MOU Fiscal Analysis:
Bargaining Unit 9 (Professional Engineers)

On August 22, 2018, the administration released a proposed labor agreement between the state and Bargaining Unit 9 (professional engineers). This analysis of the proposed agreement fulfills our statutory requirement under Section 19829.5 of the Government Code. State Bargaining Unit 9’s current employees—about 10,800 full-time equivalents—are represented by Professional Engineers in California Government (PECG). The administration has posted the agreement and a summary of the agreement on the California Department of Human Resources’ (CalHR’s) 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.)

Administration’s Timing of Release Is Not Mindful of Legislative Process. Since 2005, state law has specified that a proposed “memorandum of understanding [MOU] shall not be subject to legislative determination [historically interpreted to mean the final floor vote] until either the Legislative Analyst has presented a fiscal analysis of the memorandum of understanding or until 10 calendar days has elapsed since the memorandum was received by the Legislative Analyst.” The administration formally submitted the proposed agreement with Bargaining Unit 9 after the close of business on August 22, 2018, with nine full calendar days before the end of session on August 31, 2018. In 2016, voters approved Proposition 54, which places restrictions on when the Legislature can act on legislation. Specifically, Proposition 54 requires that a typical bill—including amendments to that bill—be available to legislators and on the Internet for at least 72 hours before the Legislature may pass that bill. A bill to ratify a proposed labor agreement is subject to this 72-hour rule. Consequently, in order to be ratified before the end of session, this agreement must be presented in bill form no later than August 28^th, further reducing the period of time for our analysis and legislative consideration.

Both of these review periods have been in place long enough for the administration to establish a collective bargaining schedule that respects the legislative process. In light of the very limited amount of time that we have to review this 195-page agreement and accompanying fiscal estimates provided by the administration, this analysis is based on our current understanding and interpretation of the provisions of the agreement.

Major Provisions of Proposed Agreement

Term. The agreement would be in place for two years—effective from July 1, 2018 to June 30, 2020. This is consistent with our 2007 recommendation to the Legislature not to approve any proposed labor agreements with a term of more than two years. Although the agreement would expire June 30, 2020, the agreement would provide senior employees new pay increases in years after the agreement has expired (this provision is discussed in greater detail below).

Pay Increases for All Unit 9 Members in 2018-19 and 2019-20. The agreement provides two General Salary Increases (GSIs) to all Unit 9 members. Specifically, the agreement would give employees a 4.5 percent pay increase retroactively effective on July 1, 2018 and a 4 percent pay increase effective on July 1, 2019. (Under the current MOU, Unit 9 members received GSIs in 2016-17 [5 percent] and 2017-18 [2 percent].)

Additional Pay for Senior Employees. The agreement establishes a “longevity pay differential” seemingly aimed at encouraging more senior employees to delay retirement. The pay differential would be phased in over four years as shown in Figure 1. Two of the scheduled pay increases would occur after the proposed agreement expires. By 2021-22, employees with 23 or more years of service would earn a pay differential equivalent to 5.5 percent of their base pay. This pay differential would be subject to Social Security and Medicare payroll taxes and would be considered compensation for purposes of calculating employees’ pension benefits.

Bay Area Pay Differential. The agreement establishes a new pay differential for employees who work in one of five counties—Alameda, Marin, San Mateo, Santa Clara, or San Francisco. Specifically, eligible employees would receive $250 per month. Although the state and employees would pay Social Security and Medicare payroll taxes on this pay, it would not affect pension benefits.

Voluntary Personal Leave Program (VPLP). Employees currently may choose to participate in the VPLP, whereby participating employees receive one day of leave each month in exchange for a 4.62 percent reduction in pay. This program is relatively popular among Unit 9 members—more than 1,100 participated in the program each month in 2017. The average pay of employees who participated in the program in 2017 suggests that higher paid employees are more likely to participate. The proposed agreement would allow participating employees to agree to either a 4.62 percent or a 9.24 percent pay reduction in exchange for either one or two days of leave, respectively. The agreement establishes a new cap on unused VPLP leave by prohibiting employees from having more than 240 hours of unused VPLP leave banked. Employees who have more than 240 hours of VPLP would not be able to participate in the program. As of December 2017, the average Unit 9 member who participated in VPLP had 175 hours of unused VPLP leave banked. Like furloughs, VPLP increases vacation and annual leave balances because employees use VPLP days before they use other types of leave. This creates a liability for the state that is paid at an employee’s final base salary rate when an employee separates from state service (refer to our 2013 report on the topic of leave balance liabilities). Also like furloughs, the reduced take home pay received during VPLP does not affect an employee’s pension benefit—the pension benefit is determined using the employee’s base pay.

One-Time Increase to Employee Pension Contribution. In 2019-20, employees agree to pay up to 0.5 percent of pay in addition to their current contributions towards their pensions if (1) CalPERS determines that normal cost increases by at least 1 percent and (2) 50 percent of the total normal cost is greater than employees’ current pension contributions. Under the Public Employees’ Pension Reform Act of 2012, employees hired after 2013 receive a lower pension benefit. However, regardless of date of hire, Unit 9 members contribute the same percentage of pay to fund their pension benefit (this is true for most state employees). While employees hired before 2013 generally pay half of normal cost for their benefit, employees hired after 2013 pay more than half of the normal cost for their benefit. The provision of the proposed agreement would apply the same increase in contribution to employees regardless of their date of hire.

Retirement Dental and Vision Benefit Vesting. Currently, Unit 9 members must work 15 years to receive half of the state retiree health benefits and 25 years to receive the full benefit. Under the proposed agreement, beginning in 2019, this vesting schedule also would apply to retirement dental and vision benefits for new hires.

Uniform Replacement Allowance. The proposed agreement increases the allowance paid to Unit 9 members who are required to wear uniforms and who work at the Department of Parks and Recreation (DPR) and the California Department of Forestry and Fire Protection (Calfire). Specifically, the current allowances at DPR and Calfire would be increased to $700 from $350 and $380, respectively. Only 17 Unit 9 employees receive the uniform allowances.

Certification Reimbursement. Under the current agreement, Unit 9 members employed in specified classifications at the Department of Industrial Relations (DIR) who complete the examination for Certified Safety Professional administered by the Board of Certified Safety Professionals may be reimbursed for application ($160) and examination ($340) fees. The proposed agreement would extend this same reimbursement policy to employees in the same classifications who work at the Department of Water Resources.

Prison Recruitment and Retention Bonus. Under the current agreement, Unit 9 members who work for the Department of Corrections and Rehabilitation at Avenal, Ironwood, Calipatria, Centinella, or Chuckwalla Valley State Prisons are eligible to receive an annual bonus of $2,400. The proposed agreement would increase the bonus by $200 to a total of $2,600. In addition, the agreement would make the bonus available to employees who work at three additional state prisons (Pelican Bay, California Correctional Centers, and High Desert). The administration indicates that no one in Unit 9 currently receives this bonus and no one will receive it for the foreseeable future. Accordingly, the administration assumes that the expansion of the facilities eligible and the $200 increase to the bonus will have no fiscal effect. The administration indicates that this provision is included in the Unit 9 agreement for consistency with labor agreements for other bargaining units.

Maintains Health Benefits. The proposed agreement would continue the current level of health benefits provided by the current Unit 9 MOU. Specifically, the agreement specifies that the state continues to pay 85 percent of an average of CalPERS premium costs plus 80 percent of average CalPERS premium costs for enrolled family members—what is referred to as the “85/80 formula.”

LAO Assessment

Administration’s Fiscal Estimate

Increased Costs in Current Fiscal Year. As shown in Figure 2, the administration estimates that the proposed agreement would increase state costs by $92.7 million ($2.9 million from the General Fund) in 2018-19. In addition, the administration estimates that extending the provisions of the proposed agreement to managers and supervisors would increase state costs in 2018-19 by $32 million ($2 million from the General Fund). These estimates appear reasonable.

Future Costs Likely Higher Than Administration Presents. As we discuss below, the administration’s projected costs do not reflect some costs that likely will occur. By 2021-22, the state’s total annual costs resulting from the agreement could be tens of millions of dollars above what is reflected in the figure for the following reasons.

• Rising Pension Costs. The administration’s estimates do not reflect any changes in state contributions towards employee pension benefits beyond 2018-19. The most recent projections from CalPERS indicate that the state’s pension contributions for miscellaneous employees will increase from 29.3 percent of pay in 2018-19 to 32.6 percent of pay by 2021-22.

• Increased Leave Balance Liabilities From VPLP. Increasing the number of days employees can receive through VPLP will increase employee leave balances. This will increase state liabilities resulting from unused leave that can be cashed out at the end of an employee’s career with the state. The increase in state liabilities depends on the number of employees who participate in the program and departments’ ability to enforce leave balance caps established by the agreement.

• Extending Provisions to Managers and Supervisors. The administration did not identify costs associated with extending the longevity pay differential and other compensation increases to managers and supervisors beyond 2018-19. These annual costs could be in the tens of millions of dollars by 2021-22.

VPLP

Participating Employees Not Using VPLP Days in Month of Pay Reduction. Under VPLP, participating employees receive one day off each month in exchange for a 4.62 percent pay cut. As of December 2017, the average Unit 9 member participating in VPLP had 175 hours—almost 22 days’ worth—of unused VPLP leave. In five departments—Caltrans, Department of Motor Vehicles, DIR, California Military Department (CMD), and Housing Finance Agency (HFA)—representing more than three-fifths of participating Unit 9 members, the average participating Unit 9 member had more than 220 hours of unused VPLP leave. The examples of CMD and HFA are extreme: at each department one Unit 9 member had about 1,000 hours (125 days) of unused VPLP leave. The large accumulation of unused VPLP seems contrary to the purpose of the program. Either employees are choosing not to take time off or departments are not allowing employees to use the time.

Existing Leave Caps Not Enforced. The current Unit 9 MOU specifies that—except under specified circumstances—employees are only allowed to carry a maximum of 640 hours of unused vacation from one calendar year to the next. The agreement specifies that “whenever an employees’ vacation accumulation exceeds 640 hours, the department head or designee has the right to order the employee to submit a vacation request which will demonstrate how and when the employee plans to use any hours which will exceed the cap by the end of the calendar year.” Assuming certain criteria are met, the department head or designee may “order the employee to take excess time at the convenience of the department.” In November 2016, CalHR issued a policy memo instructing all departments to comply with existing leave statutes, regulations, policies, and MOUs. The memo indicated that CalHR “is working to enhance its capability to oversee and manage the state’s leave programs” and that CalHR expects to be able to “enforce employee leave program laws, rules, and policies” as well as “audit/monitor departments’ leave balance systems and compliance efforts.” As of December 2017, more than 1,300 Unit 9 members had vacation or annual leave balances that exceeded the cap established in the MOU.

Not Confident VPLP Leave Cap Established by Agreement Has Meaning. If enforced, the 240-hour cap on unused VPLP would help minimize any effects on the state’s leave balance liabilities resulting from expanding the VPLP. However, given the lack of oversight and enforcement of existing Unit 9 leave balance caps and the relatively high existing balances of unused VPLP leave, we are not confident that the VPLP leave cap established by the agreement has any meaning.

Recruitment and Retention

Increasing Employment Outlook for Engineers. Engineering is a broad occupation category that includes a variety of different specializations. The U.S. Bureau of Labor Statistics (BLS) projects employment in the broader engineering occupational category to grow 8 percent over the next ten years—slightly more growth than the 7 percent growth it expects across all occupations. Among state employed engineers, the most common specialization is civil engineering. More than 40 percent of Unit 9 members are civil engineers—the vast majority of state civil engineers work for the California Department of Transportation (Caltrans). Civil engineers design, construct, and maintain infrastructure, bridges, tunnels, dams, and buildings. Largely due to a growing need to rebuild, repair, and upgrade existing infrastructure, the BLS expects employment of civil engineers to grow 11 percent over the next ten years—faster than the broader engineering occupational category. Growing employment indicates that there will be greater competition from employers to fill these jobs, meaning that it could be more difficult for the state to recruit new civil engineers in the future.

Comparing State Engineer Salaries. The CalHR and PECG jointly completed a salary survey that was released in July 2018. After comparing state engineer salaries with salaries of engineers employed by 18 public agencies and 10 University of California campuses, the survey concluded that the state salary for engineers lagged the salaries provided by the other public employers by between 2 percent and 6 percent. It is important to note that this survey did not take into consideration the value of non-salary elements of compensation like pension or health benefits.

Caltrans Has Had Difficulty Hiring Capital Outlay Support Staff. The state has had difficulties hiring capital outlay support staff—including new engineers at Caltrans. The 2017-18 budget directed Caltrans to fill all of its vacant capital outlay support positions (about 400 positions) before asking for any new positions to implement SB 1 (Chapter 5 of 2017 [SB 1, Beall]). (We discuss SB 1 in greater detail below.) The department has indicated that it has been difficult to fill the positions due to a combination of challenges in hiring new people and attrition—largely resulting from increases in retirements. For example, over an 11-month period, Caltrans averaged hiring 53 new employees while losing 41 employees to attrition, resulting in an average net increase of only 14 filled positions each month. It is our understanding that the department has undertaken various strategies to boost recruitment, including participating in recruitment fairs and visiting college campuses. We have been told that the main difficulty with recruiting the employees is competition from the private sector. The expected growth in employment across the engineering occupation suggests that the state will continue to have difficulty competing with the private sector as long as the economy continues to perform well. The state’s difficulty in hiring new engineers is evident by the fact that over the past ten years the share of Unit 9 members with between zero and four years of service has shrunk from 14 percent to 11 percent of the bargaining unit.

Increasing Share of Bargaining Unit Approaching Retirement. While the share of new Unit 9 members has shrunk, the share of mid-career and late-career employees has grown significantly over the past decade. The share of mid-career (between 10 and 19 years of service) employees has grown from 30 percent of the bargaining unit membership to more than 50 percent. Meanwhile, the share of employees with more than 20 years of service has grown from 13 percent to 23 percent of the bargaining unit. A more experienced workforce also means an older workforce. Currently, about one-third of the bargaining unit membership is at least 55 years old—up from a decade ago when one-fifth of the bargaining unit was at least 55 years old.

Proposed Agreement Tailored More Towards Retaining Employees Considering Retirement Than Attracting New Employees. The proposed compensation agreement disproportionately benefits employees with many years of service. Most notably, the agreement creates an incentive for employees who currently have more than 20 years of service to stay in state service through 2022-23, thereby allowing the 5.5 percent pay differential in 2021-22 to be included when calculating the employee’s pension benefit. In addition, higher-paid employees (usually those with more years of service) are more likely to participate in the two day VPLP authorized by the agreement—resulting in higher vacation and annual leave balances that will be cashed out upon separation from state service. Under the agreement, an employee who currently has at least 20 years of service but does not participate in VPLP would receive a base pay that is nearly 15 percent above their current pay by 2021-22 as a result of the GSIs and the longevity pay differentials. If this employee chose to participate in the two day VPLP, his or her net pay would be 4 percent above what it is today, the employee would only need to work about 90 percent, and—upon retirement—the employee’s pension and vacation leave balance cash out would be based on the full base pay. Although a future employee receives the GSIs provided by the agreement (resulting in an 8.7 percent compounded pay increase), he or she also receives a much less generous retiree dental and vision benefit as a result of the proposed agreement, receives a less generous retiree health benefit as a result of the current agreement, receives a less generous pension benefit pursuant to current law, and yet pays the same percentage of pay as senior employees to pay for these benefits.

Proposition 6 and the Possible Repeal of Transportation Revenues

SB 1 Provides Significant Funding to Engineers’ Work. In April 2017, the Legislature enacted SB 1 to increase annual state funding for transportation through various fuel and vehicle taxes and provides for inflation adjustments in the future. (For a detailed description of SB 1, refer to our analyses of the Governor’s 2018-19 transportation budget proposals and Proposition 6.) In 2018-19, the state expects these taxes to raise $4.4 billion. By 2020-21, when all the taxes are in effect and the inflation adjustments have started, the state expects the taxes to raise $5.1 billion each year. The State Constitution requires that nearly all of these new revenues be spent on transportation purposes. Senate Bill 1 dedicates about two-thirds of the revenues to highway and road repair, with the remainder going to other programs (such as for mass transit).

Proposition 6 Asks Voters to Repeal Taxes Established by SB 1. Proposition 6 is a constitutional initiative that will appear on the November 2020 ballot. If approved by the voters, the proposition would eliminate the increased fuel and transportation vehicle taxes enacted by SB 1—meaning the state would have $5 billion less money to spend for transportation in 2020-21 than currently assumed.

If Voters Approve Proposition 6, Agreement Likely Would Create Challenges for Caltrans. Caltrans has been increasing its staffing levels to work on projects funded by SB 1. In the event that voters approve Proposition 6, a significant funding source for Caltrans will disappear. Unless the Legislature appropriates funds from the General Fund or secures some other source of funding, Caltrans likely would need to terminate a number of projects and reduce its current staffing levels. Especially considering the age and seniority of the Unit 9 workforce, encouraging retirements seems like a reasonable way to reduce personnel costs—reducing the number of higher paid employees and avoiding layoffs that take many months and adversely affect the least senior employees. However, the proposed agreement creates strong incentives for senior Unit 9 members to continue working for the state for at least a few more years. Under this agreement, Caltrans likely would reduce its personnel costs by holding positions vacant and stopping its current recruitment efforts. If Caltrans had to resort to layoffs to reduce costs, civil service rules require that the least senior employees be laid off before more senior employees. If this agreement and Proposition 6 are both approved, the already growing share of Unit 9 members who have many years of experience and are at or near retirement eligibility age will become an even larger share as the number of new hires reduces. A lack of less senior employees could leave Caltrans unprepared for a large share of its workforce retiring.