Summary: The City of Madera is facing significant financial problems, with a general fund deficit projected for each of the next five years, rising from $1.7 million in FY2018 to $3.9 million by FY2023. Over that same time period, the city’s estimated annual pension costs will rise from $5.1 million to $8.5 million.

As employee compensation — salaries plus benefits — accounts for approximately 66 percent of the general fund budget, it is unsurprising that area residents concerned about the city’s fiscal health have started looking there.

Last month, an area resident discovered the city’s employee compensation costs for top administration staff had increased significantly over the past few years.

After the resident’s findings were covered in an ABC30 report, the issue received widespread attention, culminating in a full-length commentary by Madera Mayor Andrew Medellin in the Madera Tribune.

The mayor wrote that, in FY2015, the city approved a pay increase after a city-commissioned study found that the average Madera job paid 4.4 percent less in total compensation than the “market median” of the 10 other city governments surveyed.

However, the mayor described this pay increase as one that merely increased Madera compensation levels to the market median level. This is false.

The city did not merely increase compensation to the market median. Rather the city provided a pay increase to the market median, plus an additional 5 percent across-the-board pay increase to all employees, followed by an additional 3 percent across-the-board raise to all employees in FY2016 and FY2017.

Thus, the city provided an additional, 11 percent across-the-board pay raise on top of the raise to the market median.

All of these raises were authorized and approved in the same action at the start of FY2015, so it is unclear as to why the Mayor provided residents with only partial information.

Consequently, this analysis merely intends to provide Madera residents with the complete and accurate information they are entitled to.

In FY2015, the city approved a series of pay raises that produced cumulative raises ranging between 11 – 44 percent, depending on job classification. The average job classification received a 20 percent salary raise.

In aggregate, we estimate these raises will result in an additional $1.835 million in annual compensation costs.

We also note that the justification for these raises appears to be weak. There were no signs of staffing shortfalls or difficulty with regards to hiring and retaining employees. In fact, the mayor reported that the average management employee had been with the city for 14 years, a strong indication that the city does not have a retention problem.

Moreover, Madera, when measured on a variety of metrics, was the poorest of all the cities included in the survey. Thus, it is not terribly surprising that their compensation levels were 4 percent below the median. While a desire to increase to the median is not terribly surprising, why the council approved an additional 11 percent raise on top of that increase appears particularly hard to justify.

Background

Last month, a Madera city resident found that city administrators received a significant increase in their total compensation — pay plus benefits — over the past 5 years, despite the city’s growing financial concerns.

The resident’s findings sparked an ABC30 report, which generated significant attention and prompted a response from Madera Mayor Andrew Medellin in the Madera Tribune.

In his response, Medellin attempts to discredit the resident’s analysis by falsely claiming that the source of his data — TransparentCalifornia.com — was unreliable.

In fact, Transparent California’s data comes directly from the city in response to a request for employee compensation data under the same formatting and reporting guidelines used by the California State Controller’s Office.

So it was surprising to see the mayor allege that the information on our site “has no guidelines or procedures for reporting,” in addition to claiming that the cost of benefits is mistakenly reported as base pay — a demonstrably false claim that can be dispelled in the 5 seconds it takes to visit the website.

More troubling than the mayor’s poorly executed “smear the messenger” campaign, however, were his comments regarding the pay raises provided to city staff. In 2014, the city commissioned a study to compare the compensation it offered for various positions to the levels found at 10 neighboring city governments.

The study found that the average Madera job classification paid 4 percent less in total compensation than the middle-point (median) of the cities surveyed.

The mayor described the city’s response to this study as follows:

We agreed to meet the market median or in the middle of the comparison (median) when looking at the combined value of pay and benefits.

Some positions received a small increase while others were given a greater increase to meet the market median. Some didn’t receive a market adjustment at all.

As will be discussed later, the study was fundamentally biased in favor of higher pay and, even ignoring that, failed to justify the pay raises provided.

But in a commentary ostensibly designed to set the record straight about pay increases at Madera, the mayor badly misleads residents by omitting a key fact: the city didn’t merely increase salaries to meet the market median, they also provided an additional 11 percent pay raise in addition to and on top of that!

The Mayor’s omission of this point is particularly glaring given this additional raise occurred at the exact same time as the increase to the market median, as shown below:

This cumulative 11 percent raise on top of the increase to the market median can be found in every union contract that the mayor and the rest of city council approved, as well as in the most recent budget. In fact, other than the mayor’s commentary from last week, there does not appear to be any reference to the market median increase that does not also immediately, and in literally the very next sentence, reference the additional raises provided.

As will be shown below, there is little compelling evidence to justify the pay increase to the market median on its own. But the 11 percent raise on top of that is particularly indefensible, something the mayor appears to recognize by his conspicuous omission of that fact.

Methodologically flawed study

There is no economically valid justification for conducting a salary comparison that is restricted to only other governments. While this is appropriate for the few government-specific jobs like police and fire employees, there is no legitimate basis for comparing the pay for common jobs like an administrative assistant, accountant, engineer, human resources staff, payroll specialists, secretaries, etc. exclusively to other governments. And precisely because California government workers already, on average, earn up to 30% more than their equally-skilled counterparts in the private-sector, such an analysis is guaranteed to only further that disparity.

Determining whether compensation is at an appropriate level should be informed by whether an agency is able to adequately attract and retain staff. As the mayor points out, the city has had no problem retaining employees, with the average management employee having been with the city for 14 years — hardly a sign of constant turnover and an inability to fill positions at the previous salary level.

And while it may sound reasonable to increase pay to the middle of the (poorly defined) market, it is worth emphasizing the obvious mathematical necessity that not everyone can be at the middle, and that half of all agencies surveyed must be below the middle.

It is precisely because of government agencies’ misguided desire to be at the middle of an arbitrary and misleading salary survey, along with the absence of the cost restraints found in the private sector, that public pay continues to rise.

For example, Madera’s recent pay increase now moves the median benchmark that much higher. As the now comparatively lower ranked agencies seek to match the recently-increased median, their efforts will also boost the median higher, thus perpetuating an ever-increasing race to the top, with only the degree to which taxpayers can bear this burden serving as the ultimate backstop.

Madera poorest of all cities surveyed

Even setting aside the issues raised above, the prudent response to the city-commissioned study, particularly in light of the city’s financial woes, was to simply do nothing.

As shown below, Madera, when measured on a variety of metrics, is the poorest of all the cities surveyed in the study.

Source: U.S. Census Bureau, 2012-2016 American Community Survey 5-Year Estimates, Selected Economic Characteristics

Thus, a finding that Madera’s average job pays 4 percent less in total compensation than its much richer neighbors is hardly a compelling reason for an across-the-board pay increase, and the corresponding burden such an increase imposes on area residents.

Given Madera has forecasted a multi-million dollar general fund shortfall that gets larger in each of the next 5 years, alongside a nearly 70 percent increase in pension costs, the city’s recklessness couldn’t have come at a worse time.

Yes, several Madera jobs paid less than what their neighboring, richer governments paid. The fact that Madera had no trouble filling these jobs makes clear that their previous compensation levels were more than adequate. Nonetheless, if even the very poorest city surveyed is unwilling to be one of those who must be in the bottom half of a salary survey, who will?

True size of the FY2015 pay raise

By comparing the just-released FY2017 salary schedule against the FY2014 salaries in place at the time of the study, we can measure the total impact of the pay raises approved at the start of FY2015 — which include the immediate increase to the market median plus an immediate 5 percent increase on top of that, plus an additional 3 percent increase in both FY2016 and FY2017.

In the summer of 2015, after learning that the average Madera city job paid 4 percent less in total compensation than the market median, the Madera City Council approved a series of pay raises that would provide an average 20 percent increase in base salary over the next three years. A complete table showing the cumulative pay raise for each classification can be found in Appendix I.

In aggregate, we estimate that this cumulative 20 percent pay raise will result in $1.372 million in additional annual salary costs, which totals $1.835 million when including the corresponding increase in retirement costs that accompany any salary increase.

How does Madera compensation compare now?              

As a result of these newly-increased salaries, total compensation for Madera jobs range from 2 percent above the market median to as much as 28 percent above for the city administrator. The average job went from being 4 percent below the market median to more than 8 percent above it. See Appendix II for the complete table.

There are two caveats to this finding. First, it does not factor in any increases that might have occurred at the comparator cities. Thus, it is likely that this would reduce the compensation premium reported if the assumedly higher 2017 salaries of the comparator cities were used.

Second, when calculating the value of benefits, we simply adopted the static dollar values used in the original study. But because higher salaries translate to higher retirement benefits, the value of benefits will increase correspondingly. Properly accounting for this would increase the compensation premium received for Madera employees.

We have not corrected for these two, slightly off-setting variables, as the purpose of Appendix II is to merely get a sense of the size of the cumulative, one-time increase approved in 2015, rather than providing a perfectly up to date comparison.

Conclusion

Madera’s general fund is expected to be in the red for each of the next 5 years, with a forecasted annual deficit that rises from $1.7 million in FY2018 to $3.9 million by FY2023. Over that same time period, the city’s estimated annual pension costs will rise from $5.1 million to $8.5 million.

The effects of the cumulative average 20 percent salary increase approved in FY2015 will be felt twice, with the higher salaries generating a corresponding increase in pension costs. In total, we estimate the FY2015 raise will cost the city an additional $1.835 million annually.

While it is fairly common for governments to provide pay raises by employing the seemingly reasonable, albeit profoundly flawed, approach of paying the “market median,” Madera went beyond that by granting all employees an additional 11 percent pay increase above and beyond the increase to the market median.

Madera residents deserve elected officials who are both responsible stewards of taxpayer dollars and transparent with their constituents. By voting for such an excessive and unwarranted pay raise, and then providing the public with misleading and incomplete information, the mayor, in this instance at least, appears to have failed on both accounts.

Appendix I

Cumulative salary increases for Madera job classifications from FY15-17

Appendix II

Total FY2017 compensation for Madera job classifications as a percentage of FY2015 Market Median