City Employees With Six-Figure Salaries Jumps 45% In One Year, Pension Givebacks To Save City $100 Million Over 10 Years
By George Economides - Publisher’s Perspective
Click Here to Download the $100,000 Club List
August 28, 2012 – At first glance you might think, “Wow, a one-year, 45% increase in the number of city employees making six-figure salaries? From 593 on August 1, 2011, to 862 on August 1, 2012! How can that be when the city is laying off people and reducing parks, recreation and library programs?”
While there’s a good explanation for the jump in numbers, it may not be enough to sway taxpayers who are adamant that employee salaries should be reduced or frozen until the city regains its economic footing. It’s tough to disagree with them, especially with a July unemployment number of 13.1% – up from 12.2% in June – and the average household income nowhere close to six figures.
To its credit, Long Beach has been more aggressive in tackling the pension issue than have most cities – although Long Beach should have done so years earlier.
Last year, through the work of Mayor Bob Foster and city management, deals were crafted with the city’s public safety and other unions to move forward on contractual pay raises in return for employees agreeing to cover more of the pension costs. According to city staff, the “deals” save the city approximately $100 million over a 10-year period.
The Long Beach Police Officers Association came to the table first last year, and a few months later so did the Long Beach Firefighters union. In fact, all but one of the city’s nine unions made some concessions in the past year to help during these tough economic times. But the big ones were police and fire since their combined payroll is about half of the city’s overall 2012 payroll of $383 million.
The result of these pay raises – many of which exceeded $10,000 – is that 264 public safety personnel joined the $100,000 Club (that’s base salary; overtime pay is not included) since our last report a year ago. For all other city departments combined, only six are new inductees to the “club.”
Approximately two-thirds of the 862 “Club” members are public safety personnel. The give-back by police and fire is that their members are now picking up all of what is referred to as the “employee fee,” or share, of the pension cost. Other city unions are also paying more.
Prior to these agreements, police and fire personnel were paying 2% of the 9% “employee fee” of the pension cost. They are now paying all 9 percent, which, for many police and fire personnel, covers much of the pay raise received in the past year.
Here’s a quick example of how the “employee fee’ portion works. Let’s say a year ago a police officer had a base salary of $95,000. At that time, that officer paid 2% – $1,900 – of the 9% “employee fee,” which totaled $8,550 (9% x $95,000). The taxpayers picked up the difference of $6,650. This year, that same officer has a base salary of $105,000 and is paying all 9% ($9,450) of the “employee fee.”
Part of the dissension arising from the city’s deals with unions is that all city employees should have already been paying for the “employee fee” portion of the pension costs. The argument is, that since city employees are reaping the benefits of what is an overly generous pension system, that they should pay their fair share. More than a decade ago, the Business Journal urged the city’s elected officials to have employees do just that – saving about $20 million annually – but those calls fell on deaf ears.
Even more recently – June 2008 – during a panel discussion before the Anaheim Street Business Association that included two councilmembers – the Business Journal again challenged the city to tackle the pension issue.
Recession Forces Cities And Unions To Act
It wasn’t until a good two years into the recession that elected officials here and throughout the country, after already cutting expenses by streamling operations and gutting programs and services, realized that pension costs were unsustainable. That’s when the deal-making began. And because furloughs and layoffs were or would be occurring in all cities, most unions agreed to revisit existing contracts.
If it were not for the recession – which resulted in revenue sources dropping dramatically while employee costs continued to climb – most cities would have gone over the cliff. Some already have and others may follow. Keep an eye on what union-controlled Los Angeles does.
Despite the deals, Long Beach is far from being in the clear, especially when today’s “$100,000 Club” members and other city employees retire. We’ll get to that in a moment.
While the “employee fee” part of the pension cost is, with a few exceptions, finally under control, there remains the most volatile part of the pension cost: the “employer fee” that is set annually by the board of the California Public Employees’ Retirement System (CalPERS).
CalPERS is like the rich gambler who isn’t worried about losing because “it’s only money and I got plenty of it.” The difference is, when CalPERS loses, cities pay more.
The “employer fee” is paid in full by taxpayers and varies year to year based, in part, on whether CalPERS investments are good or not. The current year “employer fee” is 22.315% of base salary for public safety sworn personnel and 15.159% on the base salary for nearly all other city employees.
That means, for our $105,000 police officer salary, taxpayers are paying $22,431 into that officer’s retirement this year. And remember, there are now 862 city employees at or above that salary and nearly two-thirds are sworn personnel. (Note: according to a city spokesperson, the CalPERS “employer fee” went down slightly this year but is expected to increase next year.)
Nowhere but in the public sector do these types of pension costs exist. If these were offered in the private sector, most businesses would be out of business.
So far, we’ve addressed only payments into the retirement system. How about the pay outs when one retires.
Part of the deals cut with Long Beach unions calls for new city employees to come in at a different, and much lower-cost, pension payout formula. That’s fine when today’s new hires retire in 25 or 30 years. But until then, meeting the pension obligations will remain difficult and a leading cause of municipalities filing for bankruptcy.
To call it a “cadillac” system is an understatement.
Let’s say our current $105,000 police officer works another 10 years for the city and retires at age 50 after a 25-year career (this is fairly typical for both police and fire personnel). At retirement, that officer’s salary is now up to $125,000. The current retirement formula, known as 3% at 50, allows that officer to collect $93,750 a year for life. The “3” is multiplied by the number years worked (25), equalling 75%. That percentage is then multiplied with his salary of $125,000.
When a city employee’s pay increases, so does the pension cost to taxpayers increases. With people living longer, it’s pretty safe to forecast 30 years of payments. There are already hundreds of retired city workers receiving similar payments (a few exceeding $200,000 annually) and hundreds of current workers who will begin receiving them over the next 10 to 20 years.
These are just the “$100,000 Club” members. Now consider all city employees, most of whom are or will be receiving much lower annual pension payments.
Is it sustainable?
What do you think?
Some Good News
Is there any good news? Yes.
First, despite being criticized by some people for what they call “heavy-handed” tactics, if it were not for Mayor Foster, Long Beach taxpayers would be in much worse shape, with even more cuts to programs and services and huge layoffs of police, fire and other city personnel. It is Foster who not only put a lid on spending, but forced councilmembers – many of whom were or are aligned with unions – to get more aggressive at tackling the pension issue.
Second, Long Beach is fortunate to have two sources of revenue that most cities don’t have: oil and port money. In the current fiscal year, revenue from Uplands oil alone is nearly $11 million more than budgeted. That’s general fund money, which can be used to help the city invest in infrastructure, technology and other one-time expenses. The port will be transferring, as called for by charter, more than $16 million to the city in the near future to be used in the tidelands, or the city's coastal area.
Third, the agreements reached with the police and fire unions call for zero pay raises in the coming fiscal year, with fire non-management personnel receiving a 1% pay increase in 2014 and police non-management personnel receiving a 1% pay raise in 2015. So, for the next few years, Long Beach should be in fairly good shape – compared to what might have been.
Fourth, there’s acceptance by city staff and some elected officials that a new day has dawned in how cities are run. Cities are reexamining their role in delivering programs and services to the publics they serve. Contracting out is more acceptable. Being tech savvy is essential. Prioritizing is a must.
Fifth, the realization by city staff that normal revenue sources – retail sales, property taxes, utility users taxes – are down and will remain down for a while until the job market returns and housing prices rebound. The result is that Long Beach must focus on economic development and tourism/convention revenue.
Finally, Long Beach has an exploding creative class that only a handful of elected officials are realizing can help the city grow and prosper. Councilmembers and city staff can unleash the creative class by making it easier to open and/or grow a business. Being entrepreneurial-friendly is not that difficult. Waiving certain city fees for startup businesses – which the Business Journal proposed a year ago – is a good first step. Here are the words of Ronald Reagan during his farewell address at the 1992 Republican Convention: “We believe that no power of government is as formidable a force for good as the creativity and entrepreneurial drive of the American people.”
Raises? Not For Everyone
City Manager Pat West took over in July 2007. In November of that year, he promoted Suzanne Frick to assistant city manager. Both their salaries, while over $200,000 each, are far below what managers in comparable or smaller cities are making. Neither West nor Frick have had a pay raise since they took their “new” positions.
In fact, most management personnel under the control of City Manager West haven’t seen a pay raise in four years. That’s West’s decision to hold the line where he can, but we’re not sure councilmembers understand this, or if they do, appreciate it.
The command staffs of both the police and fire departments have also not had pay raises. It’s to the point now that the 11 police commanders are making less money than many of the 32 police lieutenants since the latter are part of the union pay raise agreements. Additionally, commanders do not qualify for overtime pay while lieutenants do. The situation is similar on the fire side with deputy chiefs being paid less than some battalion chiefs, who also get overtime pay.
One Union Holds Out; Is There A Ballot Measure Coming?
As mentioned earlier, all but one of the city’s nine unions agreed to concessions. The hold out is the city’s largest union, the International Association of Machinists & Aerospace Workers (IAM), which represents more than 3,500 city employees. On August 16, IAM members voted to reject a city proposal that would have reduced the 2013 general fund deficit by $3.9 million, thus reducing the number of city employees that would have to be eliminated – including police officers. Currently, about 160 employees will be eliminated under the proposed 2013 budget, which goes into effect on October 1. Most of these are not vacant positions. The layoffs are real.
The IAM did not release the percentage results for and against.
The city’s offer called for, among other things, an extension of the current contract to September 30, 2014; a 7% pay raise, but employees would pay all of the “employee fee” of the pension cost (while sworn personnel have a 9% employee fee as stated earlier, IAM employees are at 8% and are currently paying 2% – or one-quarter – of the 8%); assurance there would not be a ballot measure mandating IAM members pay the “employee fee;” a new pension formula for new hires; etc.
In a press release issued following the vote, Mayor Foster stated: “It is truly unfortunate that the IAM chose personal gain over serving their community. The deal put before them was a fair one that would not negatively affect the money they currently take home, but would use future raises to significantly reduce pension costs and provide future budget relief. While the Police Officers Association and the Firefighters Association realized the wisdom in this approach, unfortunately the IAM did not.”
Mayor Foster has threatened to take the issue to the voters. If he does, it should pass easily.