Posted by: thepinetree on 11/03/2010 11:08 AM
Updated by: thepinetree on 11/04/2010 12:41 PM
Expires: 01/01/2015 12:00 AM
:
How Much Are County Employees Really Making? Estimates of County Employment Total Compensation Package ~By Darrell Wilburn
Arnold, CA...(Publishers Note...Local Resident and Retired Executive Darrell Wilburn and Others recently spent an enormous amount of time researching the true compensation level of our local county employees. They are asking for feedback from the county and citizens on this report. We we would like to thank them for their hard work on this. We have also included links to the original spreadsheets and other documents if you would like to dive into the numbers yourself)
The compensation was recently posted as $38,000/year at the Appraiser I level on the county web site. The report neglected to include benefits ranging from Medical and Dental, retirement contributions, paid time off up to 45 days per year, most of all retirement benefits guaranteed by the county. Any reasonable estimate must include the total amount of payout to an employee for the year of work. For the $38,000 reported, we found the compensation including just medical and retirement contribution is $60,000. When you add in the guaranteed retirement on the date of retirement, The county will payout a total of $2,310,779 to this employee over the retirement period using the built in COLA of 2%. AT 0% COLA the payout over the retirement period would be $1,675,000. This comes to an additional $67,000 on average for each year of service. Looking at it this way yields compensation of $121,000 that will be eventually paid out for that year of service...
Compensation Spreadsheet, Compensation Estimates, Future Value of Compensation
Darrell Wilburn is a local resident who is a retired high tech industry CEO. He also holds degrees from Stanford and an MBA.
That money must come from the deposits made for the employee to Calpers plus the return on investment earned of the 25 years of active work, Plus the return on the investment of the remaining payout during the years of retirement. The past Rosie estimates of 8% forever made those numbers balance. However the 10 yr total return from Calpers is 2.8%, and they lost -28% last year. Using realistic returns and calculating the funds provided leaves an unfunded balance of $1,840,000 that must be supplied by the taxpayers. It could be supplied by increase deposits which are currently 19.33% of base salary per year or it could come as increased demand payments later on. Whenever it comes due, the bill will come due.
The portion of the Local Government Compensation Report which was released the week of October 21st is attached. As can be seen, the report fails to disclose the full compensation by deleting deferred compensation, benefits for health, built in raises, retirement benefits and value of vacation and sick leave benefits. While some of these items were required by the State, the Calaveras county disclosure has omitted them, denying voters a full and complete disclosure.
Voters and taxpayers are left with the task of estimating the total compensation from the information available. This document is an attempt by some local taxpayers to make a fair estimate of the total compensation package of county employees from the information available to the public. We welcome any corrections to the real compensation totals that the local government might supply. Since time is very limited, the analysis of cases for a few positions of selected types and different levels will be illustrated and the reader may extrapolate to other similar positions. When and if the state report is made public we will undertake a further analysis of those disclosures which we hope will be a more thorough disclosure.
Source documents for the analysis include:
A.Local Government Compensation Report 2009-2010.
B.Calaveras County Salary Grade schedule dated 3/15/2010
C.County of Calaveras Benefit Information dated 1/01/2010
D.Present Value Factors taken from “Time Value of Money”
E.Calaveras county Rates for health insurance
F.The Time Value of Money Standard tables for PVF and FVF
G.Calpers web site total returns table
It is well understood that discrepancies due to timing, incomplete years of service and other anomalies will not allow balancing to the penny but we believe we should be able to at least get a ball park of the total compensation package. If we have time we would like to pick a high, medium and low salary in each department and a separate one for department heads.
A closer look at the data reveals many anomalies such as the actual W2 pay does not fall within the min and max comp for that salary and grade. No demographics are given for time in service nor number of years worked nor age so it becomes very difficult to gage real compensation including retirement benefits or even the amount paid each year by the county verses the actual retirement pay commitment. As a result, study of cases is the only way to get realistic estimates of the real compensation package.
Without demographic information giving some estimate of how many people will retire when, the total county funding commitment estimate may only be achieved from the estimated payout referenced back or forward using present value calculations. The important point is that the county is committed to a defined benefit plan and must guarantee the future payments by making up any losses in the Calpers operations with increased contribution from taxpayer money, either along the way or at the payout.
Analysis Method
1.Starting with the published salary, the future earnings are projected over the 25 years using existing policy and practice. (Line 4) ( figures in thousands) Exhibit 1.
2.The published health benefits paid by the county will be added on a % basis throughout the service period.(Line 7)
3.The retirement paid into Calpers on behalf of each employee will be added for each year to the compensation package.(line 12)
4.The total compensation from base with direct benefits can be calculated from the simple sum.(Line 15).
5.The expected retirement pay can be laid out using the percentage per year vested either 2% or 3% /yr times the number of years service and increased by an established average COLA increase per year. (3% per year for safety workers who can retire at 50).
6.The total value of the retirement payments as of the date of retirement can be calculated from the present value at that date. This reflects the expected return on investments during the retirement years which reduces the amount the county is obligated to pay. Since the discount rate is always an issue, for comparison the sum will be calculated using 3 different discount rates of 2%, 5%, and 8%.
7.There are four(4) sources of funds to pay the retirement payments.
a. Payments by the county during the working years.
b. The Return on investment earned by the retirement year funds during employment.
c. The return on investment on remaining funds as the payout reduces the remaining amount in the retiree’s fund.
d. More funding from taxpayers to cover shortages.
8.For these Calculations the Rate of return is extremely important, therefore, the calculations will be done using three different ROI’s of 2%, 5% and 8%. Note typically in the past Calpers might return 7% - 8%, but in recent years it is much lower with last year a -28% loss. Again, The important point is that the county is committed to a defined benefit plan and must guarantee the future payments by making up any losses in the Calpers operations with increased contribution from taxpayer money, either along the way or at the payout. As shown in Appendix 1, the total return from Calpers has averages ranging from 3% to -4.86% and a 10 year average of 2.88%. For selected periods and investments returns data is sometimes reported as high as 25% and as low as -27%. The last 10 year average of 2.88% is closer to reality but the recent lower returns are sure to lower the return you can reasonably expect.
9.Finally, At different levels of COLA and Return on Investment The funds committed will be compared to funds expected to be available.
Important Note: To be fair across the board, comparisons probably should be made using the same upside ROI rate as Discount rate for the cost of money or using just ROI the same for accumulation and payout periods. Some analysts might argue for a higher or lower rate during the working period and different rate during the payout period depending on their point of view. For example, Calpers may want to argue they can sustain a higher ROI of 7-8% since there downside is guaranteed by the county tax payers so they can take more risk. Also, for a different discount rate since they are not restricted to safe bonds which would run at 3-4% . Since their recent losses of -28%, and disappearance of safe asset backed securities, that is a highly suspect assertion. For this analysis, the same rate will be used for comparison at each level which we believe is fair.
Case 1
Starting with an Appraiser I case and a 25 year career at an Appraiser, let’s examine the expected compensation with no extra bumps for school benefits or raises for education. Under a normal progression the individual would progress through steps with 5% raises per year and then be reclassified to a higher grade and receive 5% for the next 5 years and so on. There are exceptions, but as a rule that progression continues through a successful career. As shown in exhibit 1, Nominal salary would rise from $38K to $134K over the 25 year working life before the direct benefits which would increase the compensation from $52K to $181K. Direct benefits here include only medical and dental. In 2010 the amount the county pays, increased by 4.7% and in 2011 it will increase by 11%. The analysis uses 5% increase per year, which is very conservative given current legislation.
Only looking at the contribution of the county for the employee share and the county share of retirement contribution yields a compensation package of $60K to $207K over the 25 year career. Line 15 exhibit 1.
Note: this is the contribution paid in but does not reflect necessarily the value of the retirement that is guaranteed by the county. To get a reasonable estimate on the real value of the retirement we must first take the 50% resulting from 25 years of the salary base of $134K and spread that over the employee life expectancy to 80 years, which is an additional 25 years of life after retirement.. Using a 2% per year COLA,(the only number we could get from Calpers which was for 2006 was 2%) and the COLA ranges from 2% to 5% depending on the specific contract.( All Calpers would say was contracts range from 2% – 5% and the norm was 2%) For lack of more complete information, we will need to consider the effects of the full range. Retirement Pay per year would start out $67K per year and rise to $216K using 5% COLA and start at $67K/yr and rise to $108/yr using 2% COLA. The higher rate evidently applies to the protective services segment most frequently. The total payout will also be calculated with 0% COLA, since that happened in some instances last year.(REF. Calpers conversation)
Getting at the true value of the retirement package depends heavily on the discount rate or time value of money used in the calculation. Often, one side of the bargaining table will use 8%, ( as per the san Jose Police officers), which results in a much lower number for the present value of the retirement package as of the beginning of the retirement period. Current retirees will point out you can not find even 2% on money. Since it creates such a wide range both ends will be shown. Note; recently the San Jose police officers have broken the city bank since their wage agreements assumed an 8% growth and discount rate stretching forever. No one ever asked what would happen if the cpi, inflation , and other discount rates went down to around 2 % as they are currently..
To obtain the value of the package as of the day of retirement we must calculate the present value of the sting of payments from year 25 to year 50 by reflecting the present value of each payment and then adding them up. This reflects the amount of money that would need to be invested on retirement day at an ROI equal to the discount rate to provide the future string of payments to the retiree.
The correct rate to use is the % people expect for a return on a non risky investment which is currently running less than 2% at most banks and maybe up to 3% on some bond funds. In the past 6-8% was reasonable. In a 2% world assuming an 8% return is simply irresponsible and reckless.
Taking the whole 25 years of payment and calculating the total cash payout over the 25 years at each COLA commitment level results in a Total Cash payout commitment as follows: (Calculation Worksheet attached as exhibit 1 Lines 25,33,14).
At 5% COLA
$3,198,000 total cash payout $127,920 on average for each year of service.
At 2% COLA
$2,310,779 total cash payout $92,301 on average for each year of service
At 0% COLA
$1,675,000 Total cash payout $67,000 on average for each year of service.
Sources for payout funds:
1.Given the county continues to pay Calpers at rate of 19.4% of base salary: (Exhibit 4. Future value of county contributions)
At ROI of 2%/ year funds provided by deposits + interest = $436,015
At ROI of 5%/year funds provided by deposits + interest = $622,100
At ROI of 8%/year funds provided by deposits + interest = $916,209
(Exhibit 5; Earnings form ROI during retirement years) at different payout rates
At ROI of 2%/year funds from ROI during retirement years = $33K,$35K, $36K
At ROI of 5%/year funds from ROI during retirement years=$195K,$215K,$235K
At ROI of 8%/year funds from ROI retirement years = $1,088K, $1,688K, $2,134K
Net Commitment from county
At ROI of 2% /year and the county provides a 5% COLA additional funds provided by the county = $3,198K -$436K - $33K = $2,729,000
At ROI of 2% /year and the county provides a 2% COLA additional funds provided by the county = $2,311K - $436K -$35K = $1,840,000.
At ROI of 2% /year and the county provides a 0% COLA additional funds provided by the county = $1,675K - $436K -$36K = $1,203,000
At ROI of 5% /year and the county provides a 5% COLA additional funds provided by the county = $3,198K -$622K - $195K = $2,381,000
At ROI of 5% /year and the county provides a 2% COLA additional funds provided by the county = $2,311K -$622K - $215K = $1,474,000
At ROI of 5% /year and the county provides a 0% COLA additional funds provided by the county = $1,675K -$622K - $235K = $818,000
At ROI of 8% /year and the county provides a 5% COLA additional funds provided by the county = $3,198K -$916K - $1,088K = $1,194,000
At ROI of 8% /year and the county provides a 2% COLA additional funds provided by the county = $2,311K -$916K - $1,688K = ($293,000) Surplus!
At ROI of 8% /year and the county provides a 0% COLA additional funds provided by the county = $1,675K -$916K - $2,134K = ($1,375K) Surplus!
Note: the reason the returns jump up so dramatically between the 5% and 8% worlds is that we break above a break even point where the 8’% interest on the 916K approaches the retirement payment. It is clear the county plans were made for an 8% world which today is simply unrealistic.
The expected COLA for retirement years is 2%. That was missed this year by numerous plans which is why the 0% case was included.
A realistic estimate for this year and years to come over the next decade is very likely a 2% to possible 3% given the current state of the bond and safe ROI opportunities. The huge earnings dreamed of at 8% to make this system work are simply not happening as evident n the 2.88% 10 year Calpers running average return, which is falling currently.
Reasonable expected result for the next years:
A 2% ROI and the county to maintain either a 2% or 0% COLA
Therefore, The county will be short either $1,840,000 or $1,203,000
for each employee in this salary class.
Furthermore, the property tax revenues necessarily will fall roughly 50% below the revenues when these plans went in place, another never dreamed of circumstance.
The final question for the county is “What are you going to do to solve this problem and insure solvency in the future?”
Note calpers lost 28% last year. Consequently they will be increasing the required payment by the county to compensate for it, even though the county revenue is dropping and employee count reduced. The effect is to increase the real compensation package currently at $67K by an unknown amount to cover the short fall of multiple thmillion dollars. Other indirect compensation such as paid time off, and holidays etc would increase the total comp package even further.
What we do not know is the demographics of the current work force which has not been revealed. For example the current years of service of the current work force. It would be nice to have some idea of the current retirement commitment. It could be a maximum in 5 years of maybe it will be 20 years, without demographic information it is very difficult or impossible to estimate when the bill for retirement commitments will come due, but it will come due..
Case #2
Now let’s consider the case of a deputy Sheriff II, who, like probation office staff, have a retirement vesting of 3% per year and can retire at 50. Base pay is listed at $45.6K min and $55.5K.
To repeat a similar analysis
Startling fact : County guarantees the Calpers Investments. If Calpers has losses, the county must make them up in the rates paid in the future year. So the taxpayers are guaranteeing the retirement commitments and rate of return on Calpers investments. If they invest wrong or calculate incorrectly – taxpayers pay. They had a 28% loss in recent years, the payout amortization period for
Appendix 1 Data from Calpers site:
INVESTMENT PORTFOLIO MARKET VALUE
$204.9 Billion (As of August 31, 2010)
ASSET CLASS BY MARKET VALUE & ALLOCATION ASSET CLASS
MARKET VALUE ($ BILLION)
ACTUAL ALLOCATION (%)
TARGET ALLOCATION*
(%)
PREVIOUS TARGET (%)
% PASSIVE VS. ACTIVE
PASSIVE
ACTIVE
Cash Equivalents
$2.5
1.2%
2.0%
0.0%
0.0%
100.0%
Global Fixed Income
$49.7
24.3%
20.0%
19.0%
0.0
100.0
Equities:
Alternative Investment Management (AIM)
$29.6
14.5%
14.0%
10.0%
0.0
100.0
Global Equity
$101.9
49.8%
49.0%
56.0%
67.2
32.8
TOTAL EQUITIES
$131.5
64.3%
63.0%
66.0%
Real Estate
$15.0
7.3%
10.0%
10.0%
7.0
93.0
Inflation Linked
$6.1
3.0%
5.0%
5.0%
0.0
100.0
Total Fund
$204.9
100.0%
100.0%
100.0%
33.5%
66.5%
FACTS AT A GLANCE: INVESTMENTS November 2010 Page 2 GROWTH OF FUND YEAR
YEAR-END 6/30
YEAR-END 12/31
1985
$28.6 billion
$32.7 billion
1990
$58.2 billion
$57.5 billion
1995
$87.8 billion
$96.9 billion
1996
$100.7 billion
$108.0 billion
1997
$119.7 billion
$128.2 billion
1998
$143.3 billion
$150.6 billion
1999
$159.1 billion
$171.9 billion
2000
$172.2 billion
$165.2 billion
2001
$156.0 billion
$151.8 billion
2002
$143.4 billion
$133.8 billion
2003
$144.8 billion
$161.4 billion
2004
$166.3 billion
$182.8 billion
2005
$189.8 billion
$200.9 billion
2006
$208.2 billion
$230.3 billion
2007
$251.4 billion
$253.0 billion
2008
$237.9 billion
$183.3 billion
2009
$181.0 billion
$203.3 billion
2010
$200.0 billion
TOTAL RETURNS1 Fiscal year to date ended 08/31/2010
3.00%
3 years for period ended 08/31/2010
‐4.86%
5 years for period ended 08/31/2010
2.18%
10 years for period ended 08/31/2010
2.88%
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