Costa Mesa, California – City Employee Compensation Analysis

October 3, 2012

If San Jose and San Diego are ground zero for the grassroots battle to reform public sector pensions – in California at least – then Costa Mesa may be ground zero for an even broader public sector reform agenda. Because the city council in Costa Mesa has a majority of members who have been involved in a protracted and bitter fight with the public sector unions representing their employees, trying to restore financial sustainability not only to their pension benefits, but the entire package of employment compensation and work rules.

After already reporting on the total compensation packages enjoyed by the employees of San Jose (ref. “San Jose 2011 Compensation Analysis,” August 10, 2012), and Anaheim (ref. “Anaheim 2011 Compensation Analysis,” August 29, 2011), it is fitting to perform a similar analysis for the city of Costa Mesa.

The methods employed in this study mirror those used in the two 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 Costa Mesa. 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: Costa_Mesa_Total_Employee_Cost_2011.xlsx. The original spreadsheet is on the tab designated “original.” The only alteration that we have made to the original spreadsheet provided by the city of Costa Mesa’s payroll department was to delete the names of the employees in order to respect their privacy. Their job titles and departments have been retained, along with all available details regarding their compensation.

The goal of this study is to report average and median annual income for Costa Mesa’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.

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 $100,469 per year, for the 133 full time police officers, closely followed, at $98,372 per year, by the 76 full time firefighters. But base pay doesn’t tell the whole story, because Costa Mesa pays an unusually high percentage of its compensation before benefits in the form of “other pay,” which not only includes overtime, but also “certification” pay and “specialty” pay, along with other less significant sources of income. For example, the average payout of $56,395 in annual “Other Pay” on Table #1 for Costa Mesa’s firefighters included, on average, $44,810 of overtime pay in 2011.

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 2011, when base pay and “other pay” are combined, averaged $128,650 for Costa Mesa’s police officers, $154,767 for their firefighters, and $80,327 for the 216 full time employees comprising the rest of their workforce. 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 2011 for Costa Mesa’s police officers was $181,709, for their firefighters it was $208,401, and for the rest of the workforce it was $103,755. When the payroll records for employees of all departments are consolidated, the average total compensation for an employee of the city of Costa Mesa in 2011 was $146,863.

Table #2 compares average to median total compensation for employees of the city of Costa Mesa. 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 Costa Mesa, 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 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 Costa Mesa the average total compensation for police only exceeds the median by 3%, for firefighters by 2%, and for the rest of the workforce, by 9%. Interestingly, because about 50% of the employees are police or firefighting personnel, who are compensated at a significantly higher rate of pay than the rest of the workforce, the total workforce comparison between average and median total compensation comes to within a half of one percent – virtually identical. 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 Costa Mesa’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, Costa Mesa’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. Costa Mesa’s firefighters, for example, on average received “other pay” of $56,395 each in 2011; the police on average received “other pay” of $28,181 each in 2011. 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 and firefighters working for local governments in California in general compared to Costa Mesa in particular. Since, in general, police and firefighters receive far greater average compensation than all other employees, this pulls Costa Mesa’s averages way up.

What appears unlikely as an explanation for this disparity, however, is that Costa Mesa 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 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. 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 Costa Mesa, varies between 29% and 41%. 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 Costa Mesa, using two exceedingly generous assumptions: (1) Base pay is assumed to be the average household income for Costa Mesa (ref. City-Data.com, Costa Mesa), 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 Costa Mesa actually makes. And yet, even using these absurdly generous assumptions, the total compensation for the average employee working for the city of Costa Mesa exceeds that of a private sector resident of Costa Mesa by 82%, nearly twice 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 Costa Mesa pays 20.3% of their total compensation budget into pension funds. Put another way, as a percent of base pay, Costa Mesa contributes 34.4% into pension funds. Costa Mesa’s employees contribute via payroll withholding an additional 3.8 percent of their total compensation (6.4% of their base pay) to their pensions. 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 refrain a passage from our recent studies of San Jose and Anaheim’s city payroll, to properly assess how much Costa Mesa’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 Costa Mesa from the current $146,863 per year to around $175,000 per year. The typical firefighter’s pay would have to increase from the current $208,401 average per year to around $250,000 per year.

It is important to emphasize that the employment packages Costa Mesa 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. It is in this context that the ongoing debate between Costa Mesa’s union representatives and Costa Mesa’s elected officials must be viewed. By any objective analysis, Costa Mesa’s city employees earn more than twice as much as the local residents they serve.

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 what they earn. That is what they cost taxpayers. That is the number that should be compared to what taxpayers themselves earn. In Costa Mesa, the average employee’s total compensation of $146,863 adds 69% on top of their base pay. This is real money, and journalists who continue to ignore total compensation statistics in favor reporting only base pay are doing their public a disservice.

Conversely, the elected officials in Costa Mesa who are making these statistics transparent, and are attempting to bring their city’s employee compensation packages into parity with private sector norms, are blazing a trail that other elected officials must follow if California’s cities and counties are to avoid bankruptcy.