Analysis of the 2008-09 Budget Bill: General Government

Augmentation for Employee Compensation (9800)

The costs for compensating 350,000 state government, California State University, and University of California employees under existing pay and benefit schedules are included in each department’s budget. The Governor’s budget assumes these employees’ salaries total $23 billion (all funds) in 2008–09. Including employer benefit expenses (principally retirement and health benefit contributions) and payroll taxes, the total costs of compensating these employees are about $30 billion. The General Fund supports more than one–half of this total.

In Item 9800 of the budget act, the Legislature appropriates funds needed to augment departments’ budgets in order to fund additional costs for pay and benefits that are expected during the budget year. (Item 9800 addresses increased costs for most state government employees, excluding university, legislative, and some judicial employees.) These additional costs result from:

• Pay and benefit schedules established under memoranda of understanding (MOUs) with state employee unions that are approved and fully funded by the Legislature.
• Pay and benefit schedules for employees (such as managers and supervisors) who are not represented by a union.
• Legislative actions to increase compensation for specific groups of employees independent of the MOU negotiation process with the employee unions.

The Legislature approved $1 billion in spending in Item 9800 in the 2007–08 Budget Act, but the Governor vetoed $72 million from the General Fund appropriation in the item in an attempt to lower spending. This reduced the overall appropriation to $938 million ($453 million General Fund). Because departmental obligations for increased pay and benefits under MOUs were unchanged by the veto, this action resulted in many departments—especially the California Department of Corrections and Rehabilitation (CDCR)—having to reduce other categories of budgeted spending and “absorb” the costs of the veto. With the submission of the 2008–09 Governor’s Budget to the Legislature, the administration identified $90 million in unanticipated General Fund savings during 2007–08 in Item 9800. It reduced this amount—in addition to the $72 million veto—from the 2007–08 Budget Act appropriation.

For 2008–09, the Governor proposes $615 million ($362 million General Fund) for Item 9800. The Governor’s plan would result in pay increases for correctional officers, CHP officers, certain health care professionals in departments other than CDCR, and professional engineers. Combined, these groups include roughly one–third of the state government workforce. For the other two–thirds of state workers, there are no funds in the Governor’s budget for general salary increases.

Background

In general, the amounts in Item 9800 are driven by the requirements of current MOUs with state employee organizations. When the budget act is passed, it includes the estimated amount of funds needed to fulfill existing MOU requirements. New MOUs are approved by the Legislature in statutes, and these measures—if approved by the Legislature after passage of the budget—often include an appropriation to augment the funding included in Item 9800. During the budget year, the Department of Finance (DOF) allocates Item 9800 funding, as needed, to departments to pay the costs of pay and benefit increases.

Since the state began collectively bargaining with its rank–and–file employees in 1982, the annual salary increases for most civil service employees have fluctuated considerably—sometimes being zero when (1) the administration and unions are unable to reach agreement on MOUs or (2) the state faces severe budgetary challenges. Figure 1 shows the recent history of general salary increases for the bulk of state civil service workers. During the past several years, three bargaining units—California Highway Patrol (CHP) officers, correctional officers, and professional engineers—have had their salary increases linked to increases in pay of other public–sector workers in the state. Figure 2 displays the recent trend of these increases. A few bargaining units, such as the one that includes firefighters in the Department of Forestry and Fire Protection, have received salary increases different from those listed in Figures 1 and 2.

Improved Budgeting Practices

This Year, Virtually All Funding for Compensation Increases Is In This Item

In the 2007–08 Budget Act, the Legislature expressed its intent that virtually all funding for proposed pay and benefit increases be included in this budget item in future years. The 2008–09 Governor’s Budget appears to comply with this request from the Legislature. In several prior years, the number of individual departmental requests for pay raise funding had proliferated, and this caused the process for considering compensation increases on a comprehensive, statewide basis to break down. The manner in which pay and benefit increases are presented this year has a number of advantages.

Background. The Governor’s budget traditionally proposes funding for pay increases in Item 9800. Recent budgets, however, also included requests in departmental budgets to fund additional pay increases. Because some of the departmental requests never went through the ordinary vetting process for pay increases—including review by the Department of Personnel Administration—this practice made the consideration of proposed pay increases chaotic for the Legislature. Legislative staff assigned to analyze employee compensation increases sometimes were not aware of proposed pay increases in departmental budgets until late in the budget process.

New Requirements in 2007–08 Budget. In response to these concerns about the process for considering employee compensation increases, the Legislature adopted new provisional language for Item 9800 in the 2007–08 budget. The provisional language declares the Legislature’s intent that proposed budget augmentations for employee compensation increases be budgeted and considered on a comprehensive, statewide basis. Specifically, the language declares legislative intent to reject almost all proposed augmentations for this purpose that are not included in Item 9800 of the 2008–09 Budget Bill. (The language makes exceptions for employee compensation costs resulting from mandatory judicial orders—potentially including pay increase orders of the Receiver—or bills passed separately from the budget act.) The 2008–09 Budget Bill includes provisional language in Item 9800 that is essentially identical to the language in the 2007–08 budget.

Advantages of This Year’s Budgeting Method. In general, the state plans and budgets compensation increases by bargaining unit—not by department. A key reason for this is that pay raises in an individual department can lead to employees in other departments migrating to work for higher pay. Therefore, the state generally avoids giving raises to employees in one department—but not to similar employees in other departments—unless there is a compelling need to do so. Item 9800 allows both the administration and the Legislature to consider these factors before approving pay raise funding.

A second advantage relates to estimating errors. During the budget year, DOF allocates funding from this item to each department to cover its identified costs for employee compensation increases. In some years, as in 2006–07, DOF has identified unexpected additional costs for employee compensation, and the Legislature has been able to choose whether to increase funding to departments’ budgets for the increased costs. In 2007–08, by contrast, DOF has identified $90 million of unexpected General Fund savings in Item 9800 due to a number of errors in technical assumptions underlying its 2007–08 cost estimate. In our judgment, had these funds for compensation increases been appropriated to departmental budgets—rather than Item 9800—the state probably never would have identified the savings. Placing funds for pay and benefit increases in Item 9800, therefore, promotes accountability and legislative oversight of the budget.

The Legislature Plays the Central Role in Setting Employee Compensation Levels. In The 2007–08 Budget: Perspectives and Issues (P&I, see page 169), we discussed the Legislature’s responsibilities to oversee employee compensation policies. The provisional language for this item in the 2007–08 budget does not affect in any way the Legislature’s central role in setting employee pay and benefit levels. If the Legislature wishes to consider an increase of pay or benefits for any group of state employees, it has the ability to do so through:

• The regular process of considering proposed MOUs with bargaining units.
• The budget process—by (1) increasing the appropriation in Item 9800 and (2) adopting provisional language directing the administration to implement the compensation increase.
• Passing legislation to address any aspect of state employee compensation policy.

With Most Contracts Expiring, the Legislature Has Broad Discretion to Control Employee Costs

Recommend Targeting Increases to Critical Staffing Problems and Avoiding Multiyear Labor Agreements

Almost all of the state’s labor agreements are expiring or already expired this year. We recommend that the Legislature (1) target any increased compensation to employee groups of high–priority programs with critical staffing problems, (2) reject proposed memoranda of understanding that have a length of more than two years, and (3) consider skeptically all proposals that result in short–term budgetary savings for personnel costs in exchange for higher costs in the future.

No Preexisting Pay Increase Commitments for 90 Percent of Workforce in 2008–09. Of the state’s 21 employee bargaining units, only two—the units that include CHP officers and professional engineers—have MOUs that will remain in effect under current law as of the first day of 2008–09. (While the CHP officers’ MOU expires in 2010, the state’s five–year MOU with the Professional Engineers in California Government [PECG] provides for a pay increase on July 1, 2008 and then expires on July 2, 2008.) The 19 expired or expiring MOUs affect about 90 percent of the rank–and–file state workforce. Excluded workers—those not represented by a union—generally receive pay increases in line with those of the rank–and–file workers they supervise.

What Happens When MOUs Expire? When MOUs expire and no new agreements are approved by the administration, the employee union, and the Legislature, the provisions of the expired MOU generally remain in effect. This means that if an MOU contains a provision specifying, for example, that the state’s contribution to employee health benefits rises each January 1, that provision remains in effect even after the MOU has expired—absent a specific legislative action to the contrary. Accordingly, under some existing MOUs, the state may be obligated to increase some categories of compensation—particularly health benefit contributions—after the expiration date. In general, however, MOUs do not contain general salary increases for employees—the costliest category of employee compensation increases—after their expiration dates.

Recommend Targeting Any Increases to Critical Staffing Problems. Given the state’s fiscal situation, any dollars allocated for increased employee compensation are likely to be limited. As such, we recommend that the Legislature target any increased compensation to employee groups where there is clear evidence that the raises would address critical staffing problems. In our view, critical staffing problems are those affecting (1) departmental programs that provide high–priority public services and (2) groups of employees within the programs where problems in filling positions can clearly be attributed to uncompetitive compensation levels. In considering proposed MOUs, the Legislature should ask the administration to provide detailed information on critical staffing problems. Not only should this information address departmental vacancies, attrition, and pay differences between state employees and comparable workers, the information also should discuss the steps that departments have taken or not taken to streamline and expedite their hiring processes. The “target” compensation level for public employees should be the minimum amount necessary to attract enough qualified labor to fill authorized positions. If departments have hiring and training processes that are so complex and lengthy as to drive away qualified applicants, neither they nor the Legislature can easily determine what this target compensation level even is. By first taking actions to improve hiring processes and increase their pool of job applicants, departments can ease somewhat the pressures for increased compensation that otherwise may arise.

Recommend Rejecting MOUs With a Length of More Than Two Years. As discussed in the 2007–08 P&I, we recommend that the Legislature reject proposed MOUs that have a term of more than two years. Especially given the state’s volatile revenue structure and current fiscal problem, we believe that it is not advisable to give an implicit commitment to groups of employees that the state will be able to raise their pay or benefits by a given amount more than one or two years in advance. Shorter–term MOUs give the Legislature more budgeting flexibility, and we believe they represent a firmer commitment to state employees about the level of compensation the state will be able to afford in the future.

Consider Skeptically Proposals for Short–Term Concessions and Longer–Term Costs. In difficult budget years in the past, administrations have proposed budget solutions that involve (1) short–term decreases in employee costs and (2) longer–term increases in these costs. For example, in the 2004–05 Budget Act, the administration proposed and the Legislature approved the Alternate Retirement Program (ARP). The details of ARP are complex, but generally, it reduces state pension contribution requirements during workers’ first two years of state service. For some employees that opt later to receive two years of service credit in the pension system, the ARP then creates an unfunded pension liability, which the state must pay off—with interest—in subsequent decades. There are many different types of short–term budget solutions that involve future increases in employee compensation costs. We recommend that the Legislature review all such proposals with skepticism. While these proposals may help address the short–term budget problem, they may complicate the longer–term budget situation and transfer costs for today’s public services to future generations of Californians.

Governor’s Budget Funds Pay Increases for Correctional Officers, CHP Officers, Engineers, and Health Professionals

In addition to funding salary increases under the labor agreements with California Highway Patrol officers and professional engineers, the Governor’s budget would also fund several other categories of increased compensation costs. We recommend that the Legislature reject the proposed compensation increases for (1) correctional officers, an action that would result in a $491 million reduction in General Fund costs during the current year and the budget year combined, and (2) certain State Controller’s Office staff members—for minor savings. We withhold recommendation on the other components of Item 9800 pending a variety of expected technical adjustments by the administration and legislative decisions concerning new memoranda of understanding.

The Governor’s Budget Proposal. The Governor’s budget includes $615 million ($362 million General Fund), as shown in Figure 3. Included in this amount are the administration’s estimated 2008–09 costs for several categories of compensation increases:

• General salary increases for CHP officers (estimated at 4 percent) and professional engineers (estimated to be between 9.2 percent and 11.7 percent, depending on the employee classification) pursuant to the bargaining units’ existing MOUs—as well as comparable increases for supervisors of these employees and other, related non–represented personnel.
• Pay, health benefit, and other compensation increases for correctional officers and their supervisors—with estimated 2008–09 costs that assume the Legislature approves the Governor’s proposals to (1) impose a labor offer on the California Correctional Peace Officers Association (CCPOA) beginning in 2007–08 and (2) release certain prisoners early, institute a summary parole policy, and reduce the size of the CDCR workforce in 2008–09.
• Pay increases for various groups of health care professionals working in departments other than CDCR—principally the Departments of Developmental Services, Mental Health, and Veterans Affairs—and their supervisors based on:
  • Seven recently proposed MOU addenda affecting some employees in Bargaining Unit 4 (office and allied), Unit 16 (physicians and dentists), Unit 17 (registered nurses), Unit 19 (health and social services), and Unit 20 (medical and social services). The approval of these addenda was pending before the Legislature at the time this analysis was prepared.
  • Two MOU addenda that were approved in Chapter 322, Statutes of 2007 (AB 756, Committee on Public Employees, Retirement and Social Security), that affect some employees in Bargaining Unit 18 (psychiatric technicians) and Unit 19.
• Increased costs of state contributions to employees’ health, dental, and vision benefits pursuant to various MOUs and a proposed MOU addendum with Bargaining Unit 2 (attorneys).
• Increased costs for a variety of pay adjustments—generally targeted to “difficult–to–fill” classifications—described in a number of current MOUs.
• The annual statutory pay increase for judges—the average percentage salary increase in the budget year for state employees—specified in Chapter 102, Statutes of 1981 (AB 251, Vasconcellos).
• Other compensation increases totaling about $1 million, including: (1) a proposal to institute a pay differential to promote staff retention for the Human Resource Management System (HRMS) project, which is administered by the State Controller’s Office (SCO), and (2) funding for the state’s share of employee costs for the Tahoe Regional Planning Agency (which also receives funding from the State of Nevada).

Below, we discuss our findings and recommendations concerning several of these items.

CHP Officers and Professional Engineers. The state’s MOU with the CHP officers’ union expires in 2010, and the MOU with PECG expires on July 2, 2008. Under these MOUs, employees receive pay increases in line with those received by comparable workers elsewhere in California’s public sector. Nearly all of the costs of compensating employees in these two bargaining units are paid from special funds, not the General Fund. (The costs for CHP officer salaries are paid largely from the Motor Vehicle Account, while PECG salaries are paid from a number of funds.) While we raise no issue with these proposed pay increases in 2008–09, we reiterate our recommendation in the 2007–08 P&I for the Legislature to reject future MOUs that include automatic formulas to raise employees’ pay in line with increases received by other workers.

Recommend Rejecting Proposed Increases for Correctional Officers. The Governor’s budget plan includes the current– and budget–year costs for his proposed 2007–08 compensation increases for correctional officers (including a single 5 percent pay increase retroactive to July 1, 2007). As we discuss in our recent publication, Correctional Officer Pay, Benefits, and Labor Relations, we recommend that the Legislature reject the administration’s proposed 2007–08 compensation increases for the officers. Our review indicates that the officers’ pay and benefits are sufficient, if not more than sufficient, to allow CDCR to meet its current staffing needs. This action would reduce General Fund costs over the two–year period by $491 million below those assumed in the Governor’s budget.

The budget assumes that the Legislature approves (1) the proposed CCPOA labor settlement in 2007–08 and (2) significant staffing reductions in CDCR in 2008–09 resulting from the Governor’s proposals to release certain prisoners early and institute a summary parole policy. In Item 9800, the Governor’s budget assumes $30 million of budget–year savings as a result of CDCR staffing reductions, which would reduce the costs to impose the labor settlement on CCPOA. The $30 million estimate, however, appears to assume that CDCR can reduce its average daily correctional workforce in 2008–09 by over 4,000 positions. As described in the nearby box, the process that departments undergo to substantially reduce the size of their workforces is lengthy and complex. Accordingly, if the Legislature accepts the Governor’s proposal on correctional officer compensation, there is some risk that this $30 million savings will be unachievable in 2008–09 due to delays in the staffing reduction process. Moreover, pursuant to a recent Public Employment Relations Board finding, the administration is seeking to impose a labor settlement on the officers’ union “one year at a time,” rather than imposing multiple years of the settlement all at once. It is possible, therefore, that the administration will request funding in Item 9800 at a later date for additional pay and benefit increases for correctional officers.

Recommend Rejecting Proposed HRMS Retention Differential. For the second consecutive year, the administration proposes a pay differential—equal to 5 percent of pay—for about 90 employees of SCO’s HRMS information technology project at an annual cost of about $550,000. (Many of the employees are not represented by unions, and therefore, their pay and benefits are considered separately from the collective bargaining process.) The HRMS is the state’s new payroll computer system and one of several enterprise resource planning (ERP) projects now underway or being planned within state government. (Another is the administration’s proposed Financial Information System for California project.) These ERP projects are complex, requiring years of planning and implementation work, and specialists with ERP expertise reportedly are in high demand in both the public and private sectors. The rationale for the administration’s proposal is that ERP staff members should be compensated more than other information technology employees in order to promote retention of staff expertise during the long period in which the project is being implemented. We acknowledge that there may be a reason to provide such increases to some or all state ERP workers, but we recommend the rejection of the proposed HRMS pay differential at the present time. This is because the administration has failed to present a comprehensive proposal that addresses and prioritizes the compensation issues facing all state ERP workers in all departments. Increasing compensation for employees of only one ERP program creates the risk that this program will lure employees from other important state ERP initiatives. Any future proposal, therefore, should include data (1) on the loss of state ERP workers to other public–sector or private–sector information technology projects and (2) comparing pay and benefits of state ERP workers and ERP workers for other employers.

Withhold Recommendation on Other Components of Item 9800. We withhold recommendation on the other components of Item 9800 pending various technical adjustments in the cost estimates, which we expect will be released by the administration at or before the May Revision. By that time, the administration may have presented the Legislature with new proposed MOUs for some bargaining units, and the Legislature may have approved or rejected several recently proposed MOU addenda with state health care workers and attorneys.