City of Santa Monica
California

Staff Report
2940

Receive Compensation and Staffing Review and Approve Implementation Plan Responding to Recommendations

Information

Department:Finance DepartmentSponsors:
Category:08. Administrative Item

Recommended Action

Recommended Action

Staff recommends that the City Council:

1.     Receive and consider the Compensation and Staffing Review completed by Moss Adams, LLP;

2.     Provide feedback on the proposed Implementation Plan responding to Review recommendations; and

3.     Direct staff to proceed with the Implementation Plan, and provide Council with reports on the progress of implementation after six months and annually thereafter until implementation plan actions are deemed complete.

Staff Report Body

Executive Summary

In response to community and broader concerns raised by media reports, the City of Santa Monica commissioned an independent compensation study to collect and analyze pay, benefits and workload data from comparable cities and, where appropriate, the private sector to identify opportunities for improvement of policies and practices related to City employee compensation, as well as analyze use of overtime by public safety staff. The report represents one of the most comprehensive local government analyses of compensation practices done in recent years in Southern California, comparing not only pay, benefits and public safety overtime usage, but benchmarking workload data and other factors among cities comparable to Santa Monica.  The report documents that overall, Santa Monica’s pay and benefits are comparable to peer cities, albeit on the higher end of the scale. Also noted is the large scope and high level of City services. The report also identifies areas for improvement, many of which are already in progress. Implementation of these improvements will play a significant role in the City’s efforts to maintain fiscal sustainability as it faces future statewide threats from rising pension costs.

 

The Compensation and Staffing Review report (Attachment A) was conducted by the City’s internal auditor, Moss Adams, LLP, under the oversight of the Audit Subcommittee of the City Council, with advisory support from a limited-term, sevenmember ad hoc committee of residents, the Compensation Study Advisory Committee (CSAC). The report provides 13 observations and recommendations organized in the following categories: wage and benefits packages, drivers of compensation, and public safety overtime.

 

The report was informed by interviews of eleven peer cities, published data and surveys and interviews of staff and labor unions.

 

Background

On January 17, 2017, in response to concerns raised by a number of community groups related to news stories about City of Santa Monica staff compensation, and calls by these groups that an “independent” audit be conducted, the Audit Subcommittee discussed a proposed scope of work for a compensation audit to be completed by the independent firm that acts as the City’s Internal Auditor, Moss Adams, LLP.

 

After initial discussions both in the Audit Subcommittee and among community members and the City Manager, staff returned to the Audit Subcommittee on April 20, 2017 with an amended and expanded scope of work, along with the recommendation to create an ad hoc advisory committee, composed of up to 7 community members. According to the resolution establishing this ad-hoc community committee would act in an advisory capacity to the Audit Subcommittee in matters pertaining to critically reviewing and objectively considering the City's methodologies related to compensation.” The ad-hoc community committee was to join Subcommittee discussions specifically related to the scope, findings, and final report of the compensation review. At its May 9, 2017 meeting (Attachment B), Council directed the City Manager to seek applications from members of the public who would be interested in serving on the ad hoc committee, named the Compensation Study Advisory Committee (CSAC), and then make appointments. On August 23, the Audit Subcommittee, informed by its discussion with members of CSAC, approved the scope of work for the Compensation and Staffing Review. The Audit Subcommittee and CSAC reviewed data and an initial draft of the report, asked questions and discussed additional information that would be useful to incorporate into the report on November 21, 2017 and February 28, 2018. The final report was received and reviewed by the Audit Subcommittee at its meeting on April 17, 2018. Also received and filed at the April 17, 2018 meeting was an implementation plan proposing steps that staff could take to address report recommendations.

 

Discussion

The report provides observations and recommendations organized in the following categories: wage and benefits packages, drivers of compensation, and public safety overtime.

 

The report was informed by interviews of eleven peer cities: Anaheim, Beverly Hills, Burbank, Culver City, El Segundo, Glendale, Inglewood, Pasadena, Redondo Beach, Santa Barbara and Torrance. Berkeley and Palo Alto also participated in interviews to provide perspectives on leading practices in other innovative, progressive cities published data and surveys and interviews. This was in addition to interviews with staff and labor unions.  After discussions between the Audit Subcommittee and the CSAC the scope and peer cities were approved by the Audit Subcommittee.

 

While the report indicates that every effort was made to obtain comparable data, not all information can be compared equally. Factors that contribute to this include differences in operating budgets, performance measurements, community priorities, level of outsourcing, geography, and departmental organization. Additionally, a large part of the peer information used in this report is self-reported and un-audited.  Cities do not, as a general practice, gather and make public easily comparable data on compensation, workload and service levels on a consistent basis. 

 

The study documents that overall, Santa Monica’s pay and benefits are comparable to peer cities, albeit on the higher end of the scale. Also noted is the large scope and level of City services. The study also identifies areas for improvement, many of which are already in progress. Implementation of these improvements will play a significant role in the City’s efforts to maintain fiscal sustainability as it faces future statewide threats from rising pension costs. There are 13 observations and corresponding recommendations in the report that will help the City to improve its fiscal sustainability.

 

O BSER VAT I O N S  AN D  R EC O MME N D A T IO N S

WAGE AND BENEFIT PACKAGES

 

 

 

1

 

Observation

In relation to peer cities, Santa Monica exhibits the same distribution of personnel costs as peers across wages, health benefits, and retirement.

 

Recommendation

Enhance awareness and understanding of personnel costs by making this information readily accessible to the general public and provide explanations of each component of total compensation.

 

 

 

 

 

 

2

 

 

 

 

Observation

Santa Monica’s average cash compensation for employees is comparable to the average of peer cities, although the City’s median senior leadership compensation is the highest among peers. When Santa Monica’s median cash compensation was compared to peers, it was the third lowest, likely due to the City’s strong preference to insource services that require a large number of relatively low paid workers. For individual positions, Santa Monica met or fell below the peer median for 40% of the positions included in the benchmarking study, while the remaining 60% of positions were compensated at levels exceeding the peer median. Santa Monica lacks a formal philosophy to guide how compensation is determined.

 

Recommendation

Develop and implement a formal compensation philosophy, including, but not limited to, compensation and benefits components, levels, and market competitiveness, to guide labor negotiations and set employee expectations with respect to compensation.

O BSER VAT I O N S  AN D  R EC O MME N D A T IO N S

 

 

 

3

 

Observation

The City uses peer city compensation averages for individual positions during its market analysis prior to negotiations. Best practice is to expand the dataset used to include the median (midpoint) and calculate percentiles when benchmarking position wages.

 

Recommendations

Evolve the in-house position-level compensation market study methodology to include medians and percentiles in accordance with best practices, accounting for labor relation requirements.

 

 

 

4

 

 

Observation

Santa Monica has taken steps to reduce unfunded liability, including introducing an additional retirement tier prior to the Public Employee Pension Reform Act and making

$76 M in lump sum payments. Similar to peer cities, the City’s overall unfunded pension liability remains high.

 

Recommendation

Continue to take steps whenever possible to mitigate the financial threat that pension liability places on the City.

 

 

5

 

Observation

Similar to peers, Santa Monica’s employee medical insurance costs have risen steeply in recent years. The City’s cash contribution to monthly individual employee medical insurance, which varies by plan, is consistent with that of peers.

Recommendation

Evaluate options to stabilize per-employee health care costs.

DRIVERS OF COMPENSATION

 

 

 

6

 

Observation

Santa Monica is a highly unionized municipality that typically negotiates multiple labor contracts lasting one to three years. Frequently, all 11 contracts expire simultaneously, requiring a significant amount of work to negotiate.

 

Recommendations

Consider negotiating labor contracts in the next cycle to expire at different times and cover longer durations to reduce the burden of negotiations on the City.

 

 

 

7

 

Observation

Like most municipalities, Santa Monica operates a civil service system that is governed by state law and the City’s charter, municipal code, and civil service rules. As a result, it is difficult to change personnel practices as business needs evolve.

 

Recommendation

Regularly assess the City’s charter, municipal code, and civil service rules to ensure they are aligned with contemporary personnel practices and meet the evolving business needs of the City.

 

 

 

8

 

Observation

Santa Monica largely operated as usual during the 2008 recession and did not need to reduce staffing levels, while most peer cities had to significantly cut costs by increasing efficiency, outsourcing services, and reducing staffing levels.

 

Recommendation

Develop financial and operational strategies to prepare for possible future recessions, since the City may not be able to absorb a future recession as easily.

 

 

 

9

 

Observation

Santa Monica has the highest number of employees among peers. Similar to peers, tenure at the City tends to be long with 77.3% of employees being paid within 10% of the top salary step for the position.

 

Recommendation

Explore strategies for mitigating personnel costs, such as hiring personnel at lower steps, and leveraging training programs to equip personnel to take on greater responsibility earlier in their career.

 

 

 

10

 

Observation

Santa Monica employs more personnel than peers, in part, because it operates a variety of unique service offerings and responds to the service needs of a significant tourist population.

 

Recommendation

Implement an evaluation framework to assess the lifecycle costs of proposed new programs and services, and evaluate outsourcing options, where applicable.

O BSER VAT I O N S  AN D  R EC O MME N D A T IO N S

 

 

 

 

11

 

 

Observation

In general, Santa Monica has a higher workload and higher costs than peer cities. Citywide, productivity is comparable to peers, although productivity varies by program and service, and a comprehensive service level study was not conducted. The City could more strategically utilize key performance indicators to measure and communicate operational and individual efficiency and effectiveness.

 

Recommendation

Continue initiatives already underway to develop a strategic plan, comprehensive performance indicators, and leverage the City’s data for decision-making.

PUBLIC SAFETY OVERTIME

 

 

 

12

 

 

Observation

Although SMPD’s overtime expenditures increased by $1.2 million between FY 2014 and FY 2016, the overtime rate for an existing employee costs an estimated 7.1 to 14.6% less than the hourly rate of a new employee, suggesting that the use of overtime provides cost savings to the department.

 

Recommendation

In accordance with best practice, continue to evaluate police staffing levels and use of overtime.

 

 

 

13

 

 

Observation

Although SMFD’s overtime expenditures increased by approximately $800,000 between FY 2014 and FY 2016, the overtime rate for an existing employee costs an estimated 9.3% less to 6.5% more than the hourly rate of a new employee, suggesting that the use of overtime may provide cost savings to the department.

 

Recommendation

In accordance with best practice, conduct a staffing study to evaluate on-duty staffing demand, staffing levels, and use of overtime.

 

 

Some key points emerged from the study that highlight the unique landscape in which Santa Monica functions. According to the study, “Santa Monica’s community has a number of unique characteristics compared to the average municipality.” Specifically, the population fluctuates substantially from day to night, seasonally, and during the holidays. These fluctuations impact the City’s public safety, public landscape and transit services. It has more complex processes for planning and development due to its “unique environmental considerations and community development priorities. Overall, the City delivers programs and services beyond a typical full-service city, including infrastructure (airport, pier, cemetery, public Wi-Fi, community broadband, beach, regional bus service) and community programs (arts and community non-profit grant programs, housing assistance, public interest law, mobility).” (p. 8)

 

Additionally, among peers, Santa Monica shares a reputation, with Palo Alto and Berkeley, as “innovation labs’ of local government in California, because they have the employees, culture and resources to explore innovative programming and services.” As noted in the study, “Both cities reported that, similar to Santa Monica, the culture of high levels of service was driven by the community, elected officials and employees… City leadership reported that new hires typically have more experience and education than a typical new hire.” These cities “noted their highly engaged and educated communities, with long public meetings and significant effort made to quickly respond to citizen requests. Several peer cities reported a perception that their public meetings are not as long as Santa Monica’s, nor do they require as much staff time to support.” (p.46)

 

Comparison to Peers

Santa Monica’s cash compensation is comparable to the average of peer cities. (pp. 17, 21) By virtue of the fact that Santa Monica shares a regional economy and statewide structures (such as being a member of the California Public Employee Retirement System - CalPERS) with its peers, its compensation is driven by many of the same factors and is for the most part comparable. As noted in the study, the region has a high cost of living (the study refers to Santa Monica’s over $1 million median home price as the second highest among the peer group and far above the $465,000 of the Los Angeles metro area (p.8), high commute times, and high job competition, including with the private sector).

 

Overall, the City’s median cash compensation for individual positions met or fell below the peer median for 40% of positions analyzed, while 60% of the positions were above the peer median. Like all but one peer city, Santa Monica’s employees are hired, promoted and compensated according to the statutes of the City’s civil service system as defined in the City Charter and Municipal Code and overseen by a Personnel Board whose members are appointed by the City Council. Nine of the eleven peers, including Santa Monica, showed high employee tenure. According to the study, the Bureau of Labor Statistics shows that local government employee tenure is 8.3 years, while the private sector median is 3.7 years. Longer tenure is noted as a factor in higher total compensation costs. (p. 44)

 

The proportional mix of salaries, medical and retirement benefit costs is similar across the peer cities, with Santa Monica having slightly higher (1-3%) medical costs. (pp. 12-13) All cities have seen steep increases in medical insurance costs in recent years. Most peer cities face the challenge of large unfunded pension liabilities. While some cities seem to have lower liability burdens as a percent of their operating budget, four of these cities operate electrical utilities and their budgets include large contracts for electrical purchases, which affects the proportional distribution of these costs.

 

Facing the same fiscal challenges related to medical and retirement costs, Santa Monica and its peers are requiring employees to increase their cost sharing of retirement and medical contributions. Santa Monica, like four peers, has added additional, lower levels of retirement benefits for non-sworn new hires that go beyond the legislatively-mandated reduced levels (commonly referred to as tiers). The following chart shows the different level of pension benefits and the percentage of the City’s workforce in these tiers of retirement:

 

Pension benefit (Tier)

Percentage of staff in tier as of April 30, 2018

Miscellaneous 2.7% at 55

53.0%

Miscellaneous 2.0% at 55 (Hired on/after July 1, 2012)

5.1%

Miscellaneous 2.0% at 62 (New to PERS hired on/after Jan 1, 2013)

27.1%

Sworn Police 3.0% at 50

8.2%

Sworn Police 2.7% at 57 (New to PERS hired on/after Jan 1, 2013)

1.3%

Sworn Fire 3.0% at 55

4.2%

Sworn Fire 2.7% at 57 (New to PERS hired on/after Jan 1, 2013)

1.1%

 

Regular pension contributions are established by CalPERS and are set based on the assumption that unfunded liabilities will be paid off within a 30-year amortization period. Santa Monica has gone a step further than its peers, in accordance with its Council-adopted policy, to pay down at least $1.2 million of its unfunded liability each year in addition to making its regular pension contribution payments. Additionally, the City has taken the bold step to aggressively pay down the unfunded liability by making significant lump sum payments. To date, the City has made $76 million in additional payments to lower its unfunded pension liability.

 

The study found a number of areas where Santa Monica differs from peers. The report indicates these differences are often the result of the unique circumstances of Santa Monica and can represent areas for improvement.

 

·         Santa Monica has the highest median cash compensation for management positions.

The data and anecdotal research suggests that the higher median is due, in part, to Santa Monica’s desire to take on complex issues and to be a leader in local government innovation, similar to the cities of Palo Alto and Berkeley, requiring staff with more experience and education. (p.46)

 

·         Santa Monica has the largest staff of peer cities, and often has a higher workload.

The report indicates that Santa Monica has unique services including a cemetery, pier, airport, public Wi-Fi, community broadband, beach, regional bus line, Office of Sustainability, Office of Civic Wellbeing, as well as social services and arts grant programs. Santa Monica has a population that fluctuates from 92,289 to 250,000 on a daily and seasonal basis and this larger population directly impacts public safety, public landscape/beach, and transit services. Also factoring into the larger staff is Council’s policy of insourcing and keeping a low level of as-needed positions, rather than contracting out. Examples of areas that other cities contract out are solid waste, custodial, and workers’ compensation.

 

·         Some trade and frontline positions are paid less than peers.

The difference in cash compensation is likely due to the City’s in-sourcing of many services, which may lower the minimum value of the range. (p. 17)

 

·         Staff increased 5% in 9 years, while peer cities, whose revenues were more impacted during the Great Recession, laid off or furloughed staff or froze salaries.

The majority of recent position increases in Santa Monica were related to the introduction of EXPO light rail service (specifically additional Police and Fire personnel, and additional positions in BBB as part of the Evolution of Blue enhancements), changing service structures at the Santa Monica Airport (these positions have not been filled), as well as the conversion of as-needed positions to permanent positions.

 

Implementation Plan

Staff has developed an implementation plan to ensure that the recommendations of the Internal Auditor are addressed in a timely manner. The Implementation Plan (Attachment C) categorizes each recommendation based on level of difficulty to address, develops a timeline, and describes the steps that staff will take to make improvements to the compensation and staffing process as another one of the ways that the City is working to achieve long term fiscal sustainability. Many of the proposed actions are already in progress, including the development of a framework, based on performance measures, to inform staff and council on the most efficient and effective way to allocate scarce resources. The table below provides a summary of each recommendation’s priority, effort level and assigned responsibility.  Staff will report back to Council on initial progress made after every six months and annually thereafter until the implementation actions are deemed complete.

#

Recommendation

Priority

Effort Level

Responsibility

1

Enhance awareness and understanding of personnel costs by making this information readily accessible to the general public and provide explanations of each component of total compensation.

High

Moderate

HR, Finance, CMO

2

Develop and implement a formal compensation philosophy, including, but not limited to, compensation and benefits components, levels, and market competitiveness, to guide labor negotiations and set employee expectations with respect to compensation.

High

High

HR, CMO, and City Council

3

Evolve the in-house position-level compensation market study methodology to include medians and percentiles in accordance with best practices, accounting for labor relation requirements.

High

Moderate

HR

4

Continue to take steps whenever possible to mitigate the financial threat that pension liability places on the City.  

High

Moderate

Finance

5

Evaluate options to stabilize per-employee health care costs. 

High

High

HR, Finance

6

Consider negotiating labor contracts in the next cycle to expire at different times and cover longer durations to reduce the burden of negotiations on the City.

Medium

Moderate

HR

7

Regularly assess the City’s charter, municipal code, and civil service rules to ensure they are aligned with contemporary personnel practices and meet the evolving business needs of the City.

Medium

Moderate

HR and CMO

8

Develop financial and operational strategies to prepare for possible future recessions, since the City may not be able to absorb a future recession as easily. 

High

High

Finance and CMO

9

Explore strategies for mitigating personnel costs, such as hiring personnel at lower steps and leveraging training programs to equip personnel to take on greater responsibility earlier in their careers.

High

High

HR

10

Implement an evaluation framework to assess the lifecycle costs of proposed new programs and services, and evaluate outsourcing options where applicable.

High

High

Finance and CMO

11

Continue initiatives already underway to develop a strategic plan, comprehensive performance indicators, and leverage the City’s data for decision-making.

Medium

High

CMO and Finance

12

In accordance with best practices, continue to evaluate police staffing levels and use of overtime.

Medium

Moderate

Police and HR

13

In accordance with best practices, conduct a staffing study to evaluate on-duty staffing demand, staffing levels, and use of overtime.

Medium

Moderate

Fire and HR

 


 

Audit Subcommittee Review and Actions

The Audit Subcommittee and CSAC received the Compensation and Staffing Review and the Proposed Implementation Plan at the April 17, 2018 Audit Subcommittee meeting. Among the items raised by members of CSAC were whether the productivity of the City’s staff could be compared to peer cities (Moss Adams agreed to clarify Recommendation 11 to note that, based on metrics gathered but without the benefit of a service level study, the City exhibited average productivity as compared to peers); an interest in paying down the City’s unfunded pension liability within a shorter time frame than the CalPERS 30-year amortization window; and a request to extend the CSAC, without being subject to the Brown Act and with a new charge to advise on strategies for reducing unfunded pension liability. Additional comments received from CSAC and Subcommittee members are included as Attachment D and will be considered as staff solidifies the action steps included in the implementation plan. Members of the Audit Subcommittee unanimously voted to approve the Compensation and Staffing Review and to receive and file the Implementation Plan as well as the comments received.

Recommendation

Staff is recommending that the Council receive the Compensation and Staffing Review and provide direction to staff on whether to move forward with the actions proposed in the Implementation Plan.

 

Financial Impacts and Budget Actions

There is a need to contain costs associated with pay and benefits while at the same time attracting and retaining highly qualified staff to provide the level and quality of services that the community expects. This underscores the critical importance of implementing the recommendation for developing a clear and comprehensive Compensation philosophy to achieve measurable results. To effectuate the City’s Compensation philosophy, staff will present ideas to balance fiscal savings with competitive compensation to attract, retain and reward excellent performers as appropriate through policy deliberations by the council, labor relations activities and the future budgets. More immediately, if funding is needed for actions in the Implementation Plan, funds are included in the expenditure control funds of the Finance and Human Resources Departments.

 

Meeting History

May 8, 2018 5:30 PM  City Council Regular and Special Joint Meeting
draft Draft