August 29, 2012
Earlier this year the California Policy Center obtained from the city of Anaheim a comprehensive record of all payroll-related disbursements for 2011. This information was provided in the form of a spreadsheet that provided compensation details for every full and part-time employee of the city of Anaheim during 2011.
We performed subsequent analysis in order to develop total compensation averages per department. The spreadsheet provided by Anaheim’s payroll department, unaltered, can be found on the “original” tab of the larger downloadable spreadsheet, available for review, at this link: Anaheim_Total_Employee_Cost_2011.xlsx. The only data that has been deleted are the names of the individuals working for the city, in the interests of protecting their privacy. Their job titles, departments, and all other details of their compensation have been preserved.
The methodology we employed to properly develop average and median total compensation figures per department is relatively simple, and is modeled after an earlier CPPC study, published on August 10, 2012, that analyzes 2011 compensation by department for employees of the city of San Jose. In that study, entitled “San Jose, California – City Employee Total Compensation Analysis,” the reader will find a very thorough explanation of all assumptions made, assumptions that were precisely replicated in this analysis. Here is a summary of the key assumptions:
- In order to develop representative averages, records for employees who were designated as “part-time” in their job descriptions were not included in the calculation.
- Similarly, employees whose annual base pay was lower than the minimum annual base pay for their job description, as documented in the “City of Anaheim Pay Rates” available on the city website, were assumed to have not worked a full year, either because they were hired after January 1st, 2011, or because they retired or otherwise left service with the city before December 31st, 2011. These employee records were also not included in the calculation of average rates of compensation.
Table #1 provides a summary by department of both the number of employees in each department and their average pay. As can be readily ascertained, the average base pay is highest, at $118,373 per year, for the 24 full time employees of the City Attorney department. They are followed, at $102,029 per year, by the 17 employees of the City Administration. When the cost of benefits are included however, the 257 employees of Anaheim’s fire department have the highest average total compensation, at $193,516 per year. In terms of total compensation, the fire department is followed the 24 employees of the City Attorney’s office at $180,042, then the 523 employees of the police department at $170,866. As a whole, Anaheim’s full time workforce’s average annual base pay is $84,158, and their average total compensation is $146,551.
Table #2 compares average to median total compensation for employees of the city of Anaheim. This comparison is important because an average, which merely divides the payroll for an entire department by the number of employees working in that department, can potentially be skewed upwards due to the presence of a small and unrepresentative handful of highly compensated managers. To determine whether or not this is the case in Anaheim, we calculated the median total compensation for the police department employees, the fire department employees, and all other employees. Because a properly calculated median compensation amount must have an equal number of individuals making more than the media as those making less than the median, when the median is significantly less than the average, you may infer that the average is unrepresentative of the typical employee.
As can be seen, however, the median income for police employees is actually higher than the average, meaning that if anything, the average total compensation is unrepresentative of the typical officer because it is too low. In the case of Anaheim’s firefighters, the median and the average are almost exactly the same, strongly suggesting that the average total compensation is entirely representative of a typical firefighter’s pay. And even for the rest of the workforce, the average only exceeds the median by 11%. Clearly the average total compensation figures developed in this analysis are not being skewed by the presence of highly compensated members of city management.
Table #3 examines Anaheim’s base pay averages compared to U.S. Census figures reporting average base pay for employees of local governments in California in 2010 (the most recent year of data available, ref. CA Local Government Payroll 2010). As can be seen, Anaheim’s employees enjoy rates of base pay that significantly exceed the reported averages for local government employees in California. There are several possible reasons for this, but primary among them is the likelyhood that “other pay” and other categories of direct compensation are not reported to the U.S. Census Bureau as base pay. Anaheim’s firefighters, for example, on average received “other pay” of $29,776 each in 2011; the police on average received “other pay” of $17,827 each in 2011. Another reason for the significant difference is because U.S. Census data shows a much lower percentage of police and firefighters working for local governments in California than Anaheim. Since, in general, police and firefighters receive far greater average compensation than all other employees, this pulls Anaheim’s averages way up. What appears unlikely as an explanation for this disparity, however, is that Anaheim actually has unusually high rates of pay for their city employees compared to other cities in California, as indicated by published analysis of San Jose’s payroll and our examination of payroll for several other California cities and counties.
Table #4 shows how total compensation breaks down between base pay and direct overhead, which must be included in any calculation of how much an employee actually makes. Direct overhead refers to all benefits enjoyed by the employee that are paid for by the employer, including insurance premiums, payments to fund future retirement pensions and retirement health benefits, and any other employer paid benefits, such as accrued vacation reimbursement, accrued sick leave reimbursement, tuition reimbursement, housing allowance, uniform allowance, car allowance, etc.
The idea that total compensation, including benefits, must be what one uses when comparing public sector rates of pay to private sector rates of pay should be beyond serious debate. As any self-employed individual understands all too well, the difference in their case between total compensation and base pay is zero. Any benefits they enjoy, they pay for themselves. To better understand the relationship between base pay and total compensation, Table #4 calculates payroll overhead as a percent of base pay, by treating the total employer paid benefits as the numerator, and base pay as the denominator. As can be seen, the overhead, i.e., the employer paid benefits as a percent of base pay, for employees of the city of Anaheim, varies between 48% and 56%. As the next table will demonstrate, this is more than twice the rate of payroll overhead paid under even the most generous plans available in the private sector.
Table #5 calculates what the total compensation would be for the average private sector worker in Anaheim, using two exceedingly generous assumptions: (1) Base pay is assumed to be the average household income for Anaheim (ref. City-Data.com, Anaheim), and payroll overhead is assumed to comprise the best set of employer provided benefits available anywhere. Since more than one wage earner occupies the typical household, and since only about 20% of all employers (if that), offer benefits this rich, we are clearly overstating how much the private sector worker in Anaheim actually makes. And yet, even using these absurdly generous assumptions, the total compensation for the average employee working for the city of Anaheim is more than twice that of a private sector resident of Anaheim.
No discussion of public sector employee total compensation is complete without a mention of pension benefits, which must be pre-funded during the years an employee works. Currently the city of Anaheim pays 17.3% of their total compensation budget into pension funds. Presumably some additional percentage is paid by the employees via payroll withholding. But as we prove in our study “A Pension Analysis Tool for Everyone,” which includes a downloadable Pension Analysis Model, for every 1.0% that a pension fund’s long-term rate of return goes down, the annual contribution to the pension fund must go up by 10% of base pay. Because the pensions are currently underfunded, and because pension benefits are being accrued or paid out to employees who are about to retire or have already retired, this rough estimate of how much more payments will rise per each 1.0% drop in returns is definitely on the low side.
To properly assess how much Anaheim’s city employees really make in total compensation, therefore, one needs to rebuke the preposterous notion that pension funds will reliably earn 7.5% per year for the next several decades, and instead assume they will only earn somewhere between 3.0% and 5.0% per year. CalPERS themselves discount pension liabilities at a rate of 3.8% for any participant who wants to opt out of their program, a telling indication of what they consider the “risk free” rate of return. At a 3.8% rate of return, you would have to increase the average total compensation for the typical employee of the city of Anaheim from the current $146,551 per year to at least around $190,000 per year. The typical firefighter’s pay would have to increase from the current $193,516 average per year to at least around $235,000 per year.
It is the obligation of journalists reporting on government budget deficits, as well as policymakers who face these challenges, to produce analyses of this nature for the cities and counties where they report or where they serve. Municipal payroll data is publicly available and the techniques necessary to perform this analysis are not beyond the abilities of anyone with an intermediate command of Excel. It is unconscionable to report on negotiations over furlough days, foregone cost-of-living adjustments, deferred benefit enhancements, or any other details relating to the eternal bargaining between public sector unions and politicians attempting to manage municipal budgets, without providing the overall context. How much do public employees really make in total compensation? How much will they make if their retirement benefits are prefunded at realistic rates of investment return? Anaheim and San Jose are but two examples, and they are likely typical of nearly every other city and county in California.