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Effects of Excessive Increases in City of Davis Employee Compensation from 2011 to 2020 on the City's Ongoing Budget Crisis

by Alan Pryor

This author previously published an analysis of annual compensation and raises given to City of Davis employees from 2011-2018 and compared them to a government-calculated inflation rate to determine the impacts these raises had on the City budget (see article here). This article updates those disclosures through the calendar year ending 2020.

I. EXECUTIVE SUMMARY

a. Summary of Increases in Total Compensation (Pay and Benefits)

The actual average total compensation (Pay and Benefits) in 2020 for City of Davis full-time, year-round (FT) employees was $163,244 (see Appendix B and below). This is a 10.7% increase from 2019 and far exceeds the annual rate of inflation of 1.5% in 2020 as determined by the US Bureau of Labor Statistics for Bay Area Urban Wage Earners & Clerical Workers ("Bay Area CPI "- see https://data.bls.gov/timeseries/CWURS49BSA0).

The average increase in total annual compensation (Pay and Benefits) for City of Davis FT employees has been 6.0% per year from 2011 through 2020.  This is more than twice the average annual rate of inflation of 2.7% during the same period as determined by the Bay Area CPI.

If annual total compensation increases to FT employees had been instead limited to the Bay Area CPI rate of inflation from 2011 to 2020 (i.e.2.7%), the average total compensation otherwise received by FT City of Davis employees in 2020 would have otherwise been $124,169 - or about 24% less than the $163,244 in average total compensation actually received.

b. Summary of Increases in Pay Compensation (without Benefits)

Similarly, the actual average annual Pay (without Benefits) paid to City of Davis FT employees in 2018 was $107,683. This is a 7.0% increase from 2019. The average increase in annual Pay (without Benefits) for City of Davis full-time, year-round (FT) employees has been 4.6% per year from 2011 through 2020 compared to the average annual rate of inflation of 2.7% during the same period as determined by the Bay Area CPI.

If annual Pay increases to FT employees had been limited to the Bay Area CPI rate of inflation from 2011 to 2020 of 2.7%, the average Pay otherwise received by FT City of Davis employees in 2020 would have instead been $92,439 - or about 14.2% less than the $107,683 average Pay actually received.

c. Summary of Impact of the Excessive FT Employee Compensation on the City's Budget

The annual differences (i.e. payroll savings) between the actual total Pay and Benefits paid by the City to all FT employees from 2012 through 2020 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 $12.387 Million in 2020.

On a cumulative basis, the City has paid in excess of $54 Million more to FT employees in Pay and Benefits from 2012 through 2020 compared to if annual total compensation increases otherwise been held to increases based on the Bay Area CPI. 

That additional $54 million 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 and fair annual increases in employee compensation to match inflationary pressures on their costs of living.

The most recent trend in accelerating employee salaries and total compensation is ironic given the current City Council's self-proclaimed fiscal responsibility and laser-focus on cost containment.

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II. ANNUAL COMPENSATION INCREASES OF CITY OF DAVIS FT EMPLOYEES FROM 2011 – 2018 COMPARED WITH INCREASES IF BASED ON ANNUAL CONSUMER PRICE INDEX

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 the actual rates of inflation over the same 2011-2020 time-frame.

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). Summary information showing total employee compensation for all of the City's employees downloaded over the 2011 – 2020 are shown in Appendix A.

Note that the payroll data from Transparent California is only available up through the calendar year ending December 31, 2020. Year-ending data for calendar year 2021 will only be available from Transparent California when received from the various government agencies and posted later this year. 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, 2021) are not yet reflected in this data.

In addition to the summary data reported in Appendix A, regular payroll and overtime pay (collectively referred to as Pay) and total compensation including payroll benefits (including Pay and Benefits) are reported each year for each individual employee of the City (e.g. see https://transparentcalifornia.com/salaries/2020/davis/ for employee salary records for 2020). 

By segregating the annual payroll data for individual FT city employees from part time employees, the average Pay and average total compensation (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 average annual percentage changes in compensation received by FT City employees as reported by the City to Transparent California and the corresponding 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.

Pct Annual Change in Average Pay

To summarize the above information, the average annual increase in the Bay Area CPI from 2011 through 2020 as reported for Bay Area Urban Wage Earners & Clerical Workers by the US Bureau of Labor Statistics is 2.7%. The actual annual average increase in Pay and Benefits for City of Davis FT employees is 6.0% and the actual annual average increase in Pay for FT City employees is 4.6%.

Keep in mind that the Bay Area Urban Wage Earners & Clerical Workers CPI is unusually high compared to other local 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. For additional comparison, the CPI used by the Social Security Administration over the same time period for determining annual cost-of-living increases to pensioners is about 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 only by the CPI as shown in the following graph.

Actual and CPI-Adjsuted Ave

For example, the actual average annual total compensation (Pay and Benefits) paid to all FT City of Davis employees in 2020 was $163,244. If annual increases in total compensation were otherwise held to the annual Bay Area CPI Index, the average annual total compensation would instead be $124,169.

Similarly,  the actual average annual Pay paid to all FT City of Davis employees in 2020 was $107,683. If annual increases in Pay were otherwise held to the annual Bay Area CPI Index, the average annual Pay would instead be $92,437.

As is obvious, 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 Bay Area 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.

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III. TOTAL COSTS OF EMPLOYEE COMPENSATION INCREASES TO THE CITY

These increases in employee compensation over and above increases based on CPI has had a profoundly deleterious effect on City finances and the City's ability to pay for other services such as infrastructure maintenance.

The difference between the actual total Pay and Benefits paid by the City to all FT employees from 2012 through 2020 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 $12.387 Million in 2020.

On a cumulative basis, the City paid in excess of $54+ Million more to employees in Pay and Benefits from 2012 through 2020 compared to if the annual increases in compensation had otherwise been held to annual increases in CPI. This is shown in the following graph.

Annual & Cumulative Savings_2011 - 2020

The $54+ Million that would have been saved by the City had employee compensation increases been held to the CPI from 2011 through 2020 would have paid pay for an awful lot of infrastructure and road repair that was otherwise deferred by the City and now accumulates as increasing unfunded liabilities.

IV. THE CITY HAS MISREPRESENTED AND FAILED TO ACCOUNT FOR UNFUNDED PENSION LIABILITIES BY THE CITY

The City has been misrepresenting the extent of annual employee compensation increases for some time and has also failed to properly account for associated unfunded pension liabilities.

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", 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.

The Vanguard article stated at that time,

"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) strongly 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 three 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. 

Additional information on the extent of under-reporting of the City's unfunded pension liabilities is discussed in Appendix C.

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APPENDIX A – SUMMARY OF ANNUAL 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).

Summary of Annual Compensat

Inspection of this data shows a strong, increasing trend in median employee Pay and total Pay and Benefits from 2011 through 2020. It also shows a fairly sizable 17% increase in annual employee costs per Davis City resident from $627 in 2015 to $762 in 2019. Note that the population of Davis in 2020 was underestimated and the employee costs per resident thus overestimated due to the number of students that has left town because of pandemic concerns during the 2020 census.

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APPENDIX B – CALCULATIONS OF ACTUAL ANNUAL EMPLOYEE COMPENSATION INCREASES COMPARED WITH INCREASES BASED ON RATES OF INFLATION

Average compensation changes of full-time, year-round (FT) city employees was determined by first segregating and removing all part-time and non-year round employees from the listings of the individual annual payroll details for all employees of the City. Then the compensation of all the FT employees was arithmetically averaged to calculate the average Pay and average total Pay and Benefits for all FT, Year-Round City employees.

This in turn allows the average annual percent increases or decreases in average 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 average 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 only by the annual Bay Area CPI as shown in the following table.

Calculations of Actual Empl

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APPENDIX C – CORRECT REPORTING OF UNFUNDED PENSION LIABILITIES FOR CITY OF DAVIS EMPLOYEES IN 2018

One contributing factor to the unusually large increase in total Pay and Benefits (12.1% in 2018 and 10.7% in 2020) is that Transparent California now rightfully 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 because they have been adequately accounting for their full pension obligations up through 2018.

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