Growing Employee Costs

The City of San José is proud to have one of the best workforces in the entire state. Our employees are dedicated people who work hard to serve San José residents and businesses. Unfortunately, the City has been forced to continually shrink its workforce and cut services over the past decade due to tremendous growth in employee-related costs.

Learn more about the City’s unsustainable employee costs

• Types of Personnel Expenses
• The Unsustainable Growth in Employee Costs
• Why Employee Costs Have Increased So Much
• Additional Resources

Visit the Eliminating the Structural Budget Deficit, Fiscal Reforms and Budget Message sections of the Mayor’s website to learn about specific actions taken to bring the city’s unsustainable employee costs under control.

The total cost of a City of San José employee is comprised of many elements. For every employee, the City pays for his/her wages (including any overtime, hazard pay, or allowances that he or she may qualify for) and a wide array of employee benefits.

These costs - which together make up an employee's total compensation - can be broadly grouped into the following categories:

• Base Payroll (cash compensation)
• Retirement Benefits
• Healthcare Benefits (medical & dental)
• Other Various Benefits

Today, the average cost per employee totals about $140,000; the average cost for police officers and firefighters is more than $200,000.

While base payroll has long been the largest personnel expense for the City, the percentage of money dedicated to retirement benefits has grown significantly over the past decade. The cost of retirement benefits now equals 55% of base payroll. Read more about San José’s pension problems.

Source: Office of Employee Relations, FY2011-12 Total City Salary and Benefit Costs

Employee compensation started increasing in the mid-1990s and continues to grow at an unsustainable clip. Read on to the next section to learn why these costs have grown so much.

Click on the above image to enlarge

Over the past decade (FY 2001-02 to FY 2011-12):

• The average cost per City employee has increased by approximately 85%. In contrast, general revenues have only grown by about 19% during the same period.
• The City’s annual personnel costs have increased by more than $200 million, even though the City's workforce has shrunk by more than 2,000 FTEs (full-time equivalent employees).

These escalating costs have forced the City to continually reduce services and shrink its workforce. For example, despite increasing the budget in the Police Department by nearly $100 million over the past decade, we now have significantly fewer officers than 10 years ago (see right). That's because the individual cost per employee in the Police Department has grown so dramatically.

Even though all City employees took a 10% reduction in total compensation during FY 2011-12 to help balance the city's budget, the average cost per employee continues to rise.

The primary driver of these skyrocketing costs has been the sharp increase in the cost of employee benefits. In particular, retirement costs have more than tripled over the past decade and are projected to continue growing for at least another decade. Read more about the city’s pension problems.

Source: Office of Employee Relations, FY 2011-12 Citywide Average Cost per Position , FY2011-12 Citywide Average Cost by Employee Unit

Employee costs started to increase during the internet boom in the mid-1990s. At the time, city revenues were growing rapidly and the city boosted employee compensation in order to compete with private sector jobs. Unfortunately, various City Councils – and in some cases, outside arbitrators – continued to increase pay and benefits at a rate that the City could not afford to pay.

Over the past 15 years, these fiscally irresponsible actions included:

1. Giving out raises faster than revenues were growing.
2. Giving out raises and increasing benefits when revenues were falling.
3. Giving out raises and benefits retroactively (at costs of tens of millions of dollars).
4. Allowing employees to cash out unlimited amounts of sick leave when they retire.
5. Providing lifetime healthcare for retirees.

Following the lead of the State of California, the City Council and outside arbitrators also significantly enhanced retirement benefits. The maximum benefit for public safety employees grew from 75% of final salary to 90%, and a guaranteed 3% cost-of-living adjustment was awarded to all employees. Read more about the city’s pension problems.

These pay and benefit enhancements have been further exacerbated by the growing costs of providing healthcare benefits across the nation. For example, the monthly premium for the City’s health plans has more than doubled over the past 10 years.

As a result, the pay and benefit increases approved by past Councils and outside arbitrators have proven unsustainable, contributing to a decade of budget deficits that have had a tremendous impact on residents, businesses and employees alike.

• Office of Employee Relations: Total Compensation Information
  • FY2011-12 Total City Salary and Benefit Costs
  • FY 2011-12 Citywide Average Cost per Position
  • FY2011-12 Citywide Average Cost by Employee Unit
• Office of Employee Relations: Healthcare Information
• Office of Employee Relations: Retirement Benefits Information
• Santa Clara County Civil Grand Just Report: “Cities Must Rein in Unsustainable Costs” - May 13, 2010
  • City's Response to the Grand Jury Report
  • Office of Employee Relations: October 15 Presentation to the City Council