Governor Releases Budget: Salary Cuts Planned For Employees

The Governor released his proposed budget for 2010-11 today. Of interest to a lot of people are the Governor’s proposals for employee compensation. Under the proposed budget, the 3-day per month furloughs of state employees will end. However, the Governor still plans to save $1.6 billion in employee compensation costs. Here’s how he plans to do it (from page 68-69 of the Governor’s budget):

Governor’s Proposed Reductions:

Workforce Cap — A reduction of $449.6 million achieved through a five-percent increase in salary savings. An Executive Order will require that Agency Secretaries and Department Directors immediately act to achieve the five-percent reduction by July 1, 2010. It is expected that attrition will be the primary factor in achieving the increased salary savings. The constitutional offices are not included in the workforce cap because the fiscal year 2009-2010 budget for each of those officers included a permanent reduction that achieves savings to the level of the workforce cap or a higher amount.
Five-Percent Salary Reduction — A reduction of $529.6 million achieved through an across-the-board reduction in salaries by five percent.
Increased Employee Retirement Contribution — A reduction of $405.8 million achieved by increasing employees’ retirement contribution by 5 percent and reducing the employer contribution accordingly.
Lower Cost Health Care — A reduction of $152.8 million in health care costs beginning in January 2011 achieved by contracting for lower-cost health care coverage either directly from an insurer or through CalPERS. Savings beginning in 2011-12 will pre-fund other post-employment benefit costs.
Pre-funding for Health and Dental Benefits for Annuitants — A decrease of $98.1 million for pre-funding other post-employment benefits.

Comments:

Workforce Cap: The Governor wants a generalized 5% reduction in employee compensation from all agencies and departments. The budget says this will be accomplished primarily through attrition. Since it’s at the agency/department level, I can’t see how else it could be accomplished since agencies/departments don’t have the delegated authority to negotiate salary cuts. Therefore the only way to achieve a reduction in total compensation is to have fewer workers. Fortunately, the state has enough turnover that a 5% reduction achieved through attrition shoudn’t be a problem.
Five-Percent Salary Reduction: This is going to be tough for the Governor. Here’s why. It’s true that this can be accomplished without bargaining with the unions, but only if the Legislature cooperates. (All the Legislature has to do is put the magic words in a bill, “Notwithstanding the requirements of Goverment Code section 3512 et. seq.” – which is the Dills Act.) However, I can’t see the Legislature agreeing to impose a 5% salary cut on state employees without requiring the Governor to bargain that with the unions. But if the Governor goes to the bargaining table, here’s what likely will happen. The unions know that under the Dills Act, the Governor can’t impose salary cuts on them even at impasse. (Department of Personnel Administration v. Superior Court (1992) 5 Cal.App.4th 155, 174-175.) So what the unions will do (and have done) is counter the Governor’s salary cut proposal with a slew of “savings” proposals, none of which involve cutting state employee compensation. Some of these proposals will have merit, but many will not, and in either event they won’t equate to a 5% salary reduction. Then when it gets close to July 1st, the Governor will ask the Legislature to impose the salary cuts but the unions will argue that the Governor has been bargaining in bad faith because he has ignored the unions’ “savings” proposals. In the end, the Governor might be forced to impose layoffs which can be done without bargaining, and which is what I think will happen (and quite frankly, layoffs may make more sense from a policy standpoint – but that’s for another blog).
Increased Employee Retirement Contribution: Currently, most non-safety state employees pay 5% of their salary for the Tier 1 defined benefit pension plan. The state picks up the remainder of the cost. The “normal” actuarial cost for non-safety pensions is approximatley 10%. [Note: It’s currently above 15% because of CalPERS recent loses] So this basically means that most state employees will be paying the full cost of their pensions. However, the problem here is the same as with salary cuts. The Governor needs the cooperation of the unions or Legislature and neither is a sure thing.
Lower Cost Health Care: Interesting. You would think that if there was a lower cost health plan out there the state would already be using it. Maybe there is. However, my gut feeling is that the only way you’re going to decrease health care costs is to provide less coverage and benefits. Again, not easy to do without the unions or the Legislature and/or CalPERS agreeing to it.
Pre-funding for Health and Dental Benefits for Annuitants: Not sure why this is here but pre-funding certainly makes sense. It’s something that local entities are trying to do, but obviously is very difficult in these economic times.