August 10, 2012
On June 5, 2012 the City of San Jose thrust itself into the forefront of the national debate over public sector pensions with its passage of Measure B, a landmark measure that dramatically restructured the pension and retirement benefits of the city’s current employees. Though the internal pressure that led to this measure had been building for some time, the passage of this measure was still quite noteworthy in itself. For one, this measure forced city employees to either now contribute much more towards their pension plan or be placed in a pension scheme that offered far fewer benefits than is typically enjoyed by public sector employees in California.
More remarkable, though, was the fact that this measure was passed in one of California’s largest cities and in its most liberal region. For the state’s public sector unions, this was home turf. Yet, Measure B was supported by an overwhelming 69.6% of San Jose voters, by San Jose’s Democrat Mayor, Chuck Reed, who lobbied hard on its behalf, and by a significant portion of the city council. So strong was the public support for this measure that the city’s public sector unions didn’t even seriously attempt to challenge it during the election, and instead looked to the courts as where they would have it overturned.
As to be expected, San Jose’s Measure B has generated a significant amount of discussion and commentary within the nation’s political and legal circles, all of who have taken a keen interest in the outcome of San Jose’s efforts to avoid financial ruin. In an attempt to add to this discussion, we have prepared a detailed analysis of the total compensation packages for all of San Jose’s city employees from payroll data provided directly to us from the City of San Jose. Though it is true that a multitude of causes has contributed to San Jose’s financial predicament, including the real estate downturn and recession of 2008, we will show that the most primary cause of San Jose’s problems is the pension and healthcare benefits they have committed themselves to with their employees. In the paragraphs to follow, we will make this point more evident by detailing the figures we derived from San Jose’s actual payroll report for the 12 month period through 12-31-2011 and the publicly available pension data the city provides on its website.
Since the primary focus of this analysis is how the city’s employment costs have affected its financial stability, we first requested and obtained a copy of the city’s payroll report that listed all of actual expenditures for each employee for the entire year 2011, separated by department. During this period, the City of San Jose employed 7,752 workers. In order to get as precise of a reading as possible for our analysis, we made sure to have the city separate and identify all of the expenditures for each employee (e.g., salary, overtime, cash benefits, sick pay). This allowed us to get a better idea of what types of benefits the employees were able to obtain and what the average employee was getting for each of these types of benefits. The payroll report we obtained also showed each type of deduction taken from each employee’s paycheck, such as health insurance, pension contributions, etc. Of course, all of these figures varied from department to department, so we were careful to separately analyze all of the workers by department.
In the interests of both making our research as transparent as possible, and also to provide a detailed example for anyone wishing to perform this analysis for their community, we have uploaded the Excel file used for this analysis. Anyone who would like to look at the data is encouraged to download this file onto a computer equipped with Excel 2010. The reader will note that the spreadsheet has two primary tabs, the “original” which is what we received from the City of San Jose’s payroll department, and the “analysis,” which retains everything in the original, but has a few additional columns added that allowed us to screen out part-time and partial year workers. The only data we have omitted are the actual names of the individuals themselves, out of respect for their privacy. If you download this spreadsheet, San_Jose_Total_Employee_Cost_2011.xlsx, please be aware that it is over 3.0 megabytes.
To avoid skewing our averages, we had the city identify all the employees who retired during 2011. We also worked with the city to identify all employees who worked on either a part-time basis or for less than a year so we could exclude them from our primary computations. The assumption we made to screen out part-time employees was simply to sort the payroll records by job title and flag any record where the job title included the words “temporary,” “intern,” or “part-time (ref. column B of analysis).” The assumption we made to screen out partial-year employees was to sort the payroll record by job title, then by base salary, and flag all records where salaries that fell below the minimum base salary for that job title (ref. column C of analysis).
This process, while time consuming, is an accurate way of making certain that employees who only worked a partial year didn’t have their necessarily lower salaries included in the average. Since the city also provided data on who retired during 2011 (ref. column P of analysis), we were able to correlate our analysis based on base salary comparisons with that data and found it was a nearly perfect match. Those employees who did not retire, yet had lower base salaries than the minimum for their job title were assumed to be employees newly hired or newly promoted to that job classification. Because we used the minimum salary for our criteria, this exercise still understates the impact of partial year employees on the average. Our reference for this information, “City of San Jose Pay Plan,” is posted on the city’s website.
The importance of this step became apparent when we compared the averages for all categories of compensation before and after excluding part-time and partial year employees. The only average that didn’t rise considerably once part-time and partial year employees were excluded was the sick and vacation payoffs, which will be discussed in the findings section of this analysis.
Lastly, we carefully verified all of our assumptions about this data by reviewing the labor agreements (MOUs) and other payroll documents that San Jose provides through their website. We also had several discussions with members of San Jose’s Human Resources and Payroll Departments. In all of our requests and questions, we found these employees to be very gracious and accommodating, and their assistance proved to be wholly invaluable to our efforts.
The first thing to note was the degree to which base pay is not an accurate indicator of total compensation. When comparing rates of compensation it is necessary to include all payments made by an employer that directly benefit the employee, including salary and overtime, but also any “other compensation,” “deferred compensation,” the cost for medical benefits, and the cost to contribute annually to the employee’s future retirement benefits, both health insurance and pensions. Table #1 shows the average total compensation for San Jose’s full time employees in 2011, sorted by department:
A frequent criticism of “averages” when discussing California’s state and local employee compensation is that the average includes highly compensated public administrators and therefore skews the data. For this reason, we also have included an analysis of median data, wherein half of all employees make more than the median employee, and half of them make less. For the median calculation, we used the total earnings including city paid benefits, i.e., the total reported compensation of San Jose’s city employees. We excluded, of course, employees who worked part-time or retired during 2011, since that information will also prevent an accurate assessment of what a truly representative median, or average, might be.
As shown on Table #2, for all San Jose city employees, the median total compensation in 2011 was $139,634. For police officers, including the leadership, but also including the data technicians, i.e., all police personnel, the median total compensation in 2011 was $189,411 in 2011. For firefighters, again, including all members of the department, the median total compensation was $205,557 in 2011. And for all full-time employees in San Jose not including police or firefighters, the median total compensation in 2011 was $114,923.
The significance of this fact, that the median total compensation for San Jose’s city workers is nearly identical to their average total compensation, is easily understated. One certainly might say it proves a commendable level of pay equity exists between the highest and lowest paid positions. And it entirely puts to rest the contention that studies that cite average pay are presenting distorted data because a handful of grossly overpaid executive positions pull the average up to an unrepresentative level. As a matter of fact, for San Jose’s public safety personnel, the median total compensation actually exceeds the average, implying – using this same logic – that the lower echelon positions are actually overpaying.
Using this obviously best-case amount as the denominator, the table then goes on to apply best-case averages for employer paid benefits, including Medicare at 1.45% per year, Social Security at 6.2% per year, health insurance at $6,000 per year – a very good package for most companies which almost universally require significant employee co-pays via payroll withholding – and a top-of-class 401K retirement plan contribution of 6.0%. As can be seen, even under the best assumptions possible, the payroll overhead for a premium private sector position is only 21% of total direct pay. This is a staggering disparity.
If one simply assumes that only 50% of the households in San Jose have two income earners, the average direct pay reduces from $92,937 per year to $61,958 per year. And even if you apply a 21% payroll overhead rate, which represents a premium, clearly unrepresentative and overstated estimate, you arrive at an average total compensation for San Jose’s private sector taxpayers of $74,969 per year, only half as much as the average for city workers. This private sector average is still probably on the high side. Taxpayers and policymakers must ask themselves, does the premium deserved by city workers for the risks they take and for their greater average educational attainment justify paying them twice as much as the taxpayers they serve?
No discussion of how much city workers make is complete without further discussion of retirement benefits. Immediately upon retirement, for example, San Jose’s city employees typically “cash-out” their sick and vacation time, which is permitted to accrue without limit. This practice is virtually unheard of in the private sector. But in San Jose in 2011, there were 410 employees who retired, and their average sick and vacation time payouts (these figures did NOT figure into the averages reported anywhere else in the preceding analysis) were as follows:
- 100 police retirees with an average sick/vacation payout of $56,273
- 72 firefighter retirees with an average sick/vacation payout of $63,306
- 238 other retirees with an average sick/vacation payout of $28,547
Returning to the issue that impelled the pension reform vote in San Jose is necessary to fully appreciate just how much San Jose’s city workers make. Because the average total compensation of $149,829 earned by these employees is based on their pension fund contributions earning an annual rate of return of 7.5% from now on. This remains the official rate used for projections by San Jose’s pension fund. This is the same rate of return still used for projections by CalPERS and CalSTRS. The pension contribution hikes of recent years have been necessary to make up for sub-7.5% returns in past years, but these increases have not added enough money to the funds to allow sub-7.5% returns from now on. The implications of lower than 7.5% returns are sobering, and should be obvious to anyone who truly appreciates the concept of compound interest.
The California Policy Center has prepared a spreadsheet that anyone wishing to analyze the sensitivity of pension fund contributions to projected rates of return. This information can be found by referring to the study “A Pension Analysis Tool for Everyone.” A quick summary of that study would be this: For every 1.0% the pension fund’s projected rate of return drops, the required pension contribution must go up by 10% of payroll. Put another way, if the direct pay of the average worker in San Jose – not including overtime – is $90,000 per year, and it is, then if San Jose’s pension fund can only return 6.5% per year from now on, the annual pension fund contribution per employee must go up by $9,000. If that fund can only return 5.5% per year, the annual pension fund contribution per employee must go up by $18,000, and so on. In reality, because pension funds are supporting people who are already retired, and employees whose benefits were retroactively increased over the past 10 years – leaving them already underfunded – each 1.0% drop in the projected rate of return has an even greater impact than 10% of payroll. And the irrefutable conclusion that follows is that unless the pension benefits are lowered and the required employee contributions to their pensions are increased, then if long-term rates of return for San Jose’s pension funds drop by at least 2.0%, the total compensation of employees in San Jose is not roughly $150,000 per year, but at least $170,000 per year.
The other pressing obligation that has constrained the city’s long-term financial health is its obligations to cover its retiree’s healthcare benefits. To the extent the City of San Jose is contractually bound to pay a portion of their retired employee’s health insurance premiums, the pre-funding of those costs during the years these employees work is something that, like pension contributions, must be considered part of payroll overhead and must be considered an integral part of their total annual compensation. In our analysis of the payroll data and the MOUs that govern the employee benefits, we were able to confirm that the city and employees each contribute equally towards (1:1) the health care benefit fund for retiree healthcare, and at a rate of 3:1 for retiree dental benefits. Further, any portion of these funds that do not achieve total funding is borne equally by the city and employee alike. This is little comfort for the City’s managers, however, since as of 2011 these funds were only 10% funded. Although the city has also implemented a plan to achieve full funding for these plans over the course of 30 years through a series of increased contributions which began, at a minute scale, during the 2nd half of 2011, this huge outlay is still a serious impediment affecting the financial stability of San Jose for many years to come. If this obligation were fully funded, proper ongoing pre-funding would add at least a few thousand dollars per year to the average total compensation of every employee working for the City of San Jose. Because, however, San Jose is only beginning to contribute to an adequate reserve for funding retirement health insurance commitments to its retirees, a credible estimate of what it would truly take to move their retirement health insurance fund into a position of 100% solvency is probably many times that amount.
As we have shown in our analysis, the average total compensation for a full time employee with the City of San Jose averages nearly $150,000 per year. If one assumes only a modest drop in pension fund future returns, from 7.5% per year to 5.5% per year, this average total compensation jumps to at least $170,000 per year. If pension fund returns drop more than 2.0% off the current projection, average total compensation will have to go up even more. And retirement health care obligations, while amounting to less in absolute dollars than pension obligations, are significantly underfunded. Bringing them up to solvency will require additional significant increases to the average total compensation. With only modest reductions in pension fund returns, it is clear that the payroll overhead for San Jose’s city workers easily reaches 100%, whereas in the private sector, such overhead rarely exceeds 20%. And our analysis has shown, even absent these reductions in rates of return for the pension funds, and absent any increases to retirement health care pre-funding, the average worker for the City of San Jose makes more than twice as much as the average private sector worker – in an area that boasts some of the highest average rates of private sector compensation in the United States.
It is left to the reader to determine whether or not this is an appropriate level of compensation for the government workers who serve the taxpayers, or whether or not any voter approved contract modification that might reduce such a disparity between private sector and public sector compensation should pass intact through court proceedings.