Analysis of the 2006-07 Budget Bill Legislative Analyst's Office February 2006

Employee Compensation (9800)

Compensation for state employees drives a significant portion of state government’s operating costs. The Governor’s budget projects $20 billion in salary and wage expenditures for 335,000 authorized personnel-years (PYs) in 2006-07 (including $6.3 billion and more than 116,000 PYs in higher education). Figure 1 displays a breakdown of these projected 2006-07 payroll expenses (excluding benefits expenditures for items such as health insurance and retirement). As shown in the figure, higher education-consisting of the University of California (UC) and California State University (CSU) systems-represents about one-third of state payroll costs. The California Department of Corrections and Rehabilitation (CDCR) and the Department of Transportation combined represent over one-quarter of state payroll.

The state also pays for benefits such as health insurance and retirement, which equal almost 30 percent of salary expenditures. Thus, when benefits are included, total estimated expenditures for employee compensation are projected to exceed $25 billion for the budget year. The General Fund supports about one-half of this total.

State civil service employees-which exclude UC and CSU employees-generally belong to one of 21 bargaining units. Figure 2 shows the recent history of general salary increases for state civil service employees and the consumer price indices for the United States and California.

Raises for Five of 21 Bargaining Units, Judges, and Others

The budget includes $382 million ($203 million General Fund) for compensation increases for: (1) memoranda of understanding with five of the 21 employee bargaining units, (2) supervisors and managers of employees in those five units, (3) judges, (4) prison medical personnel required to receive them by a court order in the Plata v. Schwarzenegger case, and (5) medical personnel in other departments.

Budget Item for Increases in Employee Compensation. Baseline compensation costs already are included in departmental budgets. In the annual budget act, Item 9800, Augmentation for Employee Compensation, includes a lump sum for most additional compensation items. During the fiscal year, the Department of Finance (DOF) allocates from the lump sum to departmental budgets the amounts necessary to fund increased costs for pay and benefits in each department.

Raises Required by MOUs Included in Budget. Four of the state’s 21 bargaining units (representing about 30 percent of rank-and-file employees) have approved memoranda of understanding (MOUs) with scheduled compensation increases in 2006-07 for some or all of their members. The tentative Unit 2 attorneys contract-awaiting legislative consideration at the time of this analysis-also includes increases. The Governor’s budget includes $303 million ($135 million General Fund) for the increases for these five bargaining units (and for related supervisors and managers).

Among the largest components of these costs are the final raises under the state’s 2001 MOUs with Unit 5 highway patrol and Unit 6 correctional officers. After these raises, these employees will have received salary increases of about 30 percent between 2001 and 2006. Figure 3 shows the recent salary increases received by Unit 5 and Unit 6 members, as well as Unit 9 professional engineers. All of these units have MOUs that increase salaries in line with those of comparable professionals working for other public agencies.

Judges’ Pay Raises. State law generally gives judges an annual salary increase equal to the average percentage salary increase for state employees. The budget proposes $12 million from the General Fund to provide an approximately 3.5 percent salary increase to judges. A revised estimate of the amount needed for judges’ raises likely will be submitted with the May Revision. According to DOF, the administration intends to fund judges’ pay increases in the judicial branch budget beginning in 2007-08 from within funding increases tied to growth in the state appropriations limit.

Some Compensation Increases Funded in Departmental Budgets. In addition to the increased compensation costs budgeted in Item 9800, compensation increases are proposed in departmental budgets. For example, the 2006-07 Governor’s Budget includes additional compensation required under the MOU with Unit 8 firefighters. We discuss this particular issue in the “Resources” chapter of this publication.

Pay Hikes Related to Plata Lawsuit Raise Concerns

The budget proposes $68 million ($57 million General Fund) for compensation increases resulting from the Plata court order concerning prison medical staff. To date, however, the Legislature has received estimates showing that required costs total only $21 million. Accordingly, we recommend reducing the requested amount for Plata compensation by $47 million. (Reduce Item 9800-001-0001 by $36,109,000. Reduce Item 9800-001-0494 by $10,865,000.)

Court-Ordered Compensation Increases. The Plata case concerns constitutional violations related to medical care in state correctional facilities. On December 1, 2005, the federal judge in the case ordered the state to immediately increase compensation for several classes of prison medical personnel (such as physicians, nurse practitioners, and registered nurses). The judge ordered, among other things, increases in prison medical staff’s “recruitment and retention differentials.” The mandatory increases in these differentials and other court requirements equal at least 10 percent of physician salaries and 18 percent of registered nurse salaries in CDCR. By giving these prison personnel higher compensation, the order is intended to reduce position vacancies and increase retention of staff.

The Department of Personnel Administration promptly issued a pay letter to the State Controller’s Office to implement the judge’s order. The DOF also notified the Legislature of its intent to request funding through a supplemental appropriations bill for 2005-06 costs related to the judge’s order. The administration estimated that 2005-06 costs would be $12.2 million ($12.1 million General Fund) and 2006-07 full-year costs would be $20.9 million ($20.7 million General Fund).

Budget Funds Raises for Other Doctors and Nurses. The Governor’s budget also proposes pay raises for doctors and nurses-an estimated additional $47 million-in other departments with job classifications similar to those of prison staff covered by the order in the Plata case. To date, the administration has not provided detailed information on the rationale for this proposal or its details, such as which doctors and nurses would be given raises and how much.

Pay Raises Should Be Discussed at the Bargaining Table. The Ralph C. Dills Act establishes the procedures for bargaining with units representing state civil service personnel. Offers of salary increases to address recruitment and retention (and other) problems can be discussed at the bargaining table, and the costs of these offers can be offset by financial or other concessions from employee unions. Under the Dills Act’s structure, the bargaining table is the most appropriate place to settle important compensation issues. As such, the state should not voluntarily offer pay raises not required by the court order without considering the whole range of compensation and workplace issues. The proposed pay increase also could undermine the intended effect of the judge’s order-by eliminating prisons’ ability to offer somewhat higher salaries than other state medical positions in response to CDCR’s particular difficulties in recruiting staff for their facilities.

Recruitment and Retention Issues in Other Departments. The administration has not provided detailed information on how their proposed pay increases relate to any existing difficulties in recruiting and retaining medical staff in departments other than CDCR. At the bargaining table, the administration could propose compensation increases that deal specifically with any job classes most at risk of recruitment and retention problems. At the same time, the administration could more effectively use data from the comprehensive employee compensation surveys it expects to receive in March 2006. This data may be helpful for developing a strategy to more effectively target employee compensation dollars across all state job classifications.

Recommend Funding Only Required Costs. For these reasons, we recommend reducing the proposed funding by $47 million ($36 million General Fund) for medical staff compensation increases. Nonrequired compensation for all other medical personnel should be handled through the collective bargaining process, consistent with state law.

Most Contracts Will Have Expired and Costs May Increase

The budget-typical of recent practice-includes no funding for possible new memoranda of understanding (MOUs). Funding for employee compensation, therefore, is likely to exceed the amount in the budget proposal. We withhold recommendation on the remainder of the funding request to augment employee compensation pending information on any new MOUs that the administration negotiates with state bargaining units.

Up to 90 Percent of State Employees Will Have Expired Contracts in 2006-07. As shown in Figure 4, only two bargaining units (those representing protective services and professional engineering personnel) have current MOUs that extend through 2006-07. Combined, these two bargaining units represent only about 10 percent of the state’s rank-and-file employees. Attorneys-another 2 percent of the state workforce-have a tentative MOU awaiting legislative consideration.

New Contracts, if Any, Probably Will Increase Costs. The budget includes no funds for employee compensation costs of new MOUs that may be negotiated between the administration and bargaining units. This method of budgeting Item 9800 reflects prior practice and attempts to preserve the confidentiality of the administration’s negotiating strategy. In other words, the budget does not disclose the total amount of compensation increases state negotiators would be willing to give to unionized employees. New MOUs, if any, probably will increase costs above those included in the budget proposal. It would cost about $120 million ($65 million General Fund) for each 1 percent salary increase to state personnel associated with the 18 units without a current or tentative MOU extending to the end of the 2006-07 fiscal year.

Even With No New MOUs, Health Costs Will Increase. In general, pay and benefit provisions of prior MOUs remain in effect until the Legislature approves newly negotiated MOUs. Two-thirds of MOUs with state employee unions require the state to pay a specific percentage of average health plan premium costs for employees and their dependents. For these types of MOUs, this means that, if state health plan premiums rise in 2007 (as expected), the amount the state must contribute to pay for health premiums will increase-even without new MOU agreements. (Seven bargaining units have MOUs with a “flat” state contribution for health premiums-that is, a specific dollar amount and not a percentage of premiums.)

For this reason, even if there are no new MOUs negotiated, costs for health, dental, and vision benefits could increase by up to $120 million-about one-third from the General Fund-for rank-and-file personnel, assuming a 10 percent increase in 2007 state health plan premiums. The Governor’s budget includes no funding for these potential increased costs.

Withhold Recommendation Pending MOU Negotiations. Because of the uncertainty of required state costs for health premiums and other types of compensation, we withhold recommendation on the remainder of the budget proposal to augment employee compensation.