April 8, 2013
When the issue of public sector compensation is discussed, it is vital for participants to fully understand the concept of total compensation. Because the “wages” paid directly to a worker are only part of what they earn. Any costs for any direct benefits enjoyed by an employee that are paid for by the employer are part of that worker’s total compensation, and this amount is the only truly meaningful measurement that can be used when comparing rates of pay in the public sector to rates of pay in the private sector.
To make this completely clear, consider the difference between “wages” and total compensation for someone who works as an independent contractor. There is no difference. If a self-employed person earns $50,000 per year from their clients, then their “wages,” and their total compensation are both the same amount, $50,000. From these earnings they must themselves pay both the 6.25% due Social Security as an employee, as well as the 6.25% due Social Security as an employer – since they are “self-employed.” From these earnings, similarly, they must pay both the employer and employee’s required contributions to medicare. They must purchase their own health insurance, disability insurance, life insurance, etc., and of course, they must make contributions to any private retirement savings account they may have. All of this comes out of their $50,000 of total compensation.
To underscore this distinction, and to raise public awareness as to just how much local government employees are really earning per year, the California Policy Center has already published in-depth total compensation studies for three California cities, San Jose, Anaheim, and Costa Mesa. These studies use data provided directly to the CPPC by the payroll departments of those cities. They are offered in clarification to the data available on the California State Controller’s “Government Compensation in California” website, which summarizes compensation data submitted by cities and counties based not only on just wages (instead of total compensation), but also averaged to include in the denominator all part-time employees. This creates the impression that California’s state and local government workers earn dramatically less than they actually are paid, and unfortunately, these misleading statistics find their way into press releases and news reports.
The following study will analyse the total compensation paid to full-time employees of Irvine, using detailed payroll data provided by the city. Before beginning, here is a screen shot of what California’s State Controller presents as the “average wages” for a worker employed by the city of Irvine:
The methods employed in this study mirror those used in the three prior studies. The format in which we analyze and report the data also closely follows that of the earlier studies. The source data was a spreadsheet showing compensation by category for every employee in Irvine. The original spreadsheet, along with tabs that have been added to perform the necessary analysis, can be downloaded and reviewed by clicking on this link: Irvine_Total_Employee_Cost_2012.xlsx
To facilitate verification that we have not altered the data in any way, the original spreadsheet provided is retained on the tabs designated “(original KEY)” and “(original) DATA.”
The goal of this study is to report average and median annual income for Irvine’s full time city employees by department. Here is a summary of the key assumptions:
- In order to develop representative averages, employees who retired or were terminated during the calendar year were not considered in the calculation.
- Similarly, employees who were classified as part-time were not included in the calculation. This included city council members and their assistants, recreation staff, and other interns and part-time employees. The first three columns added on the “analysis” and “median” tabs of the spreadsheet clearly indicate which employees were excluded from the calculations based on these criteria.
As an examination of the original data will reveal, the city of Irvine provided unambiguous data that made the status of every employer very clear – part-time vs. full-time, employed the entire year vs. hired or retired/terminated during the year – so virtually no interpretation of the data was necessary to remove these records from the calculations of average and median total compensation for full time, full year employees.
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 $83,013 per year, for the 394 full time general (apart from Public Safety, Irvine’s “rest-of-workforce” employees fall into six departments; Administrative Services, Community Development, City Manager, Community Services, Orange County Great Park, and Public Works) employees, closely followed, at $82,970 per year, by the 265 full time police officers. but base pay doesn’t tell the whole story, because Irvine pays a significant percentage of its compensation before benefits in the form of other direct pay, which not only includes overtime, but also “credential” pay “special assignment” pay, “management” pay, and “select benefit” pay.
It is clear from reviewing Table #1 that “Base Pay” would be a highly misleading number to report as representative, even for current year earnings. Because as can be seen, the current pay earned in 2012, when base pay and “other pay” are combined, averaged $95,088 for Irvine’s police officers, and $87,409 for the 394 full time employees comprising the rest of their workforce. When you include overtime to calculate the average for all three categories of direct pay, Irvine’s full time police officers earned an average of $106,779 in 2012, and the rest of the workforce earned an average of $88,335. But no analysis of an employee’s true earnings is complete without taking into account the employer paid costs for their current health benefits, as well as the employer paid current year costs to fund their retirement benefits.
When the cost of benefits are included, as can be seen, the average total compensation in 2012 for Irvine’s police officers was $168,336, and for the rest of the workforce it was $127,115. When the payroll records for employees of all departments are consolidated, the average total compensation for an employee of the city of Irvine in 2012 was $143,691.
Table #2 compares average to median total compensation for employees of the city of Irvine. 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 Irvine, we calculated the median total compensation for the police department employees, as well as for all other employees. Because a properly calculated median compensation amount must have an equal number of individuals making more than the median 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 it turns out, however, in Irvine the average total compensation for police is actually less than the median by 2%, and for the rest of the workforce, the average total compensation only exceeds the median total compensation by 6%. 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 Irvine’s base pay averages compared to U.S. Census figures reporting average base pay for employees of local governments in California in 2011 (the most recent year of data available, ref. CA Local Government Payroll 2011). As can be seen, Irvine’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 probability that “other pay” and other categories of direct compensation are not reported to the U.S. Census Bureau as base pay. Irvine’s police, for example, during 2012 on average received “credential pay” of $,7428, “special assignment pay” of $1,466, and other categories of direct pay of $3,224. In addition, the average overtime pay for Irvine’s police during 2012 was $11,690. Another reason for the significant difference for the disparity in average individual pay for the entire workforce is because U.S. Census data shows a much lower percentage of police working for local governments in California in general compared to Irvine in particular. This is mostly because local data includes county governments which have a far higher percentage of social service employees and healthcare workers, as well as large cities which often include very large percentages of utility workers. Since, in general, police receive greater average compensation than all other employees, this also pulls Irvine’s averages up.
What appears unlikely as an explanation for this disparity, however, is that Irvine actually has unusually high rates of pay for their city employees compared to other cities in California, as indicated by our recently published analyses of Costa Mesa, San Jose and Anaheim’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. To reiterate; 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 Irvine, varies between 44% and 58%. As the next table will demonstrate, this significantly exceeds 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 Irvine, using two exceedingly generous assumptions: (1) Base pay is assumed to be the average household income for Costa Mesa (ref. City-Data.com, Irvine), and, (2) 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 Irvine actually makes. And yet, even using these absurdly generous assumptions, the total compensation for the average employee working for the city of Irvine exceeds that of a private sector household in Irvine by 40%, nearly half-again as much.
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 Irvine pays 17.5% of their total compensation budget into pension funds. Put another way, as a percent of direct pay, Irvine contributes 26.3% into pension funds, and as a percent of direct pay not including overtime, Irvine contributes 27.8% into pension funds. But this level of funding may not be nearly enough. 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 refrain a passage from our recent studies of other city payrolls, to properly assess how much Irvine’s city employees really make in total compensation, 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 Irvine from the current $143,691 per year to around $175,000 per year.
It is important to emphasize that the employment packages Irvine has awarded their unionized city workforce are not unique. In much larger cities, San Jose and Anaheim, analysis of original and comprehensive payroll data has yielded very similar results:
San Jose: Average total compensation, all workers = $149,907
Anaheim: Average total compensation, all workers = $146,551
Costa Mesa: Average total compensation, all workers = $146,863
Workers employed by local governments in California are earning total compensation that averages about $150,000 per year. And this is without taking into account the looming impact of lower earnings forecasts from the pension funds, nor does it take into account the huge unfunded liability these local governments carry for future retirement healthcare obligations they have granted their employees.
Journalists who dutifully report “base pay” rates for city workers that sound somewhat high, but not ridiculously unreasonable, are ignoring glaring facts about compensation: (1) “Other pay” now adds more than 50% to the current earnings of many city workers, and (2) The only honest measure of how much someone earns is their total compensation, i.e., everything the employer pays each year in direct pay and benefits for an employee. That is the number that should be compared to what taxpayers themselves earn.
It is impossible to overstate the importance for journalists to examine total compensation rather than just “wages” when reporting on how much government workers are actually costing taxpayers, and whether or not their rates of pay can be justified when compared to what private sector workers. Another compelling example of how misleading the statistics being promulgated by California’s state controller, and parroted by journalists as fact, relates to the “amount spent on total wages per resident,” as it appears on the state controller’s summary information regarding Irvine. The amount, $337 per resident, appears indeed modest. But the true amount is many times that amount. Here’s why:
If you include all compensation, and not just wages, the $111.2 million divided by 219,156 residents equates to $507 per resident. Since Irvine uses county services for their firefighters, and since firefighter payroll consumes about 20% of a typical municipal payroll (19.8% in San Jose, 18.6% in Anaheim, and 25.4% in Costa Mesa), a more accurate estimated per capita cost for city services must be elevated to $634 to include firefighters. And since, according to CityData.com, there are 2.6 persons on average per household, this number must increase to $1,649 per household. Every household in Irvine, on average, pays $1,649 to pay total compensation for city employees. And unless either (1) the Dow Jones average goes up to 30,000 within the next ten years – and keeps going, or (2) rates of retirement benefits for existing workers and retirees are renegotiated downwards, add 20% or more to that amount to ensure that pensions and retirement health benefits remain solvent for Irvine’s city employees.
It is left to each individual taxpayer to decide if city employees in Irvine should earn total compensation that averages $143,691 per year (median total compensation of $133,782), or whether or not those levels of total compensation should be increased by 20% or more if pension funds and retirement health care obligations continue to encounter financial challenges. Similarly, it is left to each individual taxpayer to decide if a financial burden of $1,649 per household, or more as noted, is an appropriate level of taxation to pay for the total compensation currently enjoyed by Irvine’s city employees, particularly when one must add to this their per household share of the costs for similarly compensated Orange County employees, California state employees, and Federal employees. What is less debatable, however, is the obligation of journalists and politicians to overcome their innumeracy and report to their readers and constituents, frequently, complete and accurate total compensation statistics for California’s full-time state and local government employees. They are relevant, if not central, to any report or discussion of public sector finance.
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About the Author: Ed Ring is the research director for the California Policy Center. Before joining the CPPC, he worked in finance and media, primarily for start-up companies in the Silicon Valley. As a consultant and full-time employee for private companies, Ring has done financial modeling and financial accounting for over 20 years, and brings this expertise to his analysis and commentary on issues of public sector finance. Ring has an MBA in Finance from the University of Southern California, and a BA in Political Science from UC Davis.
The California Policy Center produces studies designed to provide quantitative, top-down financial information and analysis of California’s state and local government finances, including reports on total state and local government revenue and expenses, as well as total state and local government debt. Related areas of focus include reports on the solvency of public sector pension plans and public employee total compensation. The CPPC also produces studies designed to explore the challenges and opportunities – both financial and operational – facing public education, public safety, government services, and public infrastructure projects. Other areas of focus include campaign finance and the impact of influential participants including corporate interests and public sector unions. CPPC studies are calibrated to offer more depth than a typical investigative report in a newspaper, while remaining as concise as possible in order to provide a useful, accessible reference for readers who may not be specialists in these areas.