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Beneath The Palo Alto Business Tax

Beneath The Palo Alto Business Tax

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Published by wmartin46
This sort paper looks at the cost of a police officer in Palo Alto, California, over thirty years of active employment, and thirty years of CalPERS retirement.

The paper shows that the officer will likely make twice as much in retirement, as during his/her working life.

The compensation models for government employees are clearly unsustainable, as the projections in this paper show.
This sort paper looks at the cost of a police officer in Palo Alto, California, over thirty years of active employment, and thirty years of CalPERS retirement.

The paper shows that the officer will likely make twice as much in retirement, as during his/her working life.

The compensation models for government employees are clearly unsustainable, as the projections in this paper show.

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categoriesTypes, Research
Published by: wmartin46 on Jun 01, 2010
Copyright:Attribution Non-commercial

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06/01/2010

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Beneath The Business TaxPalo Alto’s Real Problem—Growing City Salaries and Benefits
In the heartland of America, our once mighty U.S. auto industry is close to collapse. Thereasons are many. But few things have contributed to Detroit’s death spiral as much asmanagement’s failure to control runaway labor costs. Generous pensions and retireehealth care benefits have been especially crippling. We can see clearly now that such“defined benefit” costs are simply not sustainable.Closer to home, the burden of “defined benefit” costs is weighing heavily on California’scities, counties, and school districts. Last year, a financial death spiral caught up with thecity of Vallejo. No longer able to find the funds to pay for the ever-more-generous salaryand benefit contracts that had been negotiated by past city managers, the city was forcedto declare bankruptcy.Right in our own backyard, Palo Alto is facing the same kind of financial bind. Thecity’s labor costs are ever-increasing, according to the terms of the “defined benefit”contracts that were negotiated by city management years ago. Does this mean that PaloAlto is on a one-way road to bankruptcy, like Vallejo?Maybe not. The Palo Alto City Government thinks it can find the money to meet itsever-increasing labor costs. It is proposing a business tax. This tax would be levied onthe gross income (before expenses) of businesses in Palo Alto.How big is Palo Alto’s burden of ever-growing labor costs? It’s back-breakingly huge.The following example can illustrate.
30-Year Base Cost of A Police Officer-About $6.5M.
Salaries and benefits comprise about 80%-85% of Palo Alto’s city budget. Labor costsare growing faster than the cost of non-labor costs. Importantly, they are also growingfaster than the city’s revenue. These runaway labor costs are putting the city on acollision course with insolvency.The following graph shows the salary of a Palo Alto police officer, hired in 2008 at$100,000, who receives a 5.5% raise for each of the 30 years of his/her employment, andthe pension payout for thirty years of retirement:
 
Yearly Salary And Pension OfPalo Alto Police Officer (30 Years Salary+ 30 Years Pension)
$0$100,000$200,000$300,000$400,000$500,000$600,000$700,000
   2   0   0   8   2   0  1   8   2   0   2   8   2   0  3   7   2   0  4  3   2   0   5  3   2   0   6  3   2   0   7  3
   Y  e  a  r   l  y   S  a   l  a  r  y
30-Year Salary30-Year Pension
 With a yearly 5.5% pay increase, the minimum total base salary for the officer comes toabout $6.6M, for a 30-year working life.
30-Year Pension Payouts—Almost $16M.
Our public safety employees receive retirement pensions equal to 90% of their highsalary. So, since this officer will exit the Palo Alto Police force making $411,000—his/her pension payout will start at $370,500 per year.As the graph shows, the retired officer will be receiving more in his/her retirementpayouts than in his/her working pay. At age 81, the officer’s payout will be around$670,000 yearly.
Total Lifetime Compensation—Over $22M.
The
minimum
lifetime compensation for this officer is:
Minimum LifetimeSalary $6,643,885Lifetime Pension $15,699,557Minimum LifetimeCompensation $22,343,442
 
The lifetime minimum salary, and pension (or deferred-salary), comes to about $22.5M.With overtime and salary increases due to promotions, the lifetime total will becomemuch higher still.
Total Cost of Employment—Upwards of $30M.
Operational overhead, a new police building, new vehicle/equipment costs, payouts forpolice misconduct and retirement health care and pension costs all add to the total cost of employment. It would not be difficult to estimate that this hypothetical officer will costover $9M to employ, and could draw well over $16M in retirement payouts/benefits forthirty years of service. All-in-all, it would appear that society is on the hook foranywhere from $26M-$30M for total cost-of-services for each such officer in the future.
CalPERS Melt-down
Payment of public employees’ retirement benefits is officially the responsibility of CalPERS (the California Public Employees' Retirement System). Yet our currentfinancial crisis has reduced the value of CalPERS’ pension fund by almost one-third of its previous high value of only two years ago.If CalPERS is unable to generate sufficient money to pay for the pensions of Palo Alto’spublic service employees, then the responsibility for making those payments passes to theultimate “employer of record”, That would be the city of Palo Alto.CalPERS’ poor investment returns have recently required local governments, includingPalo Alto, to make sizeable contributions to fund retiree payouts. Recently, CalPERS haswarned state and local governments that their annual pension contribution could increaseby nearly a third — starting July 1, 2010, for the state and schools and July 1, 2011, forlocal government agenciesWith the Pension payouts growing at the rate shown in the graph above, it would seemthat CalPERS is racing toward an unavoidable financial train wreck.
Situation Not Sustainable
These public service labor costs are driving Palo Alto Government into ever deeper redink, which can only be turned black by cutting service levels and/or by finding newsources of funds, such as the proposed Business Tax.But if the city’s salary and benefits costs continue to be ever-increasing, then the newbusiness tax revenue would need to be ever-increasing, as well. Clearly, such a“solution” is not sustainable.

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