Last year, the Legislature asked CalSTRS to submit a report detailing at least three options for addressing the unfunded liabilities of the pension system's Defined Benefit (DB) Program, which are now estimated by system actuaries to total about $70 billion. This handout for the Legislature's Public Employment and Retirement Committees (1) describes the risks of waiting to address CalSTRS' unfunded liabilities, (2) compares CalSTRS' unfunded liabilities to California's other long-term liabilities, (3) and examines possible sources for additional funding. We recommend that the Legislature adopt a plan that aims to fully fund CalSTRS' unfunded liabilities in about 30 years. A companion video further explains our findings and recommendations.
Over the past five budget years, furloughs reduced state employee compensation costs by about $5 billion in exchange for giving state employees additional time off. This report examines whether state employees took this additional time off—or whether, after accounting for changes in use of vacation and other time, they worked about as many days as they did before. We find that (1) state workers used most of their furlough days, but decreased their use of vacation and annual leave days, and (2) state leave liabilities and payments to separating employees are now at historic levels.
Presented to Joint Conference Committee on Public Employee Pensions, Hon. Warren T. furutani, Chair, and Hon. Gloria negrete McLeod, Chair
The Governor’s 12-point pension and retiree health plan would result in bold changes for California’s public employee retirement programs. His proposals would shift more of the financial risk for pensions—now borne largely by public employers—to employees and retirees and would, in so doing, substantially ameliorate a key area of long-term financial risk for California governments. Despite the proposal’s strengths, it leaves many questions unanswered, such as how his hybrid plan and retirement age proposals would work and how the state should cope with large unfunded liabilities already affecting the California State Teachers’ Retirement System, the University of California Retirement Plan, and the health benefit program for state and California State University retirees. The Governor’s proposal to increase many current public employees’ pension contributions also raises significant legal and practical issues.
This webcast and accompanying handout summarize the major provisions of the collective bargaining agreements that the Legislature ratified in 2010-11. During the first 12 months of these agreements, most employees receive lower total compensation and the state experiences net employee compensation savings. In future years, employees will receive higher total compensation and the state will experience increased costs.
UPDATE 9/1/11 -- Handout updated to include reference to a 2009 state law eliminating two state holidays.
LAO State Finance Director Jason Sisney appears on the news interview program The Maddy Report, where he is questioned about public employee pensions. His interview is contained in the first two segments of this five segment program.
Public Retirement Benefits: Options for the Future
In this 15-minute video, LAO State Finance Director Jason Sisney describes why public employee retirement costs have risen substantially in recent years for California governments and the Legislature's options for creating new types of retirement benefits for future state and local employees. At the same time, as Sisney discusses, the Legislature may have to identify new funding soon to address substantial unfunded liabilities in the teachers' and University of California retirement systems, among others.
Presented to Assembly Budget Subcommittee No. 4 on State Administration
Presented to Senate Budget and Fiscal Review Subcommittee No. 5 on Corrections, Public Safety and the Judiciary
The Governor proposes over $580 million in General Fund budget solutions for state employee compensation and state operations. In this handout we provide an overview of state employment, consider the erosion of anticipated current-year savings, summarize and assess the Governor’s proposals for 2011-12, and discuss alternative options available to the Legislature to increase savings in employee compensation.
We reviewed the recently ratified labor agreements with the Service Employees International Union (SEIU) Local 1000, the largest state employee union. The administration estimates that the state's net savings under the proposed agreements will be $383 million ($164 million General Fund) in the current fiscal year—compared with costs negotiated in prior Local 1000 memoranda of understanding (MOUs). The administration’s estimates are generally reasonable, but we (1) discuss concerns we have with the administration’s assumption that leave days will not result in overtime costs or productivity losses, and (2) compare the MOUs’ costs with the previous three-day-per-month furlough program. Finally, we discuss the current status of state employee collective bargaining and major employee compensation policies currently affecting executive branch employees.
In our required fiscal analysis of six proposed collective bargaining agreements, we find that the memoranda of understanding (MOUs), if adopted, would produce state savings in 2010-11, little net budgetary impact in 2011-12, and some increasing state costs for one or more years thereafter. Over the long term (many decades), the MOUs' proposed changes in retirement benefits could produce significant state savings, but no actuarial analysis of these changes has yet been submitted by the administration. The Legislature will face a major decision whether and how to approve the proposed continuous appropriations for economic terms of the six bargaining agreements.
Presented to The Conference Committee on the Budget
This report discusses some key issues facing the Legislature in the employee compensation area of the budget. In 2009–10, the state has achieved significant savings due to the Governor’s furlough program, which is being challenged in many court cases. For 2010–11, the Governor proposes various measures to reduce state personnel costs, including shifting pension contribution costs from the state to employees, unallocated reductions in personnel budgets of departments, and an across–the–board salary reduction for employees. These proposals would result in $2.5 billion in savings ($1.4 billion General Fund).
We believe that employee compensation reductions are necessary due to the magnitude of the budget problem. Nevertheless, some of the administration’s proposals would face legal challenges or otherwise may be difficult to implement. Consequently, we recommend that the Legislature focus efforts to reduce compensation costs on pay reduction options.
Special session.
Presented to the Council of State Governments, La Quinta, California
On August 27, 2009, the administration presented to the Legislature a proposed addendum to the existing state employee labor agreement with Bargaining Unit 5 (California Highway Patrol [CHP] Officers). The proposal would amend the Public Employees’ Medical and Hospital Care Act and increase state budgetary costs in some future years. This letter provides our office’s analysis of the proposal, similar to the analysis we routinely provide the JLBC with proposed labor agreements.
We review the administration's proposed labor agreements with SEIU Local 1000, the largest state employee union. The administration estimates that the state's net savings under the proposed agreements would be $337 million ($156 million General Fund) between now and June 2010—compared to costs negotiated in prior Local 1000 MOUs. We also discuss two alternate ways to view the costs of the proposed agreements—compared to costs under the Governor's previous two-day-per-month furlough plan and compared to costs included in the February budget package. The proposed agreements represent a cost increase for the state under both of these alternate methods.
LAO compromise for Item 1920 of the 2008 Budget Conference Committee (page 89).
Presented to Assembly Budget Subcommittee No. 4 on State Administration
About 14 percent of state employee positions are vacant. In this piece, we discuss the factors that cause high vacancy levels. We recommend repealing an ineffective state law that purports to abolish vacant positions. In its place, we offer the Legislature some options to hold departments accountable for high vacancy rates.
The administration proposes a 5 percent raise for correctional officers and legislation to allow it to impose a labor settlement on the officers’ union, the California Correctional Peace Officers Association (CCPOA). We find that the officers’ compensation levels are sufficient to allow the prisons to meet personnel needs at the present time, but we generally agree with other administration proposals to increase management control in prisons. We note that the dysfunctional relationship between the administration and CCPOA makes it more difficult to address the many issues facing the state’s prison and personnel management systems.
The Legislature required the Controller to contract with actuaries for California's first valuation of unfunded state retiree health liabilities. On May 7, 2007, the Controller reported that the state's estimated unfunded liabilities total $48 billion. This report answers key questions concerning the valuation and identifies actions the Legislature could take to address the state's liabilities.
Presented to Assembly and Senate Budget Committees
Presented to the Public Employees Post-Employment Benefits Commission
We focus on the process for setting compensation and recommend the Legislature improve the state’s employee compensation policies. Our recommendations are geared toward the Legislature focusing state employee compensation expenditures within the context of a balanced budget. Among our recommendations are for the Legislature to (1) limit the authority of arbitrators to order large payments under their interpretation of future labor agreements and (2) end the use of automatic pay raise formulas tied to actions by other governmental employers.
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 recommend that the Legislature reject the administration’s proposed trailer bill language to (1) guarantee teachers’ purchasing power benefits through California State Teachers’ Retirement System (CalSTRS) and (2) reduce General Fund costs by $75 million in 2007-08. There are risks in assuming that the change proposed in the budget package will generate near-term and ongoing budget savings, and we are concerned about the idea of the state guaranteeing another benefit through CalSTRS, which serves employees of local districts. We do suggest, however, that such a proposal in the context of a future comprehensive reform would warrant consideration by the Legislature.
Presented to the California Health Care Foundation.
We provide a fiscal analysis of the proposed MOU with Bargaining Unit 18 (psychiatric technicians). The administration's cost estimates are generally reasonable. We estimate that total compensation costs (including benefits) for Unit 18 rank and file would total about $435 million (up 3 percent from the prior fiscal year) in 2006-07 and $460 million (up 6 percent) in 2007-08 under the proposed MOU. Our analysis also discusses the bargaining unit's high vacancy rates. In part because of the vacancy rates, departments often mandate that employees work overtime because state institutions require extra hours of work in order to meet institutional licensing and certification requirements.
We provide a fiscal analysis of the proposed MOU with Bargaining Unit 10, which includes state scientific personnel. The administration's estimate of the MOU's costs in 2006 is reasonable, but the estimate for 2007-08 likely overstates costs by around $2 million ($500,000 General Fund) due to a high estimate of inflation. Under the proposed MOU, we estimate that total compensation costs (including benefits) for Unit 10 rank and file would total about $235 million (up 8 percent) in 2006-07 and over $240 million (up 3 percent) in 2007-08. About two-thirds of the increased costs over the term of the agreement result from the proposed MOU. The remainder largely results from additional hiring authorized by the Legislature in the budget.
We provide a fiscal analysis of the proposed MOU with Bargaining Unit 7, which includes certain state public safety personnel. The administration's estimates of costs are reasonable, but we forecast a lower inflation rate than DPA assumes in estimating costs of 2007-08 pay increases. In some agencies, costs to substantially reduce currently high vacancy rates could exceed DPA's estimates. Under the proposed MOU, we estimate that total compensation costs (including benefits) for Unit 7 rank and file would total about $515 million (up 11 percent from the prior fiscal year) in 2006-07 and $540 million (up 5 percent) in 2007-08. About 55 percent of the increased costs over the term of the agreement result from the proposed MOU. The remainder results from additional hiring authorized by the Legislature in the budget or state health contributions required under the current MOU.
We provide a fiscal analysis of the proposed MOU with Bargaining Unit 5, which includes CHP officers. The administration's estimate of additional 2006-07 costs is reasonable. We estimate, however, that the annual fiscal impact after 2006-07 will be substantially more than shown in administration estimates because its projections assume (1) relatively low growth in the statutory pay formula for CHP officers, (2) no increases in state health premium costs after 2007-08, and (3) no change in required employer retirement contribution rates. By 2010-11, annual state costs could be $100 million higher than suggested in the administration estimate. In addition, various factors including pay and benefits for CHP and funding demands in the Department of Motor Vehicles are likely to put stress on the financial condition of the state Motor Vehicle Account, which funds Unit 5 personnel costs.
We provide a fiscal analysis of proposed MOUs with Units 16 (physicians, dentists, and podiatrists) and 19 (health and social service professionals). The administration's estimate of costs resulting from the MOUs in 2006-07 is reasonable, but the estimate for 2007-08 is likely too high by $6 million due to a high estimate of inflation. We estimate that total compensation costs would rise to about $579 million in 2006-07 for a cost increase of over 10 percent. More than 40 percent of this increase results from factors other than the MOUs, such as court-ordered pay increases. In 2007-08, we estimate that costs would increase an additional 6 percent to about $610 million. In addition to these costs, we expect that future court orders related to correctional and mental health programs will increase pay for some members of these units by an unknown amount.
We provide a fiscal analysis of proposed MOUs with Bargaining Units 12 (craft and maintenance workers) and 13 (stationary engineers). We believe that the Department of Personnel Administration's (DPA) estimate of costs resulting from the MOUs in 2006 is reasonable, but that the estimate for 2007-08 is likely too high by around $7 million due primarily to a high estimate of inflation. We estimate that total compensation costs (including benefits) for Unit 12 and 13 rank-and-file employees would rise to about $740 million in 2006-07 under the proposed MOUs for a cost increase of almost 7 percent. In 2007-08, we estimate that costs would increase to over $760 million, or more than 3 percent above 2006-07.
We provide a fiscal analysis of the proposed MOU with the nine bargaining units represented by Service Employees International Union (SEIU) Local 1000. We believe that the Department of Personnel Administration's (DPA) estimate of costs resulting from the MOU in 2006-07 is reasonable, but that the estimate for 2007-08 is likely too high by around $65 million due to a high estimate of inflation and not accounting for health care savings. We estimate that the total compensation costs (including benefits) for rank-and-file employees represented by SEIU would rise to over $5.5 billion in 2006-07 under the proposed MOU for a cost increase of almost 7 percent. In 2007-08, we estimate that costs would increase to $5.7 billion, or more than 3 percent above 2006-07.
We provide a fiscal analysis of the proposed MOU with Bargaining Unit 8, Firefighters. We believe that the Department of Personnel Administratrtion's (DPA) estimates of additional costs resulting from the MOU are too low. We estimate that net costs for the state will likely increase by at least $13 million in 2006-07 and $12 million in 2007-08 ($6 million more than indicated by DPA in each year).
The retirement contribution rates set by CalPERS for the state and many local governments were volatile in the late 1990s and the early part of this decade. Governments had difficulty predicting annual contributions during their budgeting process. In 2005, CalPERS adopted a comprehensive rate stabilization policy. We believe the new policy promises more stability in contribution rates for the state and other public entities.
The budget includes $382million ($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.
The costs of providing health care to retired state employees and their dependents—now approaching $1 billion per year—are increasing significantly. Many other public employers (including the University of California, school districts, cities, and counties) face similar pressures. This report discusses health benefits provided to retired public employees, focusing on state retirees. We find that the current method of funding these benefits defers payment of these costs to future generations. Retiree health liabilities soon will be quantified under new accounting standards, but state government liabilities are likely in the range of $40 billion to $70 billion-and perhaps more. This report describes actions that the Legislature could take to address these costs.
We revise our December 14, 2005 summary of the fiscal effect of the MOU with Bargaining Unit 2, Attorneys and Hearing Officers, based on a side letter which changes the retirement provisions of the previous MOU. We estimate that current annual costs for salaries, salary-related costs, and health benefits for Unit 2 members total $396 million ($144 million General Fund). The proposed MOU would require 2005-06 expenditures of about $409 million (an increase of $13 million, or 3.3 percent). The MOU would require 2006-07 expenditures of about $436 million (an additional increase of $27 million, or 6.7 percent). The side letter reduces the amount of savings the MOU otherwise would have produced for the state. The magnitude of the foregone savings is unknown since it would have depended on future decisions of Unit 2 employees.
The Governor proposes shifting $469 million in General Fund teacher retirement costs to school districts and/or schools. Due to current law requirements, it is likely that the proposal would require a $469 million upward “rebenching” of Proposition 98’s minimum guarantee—nullifying the proposed General Fund savings. In addition, from a long-term perspective, the proposal on its own would not address the retirement system’s shortcomings—the lack of local control and responsibility.
California “defined benefit” pensions in the public sector raise certain benefits and cost issues. The Governor proposes shifting all new public sector employees to “defined contribution” plans to address the high cost of the current system. Defined contribution plans address concerns with defined benefit pensions, but also introduce issues of their own. The Legislature could also address the benefits and cost concerns of current retirement plans within the existing defined benefit structure or with other pension plan alternatives.
To reduce budget costs, the administration proposes to issue bonds to finance almost $1 billion in scheduled retirement contributions. A Superior Court has thus far prevented the state from issuing such bonds. Regardless of its legality, incurring decades worth of debt to avoid an annual operating expense is poor fiscal policy. We recommend the Legislature reject the administration’s proposal. The administration also proposes having current employees contribute more of their salaries to retirement. The idea is worth pursuing in collective bargaining, but the Legislature should be aware of what this provision might cost the state in return. For new employees, the administration proposes rolling back retirement benefits to those in place in 1999. We recommend that the Legislature also consider alternatives such as Tier 2 and defined contribution plans for all new employees. These alternatives would result in more state savings and benefits compared to the administration’s proposal.
To reduce budget costs, the administration proposes to finance up to $2.5 billion in scheduled retirement contributions to the Public Employees' Retirement System (PERS) and the State Teachers' Retirement System (STRS). We recommend rejecting this proposal because incurring decades worth of debt to avoid an annual operating expense is poor fiscal policy.
We recommend that the retirement proposals be rejected because they are very costly. These costs would total over $13 billion, be paid over many years, and tie up future state revenues. In present value terms, the proposal is equivalent to getting about $2 billion worth of fiscal flexibility at a cost of well over $4 billion.
We estimate that the employee compensation package approved by the Legislature in September will cost $286 million in the current year, increasing to almost $1.3 billion in 2001-02. Enhanced retirement benefits will cost over $400 million per year beginning in 2001-02.
(1) Status of Collective Bargaining Negotiations, and (2) Economic and Revenue Developments
A major portion of state government expenditures is for compensation of state employees. Expenditures for state employee compensation (excluding higher education employees) will approach $10 billion in 1994-95. In this reprint from the Analysis of the 1994-95 Budget Bill, we discuss the employee compensation issues and options the Legislature should consider in enacting a Budget for 1994-95.
We recommend that the Legislature enact legislation to establish a new, actuarially sound, retirement program for judges taking office in the future in order to reduce long-run state costs for judges' retirement. The legislation should incorporate the retirement plan developed by the Select Committee on Judicial Retirement, with modifications to further reduce state costs, as detailed in this report.
The Legislature is considering legislation that would enhance early retirement incentives, otherwise known as "golden handshakes." In this document, we review concepts, current law, and pending legislation regarding golden handshakes. If the Legislature concludes that additional golden handshake authority is needed, we believe the Legislature should consider the steps outlined below as ways to assure accomplishing its policy goals.
In the November 1992 election, the voters approved Proposition 162—the California Pension Protection Act of 1992. This act may fundamentally alter relationships between retirement boards and the executive and legislative branches of these levels of government. There are many issues related to implementation of this act that will be of concern to the Legislature. Key issues include (1) how the Legislature can carry out oversight of the budget of the Public Employee's Retirement System and the State Teachers' Retirement System if those systems are free to spend funds without appropriations and (2) whether, or to what extent, these and other retirement boards are exempt from a wide range of provisions of state law and the State Constitution.
The state Department of Personnel Administration (DPA) is in the process of implementing administratively a federal tax provision allowing the state to "pick up" mandatory employee retirement contributions. Implementation of the pickup program would result in increased take-home pay to state employees—due primarily to reduced federal tax liabilities—at no direct cost to the state. In this report, we examine the fiscal and policy implications of implementing the pickup program.