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HomeMy WebLinkAbout03/15/2011, B1 - REVIEW AND MODIFY COMPENSATION PHILOSOPHY counat 3/15/2011 j agenda RepoRt CITY OF SAN LUIS OBISPO FROM: - Monica Irons, Director of Human Resources SUBJECT: REVIEW AND MODIFY COMPENSATION PHILOSOPHY RECOMMENDATION Adopt a resolution modifying the compensation philosophy for the City of San Luis Obispo. SUMMARY A compensation philosophy drives organizational effectiveness by providing the context in which pay and benefit plans are aligned with the organization's overall mission. Pay and benefit plans should encourage and reinforce desired behaviors by employees. The City's mission is to provide excellent service to the community and that service, in turn, is provided by employees. The City's adopted organizational values describe the expected behaviors of City employees. Therefore, the City's Compensation Philosophy (Attachment 1), adopted in March 2007, describes the purpose of City pay and benefit plans as part of an overall strategy to attract and retain highly qualified employees to serve the community. A review of the Compensation Philosophy is appropriate to ensure the philosophy remains useful throughout a changing economy and recruitment and retention challenges. Proposed modifications to the compensation philosophy are based on practical application during the past four years, as well as input from Council and community members during budget workshopsand community forums. BACKGROUND History of Current Compensation Philosophy During 2004 to 2007, the City experienced increasing difficulty in attracting and retaining qualified employees. Data at that time indicated recruitment and retention issues were broad- based within the City. Approximately 20% of the:regular employees hired in 2004 and 2005 left within their first year of employment. The :Cityexperienced vacancies for extended periods during that time due to an inability to attract qualified candidates. Anecdotal information obtained from strong candidates who chose not to accept positions with the City, as well as from key employees who left the City, indicated compensation influenced their decisions. Quantifiable information was needed to understand what, if any, changes to City compensation and benefit plans were necessary. In August 2006, the City began a comprehensive compensation study for general services, confidential, management, and department head job classifications. This was the first such study in over ten years for these types of classifications. A consultant, Geoffrey Rothman of Renee Sloan Holtzman and Sakai LLP, with extensive experience in public sector compensation was hired to provide staff and an employee committee with an objective process for gathering and reviewing market data. Mr. Rothman suggested the City develop and adopt a compensation G:\Council\Agenda reports\201 I\Compensation Philosophy\CompPhi]oReview3_l.doc B1-1 Review and Modification of Compensation Philosophy Page 2 philosophy prior to considering results from that compensation study.. He advised that a compensation philosophy would help guide the City as it made fixture compensation decisions. Council adopted a resolution establishing the City's compensation philosophy in March 2007. How Does the Compensation Philosophy Guide`Compensation Decisions? The philosophy was first used in conducting the 2007 Benchmark Compensation Study. The study surveyed salary and benefits in comparison public sector agencies and considered local private sector salary data for some classifications. Selection of the public sector agencies (what was referred to in the philosophy as the "relative labor market") was based on the demographic elements provided in the philosophy and local private sector salary data was obtained from the Bureau of Labor Statistics and a survey conducted by the Human Resources Association of the Central Coast (HRACC). The philosophy also guided recommendations from the Benchmark Compensation Study approved by Council in 2008, when "competitive, compensation" was defined as median of comparison agencies for salary and health Uenefits. Adjustments were made to specific classifications that were below the market median (many of which had been difficult to recruit and retain). Other adjustments to maintain equitable internal relationships were also made. The recommendations addressed recruitment and retention issues at the time by positioning City salaries at the median of the relative labor market. The compensation philosophy has also guided the City's labor relations actions as they relate to containing compensation and benefits costs. With fewer recruitment and retention challenges and a significant downturn in the economy, the City's fiscal health has guided compensation decisions. For example, in 2009 employee groups agreed to waive, defer, or not negotiate across the board salary increases during fiscal year 2009. More recently, employee groups again agreed to no across the board salary increases as well as no increases in the City contribution to health insurance during 2011. Why are We Looking at this Now? Decisions about compensation for public employees are complex and sensitive. This is understandable as public resources should be used wisely and with accountability. With approximately 65% of the City's total operating budget comprised of personnel costs, it is especially important that this topic be given due consideration. This report focuses on the City's Compensation Philosophy— an overarching policy,statement that guides compensation decisions. As such, review and modification are periodically wan-anted to ensure the philosophy remains useful and "stands the test of time", considering the economy is markedly different than when the philosophy was adopted in March 2007 as are the recruitment and retention issues. A review of the Compensation Philosophy sets the framework for future compensation decisions and is particularly timely given efforts in preparing for adoption of the 2011-13 Financial Plan in June 2011. In addition to updating the Compensation Philosophy, on April 5, 2011, staff will present a report to Council that examines the City's personnel costs during the past ten years and approaches to containing or reducing those costs. While no action will be taken on April 5, 2011, the personnel cost report and updated Compensation Philosophy will help establish the context in which B1-2 I Review and Modification of Compensation Philosophy Page 3 Council will provide strategic budget direction to staff on April 12, 2011. Staff anticipates presenting to Council on April 12, 2011, an overall plan to balance the budget that will include personnel cost reductions. Based on the direction provided by the City Council, staff will develop more specific plans for achieving personnel cost reductions as part of an overall labor negotiations strategy. With more than 75% of City employees represented by employee associations, changes to compensation require formal negotiations. Most employee agreements expire on December 31, 2011, and Council will provide direction to staff in preparation for those negotiations later in the year. With that in mind; reviewing the Compensation Philosophy is the first step in ensuring a broad policy foundation is provided as the City charts a path to financial sustainability through the budget and labor relations processes. It is very important to note that the Compensation Philosophy does not change compensation or address immediate or ongoing financial concerns related to compensation. In fact, a strong compensation philosophy should stand the test of time with periodic review and moderate updating. It should provide appropriate guidance in good times as well as bad. DISCUSSION Strengths of Current Compensation Philosophy In crafting the current compensation philosophy, consultant Geoffrey Rothman advised that it should include the elements noted below in bold. A brief description of how these elements were incorporated into the Compensation Philosophy follows each element. 1. Provide Council with flexibility and thus, not be prescriptive or formulaic. The adopted philosophy established a broad framework for the Council, citizens, and employees, to guide and understand decisions affecting pay and benefit plans. It retains maximum flexibility for elected decision-makers, taking such factors as fiscal health and community acceptance into consideration. Therefore, unlike some other jurisdictions, the philosophy assures that compensation decisions are not on "auto-pilot" or contractually anchored to formulas or indexes. The importance of this flexibility is represented through Council's ability to shift compensation decisions from a market position focus (market median in 2007) to that of fiscal health and sustainability (as was seen in negotiations in 2009 and 2010). These considerations are not mutually exclusive and can be weighed depending on the circumstances at the time a compensation decision is made. Ultimately, Council has the necessary flexibility to address changes that may affect the City's ability to attract and retain employees and to balance those changes against other considerations such as fiscal health, local acceptability, etc. 2. Align pay and benefit plans with the, organization's mission. The compensation philosophy is designed to acknowledge'the'connection between the quality of employees the City is able to recruit and retain and the quality of services the City provides. The opening paragraph of the compensation philosophy recognizes that public sector employees provide services to the community and the City's organizational values support that service delivery. Those organizational values include customer service, productivity, accountability, innovation, initiative, stewardship, and ethics. 3. Define the objective of the City's compensation plans The primary goal of the City's compensation plans as described in the philosophy is to attract and retain highly qualified B1-3 I 1 Review and Modification of Compensation Philosophy Page 4 employees who exemplify the organizational values in providing services to the community. The philosophy clarifies that compensation is only one component of a comprehensive strategic approach necessary to attract and retain employees. Other components include the reputation of the organization including a healthy organizational culture, quality of life in the area and the community, and a continued commitment to succession planning, training, and development. 4. Consider internal relationships Classifications performing comparable duties, with comparable responsibilities, requiring similar level of skill, knowledge, ability, and judgment, will be valued similarly. The relative value of classifications will also be considered. S. Define the basis for market comparability. The "relative labor market" is currently defined as public sector agencies as well as the local private sector for certain classifications. Public sector agencies are,in the same "industry" (government) in the same way that a hospital or technology firm typically compares wages to other companies in a similar industry. The current philosophy describes the methodology for selecting comparison public sector agencies which is based on a variety of demographic elements including population, city services directly provided, median home sales price, median household income, median age, median education level, and unemployment rate. Again, private sector employers typically compare themselves to other employers in similar industries with a similar number of employees, sales volume, revenues, etc. The defined methodology contained in the compensation philosophy brings objectivity to the selection of comparison agencies. 6. Define key elements of compensation. Total compensation is defined as including but not limited to salary,health, retirement, and time off benefits. Areas for Improvement While there are many strengths to the Compensation Philosophy, staff recommends changes in the following areas to further improve the overall effectiveness: 1. General reordering and reorganizing. In the current compensation philosophy the definition of total compensation is found under the section describing the "relative labor market". Staff recommends clarifying that definition in the opening section (Attachment 2, Section 2) so it is clear that it is applicable to all aspects of the philosophy. Similarly, considerations in determining competitive compensation have been reordered to: a) fiscal sustainability, b) internal relationships, c) the relevant labor market, and d) other relevant factors (Attachment 2, Section 3 A—D). Staff believes this order is consistent with input from Council and the community in that the City's fiscal sustainability should guide compensation decisions. Staff is not recommending weighting these considerations because weighting would reduce Council's flexibility to adjust specific compensation decisions depending upon community needs, economic factors, etc. 2. Financial sustainability. In addition to reordering this section (Attachment 2, Section 3A), staff recommends moving it from "fiscal health" to financial sustainability, emphasizing the need to examine the ongoing financial impact of compensation decisions. As proposed, long-tern impacts of compensation changes will be analyzed in context of the fiscal forecast and considered prior to Council action. In reviewing the components that indicate the City's financial condition, staff recommends adding"capital B1-4 Review and Modification of Compensation Philosophy Page 5 and other asset requirements". since they are essential to the City's long-term sustainability. 3. Relevant labor market Most employers consider the geographic region in which personnel is found, recruited, and/or lost when defining their "relevant" labor market. The current compensation philosophy places more emphasis on the "relative" labor market by addressing selection of comparison agencies. Staff recommends introducing the concept of relevant labor market, while retaining the methodology of selecting comparison agencies (Attachment 2, Section 3C). Typically, when more specialized skills are required, a broader region is considered for purposes of recruitment and compensation comparisons. On the other hand, entry level positions are often recruited locally. Secondary to the regional issue of defining a relevant labor market, is the issue of private or public sector comparisons. Clearly there are some City classifications that do not have private sector comparisons; police officer, firefighter, etc. However, many City classifications do have private sector comparisons. Therefore, when the relevant labor market is defined as "local" for a classification, local private sector compensation data will be considered. In summary, the proposed modifications are intended to further strengthen and clarify the compensation philosophy without being too prescriptive. The modifications should assist in guiding Council and staff in evaluating compensation practices and their impact on the City's ability to provide the services desired by the community. FISCAL IMPACT There is no direct fiscal impact of adopting a compensation philosophy. ALTERNATIVES 1. Do Not Adopt Modifications to the Compensation Philosophy. The Council may elect to leave the Compensation Philosophy as is. This,altemative is not recommended because the compensation philosophy should be updated'to address fiscal sustainability and relevant labor market concepts. 2. Further modify the Proposed Compensation Philosophy. The Council may elect to further modify the proposed compensation philosophy. If Council chooses this alternative, staff requests that Council provide direction as appropriate. ATTACHMENTS 1. Compensation Philosophy, Resolution No. 9885 (2007 Series) 2. Proposed Modified Compensation Philosophy, Resolution No. (2011 Series) 3. Legislative version of Modified Compensation Philosophy B1-5 Attacbmentl, pagelof 2 RESOLUTION NO.9885(2007 Series) A RESOLUTION OF THE COUNCIL OF THE CITY OF SAN LUIS OBISPO ADOPTING ITS COMPENSATION PHILOSOPHY WHEREAS, the'City of San Luis Obispo strives to provide excellent service to the community at all times, and supports this standard by promoting organizational values including customer service, productivity, accountability, innovation,initiative, stewardship, and ethics; and WHEREAS, to achieve our service standards, the City must attract and retain highly qualified employees who exemplify our organizational values; and WHEREAS, fostering an environment attractive to such employees depends upon many factors, including a competitive compensation program. NOW, THEREFORE, BE IT RESOLVED by the Council of the City of San Luis Obispo that the City's compensation philosophy is adopted as follows: SECTION 1. The City is committed to providing competitive compensation as part of an overall strategy of attracting and retaining highly qualified employees who exemplify our organizational values. SECTION 2. The City's compensation philosophy is based on both internal and external considerations, including internal relationships, the relative labor market, fiscal health, and other relevant factors as follows: A. "Internal relationships" refer to the relative value of classifications to one another as determined by the City. Classifications perfomiing comparable duties, with comparable responsibilities, requiring a similar level of skill, knowledge, ability, and judgment, will be valued similarly in the City's compensation structures. B. In determining the "relative labor market," the City will consider public sector agencies with several comparable demographic data points including but not limited to population, median home price, median household income, median age, median education level, services provided, and unemployment rate. In evaluating market competitiveness with the relevant labor market, the City will consider total compensation, including but not limited to salary, health, retirement, and time off benefits. C. The relative labor market for certain positions will also consider local private sector employers. D. The City's fiscal health will guide all compensation practices; thus, the City's financial condition, competing service priorities, fund reserve levels, and revenue projections will be considered prior to implementing changes in compensation. E. Other relevant factors may include unforeseen economic changes, natural disasters, states of emergency, changes in City services, changes in regulatory or legal requirements, and community acceptability. R 9885 B1-6 Attacbment 1, page 2 of 2 Resolution No. 9885 (2007 Series) Page 2 SECTION 3. At least every five years, the City will evaluate its compensation structure, programs, and policies to assess market competitiveness, effectiveness, and compliance with State Law. Adjustments to the compensation structure may be made as a result of this periodic evaluation and will be done through the collective bargaining process, if applicable, or other appropriate Council- management processes. Upon motion of Council Member Carter, seconded by Council Member Brown, and on the following vote: AYES: Council Members Brown, Carter, and Settle, Vice Mayor Settle and Mayor Romero NOES: None ABSENT: None The foregoing resolution was adopted on March 20, 2007. Mayor David F. Romero ATTEST: Audrey Ho4per City Cler APPROVED AS TO FORM: 7an Lowell City Attorney u�-7 Attachment 2, Page 1 of Z RESOLUTION NO. (2011 Series) A RESOLUTION OF THE COUNCIL OF THE CITY OF SAN LUIS OBISPO MODIFYING ITS COMPENSATION PHILOSOPHY SUPERSEDING PREVIOUS RESOLUTIONS IN CONFLICT WHEREAS,the City of San Luis Obispo strives to provide excellent service to the community at all times, and supports this standard by promoting organizational values including customer service, productivity, accountability,innovation, initiative, stewardship, and ethics; and WHEREAS,to achieve our service standards, the City must attract and retain highly qualified employees who exemplify our organizational values; and WHEREAS, fostering an environment attractive to such employees depends upon many factors, including a competitive compensation program. NOW, THEREFORE, BE IT RESOLVED by the Council of the City of San Luis Obispo that the City's compensation philosophy is adopted as follows: SECTION 1. The City is committed to providing competitive compensation as part of an overall strategy of attracting and retaining highly qualified employees who exemplify our organizational values. SECTION 2. The City will consider total compensation, including but not limited to, salary, health, retirement, and time off benefits.. SECTION 3. In evaluating competitive compensation, the City considers; A. Financial sustainability including the City's financial condition as reflected throughout the financial forecast, competing service priorities, capital and other asset requirements, fund reserve levels, and revenue projections prior to implementing changes in compensation. B.• "Internal relationships"referring to the relative value of classifications to one another as determined by the City. Classifications performing comparable duties, with comparable responsibilities, requiring a similar level of skill, knowledge, ability, and judgment, will be valued similarly in the City's compensation structures. C. The"relevant labor market" that may vary depending upon classification and is primarily defined by the geographic region (local; state-wide, or national) and key markets (municipal, other government agencies, private sector) where labor talent is found, recruited from, and/or lost. When the relevant labor market is defined as "local"; private sector compensation data will be considered. When the relevant labor market includes public sector agencies, the City will consider public sector agencies with several comparable demographic data points including but R B1-8 Resolution No. (2011 Series) Attachment 2, Page 2 of 2 not limited to population,median home price,median household income, median age, median education level, services provided, and unemployment rate. D. Other relevant factors may include unforeseen economic changes, natural disasters, states of emergency, changes in City services, changes in regulatory or legal requirements, and community acceptability. SECTION 4. At least every five years, the City will evaluate its compensation structure, programs, and policies to assess market competitiveness, effectiveness, and compliance with State Law. Adjustments to the compensation structure may be made as a result of this periodic evaluation and will be done through the collective bargaining process, if applicable, or other appropriate Council-management processes. Upon motion of , seconded by and on the following vote: AYES: NOES: ABSENT:. the foregoing resolution was adopted on March 151,'2011. Mayor Jan Marx ATTEST: Elaina Cano, City Clerk APPROVED AS TO FOR J. Christine Dietrick, City Attorney B1-9 Attachment 3, Page 1 of 3 RESOLUTION NO. (2WI1 Series) A RESOLUTION OF THE COUNCIL OF THE CITY OF SAN LUIS OBISPO ADOPTING MODIFYING ITS COMPENSATION PHILOSOPHY SUPERSEDING PREVIOUS RESOLUTIONS IN CONFLICT WHEREAS, the City of San Luis Obispo strives to provide excellent service to the community at all times, and supports this standard by promoting organizational values including customer service, productivity, accountability, innovation, initiative, stewardship, and ethics; and WHEREAS,to achieve our service standards, the City must attract and retain highly qualified employees who exemplify our organizational values; and WHEREAS, fostering an environment attractive to such employees depends upon many factors, including a competitive compensation program. NOW, THEREFORE, BE IT RESOLVED by the Council of the City of San Luis Obispo that the City's compensation philosophy is adopted as follows: SECTION 1. The City is committed to providing competitive compensation as part of an overall strategy of attracting and retaining highly qualified employees who exemplify our organizational values. SECTION > > > , fiseal hea4th,- and e A. «Intemal " e skill, knewledge, > and jadgment,- will Ii;. In deter rg the '!felative labor fnafket," vith sever-al eampar-able deme"hie data peints including but not hfaited to- Q The..el.,t:,.e labor l. fnaret f f eei4ai , .. ,. sitiens ,L71 else a sider level c. • see The Qt.,'s fil health will pide_„11 e t:en p etiees; thus, tl,e ., e fund r-eseiwe , eempetinge levels, R B1-10 Resolution No. (200711 Series) Attachment 2, Page 2 of 3 E. (Dabe.....eieao,ant f eteF, Fnay inelade,unfer-eseea,eeeaefaie „h,,nges rztwa_ SECTION 2. The City will consider total compensation, including but not limited to, salary,health, retirement, and time off benefits. SECTION 3. At least evefy five yeaFs, the City%ill evalue4e its eempeasafien , SECTION 3. In evaluating competitive compensation, the City considers; A. Financial sustainability including the City's financial condition as reflected throughout the financial forecast, competing service priorities, capital and other asset requirements, fund reserve levels, and revenue projections prior to implementing changes in compensation. B. "Internal relationships”referring to the relative value of classifications to one another as determined by the City. Classifications performing comparable duties, with comparable responsibilities,requiring a similar level of skill, knowledge, ability, and judgment, will be valued similarly in the City's compensation structures. C. The`relevant labor market"that may vary depending upon classification and is primarily defined by the geographic.region (local,.state-wide, or national) and key markets (municipal, other government agencies,private sector) where labor talent is found,recruited from, and/or lost. When the relevant labor market is defined as "local",private.sector compensation data will be considered. When the relevant labor market includes public sector agencies, the City will consider public sector agencies with several comparable demographic data points including but not limited to Ovulation, median home price, median household income, median age, median education level, services provided, and unemployment rate. D. Other relevant factors may include unforeseen economic changes, natural disasters, states of emergency, changes in City services, changes in regulatory or legal requirements, and community acceptability. SECTION 4. At least every five years, the City will evaluate its compensation structure, programs, and policies to assess market competitiveness, effectiveness, and compliance with State Law. Adiustments to the compensation structure may be made as a result of this periodic evaluation and will be done through the collective bargaining_process, if applicable, or other appropriate Council-management processes.. B1-11 r � Resolution No. (209711 Series) Attachment 2, Page 3 of 3 Upon motion of , seconded by , and on the following vote: AYES: NOES: ABSENT: the foregoing resolution was adopted on March 15, 2011. Mayor Jan Marx ATTEST: Elaina Cano, City Clerk APPROVED AS TO FORM: J. Christine Dietrick, City Attorney B1-12 RED FILE RECEIVED MEETING AGENDA MAR 11 2011 DATEA/s jl ITEM #-.0--/ March 11,2011 SLO CITY CLERK hard w • m City Council �dC�a�x . miil 990 Palm Street d nMCM p nuCKV San Luis Obispo,CA 93401 'a ALo� pPwnm �vo�uo ��sne� Ps cnM p rMUM pUMDIn NEWTOM FHRDnt RE: Compensation Philosophy ,f SWarYNwpWUN ca Dear Mayor and Council Members: I regret that I will not be able to attend your important meeting on Tuesday,March 15, 2011 to discuss our city's `compensation philosophy' due to a prior commitment. I will therefore present my thoughts and ideas on this important topic here and I appreciate your time and consideration. First I have a few general comments. It is well known that very many of us who live here today came from elsewhere where our salaries(and benefits)were substantially higher. We all took a voluntary pay cut in order to live here. We chose to do this because of the quality of life afforded to the residents of San Luis Obispo. This is an attractive place to live,raise a family, and retire. But it will not remain this way if the present percent of our tax dollars go towards personnel costs and retiree benefits; there will not be enough left over for our streets,parks,infrastructure, and other vital city programs that help make this the desirable place it is. Why has our city's compensation structure gotten so out of line with what is earned by the rest of our city's residents? And why must we constantly be comparing ourselves to supposedly `comparable' cities? I think it's time that our city's compensation structure and philosophy be brought more into alignment with the private sector. I have read the Agenda Report regarding our city's compensation philosophy prepared by Monica Irons, our Human Resource Director. I find a lot in here to agree with-there are many constructive and valuable recommendations that I urge you adopt. Monica Irons' Agenda Report refers to the `2007 Benchmark Compensation Study' which I also read to better understand the context of the present discussion. I would first like to address this 2007 Benchmark Study and then move on to discuss our compensation philosophy. I have significant problems with the methodology used to select the nine `comparable' cities, and I therefore question the conclusions of that study. Some of the demographic elements used by the 2007 study to select `comparable' cities included"population, median household income,and number of employees in the agency." These are all relevant and valid factors to consider in selecting comparison cities;the problem is,they weren't applied in selecting the cities chosen for the comparison! Consider the following with regards to these three criteria: Population- San Luis Obispo has the P lowest population of the cities we are compared with,having 27%fewer residents than the median population of the cities selected and 32%less than their average. Two of the nine cities had more than twice our population. Median Household Income-We have the second lowest median household income of all the cities selected and are 33%below the median income figure and 28%below the average income figure of these nine cities. Number of City Employees- We have the second lowest number of city employees of the nine cities; only Paso Robles has fewer. Our number of employees ranks 22% below the median and 35% below the average for this category. If our population,median household income, and current number of city employees are all 25%to 33%less than the cities selected,why were these cities selected? How can they be considered `comparable', and therefore why should we even be measuring our employee compensation(including salaries,pensions, insurance, paid time off,etc.) against these cities? It appears to me that we are comparing apples to oranges, so the conclusions that were drawn are not valid. If we want to compare ourselves to other cities with regards to employee compensation, then let's look to the neighboring cities in our county. After all,isn't it these cities that we are in competition with in recruiting and retaining quality employees for at least the vast majority of our jobs (with the exception of directors and top management positions)? Are we really competing with Chico or Davis or Ventura(all cities used in the 2007 study) or with cities such as Pleasanton,Napa, or Gilroy(all cities which were used by the Police Officers' Union in their binding arbitration dispute in 2008)? One other issue I take with the 2007 report's methodology is its comparison of salaries in the public sector with those in the private sector. The study compared public versus private sector salaries head to head, stripped of any benefits(like pensions, health insurance,paid time off, etc.). This method of comparing salaries between the public and private sectors is rather meaningless,as an employee's total compensation package includes far more than simply salary alone,especially for a government employee. One needs to consider this total compensation to fairly compare employees between the public and private sectors. It is typical these days that a government employee has better insurance benefits,a better retirement plan, more paid holidays, etc.,than a counterpart in the private sector. So it is not a fair comparison to compare only salaries between equivalent positions in the public versus private sector. It is once again an apples to oranges comparison. I believe that a city employee's benefits easily add another 40%to 60%(or more)added cost to the city on top of their compensation,particularly with the amount the city now contributes towards pension costs alone(18% for miscellaneous employees and 36%for safety employees),as well as the"pick up"of the employee's portion of these costs (another 8%to 9%of salaries). These pension costs alone add an additional 26%to 45% above salary expense to the city. If you then add insurance benefits (health, dental,vision, life, and disability),vacation pay,holidays, and all the other benefits,the city easily has expenses of 40%to 60%on top of wages paid. This was all omitted in the comparison. Why did the 2007 benchmark study exclude these benefits when comparing public to private sector salaries? One should expect the public sector employee's salary to be significantly lower than a comparable job in the private sector, due to these added benefits provided for the city employee that are typically not provided in the private sector. This is especially true in San Luis Obispo where we have a disproportionately large number of smaller employers. A fair comparison of compensation between the public and private sectors must consider total compensation,including the value of all the benefits provided Returning to Monica Irons' agenda report, she states on page 2 that"65%of the City's total operating budget(is)comprised of personnel costs." I have read and heard many times lately that personnel costs comprise fully 80%of our budget. Perhaps this is simply a matter of how our budget is defined (e.g., including water& sewer revenues, etc.), but I believe if we use our`operating budget' that our personnel costs comprise nearly 80%. Either way,I believe personnel costs need to be reined in. I'd like to bring to council's attention an attachment to my letter entitled, `City Employee Salary&Benefits as a Percent of Total Expenditures'. This report,compiled using data from the State Controller's office, is available online at www.cafforniacityfinance.com. The latest figures in the report are from 2007-08; at that time the mean or average of a city's budget spent on personnel costs for all the cities in California was 47%,while the figure quoted in the report for San Luis Obispo at that time was 72%. So, our personnel costs at that time were 53% above the state average! I am encouraged by the recommendations in the Agenda Report prepared by Monica Irons and am pleased to learn that a plan is forthcoming for your consideration"that will include personnel cost reductions." I wholeheartedly agree with the recommendation that our city's fiscal sustainability should be the paramount concern in compensation decisions, and that"the City's fiscal sustainability should guide compensation philosophy." I'm also heartened by the clarification of our `relevant labor market' and by the philosophy stated that"when the relevant labor market is defined as `local' for a classification,local private sector compensation data will be considered." We are at a vital crossroads and your actions in the coming months will have significant impacts upon our city's quality of life as well as on our financial sustainability for years to come. I think everything should be on the table and reviewed with regards to employee compensation,including salaries, insurance benefits,vacation time,paid holidays, administrative leave, car allowances, etc.,and particularly pension benefits. This review should take place for all city employees, be they safety, miscellaneous,or management. I support the Agenda Report presented by Monica Irons and urge council's adoption of it as a vast improvement over our current Compensation Philosophy Resolution. I,. My recommendations regarding compensation, earticularly with regards to pensions, include: • Elimination of the"step in grade"pay increases and replacement with merit increases. The current system offers no incentive for exemplary performance,whereas merit increases would motivate,reward, and retain our better performing employees. • Better alignment of city salaries and benefits with those of the local private sector and local cities, or where local private sector and city comparisons are not applicable, at least with truly comparable cities. • Requirement that all city employees contribute their full and fair share into their pension as prescribed by CaIPERS, with no commensurate increase in employee compensation as has previously been done. • Implement a pension plan along the lines of the Federal model(FERS)for all city employees. This model has three components: a defined benefit plan,a defined contribution plan, and social security. As the recent Tribune editorial (2/26/11)noted, the Federal pension model is currently running a surplus. It also is a much more sustainable model and is far more equitable to our taxpayers. • Apply any adjustments of the pension formula to all city employees, including current employees. While one's previously earned pension benefit cannot(and should never) be taken away, there is no reason the formula for calculating pension benefits going forward cannot be changed,much as you adjust employees' salaries and other benefits through negotiations. In lieu of adopting the FERS pension model, should you continue with CaIPERS,the pension formulas should be rolled back(to where most of these benefits were just five to ten years ago)as follows: • 2% at 50 for safety(police officers and firefighters). • 2% at 60 for all others(miscellaneous and management employees). • Use 5-year final average earnings for final compensation calculation. • Exclude from `PERSable' compensation any pay above one's base salary, excluding compensation such as uniform allowance, holiday pay, employer paid pick-up, paramedic pay,hazardous pay,etc. The city should also: • Negotiate cost sharing agreements with the union groups,requiring employees to pay a portion of the employer's contribution should the employer's rate rise above a certain threshold. This would equitably share the risk of pension funding between employer and employee. • Negotiate a pension benefit cap, such as 75%, of the 3-year final average earnings. r Most or all of these recommendations were discussed at the special city council meeting held on February 23, 2010,when one of your agenda items was CaIPERS retirement costs. In conclusion,it is time that you take decisive action for the benefit of all of our city's stakeholders,including employees and residents alike. If the Council explains and city staff understands the necessity and rationale of your actions, I believe you will find widespread support for your actions among employees and residents alike. Future councils will be grateful for your courageous actions taken today. I appreciate your time and your deliberate consideration of my perspectives and suggestions. Very truly yours, John Grady San Luis Obispo, CA 93401 Attachments M O OO w w v m 6 a W v v O z r S r m o w 1 i 1 3 3 � m � 3 C ♦�/. cm 0 x 3 3 O m am cc m � mm 0 0 n 100 w w w m w 0 0 o $ c 3 3 3 3 m m m m m m m m m 7 q a 0 c c m m $ m m m m $ 3 3 3 3 3 3 3 3 3 3 31 n $ 3 y a s d m m m o o` o' o' g $ $ $ $ $ $ $ $ $ a O m 3y m 4 3 3 3 ° a m CD 3 3 > > > a N m � m mto � 0 0 0 0 IPIP 0 Q 0f 0 0 0 0q 0 N 0 0 0 0 0 0 0 0 0 0 0 0 po o � 0 0 0 0 0 oq PO m W W m w 0 twit m V 41 m N + 10 O A OA O O O O O O O O O O 1919 O p OpH� O O 0 O m O a O O O O O O O O N 0 0 0 0 0 0 N m O + m m w twT 4wt 0 w V O A 0 0 + A A O W 0 0 0 m twil W N m + m N P 0 w T� O O 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 IpIpI P a Of V N A V to til W W 01 to p� C! 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A Oai + N 0 A V m 0 m 0 0 0 0 0 0 0 (Op O O O O 4 O4t1 N ON O O O O Oyy O O O O m O 0 0 0 0 0 0 0 0 q O O O O O O IF. m ip m O m O N 0 tail m p m V + + OI N + N > m A W + W -W 0 0 m 0 W 0 t N m �o' m m O tan Z O w O N 0 0 IP IP IP IP IP IP 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 o e o b N 4l fT Gl A D1 N {71 A A IJ tJ A m V A 2d m O. m m �4 m (11 if1 V b. V m in 0 V C1 m Z G1 in m W O W W W a a s a. V a W a tp a O N N O W 0 O A a A O a a 0 W N W N A a a V O T Commission recommends rolling back pensions for current state, local workers- Sacrame... Page 1 of 3 THE SACRAMENTM BEE sacbee.com Commission recommends rolling back pensions for current state, local workers jortiz@sacbee.com Published Friday, Feb. 25, 2011 California's state and local governments should roll back pensions for existing employees, dump guaranteed retirement payouts and put more of the burden for pension benefits on workers, a bipartisan watchdog commission said Thursday. Any attempt to reduce pensions for current workers would prompt a legal battle royal. Still, the 12-member Little Hoover Commission concluded that government pension funds are in such dire financial straits that they'll never right themselves without cutting into benefits for those working now. The proposal wouldn't affect benefits drawn by current retirees. "This is one of the toughest issues that we've taken on," said Chairman Daniel Hancock shortly before the commission unanimously approved the 100-page report and its recommendations. Sacramento politicians had anticipated the moment. While Democrat Gov. Jerry Brown has proposed a mix of taxes and cuts to close the state's estimated $26.6 billion deficit, his budget doesn't explicitly address pension changes, which would anger unions and would not save money immediately. Republicans have criticized that as a glaring oversight. Senate Republican leader Bob Dutton of Rancho Cucamonga has said his caucus would offer some pension-reform ideas once the commission released its report. "I'm probably going to lean pretty heavily on taking their recommendations," he said. Public employee unions counter that guaranteed pensions make up for government's generally lower wages. They say the Little Hoover report and politicians like Dutton overstate the pension problem to pursue an anti-union agenda and undercut collective bargaining. Six unions representing about 170,000 state workers have already agreed to contracts that offer lowered retirement benefits for new hires and increase what employees pay toward their pensions. "Our members - who are taxpayers, too - bargained in good faith and reached an agreement including key pension changes and concessions," said Brady Oppenheim, spokeswoman for the California Association of Psychiatric Technicians. "If there is a call for further concessions, it should come through the collective-bargaining process and be taken to the bargaining table." http://www.sacbee.com/2011/02/25/v-print/3429573/commission-recommends-rolling-html 3/11/2011 Commission recommends rolling back pensions for current state, local workers- Sacrame... Page 2 of 3 The report caps a year's research and a series of hearings that included testimony from actuaries, union officials, pension reform activists, retirement board members, labor union leaders, public employees and others. It notes that the state's 10 largest public pension systems, including the California Public Employees' Retirement System, the California State Teachers' Retirement System and the University of California pension fund reported in 2010 a collective $240 billion spread between their obligations and assets. "In another five years, when pension contributions from government are expected to jump 40 to 80 percent and remain at those levels for decades in order to keep retirement plans solvent, there will be no debate about the magnitude of the problem," the report says. Pension fund investment returns are supposed to cover the bulk of payments to retirees, but most haven't yet rebounded from Wall Street's meltdown in 2008. CalPERS says investment earnings account for 64 cents of every dollar it takes in, while employers kick in 21 cents and employees pay 15 cents. The commission recommends the employer/employee share be split equally. Since reducing pensions for the next generation of employees won't cut costs in the near term, the commission recommended the Legislature pass a measure that lets state and local governments freeze the pensions of current workers and move them into a less costly hybrid system. For example, a 20-year government employee planning to retire in 10 years at age 63 with 2.5 percent of salary for each year of service would keep the money built up under that formula. But once the pension is frozen, the employee would move into a three-legged program that keeps a much smaller guaranteed pension, a professionally managed 401(k)-style savings account and Social Security benefits. Some public employee retirement plans already include all three. Plans for current state workers and retirees vary - some receive Social Security and can invest in personal retirement accounts. The conventional wisdom is that public pension benefits are untouchable, constitutionally protected property that government has a contractual obligation to provide. A state law that says otherwise would set off a legal firestorm, said Sacramento-based labor attorney Tim Yeung, since the sanctity of public pensions has never been tested in the courts. Private companies can freeze pensions and lower their promises, he said, "but whether government can do it has never really been tested." Still, the Little Hoover report buoyed pension change advocates such as Marcia Fritz, president of the California Foundation for Fiscal Responsibility in Citrus Heights. Her group, which gained national attention with a database that lists state and local government retirees with six-figure pensions, wants to put a measure on the 2012 ballot to freeze pensions for all civil service employees and lower the benefit prospectively. 'This is amazing," Fritz said after reading the report. "It just validates everything we've been saying for years." © Copyright The Sacramento Bee. AU rights reserved. http://www.sacbee.com/2011/02/25/v-print/3429573/commission-recommends-rolling.html 3/11/2011 Commission recommends rolling back pensions for current state, local workers- Sacrame... Page 3 of 3 Call Jon Ortiz, Bee Capitol Bureau, (916) 321-1043. http://www.sacbee.com/2011/02/25/x-print/3429573/commission-recommends-rolling.html 3/11/2011 Editorial: The clock is ticking on bloated pensions- Sacramento Opinion-Sacramento Ed... Page 1 of 2 THE SACRA HIEN O BEE sacbee.com Editorial: The clock is ticking on bloated pensions Published Sunday, Feb. 27, 2011 The Little Hoover Commission's report, "Public Pensions for Retirement Security," pulls no punches. The situation is "dire," commissioners rightly warn. If something is not done to reduce retirement liabilities, "pensions will crush government." Public employee retirement benefits in California are the most generous of any in the country. They've gone from just 40 percent of pay for the average 30-year-state employee when the retirement system was originally established in 1932 to close to 75 percent of pay today. Many local government workers earn more the day they retire than when they worked. And given earlier retirement ages - 55 for most public employees and 50 for firefighters, police and prison guards - and longer life spans, many retired state workers will actually pick up more retirement checks in their lifetimes than paychecks. Such high costs are unsustainable, economically and politically. The report predicts that in coming years, cities like San Francisco, San Diego, San Jose and Los Angeles will spend one-third of their operating budgets to finance their pension systems. It's not just citizens who risk loss of vital government services as retirement obligations overwhelm state and local budgets. Public employees, the report says, "will pay a price for inaction - salary freezes, layoffs increased payroll deductions and the threat of a city or county bankruptcy. A pension not tied to a job is worthless." In recent years, the state and some local governments have enacted modest reforms, boosting retirement ages to 60 from 55 for most new hires and from 50 to 55 for new public -safety employees, and increasing employee contributions to their own retirements. But the savings come too late to avert serious fiscal distress. Given the magnitude of the problem the commission recommends what no other public entity has suggested before - cutting pension benefits for current workers. There will be a titanic fight in the halls of the Legislature, in the courts and at the ballot box to enact such reform. But reform is urgently needed. The fight is unavoidable. Specifically, the commission calls for the Legislature and local governments to freeze benefits for state workers now and enact new lower pension formulas for the future. Under the plan, current workers would be allowed to keep the benefits they have earned already but all future pension benefits would be lower. In addition, the commission calls for a restructured pension system based on a federal government model. Workers would earn a much lower guaranteed retirement benefit that could be supplemented with both Social Security and a 401(k)-type plan to which both workers and government employers would contribute. http://www.sacbee.com/2011/02/27/v-print/3431893/editorial-the-clock-is-ticking.ht nl 3/11/2011 Editorial: The clock is ticking on bloated pensions- Sacramento Opinion- Sacramento Ed... Page 2 of 2 There are other common sense and long overdo fixes in the Little Hoover plan. To avoid "spiking," future pensions would be calculated based on base salary exclusively and the average of five years' pay, not the single year used for workers now and a three-year average for new hires in a recently created second tier. The plan also would bar employees from buying extra credit or "air time" to enhance benefits, and it would strictly prohibit granting retroactive pension enhancements. All of these maneuvers are used routinely to enhance already generous public pensions. The question now is will the public employee unions, and majority Democrats whose campaigns they bankroll have the courage and the wisdom to carry out the recommendations contained in the Little Hoover Commission's report. There is reason for both to do so. Within unions there is a generational split. Older workers with fat retirements are protected by civil service seniority rules that shield them from layoffs. Younger workers lack that protection. To save jobs, young workers are more likely to want to embrace reforms. Union leaders need to pay attention. Yet so far, they appear tone deaf. They continue to roll out the old misleading statistic that public employee retirements average "$24,000 a year." Average is meaningless in this debate. Look at pension payouts for those who retired after a full career and after the big post-1999 pension enhancements were approved. Look at public -safety retirements across the board and some local governments that adopted pension formulas that outstrip even very generous state formulas. Democrats are facing a split between their constituents who are watching vital services evaporate and their public employee union political allies, whose members benefit from exorbitant pensions. They should act in the interest of their constituents and the state. If they don't act aggressively to curb pension excesses soon, an aroused public will. The Bee's past stands "A public pension feeding frenzy has increased retirement costs for local governments by staggering amounts over the last decade. Cities and counties that approved generous retirement benefits when the stock market was booming now face mounting costs as the stock market drops. Meanwhile, the Legislature has approved new measures that would boost-the retirement benefits even higher for already lavishly pensioned public employees." - Sept. 19, 2002 © Copyright The Sacramento Bee. AQ rights reserved. http://www.sacbee.com/2011/02/27/v-print/3431893/editorial-the-clock-is-ticking.html 3/11/2011 Day of reckoning on pensions - latimes.com Page 1 of 2 latimes.com/news/opinion/editoriaMa-ed-pensions-20110226,0,7405680.story latimes.com Editorial Day of reckoning on pensions The Little Hoover Commission paints a bleak picture of what's ahead for state and local governments in California. February 26,2011 The housing bubble and subsequent Wall Street collapse wreaked havoc on the nation's advertisement retirement savings,as many pension funds and 401(k)plans suffered losses of 30%or more. State and local governments are now facing huge unfunded pension liabilities,prompting policymakers to scramble for ways to close the gap without slashing payrolls and services.But a new report from the Little Hoover Commission in Sacramento makes a more troubling point: Many state and local government employees have been promised pensions that the public couldn't have afforded even had there been no crash. The commission's analysis of the problem is hotly disputed by union leaders,who contend that the financial woes of pension funds have been overblown. The commission's recommendations are equally controversial: Among other things, it urges state lawmakers to roll back the future benefits that current public employees can accrue,raise the retirement age and require employees to cover more pension costs. Given that state courts have rejected previous attempts to alter the pensions ah-eady promised to current workers,the commission's recommendation amounts to a Hail Mary pass. Yet it's one worth throwing.. A bipartisan, independent agency that promotes efficiency in government,the Little Hoover Commission studied the public pension issue for 10 months before issuing its findings Thursday. Much of the 90-page report is devoted to making the case that,to use the commission's blunt words, "pension costs will crush goverment." Without a"miraculous" improvement in the funds'investments,the commission states, "few government entities—especially at the local level—will be able to absorb the blow without severe cuts to services." The problem is partly demographic. The number of people retiring from government jobs is growing rapidly,and longer life expectancies mean that a growing number of retirees will collect benefits for more years than they worked. But the report argues that political factors have been at least as important in driving up costs,starting with the Legislature's move in 1999 to reduce the retirement age for public workers,base pensions on a higher percentage of a worker's salary and increase benefits retroactively. The increases authorized by Sacramento soon spread across the 85 public pension plans in California. Compounding the problem,the state has increased its workforce almost 40%since the pension formula was changed and boosted the average state worker's wages by 50%. Local governments,meanwhile, raised their average salaries by 60%. Much of the growth came in the ranks of police and firefighters, who increased significantly in number and in pay. http://www.latimes.com/news/opinion/editorials/la-ed-pensions-20110226,0,706778l,print... 3/11/2011 Day of reckoning on pensions-latimes.com Page 2 of 2 There's nothing inherently wrong with generous pension plans. Pensions,after all,are just a form of compensation that's paid after retirement,not before. The problem,particularly for local governments, is that the plans are proving to be far costlier than officials anticipated or prepared for. By their own reckoning,the 10 largest public pension systems in California had a$240-billion shortfall in 2010. When the funds don't have enough money to cover their long-term liabilities,state and local governments are compelled to increase their contributions. In Los Angeles,the report says,the city's retirement contributions are projected to double by 2015,taking up a third of the city's operating budget. It projects that governments throughout the state will have to raise their contributions by 40%to 80% over the next few years,then maintain that higher rate for three decades. The more tax dollars governments have to devote to pensions,the more they'll have to take from other programs or from taxpayers. That means more layoffs or pay cuts for public employees,higher taxes, fewer services, or all of the above. The situation won't be so dire if the plans earn more on their investments than expected. But with the plans typically counting on annual returns near 8%, or twice the "risk-free" level suggested by some analysts, it seems just as likely that they'll earn less than that,forcing local governments to contribute even more. The Legislature and some local governments have sought to ameliorate the situation by reducing benefits for new hires and persuading current workers to contribute more to their pension funds. The commission's report,however; argues that these moves aren't sufficient. The savings from the lower pensions for new employees won't be realized for many years,and the increased contributions aren't nearly enough to close the funding gap. The only real solution,the report contends, is to reduce the benefits that current employees are slated to earn in the coming years. That's hard to do. California courts have held that pensions for current employees can be increased without their approval,but not decreased unless they're given a comparable benefit in exchange. Nevertheless,the commission calls on the Legislature to give itself and local governments explicit authority to trim the benefits that current employees have not yet accrued, without touching the amounts they have already earned. It also calls for a hybrid retirement plan that combines a smaller pension with a 401(k)plan and Social Security benefits,as well as the elimination of a variety of loopholes used to inflate pensions. The commission is right about the importance of reducing the liabilities posed by current employees. And though picking a fight with unions over unilateral reductions in pensions probably isn't the solution, the report should persuade both sides to do more at the negotiating table to prevent pension costs from swamping state and local budgets. As the commission notes,public employees in California enjoy some of the most generous pension plans in the country. Those plans won't do them much good,however, if their employer can't afford to keep them on the payroll. Copyright©2011, Los Angeles Times http J/www.latimes.com/news/opinion/editorials/la-ed-pensions-20110226,0,706778l,print... 3/11/2011