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Los Angeles Police Average Total Compensation $157,151 Per Year

Turns out the Los Angeles Fire and Police Pension system return rate was 17.3 percent for 2013-2014, and other public pension funds reported similar double-digit returns and five-year returns exceeding their assumed rates. 
– LAPPL Board of Directors on 08/07/2014, in their post “Misuse of statistics behind erroneous LA police officer salary claims.”

The above quote was made in response to last week’s UnionWatch editorial “How Much Do Los Angeles Police Officers Make?” that analyzed total compensation for LAPD officers. The substance of their overall response was to challenge two assumptions made in that editorial, (1) that the annual rate-of-return projection of 7.75% used by the LAFPP (Los Angeles Fire & Police Pensions system) is too optimistic, and (2) that the employer’s “unfunded contribution” – that annual sum paid to LAFPP by the City of Los Angeles towards reducing the plan’s unfunded liability – must be considered part of an officer’s annual total compensation. Only the 2nd of these challenges, by the way, might indicate any downward impact on our average total compensation estimate of $157,151 per year.

This editorial will examine and defend both of these assumptions, starting with our assertion that a 7.75% rate-of-return projection is too optimistic. How much a pension fund can earn each year, on average, over the long-term, is a topic of intense expert debate. The historical performance of the LAFPP shows that as of 6-30-2013 their one year return was 13.01%, but the five year average return through that date was only 5.05%. If you go back ten years the annual average was 7.66%. But as investment professionals always remind us, past performance is not an indicator of future performance. The global economy is in the terminal phases of a debt binge that began back in the 1980’s; we’re in uncharted territory; nobody knows how investments will perform as this debt unwinds. What we do know is that throughout the industrialized world the population is aging – as a percent of total population, we have twice as many people selling their investments to fund their retirements as a generation ago. These twin phenomena, debt and demographics, suggest investment performances from now on face unprecedented headwinds. To debate this point is not to “misuse statistics.” To ignore this debate is intellectually dishonest. We are at the top of a bull market and LAFPP is only 83% funded. If the long-term average annual earnings projections aren’t overly optimistic, when you’re at the top of a market there should be a surplus in the pension fund.

Ultimately, if the LAPPL Board of Directors are so confident that a 7.75% rate-of-return can be sustained over the next 20-30 years, then they should support building triggers into the benefit formulas, allowing them to be lowered if and when earnings do not meet projections. Here is a summary of proposals to do just that: “The Case for Adjustable Defined Benefits,” CPC, July 2014. The sooner they adopt options like these, the less likely their entire defined benefit system will eventually catastrophically implode.

Which brings us to the unfunded liability, and why employer payments against this unfunded liability belong included in the total compensation of employees.

The LAPPL argument appears partly valid when they state “unfunded liabilities include pension liabilities of already retired and deferred plan members, not just active officers.” That’s true – but the problem with that reasoning is this unfunded liability is not being paid down. This means the payment towards the unfunded liability – to the extent it is not actually reducing the amount owed – is a permanent annual payment required to financially sustain the pension fund. If that is true, then currently active employees will benefit when they retire from the employer’s ongoing unfunded contribution that will, at that point, be allocated to those still active employees. Only if the unfunded liability is being paid down can you begin to make the argument that all of it does not belong included in total compensation for active employees.

Basic accounting concepts support this. If the unfunded liability is not being reduced, then the entire employer’s payment towards the unfunded liability is additional deferred compensation towards their future pension benefits. So how much of an unfunded payment is being made by the City of Los Angeles into the LAFPP? Is it reducing the balance owed?

Reviewing the most recent publicly available statements, the City of Los Angeles, Fire and Police Pension System – Financial Statements, 6-30-2013, on page 19 there is a discussion of the allocation of employer pension contributions. In that fiscal year, the employer made a $246 million “normal contribution” and a $129 million “unfunded contribution.”

The official unfunded liability for LAFPP is $2.97 billion. At a discount rate of 7.75%, just a minimal interest only payment would be $230 million. This means that during FYE 6-30-2013, the LAFPP received an unfunded contribution from the employer that was $101 million less than the amount required just to pay the interest! The fund necessarily incurred negative amortization. In that context, 100% of that unfunded contribution belongs allocated to the active employees as part of their total compensation, because at that rate, a generation from now, these unfunded contributions will continue unabated to shore up the system they will then benefit from as retirees.

For these reasons, our organization stands behind the earlier estimate of total compensation for Los Angeles police officers of $157,151 per year. The debate over whether or not any of the unfunded contribution should not be allocated to individual officers as part of their compensation is moot until the amount of the employer’s unfunded contribution, at the very least, is sufficient to avoid negative amortization.

When discussing what levels of total compensation are affordable and appropriate, especially in the case of police officers who risk their lives every day to protect the public, the best approach is to strive for accuracy and fairness, to always behave with intellectual honesty, and to engage in the debate with mutual respect. Unfortunately, the tone of the LAPPL rebuttal to our editorial deviates from these ideals. But that is their job. As unions, their rhetoric easily gravitates to an “us vs. them” mentality. This can have a corrupting effect on public servants, alienating them from private citizens.

The job of public sector unions, and they do it all too well, is to get as much for their members as they possibly can, utilizing the extraordinary leverage they have over public officials who they help elect, and then negotiate with. This tone, and this leverage, does not belong in government work. Public employee unions should be illegal, and can be replaced by voluntary associations that would still wield considerable influence. And public employees should look to the deeper causes of our shared middle class struggle; high taxes, excessive regulations, failed welfare and immigration policies, and inordinate restrictions on land and energy development.

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

REFERENCES

The quantitative work for this article and the preceding one is summarized on the Excel spreadsheet that can be downloaded by clicking on the link provided below. The CPC welcomes commentary and corrections, if any, and will acknowledge and if necessary retract any statements, calculations or estimates that are demonstrated to be inaccurate:
http://californiapolicycenter.org/wp-content/uploads/2014/08/Los-Angeles-Retirement-Fund-Analysis.xlsx

RELATED POSTS

How Much Do Los Angeles Police Officers Make?, August 5, 2014

The Case for Adjustable Defined Benefits, July 31, 2014

Two Tales of a City – How Detroit Transcended Ideology to Reform Pensions, July 22, 2014

Government Employee Unions – The Root Cause of California’s Challenges, June 3, 2014

Conservative Politicians and Public Safety Unions, May 13, 2014

Public Pension Solvency Requires Asset Bubbles, April 29, 2014

Evaluating Public Safety Pensions in California, April 25, 2014

San Jose’s Public Safety Pensions – Reduce Now or Slash Later, April 15, 2014

How Much Does Professionalism Cost?, March 11, 2014

A Policy Agenda for Union Reformers Stuck Inside Unions, November 5, 2013

How Public Sector Unions Skew America’s Public Safety and National Security Agenda, June 18, 2013

Should Police and Firefighters be Exempted from Union Reforms?, March 12, 2013

Bipartisan Solutions For California, February 25, 2013

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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.