Does this seem incredible? Well it isn’t. It is based on actual payroll records obtained from the city of San Jose for 2011, with just one assumption added – that pension funds will no longer earn 7.5% per year, but instead earn a more realistic 4.5% per year. If you want to stick with 7.5%, the average is still $150,000 per year. If you don’t believe these numbers, download the spreadsheet of raw data yourself (watch out, it’s 3.0 megabytes). Better yet, obtain a similar spreadsheet from your own local city or county government payroll department, and perform the same analysis.
With San Jose in the national spotlight due to its landside passage of comprehensive pension reform, it is timely to examine in detail the level of compensation enjoyed by its city employees. A study released last week by the California Public Policy Center does just this, examining the city’s actual payroll records per employee for 2011. Several highlights of this study bear mentioning (ref. City of San Jose 2011 Compensation Analysis).
Because the study eliminated part-time and partial-year employees, as well as retiring employees, truly representative average and median figures were calculated. The 2nd table of the study shows both average and median total compensation for San Jose city employees, broken out by police, fire, and rest-of-workforce:
What is immediately interesting about these figures is that there is not a significant difference between the average and the median, for all employees, the average only exceeds the median by 7.0%. This throws cold water on the frequently heard defense of public employee rates of pay, wherein the average is alleged to be skewed upwards by the handful of highly compensated management employees. In fact, the median for police is actually 6.0% higher than the average, and the median and the average are virtually the same for firefighters.
Another benefit of this study, which examined actual payroll records per individual, rather than looking to sources of more general data, is that no forms of “other pay” were omitted. In Table #4 of the study, the amount of “other pay” is disclosed, along with the payroll overhead that is paid for by the city.
As can be seen, other pay is particularly significant for the police and fire personnel, averaging nearly $8,000 per year for police, and nearly $15,000 per year for firefighters. Also noteworthy is the cost of the benefits, or payroll overhead, which amounts to 55% of direct pay. Table #5 in the study estimates the payroll overhead – employer paid benefits – for a best-in-class private company, i.e., the best package one might reasonably expect in the private sector – at 21%, less than half what San Jose’s workers receive.
The study concludes with a few thoughts on the impact of lower rates of investment fund returns on the cost per year to pre-fund retirement benefits. Despite the fact that San Jose now pays nearly $40,000 per year, per employee, to pre-fund their retirement pension, it probably isn’t enough. This is because these levels of pre-funding are based on rates of return for pension funds of 7.5% per year, a rate that hasn’t been reliably met for about ten years – ironically just about how long ago it was when public employee pension plans across California were enhanced retroactively. Wonks, pay attention: For every 1.0% that a pension fund’s rate of return drops, the pre-funding requirement for those pensions goes up by at least 10% of payroll (the impact can be much greater than 10% with funds where a relatively large percentage of the beneficiaries are already retired or nearing retirement, and funds where retroactive benefit enhancements and poor returns in recent years have already left them underfunded). In San Jose’s case, a 1.0% drop in the rate of return would equate to at least an $8,500 increase per employee. A 2.0% drop would equate to at least a $17,000 increase. And a 3.0% drop, which is by no means a worst-case correction in today’s debt saturated, aging world, would equate to at least a $25,500 increase in annual total pay per employee.
Retirement benefit costs cannot be properly estimated without also taking into account employer-paid retirement health care, which San Jose had never pre-funded until the 2nd half of 2011, when they began to phase in payments at an initially very low rate. Properly pre-funding retirement health care will add additional thousands in compensation to San Jose’s city employees.
It is important to emphasize that only the total compensation is relevant when considering what public employees earn. This is the only way to generate apples-to-apples comparisons with private sector averages. And this is the only way to truly calculate what taxpayers have to cover, or estimate just how much personnel costs impact total civic budgets. If you properly fund future benefits during the years an employee works, in San Jose’s case, you have average total compensation that can be conservatively estimated as follows:
Police – $212,000
Fire – $238,000
Rest-of-Workforce – $148,032
Total Workforce – $175,000
These are staggeringly high numbers. And these averages are how much San Jose’s taxpayers are currently obligated to pay their city employees. The size of these numbers underscores that the problem with public sector compensation is not just the pensions, although they are the biggest part of the problem. But for the city of San Jose, it is all forms of pay and benefits that are elevated well beyond levels that are either sustainable or equitable. The average total compensation package for an employee for the city of San Jose – adding just one assumption, that pension funds will no longer earn 7.5%, but a more realistic 4.5% – is $175,000 per year. Even if you believe the pension funds will earn 7.5% per year, and that the retirement health benefits will somehow pay for themselves without prefunding, nonetheless, using San Jose’s own data, the average employee working for the city of San Jose still makes on average $150,000 per year.
In the private sector, even in the prosperous Silicon Valley, only members of top management in small companies, and only members of upper middle management in larger companies, can expect to earn a total compensation package anywhere close to $150,000 per year. And stock options, while offering tantalizing upside, historically have only benefit a small percentage of high-tech workers.
It is in this context that unions representing San Jose’s workforce are contesting the recent vote to reduce their pensions and make them share in the cost. That anyone representing a class of employees whose average pay is somewhere between $150,000 and $175,000 per year might contest this overwhelming decision by the voters they supposedly serve, boggles the mind.