The 2020-21 Budget

Labor Agreements to Achieve Budgetary Savings

State Budget Assumes Reduction in Employee Compensation Costs to Address Budget Problem. The coronavirus disease 2019 (COVID-19) pandemic has had far-reaching negative effects on the state economy, which have direct and indirect implications for the state budget. In May, the administration estimated the state would have a $54.3 billion General Fund budget problem in 2020‑21. As we discuss in greater detail in The 2020‑21 Budget: Overview of the California Spending Plan (Preliminary Version), the state adopted a mix of solutions to address the budget problem, including reductions in state spending.

As part of the budget solutions, the Legislature directed the administration to reduce state employee compensation costs by up to 10 percent to achieve savings assumed in the budget. Specifically, under Control Section 3.90, the budget assumes savings of $2.8 billion ($1.5 billion from the General Fund) resulting from reductions in employee compensation. The Legislature directed the administration to seek to achieve these savings through the collective bargaining process. The budget grants legislative ratification to any agreement that seeks to achieves these savings and was signed by the administration and union representing the affected state bargaining unit before June 30, 2020. In the event that an agreement could not be reached at the bargaining table by June 30, 2020, the budget authorizes the administration to impose reductions in state employee compensation.

LAO Analysis of Agreements. On June 25, 2020, our office released an analysis of the 11 labor agreements submitted to the Legislature before June 30, 2020. This analysis provides a historical record of all the labor agreements between the state and its employees to reduce state costs in 2020‑21 and—in most cases—2021‑22. In addition, this analysis looks forward and provides comments and recommendations to help the Legislature think through future decisions to reduce employee compensation should the budget problem persist beyond 2021‑22.

Labor Agreements

Overview

Legislature Ratified Cost Reduction Agreements for All 21 Bargaining Units. The administration signed agreements with 20 of the state’s 21 bargaining units before June 30 that seek to reduce the state’s costs in 2020‑21. Pursuant to the budget, these agreements automatically received legislative ratification because they were signed by the parties prior to June 30. The cost reduction agreement with the final bargaining unit (Unit 13) was signed by the administration and union after June 30; however, the Legislature ratified the agreement in a trailer bill (in addition to an addendum to the agreement with Unit 12). Accordingly, the Legislature now has ratified agreements to reduce employee compensation costs in 2020‑21 with all 21 of the state’s bargaining units. (While the collective bargaining process establishes compensation for rank-and-file employees, the Governor has much broader authority to establish compensation levels for managers, supervisors, and other state employees who are excluded from the collective bargaining process. While the policies for excluded employees are not the subject of this analysis, in general, these employees are expected to receive comparable reductions in compensation as those agreed to for affiliated rank-and-file employees. The budget assumes that state employee compensation—for both excluded and rank-and-file employees—is reduced by an amount equivalent to a two-day-per-month furlough, a 9.23 percent reduction in compensation.)

Common Provisions Across Agreements. In subsequent parts of this section of the analysis, we describe each agreement in detail. There are a few similar provisions across the agreements. We describe some of these provisions in the bullets below and show how they vary across agreements in Figure 1. We discuss all of these provisions in greater detail later in this analysis.

• Personal Leave Program (PLP): Reduction in Pay in Exchange for Time Off. Furloughs (when imposed) or PLP (when established at the bargaining table) 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 benefits, health benefits, and overtime calculations). All of the agreements include PLP but vary in the pay cut and time off received by affected employees, as well as the number of fiscal years the policy is in effect.

• Suspension of Contributions to Prefund Retiree Health Benefits. The normal cost to prefund retiree health benefits is paid each year through a combination of state and employee contributions paid as a percentage of pay. All of the agreements suspend at least a portion of these contributions.

• Significant Discretion Granted to Director of Finance. The agreements ostensibly give the Director of Finance 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.

Local 1000 (Units 1, 3, 4, 11, 14, 15, 17, 20, and 21)

Current MOU In Place through June 30, 2023. The state has an active memorandum of understanding (MOU) with the nine bargaining units represented by Local 1000. This MOU was ratified in 2019 and is scheduled to expire June 30, 2023.

Budgetary Savings Achieved Through Side Letter. On June 19, 2020, the administration and Local 1000 agreed to a side letter agreement to reduce state employee compensation costs. A summary of the side letter can be found here. The administration estimates that the agreement will reduce state employee compensation costs by $782.2 million ($352.9 million General Fund) in 2020‑21.

Major Provisions of Side Letter

PLP 2020: 9.23 Percent Pay Cut. Beginning July 2020, employees’ pay is reduced by 9.23 percent under PLP 2020—equivalent to 16 hours, or two days, of work per month. Under the agreement, PLP 2020 will be in effect in 2020‑21 and 2021‑22.

PLP 2020: Accrual of 16 Hours of Leave Per Month. In exchange for the 16 hours of lost pay each month during PLP 2020, employees 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).

Defer Scheduled General Salary Increase (GSI). The current MOU provides employees a 2.5 percent GSI effective July 1, 2020. The side letter agreement defers this pay increase to July 1, 2022. The side letter maintains the 2 percent GSI scheduled for July 1, 2021. (We describe more about the maintenance of this provision below in the paragraph about the cost savings task force.)

Suspension of Employee Contribution to Prefund Retiree Health Benefits. The side letter suspends the 3.5 percent of pay that employees would contribute to prefund retiree health benefits for 2020‑21 and 2021‑22. Under the agreement, the state will continue to make its contribution to prefund the benefit.

Pay Increases to Maintain $15 Per Hour Minimum Wage. The MOU sets targets for all employees represented by Local 1000 to be paid at least $15 per hour. The side letter 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.

$260 Monthly Payment. The Local 1000 MOU provides all employees represented by the union who are enrolled in a California Public Employees’ Retirement System (CalPERS) health plan effective July 1, 2020 a $260 monthly payment. The side letter agreement retains this payment.

Cost Savings Task Force. The side letter 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 side letter defers the GSI to June 30, 2022.

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 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.

LAO Comments

Agreement Limits Options in 2022‑23. Under the agreement—absent action from the Director of Finance—PLP 2020 will end at the end of 2021‑22. The agreement specifies that reductions in compensation 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 will 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 and about 40 percent of the state’s rank-and-file salary and salary-driven benefit costs.

Unit 2 (Attorneys, Administrative Law Judges, and Hearing Officers)

Current MOU Expired. Unit 2 is represented by the California Attorneys, Administrative Law Judges, and Hearing Officers in State Employment (referred to as “CASE”). Unit 2 members work under an expired MOU that was in effect until July 1, 2020. Pursuant to state law, the provisions of an expired MOU generally remain in effect until a successor agreement is ratified.

Budgetary Savings Achieved Through Side Letter. On June 30, 2020, the administration and CASE agreed to a side letter to reduce state employee compensation costs. The agreement will expire June 30, 2022. The administration estimates that the agreement will reduce state employee compensation costs in 2020‑21 by $67.5 million ($48.5 million General Fund).

Major Provisions of Side Letter

PLP 2020: 9.23 Percent Pay Cut. Beginning July 2020, employees’ pay is reduced by 9.23 percent under PLP 2020—equivalent to 16 hours, or two days, of work per month. PLP 2020 will be in effect in 2020‑21 and 2021‑22.

PLP 2020: Accrual of 16 Hours of Leave Per Month. In exchange for the 16 hours of lost pay each month, employees 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.

Voluntary Personal Leave Program (VPLP). Effective the first pay period after PLP 2020 ends, Unit 2 members will be allowed to participate in VPLP. Through VPLP, individual employees will be able to choose to receive a reduction in pay of 4.62 percent, 9.23 percent, or 13.86 percent in exchange for 8 hours, 16 hours, or 24 hours of leave, respectively.

Suspend Employee Contributions to Prefund Retiree Health Benefits. Prior to the side letter, Unit 2 members contributed 2 percent of pay to prefund retiree health benefits. The side letter suspends employees’ prefunding contributions in 2020‑21 and 2021‑22.

2.5 Percent GSI. Effective July 1, 2022, all Unit 2 members will receive a 2.5 percent salary increase. Pursuant to the contract reopener, discussed in greater detail below, this GSI could be deferred to July 1, 2023.

Adjustments to State Contributions to Health Benefits. The agreement increases the state’s contribution towards active employee health benefits when health premiums increase January 2021 and 2022. If the 2.5 percent GSI is deferred to July 1, 2023, the agreement also would increase the state’s contribution to health benefits when premiums increase January 2023.

Continuation of $260 Monthly Payment. Under the expired MOU, Unit 2 members receive $260 per month. Similar to the payment provided to Local 1000, the intended purpose of the payment is to mitigate employee health care costs. The side letter continues this payment for the duration of PLP 2020.

Employee Pension Contributions. For miscellaneous employees eligible for social security, the agreement reduces employee pension contributions from 9 percent to 8.5 percent of pay. Effective July 1, 2023, and each year thereafter, the agreement specifies that employee contribution rates shall be adjusted if CalPERS determines that the total normal cost rate increases or decreases by more than 1 percent of payroll. The increase or decrease in any given fiscal year shall not exceed 1 percent of pay.

Temporary Increase to Cap on Accrual of Vacation and Annual Leave. The agreement increases the existing 640 hour cap on accrued vacation and annual leave by the equivalent number of PLP 2020 hours Unit 2 members receive. The higher cap will be in place through June 30, 2025. As of December 31, 2019, 404 Unit 2 members—roughly 9 percent of the bargaining unit—have vacation or annual leave balances exceeding the existing 640 hour cap.

Contract Reopener. Under the side letter, 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.

Unit 5 (Highway Patrol)

MOU Originally in Place Through June 30, 2023. Unit 5 members are represented by the California Association of Highway Patrolmen (CAHP). In 2019, the Legislature ratified an MOU between the state and CAHP that was scheduled to be in place until June 30, 2023. Our analysis of that MOU can be found here.

Budgetary Savings Achieved Through Side Letter That Extends Term of MOU. On June 26, 2020, the state and CAHP agreed to a side letter to reduce state employee compensation costs. In addition to the major provisions discussed below, the side letter extends the term of the current MOU from June 30, 2023 to July 3, 2024 and possibly July 3, 2025, if certain conditions described below are met related to contributions to prefund retiree health benefits. The administration estimates the agreement will reduce state costs by $191.3 million—none of which is from the General Fund. Unit 5 members are paid from the Motor Vehicle Account (MVA)—a state fund that historically and recently has had solvency issues. Under the budget, the state plans to borrow from state funds such that reductions to special fund employee compensation costs will benefit the General Fund in 2020‑21. The administration indicates that the MVA is eligible to loan funds to the General Fund in 2020‑21; however, the administration has not yet determined how much money the General Fund will borrow from the MVA. If the MVA is projected to have solvency issues resulting from the COVID-19 recession, a smaller share of the savings from the side letter could be loaned from the MVA to the General Fund. While such action would reduce short-term benefit to the General Fund, it would alleviate financial strain on the MVA.

Major Provisions of Side Letter

PLP 2020: 4.62 Percent Reduction in Pay. Employees’ pay is reduced by 4.62 percent under PLP 2020 in 2020‑21 and 2021‑22. This pay reduction is equivalent to eight hours of work. Patrol officers will continue to work their assigned work schedules.

PLP 2020: Accrual of Nine Hours of Leave Each Month. In each month of PLP 2020, employees will receive nine hours of PLP 2020 leave. The agreement specifies that eight of these hours are in exchange for the 4.62 percent pay cut and one hour is in exchange for employees agreeing to suspend uniform and cleaning allowances.

Suspension of State Contribution to Prefund Retiree Health Benefits. The state currently contributes 6.8 percent of pay to prefund Unit 5 retiree health benefits—one-half of this amount is paid on behalf of employees pursuant to a prior MOU. (That agreement redirected a pay increase that would have gone to employees to instead prefund retiree health benefits.) In 2020‑21 and 2021‑22, the agreement suspends the state’s entire 6.8 percent of pay contribution to prefund retiree health benefits. The agreement specifies that the contribution can be suspended until July 1, 2023 if the Director of Finance determines there are insufficient funds to restore the 6.8 percent of pay contribution. In the event that the contribution is suspended until July 1, 2023, the term of the MOU will be extended to July 2025.

Eventual Phase-In of Employee Contribution to Prefund Retiree Health Benefits. Over a three year period, the agreement phases-in employee contributions to prefund retiree health benefits. The new employee contributions will offset the state’s contributions. Specifically, in years one, two, and three, respectively, (1) employees will contribute 1.1 percent, 2.3 percent, and 3.4 percent of pay and (2) the state will contribute 5.7 percent, 4.5 percent, and 3.4 percent of pay. The three-year phase-in will begin on either July 1, 2022 or July 1, 2023, depending on whether the Director of Finance determines there are sufficient revenues.

Employee Pension Contributions. The MOU increases employee retirement contributions over three fiscal years beginning on July 1, 2020.The intention of the increases is that employees will be paying about one-half of normal cost for pension benefits at the end of the three-year period. The side letter defers these scheduled increases until retiree health prefunding contributions are restored on either July 1, 2022 or July 1, 2023.

Temporary Increase to Cap on Accrual of Vacation and Annual Leave. For the duration of the agreement, the 816 hour cap on Unit 5 accrued vacation and annual leave is increased to 1,032 hours. The agreement specifies that the higher cap could be in place beyond the expiration of the agreement “in the event the employer is not able to reduce balances for operational reasons.” As of December 31, 2019, 500 Unit 5 members—about 7 percent of Unit 5—had vacation or annual leave balances that exceeded the existing 816 hour cap.

Suspension of Uniform Allowance and Creation of Uniform Committee. The agreement suspends the $920 per year allowance that Unit 5 members receive as a uniform allowance as well as the $25 per month uniform maintenance allowance employees receive. In addition, the side letter establishes a joint labor/management committee to study, discuss, identify, and recommend an alternative uniform for highway patrol officers that does not require regular dry cleaning services. The committee shall report its recommendations to the California Highway Patrol Commissioner for review and consideration no later than July 1, 2021.

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.

LAO Comments

Complete Suspension of OPEB Accelerates Liability Growth Relative to Other Bargaining Units. The Unit 5 agreement is the only agreement that fully suspends all contributions being made to prefund retiree health benefits. The agreements with other bargaining units suspend only the employee contributions to prefund the benefit without affecting the state’s contribution—meaning that, in most cases, the total amount of money being set aside each year is halved by the agreements. In these cases, suspending the employee contribution is a way to offset the financial loss experienced by employees as a result of the pay cuts provided under PLP 2020. Unlike other bargaining units, the entire Unit 5 contribution to prefund retiree health benefits is paid by the state. Fully suspending the 6.8 percent of pay contribution to prefund Unit 5 retiree health benefits has no effect on employee pay but does significantly reduce the state’s costs today. However, by setting aside no money to prefund the benefit today, the Unit 5 agreement will result in the state’s unfunded liability for Unit 5 retiree health benefits to grow. Because highway patrol officers retire earlier than the average state employee, they are expected to receive state retiree health benefits for a longer period of time than other state employees. As such, the normal cost to prefund the benefit is larger relative to other state employees. Specifically, based on the most recent actuarial valuation, the annual normal cost per active member of Unit 5 is $9,083—78 percent higher than the $5,112 to pay the normal cost per active member for other state employees. As a result, by not setting aside any money to prefund Unit 5 retiree health benefit, the unfunded liability for Unit 5 will grow more than other bargaining unit until prefunding is restored.

Unit 6 (Corrections)

Budgetary Savings Achieved Through Side Letter. On June 18, 2020, the administration submitted to the Joint Legislative Budget Committee 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.

Successor Agreement in Place Through July 2, 2022. The prior MOU between the state and California Correctional Peace Officers Association was in place for one year and expired July 2, 2020. On June 19, 2020, the administration submitted to the Legislature a successor MOU to replace the current MOU that incorporates the June 18 side letter’s provisions. The administration’s summary of the successor MOU can be found here and its estimated fiscal effects here. The successor MOU will be in effect through 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).

Major Provisions of New MOU

PLP 2020: 4.62 Percent Reduction in Pay Each Month. For the 24 months in 2020‑21 and 2021‑22, most Unit 6 members will 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.

PLP 2020: Accrual of 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.

Deferred Scheduled Salary Increase. Under the prior MOU, Unit 6 members would have received a 3 percent GSI on July 1, 2020. The new agreement defers this pay increase to July 1, 2022. In the event that the Director of Finances determines there are not sufficient revenues 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 suspends or reduces until July 2022 the below provisions related to pay.

• Holiday Pay and Credits. The agreement suspends holiday pay and holiday credits for seven state holidays. Employees can 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 are suspended.

• Uniform Allowance. The annual $1,000 uniform allowance is reduced to $750.

Reduced Number of Personal Development Days. The agreement reduces the number of personal development days Unit 6 members receive from two days per year to one day per year.

Suspend Employee Contributions to Prefund Retiree Health Benefits. The agreement suspends employees’ 4 percent of pay contributions to prefund retiree health benefits in 2020‑21 and 2021‑22. The state’s employer contribution to prefund these benefits continue.

Modifications of Annual Training. Under the prior MOU, employees received a minimum of 60 hours of annual training, of which 48 hours must have been in a classroom setting (off-post training) and 12 hours must be on-the-job training. The new agreement reduces the number of classroom training hours by 32 hours—from 48 hours to 8 hours. The 32 hours of training is intended to 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 has 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 Contributions to Health Benefits. Under the agreement, the state will increase its contributions towards employee health benefits for the duration of the agreement in order for the state to continue paying 80 percent of the average of health premium costs for the employee and their eligible family members after health premiums increase in 2021 and 2022.

LAO Comments

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 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.

Unit 7 (Protective Services and Public Safety)

Current MOU in Place Through July 1, 2023. Unit 7 is represented by the California Statewide Law Enforcement Association (CSLEA). In 2019, the Legislature ratified the current MOU between the state and CSLEA. Our analysis of the MOU can be found here. The MOU is scheduled to expire July 1, 2023.

Budgetary Savings Achieved Through Side Letter. On June 24, 2020, the administration and CSLEA agreed to a side letter to reduce Unit 7 compensation. The side letter is in effect until June 30, 2022. The administration estimates that the agreement will reduce state costs in 2020‑21 by $80 million ($25.2 million from the General Fund).

Major Provisions of Side Letter

PLP 2020: 9.23 Percent Pay Reduction. For the 24 months in 2020‑21 and 2021‑22, Unit 7 members will receive a 9.23 percent reduction in pay each month.

PLP 2020: 16 Hours of Leave. In exchange for the pay cut, employees will receive 16 hours of leave in each month of PLP 2020.

Suspension of Employee Contribution to Prefund Retiree Health Benefits. The side letter suspends the 4 percent of pay that employees contribute to prefund retiree health benefits through the June 2022 pay period. The state will continue to make its contributions to prefund the benefit.

Deferral of 2.5 Percent GSIs. The Unit 7 MOU provides employees a 2.5 percent GSI on July 1, 2020 and another 2.5 percent GSI on July 1, 2021. The side letter defers these GSIs until either July 1, 2022 or July 1, 2023, depending on the Director of Finance’s determination as to whether the state has sufficient revenues.

New Special Salary Adjustment. Beginning July 1, 2020, the agreement provides employees in the licensing registration examiner classification a special salary adjustment of 5.74 percent.

Adjustments to Specified Payments. The agreement increases payments received by Unit 7 members for reimbursement of transportation and vanpool costs and bilingual skills. In addition, the agreement changes the existing $800 per month pay differential for certain peace officers so that, beginning September 1, 2020, the payment will be considered compensation for purposes of calculating employees’ pension benefits.

Minimum Wage. Effective July 1, 2020, the agreement specifies that the minimum salary range for all Unit 7 members will be no less than $15 per hour. Further, PLP 2020 will not reduce employee pay below $15 per hour.

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.

Unit 8 (Firefighters)

Current MOU in Place Through July 1, 2021. Unit 8 is represented by Cal Fire Local 2881. The current MOU between the state and Cal Fire 2881 was ratified by the Legislature in 2017 and is scheduled to expire July 1, 2021. Our analysis of the current MOU can be found here.

Budgetary Savings Achieved Through Side Letter. On June 30, 2020, the administration and Cal Fire 2881 agreed to a side letter to reduce Unit 8 compensation. The side letter will be in effect through June 30, 2021. The administration estimates that the agreement will reduce state costs by $68.9 million ($44.5 million from the General Fund) in 2020‑21.

Major Provisions of Side Letter

PLP 2020: 7.5 Percent Reduction in Pay. For the 12 months of 2020‑21, Unit 8 members will be subject to PLP 2020. In each of the 12 months of PLP 2020, Unit 8 members will receive a pay reduction of 7.5 percent. During PLP 2020, firefighters will continue to work their assigned work schedules. The agreement specifies that the state shall not seek additional reductions in Unit 8 compensation in 2020‑21.

PLP 2020: 16 Hours of Leave. In each month of PLP 2020, most Unit 8 members will receive 16 hours of leave. Specified specialty classifications will receive 14 hours of leave in each month of PLP 2020.

Deferral of Scheduled Special Salary Adjustments. The MOU provides pay increases to various specified classifications represented by Unit 8 on July 1, 2020. The side letter defers these pay increases until July 1, 2021. In the event that the Director of Finance determines that there are not sufficient revenues to fund the pay increases, the state shall provide notice to the union and meet and confer with the union on the impact of the Director’s determination.

Suspension of Employee Contribution to Prefund Retiree Health Benefits. For the 12 months of 2020‑21, the agreement suspends employees’ 4.4 percent of pay contribution to prefund retiree health benefits. The state will continue to make its contribution.

Changes in Formula for Computing Overtime. Firefighters are compensated differently than most other state employees. Firefighters typically work—on average—four 72-hour workweeks in a 28-day cycle. For the work performed during each 72-hour workweek, these employees receive total pay that consists of pay for (1) a specified number of hours based on a classification’s “salary range” and (2) additional hours determined using a formula to pay for scheduled overtime—referred to as Extended Duty Week Compensation (EDWC). Employees might work more than 72 hours per week during a 28-day cycle. For any time worked in excess of 72 hours in a workweek, employees receive additional pay for Unplanned Overtime. The pay that employees receive in a typical pay period—salary plus EDWC—affects employee pension benefits and is subject to Medicare payroll taxes. (Employees in specialty classifications represented by Unit 8—including foresters, forestry aids, and fire prevention specialists—are compensated more similarly to other state employees based on a 40-hour workweek.)

The agreement makes changes to the formula used to determine EDWC overtime pay. The changes in the formula increase employees’ total pay by increasing the hourly overtime pay rate over the course of the agreement. Although the administration estimates that the agreement results in net savings to the state, it estimates that the changes in this formula will increase the state’s annual costs by $13.5 million ($8.8 million from the General Fund). The agreement reduces state costs in the short term, but increases the state’s long-term costs through increased overtime costs.

Extends Period Employees Receive Fire Mission Pay. During the period each year officially referred to as “summer preparedness” (commonly known as fire season)—a period that varies year to year and region by region—a couple hundred employees (roughly 3 percent of Unit 8) in specialty classifications receive a 5 percent pay increase under the MOU. The side letter agreement amends the MOU so that these employees receive the pay for the entire fiscal year of 2020‑21.

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.

LAO Comments

Agreement Does Not Affect 2021‑22 and Beyond. The agreement does not reduce state costs for Unit 8 compensation beyond 2020‑21. If reductions in Unit 8 compensation are necessary in 2021‑22, such reductions would either need to be established in a subsequent agreement or imposed by the state.

Unit 9 (Professional Engineers)

Budgetary Savings Achieved Through New MOU in Place Through June 30, 2022. Bargaining Unit 9 is represented by Professional Engineers in California Government (PECG). The previous agreement with PECG expired June 30, 2020. On June 19, 2020, the administration submitted to the Legislature a successor agreement that will 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)

Major Provisions of New MOU

PLP 2020: 9.23 Percent Reduction in Pay. Beginning July 2020, Unit 9 pay will be reduced by 9.23 percent under PLP 2020—equivalent to 16 hours, or two days, of work per month. Unit 9 members will be subject to PLP 2020 in 2020‑21 and 2021‑22.

PLP 2020: 16 Hours of Leave. Employees receive 16 hours of paid leave in each month of PLP 2020. 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.

Suspension of Employee Contributions to Prefund Retiree Health Benefits. The agreement suspends employees’ 2 percent of pay contribution to prefund retiree health benefits in 2020‑21 and 2021‑22.

Temporary Increase to Cap on Accrued Vacation and Annual Leave. Unit 9 members’ accrued vacation and annual leave is subject to a 640 hour cap. The agreement increases the cap by the number of PLP hours Unit 9 members receive. The cap would go back to 640 hours after June 30, 2025. As of December 31, 2019, 1,030 Unit 9 members—about 8 percent of Unit 9—had vacation or annual leave balances in excess of the 640 hour leave cap.

New GSI. The agreement provides all Unit 9 members a 3 percent salary increase on July 1, 2022. In the event that the Director of Finance determines 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 is available to all Unit 9 members under the new agreement.

VPLP. Under the prior MOU, Unit 9 members voluntarily could reduce their pay in exchange for time off. Specifically, employees could 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, respectively. The new MOU increases the maximum VPLP so that employees can choose to reduce their pay by 13.86 percent and be credited with 24 hours of leave each month.

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.

Unit 10 (Professional Scientists)

MOU Expired July 2020. Unit 10 members are represented by the California Association of Professional Scientists (CAPS). Unit 10 members work under an expired agreement that was in effect from July 1, 2018 through July 1, 2020. Pursuant to state law, the provisions of an expired agreement generally remain in effect until a successor agreement is ratified. Our analysis of the expired agreement can be found here.

Budgetary Savings Achieved Through Side Letter Agreement. On June 25, 2020, the administration and CAPS signed a side letter agreement to reduce Unit 10 compensation costs. The administration’s summary of the provisions of the side letter agreement can be found here. The administration’s fiscal estimates of the measure can be found here. The administration estimates that the side letter agreement will reduce state employee compensation costs in 2020‑21 by $62.1 million ($15.3 million from the General Fund).

Major Provisions of Side Letter

PLP 2020: 9.23 Percent Pay Reduction. Beginning July 2020, Unit 10 pay is reduced by 9.23 percent under PLP 2020—equivalent to 16 hours, or two days, of work per month. Unit 10 members will be subject to PLP 2020 in 2020‑21 and 2021‑22. The agreement specifies that the state shall not impose a furlough program during PLP 2020.

PLP 2020: 16 Hours of Leave. In exchange for the 16 hours of lost pay each month, employees receive 16 hours of paid leave in each month of PLP 2020. Unused PLP 2020 leave can be used at a future date but must be used before employees separate from state service.

Suspend Employee Contributions to Retiree Health Benefits. For 2020‑21 and 2021‑22, the agreement suspends the 2.8 percent of pay that employees contribute to prefund their retiree health benefits.

Defer Scheduled 5 Percent GSI. The expired agreement would have provided employees a 5 percent salary increase July 1, 2020. The side letter suspends the pay increase and defers it to July 1, 2022 or July 1, 2023, depending on whether or not the Director of Finance determines there are sufficient revenues.

Temporary Increase to Cap on Accrual of Vacation and Annual Leave. The agreement increases the 640 hour cap on vacation and annual leave by however many hours of PLP 2020 Unit 10 members receive. The leave cap will be increased temporarily through June 30, 2025. As of December 31, 2019, 173 Unit 10 members—about 5 percent of Unit 10—had vacation or annual leave balances in excess of the cap.

VPLP. Under Unit 10’s MOU, employees may participate in VPLP. Under VPLP, employees voluntarily take a reduction in pay in exchange for time off. The agreement allows Unit 10 members to discontinue or make changes to their participation in VPLP at any time during the PLP 2020.

Accelerate Scheduled Reduction of Employee Pension Contributions. The expired MOU would have reduced employee pension contribution rates by 0.5 percent of pay beginning July 1, 2021. The side letter accelerates the date of the change in employee contribution rate to July 1, 2020.

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 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.

Unit 12 (Craft and Maintenance)

Budgetary Savings Achieved Through Successor MOU. Bargaining Unit 12 is represented by the International Union of Operating Engineers (IUOE).The previous MOU between the state and IUOE expired July 1, 2020. On June 25, 2020, the administration and IUOE agreed to a successor MOU that reduced state costs for Unit 12 compensation. The successor MOU will be in effect from July 1, 2020 through June 30, 2021. The administration’s summary of the agreement 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 in 2020‑21 by $91.6 million ($33.1 million from the General Fund).

Subsequent MOU Addendum Modifies Successor MOU. Before a successor MOU may go into effect, it must be ratified by both the Legislature and union members. The Legislature ratified the Unit 12 successor agreement through the budget. However, the union membership was not able to ratify the agreement in time for the agreement to be effective for the July 2020 pay period. Without a concession agreement in place to achieve assumed budget savings, the administration imposed furloughs on Unit 12 members for the July 2020 pay period. Pursuant to the administration’s furlough policy, employees received 16 hours of leave in exchange for this pay reduction. Without the successor MOU in place for July 2020, employees received the 9.23 percent pay reduction but also contributed 4.6 percent of pay to prefund their retiree health benefits. (Had the successor agreement been in place, the employee contribution to prefund retiree health benefits would have been suspended.) On July 22, 2020, the administration and IUOE agreed to an addendum to the successor MOU that provides Unit 12 member 8 hours of PLP 2020 leave for the July 2020 pay period. This is in addition to the 16 hours received pursuant to the administration’s furlough policy.

Major Provisions of New MOU

PLP 2020: 9.23 Percent Pay Cut. The agreement reduces Unit 12 member pay by 9.23 percent—equivalent to 16 hours, or two days, of work per month—for 2020‑21. It does not establish pay reductions in 2021‑22. Moreover, the agreement specifies that employees will not be subject to additional compensation reductions in 2021‑22.

PLP 2020: 16 Hours of Leave Per Month. In each month of PLP 2020, Unit 12 members will receive 16 hours of PLP 2020 leave.

Suspension of Employee Contributions to Prefund Retiree Health Benefits. The agreement suspends employees’ 4.6 percent of pay contribution to prefund retiree health benefits for 2020‑21. The state will continue to make its contribution.

State Contribution to Active Employee Health Benefits. The agreement increases the state’s contribution towards employee health benefits when CalPERS health premiums increase for the 2021 policy year. The state’s flat dollar contribution for the benefit will increase to be equivalent to 80 percent of the weighted average premium costs of the four CalPERS basic health plans with the highest enrollment levels.

LAO Comments

Agreement Does Not Affect 2021‑22 and Beyond. The agreement expires June 30, 2021 and does not reduce state costs for Unit 12 compensation beyond 2020‑21. If reductions in Unit 12 compensation are necessary in 2021‑22, such reductions would either need to be established in a subsequent agreement or imposed by the state.

Unit 13 (Stationary Engineers)

Current MOU in Place Through June 30, 2022. Unit 13 is represented by IUOE. The current MOU between the state and IUOE for Unit 13 was ratified by the Legislature in 2019 and is scheduled to expire June 30, 2022. Our analysis of the current MOU can be found here.

Budgetary Savings Achieved Through Side Letter. On July 21, 2020, the administration and IUOE agreed to a side letter to reduce Unit 13 compensation. The side letter will be in effect through June 30, 2022. The administration’s summary of the agreement can be found here. The summary of the administration’s estimated fiscal effects of the agreement can be found here. The administration estimates that the agreement will reduce state costs by $13.5 million ($9.3 million from the General Fund) in 2020‑21.

Major Provisions of Side Letter

July 2020 Pay Period. Similar to Unit 12, Unit 13 did not have a concession agreement in place in time for the July 2020 pay period. Accordingly, Unit 13 members were subject to two days of furlough—a 9.23 percent pay reduction in exchange for 16 hours of leave—and also contributed 3.9 percent of pay to prefund retiree health benefits. The agreement specifies that employees will receive 7 hours of PLP 2020 (in addition to the 16 hours already received) for having made the prefunding contribution in July 2020.

PLP 2020: 9.23 Percent Pay Reduction. Beginning August 2020, Unit 13 pay is reduced by 9.23 percent under PLP 2020—equivalent to 16 hours, or two days, of work per month. Unit 13 members will be subject to PLP 2020 in 2020‑21 and 2021‑22. The agreement specifies that the state shall not impose a furlough program during PLP 2020.

PLP 2020: 16 Hours of Leave. In exchange for the 16 hours of lost pay each month, employees receive 16 hours of paid leave in each month of PLP 2020. Unused PLP 2020 leave can be used at a future date but must be used before employees separate from state service.

Suspension of Employee Contributions to Prefund Retiree Health Benefits. Beginning August 2020, the agreement suspends employees’ 3.9 percent of pay contribution to prefund retiree health benefits.

Deferral of Scheduled 3 Percent and 2.75 Percent Top Step Increases. The MOU would have provided Unit 13 members who are at the top step of their classification’s pay range a 3 percent pay increase July 1, 2020 and a 2.75 percent increase July 1, 2021. Pursuant to the side letter, the July 1, 2020 pay increase did not go into effect and will be deferred to either July 1, 2022 or July 1, 2023, depending on the Director of Finance’s determination of sufficient revenues. Pursuant to the side letter, the 2.75 percent increase will be deferred to July 1, 2023.

Unit 16 (Physicians, Dentists, and Podiatrists)

Budgetary Savings Achieved Through Successor MOU in Effect Through July 1, 2022. Unit 16 is represented by the Union of American Physicians and Dentists (UAPD). The previous MOU between the state and UAPD was in place from July 1, 2016 through July 1, 2020. Our analysis of that agreement can be found here. On June 27, 2020, the administration and UAPD signed a successor agreement that reduces Unit 16 compensation. The successor agreement expires July 1, 2022. The administration has posted a summary of the agreement here and the administration’s estimate of the fiscal effects of the agreement can be found here. The administration estimates that the agreement will reduce state costs in 2020‑21 by $57 million ($53.5 million from the General Fund).

Major Provisions of New MOU

PLP 2020: 9.23 Percent Pay Reduction. Beginning July 2020, Unit 16 pay will be reduced by 9.23 percent under PLP 2020—equivalent to 16 hours, or two days, of work per month. Unit 16 members will be subject to PLP 2020 in 2020‑21 and 2021‑22. The agreement specifies that the state shall not impose additional compensation reductions in either the 2020‑21 or 2021‑22 fiscal years.

PLP 2020: 16 Hours of Leave. In exchange for the 16 hours of lost pay each month, employees receive 16 hours of paid leave in each month of PLP 2020.

Suspension of Employee Contributions to Prefund Retiree Health Benefits. The agreement suspends the 1.4 percent of pay contributions that Unit 16 members make to prefund retiree health benefits for 2020‑21 and 2021‑22. Under the agreement, the state continues to make its contribution to prefund the benefit.

Increased Payment to Employees for Continuing Medical Education. Under the agreement, Unit 16 members may be eligible for an additional $1,500 per year to cover additional continuing medical education costs.

VPLP. The agreement allows employees to opt out or make changes to their VPLP election at any time during PLP 2020.

2.5 Percent GSI 2022‑23. Effective July 1, 2022, all Unit 16 members will receive a 2.5 percent GSI. Depending on the Director of Finance’s determination of sufficient revenues, the pay increase could be deferred to July 1, 2023.

Adjustments to Other Payments. Effective July 1, 2020, employees with bilingual skills will receive an additional $100 per month (bringing total payments for bilingual skills to $200 per month). Effective July 1, 2020, the agreement increases by $35 the amount of money per month that Unit 16 members may be reimbursed each month for transit passes and vanpool reimbursements.

Contracting Out Committee. Under the agreement, a group consisting of representatives from management and UAPD referred to as the contracting out committee will develop a recruitment and retention report by February 1, 2021. The report will be submitted to the Director of the California Department of Human Resources and legislative budget committees.

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 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.

Unit 18 (Psychiatric Technicians)

Current MOU in Place Through July 1, 2022. Unit 18 is represented by the California Association of Psychiatric Technicians (CAPT). The current MOU is in effect through July 1, 2022. Our analysis of the MOU can be found here.

Budgetary Savings Achieved Through Side Letter. On June 30, 2020, the administration and CAPT agreed to a side letter to reduce state costs for Unit 18 compensation. The side letter is in effect from July 1, 2020 through June 30, 2022. The administration’s summary of the agreement can be found here. The administration’s estimates of the agreement’s fiscal effects can be found here. The administration estimates that the agreement will reduce state costs in 2020‑21 by $69.1 million ($66.3 million General Fund).

Major Provisions of Side Letter

PLP 2020: 9.23 Percent Pay Reduction. Beginning July 2020, Unit 18 pay will be reduced by 9.23 percent under PLP 2020—equivalent to 16 hours, or two days, of work per month. Unit 18 members will be subject to PLP 2020 in 2020‑21 and 2021‑22.

PLP 2020: 16 Hours of Leave. In exchange for the 16 hours of lost pay each month, employees receive 16 hours of paid leave in each month of PLP 2020. Unused PLP 2020 leave can be used at a future date but must be used before employees separate from state service.

Suspend Employee Contribution to Prefund Retiree Health Benefits. The agreement suspends the 4 percent of pay that employees contribute to prefund retiree health benefits. The contribution is suspended through the June 2022 pay period. The state will continue to make its contribution to prefund the benefit.

Defer Scheduled GSIs. The MOU provides a 2.75 percent pay increase effective July 1, 2020 and another 2.75 percent pay increase effective July 1, 2021. The side letter defers these two pay increases by two years to July 1, 2022 and July 1, 2023. If, however, the Director of Finance determines that there are insufficient funds, the July 1, 2020 pay increase shall be deferred three years to July 1, 2023.

Night Shift Differentials Now Subject to Pension Calculation. Under the MOU, night shift differentials earned by Unit 18 members were not “PERSable,” meaning they were not counted towards an employee’s compensation used to calculate pension benefits. Effective July 1, 2022, the side letter specifies that the shift differentials are PERSable and will be included as compensation for the purposes of determining pension benefits. The administration estimates that this will increase annual state costs beginning in 2022‑23 by $1.8 million ($1.7 million from the General Fund).

Minimum Wage of $15 Per Hour Maintained During PLP 2020. The side letter specifies that the minimum salary range for all Unit 18 members will be above $15 per hour. Further, PLP 2020 will not reduce employee hourly wages below $15 per hour.

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 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.

Unit 19 (Health and Social Services Professionals)

Current MOU Expired July 2020. Unit 19 is represented by the American Federation of State, County, and Municipal Employees (AFSCME). Unit 19 members work under the terms of an MOU that expired July 1, 2020. Under state law, the provisions of an expired MOU generally remain effective until a successor MOU is ratified. Our analysis of the expired agreement can be found here.

Budgetary Savings Achieved Through Side Letter Agreement. On June 23, 2020, the administration and AFSCME agreed to a side letter agreement that will be in effect through June 30, 2022 to reduce the state’s Unit 19 compensation costs. The administration’s summary of the provisions of the side letter agreement can be found here. The administration’s fiscal estimates of the measure can be found here. The administration estimates that the side letter agreement will reduce state employee compensation costs in 2020‑21 by $67.9 million ($56.6 million from the General Fund).

Major Provisions of Side Letter

PLP 2020: 9.23 Percent Pay Cut. Beginning July 2020, Unit 19 pay will be reduced by 9.23 percent under PLP 2020—equivalent to 16 hours, or two days, of work per month. Unit 19 members will be subject to PLP 2020 in 2020‑21 and 2021‑22.

PLP 2020: Accrual of 16 Hours of Leave. In exchange for the 16 hours of lost pay each month, employees receive 16 hours of paid leave in each month of PLP 2020. Unused PLP 2020 leave can be used at a future date but must be used before employees separate from state service.

Suspension of Employee Contribution to Prefund Retiree Health Benefits. The side letter suspends the 3 percent of pay that employees contribute to prefund retiree health benefits through June 2022. The state continues making its contribution.

Temporary Increase to Vacation and Annual Leave Cap. For the duration of PLP 2020, the 640 hour cap on vacation and annual leave will be increased by the number of PLP hours received by Unit 19. As of December 31, 2019, 319 Unit 19 members—about 6 percent of Unit 19—have vacation or annual leave in excess of the 640 hour leave cap.

VPLP. Under the expired MOU, employees may participate in VPLP. Under VPLP, employees voluntarily take a reduction in pay in exchange for time off. The agreement amends the expired MOU language and allows employees to opt out of the VPLP at an time during PLP 2020.

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 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.

Overarching LAO Comments and Recommendations

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, reducing employee compensation in the budget 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.

PLP

Furloughs a Common, but Imperfect Tool… 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 a one-day-per-month PLP (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 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 2019, about 13,000 state employees had a total of 1.1 million hours (averaging more than ten days per employee) of unused PLP hours from the PLP implemented in 2003‑04. Average state employee salaries have grown significantly—8 percent (after adjusting for inflation)—since 2003‑04. The cost of this accrued leave has grown at the same rate as salaries.

• 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 and PLP, their pension benefits are not affected. While state employees’ benefits are based on their full salary, the state’s contributions to CalPERS during furlough and PLP are based on employees’ reduced salary. As such, during these periods, the state systematically underfunds its pension liabilities. The degree to which the state underfunds pension benefits during furlough and PLP worsens (1) the higher the pay cut to employees and (2) the longer the policies 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.

Retiree Health Prefunding

Suspension of Employee Contributions to Prefund Retiree Health Benefits Increases Unfunded Liabilities… Historically, the state did not set any money aside to prefund retiree health benefits. As a result, the state has large retiree health unfunded liabilities. (As of June 30, 2019, the state’s unfunded liability for the benefit totaled $92 billion.) 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. (As we discussed earlier, the Unit 5 agreement will result in faster growth in unfunded liabilities because no money will be contributed to prefund Unit 5 retiree health benefits.)

…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 pre-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 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.

State Budget

Savings Achieved by Agreements in Line With Assumptions in Budget. The budget assumes that employee compensation is reduced by up to 10 percent. As Figure 2 shows, the savings to the state—as a percentage of salary and salary-driven benefit costs (state contributions to employee pension, Social Security, and Medicare benefits)—varies by bargaining unit; however, overall, the average reduction in state payroll costs is 10 percent. Importantly, the reduction in state payroll costs does not necessarily coincide with the reduction in pay experienced by employees. Due to offsetting reductions in employee costs (for example, contributions to prefund retiree health benefits), the reduction in pay is lower than the reduction in state costs.

Figure 2 also shows the total dollar savings identified by the administration in 2020‑21 to be $2.4 billion ($1.3 billion General Fund). The dollar savings reflected in Figure 2 includes $507 million ($279 million General Fund) in savings identified by the administration as “non-add” (sometimes also referred to as “below the line”). The administration presents these savings as non-add or below the line because they represent costs that are avoided, rather than a reduction in state appropriations relative to the 2019‑20 budget. For example, suspending salary increases that were scheduled to go into effect in 2020‑21 does not reduce state costs relative to 2019‑20 but does reduce state costs from what these costs otherwise could be without the agreement. Assuming the administration extends similar compensation reductions to employees excluded from collective bargaining, the state savings (all funds) in 2020‑21 roughly would be around $3 billion—near the assumed savings levels in the 2020‑21 budget.

Variations in PLP 2020. While a large majority of bargaining units and state employees are subject to a PLP 2020 that reduces employee pay by 9.23 percent in exchange for two days of leave each month for two fiscal years (2020‑21 and 2021‑22), there is variation. Notably, Units 5, 6, and 8—all peace officer and firefighter bargaining units—receive lower pay cuts. This seems most attributable to the fact that peace officer and firefighter contracts have larger non-salary pieces of compensation that are not included in non-safety bargaining units. As such, there are more non-salary options on the table for negotiators to reduce the state’s compensation costs than are available for other bargaining units.

Two Bargaining Units Did Not Agree to PLP in 2021‑22. While most state employees agreed to two years of PLP—absent action by the Director of Finance—Bargaining Units 8 and 12 only agreed to one year of PLP. If reductions in employee compensation are necessary in 2021‑22, either the administration and these bargaining units will need to sign a new agreement before July 1, 20221 or the state will need to impose reductions.

Agreements Ostensibly Give Director of Finance Significant Authority. The agreements delegate significant authority to the Director of Finance to determine the level of compensation provided to state employees based on the Director’s assessment of the state’s revenue situation. Although the agreement purports to give the Director of Finance sole discretion to determine if there are sufficient revenues to fund provisions of the agreements, the constitutional power of the purse rests with the Legislature. As such, if the Legislature disagrees with the Director of Finance’s determination, it is fully within the Legislature’s authority to appropriate more or less funds to employee compensation than the administration proposes in the budget.

Most Pay Increases Scheduled for July 1, 2020 Deferred to Future Years. Unless the Director of Finance determines that there are sufficient revenues to reinstate pay increases that are deferred by the agreements, a significant number of pay increases that would have gone into effect for 2020‑21 are deferred to future years under the agreements. Figure 3 summarizes whether or not July 1, 2020 pay increase are deferred under the agreements.

LAO Recommendations

Do Not Use Furloughs as Long-Term Budget Solution. The state might have multiple years of budget problems. With these agreements, the budget relies on reductions in employee compensation—using furloughs and PLP—to address budget problems in 2020‑21 and 2021‑22. If there is a budget problem in 2022‑23, the Legislature will need to decide whether to continue reducing employee compensation costs or solve the budget problem in other ways (like reducing other programmatic expenditures or increasing revenues). If the Legislature determines that reductions in employee compensation costs are necessary in 2022‑23, we recommend that the Legislature not approve additional years of PLP or furlough beyond 2021‑22. We think furloughs should be seen as a short-term solution until a longer-term solution can be implemented. Although difficult, workforce reductions likely are the best of the bad options available to reduce employee compensation costs, if necessary, to address a budget problem resulting from the COVID-19 recession in 2022‑23 and beyond. Workforce reductions avoid the negative effects of using furloughs for extended periods of time and honor the commitment established by the Local 1000 agreements that the state not reduce employee compensation for the nine bargaining units in 2022‑23.

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.