California Firefighter Compensation

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?

The Price of Public Safety

July 15, 2010

There is nothing wrong with paying a premium to public safety personnel because of the risks they take. And while it is true there are other career choices that are riskier than public safety jobs, and while it is also true that on average, public safety personnel in California – according to CalPERS own actuarial data – have life expectancies that are virtually the same as the rest of us, it is still appropriate to pay public safety personnel a premium. After all, we never know when these people may stand on the front lines when something extraordinary happens – such as what occurred in New York City on Sept. 11th, 2001. People who work in public safety live with this knowledge every day, and they should be compensated appropriately for that.

The question is how much of a premium is appropriate, and how much of a premium can we afford as a society? Should a fire fighter make more than a medical doctor? Should a police officer make more than an engineer?

In order to get an idea of what public safety employees in California actually make, I obtained a roster that showed the total compensation paid to each employee of a Southern California city. Out of respect for the employees noted on this roster, I won’t identify the city, much less reveal the names of these individuals. And it is fair to state this city probably has a median income somewhat higher than the average for California. It would certainly be interesting as follow-up to obtain this sort of information for other California cities. But even taking all of these factors into consideration, the amounts these folks are making is startling – particularly when you adjust for realistic current year funding obligations for future retirement health and pension benefits.

In our example city, using actual data, the fire department has about 100 full time positions. The average annual compensation for these firefighters, if you include current benefits and current funding for future benefits, is $179K per year. But it doesn’t end there, because the pension funding percentage is calculated at 34% of earnings. As argued in “Maintaining Pension Solvency,” if you calculate pension funding requirements for a safety employee in California based on after-inflation returns of 3.0% instead of CalPERS official rate of 4.75%, you need to increase the pension withholding as a percent of payroll by 20%! Making this adjustment yields an average firefighter compensation of $202K per year. And even this figure probably fails to adequately account for current funding requirements for future supplemental retirement health benefits.

For our example city’s police department, using actual data, the police department has about 150 full time positions. The average annual compensation for these police officers, if you include current benefits and current funding for future benefits, is $174K per year. If you increase the pension withholding percentage by 20%, in order to reflect realistic rates of future pension fund returns, you will calculate an average police officer compensation of $197K per year – again, probably not including enough to fund future supplemental retirement health benefits.

It is important to emphasize these amounts – roughly $200K per year each – are not for senior management, or even senior employees. This is the average, taking into account entry level public safety employees as well as senior public safety employees.

It is interesting to note what the rest of the employees, the non-safety personnel, make in our sample city – making the same adjustments, their total compensation averages $118K per year. That is still quite a bit, considering many of these jobs are relatively unskilled. To put this in perspective, the average private sector worker in California averages $40K per year in compensation – one third what the non-safety workers average in our sample city.

Should a non-safety local public employee workforce, one including a large percentage of relatively unskilled positions, have an average compensation per employee of $118K per year? Should safety employees make, on average, $200K per year? Can we afford this?

What is clear over the past several years is that as pay stagnated in the private sector, public sector employees continued to receive regular cost-of-living increases. Over the past 10-15 years, public employees also received dramatic increases to their retirement benefits. And as housing prices soared, millions of Californians borrowed against their home equity, and many of them are now paying dearly for that mistake. There are undoubtedly many public sector employees who were caught up in the borrowing frenzy, and are now on the edge financially – but it is fair to wonder why they should be immune from the same cutbacks that have left so many people in the private sector unemployed, or under-employed, or compensated at rates that are a fraction of what they were during the bubble booms.

It is also fair to wonder why public sector employees should not be obligated to plan and prepare and save, if they want a comfortable retirement. For non-safety personnel in public service, it is fair to wonder – since they now make more, not less, than private sector workers for similar work requiring similar skills – why in their retirement they shouldn’t simply collect social security and medicare like the rest of us. And even if public safety employees should collect something better than social security in recognition of their role as first responders, it is fair to wonder why their retirement pensions should be literally five times more than the social security payments due retired private sector workers with similar salary histories. As documented in “Funding Social Security vs. Public Sector Pensions,” the fiscal crisis facing social security is trivial and easily solved, whereas the fiscal crisis facing public sector pensions is catastrophic and can only be solved either through massive benefit cuts or crippling new taxes.

It is difficult to dispute the contention that the price of public safety cannot be too high. It is difficult to overstate the appreciation anyone should feel for people who stand between us and chaos – the people who protect us, the people who rescue us, the people who save our property. But those people themselves should understand the price we’re currently paying is elevated because of collective bargaining and overwhelming political clout, and is dangerously out of touch with market realities. It would be helpful for everyone to consider the choices involved – cuts to pay and benefits vs. cuts to services, cuts to pay and benefits vs. crippling taxes and economic decline, cuts to pay and benefits vs. investments to advance our technology, our infrastructure, and our military security. All of these elements must be balanced, yet are currently grossly out of balance, because in one way or another, all of them may quite legitimately be described as issues of safety and security for California and the nation.

The Real Reason for College Tuition Increases

June 8, 2010

The past year has seen a wave of protests by California’s public university students against tuition increases. These students have often been encouraged by their professors. But maybe the people encouraging them are the people they should be protesting against. Tuition increases are necessary because of increasing expenses, and the single most significant source of expenses in California’s university system are the personnel costs. So how much does a professor make? Could the solution to California’s higher-education budget crisis be not to raise tuition, but instead to lower rates of compensation?

It isn’t hard to get an idea what taxpayers and students end up paying our college personnel. One can refer to the Sacramento Bee’s “Search for State Worker Salaries” link, where you can enter the first and last name of a full time state university system employee and it will display their salary for the most recent year. For this analysis, I went to a department website and got the name of an associate professor with one of the social sciences at U.C. Davis, and learned that this individual earned a salary of $89,467 last year. According to the department website, this associate professor earns $89K per year in return for teaching (this spring quarter) one class, that meets for two hours on one afternoon per week. The professor is also obligated to be available to his students for office hours for one hour per week, immediately after class.

Clearly there is more to this professor’s job than showing up to school for three hours per week. In order to earn $89K per year this person has to prepare lesson plans, grade papers and exams, and presumably engage in research. And spring quarter may be a light quarter, and usually this professor may have two classes, or even three classes, requiring a presence on campus for 15 or even 20 hours per week. But before considering whether or not a typical social sciences professor in California’s university system actually works full time, let’s calculate how much their benefits are worth. Because total compensation has to include all costs, including current benefits and current funding obligations for future retirement benefits.

There is a Total Compensation Calculator provided by the UC Davis Dept. of Human Resources that can get us started. Assuming this individual is single and has no dependents, and elects to receive PPO Health and Dental Insurance coverage, and also taking into account the annual funding being set aside by the university for their retirement pension, their actual compensation per year is not $89,467, but actually $111,260. And it doesn’t end there.

As discussed in earlier posts, specifically in Sustainable Pension Fund Returns, but also explored in California’s Personnel Costs, Maintaining Pension Solvency, and elsewhere, it is not likely that the pension funding obligation disclosed in the “Total Compensation Calculator,” in the case of our social sciences professor, $15,755 per year, is going to be adequate. This is because the pension funds currently assume they can earn a real rate of return of 4.75% per year – that’s the return on the total fund investments after inflation – when in reality a sustainable return over the next few decades is unlikely to exceed 3.0% per year. Our social sciences professor, like most all non-safety personnel in the UC System, will get a retirement pension according to the following formula: # years worked x 2.5% x final year salary (ref. University of California Retirement Plan). It is reasonable to assume they will work 30 years, live for 30 years in retirement, and collect 30 x 2.5% = 75% of their final salary as a retirement pension for 30 years, or $67,100 per year (with cost of living adjustments) for the rest of their life. This is, by the way, about triple what someone can expect after working 40 years and then collecting social security, but more to the point, will a contribution of $15K per year for 30 years yield a sufficient amount of money to fund a pension of $67K per year for 30 years? One must fight the temptation to let the mind wander, because the next few facts are key to understanding one of the biggest financial tsunamis the world has ever seen, and it is just offshore.

At a CalPERS official projected rate of pension fund returns (after inflation) of 4.75%, a 75% pension for 30 years, funded by 30 years of contributions, would require an annual contribution of 25% of salary, or $22,367 per year.

At a more realistic projected rate of pension fund returns (after inflation) of 3.00%, a 75% pension for 30 years, funded by 30 years of contributions, would require an annual contribution of 41% of salary, or $36,681 per year. Care to wager as to which figure is safer to use? Remember you’re wagering on the future of your children and your nation.

By this reasoning, our social studies professor doesn’t make “total compensation” of $111,260 per year, but $132,186 per year. But we’re not through. Returning to our handy “Total Compensation Calculator,” provided by UC Davis, the following footnote is instructive: “The value of UC’s generous sick leave and vacation time is not included in this calculation.” So how generous is this benefit, and how does that compare to the sick leave and vacation times typically afforded in the private sector?

If you refer to the UC Davis “Accrual of Vacation” page, you will see an employee, on average during their career, will enjoy four weeks vacation per year – 20 working days. Similarly, on the page referencing holidays, you will see they enjoy 13 holidays per year. These are conservative numbers, of course. In reality our social studies professor gets the Christmas break, a few weeks, the Spring break, a few more weeks, and the whole summer off, a few more months – and we haven’t calculated the value of their sick time policy, as the UC Davis HR Dept. helpfully suggests we consider. But even if you simply compare the 33 paid days off, as though school was in session 52 weeks a year, you are still seeing our professor enjoy at least 50% more days off than the average private sector worker. Pick a number – let’s tack on the value of 16 days off by taking a daily rate of $89K / 2,000 x 8 = $356 and add another $5,696 to our total compensation, to get ourselves to a grand total of $137,882.

This sort of pay is not on the high side, it’s actually fairly typical for employees of California’s higher education system. Take a look at all of the pay scales, again courtesy of UC Davis’s HR Dept.:  Professional & Support Staff Salary Grades, and Managers & Senior Professionals Salary Grades. You will see the lowest paid full-time position in the system is $25,668 per year. But at the lower end of the salary scale benefits actually represent a greater percentage of total compensation. If we apply our calculations used above to this lowest salary, we will see this position actually pays, including all benefits, at least $39,765 per year. This is the lowest rate of total compensation you will find. The maximum rate of pay for a UC Position, before benefits, is $282,372.

Comparisons to the private sector boggle the mind. The lowest rate of pay in the entire massive California system of higher education is more than the average income for a private sector worker in this state. Most of these workers enjoy a rate of total compensation that is only found in the highest echelons of private business. Most of them, when you include the value of their benefits, are collecting six-figure rates of compensation.

When students, abetted by their professors who apparently have ample free time, protest against rising tuition, they are failing to identify the true culprits. Because the reason our university system is going broke is because our teachers in higher education have become the most extravagantly compensated, pampered class of workers in the history of the world – and taxpayers, along with students, are forced to pay for this. And this disparity between our taxpayer-funded academic class and the rest of us is not unique. The same disparity exists in all government positions today in California. Nearly all of them are grossly overpaid.

The solution to government deficits is not to raise taxes or tuition. It is to bring rates of compensation for faculty and staff at our state funded colleges and universities down to reasonable and sustainable levels, and apply that solution across the board in all of our state and local governments. The next time a student suggests their tuition is too high because taxes are too low, ask them if they think it is fair to pay someone $138,882 per year to work one afternoon per week, and take summers off.