Galveston Economic Report
David Stanowski Publisher
2009 City Budget
by David Stanowski
16 November 2008
The following comments were sent to City Council, before Hurricane Ike, in the futile attempt to get them to re-consider their spending priorities.
Next week, Council will review the financial condition of the City, in the aftermath of the recent disaster, which makes it a good time to publish these comments, so the public can consider them, and become involved in the debate about how our City government spends our money!
The salaries of City department heads, shown at the bottom of the page, have shocked and angered nearly everyone who has seen them!
Email sent to City Council on 08 July 2008:
I just finished listening to the tapes of the recent budget retreat, and there were some things I heard that disturbed me.
1. Who are the Beneficiaries of City Government?
It is the nature of all government entities to struggle with the issue of who they serve. Are they in business to serve the taxpayers, or is their primary concern to make life good for their own employees by giving them generous compensation packages? It should come as no surprise that the natural inclination for most government managers is the latter. They work with their employees every day so it is easy to yield to the temptation to make them happy, and worry about the taxpayers later.
Taxpayers have a great variety of competing things that they want to get from government, but those of government employees tend to be shared and simple. In addition, when government managers take care of their employees, they also take care of themselves. They share in the increases in salaries and benefits.
With this problem in mind, it is the role of the City Council to act as the board of directors for this corporation that we call the City of Galveston. We the taxpayers and shareholders must rely on the board (City Council) to make sure that City government managers do not ignore the needs of the people in favor of the benefits of City employees. Without this kind of strict oversight there is little hope that this will happen.
The critical quality that our City government managers must possess is the ability to spend OUR MONEY like it was THEIR OWN MONEY. When it came to discussions of pay and benefits for civilian employees this was simply NOT the case! With this country facing the worst financial crisis since 1929, this is not a time to be handing out COLAs as though it was the divine right of every City employee to get yearly raises regardless of performance or economic conditions. When this subject was introduced there was little discussion about the advisability of such a move. And, this was after the City Manager had already recommended a special 3% contribution to their pension plan due to a “shortfall”.
The proper way to look at this is; if the City Manager owned a business, would he be giving his employees a COLA plus a special contribution to their pension plan, if he had to use his own money? If not, then why should he be so free to spend OUR MONEY?
It may feel good to dole out money like this, but it is the job of our Council to resist emotional pleas and to utilize the judgment and wisdom that this position requires. We should not be surprised that City management is expecting these increases, but it is the job of Council to force them to consider what is good for the taxpayers.
There was a lot of discussion about bringing civilian employees’ pay and benefits in line with those of the police and fire departments. This is wrong headed in the extreme! The police and fire departments are special situations and should not be used as the benchmark for civilian City employees.
All City employees serve this community, and their pay and benefits should be compared to the tax payers that they serve. After all, it is the residents who must be taxed to pay them! Does anyone ever ask what our citizens can afford to pay?
The Median Household Income of this City is $30,500. This means that every City employee that earns more than $30,500 is making more money than many of the people that they serve! Any City employee who has a second income in their household is even better off against this benchmark. Looking at it this way, it should be clear that many City employees are already in the upper income brackets of this City, so how much more can we ask of our beleaguered taxpayers?
4. Pension Plans.
To reverse the current skewing of City government priorities in favor of their employees over the taxpayers, each item in employee compensation packages must be re-examined with a new perspective. A good place to begin is with the pension plans.
There are two kinds of pension plans Defined Benefit and Defined Contribution. Defined Benefit plans require that the employer guarantees a certain income to retirees. The private sector learned many years ago that Defined Benefit plans are far too generous to use anymore. They force employers into unrealistic responsibilities towards their employees, and lead to things like the current City “shortfall”, chronically underfunded plans, and bankruptcies. Defined Benefit plans are one of the major reasons that U.S. auto companies are on the verge of bankruptcy.
City Council should reject the calls to make up the current shortfall in the civilian pension plan, and vote to change this plan to a Defined Contribution plan. After such a conversion, a City Defined Contribution plan would only be responsible to contribute a certain amount to the plan; the City would no longer be responsible to guarantee a certain amount in the plan or a certain payout to retirees. This is what virtually everyone in the private sector has been doing for the last 20 years!
5. Other perks and benefits.
After Council reviews the advisability of converting the civilian pension plan to a Defined Contribution plan, further consideration needs to be given to the other perks and benefits received by civilian employees such as vacation days, sick leave, take-home vehicles, and medical insurance. This review should be done in light of the two criteria listed above: what would you choose to do if you were spending your own money, and how do these benefits stack up relative to what the typical citizen/taxpayer of this city receives from his/her employer. City employees should not be compensated to the degree that they become a privileged class.
6. Other priorities.
After you realize that City payroll consumes somewhere between 2/3 and 3/4 of the general fund, and there seems to be little effort to limit the growth in these expenses, it is not difficult to understand why other priorities that are important to the taxpayers, such as streets and traffic, public bathrooms downtown, street cleaning, code enforcement, signs pointing the way to The Strand, and efficient permitting processes never seem to get adequate funding! There needs to be more of a balance between payroll and everything else!
7. New Alliance.
Steve Greenberg and the Friends of Business have been trying to make these points to previous Councils for more than 20 years with little success. It is difficult to say how much progress can be made with the current budget under consideration, but the Galveston Founders Party has joined forces with Steve, and the FOB, in his efforts to set priorities that actually benefit the taxpayers. Hopefully, if we work together, we can have more success.
The time to make difficult choices is now. They will become much more difficult later!
Comments to the City Council meeting 09 September 2008
What is the proper benchmark to use when designing City employee compensation packages? The City often uses comparisons with other city governments, but this is not appropriate. Government relies on the private sector for most of its funding, which means that what we should be doing is comparing City employees to their counterparts in the private sector, because these workers are the ones who will actually be paying the bill!
The two most basic indicators of how well our private sector is faring are population trends and Median Household Income. Between 1980 and 2005 the local population declined 7% while the population of the State of Texas soared 61%. This demonstrates that even though many people would like to live here, they simply gave up and left when they could’t find good-paying jobs, and for a variety of other reasons.
Local economic weakness is confirmed by the fact the Galveston’s Median Household Income is $30,500; 28% below the MHI for the State of Texas which stands at $42,139. This means that any City employee who is earning more than $30,500 is better off financially than at least half of the City’s residents; and this is BEFORE we include their benefits!
We also know that per capita Retail Sales peaked in 1984, cargo handled at the Port hit a high in 1984, and the number of jobs peaked in 1995. The number of jobs in Galveston is still 15% below the 1995 peak even as the number of jobs in the state is up 22% over the same period, which means that Galveston’s job growth is 37% below that for the State.
However, the growth in the number of people working for the City stands in sharp contrast to the anemic performance of our private sector. Between 1980 and 2005 the number of City employees rose from 760 to 816, an increase of 7%; and currently stands at 810.
If the number of City employees is normalized for our loss of population, the City is now overstaffed by 15%! If current City employees are merely working at the same productivity level as their 1980 counterparts, the City would work fine on 110 fewer employees. However, since they should be dramatically more productive, the head count could easily be below 700.
The creeping headcount since 1980 is one of the reasons why about 70-75% of general fund is now consumed by payroll which leaves little left for things that the people who live here actually need like parks, streets, and sewers. In addition, with fewer employees, the City could pay the ones they do have more without straining the budget as much.
EVERYONE is suffering in this economy, and the private sector will be forced to pay for any raises for City employees. Therefore, after considering the salaries and raises given to current department heads, over the last six years, any raises handed out this year should be a fixed amount, so that those on the lower end of the pay scale get a higher percentage increase.
The City’s pension plans are Defined-Benefit plans, which means that the City is responsible for certain fixed payouts to retirees regardless of investment performance. This type of plan is what is helping to bankrupt the U.S. auto makers. Any shortfalls in City Defined Benefit Plans will have to be made up by the taxpayers.
For this reason, the City should switch to Defined-Contribution plans, as most of the private sector has done, where each employee only receives what is in their own account, regardless of investment returns. This means that there is no liability to the taxpayers to makeup any shortfalls.
Currently the City contributes 11% of compensation to the police PP, 14% to the fire PP, and 6% to the Civilian PP. The City Manager wants to increase the contribution to the Civilian PP 50% from 6 to 9%! How many of our residents receive any contribution to a PP from their employer, let alone a very generous 9%?
Furthermore, the Civilian PP currently has an “expectation” of a minimum yearly return of 8%. This means that if they make more than 8%, they keep the difference, but if they earn less than 8% they come to the taxpayers to makeup the “loss”, as they are doing this year.
This “expectation” is wrong-headed in so many ways. All PPs should be managed with a conservative approach, so any return in excess of the current T-Bond yield of 4% must be achieved through speculation. Speculation that the taxpayers must backstop when it does not pan out.
Warren Buffet’s portfolio is down 20% over the last year, so how are the fund managers of the Galveston Civilian PP going to beat the world’s greatest investor and earn 8%? If they match Buffet, they are going to be 28% beneath their expectation next year, and looking for a very big makeup! The way to cure this problem is to switch this PP to a Defined-Contribution Plan.
Council should vote no on the request for a makeup on the current shortfall against the 8% expectation, and no on raising the City’s contribution to 9%.
IN CONCLUSION: It is very easy to be generous when you’re not spending your own money! The taxpayers simply expect you to take the time to exercise your fiduciary responsibility and make the difficult choices that should be made when spending OUR MONEY.
Now is the time for any resident who isn’t going to get a COLA from their employer, a PP makeup, or a 50% increase in their employer’s PP contribution to contact their Council Member and tell them all about the reality of life in their world. Most Galveston residents probably don’t even have a PP, let alone one with a proposed 9% contribution from their employer. So why ask them to pay for one for somebody else?
The City Manager's "explanation" for the following salary increases was that he was "matching" salaries paid by other city governments. There seemed to be no comparison to the salaries and benefits of the local private-sector employees, who have to pay for this. Raises also appeared to be handed out whether or not a key employee was threatening to leave for better pay elsewhere; it was just "necessary" to the keep their salaries close to what was paid in other cities.
Salary Increases of City Department Heads as of August 2008:
Employee 2002 2008 % Increase % Increase/
Salary Salary Year
Steve Leblanc $103,371 $139,050 34.52% 5.75%
Harriet Green $85,135 $118,450 39.13% 6.52%
Deputy City Manager
Brandon Wade $75,247 $117,420 56.05% 9.34%
Assistant City Manager
Carolyn Cox $60,671 $103,000 69.77% 11.63%
Director of Community
Wendy O'Donohoe $60,899 $92,700 52.22% 8.70%
Angelo Grasso $62,188 $86,000 38.29% 6.38%
Barbara Lawrence $47,725 $76,879 61.09% 10.18%
Director of Mass
Michael Worthey $48,057 $76,220 58.60% 9.77%
Director of Parks
Barbara Sanderson $45,425 $76,220 67.79% 11.30%
Director of Grants
Patrick Sterling $51,395 $68,495 33.27% 5.55%
David Smith $46,561 $67,980 46.00% 7.67%
Hud Hopkins $51,217 $64,890 26.70% 4.45%
Charlie Kelly $35,899 $62,830 75.02% 12.50%
Muni Court Clerk
Kathy Price $30,956 $52,000 67.98% 11.33%
Michael McNeely $33/hour $41/hour 24.85% 4.14%
Average for all
Civilian Employees 20.50% 3.42%
Salary Increases of City Department Heads who joined the staff after 2002; as of August 2008:
Charles Wiley $115,000 N/A N/A
Assistant City Manager
Lloyd Rinderer $71,000 $103,000 45.07% 15.02%
Director of Finance
Jeff Miller $88,000 $97,850 11.19% 5.60%
Michael Varela $76,626 $89,095 16.27% 5.42%
Barbara Baruch $63,500 $82,400 29.76% 9.92%
Roberta Cross $82,400 N/A N/A
Director of Utilities
Eric Wilson $66,202 $95,000 43.50% 14.50%
Manuela DeLaFuente $28,303 $43,517 53.75% 17.92%
Lupe Rushing $29,414 $34,125 16.02% 16.02%
Before Hurricane Ike hit the City, local government was overstaffed by 15%. If our population drops even further, the level of over staffing will continue to climb. If layoffs are to come, it is essential that they not be confined just to the lower paid workers; the people on the list above should be considered, too.
In addition, there are many potential cost-saving measures besides layoffs. The data listed above shows plenty of room for salary reductions. The City staff are probably among the few local residents who have actually been getting paid since 13 September. In addition, City pension plans must be converted to Defined-Contribution Plans as soon as possible!
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