How Newsom’s new labor deals save money now by taking a break from a big debt payment

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Gov. Gavin Newsom’s office is making benefit deals with public employee unions that save money today in part by putting off payments that were meant to bring down costs tomorrow.

His office this month negotiated seven agreements with unions that pause state spending for two years toward one of California’s largest long-term debts: the health care benefits civil servants receive in retirement. 

Newsom’s pause on the pre-funding payments for current workers has the potential to free up a lot of money. His office in May estimated those payments would cost the state more than $700 million in the new budget year.

But the promise to workers is massive: At the last official estimate, California would need $85 billion to pay for the retirement health care benefits it has promised to state employees. 

The governor’s move to suspend payments toward future retiree health care coincides with another big concession he’s asking from unions as he manages a $12 billion deficit. The new contracts include furloughs that trim take-home pay for public employees over the next two years and essentially negate the raises state workers are getting this year.

But six of the proposed labor agreements have a sweetener to ease the pain of the furloughs. 

Like the state, workers represented by those unions won’t have to pay anything toward their retirement health care for the next two years. Suspending that deduction puts between 1.7% and 4.5% of their earnings back into their paychecks. 

“For my members, the cost of living in the state is so high, it just gives them a little bit of relief in putting money in their pockets that wouldn’t be there otherwise,” said Ted Toppin, the executive director of the union that represents state engineers, Professional Engineers in California Government.

Service Employees International Union Local 1000, which represents about 100,000 California civil servants, announced Sunday that it also made a new labor agreement with the Newsom administration that gives workers a break on the retirement health care deduction for two years. Neither the union nor the state have said yet whether the agreement pauses what the state was supposed to pay for that benefit.

“This will boost take home pay,” the union said in its message to members.

Newsom’s predecessor, former Gov. Jerry Brown, created the plan to pre-fund retiree health care benefits by having both the state and employees chip in money every paycheck. He insisted on it in difficult labor negotiations that resulted in unions agreeing to what was then a new paycheck deduction.

Until then, California had paid for the retiree health care exclusively through the state general fund. Brown and others were concerned that the pay-as-you-go practice would eat up larger and larger slices of state spending because of the rising costs of health care.

This year, California expects to spend $3 billion on the health benefits its already-retired civil servants will use, up from $1.6 billion in the 2016-17 budget year.

The state calls that other post-employment benefits, or OBEB, meaning benefits in addition to pensions.

Over time, the contracts Brown negotiated would gradually create a trust fund for retiree health care and remove that expense from the pot of money the state uses for general government services. On the current timeline, that would happen some time in the late 2040s.

Toppin, who was involved in the Brown-era contract negotiations, said the state has flexibility to manage its goal for retiree health benefits.

“This is a long horizon,” he said. “At least for the state in this year and the near term the need is deficit reduction, and for my members the need is they gotta pay the bills.”

But it also comes with long-term risk and likely will delay the state’s plan to stop paying for retiree health care out of the general fund, according to the nonpartisan Legislative Analyst’s Office. 

“Suspending the state’s contribution to prefund (retiree health care) reduces costs today but contributes to a significant and growing unfunded liability and creates risk that the benefit will not be fully funded” by the state’s target date, legislative analyst Nick Schroeder wrote in an assessment of Newsom contract with the union that represents correctional officers.

The state expects to save about $100 million a year from the prison guard contract alone by suspending its payments toward correctional officers’ retirement health care.

Newsom previously allowed state workers to skip their paycheck deduction for retiree health care early in the COVID-19 pandemic, when his office negotiated labor agreements that included furloughs because of fears that the virus would trigger a painful recession. The state restored the money in the 2021-22 budget.

“The state remains committed to pre-funding retiree health,” said Camille Travis, the spokesperson for the state human resources department, in a written statement. “The suspension of contributions to the retiree health trust will help address the budget shortfall in the near term.”