Analysis of the 2007-08 Budget Bill: General Government

Employee Compensation (9800)

Compensation for state employees drives a significant portion of state government’s operating costs. The 2007-08 Governor’s Budget projects over $21 billion in salary and wage expenditures for 345,000 authorized personnel-years (PYs) in 2007-08 (including $6.7 billion and more than 120,000 PYs in higher education). Figure 1 displays a breakdown of these projected 2007-08 payroll expenses (excluding expenditures for benefits—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 nearly 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 over 30 percent of salary expenditures. Thus, when benefits are included, total estimated expenditures for employee compensation are projected to exceed $28 billion for the budget year. The General Fund supports more than one-half of this total.

State civil service employees—which exclude UC, CSU, judicial, legislative, and various other employees—generally belong to one of 21 bargaining units. Figure 2 shows the recent history of general salary increases (GSIs) for state civil service employees and the consumer price indices for the United States and California. Rank-and-file employees generally receive pay increases under the terms of collective bargaining agreements with the administration that are ratified by the Legislature.

Overview

The Governor’s budget would increase state employee compensation costs by an estimated $1.2 billion in 2007-08. Item 9800 includes $972 million ($468 million General Fund) of this amount. The remainder is included in departmental budgets—principally the Department of Corrections and Rehabilitation. The vast majority of the funds address costs related to current labor agreements, court orders, and arbitration decisions. We withhold recommendation on the overall amount needed to fund 2007-08 compensation increases pending (1) outcomes of labor negotiations, (2) the April release of the inflation rate that will determine raises for most employees under current contracts, and (3) determination of next year’s premium costs for state employee health plans.

Status of Bargaining Agreements. Nineteen of the state’s 21 bargaining units—all except correctional officers and attorneys—have agreements that remain in effect until at least the end of 2007-08. Almost all of the funds for employee compensation increases in the Governor’s budget reflect estimated costs related to (1) these 19 labor agreements and (2) court orders and arbitration decisions that have increased state costs. We estimate that the budget would increase civil service and judicial branch employee compensation costs by $1.2 billion in 2007-08—with around 55 percent of the increased costs to be paid from the General Fund.

Most Budget-Year Funds Are Included in Item 9800. In general, departmental budgets include the current costs of compensating state employees, including the pay raises for state employees that the Legislature approved in 2006. The Governor’s budget provides for most scheduled increases in the cost of compensating state employees in Item 9800 (Augmentation for Employee Compensation). The budget proposes $972 million ($468 million General Fund) of expenditures in this item. Included in the item are several categories of compensation increases to take effect in 2007-08 (see Figure 3).

• The GSIs for employees in 15 state bargaining units tied to the inflation rate in the western United States for the 12 months ending in March 2007.

• The GSIs for employees in other units with agreements that remain in effect until at least the end of 2007-08—with most of these costs related to increases for engineers and California Highway Patrol (CHP) officers. (Figure 4 lists recent and budgeted increases for these two groups, which are based on surveys of salaries paid to employees in other California public agencies.)

• Additional budget-year costs related to a recent arbitration decision won by the California Correctional Peace Officers Association (CCPOA), which found that the state had miscalculated pay raises under the now-expired 2001-2006 CCPOA agreement. (Figure 4 shows the pay raises provided to correctional officers since 2003.)

• Proposed pay raises for health care personnel in departments other than CDCR.

• Projected increases in employee health, dental, and vision benefit costs, which will be driven largely by the 2008 rate increases set by the California Public Employees’ Retirement System (CalPERS) in June 2007.

• Over $32 million of contingency funds to cover any funding shortfall.

• Other pay increases, including $20 million for increased judges’ pay required by existing law.

Some Funds Included in Departmental Budgets. In addition to the $972 million of increased compensation items included in Item 9800, the Governor’s budget also includes increased appropriations of around $200 million in various departmental line items for (1) salary increases for specific groups of employees in these departments and (2) possible increases in 2007-08 pension contributions. Around three-fourths of these increases in departmental budgets would be paid from the General Fund. The largest category of costs relates to anticipated 2007-08 pay increases to comply with court orders affecting the prison health care system.

Budget Includes Estimated Health Premium Increases. The Governor’s budget includes $127 million ($53 million General Fund) for expected increases in the state’s contributions to employee health, dental, and vision insurance premiums. (Since the state is negotiating with CCPOA for a new contract, no funds are included in the budget for an increase in correctional officer health premium contributions in 2007-08.) Under the terms of bargaining unit contracts, the state pays 80 percent to 85 percent of health care premiums for most employees. The CalPERS will set state employee health premium rates for calendar year 2008 in June 2007. Accordingly, the state’s costs may be higher or lower than the administration has proposed depending on the size of the CalPERS premium increase.

Withhold Recommendation. The overall amount needed to fund 2007-08 employee compensation increases will depend on the outcomes of labor negotiations, the inflation rate—to be released in April—that will determine raises for most employees under current contracts, and the 2008 premium costs for state employee health plans. Given these uncertainties, we withhold recommendation on the overall amount needed in this budget item.

Additional Costs as Prison Pay Surges

A Realistic Budget Plan Requires Decisions About Correctional Officer Pay

The labor agreement with the California Correctional Peace Officers Association expired in July 2006, and negotiations on a new agreement continue. For each percent salary increase in 2007-08 for the state’s correctional officers, costs would rise by about $35 million above those in the Governor’s budget. Therefore, we recommend that the administration provide an update on negotiations prior to the May Revision so that potential costs can be considered in the development of a realistic budget plan.

Decisions About Officer Pay Drive General Fund Personnel Costs. Figure 5 shows that salaries and related costs for the state’s correctional officers were the key component of civil service personnel expenditures paid from the General Fund in 2005-06. These funds paid to correctional officers, their supervisors, and managers totaled $3.4 billion—41 percent of all such General Fund costs.

Correctional Officer Increases Outpace Other State Employees. Under a labor agreement that was adopted in 2001 and expired in 2006, correctional officers received pay increases far in excess of those given to most other state employees during this period. These increases were driven by a formula that considered the pay of local law enforcement officers in the state, as well as CHP officers. After factoring in the possible effects of a recent arbitration decision in favor of CCPOA (which we discuss later), we estimate that the officers’ GSIs have increased their pay by 34 percent between 2002-03 and 2006-07. (Other compensation items, including retirement and health benefits and overtime, also have increased.) The average annual pay increases for correctional officers between 2002-03 and 2006-07 were more than twice as much as the increases for the average state government employee.

Administration Should Provide an Update Prior to May Revision. In order to develop a realistic budget plan, the Legislature needs to consider potential costs for correctional officer compensation increases in 2007-08. We recommend, therefore, that the administration provide an update on negotiations prior to the May Revision. The box on the next page discusses what might happen if there is no agreement in place by the start of the fiscal year.

Arbitration Decision Raises Officer Pay Much More Than Expected

A recent binding arbitration decision determined that the state miscalculated the pay raises to which correctional officers were entitled in 2005-06 under the prior labor agreement with the California Correctional Peace Officers Association. The Governor’s budget accounts for $240 million from the General Fund in the current and budget years to pay for this decision, including $114 million in 2007-08. The administration has submitted a Finance Letter to account for an additional $46 million in budget-year costs. An additional $154 million for 2005-06 and 2006-07 costs will be funded through other means, including a supplemental appropriations bill.

What Happens if There Is No CCPOA Agreement Before July 1? Typically, Employees Receive No Increases After Agreements Expire. Under state law, when a collective bargaining agreement expires and the Legislature has not yet ratified a new agreement with a state employee bargaining unit, the provisions of the expired agreement generally remain in effect. Most agreements specify that employees will receive raises of specified percentages on specific dates during the contract’s term. Therefore, when the agreements expire, there are typically no additional pay raises provided until the Legislature approves a new contract. What Happens if There Is No Agreement Before July 1, 2007? The original 2001-2006 California Correctional Peace Officers Association (CCPOA) agreement listed specific dates of salary increases under the agreement, with the last date listed as July 1, 2006. Under the terms of an amended agreement ratified by the Legislature in 2004, the state received the benefits of short-term budget savings from foregone correctional officer pay in 2004-05 and 2005-06. The 2004 amendment provides that the CCPOA pay increase formula (which ties increases of correctional officer compensation to increases in California Highway Patrol (CHP) officer compensation) is “reestablished in full on July 1, 2006.” It is unknown how this phrase might be interpreted in an arbitration or court proceeding. Once “reestablished,” the formula may be a provision of the expired CCPOA agreement that remains in effect until there is a new agreement. In this scenario, when CHP officers receive a compensation increase on July 1, 2007, the state could be required to provide a pay raise to correctional officers at the same time. Under this scenario, this would likely be the case unless the Legislature explicitly chooses not to provide such compensation increases. The breadth of the recent arbitrator’s decision increases the uncertainty about how the state’s financial obligations under the contract may be interpreted.

Background. Under the pay formula in the prior CCPOA agreement, various correctional officer compensation items (collectively known as “total compensation”) were tied to the total compensation of CHP officers. By July 1, 2006, the agreement required the state to increase each correctional officer’s pay so that his or her monthly total compensation was no more than $666 below that of a CHP officer. Therefore, when CHP officer pay increased each year (based on a comparison of total compensation of CHP and local peace officers), so did the pay of correctional officers. The dispute between the administration and CCPOA that led to the arbitration proceeding had to do with whether the state should have included several categories of CHP officer compensation increases in 2005-06 in the correctional officer pay formula. The arbitrator determined that the state miscalculated the pay and benefit increases. Under this decision, the state must provide back pay to affected officers for 2005-06 and 2006-07 and adjust ongoing compensation beginning January 1, 2007.

Budgeted Costs Too Low. Since the arbitrator’s decision was finalized after the release of the Governor’s budget, the budget fails to include all of its costs. The total cost of the decision is $440 million. The proposed budget accounts for only $240 million in the current and budget years for these higher costs. The administration has submitted a Finance Letter to account for $46 million in additional 2007-08 costs. The remaining $154 million is for past and current-year costs to be funded through other means, including a supplemental appropriations bill.

Prison Health Care Cases Driving Pay Upward

Court orders have increased pay for clinicians and staff of the prison health care system significantly. This has produced a ripple effect, leading to increased pay for medical staff in other departments. We anticipate that compensation costs for health care personnel will increase much more over the next several years due to the prison court cases.

Court-Ordered Increases Have Greatly Increased Pay Levels. In the Criminal Justice chapter, we discuss the court orders that affect CDCR’s medical, mental health, and dental care systems. While the cases have been litigated for years, several court orders since December 2005 have increased substantially the pay of clinicians within the prison health care system. The courts have ordered the pay increases to address widespread staffing shortages and concerns about the quality of health care personnel in CDCR. The court-designated receiver (who now manages CDCR’s medical system), for example, now has the authority to double some CDCR doctors’ base pay—to levels as high as $300,000 per year. Raises ordered by the courts have increased—or soon will increase—pay levels for many classifications by thousands of dollars per month. We estimate that the court orders already have increased prison health care pay by over $100 million annually. In addition, the proposed CDCR budget for 2007-08 provides for over $100 million in additional compensation costs expected to result from the court orders.

The Ripple Effect in Other Departments. Like CDCR, some of the state’s other departments with medical staffs—such as the Department of Mental Health (DMH), the Department of Developmental Services (DDS), and the Department of Veterans Affairs (DVA)—historically have found it difficult to recruit and retain medical staff due to state salary levels being lower than those in the private sector and other factors. Since the recent round of CDCR court-ordered salary increases began in December 2005, these departments report that some clinical personnel and staff have left to work in CDCR for much higher salaries, and this has exacerbated existing recruitment and retention problems. In 2006-07, the Legislature approved the Governor’s budget proposals and new labor agreements that extended sometimes double-digit pay increases to medical classifications outside of CDCR to prevent (1) excessive pay disparities between CDCR and other medical personnel and (2) declines in the quality of care offered by DMH, DDS, and DVA that could affect the health of individuals in state facilities and lead to federal or court sanctions for these departments. This year, the administration proposes to extend additional raises to some medical personnel in DMH, DDS, and DVA. In this item, the administration proposes $23 million ($21 million General Fund) for this purpose, and there is an additional $6 million General Fund included in DMH’s proposed budget. Despite the pay increases implemented to date, the administration reports that its efforts to recruit new employees in these non-CDCR departments are “usually fruitless.” Coping with vacancy rates that sometimes remain over 50 percent, the departments continue to rely on expensive contracted medical personnel. (These contractors, the administration reports, sometimes make two times or more the pay provided to the state employees in these facilities.)

Additional Increases Likely. The public statements by the receiver, the special master for prison mental health care, and others related to the court cases express continuing dissatisfaction with the quality and quantity of staffing in CDCR’s health care system. While the receiver reports that the prisons have made some progress in recruitment, position vacancy rates—as reported by the State Controller’s Office—do not appear to have declined substantially in CDCR health care personnel classifications despite the court-ordered pay increases. Meanwhile, other departments like DMH, DDS, and DVA report that their historical difficulties with recruitment and retention have been exacerbated due to the CDCR court-ordered pay raises. These facts suggest that court orders may continue to increase pay for CDCR health care personnel and that there may be a need to increase medical personnel pay in DMH, DDS, and DVA even further. (In particular, additional raises may be requested soon for DMH mental health clinicians not working in prison facilities.) Each request for a new round of pay raises from either the courts or the administration could increase General Fund costs above those in the Governor’s budget by tens of millions of dollars.

Other Issues

Lower Inflation Rate May Reduce Costs in Governor’s Budget

The administration assumes that most state employees will receive a 3.3 percent pay increase in 2007-08 under current labor agreements. We believe the actual inflation rate that determines this raise (to be released in April 2007) will be lower—an estimated 2.3 percent.

2006 Contracts Included Inflation-Based Raise for 2007-08. The contracts with Service Employees International Union Local 1000 and other bargaining units that were approved by the Legislature in 2006 generally provide state employees with an inflation-based raise for 2007-08. The raise is based on a specific federal price index, which will be released in April 2007. The administration assumes the index will result in a 3.3 percent raise for affected bargaining units. We currently estimate, instead, that it will result in a 2.3 percent raise. Under our estimate, state costs would be lower by about $100 million ($40 million General Fund). We expect the administration to include a revised budgeted figure for these costs in the May Revision based on the final index data.

Legislature Should Not Put Contingency Funds in Item 9800

The Governor’s budget includes more than $32 million ($16 million General Fund) in a contingency fund in case the administration has miscalculated the amounts of added compensation to be provided. The budget, however, includes funds for unanticipated expenses in another line item. We recommend that the Legislature reject the proposed contingency fund in Item 9800 because it may allow the administration to raise pay of employees without legislative review. (Reduce Item 9800-001-0001 by $16,400,000. Reduce Items 9800-001-0494 and 9800-001-0988 by a combined amount of $16,100,000.)

The Pay Raise Process and the Use of Item 9800 Moneys. The state provides raises to (1) rank-and-file employees through collective bargaining agreements and (2) managers, supervisors, and exempt appointees of the administration through changes in salary and benefit schedules approved by the Department of Personnel Administration. Under state law and past practice, the Legislature has allowed the administration to exercise broad powers to set pay and benefit levels for non-represented employees. Funds appropriated in Item 9800 are distributed by the Department of Finance to departments during the budget year in order to fund the increases established through these processes. In the Governor’s budget and with each proposed labor agreement submitted to the Legislature, the administration uses state payroll data to make a detailed estimate of how costly state employee pay and benefit increases will be. This estimate—like any other amount included in the state budget—sometimes will be different from actual costs.

Proposal Would Give Administration Too Much Power. We recommend against including contingency funds in Item 9800. These funds may allow the administration to raise pay of employees—particularly non-represented employees (including exempt appointees)—without legislative review. In addition, the budget includes funds for unanticipated expenses in another line item (Item 9840). If the administration determines that its calculations were incorrect, it should use the existing unanticipated expense process. If the administration knows of raises that it wants to give to state employees, it should propose funding for those raises through the regular budget process or the collective bargaining process. We therefore recommend that the Legislature reduce this item by $32 million.

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