Effects of Increases in City of Davis Employee Compensation from 2011 to 2018 on the City's Current Budget Crisis
Effects of Increases in City of Davis Employee Compensation from 2011 to 2018 on the City's Current Budget Crisis
by Alan Pryor
The actual average increase in total annual compensation (Pay and Benefits) for City of Davis full-time, year-round (FT) employees has been 5.9% each year from 2011 through 2018. This is more than twice the average annual rate of inflation of 2.8% during the same period as determined by the US Bureau of Labor Statistics for Bay Area Urban Wage Earners & Clerical Workers. The actual average increase in salary without benefits (Pay) has been 4.5%.
The actual average annual total Pay and Benefits paid to City of Davis FT employees in 2018 was $144,115. Compare that to the average annual total Pay and Benefits of $118, 640 that would have alternatively been paid in 2018 if annual increases in total compensation had instead been held to the annual CPI increases since 2011.
Similarly, the actual average annual Pay (without Benefits) paid to City of Davis FT employees in 2018 was $97,834. Compare that to the actual average annual Pay of $88,324 that would have been paid to FT employees in 2018 if annual increases in payroll-only compensation had instead been held to the annual CPI increases since 2011
For comparison, median earnings for FT private sector workers in Davis was $63,125 in 2018. City employees thus received an average 55% greater Pay ($97,834/$63,125) and 128% more in Pay and Benefits ($144,115/$63,125) than FT private-sector workers in 2018.
The annual differences between the actual total Pay and Benefits paid by the City to all FT employees from 2012 through 2018 and that which would have been paid if annual increases had instead been held to the CPI is very substantial and ranges from $3.645 Million in 2015 to $7.668 Million in 2018. On a cumulative basis, the City has paid in excess of $34 Million more to FT employees in Pay and Benefits from 2012 through 2018 had annual payroll increases otherwise been held to increases based on CPI.
That additional money could have been very beneficially used in the intervening years to resurface many additional miles of the Davis streets and bike paths in most need of repair while still providing adequate annual increases in employee compensation to match inflationary pressures on their costs of living.
INTRODUCTION AND BACKGROUND
The Corona virus pandemic is causing substantial reductions in revenue across all sectors of government and is forcing drastic reductions in spending to accommodate these shortages. Recently, California Governor Gavin Newsom proposed a 10% reduction in pay to all state employees through furloughs along with pay raise and hiring freezes as well as a host of other money-saving proposals including reductions in state property leases and prison closures.
Gov. Newsom’s proposal, which requires approval from the state Legislature, relies on collective bargaining between his administration and state unions to reach agreements on how to achieve the 10 percent reduction in pay. However, Gov. Newsom is also seeking authority from the Legislature to force the reductions on employee unions if agreements cannot be otherwise reached. The proposed mechanism for pay reductions would be mandatory furloughs. Two furlough days a month would reduce salaries by 9.24 percent. The Governor's proposal calls for the reductions to start on July 1.
In a recent presentation to City Council by the City's budget consultant, Bob Leland, one of the options presented to overcome the City's expected budget deficit next year was a mandatory one-day per month furlough for City employees. This was expected to produce near-term annual savings of $1.6M. Assuming the one-day per month furlough proposed for City Staff has the same relative % reduction in annual compensation per furlough day as the proposed State 2-day per month furloughs, this one-day per month furlough will result in an average reduction of 4.62% in pay to FT City employees. But employees would also be working one less day each month so their comparative hourly pay would not be reduced.
However, in Staff's report submitted in advance for this coming June 2 Council meeting, this proposed one day per month furlough is not further discussed and the savings necessary to achieve a balanced budget are instead proposed to be realized primarily by reducing the Capital Improvement Project (C.I.P.) budget by over $7 Million this coming year. This would postpone many already-scheduled and needed street and bike path maintenance and improvement projects.
It is important to note that the City’s current $259 million budget shortfall in capital maintenance is primarily due to past decisions by our City Councils to repeatedly defer such needed maintenance in favor of annually increasing employee salaries in excess of then existing rates of inflation. Adding $7 million a year now in additional deferred maintenance will simply increase the future maintenance budget shortfall from $259 million to $287 million over 4 years. The bottom line is that the proposed deferred maintenance expenses will not actually go away. The costs will simply just be delayed until a future time when the costs of the necessary maintenance will increase even more do to further deterioration of our infrastructure..
It is also unclear if the currently planned 2% payroll increase effective July 1, 2020 that was negotiated as part of a multi-year Memorandum of Understanding approved by the City with its labor groups in 2018 is still going to take place. If the City follows Governor Newsom’s example and rolls back employee pay by 10%, the planned increase would not occur and the compensation savings would also be a true reduction in expenses.
This absence of any material sacrifices by City employees thus far to help alleviate the massive City budget shortfall is incongruous with the payroll reductions otherwise announced by the State as part of their overall budget-balancing strategy. This is particularly true in light of the fact that City of Davis employees, in particular, have received very generous employee pay raises far in excess of rates of inflation over the previous 9 years since the depths of the Great Recession.
If the City employees had their salaries rolled back by 10% similar to those cuts proposed for state employees, their compensation would still be way ahead of what they would otherwise be receiving had their salary increases been limited to annual inflation rates over the past 9 years.
To determine the overall financial impacts on City finances, it is instructive to determine the extent of actual payroll and benefit increases granted employees compared to if compensation increases had instead been based on rates of inflation over the same 2011-2018 time-frame.
ANNUAL COMPENSATION INCREASES OF CITY OF DAVIS FT EMPLOYEES FROM 2011 – 2018 COMPARED WITH INCREASES IF BASED ON ANNUAL CONSUMER PRICE INDEX
Payroll and benefits information necessary to conduct such an investigation is reported annually through Public Records Act requests by all California state, county, municipal, and UC system employers to the independent non-governmental, non-profit watchdog organization, Transparent California (www.transparentcalifornia.org). Downloaded summary information showing total and median employee compensation and other statistics for the entire City are shown in Appendix A.
Note that the payroll data from Transparent California is only available up through the calendar year ending December 31, 2018. Year-ending data for calendar year 2019 will only be available from Transparent California when received from the various government agencies and posted later this summer. As such, payroll and benefit increases for City of Davis employees that have already become effective on the start of the current fiscal year (beginning July 1, 2019) are not reflected in the following discussion and the total impacts of payroll and benefit increases are thus understated.
Additionally, regular payroll and overtime pay (collectively referred to as Pay) and total compensation including payroll benefits (hereinafter referred to as Pay and Benefits) are reported each year for each individual employee of the City (e.g. see https://transparentcalifornia.com/salaries/2018/davis/ for employee salary records for 2018).
By segregating the annual payroll data for individual FT city employees from part time employees, the average Pay and average total Pay and Benefits for FT City employees can then be calculated. This in turn allows the average annual percent increases or decreases in Pay and Pay and Benefits for all employees of the City to be determined and compared to annual increases in the CPI as reported for Bay Area Urban Wage Earners & Clerical Workers by the US Bureau of Labor Statistics (https://data.bls.gov/timeseries/CWURS49BSA0).
The differences between the actual annual percentage changes in compensation received by FT City employees and the annual increases in the specified CPI rate are shown in the following graph. Also see Appendix B for the details of these and other compensation calculations discussed below.
To summarize the above information, the average annual increase in the CPI from 2011 through 2018 as reported for Bay Area Urban Wage Earners & Clerical Workers by the US Bureau of Labor Statistics is 2.8%. The actual annual average increase in Pay and Benefits for City of Davis FT employees is 5.9% and the actual annual average increase in Pay for FT City employees is 4.5%.
Keep in mind that the Bay Area Urban Wage Earners & Clerical Workers CPI is unusually high compared to other measures of CPI because it very strongly is influence by soaring housing costs in the Bay Area. These impacts are generally more muted in the Sacramento region. Additionally, the CPI used by the Social Security Administration over the same time period for determining annual cost-of-living increases is less than 1.5%.
Using the above information, the differences in average annual compensation between what was actually paid to City employees can then be compared to the compensation that would have been paid if Pay and Pay and Benefits were instead increased by the CPI as shown in the following graph.
As can be seen from the above graph, the greater percentage of annual increases in Pay and total Pay and Benefits actually given to FT City of Davis employees over and above the CPI-defined inflation rate has resulted in an increasing spread between compensation actually paid to FT employees compared to that which would have otherwise been paid if annual increases had instead been held to the percentage increases in the CPI.
For instance, the upper two lines on the graph show the average annual total Pay and Benefits actually paid to City of Davis FT employees which equaled $144,115 in 2018 compared to $118, 640 that would have been paid, on average, if annual increases in total Pay and Benefits had otherwise been held to the annual CPI increases since 2011.
Similarly, the middle two lines on the graph show the average annual Pay paid to the City's FT employees which equaled $97,834 in 2018 compared to $88,324 that would have instead been paid in 2018, on average, if annual increases in Pay had been held to the annual CPI increases since 2011.
For comparison, the bottom line on the graph shows average median earnings for FT private sector workers in Davis which was $63,125 in 2018 (also see Appendix A). City employees thus received an average 55% greater than this amount in 2018 in Pay ($97,834/$63,125) and 128% more in Pay and Benefits ($144,115/$63,125) than average private sector workers in Davis in 2018.
TOTAL COSTS OF EMPLOYEE COMPENSATION INCREASES TO THE CITY
The difference between the actual total Pay and Benefits paid by the City to all FT employees from 2012 through 2018 and that which would have been paid if annual increases in Pay and Benefits had instead been held to the benchmark CPI is very substantial ranging from $3.645 Million in 2015 to $7.668 Million in 2018.
On a cumulative basis, the City paid in excess of $34 Million more to employees in Pay and Benefits from 2012 through 2018 had the annual increases in compensation otherwise been held to annual increases in CPI. This is shown in the following graph
The $34 Million+ that would have been saved by the City had employee compensation increases been held to the CPI from 2011 through 2018 would have paid pay for a lot of infrastructure and road repair that was otherwise been deferred by the City and now accumulates as increasing unfunded liabilities.
MISREPRESENTATION OF EMPLOYEE COMPENSATION INCREASES AND CONTINUED FAILURE TO ACCOUNT FOR UNFUNDED PENSION LIABILITIES BY THE CITY
The City has been misrepresenting the extent of annual employee compensation increases and has failed to properly account for associated unfunded pension liabilities for some time.
For example, in an article published on June 26, 2018 in the Davis Vanguard entitled "Sunday Commentary: The MOUs We Signed Should Not Be Cause for Alarm" (http://www.davisvanguard.org/2018/06/sunday-commentary-mous-signed-not-cause-alarm/), it was reported that the City recently signed Memorandum of Understandings (MOUs) with the City's employee labor groups ostensibly granting, according to the Staff Report at that time, only a 2% retroactive salary raise and three years of future 2% annual salary increases.
These MOUs were approved at that time despite a number of citizen complaints (including by this author) that the process of approving the long-term MOUs with excessive employee compensation increases was inconsistent with the stated goals of cost containment that the Council had been touting because the actual net increase in total compensation granted to employees had a net impact on the City budget far greater than the reported 2% per year.
The Vanguard article echoed and defended the City's position in the MOUs in the article stating,
"The notions of thinking about the contract in terms of total compensation and using the contract to mitigate risk are highly innovative and the council deserves a lot of credit.”
Matt Williams (then on the Finance and Budget Commission) commented in response,
"There is absolutely nothing innovative about thinking about employee costs in terms of total compensation … absolutely nothing! The community dialogue, especially here in the Vanguard over the last 3-4 years has been almost 100% in terms of total compensation...So, all the council was doing was catching up with what their constituents had already been doing for 3-4 years.
What risk did the contract mitigate? The simple answer to that question is no risk whatsoever.
Why no risk mitigation? For the following reasons …
(1) The 2% annual COLA (8.25% over the 3 year and 12 day term of the MOU) is 68% higher than the average annual COLA granted by the Social Security Administration over the last 9 years.
(2) The 6/30/2016 CalPERS Actuarial Valuation report shows 245 “active” members of the City of Davis Miscellaneous Plan. Over 31% of those “active” members will actually not receive an 8.25% increase, but instead will receive in excess of an 18% increase.
(3) Another 40% of those “active” members will actually not receive an 8.25% increase, but instead will receive in excess of a 12.5% increase.
(4) Only 28% of the “active” members will actually receive the 8.25% increase.
(5) The 18% increase bumps up the Pension Qualifying annual compensation by at least 18% (possibly more), which means the City’s Pension liability goes up substantially thanks to these MOUs.
It will take a Masters in Political Spin to transform those factual realities of the MOUs into “highly innovative risk mitigation."
And so here we are today, almost two years after the City was reporting annual total compensation increases of only 2% per year, and we find out that actual compensation increases were far greater just as Mr. Williams indicated would happen.
Further information on the extent of the under-reporting of the City's unfunded pension liabilities is discussed in Appendix C.
Additional updated information will be provided when 2019 payroll data is made available by Transparent California in the coming months.
APPENDIX A – SUMMARY OF ANNUAL EMPLOYEE COMPENSATION OF CITY OF DAVIS EMPLOYEES AS REPORTED BY TRANSPARENT CALIFORNIA
The following table shows summary statistics of City of Davis employee compensation as reported by Transparent California (www.transparentcalifornia.org).
Inspection of this data shows a strong, generally increasing trend in median employee Pay and total Pay and Benefits from 2011 through 2018. It also shows a fairly sizable 17% increase in annual employee costs per Davis City resident from $627 in 2015 to $734 in 2018.
APPENDIX B – CALCULATIONS OF ACTUAL ANNUAL EMPLOYEE COMPENSATION INCREASES COMPARED WITH INCREASES BASED ON RATES OF INFLATION
Compensation of full-time, year-round (FT) city employees from part time employees in the listings of the individual annual payroll details for all employees of the City are segregated to calculate the average Pay and average total Pay and Benefits for FT City employees.
This in turn allows the average annual percent increases or decreases in Pay and Pay and Benefits to be determined and compared to annual increases in the CPI as reported for Bay Area Urban Wage Earners & Clerical Workers by the US Bureau of Labor Statistics (https://data.bls.gov/timeseries/CWURS49BSA0).
In this manner, the differences in annual compensation between what was actually paid to City employees were then compared to the compensation that would have been paid if Pay and Pay and Benefits were instead increased by the CPI as shown in the following table.
APPENDIX C – DIFFERENCES IN METHODOLOGY IN REPORTING TOTAL COMPENSATION FOR CITY OF DAVIS EMPLOYEES IN 2018
One contributing factor to the unusually large increase (12.1%) in total Pay and Benefits in 2018 is that Transparent California now reports unrecognized pension liability as compensation in a separate category called "Pension Debt" for the first time in 2018 (see https://transparentcalifornia.com/salaries/2018/davis/).
Transparent California explained the addition of this new reporting category as follows;
"What are pension debt payments?
The cost associated with employer-provided retirement benefits is comprised of two components: the normal cost and the unfunded liability (debt) payment.
The normal cost is the amount the pension fund determines is necessary to pre-fund that employee's future benefit. But because this cost is calculated based on a series of projections about future events, they oftentimes end up being insufficient to fully fund the employee's promised benefit.
When this happens, an unfunded liability (debt) is created. In order to pay this debt down, the annual retirement costs are increased accordingly.
Beginning in 2017, agencies belonging to the state pension fund (CalPERS) are only required to report the normal cost portion — which gives the erroneous impression that their annual costs have significantly declined.
To ensure the full annual cost of employee compensation is reported, and to maintain parity with the reporting methods used by non-CalPERS agencies as well as all CalPERS agencies prior to 2017, Transparent California prorated these agencies’ pension debt payments across all employees. This prorated value is reported under the "pension debt" column.
The pension debt column does not appear for any agency prior to 2017, as that cost was already included by the reporting employer as part of their retirement costs.
Similarly, it does not appear for the agencies that continue to report their full retirement costs to Transparent California." (Bold emphasis added)
Regionally, both Woodland and Winters saw such new categorical disclosures in their total compensation reflecting accrued "Pension Debt" as reported by Transparent California. West Sacramento and Yolo County did not have these categories in their payroll disclosures for 2108 by Transparent California seemingly indicating that they have been adequately accounting for their full pension obligations up through 2018.