MOU Fiscal Analysis:
Bargaining Unit 13 (Stationary Engineers)

On June 17, 2022, the administration submitted to the Legislature a proposed memorandum of understanding (MOU) between the state and Bargaining Unit 13 (Stationary Engineers). This analysis of the proposed agreement fulfills our statutory requirement under Section 19829.5 of the Government Code. State Bargaining Unit 13’s members are represented by the International Union of Operating Engineers (IUOE), Local 39. The administration has posted the agreement and a summary of the agreement and the administration’s estimated fiscal effects of the agreement on the California Department of Human Resources’ (CalHR’s) website. (Our State Workforce webpages include background information on the collective bargaining process, a description of this and other bargaining units, and our analyses of agreements proposed in the past.)

Major Provisions of Proposed Agreement

Term. The current MOU between the state and Unit 13 is scheduled to expire June 30, 2022. The proposed agreement would be in effect from ratification through June 30, 2025, meaning that it would be in effect for three years.

Salary and Pay

Increases Pay for Top of Salary Ranges. State jobs are organized into job classifications. Each job classification has an established salary range with a minimum and a maximum salary. The agreement would increase the maximum salary of Unit 13 job classifications in three instances over the course of the agreement’s term. Specifically, the agreement would increase the maximum of the salary ranges by 2.5 percent effective July 1, 2022; 4 percent effective July 1, 2023; and 4 percent effective July 1, 2024. As of May 2021, about 70 percent of state employees represented by Unit 13 are at the top step of their salary range.

Provides Employees Payments Totaling Up to $3,000—If Employed Through August 2024. The agreement would provide four payments, each up to $750, over the course of the term of the agreement. The payments would be made in January 2023, August 2023, January 2024, and August 2024. Over the course of the agreement, employees could receive up to $3,000 from these payments. To be eligible for the full payment, employees would need to work for the six months preceding each payment and be employed by the state at the time of the payment. To be eligible for the entire $3,000, an employee would need to be employed in every pay period between July 2022 and December 2023 and be employed when payments are executed in January 2024.

Increases Reimbursement Rates for Mass Transit and Vanpools. The state reimburses employees for some costs related to their commute. The proposed agreement increases the amount of reimbursement that employees may receive for their costs related to mass transit and vanpools from 75 percent to 100 percent—up to the maximum monthly exclusion amount allowed by the U.S. Internal Revenue Services (IRS). In 2022, the IRS monthly exclusion for qualified transportation benefits is $280.

Increases Uniform Allowance for Eligible Employees. The agreement would increase the amount of money that eligible employees receive as a uniform allowance.

• California Department of Corrections and Rehabilitation (CDCR). Eligible Unit 13 members who work for CDCR receive an allowance of $400 to pay for uniform requirements. The administration indicates that (1) CDCR uniforms are required to be worn at all times and cost between $800 and $900 per year and (2) the current $400 allowance was established in 2002. The agreement would increase the annual allowance for these employees from $400 to $670.

• Department of Park and Recreation (DPR) and California Department of Forestry and Fire Protection (CalFire). Under the current MOU, eligible Unit 13 members who work for DPR or CalFire are eligible to receive a uniform reimbursement of up to $450 each year. The administration indicates that (1) DPR and CalFire uniforms are required to be worn at all times and cost between $700 and $800 each year and (2) the current reimbursement rate was established in 2002. The proposed agreement would reclassify this payment as an allowance rather than a reimbursement and would increase the amount of money eligible employees receive to $670.

Increases Footwear Allowance for Eligible Employees. Under the current MOU, employees are eligible for reimbursement for purchasing required footwear, up to $164 every two years. The proposed agreement would reclassify this payment as an allowance rather than a reimbursement and increase the amount employees receive to $200 each year.

Active and Retiree Health Benefits

Increases State’s Flat Dollar Health Premium Contributions. In the case of 14 bargaining units, the state’s contributions towards employee health benefits are established as a percentage of health premiums so that the state’s contributions automatically change as health premiums change. For the remaining seven bargaining units—including Unit 13—the state contributes a flat dollar amount towards employee health benefits. The state’s flat dollar contribution is specified in labor agreements and does not change after an agreement expires. The state’s contribution for Unit 13 health benefits was last adjusted for 2022 premiums. The proposed agreement would adjust the flat dollar state contribution as premiums change each year for the duration of the agreement so that the state’s contribution would be up to 80 percent of an average California Public Employees’ Retirement System (CalPERS) premium costs and up to 80 percent of average CalPERS premium costs for enrolled family members—referred to as the “80/80 formula.”

Employer and Employee Contributions to Prefund Retiree Health Benefits Would Fluctuate With Changes in Normal Cost. The state and Unit 13 members currently each contribute 3.9 percent of pay to prefund Unit 13 retiree health benefits. The current contribution rate is specified in the current MOU. Similar to provisions that have been included in MOUs for other bargaining units, the proposed agreement would allow the state and employees’ contributions to fluctuate as normal cost (as a percentage of pay) fluctuates over time. The intent of the provision is that the state and employees would each contribute one-half of the actuarially determined normal cost. As a result of this provision, the state and employee contributions to prefund retiree health benefits would decrease 0.5 percent of pay from 3.9 percent of pay to 3.4 percent of pay.

Other Major Issues

Allows for Reopening of Agreement to Address Issues With California State Payroll System. The State Controller’s Office and CalHR are developing a new information technology system that the state will use to process payroll. The proposed agreement specifies that, if necessary, the parties would reopen provisions of the agreement to address changes required by the new system. Under the current project time line, the system is expected to be completed April 2028.

Efforts to Develop Workforce. Under the agreement, the state and IUOE Local 39 agree to review Unit 13 classification structures, career pathways, recruitment, training, and educational opportunities. The agreement’s stated purpose of this effort is to increase diversity in Unit 13 and retain skilled labor; however, the agreement provides no specifics on how these goals might be achieved or measured. Separately, the state and union would meet within 60 days of the agreement’s ratification to review the state’s nearly 40-year-old stationary engineer apprentice program to determine if the program can be improved. Pursuant to the agreement, the state would not fill new stationary engineer apprentice positions until changes agreed to by the parties are implemented. The current apprentice program does not appear to be a major recruitment tool for Unit 13. The administration reports that, since 2010, there have been a total of 19 apprentice appointments with the last apprenticeship being completed in August 2021. The departments that employed apprentices during this time included the State Compensation Insurance Fund and the Departments of General Services, State Hospitals, Developmental Services, and Public Health.

Administration’s Fiscal Estimates

Increases State Annual Costs by $13.1 Million ($9.2 Million General Fund) by 2025-26. The administration estimates that the proposed agreement would increase annual state costs by $13.1 million ($9.2 million General Fund) by 2025-26. This estimate seems reasonable. Figure 1 summarizes the administration’s cost estimates.

Effect of Extending Provisions to Managers and Supervisors. When rank-and-file pay increases faster than managerial pay, “salary compaction” can result. Salary compaction can be a problem when the differential between management and rank-and-file is too small to create an incentive for employees to accept the additional responsibilities of being a manager. Consequently, the administration often provides compensation increases to managerial employees that are similar to those received by rank-and-file employees. Although the administration has significant authority to establish compensation levels for employees excluded by the collective bargaining process, these compensation levels are subject to legislative appropriation. The estimates above do not include any costs resulting from the state extending provisions of the agreement to excluded employees associated with Unit 13. We estimate that extending a comparable increase to Unit 13 supervisors could increase state annul costs by the low millions of dollars by 2025-26—about 60 percent coming from the General Fund.

LAO Assessment

Recruitment and Retention Issues Seem to Persist. In our August 2019 analysis of the current Unit 13 MOU, we discuss long-standing recruitment issues with Unit 13. There is evidence that there may continue to be recruitment and retention challenges among Unit 13 members. As of May 2022, across state government, 22 percent of the established Unit 13 positions were vacant, and the largest department employer of Unit 13 members, CDCR, had more than 25 percent of its Unit 13 positions vacant. Retention of the most senior employees seems like it has become more difficult. Although about 70 percent of Unit 13 members currently are at the top step of their salary range, this is much lower than it was in December 2018 when 86 percent of Unit 13 members were at the top step.

Like Current MOU, Agreement Seems Designed to Address Retention More than Recruitment Issues. Like the current MOU, the proposed agreement now before the Legislature seems to emphasize retention over recruitment. Although some of the provisions might benefit recruitment efforts—for example, efforts to improve the apprentice program—the largest financial components of the agreement benefits people who have worked the longest or who stay on staff for the duration of the agreement. The Special Salary Adjustments provided by the agreement would increase earnings potential for all Unit 13 employees and prospective Unit 13 employees; however, the immediate effect would be to increase the earnings of those already at the top of the salary ranges without increasing earnings for most new hires. In addition, the up to $3,000 payments provided by the agreement clearly is geared more towards retaining existing employees rather than creating incentive for new hires.

Pay Increases Might Not Keep Pace With Inflation. The proposed agreement would increase pay for Unit 13 members who are at the top step of their pay range by a compounded 10.9 percent over the term of the agreement. Inflation has accelerated recently, with prices increasing over 8 percent over the last year. The consensus among economic forecasts is that inflation will moderate over the next year. However, where inflation is headed over the term of the agreement is unknown. Persistently high inflation over the term of the agreement could (1) significantly weaken the purchasing power of Unit 13 members—especially those who are not at the top step and would not receive salary increases under the proposed agreement and (2) exacerbate the existing lag in state compensation compared with local governmental employers.

Addressing Diversity Is a Meritorious Endeavor. As we indicated in our analysis of CalHR’s proposal to begin the process of establishing a statewide diversity, equity, and inclusion strategic plan, overall, the state workforce is not representative of the demographic composition of the state population. The diversity, or lack thereof, varies significantly by classification and by bargaining unit. Of the 847 state employees represented by Unit 13 in December 2020, only 1 percent were women, 58 percent were older than 51 years old, and 54 percent were white. The agreement’s stated goals of workforce development could help make Unit 13 a more representative bargaining unit.

Term of Agreement Longer Than We Recommend. In 2007, we recommended that the Legislature only approve tentative agreements that have a term of no more than two years. With a term of three years, the proposed agreement is longer than our recommended term.

Issues for Legislative Considerations

Lag in Unit 13 Compensation Likely Not Addressed by Agreement. The most recent CalHR compensation study of Unit 13 found that the state’s compensation package for these employees lags local government compensation for similar employees by 15 percent. The top step pay increases and one-time payments provided by this agreement likely would not close the gap between the state and local government employers. The Legislature might want to hear from the administration and union to better understand how the proposed agreement makes the state a more competitive employer and helps the state recruit new stationary engineers. In addition, the Legislature might want to better understand how the existing compensation lag affects the state’s ability to recruit diverse talent into Unit 13 positions.

Long Term, the State Might Reduce Number of State Buildings. The state owns many buildings. One of the primary jobs of the employees represented by Unit 13 is to maintain building systems (for example, heating and cooling systems) of state buildings. The number of state buildings could decrease over the long term as the state reduces (1) the number of prisons and (2) its footprint in office buildings as the state adopts more flexible work arrangements. If the state significantly reduces the number of state buildings, the state likely will need fewer Unit 13 positions. This situation likely will have an effect on the state’s (1) compensation for Unit 13 members and (2) ability to recruit and retain stationary engineers.

Legislative Role as Administration Addresses Diversity in Civil Service. As we discuss in greater detail in our analysis of CalHR’s California Leads budget proposal, the administration is just beginning the multiyear process of developing a statewide diversity, equity, and inclusion strategy for the civil service. In the analysis, we recommended that the Legislature actively oversee the administration’s efforts as the policies that will be developed in the future likely will have significant implications for the state as an employer. The workforce development provisions of the proposed agreement demonstrate that the work towards addressing diversity in the civil service is diffuse. In addition to having CalHR report on the progress the administration has made towards addressing the statewide strategy, the Legislature might be interested in receiving reports on bargaining unit or department specific efforts to address diversity, equity, and inclusion in the state civil service. In addition, given the amorphous nature of the agreement’s commitment to improve diversity among Unit 13 membership, the Legislature might want to consider giving itself a more direct role in determining (1) what information the administration collects, (2) how those data are used to inform the state’s policy to improve diversity, and (3) how to measure the administration’s success in making the state workforce more diverse.