How Much of California’s Budget is Personnel Costs?

An influential blogger in Orange County, California, made the following claim on January 25, 2011 in a post “Busting The Myths About Public Employee Pension Costs,” “For California’s budget, salaries represent 7.5 percent of the total state budget. The costs for healthcare and pension benefits are another 3.7 percent.” If only this were true.

Because this claim is being repeated as if it were fact, such as by guest columnist Nick Berardino in the Orange County Register, who on February 4th, 2011 in a “Reader Rebuttal” accused that newspaper of having “continued its misleading and irresponsible assault on public employees,” it is important to take a closer look. Using core data, as well as some studies funded by union-friendly think-tanks (hopefully to avoid accusations of bias), here are some numbers:

As a baseline, the California Governor’s Budget Summary for fiscal 2011 shows projected revenues and expenditures balanced at $89.6 billion. Using straightforward multiplication, if salaries and benefits only consume slightly more than 10% of California’s state budget, this means salaries, healthcare and pensions should cost (.075 + .037) x $89.6 = $10.4 billion. So how much does California’s state government actually spend on total employee compensation?

According to California’s own state government payroll records, in March of 2008 there were 393,989 full-time workers employed by the state of California, and their payroll for that month was $2,235,947,296 (ref. http://www2.census.gov/govs/apes/08stca.txt). This equates to an average of $5,675 per employee per month, or $68,102 per year. So by using data that is nearly three years old and assumes zero increases to compensation since then, in aggregate, just payment of salaries to workers employed directly by the state of California totals $26.8 billion per year.

In percentage terms, this figure would suggest that just wages for California’s state workers consume $26.8 / $89.6 = 30% per year. But there’s much more – benefits. If you read the definitions section of the U.S. Census Bureau Data, “gross payroll” is defined as “all salaries, wages, fees, commissions, and overtime paid to employees before withholding for taxes, insurance, etc. It also includes incentive payments that are paid at regular pay intervals. It excludes employer share of fringe benefits like retirement, Social Security, health and life insurance, lump sum payments, and so forth.” How much do benefits cost the state?

To short-circuit a war of battling studies, let’s use a supposedly authoritative study recently produced by the U.C. Berkeley Center on Wage and Employment Dynamics, Institute for Research on Labor and Employment, entitled “The Truth about Public Employees in California: They are Neither Overpaid nor Overcompensated” where they calculate an average overhead cost for California’s state and local workers at 36% of total compensation. That is, they claim 36% of total compensation is benefits overhead, and 64% is actual pay. 36% of total compensation equates to a 56% overhead rate, i.e., [ 1 / (1 - .36) ] = .56. The Berkeley researchers, who did a very comprehensive study, had no motivation to overstate the benefits overhead paid to public employees. It is likely the actual overhead is probably much higher than 56%, because it is unlikely the Berkeley researchers included an amount any higher than the current official rates for the necessary pension fund contribution, because the conventional wisdom still adheres to higher rates of investment fund returns than are probably out there over the next 20-30 years. But when you apply a 56% overhead rate – which is probably on the low side – to an average base salary of $68,102, you arrive at a total compensation estimate for the average state government worker in California of $106,239 per year.

What this means is the total direct employee costs for California’s state government is not $26.8 billion per year, based on salary alone, but 393,989 x $106,239 = $41.9 billion per year, which is 47% of the total state budget. And yes, there’s more:

If you take a look at the data from the U.S. Census bureau, referenced earlier, you can see the many job descriptions where salary expenditures are tabulated do not include K-12 education employees. This is because the state doesn’t pay these employees directly, but helps fund them through transfer payments to the local school districts. Returning to the California Governor’s Budget Summary for fiscal 2011, page 11, $36.2 billion is proposed for K-12 education expenditures. The skeptical reader is invited to study the details of this line item, but barring such analysis, it is a reasonable assumption that half of that money is going to be spent on compensation for K-12 education employees – another $18.1 billion.

When you add this all up, personnel costs for California’s state government are not somewhere barely above 10% of their total expenditures, as Prevatt asserts, but, doing the math, $41.9 (direct employees) + $18.1 (K-12 employees) = $59.96 / $89.6 = 67%. That is, using data taken directly from the state’s payroll records, combined with overhead calculations courtesy of an exhaustive study commissioned by an (arguably) sympathetic academic institute, along with very reasonable assumptions regarding transfer payments – not even considering transfer payments to localities for line items other than K-12 education – taxpayers are seeing at least 2/3rds of California’s state budget used to pay employee compensation.

Aside from overheated rhetoric and cherry-picked statistics, have those who still claim that public sector compensation isn’t a legitimate issue for civil discourse actually tried to run the numbers themselves? A final thought: When public entities are required to contribute into funds for retirement pensions and retirement health care at more realistic, lower rates of investment returns, the percentage of public sector budgets that are consumed by employee compensation will go up by 10-20% overnight. However comforting it may be for critics of these numbers to assert otherwise, it is hard reality, not wishful thinking, nor anti-public employee sentiment, that informs whatever bias may seep through this analysis.

15 comments to How Much of California’s Budget is Personnel Costs?

  • Charles

    Editor,

    I am sure you made an unmeant error in saying the State of California has a budget of $89.6 Billion. That is the general fund.
    In reality it is 227.83 Billion. (Chart B, historical data for 2010-2011 FY.)

    Obviously, subtracting salaries and benefits out of a mere 39% of the total budget makes them appear to be more than 2.5 times what they really are.

    Thank you in advance for your retraction.

  • Editor

    Charles: Thank you for your faith in my integrity, if not my accuracy. Let’s dig a little deeper. Please refer to chart F which shows the proportion of California state expenditures that are used for “state operations”:
    http://www.dof.ca.gov/budgeting/budget_faqs/information/documents/CHART-F.pdf

    You will see that closer examination reveals $41.9 billion of employee compensation is being covered by $52.5 billion in direct funding, which actually demonstrates that my crude estimate of 67% of state spending for employee compensation is low – in reality the total is 80%.

    The rest of the budgeted spending, $165.8 billion, is almost all for “local assistance,” which I am confident is similarly weighted towards employee remuneration. It would be charitable to say my analysis is an oversimplification, but when you don’t reduce total spending to general fund expenditures you have to match employee costs to the state operations budget, which is an even smaller subset of the state budget than the general fund.

    The more I learn about this the more astonished I am that people think employee compensation is a trivial proportion of government budgets. What else do they think the money is for?

  • Charles

    Why would employee compensation not be more than a trivial portion of public budgets? Public employees are mostly a service industry who supply public goods and services. No big surprise here.

    Tell me otherwise. State service provides services.

    State service does not provide, in general, food, housing, cars, flowers or headstones.

    We simply provide highways, clean water and other things no one really wants.

    Let private enterprise provide those things. They are much cheaper. That is why California stomped on the Railroads in the California State Constitution. Pure ignorance on the part of voters in the early 1900′s.

  • Charles

    Editor:

    You can believe this or not as you choose to.

    I worked for the California Division of Highways since June 12th, 1969.

    During that time I have worked mostly outdoors on highways from San Bernardino to Las Vegas and to Parker Arizona. And everywhere in between.

    I have gone to work on a 1,500 foot rope. I have been hit by a thirty pound rock in the kidney and returned to work the next day.

    I have driven more than 250 miles on my own time on some days in 120 degree heat to do this.

    I put about 50,000 miles on my State truck doing this per year, mostly on my time. (More than 95% of the time.)

    You may think that Caltrans employees don’t work hard for a living.

    You are wrong. I worked twelve hour shifts in freezing cold enforcing chain control laws and worked twelve hour shifts plowing snow.

    I bet you have never worked that hard. If you have, tell me about it.

    I doubt it you have any idea what it is to work like this.

    I deserve every last penny of my retirement.

    If you don’t think so apply!

  • Editor

    Charles: If you search every post that’s ever gone up on CIV FI you will not find one statement that suggests a lack of respect for government workers, or any suggestion that most of them aren’t hard working and capable in their jobs. Find one suggestion of that and I will retract it. The discussion of what is equitable and the discussion of what we can afford concern completely separate issues, although it is easy to get them mixed up due to the sensitive nature of all issues of compensation. I have no doubt you believe you earned every penny of your retirement and you have strong arguments to back your point of view.

    You are quite willing to discuss the details of your compensation and you are also willing ask me about mine – and how hard you worked vs. how hard I have worked. I would prefer not to get into dueling personal stories, however, because everyone has one, and this discussion should be about what we do as a society to address these financial challenges. It doesn’t make the discussion easier for me to say “Charles, you do not deserve a $90,000 per year pension PLUS social security after 42 years of work at a final salary of $100K.” Who knows? Maybe you do. Maybe your contributions were extraordinary.

    To generalize, which frankly I think is more useful in this type of a debate, I think that government workers in California are overpaid. To be a bit more nuanced, I think state workers are not as overpaid as local government workers, and I think that more educated and skilled government workers are not as overpaid as less educated and less skilled government workers. Even this first level of nuance delves into particulars that in some ways obscure and complicate the discussion. Because before advocating any solutions, the real question that must be answered is this: Do you think we have to raise taxes and cut services, or do you think there is a 3rd option, which is to cut pay and benefits to public sector employees?

    Think about that. I’m calling it a night. I really appreciate you pointing me to source data. That furthers this discussion by helping us get more accurate numbers. Without that, we are just spewing rhetoric and getting nowhere.

  • Charles

    Ed

    Caltrans District 08 (San Bernardino and Riverside Counties) has always been proud of being the lowest District on engineering overhead for Capitol projects. Usually about 8%. Neck and neck with Bishop. San Francisco and LA sometimes run 14%. That is a long ways from 67% or 80%.

    I have no doubt that schools personnel costs are much higher. Teachers cost more than school rooms or paper and pencils.

    Space shuttles cost enormous amounts of money for hardware alone, but I think the tens of thousands of support personnel cost more.

    So it should be no surprise that personnel in State Government cost more than sand, gravel, paper clips or any other commodity.

    The forms at the DMV are a tiny part of producing licenses. The water in a fire truck is far less expensive than the cost of a firefighter.

    The government is basically a service industry. Service requires people and people cost money. And people demand services.

    If the purpose of government was to supply #2 yellow pencils the cost of labor would be extremely small. You can go to Office Depot for pencils. But if you want roads or schools it becomes more expensive.

    Talented people cost money.

  • Charles

    The last major project I was the Resident Engineer on cost $38 million dollars. The cost of field engineering personnel over the two years of the contract was a total of less than $1 million and the project development cost was less than $2 million. How can this be 67% or 80% of the cost? It is obviously less than 10%. Where do your numbers come from?

  • Bob

    Charles’s ‘I worked hard, I deserved my pay’ comments of February 11 are most certainly heartfelt. Ask him or any other state/local government employee if they are overpaid and you will get much the same reaction. It’s called having “a dog in the hunt.” The trouble is, when public sector employee unions negotiate with management, there is only one player at the table who has a dog in the hunt, the employee. Government workers in management positions get their power from spending. Cut the worker’s pay, you cut the manager’s budget and thereby you cut manager’s power. And that manager’s budget goes into her boss’s budget and now the manager’s boss’s power is reduced.

    There has been absolutely no downside to anybody at the negotiation table agreeing to give workers more. Nobody at that table has had to reach into their own pocket (like a business owner) or better yet lose their job when they negotiate contracts like the one the SF police chief Heather Fong got when she retired at age 53! She cashed in her sick pay and unused vacation to bump up her last year’s earnings and those earnings were used in the formula for her retirement and she’ll now get 276k a year in retirement, while her base pay while working was $187k.

    Charles, and the opponents of what’s going on in Wisconsin have to have blinders on if they cannot see this is tantamount to union-negotiated, legalized theft. Ms. Fong got that bump in retirement most certainly because when that provision was being negotiated, nobody at the table was saying I’m here to be sure the TAXPAYER is taken care of. Nobody at the state level gets any upside in cutting spending, because cutting spending, as implicitly shown in this post, means cutting payrolls.

    It’s time for business as usual to change. Fredrick Douglass said it best, “Power concedes nothing without a demand.” We must demand wage concessions, plain and simple.

  • Charles

    Bob,

    Thank you for another egregious instance of pay spiking. I am not a Police Chief in SF. California employees cannot spike their pay in this manner. It is and always has been based on salary alone.

    No overtime, no vacation, no uniform allowance, no steel toed boots, nothing else.

    Your example of Heather Fong (or Rizzo)is an outrider, an anomaly.

    My pension is about 13% more than it would have been based on the 1969 commitment because of the change in 1999.

    If you can legally take that back, do so. But don’t say I am a thief.

    “Charles, and the opponents of what’s going on in Wisconsin have to have blinders on if they cannot see this is tantamount to union-negotiated, legalized theft.”

    Perhaps Californians should educate themselves before they vote instead of shooting themselves in the foot year after year after year and then crying about the fact the results don’t change.

    Instead of declaring pensions which cost $4b per year the cause of the deficit they should look at welfare which costs $83B per year.

    Or bullet trains or stem cell research. Or closing our southern border.
    Or contracting out government services in technical and professional fields which double costs to the taxpayer.

    Brought to you by government, both Republican and Democrat who get funding from private business.

  • Leroy

    This is for all the state service employees; The common people are sick of your great pay and benefits. See the realization is that people get a Govt’ job and our set for life. I just meet a firefighter who was telling me at 55 he is done and gonna retire. Good for him but why do I have to wait till 65? But he has a dangerous job, well your more likely to die as a lumberjack but they wait till they are 65 to retire. But they should be allowed to have union’s and collective bargaining right? NO, I was in a Govt’ job for 8 years called the Navy, and we never got to bargain for poop!! Oh but they work 12 hours days? I work 12′s now as an engineer, and Ive put in many hours straight in the Navy (over 24 at a time) (doing things that are called CLASSIFIED) but guess what you got paid for your time don’t like your job quit! if the pay is slashed and benefits cut find a new one.

  • oz

    Leroy-

    So you voluntarily left a job (the Navy) that would have allowed you to
    retire in your 40′s?

    And you want to complain about someone retiring at 55?

    Pension envy is an ugly thing, and the anti-pension crowd is capitalizing
    on it heavily, stirring up an intra-class warfare. Please don’t fuel their
    fire by unnecessarily promoting strife.

  • Fred Matteson

    I wouldn’t want to see a 55 year old fireman hauling up a hose and walking through a burning building. Basically, for their profession, such age is the perfect time to retire and we should thank them for the daily risks they take to save other people’s lives.

  • Anon

    David Crane, the former economic adviser [to Governor Schwarzenegger] could itemize the result: a long list of depressing government financial statistics. The pensions of state employees ate up twice as much of the budget when Schwarzenegger left office as they had when he arrived, for instance. The officially recognized gap between what the state would owe its workers and what it had on hand to pay them was roughly $105 billion, but that, thanks to accounting gimmicks, was probably only about half the real number. “This year the state will directly spend $32 billion on employee pay and benefits, up 65 percent over the past 10 years,” says Crane later. “Compare that to state spending on higher education [down 5 percent], health and human services [up just 5 percent], and parks and recreation [flat], all crowded out in large part by fast-rising employment costs.” Crane is a lifelong Democrat with no particular hostility to government. But the more he looked into the details, the more shocking he found them to be. In 2010, for instance, the state spent $6 billion on fewer than 30,000 guards and other prison-system employees. A prison guard who started his career at the age of 45 could retire after five years with a pension that very nearly equaled his former salary. The head parole psychiatrist for the California prison system was the state’s highest-paid public employee; in 2010 he’d made $838,706. The same fiscal year that the state spent $6 billion on prisons, it had invested just $4.7 billion in its higher education—that is, 33 campuses with 670,000 students.
    - quoted from California and Bust by Michael Lewis, Vanity Fair November 2011

  • Charles

    I don’t know if David Crane actually said this. If this is true I want to know how they pulled this one off.

    A prison guard gets 3% of his final salary per year at fifty years of age. California STATE employees cannot spike their pensions. The excesses you see in the news are about local or county employees. There are NO county or local prisons.
    5 years times 3% equals 15% of final pay. Try it at home on your very own computer! Or tell whoever wrote this that their source needs to retake Remedial 2nd Grade arithmetic.

    By the way, where is Ed? Maybe he got tired of refereeing his blog. Ed? Ed? I miss you and Tough Love.

    This hypothetical prison guard cannot possibly get more than 15% of his final one years salary.

    I had to work for the State for 40 years and retire at 59 to get a mere 90%. I was robbed! I shall take this all the way to the Supreme Court if necessary. I have Rights! Gimme da money or I’ll shoot myself!!!

  • Billy

    Interesting debate. Persons who have earned pensions should not generally have their benefits cut as they, in good faith, accepted a commitment; however, changes for current and future employees should be made sustainable. This generation will never pay current debt. Therefore, Charles and his ilk are already being paid by their children and grandchildren. Enslaving debt of future generations is an elephant in the room that is at least as important as any specific public union member’s lifestyle. The idea that unionized teachers are failing our children (statistics of failing public schools abound) while being paid by those same un-empowered children is the height of irony. Also, taxing earners more has proven to be inefficient. The government is too corrupt (including influence of public unions). History shows that higher tax rates just produce more spending rather than stabalizing current unsustainable spending. Finally, anecdotal evidence (how hard one particular person says they worked, for example) is of low value to analysis. For example, I am not envious of a public employee’s pension even though the promise of a defined pension for me (after 36 years) is now half of what was promised 20 years ago. That is my situation and cannot be compared to others. What is important are my children, their future, and what I can do to help ensure that for them and others of their generation.