after furloughs: state workers' leave balances

7/29/2019 After furloughs: State workers' leave balances

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Ae Flohs:

Sae Woes Leae Balaes

M AC TAy lo r l e g i s l A T i v e A n A l y s T M A r C h 14 , 2 01 3


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A n L A O R e p O R t

2 LegislativeAnalystsOfcewww.a.ca.


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www.a.ca.LegislativeAnalystsOfce 3

ExEcutivE SummAryOver the last ve years, the state has reduced state workers pay in exchange or giving them

additional time o. Tis report examines whether state employees took this additional time oor

whether, aer accounting or changes in use o vacation and other time, they worked about as many

days as they did beore.

LAO Fs

Furloughs Increased Allowed ime O by 50Percent. Te time o policies (urloughs)

greatly increased the average state workers allowed time o andover the course o the ve years

reduced his or her pay by about $21,000. Te average employee received 79 urlough days, increasing

his or her available time o by 50 percent during this period.

Vacation Balances Increased, Cap Did Not Contain Growth. State workers used most o their

urlough days, but signicantly decreased their use o vacation and annual leave days. As a result,

the average employees vacation/annual leave balance increased by 16 days between 2008 and 2012.Te states primary tool or limiting its leave balance liabilitiesa cap on the amount o vacation

and annual leave hours an employee may havewas not eective at containing leave balances. In

January 2013, more than 23,700 employees leave balances exceeded the cap.

Separation Payments at Historic Levels. Employees with leave balances may cash out or

burn o their leave as they separate rom state service. Payments to separating employees are now

at historic levels, nearly $270 million in 2011-12.

Leave Liabilities at Historic Highs. Furloughs reduced state employee compensation costs

by about $5 billion between 2008-09 and 2012-13. Probably nearly $1 billion o these urlough

savings was not long-term savings. Instead, the state must pay employees this money as they retire

or otherwise leave state service. As o June 2012, the states liability to pay employee leave balances

totaled $3.9 billion (about $2.1 billion General Fund) and was growing. Tis leave balance liability

equivalent to about 27 percent o the states salary costsis higher than most other public and

private employers.

Opos o Leslae coseao

Te states large balance o ununded leave liabilities can pose scal stress on departments,

reduce budget transparency, strain management-employee relations, and negatively aect public

trust in state employee management. For these reasons, we recommend the Legislature consider

options to reduce the states leave balance liabilities (or at least take actions containing their uturegrowth), including imposing a use it or lose it policy on uture accruals o leave, requiring

departments to actively implement the states leave cap policy, and instituting a leave buyback

program.


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intrOductiOn

Over the last ve years, in response to severe

state budget diculties, the state has given

most employees time o rom work in exchange

or reduced pay. Te time-o policy began as

administratively imposed urloughs and was

replaced by the collectively bargained Personal

Leave Program (PLP). Because urloughs and PLP

are unctionally the same policy, we reer to them

as urloughs in this report.

Caliornia state workers historically have not

used all o the time o they earn in a year. Tus, at

the time the urlough policies were adopted, there

was concern that state employees might not take o

all the additional time provided under urloughs.

Tis, in turn, would result in state workers carrying

larger balances o unused vacation time and annual

leavetriggering increased state costs when the

employees separate rom state service.

Tis report provides an overview o state

leave and urlough policies and then examines the

eect o the recent urloughs on leave balances.

Te second part o the report discusses whether

large leave balances are a problem or the state and

reviews the states options or reducing them or

containing their growth.

BAckgrOund

State employee leave BenefitS

Paid ime O Is an Important Part o

Employee Compensation. Research indicates that

employees across the public and private sectors

in the United States highly value paid time o

and that employees who take time o are happier

and more productive. As a result, the state o

Caliornia and most other employers provide paid

time o as part o their compensation packages to

recruit and retain employees. Te states employee

compensation package includes salary, pension,

health, and leave benets.

State Oers Relatively Generous Leave

Benets. Based on surveys o other employers in

the United States, the state o Caliornia appears tooer employees more paid days o each year than

the average employer. Te states relatively generous

leave benetsin addition to its pension and health

benetslikely make the states compensation

package more competitive in recruiting and

retaining sta who otherwise could receive higher

salaries working or dierent employers.

Sae Eploees reee a

vae o Pa das O

About 215,000 people work or a Caliornia

state department or agency (excluding the states

public universities). Figure 1 (see next page) shows

the major departments where these executive

branch employees work. State workers receive a

variety o days o in an ordinary year, including

state holidays, proessional development days

(PDD), and personal holidays. Tese days o

are established in memoranda o understanding

(MOUs) or statute. Employees may use PDD and

personal holidays or any purpose and at any time

during the year, subject to management approval.

Vacation or Annual Leave. In addition toholidays and PDD leave, state employees may

choose whether to earn vacation or annual leave.

As Figure 2 (see next page) shows, vacation and

annual leave are earned on a monthly basis at

rates determined by the employees seniority. I an

employee chooses to earn vacation leave, he or she

accrues 12 days o sick leave each year in addition


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to vacation. While vacation may be used or any

purpose, sick leave may only be used or limited

purposes. Employees who earn annual leave,

conversely, do not earn sick leavethey use annual

leave or vacation and sick days.

Leave Can Be Banked, Cashed Out, or

Burned O.Dierent rules apply to the dierent

types o leave. As shown in Figure 3, most paid

days oas well as leave days provided under

the urlough programs or earned by working onholidays or overtimemay be banked and used in

uture years. In addition, most leave may be burned

o, a term that means that the employee collects a

salary and benets while not working in the period

just beore he or she separates rom state service.

Finally, as an alternative to burning o leave,

employees may cash out leave that is considered

compensableprimarily, vacation, annual

leave, and holiday and overtime credit. When an

employee separates rom state service, he or she

receives a separation payment or any unused

compensable leave. Separation payments are

calculated by multiplying the number o unused

compensable leave hours by the separating

employees nal salary at an hourly rate. Other

Corrections and Rehabilitation

Transportation

California Highway Patrol

State Hospitals

Employment DevelopmentMotor Vehicles

Developmental Services

Other

Nearly Three-Fifths of State Employees Work in Seven Departments

Figure 1

Figure 2

Number of Vacation or Annual LeaveDays Earned Each Year IncreasesWith Senioritya

Years of Service

Employee MayChoose to Receive:

VacationbAnnualLeave

Less than 3 10.5 16.5

3 to 10 15.0 21.0

10 to 15 18.0 24.0

15 to 20 19.5 25.5

More than 20 21.0 27.0a Managers, supervisors, frefghters, and highway patrol ofcers

generally accrue more leave each month.b Employees who choose to take vacation leave also receive

12 days o sick leave each year.


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dayssuch as urlough days and sick leaveare

considered non-compensable. When an employee

separates rom state service, he or she does not

receive compensation or unused non-compensable

days. (In the case o sick leave, however, an

employee retiring rom state service can applyunused sick leave towards his or her service credit

or purposes o calculating pension benets.)

use Leae ceaes Lables

Direct Costs, Overtime, and Productivity

Losses. Under current law, virtually all unused

leave poses some orm o liability or employers

when an employee separates rom employment.

Specically, employers, including the state, incur:

Costs when the employee cashes out

compensable leave.

Productivity losses when employees burn

o leave.

Additional costs i the employer pays

another employee to cover or workers

burning o leave. Tese costs sometimes

accrue to employees as overtime wagesin

which per-hour costs are higher than or

the typical hour worked.

Certain Costs racked in Financial

Statements. As a result, the statelike most public

employerstracks these liabilities and reports

compensable leave

balances in its annual

nancial statements. Te

state, however, does not

set aside unds to pay

these costs, but requires

departments to pay them

on a pay-as-you-go basis

as state workers separate

rom employment.

Departments Leave Positions Vacant or

Redirect Funds to Cover Costs. o cover these

costs, departments typically leave positions vacant

and/or redirect unds rom other parts o their

budgets. Depending on the amount o unused leave

associated with employees separating rom stateservice in any year, this approach can negatively

aect a departments (1) productivity (by causing

it to leave many positions vacant or lled with

absent sta members) or (2) ability to carry out its

obligations within budgeted resources.

caps o Leae Balaes

Many Employers Limit Accumulation o

Unused Vacation and Annual Leave Days. o

minimize the nancial risks associated with

large leave balances, many public and private

organizations adopt leave policies that limit the

number o unused vacation/annual leave days

employees may carry over rom one year to the

next. It is common or these limits to be between

20 days and 40 days o leave, meaning these caps

typically prevent vacation/annual leave balance

liabilities rom exceeding between 8 percent and

15 percent o an employees annual salary costs.Many large public employers that we reviewed

imposed a cap on the amount o vacation/annual

leave employees may carry over. For example, the

ederal government limits most employee vacation/

annual leave balances to 30 days, New York State

Figure 3

Rules Governing the Major Types of State Employee Leave

Leavea Banked? Burn Off? Cash Out?

Vacation Yes Yes Yes

Annual Leave Yes Yes Yes

Holidays No Yes No

Holiday and Overtime Credit Yes Yes Yes

Proessional Development Days No Yes No

Sick Leave Yes No No

Furlough Yes Yes Noa Some state employees are eligible or additional types o leave.


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limits these balances to 40 days, and exas limits

balances to between 23 days (or employees with

less than two years o service) and 67 days (or

those with more than 35 years o service). Here in

Caliornia, the city o Los Angeles limits balances

to the amount o vacation an employee earnsover two years, the county o Los Angeles limits

balances to 40 days, and San Francisco limits

balances to between 40 days (or those with up to

ve years o service) and 50 days (or those with

more than 15 years o service).

State Policy Caps Vacation and Annual Leave

Balances. Te state o Caliornia caps the amount

o vacation/annual leave that most state workers

may accumulate at 640 hours (80 days). Te two

signicant exceptions to this rule pertain to the

ollowing nonmanagerial groups.

California Highway Patrol (CHP)

Ofcers. Te CHP ocers may accumulate

up to 816 hours (102 days) o leave.

Correctional Ofcers. Tese ocers cap

was 640 hours, but the cap was eliminated

in their most recent MOU.

Te states leave balance capsestablished in

regulations, statute, and MOUsare the states

main tools to manage state employees leave

balances. When an employee approaches or exceeds

the caps, managers are supposed to work with

the employee to develop a plan to ensure that the

employee is able to take time o to keep his or her

leave balances below the applicable cap.

furloughS

Many Employers Use Furloughs. When acing

scal challenges, many employersin state, ederal,

local government, and the private sectorhave

used urloughs as a way o maintaining their

workorce while reducing employee compensation

costs. Furloughs typically reduce workers pay by

reducing the amount o time they work.

State Frequently Uses Tem. Te state o

Caliornia has used urloughs in 8 o the last

30 scal years (1992-93, 1993-94, 2003-04, and

2008-09 through 2012-13), typically reducing state

employee pay by about 5 percent and increasing

employee allowed time o. Te state also realizesother savings rom urloughs because the pay cuts

indirectly reduce its costs or employee benets that

are determined as a percentage o employee pay,

such as contributions to Medicare, Social Security,

and pensions. Caliornia, however, typically has

chosen to apply its urlough policies in a manner

that does not aect employees pension and other

benetsor the amount o vacation and other leave

that employees earn.

Recently, State Has Imposed Five Years o

Furloughs. Te state began its recent series o

urloughs in February 2009. Te current urlough

program is scheduled to end July 2013. Between

February 2009 and July 2013, there have been only

our months during which no state employee was

urloughed (July 2010 and April, May, and June

2012). Troughout this ve-year period, urloughed

state employees received one, two, or three days

o urlough each month, generally correspondingwith 4.62 percent, 9.24 percent, or 13.86 percent

cuts in pay, respectively. Figure 4 shows that as a

result o this policy, the state reduced its employee

compensation costs by about $5 billion between

Figure 4

Savings From Furloughs andPersonal Leave Programs

(In Millions)

FiscalYear

GeneralFund

OtherFunds Totals

2008-09 $322 $268 $590

2009-10 1,185 982 2,167

2010-11 601 519 1,120

2011-12 183 153 335

2012-13 373 445 818

Totals $2,663 $2,367 $5,030


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February 2009 and July 2013. O this $5 billion,

about $2.7 billion o savings accrued to the

nancially troubled General Fund. Furloughs,

however, also were applied to employees supported

in whole or part by other unds or administrative

reasons and to prevent employee migration romGeneral Fund departments.

Furlough Policies Varied Considerably. At

various points in time, certain classications,

bargaining units, and departments have been

exempt rom the urlough policy. As a result, there

Figure 5

Major Findings Furloughs greatly increased employees available time o.

State workers used most o their urlough days, but decreased their use ovacation and annual leave days.

The states cap on leave balances was not eective.

Leave liabilities and payments to separating employees are now at historiclevels.

Some urlough savings create long-term liabilities.

is signicant variation in the number o urlough

days employees received. In addition, during

this period, urloughs or some employees were

sel directed, meaning that employees could

choose when to use their urlough day, subject to

management approval. In other cases, urloughswere compulsory on specied days, commonly

called Furlough Fridays. For details on when each

employee group was urloughed and background

on how the urlough policy was administered

during this period, please reer to the appendix.

LAO FindingS

o assess the eect o urloughs on stateemployee leave balances, we reviewed summary data

regarding state compensable leave balances over the

last ew decades, met with selected departments,

and examined department level leave balance data

between September 30, 2008 (the earliest date or

which detailed inormation was available) and

June 30, 2012. Figure 5 summarizes the key ndings

rom our review.

Flohs geal iease Eploees

Allowe te O

Most state employees received a signicant

number o days o in exchange or reduced pay

during the recent urlough period. Figure 6 (see

next page) illustrates how many urlough days an

employee received i the employee had been subject

to the policies or their entire duration. As can be

seen rom the gure, the

number o urlough days

given to employees variessignicantly by employee

group.

For Average Worker, Allowed ime OIncreased by 50Percent During Last Five Years.

o put the number o urlough days in Figure 6 into

perspective, it is helpul to compare them with the

number o paid days o an average state worker

receives in the absence o urloughs. Specically,

the average state employee earns 32 paid days o

each year18 vacation days and 14 days or state

and personal holidays and PDD. Te average worker

received 79 urlough days between 2008-09 and

2012-13, averaging 16 days per year. Te states

urlough policy, thereore, increased the average

employees total amount o available time o by

50 percent. Tis large increase in time o decreased

the amount o time available to complete state work

products. It is important to note that, in many cases,

this signicant increase in available time o and


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decrease in work time occurred without the state

ormally adjusting expectations or state department

productivity.

Sae Woes use mos o

the Floh dasPrison Workers, However, Used Less o

Teirs. As o June 2012 (the latest data we

reviewed), state employees had used about

95 percent o their urlough days and had, on

average, three unused urlough days banked. Te

key exceptions were employees o the Caliornia

Department o Corrections and Rehabilitation

(CDCR) and certain small departments.

Specically, while CDCR employees make up less

than 30 percent o the states workorce, these

employees account or nearly two-thirds o the

states balance o unused urlough days. Tis is not

entirely surprising given that CDCR employees

(1) received the greatest number o urlough days,

(2) work at 24-hour aci lities where giv ing one

employee time o oen requires paying another

overtime, and (3) had greater fexibility to bank

urlough days under sel-directed urloughs rather

than Furlough Fridays.

Workers in Some Small Departments

Used Less. Viewed in terms o balances o

unused urlough days per employee, some o

the states smallest departments reported the

largest balances. In act, employees in two o the

states smallest departmentsthe Santa MonicaMountains Conservancy and Commission on

State Mandatesreported having about 14 and 9

unused urlough days per employee, respectively.

Sta rom the commission and other small

departments with whom we discussed our

ndings indicated that the limited number o

sta in their departments made it dicult or any

employee to take time o or lengthy periods.

Eploees deease use o

vaao a Aal Leae

Leave balances grow when employees do not use

all o the days o that they earn. Larger leave balances

result in higher long-term liabilities or the state.

Prior to 2008-09, the average employees vacation/

annual leave balance grew by about 2 percent

annually. During the rst our years o urloughs, in

contrast, our review indicates that that the average

employees vacation/annual leave balance grew byabout 11 percent annually. Tis higher level o growth

is equivalent to the average

employee banking about

4 days o vacation/annual

leave each year during the

urlough period.

Growth in Balances

Caused by Use o Furlough

Days First. Tis growth

in vacation/annual leave

balancesat the same

time that employees used

most o their urlough

daysstems rom

employee decisions to

use urlough days rst,

Figure 6

Employee Groups Received Different Numbers of Days Off

2008-09 Through 2012-13

Employee GroupaFurlough and Personal

Leave Program (PLP) Days

Correctional ofcers, engineers, attorneys, park

rangers, scientists, and stationary engineers

94

Employees represented by SEIU (Local 1000) 79

Managers and supervisors 79

Heavy equipment mechanics, maintenanceworkers, physicians, psychiatric technicians,and health and social services proessionals

70

Firefghters 20

Highway patrol 12a There is variation within employee groups because some departments and classifcations were excluded

rom urlough or PLP policies.


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beore using vacation/annual leave days. Tis action

is consistent with the administrations policy that

management approve the use o urlough days beore

other types o leave. We note that employees also

have a personal nancial incentive to use urlough

days beore vacation/annual leave. Tis is becauseseparating employees have the option o burning o

orcashing out unused vacation/annual leavebut

may only burn o unused urlough days. By using

urlough days instead o vacation/annual leave days,

employees signicantly increased the states leave

balance liabilities.

Also Reects Departmental Workload Issues.

Te decreased use o vacation/annual leave also

may refect the diculties many departments

experienced completing their workload with reduced

stang levels. Tere is signicant evidence, or

example, o departments denying or discouraging

employee requests to take time o due to workload

pressures. In addition, there is evidence o managers

authorizing employees to take time o, but then

rescinding the authorized use o leave, citing

operational needs. Actions by management to deny

the use o time o, in turn, appear to have created

some tension in the workplace. We note, or example,that many o the 2012 MOU addenda that established

the collectively bargained urlough program, the PLP,

provide that an employees authorized use o PLP

days cannot be rescinded more than twice even or

operational needs.

Saes cap o Leae Balaes is no Eee

Ineective Leave Cap Not a New Issue. As

discussed earlier in this report, the states main policy

tool to limit state leave balance liabilities is a cap on

unused vacation/annual leave. For many years, there

has been concern about the eectiveness o the cap

on a statewide basis. We note, or example, that in

2005a year without major budgetary constraints

and workorce reductionsthere were more than

900 nonmanagerial correctional ocers and more

than 10,000 other state employees whose vacation/

annual leave balances exceeded the cap. During

labor negotiations that year, the Schwarzenegger

administration characterized these leave balances

as a huge ununded liability or the State and

proposed actions to strengthen the eectiveness othe cap. Tese changes, however, were not included in

any o the ratied MOUs.

Recently, Cap Seemed otally Ineective.

During the urlough period, we ound no evidence

that the cap had an eect on containing state

employee leave balances. Instead, the number o

nonmanagerial correctional ocers over the cap

quadrupled to more than 3,700 by March 2011, when

the state eliminated the cap or these workers. Te

number o other employees over the cap also grew

quickly rom more than 10,000 in 2005 to nearly

24,000 by January 2013.

Department sta with whom we spoke suggested

that they took ew, i any, steps to counsel employees

reaching the cap or to modiy workload to allow

employees to take more time o. In some cases,

supervisorial sta do not appear to receive regular

reports o their stas leave balances. We also note

that there does not appear to be any concerted orconsistent eort by state control agencies to enorce

the cap.

Leae Lables now a Hso Leels

Vacation/Annual Leave Balances Were High

Beore Furloughs Started. During the 1980s and

early 1990s, the states vacation/annual leave balances

were about 22 days per employee. Leave balances

o this size represent more than 8 percent o the

employers annual salary cost. As discussed earlier in

this report, most other employers limit the maximum

vacation/annual leave balance or any single

employee to be between 8 percent and 15 percent o

salary costs. Tus, it is possible that the states average

leave balance o 8 percent was somewhat similar to

other employers liabilities during this period.


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Later in the 1990s and early 2000s, however,

the average state employee vacation/annual leave

balance grew, partly as a result o personnel policy

changessuch as extending the annual leave

program (which oers a greater number o leave

days) to all state employees (instead o limiting it tomanagers) and the urloughs o the early 1990s and

2003-04.

Shortly beore the most recent series o

urloughs, the average state worker had 35 days o

banked vacation/annual leave. Te states liability

rom this unused vacation/annual leave was about

$1.9 billion, or about 14 percent o state salary costs.

Vacation/Annual Leave Balances Grew

Rapidly Afer Furloughs. Aer urloughs started,

employees began using urlough days instead o

vacation/annual leave days. By June 2012, the

average state employees vacation/annual leave

balance grew rom 35 days to more than 53 days.

Te states liability rom vacation/annual leave

in 2012 was about $3 billion. Tis is equal to

more than 20 percent o state employees salaries,

considerably higher than the maximum range o

vacation/annual leave balances allowable by most

other employers and, as Figure 7 shows, over twice

the level in 1984.

Te states total compensable leave liabilities,

however, actually are higher than those shown inFigure 7. Tis is because, in addition to vacation/

annual leave, the state must reimburse separating

employees or unused holiday credit, overtime,

and certain other types o compensable leave

balances. When all orms o compensable leave

are included, the states leave balance liability in

June 2012 was $3.9 billion (about $2.1 billion o

which is attributable to the states General Fund).

Tis $3.9 billion amount is about $1 billion higher

than the states total compensable leave balance

beore urloughs. (Data limitations prevent us rom

discussing the changes over the decades in the states

total compensable leave balances.)

CDCR Accounts or One-Tird o Leave

Balance Liabilities. Figure 8 shows the distribution

o the states $3.9 billion liability across departments.

State Liabilities for Unused Vacation and Annual Leave Time at 30-Year High

Figure 7

2

4

6

8

10

12

14

16

18

20

1984 1989 1994 1999 2004 2009

State Leave Balance Liabilities as a Percentage of State Salary Costs

22%


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As shown in the gure, CDCR employees account

or about one-third o these liabilities, but CHP

ocers have by ar the largest number o banked

compensable leave days compared with the average

employee at other major departments. We provide

additional inormation regarding compensable leavebalance liabilities on our website.

$3.9Billion otal Liability Likely to Grow.Going orward, we expect this $3.9 billion liability

to grow because (1) most state employees will

receive a 3 percent to 5 percent pay increase in

July 2013, increasing the cost to cash out their

leave balances, (2) most state employees have been

urloughed or 12 months ollowing June 2012,

(3) employees have some banked urlough and

other non-compensable days that they are likely to

use in lieu o compensable leave, driving up their

compensable leave balances, and (4) state employees

historically have not used all o their leave time

earned in a year even in the absence o urloughs.

For these reasons, we estimate that the states

compensable leave balance will exceed $4 billion by

the start o 2013-14 and

continue to grow in the

oreseeable uture. Tisgrowth will be moderated

somewhat by a likely

increase in the number o

state employees retiring.

Paes o Sepaa

Eploees now a

Hso Hhs

Aected Departments

ypically Absorb

Costs. Under state

budget practices, when

an employee separates

rom state service, the

department that last

employed the individual

pays the employees ull separation payment

regardless o where the employee accrued the leave

balance. Departments typically are not budgeted to

make these separation payments, but are expected

to absorb them within existing resources.

In some cases, because workers have retiredwith extensive unused leave balances, separation

payments have been largesometimes hundreds

o thousands o dollars. Tese large payments, in

turn, have evoked controversy in news reports

particularly in cases when the employee received

payments equal to many months o leave accrued in

excess o the state leave cap.

Separation Payments at Highest Levels

in 30 Years. Te amount o money that state

departments have paid in separation payments has

increased signicantly in recent years to the highest

levels in 30 years. In 2011-12, state departments paid

$270 million in separation paymentstwo-thirds

more than they did during the year beore

urloughs. Tis sudden increase in separation

payments is due to an increase in retirement rates

Figure 8

Leave Balances by Department as of June 30, 2012

Department

Banked Compensable

Leave Days PerEmployee

Liability From

Compensable Leave(Millions)

Corrections and Rehabilitation 72 $1,237.4

Transportation 60 385.2

Caliornia Highway Patrol 91 314.5

Mental Health 51 154.8

Employment Development 39 89.6

Developmental Services 69 89.0

Justice 52 70.6

State Compensation Insurance Fund 55 69.2

Motor Vehicles 34 60.1Social Services 50 50.5

Board o Equalization 42 49.5

Parks and Recreation 42 46.6

General Services 47 40.9

Industrial Relations 51 38.6

Fish and Game 53 37.7

All other 53 1,142.0

Totals 59 $3,876.2
http://lao.ca.gov/reports/2013/stadm/leave-balances/leave-balance-data-supplement.xlsxhttp://lao.ca.gov/reports/2013/stadm/leave-balances/leave-balance-data-supplement.xlsx


14/28



and the rapid growth in employee compensable

leave balances. Some departments have requested

budgetary augmentations to cover these costs. As

in the case with the states overall leave balance, we

expect separation payments to remain at high levels

or at least the next ew years.

Soe Floh Sas She

coss o Fe yeas

Roughly $1Billion o Savings Carried Into

Future as a Liability. While employers implement

urloughs to achieve employee compensation

savings, urloughs generally do not yield real

savings unless workers actually take the time o.

Specically, i an employer reduces a workers

pay but the employee works the same amount o

time, the employers leave balance liability usually

grows. Te employer then must pay the employee

when the worker separates rom service. Furlough

policies that reduce employees paywithout

reducing their hours workedshi compensation

costs to uture years when the employer must

make larger separation payments.

Our analysis indicates that roughly

$1 billionmore than $500 million General

Fundo the states $5 billion in urlough savings

has been carried into uture years as a liability

rom larger leave balances. Te state will pay these

liabilities when the employees separate rom stateservice. We note the state also may have incurred

other costs due to the urlough policy, such as

increased overtime expenses or costs to pay

growth in the states ununded pension liabilities.

Tese costs are not included in our $1 billion

estimate.

About $4,000 Owed to Average Employee.

Viewed rom the perspective o an average state

employee, the ve years o urloughs reduced his

or her $69,000 annual salary by a total o $21,000.

Te worker took o most o the urlough days,

but banked some vacation days. Te va lue o

this increased leave is roughly $4,000 today and

will grow, over time, as the employees salary

increases. I the employee does not use this time

in the course o his or her career, the state will

pay the employee or this leave when the worker

separates rom state service.

rEASOnS FOr tHE StAtE tO

rEducE LEAvE BALAncES

Te states liabilities associated with unused

leave are large. Based on trends over the last

30 years, these liabilities likely will continue to

grow. Tis, in turn, prompts the question: Should

the state take actions to reduce employee leave

balances or contain their uture growth?

No Right Level o Employee Leave

Balances. Our review indicates that there is no

single right level o employee leave balances.

Whether large leave balances pose scal or

operational stress on a department depends

on many actors. We note, or example, that

Caliornia had relatively high employee leave

balances or most o the 1990s and early 2000s.

During this time, departments periodically

requested midyear appropriations to cover

separation payments, but the states leave balances

did not appear to pose a major scal problem.

Tat said, or the reasons discussed below, we

think the Legislature should take steps to reduce

the states leave balancesor at least contain their

uture growth.


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rees Be taspae

How Departments Absorb Costs Ofen Not

Known. Trough the annual budget process, the

Legislature appropriates money and authorizes

positions or departments to achieve specied

legislative priorities. Once the Legislature approves

the budget package, however, departments modiy

their nancial and operational plans to refect the

pressures related to separating employees leave

balances, including making separation payments,

holding positions vacant, and allowing sta to be

absent. Tese changes generally are not reported

to the Legislature. Tus, it is not possible or the

Legislature to determine what priorities are not

being ullled due to the pressures associated withseparating employee leave balances.

iposes Fsal a Opeaoal

Sess o Soe depaes

Can Negatively Aect Departmental

Perormance. Te lack o budgetary transparency

also makes it dicult or the Legislature to

determine the extent o scal and operational stress

that these liabilities impose on state departments.

In our discussions with departments, we ound

that some perceive their ability to carry out their

responsibilities has been negatively aected by

large leave balances. For example, the Fair Political

Practices Commission advises us that it kept its

executive director position unoccupied or nearly

eight months because the ormer executive director

separated rom the commission with leave balances

approaching 70 percent o his salary. Te separating

employee burned o about two months o leavebeore separating rom the commission with a

separation payment worth over hal o his salary.

Similarly, CDCR indicates that it made separation

payments totaling $300 million between 2009-10

and 2011-12 and projects it will make more than

$100 million in separation payments in 2012-13.

Te CDCR indicates that these costs contributed

to its need to seek midyear supplemental

appropriations and its delay o special repairs and

other essential activities, actions that can increase

uture CDCR operating costs.

Sas maaeeEploee relaosHard to Allow Employees to ake All

Allowed Leave Days. Trough the recent urlough

programs, the state reduced employees pay with

the promise o giving them commensurate time o.

In some cases, however, workload considerations

caused management to deny state workers requests

or time oor led to workers not requesting the

time o. In these cases, because workers do not

receive the benet promised by management on a

timely basis, urloughs can negatively aect labor

relations. Longer term, strained labor relations

can impair the states productivity and the level

o service provided to the public. In addition, the

states reputation as an employer can be weakened,

aecting its ability to recruit and retain desired

talent rom the labor market.

ma Weae Pbl coee

maaee o Sae WooeLarge Dierences Between State and Other

Employers. Te public entrusts government to

eectively and eciently manage resources and

the workers it hires. In assessing governments

management o its employees, residents and the

media typically compare governments personnel

policies with those used in the private sector. When

residents and the media nd public sector personnel

policies that appear to be more generous than those

in the private sector, questions oen arise as to

whether government is spending public resources

wisely.

Te states personnel policies have led to large

dierences between the benets oered to state and

private sector workers when they separate rom their

employment. Specically, compared with private


16/28



sector employees, many state workers (1) receive

larger separation payments and (2) collect salaries

and earn benets (including more leave time) or

longer periods while burning o accumulated

leave. Te magnitude o the benets provided to

state workers is partly due to reasons that are notlikely to encourage public condence in the states

management o its workorce. Specically, as

administered by the state, the urlough program

did not reduce employee work time to levels that

would prevent rapid growth in leave balance

liabilities. In addition, the state has not enorced its

primary policy to contain these uture coststhe

cap on accumulated vacation/annual leave. Looking

orward, having state leave policies that are moresimilar to other employersand enorcedmay

give the public greater condence that the state is

eectively and eciently managing its resources.

OPtiOnS FOr tHE LEgiSLAturE

In this section o the report, we discuss options

available to the Legislature to reduce existing

leave balances and contain their uture growth.Most o the options involve dicult decisions

and trade-ossuch as those between incurring

near- and long-term state costs, and paying or

employee leave benets versus other orms o

compensation. In addition, many o the options

could have unintended consequences by modiying

employee behavior. Tere is no perect option.

Each option has limitations, and no one option can

resolve all o the concerns discussed in the section

above. In act, some o the options could address

some o the concerns while worsening othersor

example, reduce liabilities but urther erode public

condence.

optionSto reduce exiSting

leave BalanceS

Options Limited Due to Contract Law.

Te state is limited in what it can do to reduce

existing leave balances. Current law establishesthat employees have a vested, contractual right to

earnedcompensable leave. Tis means that once

an employee earns compensable time o, the state

cannot take it away without due compensation.

Te state must compensate employees or any

compensable leave that is already earned by

allowing employees to (1) take the time o or

(2) cash out the unused leave. Below, we discuss

two options available to the Legislature to reduce

existing leave balance liabilities. Tese optionswould reduce the states long-term liabilities, but

would reduce productivity or costs in the short

term.

Fos Aeo o depaes

Wh Lae Leae Balaes

Tere are many approaches the Legislature

could take to ocus attention on departments

with large leave balances. Below, we outline one

approach the Legislature could use in the current

budget cycle.

Spring 2013: Establish argets or Reducing

Leave Balances . . . Each department has

unique circumstances that led to its employees

accumulating large leave balances. o better

understand why employees have large leave

balances and what steps the state could take

to reduce these liabilities, legislative budget or

oversight committees could hold hearings withrepresentatives rom the Human Resources

Department (CalHR), Department o Finance,

and a representative sample o departments with

large employee leave balances. o establish a

baseline assessment o all departments and help

the committees identiy which departments should

attend the hearings, the State Controllers Oce


17/28



could report on the number o employees in each

department with leave balances over a threshold

amount, such as 640 hours, and the current value

o this leave. Te purpose o the legislative hearings

would be to (1) identiy why these departments

employees have large leave balances and (2)establish reasonable targets or reducing these leave

balances by spring 2014 and uture years.

. . . But Give Special Consideration to

Departments With 24-Hour Operations. In

developing these leave reduction targets, we

recommend the Legislature be realistic about

departments with 24-hour operations. Specically,

unless the state provides more unding or sta

at these departments or changes their workload

requirements, it is likely that these departments

will incur increased overtime costs to give their

employees more time o. We also note that,

in some cases, paying overtime so that other

employees can use leave costs the state more than

allowing workers to cash out their leave (either at

the end o their career or through an authorized

buyback program). Te Legislature could use the

hearings to explore options specically oriented

towards these departments.Spring 2014: Assess Departments

Progress. During the 2014-15 budget cycle and

in subsequent years, CalHR could provide the

Legislature an assessment o the states progress in

reducing employee leave liabilities. Additionally,

departments could report their individual

progress at achieving the targets established by the

Legislature.

ise Bba Poa

Many public and private sector employers oer

leave buyback programs to reduce leave balance

liabilities. A buyback program gives employees

the opportunity to cash out some o their existing

compensable leave balances at their current salary

level. While a leave buyback program increases

employer costs in the short run, it reduces the

employers outstanding long-term liabilities.

State Has Oered Buybacks in the Past. While

the state has oered leave buybacks in the past,

CalHR indicates that it has approved only one leave

buyback program in the past ten years. ypically,buyback programs are limited to (1) specied

employees, (2) a period o time during which

eligible employees may cash out leave, and (3) a

maximum number o hours that an employee may

cash out. Te last authorized leave buyback was

available primarily to managers and supervisors

between April and June 2007. Eligible employees

could cash out up to 40 hours o compensable leave.

A department, however, could choose to urther

limit the number o hours employees cashed out i

departmental unds were limited. As discussed in

press reports, in 2011, the Department o Parks and

Recreation instituted a buyback program or which

it did not have authorization. Te department

cashed out about $270,000 o employee leave under

this unauthorized program.

Buyback Program Would Increase Short-erm

Costs, but Reduce Long-erm Liabilities. Te

Legislature could direct the administration toauthorize a leave buyback program. A buyback

program could be administratively established

or managers and supervisors, but probably

would need to be collectively bargained or

rank-and-le employees. Depending on how

many employees were eligible to participate in

a buyback program and how many hours they

could cash out, a buyback program could result

in signicant up-ront costs. For example, a

buyback program that cashed out all leave in excess

o the existing cap would cost the state about

$270 million (or $330 million i nonmanagerial

correctional ocers were included). o control

these costs, the Legislature would need to provide

the administration guidance as to the design o

the buyback program. Te Legislature also would


18/28



need to make decisions about how to und it. For

example, the Legislature could augment individual

departmental budgets to provide unding or the

expected costs or establish a separate item in the

budget to pay these costs or all departments.

Regardless o the unding mechanism, the costsassociated with a buyback program would reduce

the Legislatures ability to provide resources to

other programs in the state budget. Obviously,

because o the up-ront cost o a buyback program,

such a program would be easiest during years

without signicant budgetary constraints.

optionSto containgrowthin

future leave BalanceS

Signicant Flexibility or the State. Te

Legislature has a greater degree o fexibility to

implement options that containfuture ununded

liabilities rom employee leave balancesranging

rom changing budgeting practices to changing

leave policies. Because employees only have a vested

right to earned leave, the Legislature can change

leave benets on a prospective basis. Prospective

benet changes could be administratively imposed

on managers and supervisors, but probably wouldneed to be bargained or rank-and-le employees.

Because 19 o the states 21 MOUs with state

workers expire in July 2013, the administration

could incorporate mechanisms to contain leave

balance growth in labor agreements submitted

to the Legislature or ratication. We note,

however, that any action that reduces prospective

leave benets likely would put pressure on the

state to augment other components o employee

compensationsalary, pension, and health

benets.

ceae a use i o Lose i cap o Leae Aals

Te Legislature could create a strict cap on

prospective leave accruals. Te cap could give

employees the opportunity to use the time o

they earn, but minimize the states liabilities rom

compensable leave balances. Such a cap could

take many dierent orms. Most o the other

states we looked at have some orm o a strict

cap on the amount o vacation/annual leave that

employees may accumulate. Below, we describethe key elements o a cap that we think would be

reasonable.

Establish an Accrual Limit. Te limit should

allow employees to have fexibility to take time

o during the year but also be low enough to

minimize the states liabilities. Most o the states

that we looked at limit the amount o vacation/

annual leave that a state employee could carry

year-over-year to about 40 days. Tis is hal o the

limit established by the cap that currently applies to

most Caliornia state employees.

Speciy No Vested Right to Leave Above Cap.

Employees could continue to accrue a certain

amount o time o each month based on vacation/

annual leave accrual schedules; however, employees

would have no vested right to any time o received

in excess o the cap. For example, i the Legislature

adopts an 80-day cap, an employee with 80 days

o banked leave would still earn his or her normalvacation days, but these days would need to be

used beore the end o the year. Te employee could

only carry up to 80 days o leave year over year. For

reasons we discussed earlier, we note that it may be

dicult or employees at 24-hour acilities to use all

o the vacation/annual leave that they accrue in a

year. For these employees, the Legislature may wish

to set a higher cap or take other actions to contain

long-term liabilities, such as establish regular leave

buyback programs.

Pla caell Beoe g new

Flohs o moe te O

Inevitably, at some time in the uture, the

Legislature will consider proposals to urlough

employees or give them additional holidays or


19/28



other paid time o. Our review indicates that any

additional time opaid or not paidcan result

in higher employee leave balances and larger state

liabilities. Below, we explain some actions that

the Legislature could take to minimize the eects

o additional days o on uture leave balanceliabilities.

When Considering Future Furlough

Proposals. Furloughs are a common tool used

by employers to reduce employee compensation

costs. o achieve savings, the employer reduces its

workers pay but increases their amount o time

o. Administering urloughs on specied days by

shutting down operations, like Furlough Fridays,

helps contain the growth in leave balances because

it orces employees to work ewer hours. Some o

the states largest departments, including CDCR

and CHP, have 24-hour operations, however, and

cannot shut down. Tus, extending a urlough

program to include their workers does not change

the amount o sta hours worked and, instead,

increases state leave balance liabilities. In these

cases, the Legislature has limited options. It can:

Exempt workers in these departments rom

the urloughan action that reduces by

more than 60 percent state General Fund

savings rom the urlough.

Reduce departmental workload or

requirements so that these departments

can operate with ewer workersan action

that would be dicult to implement in

many cases due to ederal, state, and other

requirements.

When Considering Proposals or Additional

Paid Days O. In general, giving state employees

additional paid days o augments their

compensation package without increasing state

costs in the short term. I the employees do not use

the additional paid days o, however, state leave

balance liabilities grow and the state makes higher

separation payments in the uture. Te Legislature

could minimize this potential scal eect by

speciying that employees have no vested right to

the new day. Tat is, it must be used in the same

year given and included within a strict cap on leave

accruals (discussed above).

cash O Leae Whe Eploees

tase depaes

Under current law, employees may not cash

out their leave when transerring rom one

department to another. Further, when an employee

separates rom state service, the department o

last employment is responsible or paying the

employees entire separation payment. As a result,

i an employee accrues a large leave balance while

working at Department A and then works one year

at Department B beore retiring, Department B

must pay the employees entire separation payment.

Tis can create signicant budgeting problems or

Department B. o ensure that state departments

realize the scal eects o their leave management

policies, the Legislature could allow employees to

cash out leave amounts above a certain threshold

when transerring to a new departmental employer.Tese early cash outs also would (1) reduce uture

state liabilities and (2) provide more timely

compensation to employees or leave they were not

able to use.

Pe Lables

Te state does not preund leave balance

liabilities but instead makes separation payments

on a pay-as-you-go basis. Te Legislature could

explore the option o preunding leave balance

liabilities. o preund these liabilities, the

Legislature would put money aside in a trust

undperhaps in the range o hundreds o millions

dollars each year initiallythat would be invested.

Te states contributions and any growth in the

und rom investments would be used to pay uture


20/28



separation payments. Annual contributions to this

und could be distributed across departments

similar to how the state preunds employee pension

benet costs. Because liabilities rom leave balances

are constantly changingemployees receive

pay increases, the size o the workorce changes,employees take o varying amounts o time year

to year, and so onthe amount that the state

contributes on an annual basis would need to be

determined through an actuarial valuation that

takes into account various assumptions. While

preunding these benets increases the states costs

in the short run, it would signicantly reduce the

states costs associated with separation payments in

the long run.

ree nbe o das O

Aalable o Eploees

Te states employee compensation package

provides employees a generous number o paid days

o each year. I the state were to reduce the amount

o time o included in the compensation package,

employees likely would use a higher share o their

compensable leave days in a given year. Tis would

result in lower leave balance liabilities in the uture,

but, as discussed earlier, likely would increasepressure on the state to increase other orms o

employee compensation.

Ealae Woloa a Saf Leels a

depaes Wh Hh Leae Balaes

Persistently high leave balances may indicate

that employees at a department do not take time

o due to high workload. Aer urloughs end in

July 2013 and the state workorce normalizes, the

legislative budget subcommittees may wish to

examine departments with high leave balances to

determine whether additional stang resources or

changes in statutory duties may be merited.

cOncLuSiOn

Most employers have scal liabilities related to

vacation and other leave that their employees have

earned, but not used. Tese leave balance liabilities

must be paid when an employee retires or separates

rom employment.

Te state o Caliornia has carried large leave

balance liabilities or decades. Te last ve years

o state employee urloughs, however, have pushed

its leave balances to unusually high levels. Our

review indicates that that the states leave balances

directly or indirectly have negative eects on the

state, including: imposing scal and operational

stress on departments, reducing transparency in

state budgeting, straining management-employee

relations, and weakening public trust in state

government. For these reasons, we recommend the

Legislature take steps towards reducing the states

leave balancesor at least containing their uture

growth. In this report, we describe several options

the Legislature could take to help achieve this goal.


21/28



One Shape = One Day Per Month Off and a 4.62 Percent Pay Reduction

Correctional Officers and Engineers

Employees Represented by SEIU (Local 1000) and Managers

Maintenance Workers and Health Professionals

Firefighters

Highway Patrol Officers

2008-09: Furloughs Began

Figure A-1

July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June

In February 2009, the Legislature amended the 2008-09 budget to reduce funding for state employee

compensation, and directed the Schwarzenegger administration to achieve these savings through collectivebargaining or administrative actions.

Through executive order, Governor Schwarzenegger directed that state employees be furloughed two daysper month. Employees at 24-hour facilities were allowed to select their days off, a policy known as

self-directed furloughs. Other state employees initially were required to take off designated Fridays, butthen allowed to take self-directed furloughs.

Some departments, including California Highway Patrol, were not furloughed. Beginning in June, theDepartment of Forestry and Fire Protection also was exempted from furloughs.

APPEndix 1:

FivE yEArS OF StAtE EmPLOyEE WOrk

And PAy rEductiOnS (2008-09 tO 2012-13)


22/28



2009-10: Furloughs Increased to Three Days Per Month

Figure A-2

The 2009-10 budget included reductions in funding for state employee compensation and directed theSchwarzenegger administration to achieve these savings through collective bargaining or administrative

actions.

Through executive order, Governor Schwarzenegger directed that most state employees be furloughedthree days per month. Most state offices were closed three Fridays each month for the year.

Employees at 24-hour facilities continued to have self-directed furloughs.





Firefighters




23/28



2010-11: Furloughs Replaced by Personal Leave Program

Figure A-3

The 2010-11 budget included reductions to state employee compensation costs and directedthe administration to achieve these savings through collective bargaining or administrative actions.

Through executive order, Governor Schwarzenegger directed that most state employees be furloughedthree days per month until their bargaining units agreed to new memoranda of understanding (MOUs).

Initially, most employeesexcept those working in 24-hour facilitieswere required to take off specifiedFridays. In November 2010, the administration authorized all employees to take self-directed furloughs.

During the fiscal year, all employee bargaining units agreed to new MOUs. Most of the MOUs providedthat the employees would receive one self-directed, unpaid day off monthly for 12 months. The administration

also extended this policyknown as the Personal Leave Programto managers and supervisors.

In October 2010, the California Supreme Court ruled that (1) the Legislature must authorize any furloughsand (2) the budget language that had been used to reduce employee compensation costs tacitly approved

the administrations furlough programs.






Firefighters



24/28



2011-12: Personal Leave Program Expired

Figure A-4

Each bargaining units Personal Leave Program expired 12 months after the bargaining unit agreed to a newmemorandum of understanding.





Firefighters




25/28



2012-13: Personal Leave Program and Furloughs Began Again

Figure A-5


The 2012-13 budget included reductions in funding for state employee compensation and authorized theBrown administration to achieve these savings through collective bargaining agreements, furloughs, and

the use of existing administrative authority over managers and supervisors.

Nineteen of the states 21 bargaining units agreedin addenda to their memoranda of understanding

to receive one self-directed, unpaid day off per month, a policy referred to as the Personal Leave Program.This policy was extended to managers and supervisors. The administration imposed one day per month,

self-directed furloughs on the two remaining bargaining units. Thus, for the 12 months of 2012-13, all stateemployees were subject to one self-directed unpaid day off per month.





Firefighters



26/28




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28/28

LAO Publications

This report was prepared by Nick Schroeder and reviewed by Marianne OMalley. The Legislative Anal ysts Ofce (LAO)

is a nonpartisan ofce that provides fscal and policy inormation and advice to the Legislature.

To request publications call (916) 445-4656. This repo rt and others, as well as an e-mail subscription service,

are available on the LAOs website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000,

Sacramento, CA 95814.


after furloughs: state workers' leave balances

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