Analysis of the 2004-05 Budget Bill Legislative Analyst's Office February 2004

Augmentation for Employee Compensation(9800)

A significant portion of state government's operating costs is for compensation of state employees. Figure 1 displays a breakdown of 2003-04 estimated state payroll (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 approximately one-third of state employment. The Departments of Corrections and Transportation combined represent an additional one-quarter of state payroll.

The Governor's budget projects $17 billion in salary and wage expenditures for 316,000 authorized personnel-years (PYs) in 2004-05 (including $5.9 billion and almost 113,000 PYs in higher education). In addition, the state pays for benefits such as health insurance and retirement. These additional employment costs are generally around 30 percent of salary expenditures. Thus, when benefits are included, total estimated expenditures for employee compensation are projected to approach $23 billion for the budget year, about half of which is supported from the General Fund.

Employee Pay and Benefit Increases

The budget includes $875 million ($464 million General Fund) for pay and benefit increases for collective bargaining units that negotiated contracts to delay the current-year general salary increase (5 percent for most state employees) to 2004-05 and have the state pay 80 percent of average health insurance premiums. Departments with employees of unions that did not negotiate a deferral would continue without additional funding for those employees' salary increases.

Most State Employees Scheduled for 5 Percent Salary Increase. State employees were scheduled for a salary increase on July 1, 2003. In an effort to generate 2003-04 savings, the prior administration entered into negotiations with the unions. The Legislature approved administration-negotiated agreements for 14 of the state's 21 bargaining units to defer scheduled July 1, 2003 salary increases in exchange for additional benefits. In particular, the administration agreed to (1) pay 80 percent of health insurance costs effective January 1, 2004, (2) allow employees to accrue one additional vacation day per month (approximately equivalent to the deferred 5 percent salary increase for most employees), and (3) in some cases, continue the suspension of employees' retirement contributions to maintain take-home pay at June 2003 levels. (In the future, state retirement contributions will make up the suspended employee contributions with interest. Thus, the suspension is essentially borrowing that will be paid off by the state instead of by employees.) The administration approved a similar package for supervisors, managers, and other employees not subject to collective bargaining.

Of the remaining seven bargaining units, one has reached agreement with the administration and awaits legislative approval of the proposed memorandum of understanding (MOU). The remaining six have not negotiated new contracts. The largest group that did not come to a new or revised agreement is Unit 6, which represents correctional officers. Figure 2 shows the contract status of each of the state's bargaining units.

Figure 3 shows the recent history of general salary increases for state civil service employees and the consumer price indices for the United States and California.

Multiyear Raises for Highway Patrol and Correctional Officers. For most bargaining units, employees will receive a 5 percent salary increase (either in 2003-04 or deferred to 2004-05). The MOUs for Unit 5 and Unit 6, however, include four annual pay raises, the second of which is effective July 1, 2004. The budget-year salary increases are 7.1 percent and 11.3 percent for Unit 5 and Unit 6, respectively. These multiyear salary increases are designed to eliminate the state's pay differential with particular local law enforcement agencies, as specified in current law. Supervisors and managers of these employees will receive a similar package. By the final pay raise effective July 1, 2006, the cumulative salary increase for employees in the two units is estimated to be one-quarter more than their 2002-03 salaries. This amount could change, however, depending on future pay increases in local law enforcement. Currently, the Department of Personnel Administration assumes just 2 percent adjustments each year for local law enforcement from 2004-05 through 2006-07. If these agencies receive higher raises, the amounts for state highway patrol and correctional officers will go up proportionately.

Future Cost of Negotiated Pay Raises Increases Significantly. Figure 4 shows the projected ongoing cost of the negotiated general salary increases through 2006-07, when all pay raises already agreed to would be fully implemented. These costs are estimated to be $939 million in the budget year, growing to an annual cost of $1.1 billion by 2006-07. More than half of these costs are to be paid by the General Fund. As shown in the figure, a key factor driving this growth is the multiyear raises negotiated for the highway patrol and correctional officers.

Proposal for Employee Compensation Budget Item. In the annual budget act, Item 9800, Augmentation for Employee Compensation, includes a lump sum for any additional compensation items that take effect in the budget year. (Baseline costs are already included in department budgets.) During the fiscal year, the Department of Finance allocates to department budgets, from the lump-sum appropriation, the amounts necessary to fund these additional cost items.

The budget proposes $875 million ($464 million General Fund) for the negotiated compensation package. (This excludes higher education.) This amount includes:

• $431 million ($162 million General Fund) to pay for salary items related to the deferred pay increase.
• $138 million ($55 million General Fund) to pick up additional health, dental, and vision insurance premium costs.
• $295 million ($247 million General Fund) for the second year of raises for Unit 5 and Unit 6.

No Additional Funding for Nondeferred Current-Year Salary Increases. Employees who are members of unions that did not renegotiate their contracts received the 5 percent pay raise scheduled for July 1, 2003. Departments, however, did not receive funding for these additional costs—$201 million in the current year, as shown in Figure 4. Instead, current-year reductions adopted pursuant to Control Section 4.10 of the 2003-04 Budget Act accounted for these costs by reducing most departments' budgets to live within existing appropriations. Under the Governor's budget, departments would continue without additional funding for these employees' pay raises already in effect. The state would also not incur any new costs for health insurance above the 2003 state contribution since these unions have not negotiated such a provision.