We reviewed the proposed memorandum of understanding (MOU) for Bargaining Unit 9 (Professional Engineers). Bargaining Unit 9 is represented by Professional Engineers in California Government. This review is pursuant to Section 19829.5 of the Government Code.

LAO Contact: Nick Schroeder

MOU
September 4, 2015

MOU Fiscal Analysis: Bargaining Unit 9 (Professional Engineers)

This analysis of the proposed labor agreement between the state and Bargaining Unit 9 (professional engineers) fulfills our statutory requirement under Section 19829.5 of the Government Code. State Bargaining Unit 9’s current employees are represented by Professional Engineers in California Government (PECG). (Administration and PECG websites include  summaries of the agreement’s major provisions. Our State Workforce webpages include background information on the collective bargaining process, a description of this and other bargaining units, and our analyses of agreements proposed in the past.)

Pay and Related Provisions

The proposed Unit 9 memorandum of understanding (MOU) would be in effect for three years—from July 2, 2015 through June 30, 2018. The administration provided fiscal estimates (refer to Page 7 of this pdf) of various provisions that would affect Unit 9 employee compensation:

  • 2016-17 Pay Increases for All. Unit 9 employees would receive a 5 percent pay increase on July 1, 2016. The administration estimates that this would increase the state’s annual costs by $81.4 million ($2.9 million General Fund) beginning in 2016-17.  
  • 2017-18 Pay Increases for All. Unit 9 employees would receive a 2 percent pay increase on July 1, 2017. The administration estimates that this would increase the state’s annual costs by $34.0 million ($1.2 million General Fund) beginning in 2017-18.
  • Higher Pay for Working Evening and Night Shifts. Beginning in 2016-17, employees would receive a $1.00 increase in their hourly wages during time worked on shifts between 6:00 pm and 6:00 am. The administration estimates that this would increase the state’s annual costs by more than $200,000 (mostly from special funds) each year beginning in 2016-17.
  • Higher Reimbursement Rates for Travel. A greater share of certain travel costs incurred by employees—including lodging in three high-cost counties and the use of private aircraft—would be reimbursable by the state under the agreement. The administration estimates that these provisions would increase the state’s annual costs by about $20,000 (mostly from special funds). The administration assumes that departments are expected to absorb these costs within existing resources.
  • Greater Levels of Leave Cash Out. The agreement would increase the number of hours of vacation or annual leave that employees annually may cash out from 20 hours to 80 hours. The administration estimates that allowing employees to cash out 60 additional hours each year could increase the state’s annual costs by more than $30 million ($1 million General Fund) for each of the three years of the agreement. The administration assumes that departments are expected to absorb these costs within existing resources

Based on our review, the administration’s estimates for the above provisions seem reasonable. The below table summarizes the administration’s estimated costs of these provisions for the term of the agreement.

Fiscal Effect of Select Provisions of Proposed Unit 9 Contract

(Dollars in Millions)

2015–16

2016–17

2017–18

General Fund

Total Funds

General Fund

Total Funds

General Fund

Total Funds

2016–17 pay increase

$2.9

$81.4

$2.9

$81.4

2017–18 pay increase

1.2

34.0

Night shift hourly pay increase

a

0.2

a

0.2

Travel reimbursement increases

a

a

a

a

Leave cash out

$1.2

$33.0

1.2

35.0

1.2

35.0

Totals

$1.2

$33.0

$4.0

$116.4

$5.3

$151.3

aCosts of less than $100,000.

Retiree Health Benefits and Funding

The administration’s summary (refer to Page 4 of this pdf)  and the union’s summary lists some of the key proposals in the Unit 9 MOU concerning retiree health benefits and funding. We have long recommended retiree health prefunding (see our analyses from 2015, 2014, 2011, 2007, and 2006 on this issue). The Governor and PECG deserve credit for acknowledging the importance of this issue and demonstrating a willingness to set money aside to prefund these benefits.

Significant Long-Term Savings. The agreement (refer to Page 176 of this pdf)  would (1) require current and future employees and the state to begin contributing a specified percentage of pay towards an invested trust fund to prefund retiree health benefits beginning in 2017-18 and (2) significantly reduce the amount of subsidies that employees hired after January 1, 2016 will receive for health benefits after they retire. While these provisions would increase state costs in the near term, these provisions likely would result in significant net state savings over the long run. The exact amount of savings would depend on such unpredictable variables as future investment returns of the trust fund, future growth in health care costs, and changes in Medicare. 

Prefunding Proposal Has Long-Term Consequences. We previously expressed concerns (refer to Page 10 of this pdf) with making changes to retiree health benefits through the collective bargaining process, which allows for only limited legislative involvement. It is not possible to analyze the significant issues associated with the Unit 9 retiree health proposals during the 10-day maximum statutory time period for completion of this MOU analysis. The information that the administration has provided to us does not address the key issues we raised earlier this year. For example, the administration appears to have given no consideration to the degree to which the provisions create contractual obligations for the state to provide a certain level of health benefits to retired state employees. These provisions could limit future Legislatures’ ability to reduce the state’s costs for retiree health benefits depending on how these provisions are interpreted by the courts under the strict "California Rule" of public retirement law. A lack of clarity in the legislative record can result in unwelcomed court rulings for employers or retirees in later disputes.

We also believe it is critical for the Legislature to review a full actuarial analysis of the proposed changes in retirement benefits in this specific proposal. (The California Actuarial Advisory Panel—established by the Legislature in 2008—has recommended [refer to Page 9 of this pdf] consideration of many financial matters when changing retiree health benefits, including the identification of intended funding sources.)

Finally, the administration’s proposal raises many significant fiscal and policy issues such as: (1) the magnitude of proposed reductions to future retirees' benefits (including Medicare premium payments by the state), (2) the ability (if any) for the state to change future drawdown schedules of retiree health trust funds, (3) the lack of clarity about which prefunding contributions will be paid from Proposition 2 funds, (4) the administration's preparations (if any) for drawing down federal funds to support eligible prefunding contributions and federal funding estimates, (5) administration projections (if any exist) concerning the future fiscal condition of special funds supporting future Unit 9 employee costs, (6) the level of required prefunding contributions by future hires given their lowered benefit levels and changed "vesting" periods, (7) the prospect of future employees contributing money that cannot be refunded to prefund a benefit many will never receive, and (8) the possible effects of lowered benefits and prefunding contributions on future recruitment and retention of state engineers. 

The administration's lack of attention to such important details places the Legislature in a difficult position so late in its session.

LAO Contact: Nick Schroeder