total 1999-00 cost of the compensation provisions for represented and nonrepresented employees is $590 million ($303 million General Fund). Chapter 776, Statutes of 1999 (SB 339, Burton) appropriates a total of $601.2 million ($341.5 million General Fund) to pay for both the 1999-00 compensation provisions and a portion of the cost for compensation provided in 1998-99. The General Fund portion of these two-year costs totals $330 million$11.5 million less than the amount in Chapter 776.