The compromise budget package will be considered by the California State Senate on June 25, 2020 and by the California State Assembly on June 26, 2020. Various pieces of this package relate to employee compensation and collective bargaining. The package assumes reductions to state employee compensation costs—not to exceed a 10 percent reduction in pay—achieved through collective bargaining or imposed in the case of employees excluded from the collective bargaining process or bargaining units that were not able to reach an agreement at the bargaining table before July 1, 2020. Under AB 119 (Ting), the Legislature would ratify the provisions of any labor agreements entered into between the Governor and bargaining units before July 1, 2020 that require the expenditure of funds necessary to achieve the level of savings assumed under Control Section 3.90 of the 2020‑21 Budget Act. The package explicitly authorizes the administration to impose furloughs on bargaining units that do not come to an agreement at the bargaining table. In total, across the state workforce, Control Section 3.90 assumes a reduction in state employee compensation costs of $1.5 billion from the General Fund and $1.4 billion from other funds. To achieve the assumed level of savings, a two-day-per-month furlough likely would be imposed.
Since June 18, the administration has submitted to the Legislature agreements with Bargaining Units 6 (Corrections); 9 (Professional Engineers); and the nine bargaining units represented by Services Employees International Union, Local 1000 (Local 1000)—Units 1 (Professional, Administrative, Financial, and Staff Services), 3 (Professional Educators and Librarians), 4 (Office and Allied), 11 (Engineering and Scientific Technicians), 14 (Printing and Allied Trades), 15 (Allied Services), 17 (Registered Nurses), 20 (Medical and Social Services), and 21 (Educational Consultants and Library). The administration estimates that these agreements will reduce state costs in 2020‑21 by $1.4 billion ($745.3 million from the General Fund)—about one-half of the total savings in reduced state employee compensation assumed in the budget. In this analysis, we summarize the major provisions of these agreements and provide any commentary that is specific to an agreement. We then provide overall comments and provide recommendations to the Legislature. For a full accounting of the changes in the agreements relative to current law, refer to the California Department of Human Resources’ website. This analysis fulfills our statutory requirement under Government Code Section 19829.5. We will post additional analyses as subsequent agreements are submitted to the Legislature.
Side Letter and Successor MOU. Bargaining Unit 6 (Corrections) is represented by the California Correctional Peace Officers Association (CCPOA). The current memorandum of understanding (MOU) between the state and CCPOA is scheduled to expire July 2, 2020. On June 18, 2020, the administration submitted to the Joint Legislative Budget Committee (JLBC) a side letter to implement cost reductions in response to the current budget problem. The side letter has a term of July 1, 2020 through June 30, 2022. On June 19, 2020, the administration submitted to the Legislature a successor MOU to replace the current MOU that incorporates the side letter’s provisions. The administration’s summary of the successor MOU can be found here and its estimated fiscal effects here, and the summary and fiscal estimates of the side letter can be found here. The successor MOU will be in effect from July 3, 2020 to July 2, 2022. For purposes of this analysis, we do not distinguish between the side letter and the successor MOU but rather treat the side letter as part of the successor MOU. The administration estimates the agreement will reduce state costs in 2020‑21 by $380.9 million (all from the General Fund).
Suspend Employee Contributions to Prefund Retiree Health Benefits. Unit 6 members currently contribute 4 percent of their pay to prefund retiree health benefits. The proposed agreement would suspend employee contributions to prefund these benefits in 2020‑21 and 2021‑22. The state’s employer contribution to prefund these benefit would continue.
Personal Leave Program 2020 (PLP 2020): 4.62 Percent Reduction in Pay Each Month. For the 24 months in 2020‑21 and 2021‑22, most Unit 6 members would receive a reduction in pay equal to 4.62 percent under PLP 2020. This is equivalent to the pay received over eight hours—or one day—of work each month. The reduction in pay would not affect employees’ pension or health benefits.
PLP 2020: 12 Hours of Leave Each Month. In exchange for the 8-hour reduction in pay each month as well as the other compensation reductions included in the agreement, each full-time employee would receive 12 hours of paid leave each month during PLP 2020. PLP 2020 leave can be used at a future date but must be used before employees separate from state service. PLP leave can be used at the employee’s discretion. This is different from imposed furloughs that might require employees to use furlough days within a specified time period—for example, within the pay period of the pay reduction
Deferred Scheduled Salary Increase. Under the current MOU, Unit 6 members would receive a 3 percent General Salary Increase (GSI) on July 1, 2020. The proposed agreement would defer this pay increase to July 1, 2022. In the event that the May Revision for the 2022‑23 budget projects that revenues are not sufficient to fully fund existing statutory and constitutional obligations, the GSI would be deferred to July 1, 2023. The agreement specifies that it is the sole discretion of the Director of Finance to determine whether there are sufficient revenues for the GSI to go into effect.
Suspended or Reduced Provisions of Pay. The agreement would suspend or reduce until July 2022 the below provisions related to pay.
Holiday Pay and Credits. The agreement would suspend holiday pay and holiday credits for seven state holidays. Employees could still earn holiday pay and credits for working on July 4, Thanksgiving Day, Christmas, and New Year’s Day.
Night and Weekend Shift Differentials. Pay differentials of $1.50 per hour received for working night and weekend shifts would be suspended.
Uniform Allowance. The annual $1,000 uniform allowance would be reduced to $750.
Reduced Number of Personal Development Days. The proposed agreement would reduce the number of personal development days Unit 6 members receive from two days per year to one day per year.
Modification of Annual Training. Under the current agreement, employees receive a minimum of 60 hours of annual training, of which 48 hours must be in a classroom setting (off-post training) and 12 hours must be on-the-job training. The proposed agreement would reduce the number of classroom training hours by 32 hours—from 48 hours to 8 hours. The 32 hours of training would become nonclassroom, on-the-job, or online training. The administration indicates that this will result in nearly $60 million in savings because the administration will not need to backfill officers who are attending classroom training with other officers who receive overtime payments.
Contract Reopener Language. In addition to determining when the GSI will go into effect, the Director of Finance also would have sole discretion under the agreement to determine if there are sufficient revenues to restore other pay reductions provided in the agreement. In the event that the Director of Finance determines there are sufficient revenues and decides to restore some or all suspended provisions of pay, the state and union shall meet and confer regarding the impact of the Director’s determination.
State Contribution to Health Benefits. Under the agreement, the state would increase its contributions towards employee health benefits for the duration of the agreement in order for the state to pay 80 percent of the average of health premium costs for the employee and their eligible family members.
Effects of Reduced Class Time Training Not Certain. Whether on-the-job training is as effective as a classroom setting for the type of material employees are expected to learn during training is unclear. However, we also understand that it might be more difficult to administer a classroom training program in light of coronavirus disease 2019 (COVID-19) social distancing requirements. The administration should explain to the Legislature what course material will be converted to on-the-job training and the steps the administration will take to make sure the modified training is as effective as a classroom setting.
Major Effects of Proposed Agreement. Overall, the agreement would reduce Unit 6 members’ base pay by 0.62 percent compared with current levels. In addition, differential pay for nights and weekends and working on seven state holidays would be suspended and the scheduled 3 percent GSI would be deferred until July 1, 2022. In aggregate, the savings to the state associated with these changes is roughly equivalent to a two-day-per-month furlough. In addition, Unit 6 members would have one fewer personal development days off each year; however, Unit 6 members would receive 18 days of PLP 2020 leave per year. PLP 2020 leave can be used at any time before an employee separates from service. As result, while compensation reductions are achieved in the near term, by increasing employees’ paid leave balances, additional costs are shifted to future years.
Successor MOU. Bargaining Unit 9 is represented by Professional Engineers in California Government (PECG). The current agreement with PECG is scheduled to expire June 30, 2020. On June 19, 2020, the administration submitted to the Legislature a proposed successor agreement that would be in effect from July 1, 2020 through June 30, 2022. The administration’s summary of the agreement can be found here. The administration’s estimated fiscal effects of the agreement can be found here. In 2020‑21, the administration estimates that the agreement will reduce state costs by $197 million ($11.5 million from the General Fund)
Suspend Employee Contributions to Prefund Retiree Health Benefits. Unit 9 members currently contribute 2 percent of pay to prefund retiree health benefits. The agreement would suspend the employee’s contribution in 2020‑21 and 2021‑22.
PLP 2020: 9.23 Percent Reduction in Pay. Beginning July 2020, Unit 9 pay would be reduced by 9.23 percent under PLP 2020—equivalent to 16 hours or two days of work per month. PLP 2020 would be in effect in 2020‑21 and 2021‑22.
PLP 2020: 16 Hours of Leave. In exchange for the 16 hours of lost pay each month, employees would receive 16 hours of paid leave. Unused PLP 2020 leave can be used at a future date but must be used before employees separate from state service. The agreement specifies that the state shall not impose a furlough program during PLP 2020.
Increase Vacation and Annual Leave Cap. Unit 9 members’ vacation and annual leave is subject to a 640 hour cap. The agreement would increase the cap by the number of PLP hour Unit 9 members receive. The cap would go back to 640 hours after June 30, 2025.
New GSI. The agreement would provide all Unit 9 members a 3 percent salary increase July 1, 2022. In the event that the May Revision for the 2022‑23 budget projects revenues are insufficient to fund existing statutory and constitutional obligations, the pay increase will go into effect July 1, 2023.
Professional Qualification Compensation. The $100 annual payment currently available only to specified classifications with professional certifications would be available to all Unit 9 members.
Voluntary PLP. Under the current agreement, Unit 9 members voluntarily can reduce their pay in exchange for time off—referred to as a Voluntary PLP. Employees currently can choose to receive a 4.62 percent or 9.24 percent reduction in pay corresponding with a monthly accrual of 8 hours or 16 hours of leave. The proposed agreement would increase the maximum Voluntary PLP so that employees could choose to reduce their pay by 13.86 percent and be credited with 24 hours of leave each month.
Contract Reopener Language. Under the agreement, the Director of Finance has sole discretion to determine whether or not there are sufficient revenues to restore suspensions or deferrals or other compensation reductions provided by the agreement before the schedule restoration. In the event that the director determines there are sufficient revenues, the parties will meet and confer to discuss the impact of the director’s determination.
Major Effects of Proposed Agreement. Overall, the agreement would reduce Unit 9 members’ pay by 7.23 percent compared to current levels. In exchange, Unit 9 members would receive 24 PLP 2020 days off per year. To the extent that this increases employee leave balances, the state’s liabilities associated with unused leave balances will grow. Accordingly, while PLP 2020 reduces state costs in the short term, it creates a liability that increases the state’s costs in the future.
Side Letter. The current MOU with the nine bargaining units represented by Local 1000 is scheduled to expire June 30, 2023. On June 23, 2020, the administration submitted to JLBC a side letter to the current MOU to establish reductions in compensation. A summary of the side letter can be found here. The administration’s estimated fiscal effects of the agreement can be found here. The administration estimates that the agreement will reduce state costs by $782.2 million ($352.9 million General Fund) in 2020‑21.
Suspend Employee Contributions to Prefund Retiree Health Benefits. Employees represented by Local 1000 currently contribute 2.3 percent of their pay to prefund retiree health benefits. Under the current agreement, that contribution amount is scheduled to increase to 3.5 percent in 2020‑21. The side letter suspends the entire employee contribution in 2020‑21 and 2021‑22.
PLP 2020: 9.23 Percent Reduction in Pay. Beginning July 2020, employees’ pay would be reduced by 9.23 percent under PLP 2020—equivalent to 16 hours or two days of work per month. PLP 2020 would be in effect in 2020‑21 and 2021‑22.
PLP 2020: 16 Hours of Leave. In exchange for the 16 hours of lost pay each month, employees would receive 16 hours of paid leave. Unused PLP 2020 leave can be used at a future date but must be used before employees separate from state service. The agreement specifies that the state shall not seek additional employee compensation reductions from Local 1000 represented employees through June 30, 2023 (meaning through fiscal year 2022‑23).
Deferral of Scheduled GSI. The current MOU provides employees a 2.5 percent GSI July 1, 2020. The proposed agreement would defer this pay increase to July 1, 2022.
Pay Increases to Maintain $15 Per Hour Minimum Wage. The current agreement sets targets for all employees represented by Local 1000 to be paid at least $15 per hour. The proposed agreement accelerates when this target is met and when Special Salary Adjustments to meet these targets go into effect. Specifically, the target would move up one month from July 31, 2020 to July 1, 2020.
Retains $260 Monthly Payment. The current Local 1000 agreement provides all employees represented by Local 1000 who are enrolled in a California Public Employees’ Retirement System (CalPERS) health plan effective July 1, 2020 a $260 monthly payment. The proposed agreement retains this payment.
Cost Savings Task Force. Under the current agreement, employees will receive a 2 percent GSI July 1, 2021. The proposed agreement establishes a cost savings task force that will meet to discuss, identify, and recommend cost savings solutions. The goal of the task force is to find sufficient cost savings to fully pay for the GSI scheduled for July 1, 2021. If the parties cannot mutually agree to cost savings, the proposed agreement would defer the GSI to June 30, 2022.
Contract Reopener. Under the agreement, the Director of Finance has sole discretion to determine whether or not there are sufficient revenues to restore suspensions or deferrals or other compensation reductions provided by the agreement before the scheduled restoration. In the event that the director determines there are sufficient revenues, the parties will meet and confer to discuss the impact of the director’s determination.
Agreement Limits Options in 2022‑23. Under the agreement, the PLP would end at the end of 2021‑22. No reductions would be in place in 2022‑23 under the agreement. The agreement specifies that reductions will not be established for employees represented by Local 1000 in 2022‑23. The state could continue to have a budget problem in 2022‑23. To the extent that a budget problem persists in 2022‑23, this provision would make it more difficult to reduce employee compensation for the state’s largest union—representing about one-half of the state’s rank-and-file employees.
Major Effects of Proposed Agreement. Overall, Local 1000 members’ pay would be reduced by 6.93 percent compared to current levels and at least one scheduled GSI would be deferred. In exchange, Local 1000 members would receive 24 PLP 2020 days off per year. As noted above, to the extent that this increases employee leave balances, the state’s liabilities associated with unused leave balances will grow. Accordingly, while PLP 2020 reduces state costs in the short term, it creates a liability that increases the state’s costs in the future.
No Easy or Right Way to Reduce Employee Compensation. Fundamentally, any decision to reduce employee compensation is difficult because the decision directly affects someone’s livelihood and the morale of the state workforce. Considering the potential magnitude of the budget problem California faces and the fact that state employee compensation costs about $30 billion (about one-half paid from the General Fund) annually, however, including reductions in employee compensation in the final budget package is reasonable. While there is no good option to reduce employee compensation costs, some options have fewer downsides or long-term implications for the state. We agree with the Legislature’s stated goal that—to the extent possible—savings be achieved at the bargaining table. Achieving savings at the bargaining table—rather than imposing compensation cuts—results in less discord between the state employer and its workforce and is less detrimental to morale. This, in turn, can lead to fewer lawsuits and other actions from state employees that can create short- and long-term uncertainty to the level of savings achieved by the state or affect service levels.
Furloughs a Common, but Imperfect Tool… Furloughs or PLP are the most common tool adopted by the state to reduce state employee compensation costs in times of budget problems. A furlough for state employees typically means a 4.62 percent reduction in pay in exchange for one day off per month without affecting other elements of compensation (for example, pension and health benefits). In the past, the state has both (1) imposed furloughs and negotiated PLP at the bargaining table and (2) established mandatory days when employees do not work (state offices would be closed one, two, or three “Furlough Fridays” each month) and allowed employees to have “self-directed” furlough days where employees have discretion to use furlough days as they would PLP, vacation, or other leave benefits. During the most recent period of furloughs—across the five fiscal years of 2008‑09 to 2012‑13—the state initially imposed two or even three furlough-days per month (corresponding to a 9.24 percent or 13.86 percent reduction in pay) and eventually bargained one-day-per-month furloughs (corresponding to a 4.62 percent reduction in pay). (For a summary of the state’s furlough policies during this period, refer to our 2013 report After Furloughs: State Workers’ Leave Balances and its appendix.) The most recent period of furlough was an extreme example of the state’s reliance on furloughs to achieve savings in terms of (1) the magnitude of pay cuts applied to state employees and (2) the number of months employees were subject to furloughs.
…With Some Advantages… Furloughs have certain advantages over other policies. We describe these advantages below.
Administratively Easy. Compared with the layoff process, furloughs require relatively little administrative work.
Immediate Savings. Because furloughs are relatively easy to administer, the budget can assume savings from furloughs starting immediately at the beginning of the fiscal year. This is in stark contrast to the layoff process that can take between six and nine months to complete and achieve savings. (See our 1995 analysis for a discussion of the layoff process and an overview of the state’s civil service.)
Known Savings. Unlike other tools that have been used in the past—for example, an early retirement incentive program (also known as a “golden handshake”—see our 1993 analysis on a proposal at that time)—legislatively approved furloughs result in almost certain savings that can be assumed in the budget. (In 2010, the California Supreme Court determined that the Governor cannot unilaterally establish furloughs for rank-and-file employees—legislative approval is necessary for a furlough to be legal.)
No Reduction in Workforce: Allows for Immediate “Staff Up” After Budget Problem Passes. By temporarily reducing payroll costs without reducing the number of people employed by the state, furloughs do not require the state to embark on its bureaucratic and time consuming civil service hiring process to staff up after the budget problem has passed.
…And Notable, Long-Term Disadvantages. The advantages of furloughs make it a compelling tool to reduce employee compensation costs in the short term in response to a sudden budget problem. However, the disadvantages of furloughs become increasingly more apparent the longer furloughs are in place. We discuss these disadvantages below.
Shutting Down State Offices Makes Services Unavailable to Public. When most state services were closed on Furlough Fridays beginning in 2008‑09, there were longer wait times and limited opportunities for the public to receive service for essential government services like those provided by the Department of Motor Vehicles.
Keeping State Offices Open Increases Employee Leave Balances. Self-directed furloughs have the advantage of keeping state offices open—minimizing the effects on service to the public. However, as we reported in 2013, giving state employees additional time off significantly increases leave balances. These increased leave balances are an unfunded liability for the state that grows at the rate of employee salaries. As an example of the potential longevity of the effects furloughs have on state employee leave balances, as of December 2018, about 15,000 state employees had a total of 1.2 million hours (averaging more than ten days per employee) of unused PLP hours from the PLP implemented in 2003‑04. State employee salaries have grown significantly since 2003‑04, meaning that the liability associated with these unused furlough hours also has increased significantly.
Systematically Underfunds Pension Liabilities. The state contributes a percentage of pay to fund state employee pension benefits at CalPERS. Although state employee pay is reduced during periods of furlough, their pension benefits are not affected. While state employees’ benefits are based on their full salary, the state’s contributions to CalPERS during furlough are based on employees’ reduced salary. As such, during furloughs, the state systematically underfunds its pension liabilities. The degree to which the state underfunds pension benefits during furlough worsens (1) the higher the pay cut to employees during furloughs and (2) the longer furloughs are in effect.
Makes Little Sense for Certain Employees: 24-Hour Settings, Federally Funded, Revenue-Generating. Furloughs create significant operational challenges in 24-hour settings (for example, prisons, hospitals, highway patrol, and firefighting) where positions must be filled around the clock. As a result of these operational challenges, departments are more likely to experience increased (1) overtime if employees take more time off as a result of furloughs or (2) leave balances if employees are not able to take furlough time off. Furloughs also make little sense when applied to employees who are paid from federal funds or who work for revenue-generating departments as the state might lose revenue as a result of employees working less.
No Reduction in Workforce: Long-Term Liabilities Not Reduced. By not reducing the size of the state workforce, furloughs do not decrease long-term liabilities as might occur with layoffs.
Suspension of Employee Contributions to Prefund Retiree Health Benefits Increases Unfunded Liabilities… The state’s strategy to prefund retiree health benefits was only recently established and in fact would only be fully in place for Local 1000 in 2020‑21 absent the side letter. The state historically has not set any money aside to prefund retiree health benefits. As a result, the state has large retiree health unfunded liabilities. Beginning in 2015‑16, the state began implementing a strategy to prefund retiree health benefits through the collective bargaining process whereby the state and employees each would contribute one-half of the “normal cost” of the benefit. (The normal cost is the amount of money that actuaries estimate is necessary to be put aside today to—after accounting for assumed future investment growth and other assumptions—pay for the benefit an employee earns today but that they will not receive until retirement.) By suspending the employee contribution, only about one-half of the normal cost will be set aside. This will result in the state’s unfunded retiree health liabilities growing.
…And Reduces Likelihood That Benefit Will Be Fully Funded by 2046… Under the state’s strategy to prefund retiree health benefits, the money that is set aside to prefund the benefit will not be used until either the benefit is fully funded or 2046, whichever occurs sooner. By increasing the unfunded liability, the agreements create a greater likelihood that the benefit will not be fully funded by 2046. This growth in unfunded liability means that the state’s costs in a few decades could be higher than they otherwise would have been under the current plan. However, the longer that contributions are suspended, the higher these future costs will grow.
…Creating Opportunity to Revisit Funding Plan. We repeatedly have raised concerns with the current prefunding strategy since the time the previous administration first proposed that the state and employees each pay one-half of the normal cost to prefund the benefit (see our initial response to the strategy and our comments on the labor agreements implementing the strategy for Units 6, 9, and Local 1000). As we have explained in the past, we think it makes more sense for the state to assume full responsibility to fund retiree health benefits as it is a simpler approach, is cheaper than sharing prefunding costs with employees, is more likely to result in a fully funded benefit within the next few decades, and could give the Legislature greater flexibility in the future to modify the benefit. With these agreements suspending employee contributions to prefund the benefit, the state is given an opportunity to revisit the current strategy. In the successor agreements to these agreements, the Legislature could encourage the administration to permanently eliminate employees’ contributions to prefund retiree health benefits. This could be established in bargaining agreements in lieu of pay increases that otherwise might occur.
Do Not Use Furloughs as Long-Term Budget Solution. The agreements discussed above each provide two years of PLP across 2020‑21 and 2021‑22. The state might have multiple years of budget problems. We do not recommend repeating the never ending cycle of furloughs that occurred over the five fiscal years following the Great Recession where most employees were subject to between 79 and 94 days of furlough over the five years. Instead, furloughs should be seen as a short-term solution until a longer-term solution can be implemented. To that end, we recommend that the Legislature not approve more than two years of PLP or furloughs. If the administration anticipates a budget problem persisting beyond 2021‑22 that necessitates reductions to employee compensation, we recommend the Legislature direct the administration to identify staffing reductions as part of its January 2021 Governor’s budget proposal that can occur such that any layoffs can be completed by July 1, 2022. If such reductions in workforce are necessary, the Legislature should review the administration’s layoff plans and any labor agreements entered into to address the impact of layoffs on employees.
Questions to Consider When Evaluating Proposed Concession Agreements. As the Legislature considers the agreements with these 11 bargaining units and any other agreements that come in over the next few years to address the state’s budget problem, we recommend the Legislature consider the following questions.
Do Options of Similar Savings Exist That Will Do Less Financial Harm to Employees? The goal should be to achieve savings to address the state’s budget problem, not to inflict unnecessary financial harm on the state’s employees.
Do the Proposed Agreements Create Long-Term Liabilities for State? Understanding the extent to which proposed agreements exchange savings today for higher costs in the future is important. Specifically, seek to understand how much an agreement increases future costs and when those costs will be incurred.
Do the Proposed Agreements Diminish the State’s Ability to Respond to COVID-19? Many state departments are essential to the state’s response to COVID-19 and the accompanying recession.
Do the Proposed Agreements Limit Future Options or Flexibility in the Event That Budget Problem Persists? The state may have a budget problem for multiple years. Although the Legislature has the authority to not fund a provision of a ratified labor agreement, such action is difficult and erodes state employer-employee relations. As such, understanding the extent to which an agreement might limit future options or flexibility to address budget problems in the future is important.