The presentation of the Cambria Community Healthcare District’s proposed budget for 2009-2010 was fairly thorough and made it clear that the Board is going to have to step up to the plate and make some difficult choices to balance their budget. With nearly 87% of all their revenue needed to cover their personnel costs, there isn’t much they can do other than review their employee compensation agreements. The staff have agreed to a freeze in the step increases that are part of the current MOU (aka contract) for one year. The dedication and loyalty they have shown in agreeing to the freeze is to be applauded. Unfortunately, a freeze for one year is not going to solve the problem. And the problem is just going to grow exponentially as we go forward if the board doesn’t address the issue now.
No one likes to be the bad guy who cuts salaries or even eliminates entire positions. We must give our expectations a reality check and get our spending under control. We are a town of about 6,000. It would be nice to have it all, but let’s get real about how much we can really afford before our quality of life is damaged beyond repair and our community dies of thirst and starvation. (Although we’d be able to say that at least no one lost their job or retirement benefits.)
In February, the editor of EcoWorld.com posted a relatively clear and comprehensible article about how to “properly assess worker’s compensation.” Personnel costs account for a large portion of all expenditures for almost every kind of company or agency that exists. As budgeting concerns dominate conversations of Boards of local governments all over California and the compensation liabilities come into clearer focus, the public needs to get educated about how their money is being spent and whether that spending is appropriate. In Cambria, we are facing rate increases of 9.75% on water and 15% on wastewater – mostly just to keep up with the costs of employing the 32 staff of the CCSD.
Now, I’m the last person to stand up and say: hey, those folks don’t deserve that pay or the benefits! I think all employees should be provided reasonable health coverage and some sort of retirement/pension benefit (once they’ve been around long enough.) But I also think the days of over for the commonly cited rationale of “recruiting and retaining qualified people” public sector jobs. Especially as the economic downturn shows no signs of loosening its grip, jobs in the public sector are many times more attractive than the more volatile private sector.
I recommend you take a look at this article. And offer your two cents. I’m not a genius, but the reasoning and equations seem sound enough.
From the article:
…the way retirement pensions and health benefits affect real compensation in the public sector, normalized for all benefits, is quite dramatic. During the years public sector employees work, the funding requirements of their future benefits need to be paid. While ongoing funding allows interest to be earned, the real return of these funds is not likely to exceed 5% per year, if that. Despite a run of excellent returns in recent years, fueled by unsustainable debt fueled economic “growth,” in general funds large enough to service pensions for millions of workers cannot experience real growth greater than the rate of overall economic growth for the economy at large. A good global fund should not be expected to grow faster than the sustainable rate of global economic growth, which has never exceeded 4% historically (ref. Humanity’s Prosperous Destiny); this is a realistic if not optimistic real rate of return, adjusted for inflation. Let’s also assume a public employee works for 30 years, retires at age 55, lives to be 75, and started their career earning a salary paying one-half as much as what they earned by the end of their career, with the increases spread evenly through their 30 year working life. Assume these are merit increases since we are dealing with real dollars, and similarly, since we are using real dollars, assume no cost of living adjustments during retirement. All of these assumptions, please note, will lower the amount of funding required each year. Assume they are state workers, meaning they “only” get 2.0% per year applied to their retirement calculation.
The math is somewhat complex, but here is the result: At a return of 4% per year, a state worker will have to have an additional 19% of their salary contributed to their pension fund each year they work in order for the fund to accumulate enough to pay them their defined pension until they reach the age of 75. During the years they work, they will also have to have annual contributions made for their future health benefits - to say these amounts would be at least 2.0% more of their salary, which is about what medicare requires, would be a generous understatement, since public employees often receive supplemental health coverage for the period prior to age 62 when medicare eligibility begins, and they often receive coverage to supplement medicare as part of their retirement. For a state employee making $65K per year, this 21% of salary set-aside for their future health care and pension must be paid each year, and this is part of their compensation. Just as an aside, a city or county worker who gets a 2.7% per year pension plan, earning $65K per year at retirement, with a fund earning a realistic 4% per year, would require 27% (including the understated 2% for future health benefits) on top of their salary put into a retirement fund each year. Those in public safety who earn a 3.0% pension package, under these assumptions, would require 31% of their salary to be paid each year to adequately fund their retirement benefits.
It doesn’t end there. Public employees don’t work as many hours each year. Instead of 10 holidays, usually they get at least 15. Instead of 10 days of vacation, over their career, on average, if you include “personal days” as well as vacation time, public employees get at least 30 paid days off annually, 50% more than private sector workers. This is not to mention the “9/80? program where they get to work 9 days every two weeks instead of the normal 10 days, so long as they work an extra hour per day – hmmm, lunch at the desk and a few minutes early to arrive and a few minutes late to leave – sounds like a typical salaried job in the private sector, but never mind.
Where does this put us? If an executive in the private sector making $65K per year is going to actually make, best case, $94K per year, with an overhead of 45%, what is the overhead, and true compensation for a public employee?
Using the state worker as an example, you will take $65K, add 21% for funding future retirement benefits, add $12K for health benefits (apples and apples here – in reality health benefits are on average much better for public sector workers), normalize for 30 paid days off per year instead of 20, and you get an adjusted compensation of $102K per year, or an overhead of 58%.
It is important to note that a private sector workers overhead component of their total direct compensation of 45% is the absolute high end, whereas the overhead for a state worker in this example of 58% is the low end.
PensionTsunami.com lives up to its name – providing an unreal tidal wave of links to news stories and articles that provide an overview of the multiple pension crises that are about to drown America’s taxpayers.
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