Why California is Bankrupt

Over the past year several attempts have been made here to evaluate just how much public sector employees make in total compensation. The most comprehensive of these was “Public Employee Compensation,” published on Oct. 24th, 2010. In that post, which as of this writing has attracted 44 comments from very informed readers, it appears fairly well-settled that the average total compensation for a state or local worker in California is about $100K per year, and the average total compensation for a private sector worker in California is slightly under $60K per year.

This data comes with a lot of caveats, two of which are worth highlighting, (1) total compensation is based on putting a value on current funding requirements for future retirement benefits, including pensions and health insurance, using a conservative inflation-adjusted 3.0% return to retirement benefit funds; currently, for example, CalPERS uses an after-inflation return projection of 4.75%, and (2) a true apples-to-apples comparison of public sector compensation to private sector compensation should normalize for the average skill sets that characterize the workforce in each sector. Advocates for retaining the higher rates of average compensation to the public sector argue, for example, that on average, public sector workers have higher average educational attainments. There is clearly a degree of truth to this argument. Another argument frequently heard is that public safety employment entails personal risk that doesn’t accrue to jobs in the private sector, and this too has validity. The real question is how much premium is appropriate for jobs that require higher levels of education and personal risk.

Something that has become quite clear during all this analysis and discussion is this: The rates of pay that state employees enjoy, on average, is lower than the rates paid to local employees. This is particularly true with respect to local public safety jobs in law enforcement and firefighting. In the post “The Price of Public Safety,” which looked at compensation data for employees of the city of Costa Mesa, a total compensation analysis indicated their firefighters collected an average total annual compensation of $202K, and their police officers collected an average total annual compensation of $197K. In the post “California Firefighter Compensation,” which looked at compensation for firefighters working for the city of Sacramento, a total compensation analysis indicated the average total annual compensation for these firefighters was $180K per year.

There is an interesting website called “Public Safety Project,” edited by a citizen activist in El Segundo, California, that has an impressively comprehensive compilation of data resources on the topic of public employee compensation in that city. El Segundo is close to my heart, insofar as I lived and worked there for three years immediately after graduating from college. I worked for Hughes Aircraft Company, in their high-rise on the corner of the Imperial Highway and El Segundo Boulevard, and I rented a one bedroom apartment just off Main Street in the heart of this charming small town. El Segundo, which is surrounded by a power plant, a sewage treatment plant, then the Pacific Ocean, to the west, Los Angeles International Airport to the north, a massive Chevron oil refinery to the south, and compound after compound of aerospace companies to the east, is essentially cut off from the rest of Los Angeles. It is a tranquil suburb with rolling hills and a downtown center that could have been lifted out of the Iowa cornbelt. So I felt more than just an interest in the data when I stumbled across this website. And I was saddened to learn that El Segundo, like most cities and counties in California, has been hijacked by public sector unions, and they are flirting with bankruptcy because they can’t afford their payroll.

While Public Safety Project focuses on rates of compensation for public safety personnel in El Segundo, they offer links to compensation data for all the city employees, as well as links to the labor agreements governing these pay rates, as well as links to other databases around the state on this topic, as well as links to the enabling legislation that has brought us to this point. As Editor Mike Robbins puts it, “Public employee labor unions, especially firefighters, police, school teachers, and nurses, provide campaign support to help elect the politicians who will be their bosses and determine the terms of their labor contracts, including salaries, benefits, and pensions.”

According to information obtained by Robbins, the average compensation for El Segundo’s 57 full-time firefighters is $161K per year (ref. Sworn Firefighters), and the average compensation for El Segundo’s 64 sworn police officers is $139K per year (ref. Sworn Police Officers). Overall, the average compensation for all 273 city employees in El Segundo (including the police and firefighters) is $109K per year. If you crunch the numbers, this means the average non-safety employee in El Segundo is earning $77K per year. But there’s much more to this, because Robbins data (ref. City of El Segundo, Full-Time 2009 Employee Earnings) does not include benefits.

The best explanation of what benefits overhead costs on top of base wages is offered in the post referenced earlier, Public Employee Compensation,” and the rate developed there, 36% of total compensation (which translates into an overhead factor of 56% of compensation before benefits) is almost certainly a conservative rate. That is because this figure is exactly the same figure the pro-union, UC Berkeley affiliate, Center on Wage and Employment Dynamics came up with in a policy brief in October 2010 entitled “The Truth about Public Employees in California: They are Neither Overpaid nor Overcompensated.” In this comprehensive study, the Berkeley researchers came up with a 56% benefits overhead calculation for the average state/local employee in California, without adjusting for a higher pension fund contribution. In the study performed here, a 3.0% inflation-adjusted rate of return was used instead of the 4.75% official CalPERS rate, but very conservative assumptions were made regarding the value of the other benefits, such as health insurance and vacation, etc., causing the amounts to offset. In reality, the Berkeley researchers were probably correct regarding the value of these other benefits, since they did a much more comprehensive analysis and had no motivation to over-state those numbers. Also, statewide, public safety workers represent 15% of the state/local workforce. In El Segundo they represent 44% of the city’s workforce, and since public safety employees receive far more costly overall benefits than non-safety employees, using a 56% benefits overhead factor to calculate their actual total compensation is decidedly conservative – but here are the calculations:

El Segundo’s average total annual compensation for their firefighters, including benefits, is $251K per year, for their police officers, the average total compensation is $216K per year, and for all other employees, the average total compensation is $120K per year. These are staggering numbers. This is the reason California’s cities and counties are going bankrupt. Is the premium for education and risk worth this much? Read the labor agreement negotiated by El Segundo’s city council with their firefighters – it is not atypical. When you factor in vacation, a journeyman firefighter works two 24 hour shifts every 7 days. Is this worth paying, on average, $251K per year? It is disingenuous to suggest there shouldn’t be a premium paid to anyone involved in public safety. El Segundo’s proximity to some of the most concentrated infrastructure in the state – LAX, a refinery, and a power plant – guarantee that at any moment their public safety employees may have to help manage a maelstrom unimaginable in small-town Iowa. But how much risk premium is affordable, and how much can taxpayers afford? And how much might risks be mitigated if compensation were lowered to market rates, so more public safety workers could be hired while still saving money?

Most policymakers, much less voters, are still familiarizing themselves with the concept of total compensation. But this is the only fair way to compare public sector and private sector compensation. Because in the private sector, the employer puts aside 6.2% for Social Security (in addition to what is withheld from the employee’s paycheck), and they put aside 1.45% for Medicare. This, along with possibly a contribution to the employee’s current health insurance premium, and maybe a matching contribution to their 401K plan, is all they get. And that amount in employer benefits, over and above what appears on their W-2, is what they actually earn. That is their total compensation. In California, the average total compensation for private sector workers is $60K – probably much less than that, since the data used only included full-time, non-self-employed workers.

As always, readers are encouraged to comment and offer contradictory data. Anyone who believes these figures are incorrect is invited to explain how and why.

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44 comments to Why California is Bankrupt

  • Time for Change

    Find out how much you need to retire in luxury like these “civil masters”

    http://www.pensionjackpot.com/

  • Tough Love

    We’ll get THERE eventually (even in California, where most say it’s not possible) … and THERE is a significant reduction in pensions for CURRENT (yes CURRENT) employees (and very likely retirees as well)…. because when the money runs out …. well … it’s game over.

    BUT, (politics being what it is) we won’t do it until the pain of lost services is excruciating. We ALL now that this is the scenario that will play out. So why do we all sit and wait, unable to act on the writing clearly on the wall ?

    Perhaps the biggest fools are the younger and mid-career Civil Servants who somehow think they’ll make it to retirement and be safe or protected from such reductions. Their contributions will all go to fund the lavish pensions of those before them, and they’ll be LUCKY to get back the dollar amount of their contributions.

  • SkippingDog

    Things are already changing, and the application of greater contribution rates for current employees and fewer benefits for future employees will balance the system again, just as it did when we last implemented two-tier systems in the 1970’s.

    There is also the reality that investment markets rise and fall over time, even if we can’t predict exactly when or how far those rises and falls will be. If we could, we wouldn’t have to work because we’d be rich already.

    Unless you believe the entire U.S. and world economies are permanently in the toilet, there’s no reason to believe the pension funds won’t maintain solvency. If you do think the world economy is permanently debilitated, you should just take your guns, gold, and canned foods to the hills and wait for the apocalypse.

  • Tough Love

    The US economy will get fixed, but with great pain. Civil Servants need to share in that pain via pension reductions for CURRENT employees (and if the money runs short … for retirees as well).

  • SkippingDog

    ToughLove – I understand that is your hope, but hope is not a strategy, nor even a plan.

  • Keen Observer

    Your piece prompted me to go back to the study, which I had not seen. What trash! Funding a 30 year retirement? This sounds like the authors of the “study” never encountered the word “actuarial.” First of all, as a teacher, I ray 8% of my salary into the State Teachers Retirement System. My employer kicks in 8.25%. So there’s a total of 16.25%, which isn’t far off the 21% contribution that was mentioned. (Keep in mind, I’m not eligible for Social Security, so this is my only pension). Now, I might live 30 years after I retire but I might also live 6 months. That’s what actuaries do: calculate the likelihoods of lifespan so that the costs of the longer-lived members of the pension plan are balanced out by the far lower costs of the shorter-lived. The conclusions of the study are flat out incompetent in this light.

  • Tough Love

    Skipping Dog, It’s NOT that I “hope” your comrades lose pensions or benefits …. it’s a matter of fairness.

  • Tough Love

    Keen Observer, Where did you get the 21% figure? The % referenced in the article (from 2 sources) is … pensions & benefits cost 56% of cash pay.

    So you are paying 8/56 =.1428 or less than 15% of your pension & benefit costs. If you expect to actually get what you have been promised, it doesn’t matter what your employer (meaning the taxpayers) HAVE BEEN contributing. What matter is what the SHOULD BE putting in to fully fund your Plans … and THAT is the other 85% of the cost you are NOT paying.

    NOW do you understand why WE(the taxpayers ) are PISS*D OFF ?

  • boprn

    Ed,

    That’s the best article you put together yet. I have noticed that more people are catching on to where the problem is – the cities and counties. The ability to spike pensions, and excessive pay is pretty much unchecked at that level. The state has built in mechanisms (most notably the press) that prevent pension spiking (using vacation/holiday/other pay to spike). I believe the lack of differentiation in past articles between state and city/county govt employees is where you have caught some flack from posters.


    Tough Love,

    As usual you are so far off base it is laughable. Keen talks about pensions, and stated it exactly right. You go off a a tyrant about pensions AND other benefits. You then go on to say how keen is wrong because his numbers don’t add up to yours. They don’t because your talking about something different. Your hatred of govt employees, jealously I honestly believe, makes it difficult for you to have any kind of real input. Your just part of the problem. Perhaps GAS can hire you as his post-governor talking head.

  • Keen Observer

    Tough Love, the 21% figure was in the linked study

    http://civfi.com/2010/10/24/public-employee-compensation/

    You\’re forgetting that my employer and I began paying that money in for me more than 20 years ago. Go to a 401(k) calculator and use whatever assumptions you like about annual rate of return (6-8% or whatever the historical rate is)over 30 years of contributions. It\’s just intellectually dishonest to total up the contributions without any investment gains – just as it\’s dishonest to leave out the actuarial reality that for every teacher who has a 30 year retirement there will be one who collects for five years or less.

    Please also remember that before the 2008 crash, STRS was 97% funded. This is not a pension fund that allows a 3% retirement at 55 or any spiking. It\’s 1.4 at 55 up to 2.4 max (either at 63 or at 60 with 30 years of service).

  • boprn

    Perhaps I shouldn’t be so hard on TL…

    ——-

    Ed,

    I know you asked for a response on another topic on a different article. Saw your question the other day in response to a hybrid model I proposed. But..can’t find your post now. If you could post a URL?

  • Editor

    Boprn – that was the post from last May, Social Security vs. Public Pensions
    http://civfi.com/2010/05/08/social-security-vs-public-pensions/

  • Tough Love

    Boprn, Keen Observer:

    As a point of reference I know more about pension Design/Funding than perhaps 99% of the common posters. I do not claim to have specific detail on the Plans governing a given location. This being the case, generalities as to excess common in California Plans my be MUCH less true in say Texas or Nebraska. Someone also corrected me in assuming OT was includable in pensionable comp in Calpers. Evidently it isn’t.

    Addressing a few of the points you brought up:

    (1) What is wrong with including benefits (such as retiree healthcare) as well as pensions in the discussion ? Especially because many Civil Servants retire at ages well below eligibility for Medicare. The ability to get free or heavily subsidized retiree healthcare before age 65 is VERY VERY costly …. at least $25K/yr for family coverage (and likely higher). Most Private sector workers cannot even consider retiring before age 65 due to this singular issue. The Public Sector Retirees rarely pay but a few % of the actual cost, with taxpayers paying for the balance.

    (2) Keen Observer, you talk of your 30 years of contributions (with interest). Yes, I’ve done that. Please create a spreadsheet that takes your 8% of pay contribution and accumulate each contribution (with interest) to the presumed date of your retirement. Then take the ratio of that figure (the sum of all accumulated contributions) to the present value of your expected future pension payments (this would be your Lump Sum payout, if such option were available). You would find that this ratio is probably no more than 0.10-0.15, which means YOUR contributions WITH INTEREST are paying for 10-15% of your pension. Don’t be surprised … this is very common…. and for safety workers is often less than 10%. The reason isn’t your lack of participation in the cost, but the extraordinary richness of most Civil Service Pensions.

    As a general rule of thumb, the value at retirement of the employer (meaning taxpayer) paid-for share of the typical Civil Servant’s retirement package (pension + subsidized retiree healthcare) is 2-4 times greater than that of a comparably paid Private sector worker retiring at the SAME age and having the SAME years of service, and that 2-4 times increases to 4-6 times for safety workers.

    Do you think that is “fair” ?

    If your reaction is “impossible”, I’ll just point out just 3 (of the many) differences which make Public Sector Plans so much more costly:
    (a) post retirement COLAs. Depending on the age at retirement and the existence of a cap on the annual increase, inclusion of a COLA provision (ALONE) increases the Plan’s cost from 50-100% (b) the cost of an unreduced pension payable at age 55 is 50% greater than the same pension that begins payout at age 65 (common in the Private sector) (c) basing pensionable compensation on the final year of pay rather than the last 3 or 5 years can add 10-25% to the pension’s cost, as can the inclusions of miscellaneous allowances (uniform, parking, etc.), unused sick and vacation days.

    None of the items in (a ), or (b), or (c) will be found in Private sector pensions…. because they really do not belong there and corporations have to pay THEIR money …. not other peoples’ (the Taxpayers’) money as is what happens when politicians make promises.

    (3) Bjorn, I do not hate gov’t workers. I would do the same if I were in their shoes … take advantage of all legal options/avenues to maximize my pension. I am disappointed with Public Sector Unions that have mastered the pursuit of greed with no care as to the impact of their success on others. But the real blame lies with the vote-selling, contribution-soliciting, self-serving politician-enablers who have approved these pension Plans. In any other venue, their acceptance of Union contributions and election support from Union members in exchange for more workers, bigger pay, and better pensions & benefits would be considered bribe-taking.

    It would be “fair” for comparable jobs in the Public & Private Sector to have roughly comparable TOTAL COMPENSATION (cash pay + pensions + benefits). 15+ years ago it could have been argued that lower cash pay in the public sector justified the higher pensions. Today, with (per the US GOV’T BLS) cash pay in the Public sector exceeding that in the Private sector (in all but the highest professional positions …. e.g., doctor, lawyer, etc), there is no longer any justification for the extraordinarily more generous pensions & retiree healthcare benefits ….. especially with Private sector taxpayers paying for perhaps 85% of it (as described above).

  • Keen Observer

    In California, the State Teachers Retirement System is a pure pension plan – no retiree health care. Retiree health care is offered by my school district, but most do not provide it.

    I don’t doubt your knowledge, but in addition to the 8% I’ve paid in, my employer has paid in 8.25%. Both sides have paid more than the 6.45% we would have paid Social Security.

    Your calculations are interesting, but pensions are a crapshoot. They are not wealth that becomes part of the pensioner’s estate. The value depends entirely upon how long the pensioner lives. That’s where the actuaries come in.

  • Boporn: The cities and counties that are members of CalPERS are bound by the same no-spiking rules as the State. I worked for a muni, and the only thing besides base salary that I could have used in my CalPERS retirement calculation was one-half of unused sick leave, which could have been added to the service credit total. My entity paid me cash for one-half of my unused sick leave. The pension spiking that upsets you and others comes from pension plans throughout the state, other than CalPERS.

  • Keen, it is only partly true that a pension does not become part of the retiree’s estate. Most retirees take a modified, instead of a full, pension in order to leave something to a beneficiary, such as a spouse or child. Its true that the pension is gone after both the retiree and the beneficiary or beneficiaries are gone.

  • Keen Observer

    SeeSaw,

    Many teachers are single. The survivor options are also determined by actuaries, based on the age of the survivor as well as the age, years of service and salary of the retiree. It’s just wrong to look at the total value of the pension in the same frame as how much an employee would have to save in a 401(k)/403(b) to produce annual income at the level of a pension.

  • Editor

    Keen Observer: Government jobs are paid funded by taxpayers. Therefore taxpayers have a right, and politicians have an obligation, to evaluate the total compensation of government workers in an attempt to ensure what they get is neither inordinately high or inordinately low. As part of this exercise, it is appropriate to consider the funding requirements for a retirement benefit as part of a government employee’s total compensation. Typically, 401K plans are disbursed in retirement as an annuity with a declining principal, which is the same way actuaries project pension fund balances. 401K plans and public sector pension funds are invested in the same things – individuals can opt into 401K funds that are aggregated and professionally managed by people with precisely the same training and investment opportunities as pension fund managers.

    You have stated your pension fund contribution is 16.5% of your pay per year. What is your pension benefit? Are you getting 2.0% of final salary for each year served? What is it? Because when you make these comparisons, social security is equivalent – using averages – to an accrual of 0.7% per year, yet requires an annual contribution of 12.4% per year. You don’t need to be an actuary to see there’s something wrong with this picture.

  • boprn

    Some lines from TL…

    “as a point of reference I know more about pension Design/Funding than perhaps 99% of the common posters.”

    Since less than 100 of us post on these boards, guess your the top guy.

    As for “common posters”…just nice.

    “What is wrong with including benefits (such as retiree healthcare) as well as pensions in the discussion ?”

    Nothing wrong with talking about it. I was pointing out that Keen was talking about pensions when he posted his numbers, but you choose to go with pensions PLUS other benefits to pump up the costs of pension itself. Keen’s numbers were exactly right – yours are exactly wrong.

    “Yes, I’ve done that. Please create a spreadsheet that takes your 8% of pay contribution and accumulate each contribution…”

    Your missing a data point, about 50% of all govt employees don’t retire. They quit after a few years. The money they put in is returned to them. What the employer puts in is still invested in CalPers for the people who do stick around. As a result you get a better funding ratio. What exactly that ratio is…? Now, with your superior (99% I believe) knowledge I’m sure you could tell us.

    “It would be “fair” for comparable jobs in the Public & Private Sector…”

    Do you know that Boeing pays less than Lockheed (know this from personal experience)? It just isn’t fair that one of those jobs, which are comparable, provides better pay and retirement – is it? Whatever the pay (public vs private) YOU have a choice to apply for whatever company you want. Everyone has the choice; if its really that great in the public sector JUMP ON IN. I mean, if I were bitching and moaning about how good ‘they’ have it – I would just make the jump so I would have it good too. Why don’t you make the jump? Because its not really that good of a deal maybe? Don’t have the qualifications? Got a felony? Honestly, if public employees are getting the sweet deal, and you know that its a sweet deal – you should be there, yesterday. Right? Perhaps its some moral superiority?

    —————————

    SeeSaw –

    Pension spiking at the county/city level depends on the rules at that level. Each can have different rules to play by. It needs to be changed, it needs to be uniform with the state level. As it stands now, I could go work for another govt entity (a county perhaps) and spike my pension. Its because the rules are not uniform. To tell you the truth, it’s tempting….got a job offer sitting on my desk right now that would spike my pension by about 50%. Only have to work 12 months in the new job. Might just do it. Would be nice to drive by TL’s house in a new BMW, instead of my 1992 Escort. =]

  • Tough Love

    Editor, Your last paragraph highlights the problem, basically the same as what I was saying in an earlier comment responding to Keen Observer…..

    “…… pensions & benefits cost 56% of cash pay. So you are paying 8/56 =.1428 or less than 15% of your pension & benefit costs. If you expect to actually get what you have been promised, it doesn’t matter what your employer (meaning the taxpayers) HAVE BEEN contributing. What matter is what the SHOULD BE putting in to fully fund your Plans … and THAT is the other 85% of the cost you are NOT paying.”

    The COMBINATION of very rich formulas 2, 2.5, even 3% of pay per year of service, inclusion of COLAs, unreduced payouts at early ages, end-of-career promotions, and on and on, create VERY expensive Plans …. which your article say cost 56% of cash pay. Annual contributions less than this lead to the underfunded plans we have today. As I said earlier, when comparing Private to public sector pensions it’s NOT what the employer ACTUALLY contributes (but what he SHOULD BE contributing to fully fund the Plan in a reasonable time frame … defined as 7 years for Private sector plans vs the 20 or 30 years often used in Public sector Plans to artificially lower the contributions really needed) that is relevant to the comparison. Of course the supporters of the rich Public sector Plans never do so, because it’s nullifies their position.

  • Tough Love

    Bporn, You seem to have a chip on your shoulder…

    (1) Yes, I do believe I know more about pension plan design and funding than 99% of the common posters on these boards. By “common”, I meant “regular” (as in the ones I see regularly post comments). No disrespect was intended, but it appears you are just looking for something to fight about.

    (2) You complain about my including Retiree healthcare in the discussion. Clearly the Public Sector vs Private Sector comparison need to include TOTAL COMPENSATION and ALL elements of post-retirement costs are relevant. Especially Retiree heathcare because is is RARE in the Private sector but COMMONPLACE in the Public sector. To exclude it would lead to incorrect conclusions. I’m wondering if that’s your desire (are you or a family member currently a Civil Servant or retiree benefiting from the status quo ?)

    (3) As to your response to my spreadsheet remarks … I’m not missing anything. The point (properly described) is how to determine what percentage of the public sector retiree’s total retirement costs (WITH interest credited to their contributions) is actually paid for BY THE RETIREE. I described this correctly. The fact that employer contributions associated with terminators stay with the Plan is irrelevant to that calculation. As to funding ratios, Calpers purports to be roughly 80% funded. However, that 80% is based on aggressive (i.e. too high) interest rate assumptions for investment returns and in the discounting of Plan liabilities, as well as using “smoothed” assets (which do not fully reflect the still un-recouped equity losses from 2008) rather than the true current MARKET value of assets. Using more appropriate interest rate assumptions (that reflect the conservative nature of the Plan guarantees and more realistic long-term invest returns) and the current MARKET value of assets, CALPers has a funding ration of approximately 60% ….. VERY VERY POOR.

    (4) I accept your statement that compensation in Boeing and Lockheed differ (I have no idea whatsoever). However, in the Private sector strong market forces act to minimize such difference over time or the more competent employees leave the poorer payer. Those forces are stymied in the Public sector by inappropriate Union influence and the “vote-selling, contribution-soliciting, self-serving politician-enablers” I mentioned earlier.

  • Tough Love

    Bporn said …”… As it stands now, I could go work for another govt entity (a county perhaps) and spike my pension. Its because the rules are not uniform. To tell you the truth, it’s tempting….got a job offer sitting on my desk right now that would spike my pension by about 50%. Only have to work 12 months in the new job. Might just do it. Would be nice to drive by TL’s house in a new BMW, instead of my 1992 Escort. =]”

    If you don’t do it you’re nuts.

    That being said, the pension structure in CA that allows such nonsense should (and eventually will) be changed. Your switch could increase the unfunded liability by perhaps $1 Million … an unjustified gift from taxpayers.

    And please….. the gatehouse would smell you 3 blocks away from my house and sick the dogs on you.

  • boprn

    TL,

    “That being said, the pension structure in CA that allows such nonsense should (and eventually will) be changed. Your switch could increase the unfunded liability by perhaps $1 Million … an unjustified gift from taxpayers.”

    My point exactly. This shouldn’t be allowed, and the saddest part of it is that it breaks the local govt that allows it. Since the increased pensions is based on the year of spiking, the local govt that allowed it is responsible (at least as I understand it). A person can take a job for just 12 months, and be paid hundreds of thousands of dollars for it over the pension life time. For instance, I would add an additional 400k to my total lifetime pension payout switching jobs for 1 year. This stuff needs to stop.

    Regarding the gate communities dogs – used to live in one of them communities. Couldn’t stand the stuffed shirts. Ever hear of RMCC? Pretty sure our EDitor has….

    =]

  • oz

    Ed-

    Thanks for the info on resource sustainability in the previous post.

    In the “public employee” post you linked too, you recall that the highest numbers you could get was corrected to 95k total comp. And just to get the numbers to add up to 95k you had to pretend to assume that all public employees worked 12 months a year… you took March (a big school/university month) numbers and multiplied by 12.

    Again, with 50% of the employees being educational and likely making 20-25% less than your 12x math would indicate (due to a few months of missing/reduced pay), the highest you could make your statement should be “the average total compensation for a state and local worker in California is 86k/yr. (~10% less than 95k)”

    I guess you could say 86k is “about” 100k, but that’s a stretch and an unnecessarily inflammatory one. That 100k figure is quite incensing to some.

    Anyhow, on a more interesting note, you noted that your total comp numbers are based on a real pension investment returns of 3% instead of 4.75%. I know you do not anticipate a high inflation environment, but I believe that it is also worth mentioning that CALPERS really does not need a 4.75% real return so much as it needs a 7.75% TOTAL return. Any inflation greater than 3%, which I believe is coming, is likely to be a significant gift to CALPERS.

    Let’s do a thought experiment. If inflation hit a moderately high rate of 5%/yr, what do you think it would do to CALPERS? Even if we had the stagflation of the 1970’s, CALPERs would be able to hit 7.75% with just 2.75% dividend payments on its positions.

    Again, I know you don’t think big inflation\’s coming, but just indulge me. What if it did? What would it look like to you, CALPERs, and municipal financing?

    Thanks,
    Oz

  • Editor

    Oz: Here are some additional calculations that are relevant to the $100K per year average total compensation for state/local government employees in California:

    To your point about teachers, they actually comprise 39% of the state/local government workforce in California (this includes higher education), that’s based on 773,000 / 1,850,000. For this next part, I can’t find exact figures (if they are even available), but it is clear teachers all have the option to collect their pay over a 12 month period, and I would guess that 50% of them do this. I know several teachers and ALL of them take their pay smoothed over 12 months. So under these assumptions, it means my calculations in the original analysis were overstating the payroll of 19.5% of the workers (50% x 39%). In those cases, the pay should have been reduced to 10/12ths of the reported amount, meaning the pay was overstated by [1 – (10/12)], or 16.6%. If you spread this over the total, i.e., if you multiply 19.5% by 16.6%, you get a gross overestimate of 3.3%, or about $3,300 per year.

    At the same time, in the huge thread of very informative comments that have come into that analysis and others, I’ve learned that 40% of the state/local employees in California still participate in social security! The employer contribution to social security is 6.2%, which if you spread over the total pool, by multiplying 6.2% by 40%, you get a gross underestimate in the original analysis of 2.5%, or about $2,500 per year.

    These are offsetting amounts, given the margins for error, which brings us back up to the question of $95K vs. $100K, based on my miscalculation in the original analysis of the value of the extra vacation – which you uncovered. When you get to this point, it may be useful to review again the assumptions I made regarding benefits – and in that I’ll return to this: I was very conservative in assessing the value of current benefits, which I think is confirmed by the fact that the Berkeley study, which had no incentive to overstate the value of public employee benefits, came up with the same overhead rate I did, despite the fact that I’d grossly increased the pension funding proportion of those benefits – by much more than $5,000 per year. Therefore, if you use a higher, more realistic assessment of the value of the current benefits than I did, while retaining my assumption that increases pension fund contributions to the amount they need to be in order to retain solvency – something the Berkeley study did not recognize – you easily make up that $5,000.

    Therefore I remain very comfortable asserting that the average total compensation to state and local public employees in California is about $100K per year.

  • Keen Observer

    If I retire at 55, I’d receive 1.4% of the average of my three highest consecutive years. If I retire at 60, it will be 2.0%. If I retire at 63, it will be 2.4%.

    A small correction: my contribution is 8%; my employer is 8.25% – a total of 16.25%.

  • Tough Love

    Keen Observer, Based on this, (and assuming “normal” raised from age 55 to 63) your pension will MORE THAN double from age 55 to age 63. You should stay to age 63.

    In Private sector plans the rate per year of service is flat per year of service and is RARELY over 1.5% (and usually less). This is just one reason to add to the list of why Public sector pensions exceed those of comparably (cash paid) Private sector workers ……..again, while the private sector workers pay for about 85% of it.

    Your employer (meaning the taxpayers) may be contributing 8.25%, but its VERY likely (with a formula as you described) that they NEED to be contributing 30-50% of your cash pay to fully fund your promised benefits. W/o it, the Plan will ultimately fail (i.e., run out of money).

  • Keen Observer

    Tough Love,

    Are you assuming that I (and everyone else in the plan) will have a 30 year retirement, because that’s not an actuarially sound assumption. STRS says that if I retire at 55, my annual pension will be $23,211. Assuming a conservative 6% return, STRS would need $386,850 to fund my pension on an ongoing basis. Over the past 20 years, I have contributed 136,261, and the contributions have earned about $58,500 in interest – a total of close to $195,000, or half of what STRS would need to fund my retirement on an ongoing basis.

    If I live 30 years into retirement, the total of my pension payments would be around $700,000. Of course, if I were to only live two years into retirement, I would only collect $46,422.

    The actuarial art in a pension system is determining how long pensioners will live on average, because the system certainly won’t be paying out for 30 years to all members.

  • oz

    Ed-

    You want so badly to use that 100k figure that you are misusing the same points as the opposing side.

    I was being generous with the 86k figure.

    The very part you mention- 40% of educ. employees are eligible for social security highlights a large issue… the vast number of part time educational workers.

    Again, this is likely all they get! no other benefits.

    Notice with the numbers you gave a few posts ago that at the state level there are MORE part time workers than full time! Yes we can stretch them out into full time equivalents, but do we retroactively add on full benefit packages?

    Your “about” section doesn’t mention it anymore, but I thought I read that you used to be adjunct faculty somewhere, was it a state university? If so, did you receive any benefits at all aside from social security? Not likely.

    Assuming all those workers get a benefit package of ~40% of their salary will twist your numbers.

    By the way, do you see how all it takes is a few thousand adjunct faculty at a few state universities making 7k/yr and the opposing side can accurately, but misleadingly, say that the average public worker compensation is significantly lower?

    Let’s be above that.

  • Tough Love

    Keen Observer, I started to do some calcs you might find interesting & helpful, but ran into an inconsistency. Assuming you have contributed to your plan at 8% of pay in each of 20 years, your total contribution (w/o interest) of $136,261 is illogical (way too high). Perhaps you mean BOTH your 8% + the 8.25% from your employer, or perhaps you mistakenly assumed 8% of you CURRENT salary (for 20 years) rather than 8% of you actual salary in each of the 20 years.

    My quick calcs suggest your 8% would be closer to $70K w/o interst.

    Can you clarify? Then I’ll follow-up with some interesting calcs. (if you wish).

  • Editor

    Oz: With respect to social security, the assertion that 40% of public sector employees in California participate in social security was referencing ALL state/local public employees, not just the ones in education. I will have to dig up the source for that and take another look. Ditto for the impact of backing part-time workers out of the equation to come up with average total compensation for public employees in California – I don’t think doing that will change the calculation of base-pay averaging over $60K per year, but I will check. When I come up with a total compensation calculation of $100K for the average public employee, that is referring to full-time employees, not part-time workers. Obviously part-time workers will not get the same benefits package – but again the key point is whether or not the base-pay calculation was skewed by including part-time workers. I don’t think it did, but I’ll check.

    As for my own background, I can tell you categorically that I have never worked in a government job of any kind, not part-time, or temporarily, not for a quasi-government entity, or a public education entity, or anything you might in any manner consider funded by the government. I have also never worked in academia in any capacity, at any level. My education is in political science and finance, and my career background for the most part has been to be a CFO for small private companies. Doing this has given me a visceral impression of just how vast the gulf has become between public and private sector compensation, as well as the technical skills to quantify this accurately.

    Believe it or not, it is more important to me to uncover and disseminate the real numbers than to distort anything. I’m firmly convinced that the real numbers are alarming enough without any need whatsoever to exaggerate.

  • Tough Love

    Dear Editor, RE your quote …”Doing this has given me a visceral impression of just how vast the gulf has become between public and private sector compensation, as well as the technical skills to quantify this accurately.”

    My work training and work experience put me in a similar position I fear 95% of the population is fully unaware of the financial tsunami bearing down on them, and that portion (elected officials) of the remaining 5% are so overwhelmed by the lack of palatable REAL options to fix it (of which pension/benefit reductions just for NEW employees is woefully inadequate) that they do nothing.

    At some point they WILL have to tell even the strongest of Unions (safety) they there will simply never be sufficient money to pay them what they were promised.

    The longer we wait the worse it gets because the hardest part to take way are pensions already accrued for PAST service ….. and as they “fiddle”, that ACCRUED number continues to grow.

  • Editor

    Oz: I have gone ahead and rechecked the data for average compensation for full-time state and local employees, in order to verify whether or not including part-time employment compensation data skewed the results upwards in my analysis of average base pay for a state/local employee in California. Here’s what I wrote in the post Public Employee Compensation, which you have questioned:

    “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.”

    Here are these same calculations, using only full-time workers in the data pool:

    As of March 2008 there were 1,245734 full-time workers employed by local government agencies, mostly cities and counties, in California, and their payroll for the month of March 2008 was 7,070,297,612 (ref. http://www2.census.gov/govs/apes/08locca.txt ). This equates to 5,652 per month, or 67,818 per year. During the same period there were 338,725 full-time workers employed by the state of California, and their payroll for the month of March 2008 was 2,002,723,495 (ref. http://www2.census.gov/govs/apes/08stca.txt ). This equates to 5,913 per month, or 70,950 per year. In aggregate, the state and local government workers have an average base salary of $68,488 per year, over $3,000 more than I had originally calculated when I included part-time workers in my calculations.

  • oz

    Ed-

    You’ve just shown that there is a massive load of NON-full time workers (almost half!) in the public sector! Almost as though the public sector was run by a private sector CEO trying to get the most bang for his buck!

    Can you include the part timer’s compensation in your average along with a sense of what their benefits (or lack thereof) might be?

    Thanks

  • Editor

    Oz – in the data used there are 521,000 part-time local government workers in California, and 1,245,000 full-time workers, which means that 521 / (521 + 1,245) = 29% of the workers are part-time. For the state government, the ratio is 339,000 full-time vs. 150,000 part-time, which equates to 30% of the workers being part-time. I don’t think less than one-third equates to nearly half, and this is something you would call me on.

    More to the point, I’m not interested in what part-time state or local government workers make, because I’m not criticizing their compensation package. If the unions hadn’t made the wages and benefits we’re paying the full-time workers totally unsustainable, maybe we could have more government workers making salaries that, overall, are in line with market rates. Assuming there were sufficient legitimate areas to employ people in government. I certainly don’t think we have too many police officers, for example. I think we could probably use more police in many areas of California. And if we paid them less than we could afford to do that. What are you saying – that an average total compensation for a police officer is $200K per year? Because that’s about what the average is in most cities in California when you include realistic funding requirements for their pensions.

    Public employees who work full-time with benefits are, in my opinion, overcompensated, and we can’t afford this. To dilute the amount by including part-time workers is completely beside the point.

  • Charles

    “…… pensions & benefits cost 56% of cash pay.”

    How can pensions and benefits cost 56% on top of payroll? The State marks up payroll by 50 to 51% of payroll for work done for outside parties. That includes the whole enchilada. SS, workman’s comp, vacation, sick leave, holidays the buildings you work in, the cost of supervision, keeping the lights on and computers, phones and supplies, etc. In short, everything. Where do you get this 56% number from?

  • Charles

    “Please note that a 38% average pension fund contribution is not what is being contributed, but is what needs to be contributed for California’s state and local employee pension funds to remain solvent according to their current benefit formulas, and is probably a very conservative assumption.”

    So it is still nothing but an assumption. Calpers was 100% funded in 2000 and for all anyone knows will be again in few years. You have doubled the State’s contribution which is a total unknown.
    Apples to apples?

  • Tough Love

    Dear Editor, Charles never gives in …

    In a recent comment he argued that (the soon to come increase from 5%) public employee contribution of 8% is higher than Private Sector workers’ Social Contributions of 6.4%… as though this justified greater Public sector pensions.

    How convenient that he neglected to mention that the (8-6.4)/6.4 or 25% higher Public sector contribution TYPICALLY results in 4 times the pension.

  • Charles

    Tough Love says: “Dear Editor, Charles never gives in …

    In a recent comment he argued that (the soon to come increase from 5%) public employee contribution of 8% is higher than Private Sector workers’ Social Contributions of 6.4%… as though this justified greater Public sector pensions.

    How convenient that he neglected to mention that the (8-6.4)/6.4 or 25% higher Public sector contribution TYPICALLY results in 4 times the pension.”

    Where did I say that? Show me. The thing I have consistently said is that California made a deal with their employees 40 years ago and no one has said it wasn’t fair until the last two or three years.

    Private employees have been ripped off by their employers. That is where the unfairness lies.

    As long as you insist on everyone being equally treated unfairly you will never have what you should want, which is more than barely enough to get by on in retirement, like Social Security.

    This reminds me of the old story about the Russian who finds the bottle with the genie in it and is allowed one wish. He has a neighbor with a cow that gives large amounts of milk with a lot of cream. He tells the genie, “I want dat cow dead!”

  • Tough Love

    Charles.

    It isn’t what you said … it’s what you didn’t point out …. that the Public sector pension is so much bigger for so little extra contribution FROM THE EMPLOYEE.

    I don’t care what you get as a pension even if it were 10 times more than mine … it’s just that as long as cash pay is equal or better in the public sector (as it is for most jobs), we (the TAXPAYERS) should NOT pay for one dime more pension for you than we get.

    Yes, I do believe in fairness. You don’t …. but I bet you would if the tables were turned !

  • Charles

    Why is California bankrupt?

    First, I am not sure we are bankrupt although we are getting close.

    California through the initiative process has voted in programs with “no known means of support”, something you will to to jail for if you are an individual citizen in many states.

    The avian brained citizens of California vote for legislators who vote for unsustainable bills.

    What is left? A State
    who believe in the money tree and the tooth fairie.

    Wake up California there is no such thing as a free lunch.

    Pay for what you want. Or quit.

    1-1=zero. Get it. When there is nothing left, there is nothing left.

    No wonder your children don’t get math. Nothing left is simply nothing.

  • Pelye

    Why is California bankrupt?

    Because we want to keep fire stations and police stations fully staffed. Because we have too many rich enterpreneurs and movie stars here who wouldn’t feel secure if otherwise. Because cops and firefighters are not very attractive career options for most people and high salary is necessary to make these jobs attractive. Because the tax for the rich is not high enough.

  • Mark

    My children ate my 401K before I sent them to live with relatives out of state. I have 3 chronic illnesses and out of work for 2 years, my kids lost their childhood home and their mother passed. No christmas for us 99ers…

    I find it very difficult to read about this subject. I have sacrificed. I volunteered to serve this country for 4 years, while we were at war and now the repubs want to look tough and the dems want to look soft and I get no aid.

    Thankfully I can survive in the urban setting, using the skills taught me by your government and those I learned in a real jungle.

    They act in your name.

  • Tough Love

    Qouting Peyle …”Why is California bankrupt? Because we want to keep fire stations and police stations fully staffed. Because we have too many rich enterpreneurs and movie stars here who wouldn’t feel secure if otherwise. Because cops and firefighters are not very attractive career options for most people and high salary is necessary to make these jobs attractive. Because the tax for the rich is not high enough.”

    Bingo, YOU get the prise for EVERYTHING you said being false.

    Oh, and quite obviously you are a Civil Servant liking the status quo.

    But don’t worry, we’re going to lower your pay, take away your benefits, and cut your pension by a factor of 2.

    And then, when we realize you’re STILL getting more than those (Private Sector taxpayers) who pay your way, we”ll be back for round 2.