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Calculating Public Employee Total Compensation
By
Editor, on December 19th, 2011
A study
released late last year, sponsored by U.C. Berkeley’s “Institute for Research
on Labor and Employment” entitled “The
Truth about Public Employees in California: They are Neither Overpaid nor
Overcompensated,” contains its conclusion in its title, but whether or not
this study is presenting the “truth” or not is worthy of further discussion.
According
to this study, “the wages received by California public employees are about 7%
lower, on average, than wages received by comparable private sector workers;
however, public employees do receive more generous benefits. An
apples to apples comparison, or one that controls for education,
experience, and other factors that may influence pay, reveals no significant
difference in the level of employee compensation costs…”
While the
study goes on to explain the variables they evaluate in order to arrive at an
“apples to apples” comparison, it never actually estimates the actual amount of
wage disparity between the average compensation packages for California’s
public employees compared to California’s private sector employees, so here
goes:
Using California’s Employment Development Department’s 2010
report “Labor Market Trends,” (ref. figure 1) it is
evident there are 2.4 million Federal, State and Local employees in California, 12.2 million
full-time private sector employees who work for an employer, and another 1.4
million “self-employed” private sector workers. Worker compensation as reported
by the Bureau of Labor Statistics don’t include
estimates for California’s
1.4 million self-employed workers, nor does the U.C. Berkeley study. If these
estimates were included, they would almost certainly skew average private
sector compensation downwards, since according to California’s Employment
Development Dept., self-employment does not include anyone working for a
Corporation or LLC, even their own, meaning that more highly-compensated
professionals fall within the BLS statistics for California’s 12.2 million
private sector employees, whereas the remaining self-employed include part-time
workers, independent contractors; in aggregate, a marginally compensated
multitude who have to cover 100% of their benefits – a 2x payment for
social security, and zero paid time off, or free insurance of any kind, or
automatic pay for sick time and retirement.
Returning
to the 14.6 million people in California
who either work for the government or are employed by private sector firms,
according to the Bureau of Labor Statistics report “May
2009 State Occupational Employment and Wage Estimates California,” their
average annual compensation (not including employer funded benefits) in 2009
was $49,550. In order to extract from that average the compensation for the 2.4
million government workers in California, one may refer to Census Bureau data
for 2009 as follows – for 394,000 state workers ref. State Government Employment Data,
and for 1,451,619 local government workers ref. Local Government Employment Data.
If you combine and average the compensation data for these two groups, you will
arrive at an annual average pay – before any employer funded benefits – of
$65,000 per year.
Making just
one assumption, that California’s 500,000 federal workers not included in these
statistics are earning the same average salary as the state and local workers,
it is possible to subtract the figures for government workers from the pool of
14.6 million workers, who, according to the BLS earn an average of $49,500 per
year, in order to calculate an average private sector (not including
self-employed) compensation of $46,528 per year. This means that the Berkeley study has
“normalized” for education, experience, and “other factors” to turn a 40%
disparity between public and private sector compensation into a 7% disparity.
Before
accepting the conclusion of this study, there are several assumptions it makes,
both factual and subjective, that should be questioned; starting with this:
“The average age of a typical worker in state and local government is 44
compared to 40 in the private sector.” The benefit of coming up with a “fact”
like this, of course, is because by combining this fact with the assumption
that compensation increases with seniority, the researchers are able to
normalize downwards the average compensation of public employees significantly.
For example, if one assumes an average career of 30 years, and that a worker’s
inflation-adjusted salary will double between when their career begins and when
they retire, than one might reasonably conclude a “normalized” compensation
average for the public sector worker must be adjusted downwards by 13.3% in
order to represent an “apples-to-apples” comparison with the younger private
sector workers. Here again, it is serendipitous for the Berkeley study to
exclude self-employed individuals, since according to California’s EDD, for
workers over forty years of age, fully 50% of the civilian workforce is
self-employed (ref. EDD’s California’s Self-Employed Workforce,”
figure 6).
Another
normalizing factor used by the researchers is gender, wherein they claim 55% of
the state and local government workers are women, compared with 40% of the
private sector. This is partially skewed, again, by the fact that 60% of self-employed
people are men, but even adjusting for that, this fact, if accurate, represents
another huge opportunity for the researchers to “normalize” compensation
statistics in favor of reducing the disparity between private and public sector
pay. Without having access to the work-papers used by the researchers, one can
only speculate, but here’s the logic that could have been used: If women make
30% less than what men make for comparable work requiring comparable
credentials, and if women represent 55% of the government workforce compared to
40% of the private sector workforce, this means an “apples-to-apples”
comparison would require adjusting the public sector compensation upwards
by 17% (55% x 30%) vs. an upwards adjustment of only 12% (40% x 30%) for
the private sector workforce. Voila, another 5% of pay disparity is vaporized.
The problem here is whether or not the “30%” pay differential rests on valid
assumptions. When one normalizes for technical degrees vs. non-technical
degrees, and the actual supply and demand parameters for jobs that might be
deemed “comparable,” as well as for the significant percentage of women who opt
out of full-time work in favor of being moms, much of this gender disparity may
disappear. Whether or not there remains a gender bias in employee compensation
is certainly open to debate, but the researchers should be transparent
regarding how significant this factor was in their calculations.
The other
major normalizing factor employed by the researchers is education, because the
researchers have determined that 35% of the private sector workforce have
earned at least a bachelors degree, compared with 55% of the public sector
workforce. The researchers also claim the “return to education,” wherein people
who have higher educational attainment should earn more, is skewed; that is,
they claim private industry rewards education more than the public sector. What
the study ignores here, however, is the fact that educational attainment yields
qualitative dividends – what degrees are being compared? Is a sociology degree
from Sonoma State the equivalent of a computer
science degree from Stanford? Is it appropriate to pay more to employees with
advanced degrees even if the job they do doesn’t require that level of
education? The study doesn’t address this.
In any
event, by excluding 1.4 million self-employed and part-time workers, and
“normalizing” for seniority, gender and education, the Berkeley study has
concluded that an average public sector salary in California is not 40% more
than an average private sector salary – and without any normalizing
adjustments, 40% higher wages for public sector vs. private sector workers
appears to be a conservative estimate – but instead, that public sector wages
are 7% less than private sector wages.
When
turning to comparing benefits for public employees vs. private sector workers,
it is important to understand that salary is the base on which the most
significant benefits are calculated. In particular, the largest benefit
category in the public sector is retirement pensions, which are calculated
based on final salary earned. This means that even if public employee pension
benefits were calculated in the same parsimonious manner as social security,
they would apply to an average compensation base that is 40% larger for public
employees. Moreover, public sector pensions are linear, meaning the benefit
increases exactly proportionally to the amount of base salary without limit,
whereas social security benefits increase at progressively lower rates, meaning
that the more one makes, the lower percentage of their final salary will
actually be realized in a social security benefit. These sound like nuances,
but have enormous financial consequences.
Before
independently estimating the disparity between public employee and private
sector employee benefits, here is the Berkeley
study’s specific conclusion: “public employers contribute on average 35.7%
of employee compensation expenses to benefits, whereas private employers devote
30% of compensation to benefits.”
By far the
biggest single cost for employee benefits in both the public and private sector
is the cost of retirement security. The calculation in the private sector is
relatively straightforward – the employer withholds 6.2% for social security
and 1.45% for medicare from employee paychecks, and
contributes an equivalent amount themselves as a benefit – 7.65%. Some private
sector employers will match a 401K contribution up to 6.0%, but the percentage
of private sector employers who do this, combined with the number of private
sector employees who take full advantage of this, is probably under 25%, which
means the average overall retirement benefit paid by private sector employers
is probably 10% (or less) of total wages.
For the
public sector in California,
the cost of retirement security borne by the employer is something else
entirely. The typical formula for non-safety employees (about 85% of the public
sector workforce) is to multiply the number of years they work by 2.0%, and
apply the resulting percentage to their earnings in their final year of active
employment. For example, if a non-safety employee works for 30 years, then 60%
of their final salary will be the amount of their retirement pension. For
safety employees, the typical formula is the same, but based on a 3.0% per year
accrual. In the public sector, unlike with social security, the money
contributed each year to fund the future retirement benefit is invested by a
pension fund, which means the value of this benefit – and the funding required
each year to ensure the pension fund remains solvent – must be calculated based
on the expected investment returns of the pension fund. This is a matter of
great controversy.
In the post
“What Payroll
Contribution Will Keep Pensions Solvent?,” a best-case and realistic-case
set of scenarios are offered:
(1) At a
real rate of return of 4.75% per year, a worker would need to set aside an
additional 20% of their salary each year for 30 years, in order to enjoy a
pension benefit during a 30 year retirement equivalent to 60% of their
paycheck.
(2) At a
real rate of return of 4.75% per year, a worker would need to set aside an
additional 30% of their salary each year for 30 years, in order to enjoy a
pension benefit during a 30 year retirement equivalent to 90% of their
paycheck.
(3) At a
real rate of return of 2.75% per year, a worker would need to set aside an
additional 36% of their salary each year for 30 years, in order to enjoy a
pension benefit during a 30 year retirement equivalent to 60% of their
paycheck.
(4) At a
real rate of return of 2.75% per year, a worker would need to set aside an
additional 54% of their salary each year for 30 years, in order to enjoy a
pension benefit during a 30 year retirement equivalent to 90% of their
paycheck.
For this
independent estimate of the value of public sector employee pension benefits,
using an assumption that 15% of public employees receive the enhanced “safety”
pension, and assuming that the real rate of pension fund returns going forward
will be 3.0% per year (still quite optimistic), it is necessary to contribute
an amount equivalent to 38% of the average public employee’s pay in order to
keep their pension solvent. Since, on average, public employees contribute
about 5% of this amount in the form of withholding, an additional 33% has to be
contributed by the employer. Many public employees receive supplemental retirement
health insurance, for which few of them contribute anything at all in the form
of withholding. It is certainly accurate to value this additional benefit as at
least twice the amount of medicare, which adds
another 3.0% per year.
Adding this
all up, using conservative assumptions, the employer contribution to retirement
security in the private sector is at most 10% of average salary, whereas in the
public sector the employer contribution is at least 36% of average salary.
When
assessing the value of current benefits granted public employees, most reviews
of public sector benefit schedules suggest the standard package is a
comprehensive set of benefits – for example, if one refers to the State of
California’s Dept. of Personnel Administration, some of the current benefits
include health insurance, dental
benefits, a vision program, long-term care insurance, and long-term disability insurance.
While these benefits are partially funded through employee withholding, the
amounts withheld almost never exceed 50% of the premium, even for dependent
coverage. To suggest that current benefits for public employees are, on
average, less generous than the average current benefit for private sector employees strains credulity. What about the millions of
part-time workers and self-employed people, who have to pay 100% of whatever
health insurance they can afford – at premium rates that aren’t discounted and
guaranteed by the insurance companies the way they are for the huge state
employee bargaining units? What about all the small companies out there,
employing at least 50% of full-time private sector workers, who can barely
afford to offer basic health insurance, much less dental, vision, long-term
care and long-term disability? It would be conservative indeed to simply assume
the cost of current health insurance and other current benefits paid for by the
employer is the same for both public and private sector workers, at
approximately 5.0% of payroll.
The other
significant factor to assess when estimating the value of public sector
benefits is the amount of paid time off enjoyed by public sector employees vs.
private sector employees. On this matter the Berkeley study makes a claim that they simply
must substantiate; they state: “public employees receive considerably less
supplemental pay and vacation time.”
Perhaps to
rebut this preposterous claim one must revert to anecdotes, but here at least
are some quantitative considerations: there are 723,000 teachers in California who work for
the government either in primary and secondary school or in higher education.
Every one of these instructors and administrators works about 180 days per
year, which when one considers there are 260 weekdays in a year (52 weeks x
five days per week), indicates that teachers in California get 16 weeks of paid
days off each year. What about college professors who only teach one class per
week, yet enjoy total compensation packages worth $138K per year (ref. The Real Reason for
College Tuition Increases). If you review compensation studies for safety
employees in the city of Costa Mesa (ref. The Price of Public Safety), or
firefighters in Sacramento (ref. California Firefighter Compensation),
you can see, for example, that before overtime, full-time service for a veteran
firefighter in Sacramento requires them to work, on average, two 24 hour shifts
per week. Does the Berkeley
study normalize for any of this? Compare vacation time in any public entity in
California against private sector norms – the average vacation days awarded in
the public sector allocate employees after about 10-15 years of service 20 days
of vacation per year, and by the end of their careers, up to 30 days of
vacation per year (ref. CA Dept. of Personnel Administration, Leave Benefits). This amount of paid vacation is
rarely offered to employees in the private sector – with many small companies
offering virtually no vacation to their employees, a generous assumption might
be 10 days, half as much as public sector vacation benefits. With respect to
paid holidays, the typical public sector benefit is at least 12 days, while
small private companies often only award six (Christmas, New Year, Memorial
Day, July 4th, Labor Day and Thanksgiving), if that. In addition to vacation
and holidays, many local governments and various state units also offer paid
“personal days,” something nearly unheard of in the private sector. It is also
common for sick time to be accrued without limit in the public sector, also
something nearly unheard of in the private sector. And self-employed workers,
of course, get nothing.
In order to
continue to make conservative assumptions, however, one may estimate the
average number of paid days off in the private sector to be 20 per year
(probably high) and the average number of paid days off in the public sector to
be 30 per year (probably low). How does this all add up?
The average
public sector worker makes $65,000 per year, with the employer contributing an
additional 21,450 for their retirement pension, $1,950 for their retirement
health insurance, $3,250 for their current health insurance and other benefits,
and they earn vacation worth an additional $10,575 – making their average total
compensation $102,225 per year. It is interesting to note that the benefits as
a percent of total compensation in this analysis agree with the Berkeley study
– 36.4% vs. 35.7%, because the Berkeley study has almost certainly understated
the value of the required pension fund contribution, which is another reason
why the assumptions made here to estimate the value of all the other public
employee non-pension benefits are probably conservative.
The average
private sector worker makes $46,500 per year, with the employer contributing an
additional $4,650 for their social security, medicare,
and 401K, $2,325 for their current health insurance and other benefits, and
they earn vacation worth an additional $4,113 – making their average total
compensation $57,558 per year. The average private sector worker’s benefits as
a percent of total compensation in this analysis is 19%, not 30% as claimed in
the Berkeley
study. And again, the Berkeley study failed to
consider any of California’s
1.4 million self-employed and part-time workers in the pool they evaluated .
It is left
to the reader to decide which numbers are more accurate, the numbers put
forward here, or the numbers put forward by the Berkeley research team. Similarly, it is left
to the reader – and the voter – to decide whether or not the services provided
by California’s state and local governments, and the skills required to render
them, entitle California’s public servants to earn, on average, $102K per year,
compared to average annual earnings of $57K by those of us whose taxes sustain
them.
http://unionwatch.org/calculating-public-employee-total-compensation/
Berkeley,
California Retired City Manager's Annual Pension Will Exceed His Former Salary
(Carolyn Jones / San Francisco Chronicle)
Carolyn Jones, Chronicle Staff Writer San
Francisco Chronicle San Francisco Chronicle December 21, 2011 04:00
AM Copyright San Francisco Chronicle.
All rights reserved. This material may not be published, broadcast, rewritten
or redistributed.
Wednesday,
December 21, 2011
Berkeley's recently retired city manager left City Hall with
a check for nearly $150,000 in unused sick and vacation time and an annual
pension that exceeds his former salary, according to public records obtained
Tuesday.
Phil Kamlarz, 64, retired Nov. 30
after 36 years with the city, the final eight as city manager. His yearly
salary was $242,580, according to the city human resources office. In
retirement, he'll make $249,420 annually due to bonuses he received for his
longevity with the city, said Dave Hodgkins, director
of the city's Human Resources Department.
The pension is among the highest in the state for government
employees, according to a California
Public Employees' Retirement System database.
In addition to his pension, Kamlarz
received $147,439 in unused sick and vacation time, Hodgkins
said.
Kamlarz is not alone in collecting a generous pension
from the city. In all, Berkeley
has 75 retirees who are paid more than $100,000 annually. Former City
Attorney Manuela Albuquerque, for example, who retired in 2007 after 26 years
with the city, makes $129,780 annually.
City councils across the state are facing similar challenges
with pensions, particularly those of administrators, said Marcia Fritz of the California Foundation
for Fiscal Responsibility.
"It's rampant," she said. "Almost
universally, these city managers were in a position to influence city councils
on salary and contract negotiations, and often they did not have the back of
the people they're supposed to be serving."
Kamlarz, who lives in Oakland, could not be reached
for comment.
"This is just the way the rules were written,"
said City Councilwoman Susan Wengraf. "But these
enormous pensions are threatening the financial stability of the entire
city."
Kamlarz's pricey payout
comes as the City Council embarks on reforming pension policy. An independent
actuary this month warned the council that the city's pensions are seriously underfunded. In all, the city will need about $400 million
to cover the pensions of future retirees.
The City Council probably will take up the issue in 2012,
when four union contracts - including fire and the Service Employees
International Union - are due for
renegotiation. Staffers are currently in talks with the police union.
"I think some of these pensions and payouts are
excessive. I'd certainly like to see them trimmed," said City Councilman
Gordon Wozniak.
A few of the options Berkeley might consider are adopting a
two-tier pension system for new employees, reducing payouts for unused sick and
vacation time, and basing pensions on salaries averaged over an entire career,
not the final year of an employee's stint with the city, Wengraf
said.
Still, some residents feared that pension costs would
eventually translate to new tax measures.
"They'll dress it up in a way that appeals to Berkeley sensibilities,
like 'Save our libraries,' " said David M. Wilson. "Although if the unions bellied up, too, I'd be willing to pay more
taxes."
This article appeared on page C - 3 of the San Francisco Chronicle http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2011/12/20/BAVO1MF13L.DTL
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Riverside County, California's Interim CEO Will Be Paid
$15,000/month on Top of a $233,000 Annual Pension (SWRNN) By City News Service, on December 20, 2011, at 8:22 am
http://www.swrnn.com/2011/12/20/riverside-county-interim-ceo-likely-to-retain-position-through-mid-may/
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VIDEO:
Pension Problem Is 'About Math, Not Politics' Says Rhode Island Treasurer Raimondo (Squawk Box / CNBC)
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Illinois Governor Sets Up Panel to Examine State's Troubled
Pension System (Monique Garcia / Chicago Tribune)
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