Reports on Public Insolvency Incomplete Without Employee Compensation Data

Edward Ring

Director, Water and Energy Policy

Edward Ring
September 24, 2013

Reports on Public Insolvency Incomplete Without Employee Compensation Data

On Sept. 23rd the New York Times published an in-depth report on how the cost of public employee pensions is causing budget challenges in San Jose, California. Entitled “Struggling, San Jose Tests a Way to Cut Benefits,” this article ran over 1,500 words and was filled with examples of city workers who are struggling financially.

Referring to city employees who face having more pay withheld from their paychecks to fund their pension benefits, the authors provide quotes:

“They’re kind of encouraging us to leave.”

“I’m leaving as soon as I get my 25 years in.”

“What they’re doing is destroying what had been a great police department.”

“I have to sell my house.”

While replete with quotes, however, the NYT only chose to share one statistic with its readers:

“San Jose now spends one-fifth of its $1.1 billion general fund on pensions and retiree health care, and the amount keeps rising.”

Since the New York Times is unwilling to put the challenges facing San Jose’s city employees into an appropriate financial perspective, here is some data gathered from a California Public Policy Center study entitled “San Jose, California – City Employee Total Compensation Analysis,” published last year, that used 2011 payroll data supplied by the City of San Jose:

Average Annual Pay, 2011, San Jose City Employees:

Police:  Direct Pay (incl. overtime avg. $7K) = $112K, Employer paid benefits = $67K.  Total compensation = $179K,

Fire:  Direct Pay (incl. overtime avg. $10K) = $125K, Employer paid benefits = $77K.  Total compensation = $203K.

Rest-of-Workforce (incl. overtime avg. $2K) = $81K, Employer paid benefits = $39K.  Total compensation = $120K.

Overall Total Compensation: All Departments = $150K.

Now let’s compare that to the average worker in Silicon Valley, currently one of the hottest economies on earth, using Bureau of Labor statistics  data from May 2012:

Workers in the San Jose-Sunnyvale-Santa Clara Metropolitan Statistical Area had an average (mean) hourly wage of $33.50 in May 2012, about 52 percent above the nationwide average of $22.01,” and, “Annual wages have been calculated by multiplying the hourly mean wage by a ‘year-round, full-time’ hours figure of 2,080 hours.

This means that direct pay for the average worker in San Jose is $69K per year. Add to that employer contributions of 9% for social security and medicare, 5% for health insurance (probably generous), and 3% for a matching 401K (as if every company has one), and you get total compensation averaging $81K. And of course this average is skewed upwards because within those figures are included a local, state and federal public employee workforce representing at least 15% of all workers.

So police officers, firefighters, and bureaucrats who work for the city of San Jose are upset because they make, on average, $150K per year, in a city where the average worker makes (at most), $81K per year. They are making about twice as much as the citizens they serve. Is something wrong with this picture?

What about the average home price? After all, apparently some of San Jose’s city workers – along with thousands of other people in the private sector who also bought overpriced real estate – may have to sell their homes. An article published by the San Jose Mercury on August 9, 2013, is self-explanatory: “Average Silicon Valley home tops $1 million.”

The message here? NOBODY can afford to live in San Jose. The only way the average worker can buy a home in San Jose is to go into debt up to their eyeballs for the rest of their life. If you want to buy a house in San Jose and stay there, expect to pay off your mortgage before you retire. That’s the way it is. And even then, of course, only if the unions representing municipal workers don’t figure out how to raise property taxes.

San Jose’s public sector workers may be disgruntled because San Jose’s mayor, city council, and voters have decided to confront the costs of their pensions. But if these employees take jobs elsewhere, their relief may be short-lived. Because what San Jose is going through is going to hit every city and county in California. And by being first to tackle this issue – should they succeed, that is – San Jose’s city government is going to emerge in financially sound condition ahead of the pack. They may very likely avoid bankruptcy and a complete collapse of their pension system. Cities and counties that wait may not be so fortunate.

It is probably accurate to state that not one public safety employee, anywhere, who is currently retired or about to retire, expected to accrue their retirement benefit under a 3% per year multiplier back when they entered public service. Because SB 400 that enabled the first fully retroactive 3% benefit was passed back in 1999, which is relatively recently. Although San Jose began to modestly enhance pension benefit formulas as early as 1991, even those hires would only be completing their 22nd year of work. To no longer be able to accrue retirement benefits at the 3% per year rate from now on – unless agreeing to more withholding to pay for it – is not much to ask.

Any reporter who reports on public employees facing pay and benefit cuts, who doesn’t also report just how much those pay and benefits are worth, is not doing their job. And they need to report averages that are restricted to full-time workers, that include ALL employer paid benefits. That rule should apply whether they write for the New York Times, or the Campbell Press.

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

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