September 25, 2006
Subject: UNSUSTAINABLE COMPENSATION GROWTHDear Mayor and Members of City Council
Ms. Walston’s recent report to council on the trend in the city’s cost for health care, the fiscal implications, and its non-sustainability was not news. VBTA in numerous communication updates over the last two operating budget development cycles has argued that the city’s growth in total labor costs (direct salaries plus benefits) was out of touch with long-term affordability and market conditions.
VBTA has long made the case that city council should not evaluate compensation piece meal. City council must evaluate compensation in its totality. Here are some things to think about and by no means exhaustive in an “end-to-end” analysis
1. What is the value of a “no layoff policy”?
a. Private sector has much higher employment risk
b. The higher the risk the higher the reward
• Therefore, all things being equal a city job with little to no employment risk should pay less than a similar private sector job
2. What are the actual productive hours work in a year?
a. Average number of annual leave earned each year plus number of holidays, and the average number of sick days taken multiplied by eight and subtracted from 2087 to get the actual number of hours worked each year.
b. How does that compare to the private sector?
3. Only 11 percent of the workforce today is covered by a defined pension; what is the economic value of the City’s risk free pension and that the City pays the employee share of VSRS? (what is the equivalent salary they would have to earn in the private sector to derive the same benefit)?
4. What is the attrition rate for City employees by cause by a grouping?
5. What is the local private sector contribution (large and small businesses) to health care versus the city?
6. What has been the local area private sector average annual percentage increase in wages versus the City average salary increase for its employees?
All of us appreciate the hard work our neighbors who are city employees do for us. All of us appreciate how hard all of us work for the wages and benefits we receive. All of us want to be treated fairly. When we work for a company it is understood that our wages are limited by the ability of the market place to accept those wages embedded in products for sale. The airline industry with the exception of Southwest (they control wages) and the American auto industry tell the sad story when leadership failed to be honest with their employees – their compensation was out alignment with a competitive marketplace. The city is not exempt from this basic model.
Your challenge is not unlike the legacy industries just referenced. You face the challenge of maintaining legacy infrastructure, investing in the future, accepting risks, increasing labor productivity, reducing the cost of current service delivery, and holding growth in city expenses to no more, if not less than, the growth in families incomes. City Council too is constrained by the reality that there is a top line revenue restraint.
What last year’s five-year forecast told you, and what Ms. Walston shared was that revenue growth is not going to keep pace with the current programmed growth in labor cost. The gap can only be closed in one of three ways or any combination of the options in varying degrees. City council can reduce the growth rate in labor cost by fiscal policy changes (benefit changes, pay raise changes, etc.), reduce expenses in non-labor categories and increase the percentage of the total budget invested in labor, and city council can increase taxes and fees.
The City manager and his leadership team on the other hand can exercise the managerial stewardship they are compensated for to produce labor productivity and process efficiencies to lower the quantity of labor required to offset the increased cost of the current benefit stream. Of course, the city manager has over a decade to show his ability to exercise managerial stewardship. The trend line of city spending versus growth in the average family’s income speaks for itself.
What is clear is that the private sector workers whose employers cannot afford to offer them defined benefit pensions, health care in retirement, generous holidays and vacations, and a no lay-off policy to name a few, cannot afford to pay increased taxes to compensate their city employee/neighbors who annually are getting double, if not more, the percentage increase in pay they – private sector worker- are receiving. There are political and economic market places that City Council needs to come to terms with if the public’s interest is truly to be served.
The City Manager and his leadership team should be doing the heavy lifting to educate the municipal workforce just how lucky they are and how immune they have been to the ravaging effect of global competition. This is not to say City employees should not see their total compensation package increased. It is to say that changes in the total compensation package has to reflect the fiscal realities of the customers who have to pay it. All of us as a community of neighbors are looking for balance. Part of the process of balance is education to appreciate the equities and risks of all the parties at the political table.
I recommend City Council convene a round table of businesses leaders in the community and compare notes. We certainly want to compensate our public employees and neighbors fairly. We certainly want City Council to tax us fairly unlike your current practice of spending that is financed by taxes increasing faster than our incomes and pensions.
The Pilot in a recent editorial remarked that citizens need to engage you earlier and often on tax policy. City Council knows that VBTA for over two years has frequently and with analytical rigor engaged City Council members on fiscal policy. City council members cannot delegate to the staff the heavy lifting of assessing the alternative futures before us and deciding which one to pursue.
VBTA as does the public at-large continues to wait for City Council to define the future you want to achieve, to share the metrics by which you want to be held accountable, and to articulate the business case that sustains your choice to increase the wealth and incomes of Beach families at their disposal. VBTA remains committed to the belief that it is the balance sheet of families and not the balance sheet of the City that counts.
VBTA does not profess to have all the answers. VBTA is certain that all the answers are not found within the workings of the City Manager’s inner circle. City Council would be very wise to reach out well beyond the bureaucratic status quo in looking for approaches to win the cost war and redefine the role of local government.
Change is a constant. The direction of change is not. The fiscal inertia if not arrested will drive changes none of us like and few will have prepare for. VBTA endorses future shaping initiatives over falling-behind reactive behavior. Limited government and empowered free markets create wealth that best improves the living standards of all citizens.
VBTA commends Ms. Walston for a good start, but much work still needs to be done to conduct an integrate assessment of compensation and an affordable way ahead. This discussion by its nature is political. Politics is about the taking of private wealth and income and its allocation for public purposes. To call the issue political is a good and healthy thing.
What is important is that the discussion be reasoned with a clear understanding of the risks, as well as who pays and who benefits. The more transparency there is, the better the opportunity for the voters to impose accountability for results should they chose to vote.
John D. Moss
VBTA Chairman
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