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City of Stanton Proposes Higher Taxes Instead of Cutting Pay and Benefits

On November 4th, voters in Stanton, California, will be asked to vote on a 1.0% sales tax increase, which if approved will raise their sales tax to 9.0% – the highest in Orange County. Nestled in the heart of Orange County, tiny Stanton, a city of barely three square miles in size with a population in 2012 of 38,915 residents, is an unlikely candidate for the spotlight, when California’s local ballots are about to be inundated with over 140 local tax increases affecting many cities and counties that are ten times bigger. But Stanton is ground zero in a battle over how to manage municipal budget deficits, because if their voters approve this tax increase, cities throughout Orange County will follow suit.

We’re not talking small potatoes here. Stanton currently only retains 1.0% (one-eighth) of the 8.0% sales tax they currently collect. According to Stanton’s Consolidated Annual Financial Report for the fiscal year ended 6-30-2013 (page 9), their total sales tax revenue for that year was $3,683,199. If they increase their sales tax rate from 8.0% to 9.0%, they should double the amount of sales tax collections retained by the city. A spokesperson for the city of Stanton confirmed they project the new sales tax will add $3.1 million to their projected annual sales tax revenues. How does that compare to their spending?

According to Stanton’s “Measure GG,” the city “now faces a $1.8 million structural budget deficit.” This means the sales tax increase is expected to eliminate their budget deficit with $1.3 million left over. But if you evaluate Stanton’s expenditures, there is an alternative to new taxes. How does the city spend most of their money?

To answer this, again, look no further than the “Whereas” section of Measure GG. The third “Whereas” states “public safety is a top priority in Stanton and represents over 70% of the City’s General Fund budget, and without a local funding source the City will be forced to significantly cut public safety services.”

It’s quite clear that Stanton has already cut everything else. Based on information reported to the California State Controller’s Office, in 2012, the City of Stanton had 26 full-time non-safety personnel. Their average base pay was $74,146 per year, with negligible overtime, and “lump sum” payments averaging $4,700 per year, mostly to management. The lowest full-time regular rate of base pay was $42,359 for an administrative clerk. When you pile on the employer payments for retirement health care (average per year $8,691) and for their 2% at 55 pensions (average per year $15,693), the total pay and benefits for Stanton’s 26 non-safety employees in 2012 averaged $104,990. Nice work if you can get it. But it represents less than 18% of Stanton’s estimated direct personnel costs.

Finding information as to just how much Stanton pays for police and fire protection is not easy, but a reasonably accurate estimate is possible. According to Stanton’s city website under “Fire Services, we learn “there are a total of 21 firefighters who serve the City of Stanton.” Under “Police Services,” we learn “the Sheriff’s Department provides 44 staff members to the City of Stanton.” If we make just one assumption – that the rates of pay earned by the sheriffs and firefighters assigned to Stanton are representative of the rates of pay earned by all Orange County sheriffs and firefighters, we can estimate how much Stanton incurs in direct personnel costs for public safety. Pay for Orange County sheriffs can be found using 2012 data reported by Orange County to the CA State Controller. Pay for Orange County firefighters can be found from 2013 data recently obtained by the California Policy Center directly from the Orange County Fire Authority. Here goes:

Orange County Public Safety – Average Compensation

20141007_OC-public-safety-comp

Based on the data and assumptions as noted, on average, Stanton’s 21 firefighters earn a direct pay and benefits package of $217,956 per year; Stanton’s 44 sheriffs earn an average direct pay and benefits package of $186,682 per year. The source data used for these calculations and others cited in this post can be downloaded here “Stanton_2014_Statistics.xlsx” and readers are invited to point out any errors in calculations or reasoning therein.

There are a lot of takeaways here. For example, if Stanton were to join with other Orange County cities who contract for their police and fire protection and negotiate a 14% decrease to the average total pay and benefits their police and firefighters earn, they would eliminate their structural deficit of $1.8 million – and their firefighters would still earn average pay plus benefits, after the reduction, of $187,285 per year, and their sheriffs would still earn average pay plus benefits, after the reduction, of $160,412 per year. The average household income in Stanton during 2012 was $48,146.

A final observation – CalPERS has announced a 50% increase in required annual pension contributions, to be phased in between now and 2017. If Orange County’s independent pension system follows suit, and there is no evidence their financial imperatives differ significantly from CalPERS, then Stanton’s annual required pension contributions will increase by $2.2 million per year – nearly all of that for public safety. So even if Measure GG passes, the projected surplus of $1.3 million will probably be more than offset by increased pension contributions. Expect more taxes, or start cutting pay and benefits.

It is always important to emphasize that public safety employees deserve to be paid a premium to compensate for the risks they take to protect the public. But Stanton’s citizens and elected officials, and their counterparts in cities throughout Orange County, will have to decide where to draw the line on that premium. Perhaps the facts should speak for themselves.

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Ed Ring is the executive director of the California Policy Center.

RELATED POSTS

Palo Alto’s Proposed New Pension Tax – Oops, Hotel Tax, Sept. 30, 2014

California’s 2014 Local Tax Proposals – The Costly Alternative to Pension Reform, Sept. 23, 2014

Watsonville, California – Another Tax That’s Really Just For Pensions, Sept. 16, 2014

How Much Do Los Angeles Police Officers Make?

There’s a deep seated frustration and anger among the rank and file due to their low pay.
Det. Tyler Izen – President, Los Angeles Police Protective League, July 28, 2014, KTLA Channel 5

Low pay, of course, is relative. It’s very difficult to objectively determine what a police officer should be paid. There aren’t jobs in the private sector that are easily compared to police work. As a result, police officers typically compare how much they are making in their city to how much other cities are paying their police officers. The problem is no city wants to pay the lowest rates, which creates endless rounds of wage and benefit increases. But a city as big as Los Angeles doesn’t have the option of matching what a much wealthier, much smaller city may pay. Too many billions are involved.

Despite the difficulty in determining what may be a fair rate of pay and benefits for police officers, this very sensitive debate has to be waged. Because without debate, there can be no limit – how do you put a price on safety and security? How do you put a price on enduring the stress and the dangers that come with police work? You can’t. In that context, a fair wage will always be far more than any public institution can possibly afford.

Calculating Average Total Compensation for LAPD Officers

So how much do Los Angeles police officers make? This information is not easily found. Every year California’s cities are required to report to the state controller the individual pay and benefits for all of their employees. The most recent 2012 raw data for cities can be downloaded here. The information can be sorted by city, then by department. Within police departments, by sorting records by the reported pension benefit formulas, sworn officers can be differentiated from administrative police personnel. There is even sufficient data to eliminate records for officers who have not worked the full 12 months in the year being analyzed. Using all of these techniques, we were able to determine that the average LAPD pay and benefits during 2012 for full time sworn officers was $110,285. But the state controller’s numbers are grossly understated because they don’t include how much the City of Los Angeles paid for retiree health benefits or retiree pensions. This adds a significant amount to their actual total pay. Funding these benefits are part of any employee’s total compensation package.

How can that information be obtained for Los Angeles police?

If you review the Actuarial Valuation and Review Of Retirement and Other Postemployment Benefits as of June 30, 2013, performed by Segal Consulting Group for the City of Los Angeles Fire and Police Protection Plan, there is some pretty good information available. Exhibit B in the beginning of the document shows the retirement fund contribution rates as a percent of eligible payroll. The pension contribution last year was 37.82% of base pay, and the retirement health care contribution was 11.69% of base pay. An expert at the LAFPP office confirmed that these percentages exclusively represent the employer contribution and do not include amounts withheld from employee paychecks which are also contributed to their retirement funds. Therefore, the total of those percentages, 49.51%, can be applied to to the average LAPD base salary of $94,660 and apportioned per employee to accurately represent, on average, how much they are making in retirement benefits. As it is, that equates to $59,491 per year – meaning that the average total compensation for LAPD officers is actually $157,151.

LAPD Retirement Payments Affected by Investment Returns

It doesn’t end there, however. If the LAPD retirement systems fail to achieve forecast investment results, the amounts currently being paid by the employer – already nearly 50% of base pay – will have to increase. According to the Segal Report (Exhibit III, page 59), as of 6/30/2013 there were assets of $14.6 billion set aside for retirement pension liabilities estimated – using a discount rate of 7.75% – to have a present value of $17.6 billion, leaving a $2.6 billion unfunded liability. How confident can the LAFPP be that they will be able to grow a $14.6 billion fund at a rate of 7.75% per year? Using formulas provided for this purpose by Moody’s Investor Services, if you lower that annual projected earnings rate just a little, to a still very healthy 7.0%, the unfunded liability grows to $4.65 billion; at projected annual earnings of 6.2%, which represents the historical earnings rate of U.S. equities (including dividend reinvestment), the unfunded liability grows to $6.62 billion. And at the less risky 5.0% annual earnings rate of top grade corporate bonds, that liability grows to $10.1 billion.

In plain English – the unfunded liability for the LAPD pension fund could quadruple if the fund earns 5.0% per year instead of 7.75%. Just dropping the rate of earnings to 6.2% nearly triples the unfunded liability.

And it gets worse. The pension plan – officially analyzed at what some of us would consider to be a ridiculously optimistic annual 7.75% rate of return assumption, has a “funded ratio” of 83.2%. That should still alarm us, actually, because only 100% qualifies as fully funded, but 83.2% is a better ratio than most public employee pension funds out there. The other fund managed by LAFPP, however, for retirement health care, is only 38.5% funded (Segal Report, Valuation Results, Health Plan, page 4), although it is a much smaller fund – it’s officially recognized unfunded liability is “only” $1.6 billion.

There may be a lot of deep financial concepts and arguments in play here, but unfortunately, it’s not mere gibberish. There are real world consequences and tough decisions signified by these numbers. The city of Los Angeles is going to have to put more into these retirement funds then they already are, or they are going to have to cut benefits.

What Criteria: Comparable Pay, Affordable Pay, or Appropriate Pay?

If you look around Southern California it isn’t hard to find cities who pay their police officers more than LAPD. The California Policy Center compiled 2011 and 2012 data for a few cities in Orange County and here are some of the numbers they found for average annual total compensation for their police: Irvine, $168,336; Anaheim, $170.866; Costa Mesa, $181,709. One may reliably surmise that immediate neighbors such as the city of Beverly Hills also pay their police more than Los Angeles – and herein lies an irony that will justifiably grate on any officer of a large city like Los Angeles: The wealthy cities have less crime, but can afford to pay more to their police. But are the LAPD receiving low pay, or are the police in these other cities overpaid?

Moreover, there is a converse to this point – small cities cannot possibly absorb and employee thousands of police leaving because they want to earn more money.

Which returns us to the difficult question – is an average pay package of $157,151 really “low pay?” Beyond what rate of pay may be comparable or affordable, what is appropriate? Bear in mind the average LAPD overtime earned per officer, as reported in the 2012 data, was $1,691, which means that most LAPD officers are working the 4-10 or 3-12 shifts and not much more. According to an official summary of LAPD benefits, they also get 13 holidays, and three weeks vacation as rookies, which increases to 4.6 weeks after ten years. And for all those contributions to their retirement benefits, after 30 years work the average LAPD officer can expect to retire with a pension and health insurance package worth between $90K and $100K per year (ref. Evaluating Public Safety Pensions in California, CPC, April 2014).

One of the most significant reasons the City of Los Angeles faces financial challenges is because personnel costs – for all departments – increased year after year, thanks to the power of collective bargaining. But was this appropriate? During the lean years after the internet bubble popped, and again after the real estate bubble popped, people in the private sector felt lucky to have jobs. Meanwhile, in the public sector, year after year, annual cost-of-living adjustments kept being awarded. And even in cases where, finally, cost of living increases were suspended due to financial constraints, “step increases” and “longevity pay” and other annual pay hikes continued per labor agreements. Worse still, the pension funds and retirement health care funds, which appeared to be flush during the bubble years, have now revealed themselves to be in serious trouble. When comparing their pay to what other cities pay, LAPD officers, and all public employees, ought to also compare their rates of pay to what private citizens have experienced. Making $157,151 per year is a LOT of money in virtually any profession in America, including police work if you venture outside of California, New York, and a few other places where, arguably, public employee unions have taken over their local governments.

When confronting the continuous risk and inevitable tragedies that befall police officers, no amount of money will ever be enough. But the Los Angeles Police Protective League, and other public and private unions, should consider the deeper cause of middle class struggle, which is the artificially high cost of living in California. Despite well crafted arguments to the contrary, there is plenty of land and almost limitless conventional energy in California. And if the alfalfa farmers in the Mojave Desert were permitted to sell their water allotments to the LADWP, there wouldn’t be a residential water shortage even in this tough year. Taxes in California are among the highest in the nation, and taxes are driven primarily by public sector personnel costs, along with the costs for an unreformed welfare system that gives California the dubious distinction of having 12% of the nation’s population but 30% of its welfare recipients. Failed immigration policies further strain the system. Public employees could afford to make less, a lot less, and live better, if these needless hindrances to California’s prosperity were corrected.

Along with protecting one of the greatest cities in the world, and hopefully participating constructively in a tough debate over whether or not their compensation is appropriate and affordable – LA’s finest should consider the deeper roots of the economic hardships we share together, and how to engage on those fronts for the good of everyone.

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Ed Ring is the executive director of the California Policy Center.

BART Strike Highlights More Than Just Compensation Issues

The four day BART strike that ended on July 5th provided ample evidence of how public sector union power can inflate wages – and expectations – far beyond what the rest of us may consider normal or fair. In a July 1st editorial entitled “Striking BART workers out of touch with financial reality,” the Contra Costa Times wrote:

“They’re already the top-paid transit system employees in the region and among the best in the nation. They also have free pensions, health care coverage for their entire family for just $92 a month and the same sweet medical insurance deal when they retire after just five years on the job. They work only 37½ hours a week. They can call in sick during the workweek and then volunteer for overtime shifts on their days off. The rules exacerbate out-of-control overtime that added in 2012 an average 19 percent to base pay for station agents and 33 percent for train operators.”

According to the San Jose Mercury, who has published BART payroll and benefits per employee as part of their Public Employees Salary Database, the average total compensation – what they refer to as TCOE or “total cost of employment” for a BART worker in 2011 was $116,309. This is for a 37.5 hour week before overtime – but there’s more:

From the San Jose Mercury’s editorial of June 13th, BART pay plan is the most outrageous yet,” in addition to working 37.5 hour weeks, BART employees “earn three weeks’ vacation each year, gradually increasing to six weeks after 19 years on the job. They also have 13 holidays. Naturally they don’t use it all, so they’re allowed to save unused vacation and holidays without limits. Many can even add some unused sick leave. In San Jose, top management and some unions can accrue time like this for a huge payoff when they retire. BART’s system is even more outrageous. When managers leave, they can use that accrued time to actually stay on the payroll — to continue receiving full salary, incentive pay and health benefits, and to accrue work credit that boosts their subsequent pensions. They even — get this — receive holiday pay and accrue more vacation time that they can use to further extend their time on the payroll.”

Journalists are getting much better at recognizing that total compensation – total cost of employment including the cost of employer paid benefits – is the only valid way to evaluate how much someone earns. Equally significant however is the value of paid time off. If a person works 37.5 hours a week, they are only working 93% as much as someone who works a 40 hour week. To get a valid comparison, inflate the pay of the person who works 37.5 hours per week by (40/37.5)-1, or 6.7%. If someone is getting six weeks paid vacation per year, and the average worker only gets two weeks off with pay, then consider a 50 week year vs. a 46 week year, and inflate the pay of the person with six weeks vacation by (50/46)-1, or 8.7%. It adds up. Ask anyone in a salaried job that requires 50 hour weeks, or a self-employed person who isn’t paid on days they don’t work. And how many of them ride BART?

One may argue whether or not unions have a legitimate role in private industry – but BART is a public institution, holding monopoly power over mass transit options in much of the San Francisco Bay Area. There are few journalists or commentators left, even in the Bay Area, who won’t consider that excessive union power is the reason for excessive compensation packages for BART employees.

But compensation is only one aspect of how unions in the public sector damage the solvency and effectiveness of public institutions.

In a July 5th commentary on Townhall entitled “Labor Unions Against the Public Interest,” author Chris Edwards examines the additional challenges mass-transit management encounter thanks to a unionized workforce. Referring to the Washington DC Metro, he writes:

“‘If I had my druthers,’ [The DC Metro’s System Manager] said, he would hire station managers based on ‘the ability to operate in a customer-friendly way.’ But, Sarles said, Metro’s collective bargaining agreement requires him to promote bus drivers to train operators and station managers. In fact, his spokesman said, mediocre bus drivers may get promoted more quickly because ‘we need to get you from behind the wheel.’ And if someone does a great job as station manager, ‘I can’t recognize that financially,’ he said. So here’s the “manager” of a government agency who doesn’t even have the authority to manage his own workforce. It is ironic that Metro and BART are called “public services,” but managers of private businesses are better able to actually serve the public.”

This is just one example of work rules that greatly impede the ability of unionized public agencies to operate efficiently. These work rules undermine the authority of public officials – most of whom are elected by these same unions they supposedly manage – to promote based on merit, to demote or fire for incompetence or negligence, to streamline operations, to change job descriptions, or otherwise manage their agencies. And this affects every unionized transit agency, public utility, municipal bureaucracy, public safety organization, school district or public works department in the United States.

The BART strike cast a bright light on excessive compensation for unionized public workers. But the issues run far deeper than just money. If government workers were not exempt from the challenges of globalization because of their unions, they would use their influence within government and as private citizens to help break up monopolies and enable competition. This in-turn would lower the overall cost-of-living and benefit everyone. Instead, public sector unions are monopolies themselves, first among equals, in an increasingly monopolized society.

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UnionWatch is edited by Ed Ring, who can be reached at editor@unionwatch.org