Gov. Gavin Newsom and the California State Legislature are cutting state workers’ pay in a way that could burden the state’s long-term finances for many years to come.

The state is cutting workers’ pay for the next two years, and in exchange is giving most of them two flexible days off. That’s 48 days off to use at their discretion.

Newsom expects the reductions, achieved through what’s called a personal leave program, to save the state $2.8 billion per year, helping the state close a projected $54 billion deficit.

But if past experience with similar programs is a guide, the state could end up paying more than a fifth of the savings back to workers over time, according to a 2013 Legislative Analyst’s Office report on state pay cuts during the Great Recession. The program also will grow the state’s liabilities related to pensions and retirement health care, according to a June report from the office.

Many workers didn’t use all of the days off they received in exchange for the round of pay cuts a decade ago, and accumulated banks of leave. Over the years, the value of their leave grew as their pay grew, increasing what the state would have to pay them for the time, including cashouts upon retirement.

“There’s not really much reason to assume there won’t be a similar liability associated with this leave,” Nick Schroeder, an analyst with the office, said of the new leave program.

At the end of 2019, the average state employee had 325 hours, or about 40 days, of accrued compensable leave, according to CalHR. The figure does not include sick leave, which can’t be cashed out.

The state’s most senior workers likely have many more days than that, while newer workers likely have far fewer, or none, Schroeder said.

Citing long-term costs, the Legislative Analyst’s Office recommended in May that the Legislature find ways other than furloughs or personal leave to reduce pay, but conceded in the June report that there is “no easy or right way to reduce employee compensation.”

The program differs from traditional furloughs, such as those imposed by former Republican Gov. Arnold Schwarzenegger.

Under Schwarzenegger’s “furlough Fridays,” most state offices were closed for two days per month. Workers stayed home and weren’t paid for those days.

His furloughs created more permanent savings while telegraphing to taxpayers — who saw the closed offices — that the state government was sharing in the economic pain of the times, said Schwarzenegger’s former finance director Mike Genest.

“I think it was just a feeling of, we want to get real savings, we don’t want to just push the thing out into the future,” Genest said. “And it also looks tougher. I think there was a political element to that.”

The furloughs also hurt state worker morale, poisoned the administration’s relationships with unions and resulted in several lawsuits.

Coronavirus complications

A similar program today would be complicated by the coronavirus. The personal leave program keeps workers in offices performing critical functions related to the pandemic, Human Resources Department spokesman Andrew LaMar said in an email.

“The policy of the leave program is to allow flexible employee use of leave consistent with department operational need,” LaMar said in the email. “The state is under a declaration of emergency due to the coronavirus pandemic. State operations, policies and programs need to continue to provide public service while maintaining the health and safety of state employees.”

State unions negotiated agreements over the pay cuts after Newsom announced on May 14 that he would mandate reductions and the Legislature followed suit.

A pay reduction equivalent to two days of work per month amounts to a 9.23 percent cut. The state is softening the hit by suspending workers’ contributions to their retirement health care, which for most workers is 2% to 4% of pay.

The average state worker, not including seven high-paid medical, legal and administrative offices, earned about $66,000 in 2018, according to State Controller’s Office data.

The agreements tweaked pay in other ways to make smaller adjustments in addition to the two leave days.

Some groups of workers, including correctional officers and firefighters, will receive fewer days of leave under different agreements their unions negotiated with Newsom’s administration. The Human Resources Department hasn’t yet posted, nor has the analyst’s office reviewed, several of the agreements.

Growing liabilities

Schwarzenegger’s administration negotiated personal leave programs late in his term with some state unions. Former Democratic Gov. Jerry Brown negotiated similar agreements.

During five years of furloughs and personal leave programs from 2008 to 2013, the average state worker received 79 furlough days and lost $21,000 in pay, according to the Legislative Analyst’s Office.

Some workers are still carrying leave balances from even earlier personal leave programs.

At the end of 2018, about 15,000 state employees were still carrying about 1.2 million hours of leave from a personal leave program from from 2003 and 2004, according to the Legislative Analyst’s Office.

The state caps the amount of leave workers can accrue. For most, the limit is 640 hours. But the state’s enforcement of the cap has been lax, according to the Legislative Analyst’s Office.

Some of the recently negotiated agreements temporarily raise the cap. Some of the agreements also include provisions that restrict the circumstances under which the leave may be cashed out.

When asked whether the state would enforce the caps more aggressively going forward, LaMar said the Human Resources Department has been “very clear about the policy and what is required, and we expect it to be followed, just like all other provisions of (contract agreements) and side letters. This balance is managed by reference to the labor agreements, statutes, and rules and policies.”

Get the State Worker newsletter

Work for the state of California? Get the latest news on pensions, pay and more in the State Worker newsletter.

SIGN UP

Pensions, health care

The personal leave program also hurts the state pension system over time, according to the analyst’s office.

Workers and the state each pay a percentage of workers’ wages to CalPERS. When the state reduces workers’ pay, the state and workers each contribute less to the underfunded pension system, according to the analyst’s office.

A separate long term fund supports retiree health care. Suspending workers’ contributions will make it less likely that the state meets its goal of fully funding retiree heath care by 2046, according to the report.

The report cautions legislators not to extend the personal leave program beyond June 2022, when the program is set to end under the union agreements.

If the economic depression caused by the coronavirus extends beyond then, the state should instead lay off workers, the office recommends. Reductions in force take about six to nine months for the government to implement, according to the office’s recent report.