Labor Agreements to Achieve Budgetary Savings

As we discussed in May, the administration proposed as part of the Governor’s May Revision that the Legislature (1) not fund scheduled pay increases to state employees established in ratified labor agreements and (2) authorize the Department of Finance to impose reductions to employee compensation if collective bargaining agreements to achieve savings were not in place by July 1, 2025. The final 2025-26 budget package approved by the Legislature maintained the May Revision level of savings in employee compensation and set an expectation for the administration and the state’s 21 bargaining units to meet and confer in good faith in order to achieve those savings through the collective bargaining process. To effectuate those savings, the budget package provided legislative ratification of any agreement that achieved budgetary savings and was entered into before the start of the 2025-26 fiscal year. In total, the administration and 19 of the state’s bargaining units were able to enter into agreements by midnight on June 30, 2025. The purpose of this analysis is to serve as a historical record of these legislatively ratified labor agreements with the 19 bargaining units. The text of each agreement and the administration’s summaries of the provisions and fiscal effects of each agreement are available on the California Department of Human Resources’ website. Our analyses of the current memoranda of understanding (MOUs) between the state and these bargaining units and other labor agreements proposed in the past are available on our State Workforces webpages.

State Budget Assumes Reduction in Employee Compensation Costs to Address Budget Problem. Control Section 3.90 of the 2025-26 budget (as added by Chapter 5 of 2025 [AB 102, Gabriel]) established an expectation of the Legislature that all 21 of the state’s bargaining units would meet and confer in good faith with the administration before July 1, 2025 to achieve savings assumed in the budget.

Status of Agreements to Achieve Budgetary Savings. As we describe below and list in Figure 1, the Legislature has ratified agreements between the administration and 19 of the state’s 21 bargaining units. The rank-and-file and excluded employees associated with these 19 bargaining units represent more than 95 percent of the state workforce. Section 19829.5 of the Government Code establishes our ten-day review of proposed MOUs. While our office has issued unit-specific analyses for Units 6, 9, and 12, we have not issued analyses of the agreements with the other 18 bargaining units discussed below due to the ratification provisions provided in the budget.

• Legislative Ratification of Agreements With Units 6, 9, and 12. In June 2025, our office issued analyses of proposed labor agreements with Units 6 (Corrections), 9 (Professional Engineers), and 12 (Craft and Maintenance). The Legislature ratified these three agreements on June 30, 2025. Specifically, the Legislature ratified the agreements with Units 9 and 12 though Chapter 25 of 2025 (SB 139, Committee on Budget and Fiscal Review) and the agreement with Unit 6 through Chapter 26 of 2025 (SB 140, Committee on Budget and Fiscal Review).

• Legislative Ratification of Agreements With 16 Additional Bargaining Units. Notwithstanding Section 19829.5, Section 11 of Chapter 25 provided legislative ratification of any labor agreement that (1) was entered into by the state employer and a state bargaining unit between June 21, 2025 and June 30, 2025 and (2) included savings measures to achieve budgeted reductions pursuant to Control Section 3.90 of the 2025-26 Budget Act. The administration entered into agreements to achieve budgetary reductions with 16 other bargaining units between June 21, 2025 and midnight of June 30, 2025. We interpret these agreements to be ratified by the Legislature pursuant to Chapter 25.

• Agreements With Two Additional Bargaining Units Have Been Submitted to the Legislature for Consideration. Since June 30, 2025, the administration signed tentative agreements with Bargaining Units 10 (Professional Scientists) and 16 (Physicians, Dentists, and Podiatrists). The Unit 16 agreement is a proposed successor MOU to the expired Unit 16 MOU. The Unit 10 agreement is a side letter related to the administration’s telework policy and does not include provisions to reduce employee compensation. As a proposed MOU, the Unit 16 agreement is subject to our review under Section 19829.5. This analysis does not constitute that statutory review of the proposed Unit 16 agreement.

Ratified Agreements Include Successor MOUs and Side Letters to Expired Agreements. Before these agreements were ratified, six of the bargaining units were scheduled to have expired MOUs in 2025-26 and 13 bargaining units were scheduled to have MOUs that would expire some time after June 30, 2026. The ratified agreements include successor MOUs for five of the seven bargaining units with expired MOUs: Units 2 (Attorneys and Hearing Officers), 6 (Corrections), 9 (Professional Engineers), 13 (Stationary Engineers), and 19 (Health and Social Services/Professional). The successor MOU for Unit 13 will expire at the end of 2026-27. The successor MOUs for Units 2, 6, 9, and 19 will expire at the end of 2027-28. The ratified agreement with Unit 18 (Psychiatric Technicians) is a side letter and not a successor MOU. Under state law, provisions of an expired MOU generally remain in effect. As such, with the exception of provisions included in the side letter, Unit 18 members will continue to work under the terms of the MOU that expired on July 1, 2025 until a successor MOU has been ratified.

Common Provisions of Ratified Labor Agreements

In this section, we discuss common provisions that appear in most of the bargaining agreements and side letters. As we indicate below, not all of the provisions appear in all of the ratified agreements for the 19 bargaining units. In most cases, the general overarching structure of the agreements result in (1) employee take-home pay remaining flat for two years (by providing a General Salary Increase in exchange for additional leave credits through Personal Leave Program 2025 [PLP 2025]), (2) the state employer and employee suspending contributions to prefund retiree health benefits (also referred to as Other Post-Employment Benefits, or OPEB) for at least two years, and (3) state employee take-home pay increasing in 2027-28 relative to 2024-25 pay levels at the conclusion of PLP 2025.

PLP 2025

The agreements with 17 bargaining units establish PLP 2025. Agreements with Units 8 (Firefighters) and 18 (Psychiatric Technicians) do not include PLP 2025. The agreements that include PLP 2025 include provisions to increase pay that either were included in existing labor agreements or were established by the new ratified agreements. During PLP 2025, employees forgo these pay increases in exchange for monthly accruals of a specified number of hours of leave. After PLP 2025, the employees’ salaries will be restored and the intervening deferred pay increases will be applied. This will result in a relative jump in state salary and salary-driven benefit costs.

Pay Increases Established or Maintained Under PLP 2025 Agreements… The agreements that include PLP 2025 either maintain the pay increases scheduled under existing labor agreements or establish new pay increases. Figure 2 summarizes the pay increases provided by the ratified agreements.

…But Employees Receive Time Off in Lieu of Higher Pay During PLP 2025. While the PLP 2025 agreements provide pay increases to affected employees in 2025-26, employees will defer these pay increases until 2027-28 in exchange for time off roughly equivalent in value to the 2025-26 pay increases. Figure 3 summarizes the pay reduction and the number of hours of leave employees will receive during PLP 2025. Eligible employees will continue to receive merit salary adjustments year over year until they reach the top step of their job classification’s salary range; however, the result of PLP 2025 for most affected bargaining units is that employees’ salaries will remain flat relative to 2024-25 in exchange for the accrual of a specified number of hours of PLP 2025 leave each month. We discuss three exceptions to this generalization below.

• Unit 2. In the case of Unit 2 (Attorneys and Hearing Officers), employees receive time off—and an equivalent pay offset—during PLP 2025 that exceeds the scheduled pay increase in 2025-26 under the ratified agreement. This means that Unit 2 pay will be lower relative to 2024-25 levels during PLP 2025; however, PLP 2025 for Unit 2 would only be in effect for 16 months rather than 24 months and employees will accrue a higher number of hours of leave each month.

• Unit 5. In the case of Unit 5 (Highway Patrol), state law provides employees an automatic salary increase each year based on the results of an annual salary survey of five local government jurisdictions. Through the ratified Unit 5 PLP 2025 agreement, employees will forgo both the 2025-26 and 2026-27 pay increases during PLP 2025 in exchange for an equivalent PLP in 2025-26 and an increase in the monthly accrual of PLP 2025 leave in 2026-27 corresponding with the 2026-27 pay increase. This results in Unit 5 receiving the highest pay reduction and highest number of PLP 2025 leave hours over the course of 2025-26 and 2026-27.

Suspension of OPEB Prefunding Contributions

State and Employees Share Prefunding Costs. For most of the more than six decades that the state has offered its employees retiree health benefits, the state did not prefund the benefit but instead paid the cost on a pay-as-you-go basis after employees retired. The result is that the state has a large unfunded liability associated with retiree health benefits for state employees—estimated to be $85.2 billion as of June 30, 2023 (the most recent actuarial valuation). In 2015-16, the state adopted a policy to establish through the collective bargaining process a prefunding arrangement whereby the state and current employees each pay one-half of the normal cost of the benefit. These contributions are invested in a trust fund. Under the funding plan, the state may not use the assets of the trust fund to pay benefit costs until 2046 or the benefit is fully funded, whichever comes first. For most state bargaining units, as of the last actuarial valuation, the state was on track to fully fund the benefit by 2048.

All 19 Ratified Agreements Suspend State Employer Contribution to Prefund OPEB for at Least Two Years… Under all of the ratified agreements, the state will not make contributions towards prefunding retiree health benefits in 2025-26 or 2026-27. Suspending the state’s prefunding contributions reduces the state’s costs by between 1 percent of pay and 4.5 percent of pay in 2025-26 and 2026-27. (The General Fund share of these costs are paid from the state’s required annual debt payments under Proposition 2 [2014].) The reduced amount of money invested in the trust fund will result in higher unfunded liabilities in the long run. In most of the agreements, the state’s contributions towards the benefit would be fully restored in 2027-28. However, the agreements with Units 7 (Protective Services and Public Safety), 12 (Craft and Maintenance), and 13 (Stationary Engineers) would phase in the restoration of the contribution rate so that the state’s contribution would not be fully restored until 2029-30.

…And All Except Unit 6 Also Suspend Employee Contributions for at Least Two Years. In addition to suspending the state’s employer contribution to prefund retiree health benefits, 18 of the ratified agreements (all except the agreement with Unit 6) also suspend the employee contribution to prefund the benefit. For these 18 bargaining units, this means that no money will be contributed towards prefunding the benefit in 2025-26 and 2026-27. Similar to the employer rates, the agreements with Units 7, 12, and 13 also phase in the employee contribution so that the contribution rate will not be fully restored until 2029-30. Figure 4 shows the OPEB prefunding contribution rates that will be suspended under the ratified agreements. By suspending employee contributions, workers take-home pay will increase by the same amount during the duration of the suspension.

Foregone Contributions Total About $2.7 Billion Over Four Years. Suspending OPEB contributions for two years (and gradually phasing in some contributions) reduces OPEB prefunding by about $2.7 billion over 2025-26 to 2029-30. This reflects a roughly $1.5 billion reduction in employer contributions and $1.2 billion in employee contributions. The state’s contributions would have been supported by $748 million in General Fund resources (using constitutionally required Proposition 2 debt repayments) and $730 million in special fund resources. Proposition 2 requires the state to make a specified General Fund payment towards retirement liabilities. It is the state’s policy to apply these payments towards the state’s General Fund OPEB prefunding costs and to the California Public Employees’ Retirement System (CalPERS) unfunded liabilities as a supplemental pension payment. As such, the savings from the General Fund portion of the employer contribution does not represent an overall reduction in General Fund expenditures, but rather shifts which retirement liability benefits from the Proposition 2 payment. The interaction of the ratified agreements and the state’s Proposition 2 policy will result in the portion of the Proposition 2 payment that would have been made towards prefunding OPEB to instead be made to CalPERS as a supplemental pension payment. The new unfunded liability created by suspending OPEB contributions will become a long-term General Fund obligation.

Administration’s Estimated Fiscal Effect of Ratified Agreements

Reduced State Costs Through 2026-27. As Figure 5 shows, the administration estimates that the agreements will reduces state costs by $720 million ($351 million General Fund) in 2025-26 and $645 million ($289 million General Fund) in 2026-27. These savings will help address the state’s immediate budget problem.

Long-Term, Higher State Costs. The agreements result in higher annual state costs beginning in 2027-28 as the state resumes contributing money to prefund retiree health benefits and employees receive the pay increases deferred under PLP 2025. The administration estimates that the state’s annual costs will increase by $1.8 billion in 2027-28 ($941 million General Fund) relative to 2024-25.