August 31, 2010
On August 4th an interesting analysis of public sector compensation was posted on the blog Inflection Point Diary entitled “How to Figure Out How Much Money a Local Government Manager Makes.” In this decidedly conservative analysis, the conclusion was that “real annual compensation [is] at least 33 percent higher than the ‘salary’ the city would have told you about if you called to ask this question.”
This 33% is typically called salary overhead, and must include the current year funding required for everything not included in straight salary – such as the value of all current employee benefits, as well as the current year funding requirements for all future retirement benefits for the employee. In the private sector, a generous overhead percentage would be about 25% – about 9% for the employer’s contribution to social security and medicare, a 6% employer contribution to the employee’s retirement savings account, and roughly another 10% for the employer’s contribution towards the employee’s current health benefits.
If only the difference between private sector employee overhead were only 33% vs. 25%, however. In reality, because public sector employees receive defined retirement benefits that are anywhere between 3x and 10x (that’s right 10x, ref. Social Security Benefits vs. Public Sector Pensions) better than someone with a similar salary history can expect from social security, and because these future benefits must be funded as part of a public employee’s total compensation each year, public sector salary overhead can often reach 100%. This is particularly true for public employees who work in safety-related occupations, such as police officers and firefighters (ref. The Price of Public Safety). With all this in mind, how much do firefighters really make?
To perform this analysis I obtained payroll data for the firefighters employed by the City of Sacramento. The data is for the most recent 12 months, and does not include the top management of the fire department. It does include data for 543 individuals. The numbers are probably a bit low, on average, because there are undoubtedly people on this list who didn’t complete a full year of work, but the calculations to follow will assume all of the payroll data represents 12 months of full-time work.
In terms of basic pay, the “base hourly earnings” of Sacramento’s firefighters was $74,000 per year. Overtime, on average only added $10K to that total, which suggests that – at least in Sacramento’s case – overtime is not creating a crippling additional burden to the department expenses. But when you add “incentive earnings,” “holiday payoff,” “other earnings,” “sick payoff,” “other payoffs,” and “vacation payoff” to the total, the average firefighter in Sacramento makes $101K per year. This does not include health and retirement benefits, however.
To get to the true number, I then reviewed the current Labor Agreement in force between the Sacramento Firefighters Union Local 522, and the City of Sacramento. I then verified with a senior attorney with the City of Sacramento that certain of my assumptions were correct. In particular, the City pays 100% of firefighters current and retirement health insurance benefits, and the City pays 100% of firefighters retirement pension contributions. So what is all of this worth?
Calculating the value of current benefits is relatively easy, particularly if you simply want to pick a conservative number. In the firefighters labor contract, health insurance benefits are covered up to a maximum of $1,200 per month, and after 20 years of service, the City pays 100% of this coverage for life. The City also pays a uniform reimbursement of $871 per year, tuition reimbursement of up to $1,500 per year, along with life insurance, and subsidized parking or subsidized mass transit benefits. There are certainly other benefits not identified in a relatively cursory review of the 81 page labor agreement Sacramento’s firefighters are under, but it is fair to assume the value of current benefits averages about $12,000 per year, raising the total compensation for the average Sacramento firefighter to $113K per year. But we haven’t yet accounted for the current year funding requirements for future benefits, such as retirement health and pension payments.
If you refer to Sacramento’s reported payroll data, the average pension fund contribution per firefighter per year is $31K, which means – since the City pays 100% of this contribution and the firefighters contribute zero in the form of payroll withholding – the average compensation for the average Sacramento firefighter is actually $144K per year. But it doesn’t end here, because these pension fund contributions are based on CalPERS official return on investment projection for their fund, which is 4.75% per year, after adjusting downwards for inflation. I would argue that the chances that CalPERS is actually going to earn this sort of real, inflation-adjusted return is zero. For much more on why it is absurd to expect a 4.75% year-over-year return on hundred billion dollar funds in this era, read The Razor’s Edge – Inflation vs. Deflation, Pension Funding & Rates of Return, and Sustainable Pension Fund Returns.
For these reasons, a truly conservative fiscal strategy for pensions would be a pay-as-you-go model, where pension fund allocations aren’t even invested because the present value of the money is not discounted. Using such assumptions would go a long way towards guaranteeing solvency to pension funding, and would dismantle the pernicious alliance of public sector pension funds and Wall Street brokers and speculators (ref. The Axis of Wall Street & Unions). And why should public sector employees collectively invest taxpayer’s money into public equities and other private sector investments where they (1) exercise influence over the management of these companies as shareholders, (2) reap the sole benefit of windfall returns from these investments when they occur, and (3) compel taxpayers to make up the shortfall whenever these investments do not perform adequately? But just in the interests of presenting a realistic calculation of what firefighters in Sacramento are really making each year in total compensation, let’s use a rate of return that might actually be achievable, one-half the rate CalPERS clings to, a return of 2.375%. What happens?
As explored in the posts Maintaining Pension Solvency, and Real Rates of Return, where charts are depicted showing the entire logic of this calculation, if you assume 30 years working, 30 years retired, a pay history wherein annual salary doubles in real dollars over the employee’s career, and a retirement pension based on 90% of the employee’s final year of pay, at a fund return of 4.75%, to maintain a solvent pension fund you would have to set aside 30% of the employee’s salary each year. This 30% calculation is a bit lower than the percentage actually being set aside by the City of Sacramento for their firefighters. The 34.9% of salary that Sacramento contributes into CalPERS for each firefighter probably reflects the fact that CalPERS is currently underfunded, plus other more conservative assumptions than are made in this simplistic example. The point is this: If you make these assumptions and use a projected rate of return of half what CalPERS still claims they can earn, you will get a result that is, if anything, too low. And based on a rate of return of 2.375%, it is necessary to contribute 60% of salary into CalPERS each year to keep each firefighter’s pension solvent.
Total compensation has to include current year funding requirements for future benefits. Using a realistic rate of return of 2.375% (after adjusting downward for inflation), pension funding requirements double, which means the average firefighter in Sacramento – if these pension commitments are honored – is really making $174K per year. And while the City of Sacramento doesn’t accrue for, much less fund, their future obligation to provide retirement healthcare benefits to their firefighters, it is still a liability, and it is still necessary to apply the present value of these future costs to the years these employees are actually working. This fact will easily put the annual total compensation for the average Sacramento firefighter at $180K per year.
So how much do firefighters in Sacramento work, in order to earn $180K per year on average? Returning to the labor agreement, firefighters working the “suppression” shifts, i.e., most of them, the guys who staff the firehouses and are on call 24 hours per day, typically work two 24 hour shifts every six days. That is they work a 24 hour shift one in every three days. During these 24 hour shifts, most of the time, they have time to eat and sleep, in addition to performing their duties. But if you review the agreement, you will see that by the midpoint in their careers, after 15 years, firefighters will earn the following quantity of 24 hour shifts off with pay – 6.53 for holidays, 9.33 for vacation, and 2.0 for personal time. This means, not including sick leave, the average firefighter works 2 shifts of 24 hours every 7 days. Two days per week. This estimate is not significantly skewed by overtime pay, since on average, Sacramento firefighters are only logging about 8% overtime hours.
One can make as much or as little as one wishes with these numbers. There is nothing here suggesting firefighters are overpaid or underpaid. Because before having a discussion regarding whether or not firefighters are overpaid or underpaid, it is important to simply present the facts – here is how much firefighters are paid. It is left to each reader, voter, financial analyst, policymaker, and firefighter to ask themselves: Should firefighters make $180K per year, on average, to work two 24 hour shifts per week, and can we afford this? And should the premium, in terms of salary overhead, for public safety personnel be nearly 100%, if not more?