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Monday, September 28, 2009

How To Crush Budgets: The Median Income Spiral

Last Wednesday I posted Dear City Council: Fix It, which the Long Beach Post was kind enough to re-print. Predictably a few public employees were quick to comment, some pulling out the old canard that current union employees get what they deserve because 100 years ago unions started working to improve work conditions, etc, etc. Others immediately go to my missive was partisan-Republican-anti-union to try to dismiss the message. Well the message was clear, without pension reform the future of the city is bleak financially as the number of ex-employees we support grows with no contribution from them. As well the political climate appears to be right for such reform, if the members of the Long Beach City Council (or insert any public agency/government here) has the courage to tackle the issue.

Today I want to address the front end of public employee contracts, most specifically the police officers contracts with guaranteed pay increases based on what other cities pay their cops. In a formula that has been adopted not just by Long Beach but by other municipalities, the contract between the City of Long Beach and the Long Beach Police Officers Association, pay increases are based not on the needs of Long Beach, the job of the LBPD or any other factor that would normally go into contract negotiations. The salary aspect of members of the LBPOA is based upon what other cities pay their police officers. The median salary of nine other cities in California is the salary of Long Beach Police. There is an exception in the coming year with the budget troubles of the city and the LBPOA has agreed to forego a 9% increase in pay for a 2% increase in pay--well forego is not the right word, they have agreed to 11% pay increases over the next five years and go off the median salary chart. Good, the median salary formula should be thrown out for all public contracts as it is a never ending spiral that prevents local governments from controlling their salary and employment expenses.

For those who were not paying attention during math class, the median of a group of numbers is the number that is right in the middle: if you have a set of three numbers arranged highest to lowest, the middle number is the median. Example: 3, 8, 12 the median number is 8. If you have nine numbers in a set the median is the 5th number. Example nine other cities pay a position the following salaries: $43,000; $45,000; 45,500; $46,250; $50,125; $51,250; $51,800; $52,050 and $53,000. The median salary is $50,125 which if this were a public contract would be the new salary.

As you can see as soon as one city gives raises to the median level plus $1 then the median level shifts up for everyone. If Santa Ana gives a 5% raise the median level increases, if Oakland then gives a 5% raise to its workers and it jumps above the median level then we see another increase. Mathmatically this should smooth out over time, but as we have seen in Long Beach and other cities that use this formula, the raises do not smooth out. Depending on contract negotiations in other cities we can see raises of 5% to 15% in a given year. For the police contracts those swings have been between $5 to $15 million depending on what happens in other cities.

The unions of course are all in favor of median-salary-based contracts as they know there is guaranteed escalation. Statewide it is encouraged for all locals to enter median based contracts, and many city governments have these budget busters on their books. Fortunately in Long Beach the City and the LBPOA negotiated out of the median salary increase for the coming five years, had they not our city would have lost police officers to bring the police budget into the available city budget.

The median contract mentality is not just for the hourly and union employees, it also exists for management. We hear, "well Vernon/Maywood/Chula Vista/etc is paying their _______ (fill in management role) so much so we have to pay the same to keep our people." To which I say, "No. We don't." Let them go to work in Vernon/Maywood/Chula Vista. At some point the city needs to quit competing with other cities that are paying hirer salaries to lure top management from bigger cities and let the employees make their choices: get paid more to work for another city or stay in Long Beach where you have seniority, work in a vibrant city and have family and friends. This is the same choice that is made by private sector managers and companies all the time. Even in this economic climate some companies are looking to hire top talent and are willing to pay for it. Individuals need to weigh their current scenarios against hirer pay in an unknown scenario.

One way to prevent, or reduce, employees jumping to other cities for higher pay would be to put some restrictions on their pensions. As I mentioned last week the first adjustment should be greater contributions from the employees, those in unions and those in upper management who are not. Second, the employer (read: taxpayer) contributions to the pensions should be vested over time as they are in the private sector, and not vested across PERS (Public Employees Retirement System) but vested by contributor. If someone leaves the City of Long Beach after five years they only get 20% of the employer contribution to carry with them, if someone comes in from another city they are not fully vested right away but must begin the vesting schedule from year one like any new higher. The ability to transfer pension rates and vestings across employers through PERS is highly detrimental to the budgets of cities and municipalities. It encourages job jumping and hinders the ability of those governments to retain workers they have trained and vested their resources in unless they pay higher and higher salaries.

It is time for the City of Long Beach to scrap the compensation models of the past that have led the city to the current budget crisis. Instead of relying on upper management who have Masters and higher education degrees in Public Administration and Public Finance, the city needs to rely on some private sector ideas and formulas to create compensation models for public employees that more accurately mirror those that most tax payers fall under. Compensation needs to be performance based, need based and fiscally based upon a long term budget plan. Pensions and benefits need to be shared between the employer and the employee, and further employees should be paying the full weight of their dependents' coverage.

To use a phrase that was repeated in Sacramento repeated in the last year, this City Council can either "kick the can down the road" or it can take a stand now and tell city management to begin restructuring contracts and compensation formulas. As new hires come into the city the new formulas need to be put into place. Without any restructuring our budget deficits will continue to grow as the deficits grow in Washington and Sacramento and they reach down to take more and more from the counties and cities.

I ask again, does our City Council have the courage and wherewithall to tackle this critical issue?

1 comment:

Mark said...

good article and solid logic. Time to wake up and get realistic about what we taxpayers can afford.