MOU Fiscal Analysis: Bargaining Unit 6 (Corrections)

This analysis of the proposed labor agreement between the state and Bargaining Unit 6 (corrections) fulfills our statutory requirement under Section 19829.5 of the Government Code. State Bargaining Unit 6’s current members are represented by the California Correctional Peace Officers’ Association (CCPOA). The administration has posted the agreement and a summary of the agreement on its website. (Our State Workforce webpages include background information on the collective bargaining process, a description of this and other bargaining units, and our analyses of agreements proposed in the past.)

If this proposal is approved by the Legislature and Unit 6 members, the Governor would achieve his goal of implementing a new funding plan for retiree health benefit liabilities and reducing retiree benefits for future Unit 6 members. These actions would lower state costs significantly over the long term. In order to reach this agreement, however, the Governor agreed to propose various pay and benefit increases for Unit 6 members in the near term. These proposed pay and benefit increases—along with state contributions to match employee payments to a retiree health funding account—would be a significant new budgetary commitment for the state General Fund.

Major Provisions of Proposed Agreement

If ratified by the Legislature and CCPOA membership, this agreement would be in effect through July 2, 2018. The key provisions of the proposed agreement are summarized below.

Three General Salary Increases. The proposed agreement would increase pay for all Unit 6 members by 3 percent on three separate occasions—a cumulative pay increase of 9.3 percent over the course of the agreement. The first of these pay increases would apply to the pay period immediately following ratification of the agreement by the state and Unit 6 members. The other two pay increases would occur on July 1 of 2017 and 2018.

Twice since furloughs ended in 2012-13, the state has provided most Unit 6 members pay increases. (For a summary of the number of furlough days received by Unit 6 members, refer to Appendix 1 of our March 14, 2013 report After Furloughs: State Workers’ Leave Balances.) Figure 1 illustrates the actual pay increases received by most Unit 6 members since 2012-13 and the proposed future pay increases under the agreement.

All of these salary increases also increase the state’s costs associated with benefits that are paid as a percentage of salary—referred to as “salary-driven benefits.” In 2016-17, salary-driven benefits for Unit 6—pension and Medicare benefits—are expected to equal about 40 percent of salary. In addition, as we discuss in greater detail later, the administration proposes prefunding retiree health benefits in the future as a percentage of pay, which—once fully implemented in 2018-19—will increase the near-term costs of salary-driven benefits by 4 percent of pay.

Expand Definition of Base Pay. Employees currently receive a monthly bonus of either $65 or $130 (depending on seniority) that is subject to Medicare payroll taxes but does not affect employees’ pension benefits. This bonus is referred to as a “Physical Fitness Incentive.” As we indicated in our April 8, 2011 analysis, employees are eligible to receive the bonus regardless of their physical condition. The proposed agreement would provide all Unit 6 members the $130 monthly bonus and incorporate the bonus as part of employees’ base pay. This means that the bonus would (1) be considered in calculations of benefit payments like pensions and leave cash outs and (2) grow with any future percentage increases to base pay, for example the general salary increases provided by the agreement.

Increase Uniform Allowances for Most Employees. Nearly 90 percent of Unit 6 members are required to wear a uniform while at work. These employees receive annual uniform allowances of $530 in the case of correctional officers and $305 in the case of medical technical assistants (psychiatric). The proposed agreement would increase these allowances by about 80 percent so that correctional officers receive $950 and medical technical assistants receive $546. These payments do not affect employees’ pension benefits but are subject to Medicare payroll taxes.

One Percent Pay Increase for Senior Employees. In 2015, more than 6,800 employees each with more than 17 years of service received a pay differential based on their years of service. The proposed agreement would increase this pay differential by 1 percent of pay so that an employee with 17 years of service would receive a 2 percent pay differential and employees with 25 or more years of service would receive a 9 percent pay differential. This pay differential also increases the state’s costs for employees’ pension and Medicare benefits.

Pay Increases for Employees at Certain Facilities. Under the current agreement, employees who work at (1) Correctional Training Facility, Salinas Valley, or San Quentin State Prison (about 2,300 full-time equivalent employees) receive additional pay in the form of monthly housing stipends of $175, and (2) Avenal, Chuckawalla Valley, Ironwood, Calipatria, or Centinela State Prisons (about 3,000 full-time equivalent employees) receive annual recruitment/retention bonuses of $2,400 paid once per year. The proposed agreement increases the state’s costs to provide these payments. Specifically (1) the housing stipend would be increased to $200 each month and (2) the recruitment/retention bonus would be increased to $2,600 (to be paid in two equal installments every six months) and would be provided to employees who work at three additional facilities—California Correctional Center, High Desert, and Pelican Bay State Prisons (about 2,000 full-time equivalent employees). This would increase the number of full-time equivalent employees potentially eligible for the bonus to nearly 5,000. These payments do not affect employees’ pension benefits but are subject to Medicare payroll taxes.

Allow Annual Cash Out of Vacation and Annual Leave. The proposed agreement would permit—to the extent departmental resources allow—Unit 6 members to cash out up to 80 hours of vacation or annual leave each year. Leave would be cashed out based on employees’ current hourly pay. These leave cash outs are subject to Medicare payroll taxes but do not affect employees’ pension benefits. The administration assumes that departments would absorb these costs within existing departmental resources.

Change How Overtime Is Calculated. In general, employees receive overtime pay (1.5 times regular pay) for each additional hour worked more than 40 hours in a week. Under current law, any form of paid leave during the week “shall not be considered as time worked by the employee for purpose of computing cash compensation for overtime or compensating time off for overtime.” If a labor agreement conflicts with this law, the agreement is the controlling document. The proposed agreement conflicts with existing statutory law by allowing time off from work for jury leave, military training leave, and subpoenaed witness leave to count as “time worked” for purposes of calculating overtime pay in a week. The overtime calculation established by the agreement would become the controlling state policy for Unit 6 employees beginning on July 1, 2016.

Increase Overtime Meal Allowance. Under current practice, Unit 6 members are given an overtime meal allowance when they are required to work overtime within two hours before or after their scheduled shift. Beginning the pay period immediately following its ratification, the proposed agreement increases this allowance from $6 to $8.

Increase State Costs for Health Benefits. The state contributes a flat dollar amount to Unit 6 members’ health benefits that was last adjusted in January 2015. The proposed agreement would adjust the amount of money the state pays towards these benefits immediately following the ratification of the agreement by the state and Unit 6 members and again in January 2017 and 2018. Under the agreement, the state’s contribution would be adjusted so that the state pays 80 percent of an average of CalPERS premium costs plus 80 percent of average CalPERS premium costs for enrolled family members—referred to as the “80/80 formula.” The state’s contributions would not be increased thereafter unless agreed to in a future agreement.

Increase State Costs for Vision and Dental Benefits. The CCPOA Benefit Trust Fund provides a number of benefits to members, including legal services and vision, life, and dental insurance. It is a trust fund established pursuant to federal trust law and administered by a member-controlled board of trustees. Members of the trust fund consist of Unit 6 members, supervisors, and retirees. Unit 6 members do not receive vision and dental benefits purchased by the state. Instead, these benefits are purchased by the trust fund. The state and employees make regular contributions to the trust fund to pay for these benefits. The Department of Finance informs us that the state currently contributes a flat-dollar annual contribution of about $5 million to fund these benefits. The proposed agreement specifies that the state will increase its contributions to the CCPOA Benefit Trust Fund by $7 million in 2016-17 and $14 million ongoing—bringing the state’s total annual contributions to the trust fund to $19 million—beginning in 2017-18.

Removal of Certain Information From Supervisory Files. Personnel information regarding an employee is maintained in two locations. Some information is kept in the official personnel file held by the department—including more formal documents such as adverse actions, settlement agreements for adverse actions, health coverage and retirement elections, or emergency contact information. Other information is kept in the supervisory file held by the supervisor—including less formal documents such as notes used in preparing probationary reports, letter of instruction, individual development plans, record of conversations between an employee and a supervisor, or accommodations and training records. The proposed agreement allows an employee to submit a written request—to which a supervisor must comply—that any document that is more than one year old be removed from that employee’s supervisory file. The California Department of Human Resources indicates that if any employee misconduct results in an adverse action or other formal disciplinary documentation, those documents would be retained in the employee’s official personnel file regardless of an employee’s request.

Retiree Health Benefits and Prefunding

Current Benefits and Funding. Until recently, like most governments in the U.S., California did not fund health and dental benefits for its retirees during their working careers in state government. This has resulted in large unfunded state liabilities for the benefits. The state now pays for retiree health and dental benefits on an expensive "pay-as-you-go" basis. This means that later generations pay for benefits of past public employees.

Currently, after Unit 6 members retire, the maximum state contribution to their health benefits covers 100 percent of an average of CalPERS premium costs plus 90 percent of average CalPERS premium costs for enrolled family members. (This maximum contribution is sometimes referred to as the "100/90 formula.") Most Unit 6 members—hired after 1989—receive 50 percent of the maximum contribution from the state if they retire with ten years of service, with this amount growing each year until it reaches 100 percent of the maximum contribution if they retire after 20 or more years.

Proposed Retiree Benefit Changes. The proposed agreement changes future retiree health benefits for Unit 6 members first hired in 2017 and thereafter. The agreement requires future workers to pay more towards their health benefits in retirement. The maximum state contribution for these workers' future retiree health benefits would be revised to reflect the contribution received by active workers based on the 80/80 formula. In addition, the agreement requires future employees to work longer to receive the maximum state contribution. Under the agreement, employees first hired by the state in or after 2017 will not receive any employer contribution for health and dental benefits in retirement unless they work for 15 or more years. After 15 years of service, these workers would receive 50 percent of the revised maximum state contribution in retirement, with this amount growing each year until it reaches 100 percent of the revised maximum contribution if they retire after 25 or more years.

Proposed Funding Changes. This agreement would institute a new arrangement to begin to address unfunded retiree health benefits for Unit 6 members. While the administration's plan seems to be to keep making pay-as-you-go benefit payments for many years, the new arrangement would begin to fund "normal costs" each year for the future retiree health benefits earned by today's Unit 6 workers. The agreement would deposit those payments in an invested account that would generate earnings and gradually reduce unfunded liabilities over the next three decades or so.

Under the agreement, all Unit 6 members would contribute 1.3 percent of pay to a retiree health funding account beginning in 2016-17, rising to 2.6 percent of pay in 2017-18, and rising again to 4 percent of pay beginning in 2018-19. The state would match these contributions to the trust account. In 2018-19, total employee and state payments to the account would be about $170 million, which is essentially equal to the actuarially estimated Unit 6 rank-and-file normal costs under the most recent state valuation (specifically, that valuation's "full funding policy" scenario with an assumed 7.3 percent discount rate). Under no circumstances would an employee or beneficiary or survivor be able to recover employee contributions to the retiree health funding account, even if the employee leaves state service after a few years and is ineligible for retiree benefits.

Fiscal Effects

Significant New State Budget Commitment. As shown in Figure 2, the administration estimates that the proposed agreement will increase state costs by nearly $600 million per year by 2018-19—virtually all coming from the state’s General Fund. While we think the administration’s estimates in Figure 2 are reasonable, we have identified costs that are omitted from these estimates.

The most notable exclusion from the administration’s estimated costs is the increased overtime costs that will result from the scheduled pay increases. Overtime is a significant component of Unit 6 members’ compensation. For example, Unit 6 members received more than $340 million in overtime pay (on average, more than $12,000 per employee) in 2015. We think it is reasonable to assume that the scheduled pay increases will increase overtime costs for Unit 6 members by tens of millions of dollars—likely exceeding $30 million each year by the end of the agreement. In addition, some of the provisions could make it difficult for institutions to cover vacancies without using overtime—possibly increasing overtime costs even further.

Extension of Provisions to Management Further Increases Costs. When rank-and-file pay increases faster than managerial pay, “salary compaction” can result. Salary compaction can be a problem when the differential between management and rank-and-file is too small to create an incentive for employees to accept the additional responsibilities of being a manager. Consequently, the administration often provides compensation increases to managerial employees that are similar to those received by rank-and-file employees. In the case of rank-and-file state highway patrol officers (Unit 5), correctional officers (Unit 6), and firefighters (Unit 8), state law requires supervisors of these employees to receive salary and benefit changes that are at least generally equivalent to the salary and benefits granted to the employees they supervise. The administration indicates that in 2015-16, this agreement will increase costs associated with Unit 6 supervisors and managers by $6 million. We think it is reasonable to estimate that extending a comparable increase in compensation to Unit 6 supervisors and managers will increase state annual costs by between $100 million and $200 million (mostly from the General Fund) by 2018-19. More than $20 million of these costs would fund the state’s share of the Governor’s plan to prefund retiree health benefits for Unit 6 managers and supervisors.

Leave Cash Outs Can Reduce Long-Term Costs. The average state employee earns a significant number of days off each year. Most Unit 6 members work in 24-hour facilities where it can be difficult for employees to take time off. During the five years of furloughs from 2008-09 and 2012-13, it was virtually impossible for Unit 6 members to use the 94 furlough days they received plus the vacation or annual leave they earned throughout the year. As Figure 3 shows, the result of these furloughs was that the average Unit 6 member’s vacation/annual leave balance more than doubled between 2008 and 2013.

As we explain in our March 14, 2013 report After Furloughs: State Workers’ Leave Balances, unused leave balances create a liability for the state because the state must compensate employees for any unused leave—at their final pay rate—when the employee separates from state service. Employees typically earn their highest salary during their last year of service with the state. We estimate that the total value of Unit 6 members’ unused vacation and annual leave will be more than $430 million after employees receive the first general salary increase proposed under the agreement. Offering cash out programs in which employees can cash out unused leave at their current pay level will reduce the state’s long-term costs associated with these liabilities.

Long-Term Fiscal Effects of Retiree Health Proposals Uncertain. For just Unit 6 members and their supervisors, the state's unfunded retiree health and dental benefit liabilities now exceed $12 billion under the existing pay-as-you-go approach. We have long recommended that the state move toward funding normal costs for these benefits. This agreement—according to the best information available now—would achieve that important goal. Over the long term, by generating investment gains in a dedicated retiree health funding account, this approach would significantly reduce state taxpayer costs. In addition, the proposed reduction of future Unit 6 retiree benefits also would significantly reduce state costs over the long term.

The administration has submitted no Unit 6-only actuarial valuation specifically tied to this agreement's retiree health and dental benefit provisions. Moreover, as with other recent labor agreements, there is no detailed analysis of the complex legal issues involved with the new retiree health provisions. If the Legislature and Unit 6 members approve the agreement, it will be important to monitor future state actuarial valuations to see if the new funding plan is on track to achieve the goal of eliminating Unit 6 unfunded liabilities over the next 30 years or so.