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?

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Self-Filling Paychecks Crashing Local Budgets

The vast majority of California cities are doomed to financial failure in the near future because of the mandatory raises in salary given to the bulk of their employees and subsequent increase in pension payments. Imagine if you were guaranteed a raise in your salary every year and corresponding raise in your retirement pension with no regard to how well you do your job, all because your employer is worried you will go to work for your competition.

That is what happens with most of the municipal employees across the State of California. Here in Long Beach we hear the same refrains when contracts with various sectors of city employees are being negotiated: 1) We have to pay them more or they will go work for City "X" and 2) We have dedicated employees in the City who deserve our support.

Which is it? Are they dedicated to their jobs or are they mercenaries ready to bolt to Vernon or Bellflower or Santa Ana because the same position there is paying 3% more in base salary? They cannot be both, either they are loyal or they are in it for the bucks. Because almost none of our members of City Council over the years have any business experience, especially management and/or ownership experience, they believe the arguments. As a result our city employees have guaranteed raises in their contracts and when it comes time to renegotiate they are given raises framed in such a way at to appease only the most intellectually vapid among us: our employees are within 5%, 3%, 1% of the median for the sector in the region/state. Of course the employees in the municipalities against whom our employees' contracts are based are represented by the same union and of course have the same language in their contracts. As a result the unions, across several different city governments, have contracts guaranteeing perpetual raises for their members since the median income will always be going up.

Essentially every raise that occurs in any municipality in the state trickles through the system to enact raises for every other city due to a rising median salary and benefit package. If Alameda pays their General Maintenance Worker II's more money then when Richmond's contract renews their workers will get a raise to "stay competitive" and so it trickles down the state, Fresno, San Louis Obispo, Glendale, Bell, Long Beach. And by then when Long Beach gets their raises it will trickle back up to Alameda in time for them to get their new raises.

Keeping in mind how difficult, damn near impossible, it is to fire any employee with union representation, these employees are guaranteed the salaries regardless of productivity, efficiency or any standard of job performance. Further, it includes payments into their pension plan--which is the real budget killer.

As residents we are subject to attempts at blackmail by management telling us, if we do not give these raises and "stay competitive" we will lose our best and brightest to a neighboring city who is paying their employees more. Really? In this economic environment Carson, El Monte or Aracadia are going to bring in new employees to replace existing employees who are what retiring? Being fired? Because they have money in their budgets to hire more General Maintenance Worker II's or Division Budget Analyst Managers?

If anyone decides to leave the guaranteed employment, guaranteed salary--which is quite generous given the lack of performance requirements that can lead to dismissal--and guaranteed pension for a few bucks more, I say let them. Let them go. Here in the private sector we often do, sure go to the suppossed greener pasture, leave stability and venture into the unknown. Employees know this is the case and because of that do not play chicken for pay raises. There is a bottom line to company profit and sustainability, if giving you a raise just to keep you jeopardizes that then good luck at your next place of work if you choose to go. Further, if you cannot justify your raise with corresponding increases in profit, decrease in other expenses, productivity or other measurable output then you will not get one. Try that with a city job.

So if employees in negotiations say, "We can go to ______ (fill in city of choice here) for more pay, I say let them try it. For one we can use the job loss on the city income statement. But more importantly it is a bluff. If we do not give our cops a big pay increase, or our firefighters or our City Hall employees, we will not be seeing any job exodus. When city management uses this argument it is tatamount to me telling my children to go to bed or the Bogeyman will get them.

Currently the City of Long Beach has ninety-four former employees drawing over $100,000 per year in pensions from CalPers for a total of over $11.25 million per year. Guess where that money came from? Not the employees but from the tax payers. Instead of building a new library City Councils past handed out pay raises. Instead of fixing streets or sewers City Councils handed out retirement benefits based on last salary. Instead of protecting the city infrastructure our elected officials and city managers padded salaries, particularly for those groups most active in campaign donations for local and state elections. With each new series of raises comes a series of pension contributions that are that much higher, that drain that much more from city coffers, that creates that many more retirees in the $100k club. Meanwhile the rest of us pay into our own 401(k) with limited company contributions--mainly due to federal tax limitations--and keep pushing back how long we will have to work before retiring.

The City of Long Beach, and other city governments across the state, must stop the spiralling salary increases that feed off each other. Call the employees' bluffs that they will leave their current jobs in search of more pay elsewhere, I say good luck matching what you have now. There is a reason employees in the private sector stay with the same companies for decades: loyalty, steady employment and fairness by both sides.

Finally regarding the pensions Long Beach and other cities need to renegotiate with every group and individual. Retirement benefits should not be set on an employee's last year, or six months, of employment but rather be based on the median income of the last five or seven years. Each employee must pay into his or her retirement account as we do in the private sector. Finally, if an employee leaves before five years they only carry a portion of the city contributions with them.

It is time for our elected officials and senior city management to quit playing us for fools, and time for the electorate to quit being played. Take control of the spending which is 80% of the budget: salaries and benefits. Quit worrying about losing employees and start worrying about saving money for today and into the future. Start acting like employers who care about the long term survival of our city and not like politicians worried about your next campaign donations.