Phoenix's automatic pay raises draw scrutiny

December 3, 2014
The Arizona Republic
Dustin Gardiner

When new employees walk through the doors at Phoenix City Hall, they are almost guaranteed a raise every year.

After about eight years, bonuses typically replace the raises — and the amounts generally grow year after year.

It's a system several city leaders say spends taxpayer money unwisely or rewards workers equally regardless of individual performance. They want reforms and are pushing to create a private-sector-style performance system.

Efforts to change the pay system face fervent opposition from some employee unions, and human-resource experts say the city may have difficulty implementing the concept for some city workers, such as police officers and firefighters.

Last year, the vast majority of rank-and-file city employees — 96.7 percent — received a raise or bonus, according to data analyzed by The Arizona Republic. In other words, about 12,000 of the 12,400 regular city workers got a pay bump.

And the payouts weren't small: The average raise was more than $2,500, or 4.6 percent. The average bonus, given to employees at the top of the salary ladder for a position, was nearly $2,200.

Phoenix's raises and bonuses continue despite a common perception that city employees have seen their wages cut in recent years. Although it's true the city has made compensation cuts, the raise and bonus system remains in place, and many workers are earning more overall. The bill for such pay increases and bonuses topped $28.1 million this year and comes as the city faces a budget crisis.

Just last spring, Phoenix faced a budget deficit that led it to enact a new water-bill tax for residents and cut employee compensation. Early projections show a $14 million to $54 million shortfall is possible next year.

City leaders started advocating system reforms three years ago, when the pay increases sparked debate in the midst of budget cuts and a fierce mayoral election. They wanted to create a "pay-for-performance" system that awards top achievers and removes the automatic raise and bonus amounts for the rest.

In recent years, former City Manager David Cavazos said creating a new pay-for-performance system was one of the city's top priorities as it prepared to negotiate new contracts with its employee unions. But the city has made few changes.The City Council approved new labor contracts in May with no real talk of pay-system reforms.

As negotiations started, city officials faced a $38 million deficit and dropped the issue of reform as they pushed labor unions to accept compensation cuts. Most of the unions agreed to reduced benefits and trimmed a second retirement plan, but the city left the raises and bonuses in place.

Now, council members on both sides of the political aisle agree that the city's approach is outdated and that it needs to more closely mirror private business.

"Now is the time to develop this system," said Mayor Greg Stanton, a Democrat who has voted for contracts with the raises and bonuses. "I don't think you're going to see those numbers (96 percent) in the future."

Yet the council disagrees whether the aim is to decrease money for pay raises overall or simply distribute the money more competitively.

City Manager Ed Zuercher said he is committed to overhauling the city's raise and bonus practices if it can be done in cooperation with its seven employee unions. He said the goal is to create a system that allows top performers to stand out from the satisfactory, not cut employee pay.

"What the system we have today doesn't do is differentiate among those 96 percent who are doing the right thing and working hard," Zuercher said. "The idea is absolutely the right one. It's where the world is heading."

Automatic raises?

What should be considered a true pay-for-performance plan? That question is at the heart of the debate over reforming Phoenix's practices for rewarding raises and bonuses to city workers.

Union leaders say the city already has such a system as it conducts performance reviews for its employees every year.

"I don't understand why (this issue) keeps popping up," said Ron Ramirez, union president for the Administrative, Supervisory, Professional and Technical Employees Association. "We do do pay for performance. It's not a loosey-goosey criteria."

But Zuercher, former City Manager Cavazos and several council members have said that although the city might appear to have such a system on paper, it's not a strong setup in practice.

Phoenix currently has a pass/fail evaluation that allows nearly all employees to earn a passing grade and receive the same raise or bonus as their peers at the same experience level, regardless of whether an individual exceeds expectations or does just enough to get by.

Like many government agencies or companies with unions, Phoenix has a "step-pay" system that allows employees to get a set raise — typically 4 percent to above 5 percent — every year as long as they pass their review. The salary ladder includes up to 10 steps.

New employees can generally advance to the second step after six months and once every year thereafter. If they are promoted, they start a new set of steps.

For example, a garbage-truck driver could get hired at Step 1, which pays $34,674 a year. After about 71/2 years of satisfactory reviews, the employee could top out at Step 9, earning $47,923 a year.

An employee who reaches the top of the pay range for a position will begin receiving a "longevity" bonus. Some public-safety employees can collect raises and bonuses at the same time.

Vice Mayor Jim Waring, a Republican, called the city's pay increase system a "dinosaur of the past." Unions negotiated to create the step-raise plan more than 50 years ago, and the longevity-bonus system followed in the early 1990s.

Waring has raised concerns that the city has created an unsustainable compensation system, noting that the percentage of employees receiving raises outpaces anything he has seen in the private or government sectors. He said it's telling that employee unions opted to take a compensation cut rather than give up the step raise or bonus ladder.

"They didn't want to turn off the spigot of automatic increases," Waring said. "You're saying 96 percent of people were worthy of a bonus or a raise? Things have been on autopilot in a host of areas."

The city only gives pay increases to employees who pass their performance review. But few employees ever receive an unsatisfactory mark — only 64 workers failed their reviews last year. That's less than 1 percent.

Phoenix has taken some steps to tighten its rules. The city previously allowed some workers to collect a bonus even if they failed a review. Labor-relations administrator Cindy Bezaury said that stopped this year.

On top of the step raises and longevity bonuses, the city also can give employees cost-of-living pay bumps. It has been at least five years since the city approved the additional raise.

Still, the size of Phoenix workers' pay increases can often outpace the private sector.

According to a 2014 reportfrom WorldatWork, a human-resources research association, the average merit increase for U.S. workers is 2.7 percent for midlevel and 4.1 percent for top achievers.

Phoenix employees in the step system typically get larger raises, though Zuercher notes that they don't get the additional bonuses and stock options seen in the private sector.

That said, many city workers have plusher retirement benefits than those in the private sector. Most Phoenix employees earn a pension and deferred compensation, a second retirement plan similar to a 401(k). Compare that with private-sector employers who've largely moved employees to 401(k) systems.

Kerry Chou, WorldatWork's senior compensation-practice leader, looked at the raise and bonus data city officials provided The Republic. He said the percentage of employees receiving a raise or bonus might not be unusual for a unionized workforce, but the average increase appears high for the job market.

Chou said the city's pay structure isn't ideal for recruiting and retaining the most talented workers because research suggests high achievers are "more likely to be drawn to organizations that have a strong pay-for-performance post."

On average, private-sector companies gave raises or bonuses to roughly 89 percent of their workforces, according to WorldatWork's 2014 salary survey.

Impacts weighed

Although Phoenix's pay raises and bonuses are widespread, the increases may come as a surprise to many residents who've heard employees have taken cuts the past six years.

The 3.6 percent compensation cut being taken by the city's seven union groups doesn't prevent them from receiving raises or bonuses. An additional 0.9 percent compensation cut will take effect next fiscal year, which starts July 1, 2015.

Phoenix will spend about $10.3 million on new raises and increases to bonus amounts this fiscal year while it saves about $24.5 million through new compensation cuts.

Those figures don't include the city's pension costs that increase as a result of giving raises and bonuses over time.

Most of the cuts come out of fringe benefits, such as the second retirement plan and uniform allowances. Some unions also were allowed to count ending the practice of "pension spiking," seen as the inflation of an employee's pension benefit before retirement, as part of their compensation cut.

Only one of the city's unions, which represents landscapers and street-maintenance and waste workers, agreed to a base pay cut.

Waring and Councilman Sal DiCiccio, a Republican, have called the pay cuts an illusion, suggesting the city has downplayed the fact that most employees still receive raises or bonuses. They blasted the city for giving automatic pay bumps when it raised feesand taxes for residents.

But Zuercher and other city leaders say although the system needs reform, the city must be able to attract and retain talented workers. For them, the focus isn't so much on cutting spending for pay increases as it is on recognizing employees who exceed expectations.

For Firefighter Beth Espinoza, a 29-year veteran of the department, the concept raises concerns for rank-and-file workers. She said it can be difficult to evaluate police officers and firefighters with quotas given the unpredictable and dangerous nature of their jobs.

"Would we do it on the amount of calls?" Espinoza questioned. "Per fire? Per (emergency-medical-service) call? How would you measure that?"

She said employees are also wary of any system that gives managers too much leeway to write subjective reviews. Unions across the country pushed for step-pay systems to protect workers from the personal biases of management.

City officials and human-resource professionals acknowledge that implementing such a system faces logistical hurdles. For starters, Stanton and some council members say the city should leave public-safety workers out of the mix, but there are challenges for other types of workers, as well.

Would a garbage-truck driver be evaluated based on how much trash he or she collects? What about utility workers who keep water and sewer systems functioning?

"Pay for performance sounds great in theory," said Neil Reichenberg, who leads an association of government human-resources managers. "But when you look at it, particularly in the public sector, with some jobs it can be difficult to make those determinations."

Reichenburg, executive director of the International Public Management Association for Human Resources, said he didn't know of a major city or county that has created the type of system Phoenix has discussed. However, he said, it's not an impossible task.

A starting place could be at the top of the city food chain.

Zuercher said he is especially concerned about providing a performance-pay system after a wave of senior staffers departed City Hall in recent years. Many retired from the city to start drawing a pension and work in government elsewhere.

Unlike rank-and-file workers, Phoenix doesn't have a set raise or bonus system for top managers, and most have received only one increase in the past five years.

Stanton agrees that change should start at the top. In a memo to city management last year, Stanton and council members Thelda Williams and Daniel Valenzuela said the compensation system too often "fails to recognize the difference between satisfactory and excellent performance."

How the council intends to make that a reality isn't clear. Officials have taken no formal steps to prepare the city to transition to a pay-for-performance system, something everyone acknowledges the city would have to do when it negotiates new labor contracts in spring 2016.

The mayor said reform will succeed only if it has the support of the unions, saying, "I won't support a draconian system." He said the city is already asking many employees to do more with less given it has shrunk the workforce through attrition.

However, Waring and other council members have said elected leaders can impose contracts on employees if the unions don't agree.

"This idea that our hands are tied," Waring said, "at some point, somebody has to exhibit some leadership and say, 'We're going to do something different.'"

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