Legislative Analyst's Office Analysis of the 2002-03 Budget Bill

Augmentation for Employee Compensation (9800)

A significant portion of state government's operating costs is for compensation of state employees. The Governor's budget projects $17 billion in salary and wage expenditures for nearly 327,000 authorized personnel-years (PYs) in 2002-03 (including $5.9 billion and almost 113,000 PYs in higher education). Including benefits (such as contributions to retirement and health insurance), estimated employee compensation expenditures are projected to be about $20 billion for the budget year.

Employee Pay and Benefit Increases

The budget includes $209.7 million ($130 million General Fund) to fund for state employees, except higher education, the compensation package the administration has negotiated with most bargaining units. We estimate that ongoing General Fund costs of this package will grow from about $325 million in 2003-04 to $900 million annually by 2006-07.

State Civil Service Employees. The administration has negotiated, and the Legislature has approved, new memoranda of understanding (MOUs) for 9 of the 21 employee bargaining units, as shown in Figure 1. Of the remaining 12, 7 have reached agreements with the administration and await legislative approval of the proposed MOUs, and the remaining 5 still have not concluded negotiations. Figure 2 shows a history of general salary increases for state civil service employees and the consumer price indices for the United States and California since 1991-92.

The basic compensation package that most bargaining units have agreed upon (1) increases take-home pay by reducing employee retirement contributions and (2) pays for a portion of health insurance premium increases. The administration approved a similar package for supervisors, managers, and other employees not subject to collective bargaining.

As shown in Figure 2, the take-home pay provision does not provide a salary increase in the current year or budget year. Rather, the provision increases employees' take-home pay by reducing employee retirement contributions from the 5 percent paid by most employees to 2.5 percent upon approval of the MOUs. Employee retirement contributions will be further reduced to zero effective July 1, 2002. On July 1, 2003, the previous employee retirement contribution will be reinstated and employees will receive a 5 percent increase in their base salary. Because of the manner in which the Public Employees' Retirement System sets state retirement contribution rates, this provision would not impact the state budget until 2003-04. At that time, state retirement contributions will be higher than they otherwise would have been because the state must make up for the reduction in retirement contributions coming from employees in the current year and 2002-03.

Under the health insurance premium provision, the state will continue to pay half of the premium increases that went into effect January 2001 and will pay two-thirds of premium increases effective January 2002 and January 2003.

Chapter 366, Statutes of 2001 (AB 933, Migden), appropriated $69.5 million ($45.5 million General Fund) for the current-year costs of the nine agreements the Legislature has approved. In addition, the Governor's budget includes a current-year adjustment (to be appropriated through separate legislation) of $64.3 million ($41.8 million General Fund) for the 12 bargaining units that do not have approved MOUs at the time this analysis was prepared. These funds would pay for the costs of the basic compensation package discussed above.

The budget also proposes $209.7 million ($130 million General Fund) for budget-year costs of the compensation package for state employees, excluding higher education. This includes $111 million ($58 million General Fund) to pay for the state pick-up of 2002 and 2003 health premium increases.

If the remaining bargaining units receive the basic compensation package discussed above, we estimate the ongoing General Fund cost of collectively bargained provisions will be around $325 million in 2003-04 when the 5 percent salary increase becomes effective, growing to about $900 million annually by 2006-07.

Employees in Higher Education. Employees of the University of California (UC) and the California State University (CSU) systems are not part of the 21 bargaining units discussed above. Instead, they negotiate with the universities' administration to determine terms of employment. The Governor's budget proposes General Fund expenditures of $47.6 million for UC and $37.7 million for CSU for, among other things, employee compensation to provide salary and benefit increases to faculty and staff. Figure 3 shows how UC and CSU propose to allocate the majority of these amounts for employee compensation. The remaining funds for the CSU system would be used for various expenditures including facility maintenance and insurance.