State budget advisor examines workers, retirees

The Legislature’s nonpartisan budget adviser says the Schwarzenegger administration’s overdue budget contains scant dollars for state-employee salary increases and assumes that “the vast majority of state employees receive no pay increase in 2008-09.”

“The budget act assumes that total pay and benefits for about 350,000 state government and university employees equal about $30 billion (all funds) in 2008–09. The budget, however, includes a very limited amount – $327 million ($124 million General Fund) – for pay and benefit cost increases…This is because the budget package assumes that the vast majority of state employees receive no pay increase in 2008–09,” said the study by Legislative Analyst Mac Taylor.

The findings come as little surprise to state employees. Nineteen of the state’s 21 bargaining units representing state workers currently are engaged in contract negotiations with the state Department of Personnel Administration, which represents the Schwarzenegger administration. One unit, representing prison guards, is working amid state-imposed rules and conditions following a lengthy contract dispute. Another unit, the Highway Patrol, has reached agreement with the state, and negotiations continue with the others.

“The budget generally includes no funds for pay increases for the 19 other bargaining units, with the exception of pay increases resulting from orders of the prison medical care Receiver. (Judges are not a part of any bargaining unit and receive a pay increase each year pursuant to statute.) Consistent with its good faith negotiating requirements under state law, the administration continues to negotiate with various rank–and–file employee bargaining units and may present pay increase proposals to the Legislature at a later date,” Taylor said.

Last year, the Schwarzenegger administration declared an impasse in negotiations with the California Correctional Peace Officers Association, and submitted its “last, best, and final offer” with the correctional officers’ bargaining unit. Earlier, the governor sought $260 million to pay for the pay and benefits increase in the final offer, but the Legislature blocked it.

The legislative analyst also examined issues surrounding state workers’ retirement.

The spending plan eliminates a program that provided additional health benefit subsidies for state retirees living in rural areas not served by a health maintenance organization. This change results in more than $5 million annually in savings to the state, but will increase the out–of–pocket health-care costs of several thousand rural retirees and their family members by a like amount.
“Unlike most other retirement programs, the rural health care program involved statutory language that explicitly authorized the Legislature to change or terminate the program. A similar program for active state employees was not affected by this action,” the analyst’s report said.

The budget act assumes that the state’s payment obligations for pension, retiree health, and other retirement programs will total about $6 billion in 2008–09, about the same that the state spent on such obligations in 2007–08. Some retirement costs will increase this year but are offset by reduced spending due to a one–time, $500 million payment to the California State Teachers’ Retirement System. The payment is required under a court order last year.

The budget package enacts changes to a category of CalSTRS benefits – principally received by retired teachers age 80 and over – that protect the purchasing power of retirees’ pensions from being eroded by inflation.

The report noted that the “the state’s contributions for the benefits will decline by at least $66 million each year beginning in 2008–09.” The recent court order also forced the state to pay interest on the $500 million the state withheld from the system on a one–time basis in 2003. A budget trailer bill appropriates these funds—$57 million each year for four consecutive years—beginning in 2009–10.
Also regarding health benefits, California public employee pension and retiree health programs have unfunded liabilities of about $109 billion. Of this amount, the largest portion—over $59 billion—relates to the unfunded retiree health liabilities of the state and the two university systems.

Like most governments in the United States, the state has long paid its retiree health obligations on a “pay–as–you–go” basis, which essentially defers payment of retiree benefits earned by current employees to future taxpayers. (By contrast, pension obligations are largely funded on an annual basis, and these funds are set aside and invested to generate returns that minimize costs for future taxpayers.) In January 2008, a commission appointed by legislative leaders and the Governor recommended that the Legislature begin funding retiree health benefits in the same manner as pensions and amortize existing unfunded liabilities over the next few decades. The 2008–09 budget package contains no funds for this purpose.

Nevertheless, it is possible that an updated actuarial valuation this fall will show that the state’s unfunded retiree health liabilities have declined. This is because the California Public Employees’ Retirement System has negotiated state health plan premium increases in 2008 and 2009 that are well below those assumed by actuaries last year when they completed the state’s previous retiree health valuation. Despite these relatively low premium increases (compared to recent years), costs for state and CSU retiree health benefits are projected to increase by 7.6 percent in 2008–09 to $1.2 billion—well above the rate of expenditure growth for the overall state budget.
Each year, Taylor’s office analyzes the governor’s annual budget proposal and produces a report that is used by lawmakers and others in negotiations with the administration.

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