2014/15 Total Compensation Report: A Colorado WINS analysis

Total Compensation Report Analysis | Colorado WINS | page 1

IntroductionThe Department of Personnel and Administration’s annual Total Compensation Report was released in early August 2013. This report is required by statute to annually review the results of 3rd party surveys and to assess the state’s prevailing total compensation practices, levels, and costs (salary survey). The purpose of this survey is to determine if the State’s total compensation plan (including salaries, group benefit plans, retirement benefits, merit pay, incentives, and paid leave) are comparable with other public and private employers. The purpose of the Total Compensation Report is to ensure that the State’s total compensation plan meets Colorado’s statutory total compensation philosophy to “ensure the recruitment, motivation, and retention of a qualified and competent work force1.”

The following analysis of the Total Compensation Report from Colorado WINS is designed to shine a light on areas where Colorado WINS believes the State’s process is flawed. And, more importantly, how those flaws are negatively impacting Colorado’s ability to recruit, motivate, and retain a qualified and competent work force and how we can address those issues.

In this analysis we’ll focus on three major areas. First, how should the State measure the rate of annual inflation that erodes worker’s wages?

1 C.R.S. § 24-50-104(1)(a)(I)

Second, how do we make an “apples to apples” comparison of private sector retirement benefits, including Social Security and PERA benefits? Third, what impact does wage stagnation have on the prevailing wage concept currently employed by DPA?

State government touches each of our lives every single day, often times directly and other times in less obvious ways. Given the role of state employees in keeping our communities safe, our roads cleared, and our water clean every Coloradan has an interest in seeing the state recruit, motivate, and retain a qualified and competent work force.

And we shouldn’t forget that the State is Colorado’s largest employer; the wages of state employees have a direct economic impact in all 64 of our counties. If state employees are falling behind economically then every county in the state is falling behind.

With some adjustments to the State’s total compensation salary survey process Colorado WINS believes that we can start pushing Colorado’s economy forward.


Determining inflation salary adjustments: CPI-U or W@W?There are some very interesting questions raised in this year’s total compensation report. First among them, what inflation measurement should the State use when determining salary adjustments and merit increases? And how much influence should an advocacy organization have in that process?

In their August 1, 2013 letter to the Governor, DPA states:

“Historically, the State has used the Consumer Price Index for all urban consumers (CPI-U) to determine salary adjustments, however a recent recommendation issued by the Office of the State Auditor (OSA) advised the state to use the WorldatWork (W@W) Salary Budget Increase Survey to determine salary adjustments and merit increases. The W@W 2012-13 Salary Budget Planning Survey estimated overall salary increase projections at three percent nationally and for Colorado.”

This is not just a simple technical change in how the state determines salary adjustments and merit increases. It is, in fact, a significant change in policy and one which should be discussed openly with the State workforce.

What is WorldatWork?

They are a non-profit membership organization based out of Arizona and they describe themselves as a “human resources association for professionals and organizations focused on compensation, benefits, work-life effectiveness and total rewards – strategies to attract, motivate and retain an engaged and productive workforce.” In their 2011 Form 909 filings with the IRS (the most recent available online) we see that WorldatWork took in over $5 million in membership dues from their 30,000 members that year and generated over $17 million from what is described as “program service revenue.” When all was said and done they had about $21 million in total assets for the year. As a 501(C)(3) nonprofit they spent almost all of that money on things such as member services and employee salaries.

What is CPI-U?

It is “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”2

It is measured by the Bureau of Labor Statistics (BLS), a 130 year old agency of the United States federal government. The BLS is a non-partisan agency staffed with professional economists and statisticians. Their measurements, such as the unemployment rate and CPI-U, are watched closely by private industry, working and academic economists, and policy makers at every level of government. Many private sector employment contracts tie annual wage increases to the BLS measure of CPI-U and public employers rely heavily on the CPI-U as well when making compensation decisions.

What’s the difference?

The BLS provides a tremendous public service and they are considered the gold standard of statistics about our labor markets and our economy as a whole. As a public agency the BLS has no financial supporters to placate, the staff members are not political employees beholden to a political party for their employment. They are a truly independent organization with more than a centuries worth of data that is easily accessible by anyone in the general public. Their methods and data are there for anyone for wishes to examine their conclusions.

WorldatWork does not just sit on the sidelines and collect data and educate their members on market movements, they are an advocacy organization. As they state in a PDF on the advocacy portion of their website,

2 “Consumer Price Index – Frequently Asked Questions” Bureau of Labor Statistics


“The WorldatWork public policy department is an independent, non-partisan authority on topics related to total rewards. Through legislative and regulatory analysis, strategic lobbying, advocacy, and targeted outreach and communications, the public policy team represents the interests of WorldatWork’s members and the HR/total rewards profession before lawmakers, policy institutions and federal agencies3.”

WorldatWork actively lobbies for legislative and regulatory changes on behalf of their members; they spent $246,241 on lobbying between 2008 and 20114. They are not an independent, objective source of data – unlike the BLS. Membership organizations, by their very nature, support the interests of their members. The WorldatWork membership list is not publicly available but they do boast that “95% of Fortune 500 companies” have WorldatWork members working for them. In addition we can see from a brochure for their April 2013 “Total Rewards” conference that they accept corporate sponsorship from such companies as the Hay Group, a management consulting firm, and Towers Watson, a Denver-based human resources consulting firm.

While we have no reason to doubt that these firms, and other similar sponsors, are anything but professional and well-meaning in their services, their financial support of WorldatWork raises questions about potential bias in the data and analysis provided by WorldatWork.

There are serious questions about why the state would move away from relying on the easily accessible, non-partisan, publicly funded research and analysis provided by the BLS to a far less transparent, privately funded, corporate sponsored source such as WorldatWork.

Inflation and Merit Pay

Why the concern with how inflation is measured? Colorado WINS believes that without an annual increase tied closely to inflation an enormous percentage of state employees will see their real wages cut every year, even

3 “Advocacy at WorldatWork,” http://www.worldatwork.org/pub/PP_Factsheet_2012.pdf4 2011 WorldatWork IRS Form 909 filing, page 19, http://990s.foundationcenter.org/990_pdf_archive/316/316054097/316054097_201112_990.pdf

in a year like last year which saw base building and merit pay increases.

Last year’s budget provided for a 2.0% base building increase for 99% of all employees and then created a merit pay scale. The higher you scored on your evaluation and the lower you were in your salary range the more money you received in merit pay. So those with the highest scores who were lowest in their range received an additional 2.4% base building merit increase on top of the 2%.

The funding of the new merit pay system was an important moment for state employees after many years of suffering with a broken and unfunded performance pay system. Merit pay helps build morale, it rewards good performance and it helps move people through their pay range. These are all undoubtedly good things.

However, inflation impacts every state employee. Regardless of how you scored on last year’s performance evaluation, inflation had the same effect on your wages as on the wages of your co-workers. If your annual wage increase is not keeping up with the rate of inflation then your wages are worth a little less every single year. This has a negative cumulative effect on the value of our wages.

Furthermore receiving the highest level of merit pay is a goal that is simply unattainable for certain job classifications. Take for instance the Corrections Officer I and II series. According to data that Colorado WINS obtained from DPA, 87% of all Corrections Officer Is and IIs received a Level II score on their annual evaluation. This isn’t a problem just in the Department of Corrections – in the IT Professional series 78% of all IT Pro I-IV received a Level II score on their annual evaluation. If too much of the State’s annual increase to employees is weighted towards merit pay then huge numbers of state employees will not see a meaningful wage increase.

Colorado WINS proposes that in this coming fiscal year, in addition to fully funding merit pay, the State provide all employees a base building increase of 3% so that every employee receives an increase that keeps up with inflation.


Comparing PERA and private sector retirement benefitsCertainly one of the most important parts of any compensation package in either the public sector or the private sector is the retirement benefits. In Colorado most state employees participate in a defined-benefit pension plan administered through the Colorado Public Employee’s Retirement Association (PERA).

What is important to remember, and which is often lost in the debate over public employee pensions, is that state employees do not earn Social Security while they are employed by the state.

When someone in the general public hears about a PERA pension they often are not aware of this fact and assume that a state employee’s pension is an add-on to their Social Security benefits, similar to the role of a 401k or a pension in the private sector.

Apples to apples: normal vs. actuarial costs

Doing a true “apples to apples” comparison of PERA benefits to the retirement benefits available in the private sector is a complex process and one that even DPA admits they are not fully equipped to do. The key issue in making such comparisons comes down to the differences in “normal costs” versus “actuarial costs.”

In layman’s terms normal costs are the percentage of salary necessary to pay for the future benefits of an existing employee. The actuarial costs however include moneys needed to make up for years when the state underfunded

their portion of the PERA contribution and all other such accrued liabilities and any other contributions made to PERA.

In their analysis of retirement compensation in the 2014/15 total compensation report, DPA compared the actuarial costs to private sector retirement plans. WINS strongly believes that this is an incorrect comparison and that such an analysis gives an overinflated sense of the state’s PERA contribution as it relates to individual employee compensation. On page 17 of the total compensation report we see in Table B9 that DPA has concluded that the state contributes 10.15% to the defined benefit/defined contribution pension plans based on analysis that relies on actuarial costs.

Table B9 Components of pension benefits Market State

Social Security 6.20% N/A

Medicare 1.45% 1.45%

Defined Benefit/ Defined Contribution N/A 10.15%

AED for PERA N/A 3.60%

Average Tax Deferred matching 4.45% N/A

Total Contribution from Employer 12.10% 15.20%

What does the state pay toward retirement?In PERA’s most recent Comprehensive Annual Financial Report (CAFR) for the year ending December 31, 2012 and released in June of 2013 we see that the employer contribution normal cost is just 1.64%. The total contribution normal cost is 9.69% of an employee’s salary, of that total the employee pays 8.05% with the state paying the remaining 1.64%5.

5. Colorado Public Employee’s Retirement Association, Comprehensive Annual Financial Report For the Year Ended December 31, 2012, “Schedule of Computed Employer Contribution Rates for the 2014 Fiscal Year,” page 138

Colorado WINS retirees


Based on PERA’s report we see that a state employee pays 83% of the contribution necessary to pay for their future retirement benefits – this is significantly higher than what an employee pays in the private sector.

This chart will make the comparison more clear:

Components of Retirement

Benefits

Private Sector Employer

Contributions

State Employer

Contributions

Social Security 6.20% N/A

Medicare 1.45% 1.45%

PERA Contribution N/A 1.64%

Avg. Tax Deferred Matching 4.45% N/A

Total contribution from employer: 12.10% 3.09%

As this chart makes clear, the State of Colorado lags the private market by slightly over 9% in their contribution to employee retirement benefits.

Why does the DPA analysis show a 15% employer contribution but the WINS analysis shows a 3% contribution?

The added employer costs in the DPA analysis are a result of underfunding of the State’s pension obligation by the State in previous years. In order to make up that difference the General Assembly passed legislation in 2004 and 2006 mandating payments to restore the PERA trust fund to where it would have been had the State met its prior obligations. These contributions are known as the Amortization Equalization Disbursement (AED) and the Supplemental Amortization Equalization Disbursement (SAED).

We certainly do not want to simply disregard the financial liabilities to the state that AED and SAED represent, these are real costs to the State as an employer. However we think that their appearance in the total compensation report without, in the very least, some background explanation leads some to the false belief that the State contributes more to employee retirement than private sector employers.

Some will look at the total compensation report and argue that the Table B9 shows that the state is being too

generous with its retirement benefits and that the state should scale back on their PERA contributions. Such an argument ignores two important facts.

First, the underfunding that the AED and SAED are designed to address occurred through no fault of any State employees. Rather the State chose to underfund its portion of contributions. Employees should not have their benefits attacked because of an action that their employer freely took. Second, AED and SAED payments cannot be accurately categorized as part of the total annual compensation package for current employees. These are not new benefits; rather they are payments on already owed benefits.

The distortion in the numbers which occurs when the state chooses to lump in AED and SAED payments into their total compensation analysis is quite dramatic. The DPA analysis shows a total State contribution to retirement benefits of 15.20%, compared to the 3.09% normal costs demonstrated above.

If the State is trying to accurately assess their total compensation in order to be competitive with other employers in recruiting and retaining a talented workforce then it is imperative that the State provide an accurate assessment of their retirement contributions.

A prospective candidate comparing a job in the private sector to a job with the State will see that in the private sector she pays 6.2% to Social Security and that amount is matched by her employer and that they may likely pay another 4.45% into a 401k or similar plan6; however when she looks to the State she will see that she pays in 8.05% and the state kicks in just 1.64%. In that analysis it is clear that the State is simply not competitive in any real world, practical analysis of their retirement benefits plan.

6 Annual Compensation Survey Report for FY2014-15, August 1, 2013; Table B9, page 17


Wage Stagnation and Prevailing wage

“We will not be able to have a sustainable economic recovery…

unless we get wage growth.”Larry Mishel

President, Economic Policy InstituteGiven the hollowing out of the American middle class over the past several decades we should question the reliance on the concept of “prevailing wage” as it is currently interpreted in state statute. The application of the current prevailing wage standard inevitably leads to wage stagnation for state employees and if the state’s largest employer can’t deliver wage gains to their employees how can we expect Colorado’s economy to recover?

A quick review of the current state of American household incomes shows us the underlying issues. As the U.S. Census Bureau noted in a September 2012 report7,

• Median family household income in the United States declined by 1.7% in real terms between 2010 and 2011 to $62,273.

• In 2011, real median household income in the United States was 8.1% lower than in 2007, the year before the most recent recession, and was 8.9% lower than the median household income peak that occurred in 1999.

In addition, a 2013 report by the Colorado Center on Law & Policy analyzed census data and found growing income inequality and plummeting family income in Colorado.

Since 1980 incomes for the top 80th percentile of income earners in Colorado grew by 18.7%, median earners saw their wages grow by 9.3%, but the bottom 20th percentile saw less than 1% growth. Since 2007 Median Family Income in Colorado has fallen by $8,000, or slightly over 12%8, and since 2000 the median weekly wage, when adjusted for inflation, has fallen 1.7%9.

7 US Census Bureau Report, Income, Poverty, and Health Insurance Coverage in the United States: 2011,” Carmen DeNavas-Walt, Bernadette D. Proctor, Jessica C. Smith, page 5 (www.census.gov/prod/2012pubs/p60-243.pdf)8 “State of Working Colorado 2013,” Colorado Center on Law & Policy, Figures 27 and 299 ‘Wage Gains Missing for Most US Workers Since 2000,”

How do state workers compare?

State workers have been no exception to this trend. Beginning in 2009/10 and continuing through the 2012/13 fiscal year state employees saw no annual wage increases and no performance based increases. In addition state employees had a take home pay cut in 2010/11 and 2011/12 when the state required them to contribute an additional 2.5% to cover a PERA shortfall created through no fault of their own.

In the 2013 legislative session Colorado WINS members helped secure a 2% base building increase for 99% of all state employees. They also secured funding for the state’s new merit pay system, which bumped pay for some state employees up by another 2.4%. These wage gains are real and we shouldn’t minimize the impact they have for families. That being said, they are simply inadequate in light of the real wage losses faced by state employees in the past decade.

In the 10 years beginning with fiscal year 2003/04 and going through 2012/13 state employees saw a 0% increase in wages (annual and performance based) five times. Not once in any of the remaining five years did the total annual and performance based increase meet the increases recommended in DPA’s annual total compensation report.

That’s a remarkable fact and places last year’s gains in their proper context. It also demonstrates a clear need to rethink the way we approach total compensation for state employees.

Aldo Svaldi and Electa Draper, Denver Post, August 23, 2012


Race to the bottom

Household income for most Americans is, at best, stagnant and in many cases declining while our income distribution has not been this stratified since the Gilded Age. Given these facts a reliance on a simple “prevailing wage” measurement serves only to further drive down wages across the board. In a salary survey process where state employee jobs are simply compared with “similar” public and private sector jobs at a time of wage stagnation the salary survey creates its own negative feedback loop and unnecessarily prolongs our state’s economic recovery.

If the median wage has been stagnant or declining for three decades then how can state workers ever expect to see a meaningful raise? Stagnant and declining real wages become a self-fulfilling prophecy, bordering on wage fixing, under our current “prevailing wage” regime.

And remember the state of Colorado is the largest employer in the state - if the State is not driving standards up for the rest of our state’s economy then state employees and the Colorado economy as a whole are simply adrift in the economic doldrums.

Rethinking Prevailing Wage

Colorado Corrections Officers are not leaving state service to work for the Kansas Department of Corrections. They are leaving state service to work for local law enforcement, local mining operations, or for Haliburton or Anadarko. Yet our current prevailing wage analysis fails to take into account the State’s real competitors for talent. This must change.

If prevailing wages are stagnant and the State is not getting an accurate picture of who their competitors are then the current process is not living up to the State’s total compensation philosophy. And if the State is not living up to their total compensation philosophy then it is time to rethink current practice so that Colorado can recruit, motivate and retain a qualified and competent workforce.

Colorado WINS proposes a change in statutory language to address the issues with the current system. Specifically C.R.S. §24-50-104 repeatedly uses the phrase “prevailing total compensation.” That should be changed to read “competitive total compensation.” How do we define “competitive total compensation”? It is a rate of compensation that:

1. Takes into account the State’s position as Colorado’s largest employer and embraces the State’s role as a wage setter;

2. Considers who the State’s actual competitors for talent are;

3. Isn’t bound to merely a comparison of similar job classifications;

Amending Colorado’s total compensation philosophy to better reflect the State’s economic position and directly address competitiveness issues will benefit the State as an employer and also Colorado’s economy as a whole.


While the salary survey finds that overall state employees are paid 3.8% under the market median when we dig deeper we find interesting outliers, from positions that are significantly underpaid to some that the DPA report identifies as being significantly overpaid.

Some of the most underpaid…

• Admin Assistant I -26%• Admin Assistant II -31%• Admin Assistant III -26%

• Custodian I -21%• Custodian III -20%

• Client Care Aide I -24%• Client Care Aide II -12%• Healthcare Tech II -8%

• IT Professional I -12.9%*• IT Professional II -6.6%*• IT Professional III -14.3*

• Equipment Operator I -15%• Equipment Operator II -26%• General Labor I -27%• LTC Operations I -16%• Pipe Mechanic Trades III -17%• Structural Trades I -16%• Structural Trades III -29%

Some of the allegedly overpaid…

• Case Manager I +21%• Community Parole Supervisor +29%• Machining Trades +32%• Pipe/Mechanic Trades I +18%

Looking at some of the occupational groups as a whole,

• Labor, Trades, & Crafts occupational group is under market by 5.98%.

• Administrative Support occupational group is under market by 25.39%

• Management occupational group is only 0.44% under market

How can so many occupation groups be so far out of balance with the market? DPA conducts an annual salary survey to ensure competitiveness but these dramatic variances demonstrate that the current process is breaking down.

DHS

DOC

OIT

CDOT

* Different methodology used for these position comparisons

Who is far underpaid and who is, from DPA’s analysis, overpaid?


Conclusion and recommendationsThe Total Compensation Report and salary survey are complicated processes which have a tremendous impact on every state employee in Colorado, their families and the communities they live in. Every organization, be it a Fortune 500 company, a non-profit, or state government strives to recruit, motivate and retain the best possible employees and Colorado is no different. In order to achieve that goal we believe the State should take a serious look at the issues of concern raised in this report.

First, inflation impacts everyone, regardless of their score on their annual evaluation.

We should use a reliable and non-partisan source of data to determine that inflation rate. And we should make sure that every state employee receives an annual base building increase that matches inflation, without such a raise employees are falling further and further behind every single year.

Colorado WINS believes that annual raises should be weighted more heavily towards annual inflation adjustments and less towards merit pay. That’s why Colorado WINS members are calling on the governor and the members of the General Assembly to fully fund merit pay and support a 3% base building increase for every state employee this year.

Second, we need to do a true “apples to apples” comparison of private sector retirement benefits and PERA if we are going to have a true understanding of the value of PERA benefits.

While the AED and SAED costs are real they are not accurately described as benefits for current employees and their inclusion in the total compensation report as such distorts the value of the state retirement benefit.

Third, in a time of on-going wage stagnation the state’s salary survey process and their current prevailing market comparison actually makes further wage stagnation a self-fulfilling prophecy. We need to fundamentally rethink how the state’s largest employer determines what a competitive salary is. Colorado WINS believes the state needs to take a more holistic look at the market.

For example, who are we really competing against in a given market? We should, in short, redefine our current ‘prevailing’ market comparison to a ‘competitive’ market comparison.

Colorado WINS believes that by addressing these issues and adopting these recommendations the state will be able to fulfill its statutory total compensation philosophy to recruit, motivate, and retain a qualified and competent work force and propel Colorado’s economy forward.

2014/15 Total Compensation Report: A Colorado WINS analysis

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