During the City Council meeting on February 28, 2017, Laguna Beach resident Emil Monda spoke during the public communications period. During public communications anyone can speak on a topic of their choice for 3 minutes. Mr. Monda brought up a concern that had been circulating among residents since it had become known that the City had an “Essential Employee Housing Assistance Program” (EEHAP) and that the program had no official guidelines. Mr. Monda admonished the Council to review the program and “develop a detailed written policy…to clarify eligible positions, what the program offers to the employee and the responsibility of the employee who makes use of the program”. He voiced the concerns that many residents had that the City was offering to enter into 50/50 ownership arrangements with certain senior staff members under the idea that certain “essential” employees needed to live in Laguna Beach so as to be most effective in their jobs. In addition to becoming joint-owners on the properties, the City would also become the mortgage provider for the employee’s share of the purchase.

A Bit of Background and Some Maths

The EEHAP program was started in April 2000 when the then city council (motion by Dicterow, seconded by Iseman and supported by all others: Blackburn, Peterson, Freeman) approved the program which was intended to encourage employees having “essential emergency response duties and/or department heads essential to the efficient operation of the City to live in the City and be available to quickly respond to emergencies and other exigent conditions”. Back then, the median Laguna Beach house cost $625,000 and the informal program (recall, it was never formalized) was targeted at positions such as: City Manger, Assistant City Manager, Fire Chief, Fire Division Chief, Sewerage Supervisor, etc. During the ensueing 17 years, only 6 City essential employees have taken advantage of the program they are with the year they entered the program:

1. Mike Macy (former Fire Chief)
2. Jeff LaTendresse (a Battalion Chief at the time of the agreement, now Fire Chief) – 2000
3. Tom Christopher (Fire Division Chief) – 2006
4. Graham Wright (former Water Quality Supervisor)
5. Shohreh Dupuis (Assistant City Manager/Director of Public Works) – 2016
6. John Pietig (Asst City Mgr at the time of the agreement, now City Manager) – 2001

The most recent recipient of the program was Ms. Dupuis, who joined the City on or about May 1 2016. During the May 10, 2016 City Council meeting, a motion was made and unanimously passed to include Ms. Dupuis in the EEHAP with a term to:

“(c) appropriate $1.3 million from the proceeds received from the sale of 1044 Noria Way and 1419 Regatta Road toward this transaction and, if necessary until the properties are sold, temporarily borrow from the Insurance Fund to complete the transaction.“

(1044 Noria Way was the home that was jointly owned between the City and Fire Chief LaTendresse). So until just 14 months ago, the City Council felt that the program was reasonable, even though Ms. Dupuis’ likely total annual compensation (excluding pension benefits) is over $220,000 (we don’t have the exact figure but are using the 2016 figure for the other Assistant City Manager, Ms. Christa Johnson). Total annual cost to the City taxpayer’s for Ms. Dupuis inclusive of benefits is well over $275,000. For the Dupuis purchase, the City put in $797,500 for a 50% ownership, plus it provided a $450,000 loan. This means that the Dupuis contributed approximately $347,500 towards the total purchase price, or just under 22%. A commercial 30yr fixed mortgage for such a property would cost borrowers about $6,900 per month at current interest rates. On her income alone (ignoring that of her spouse), it seems that the Assistant City Manager could afford the house they purchased without any assistance from the City.

As is mentioned above, Fire Chief LaTendresse exited the program in July of 2016, and the City was the beneficiary of 50% of the proceeds of the sale of his property. As we see now, the Fire Chief’s exiting from the program was an early indicator of his intention to leave city employment (he announced his retirement in July 2017). A term of the program is that once the participating employee retires or otherwise separates from City employment, the joint-ownership arrangment must end; either through a sale of the property or a ‘buy-out’ by the exiting employee of the City’s interest. With LaTendresse’s exit, only 3 employees remain in the program: Christopher, Pietig and most recently, Dupuis. It is worthwhile noting however, under the programs if the participant retires and has been in the program for X years, they have X years after retirement to complete the sale. Since Mr. LaTendresse was in the program for over 16 years our reading of the program indicates that he could have waited until 2033 to buy-out the city’s equity in his home. The taxpayers’ money could have been tied-up for 32 years in this property.

The analysis done by City staff found that contrary to common assumptions, the City did not gain financially through participation in the EEHAP. Most thought that despite tying up large amounts of taxpayers’ funds in local properties, property-value increases together with the loan interest-rate being pegged at an amount slightly higher than the City gains from investments would naturally mean that the City gains financially through the program. The findings were that the City actually loses approximately $8,200 per participant/per year via the program. The reasons given were: “ongoing costs for property insurance, property taxes, reimbursement of federal and state taxes attributable to City ownership interest, and qualifying property repairs have created an annual cost for some properties. … the annual cost of the three properties recently sold in the Program averaged approximately $8,200 for each employee…”.

Reduced Need for Such a Program

Half of the program’s participants have been with the Fire department and most would agree that having managers of this department living in the City would be adventageous. However, the Fire department has gone to 24-hour shift management, meaning that there is always senior management on-duty in the City. This reduces the need for EEHAP participation for senior Fire department staff. For the sewerage department, the City has established the ‘Wastewater Emergency On-Call Response Program’ in 2003. As stated in the staff report: “This program was designed to help facilitate response to the sewer system emergencies (sic). In general, the program reimburses four employees up to $987 a month for locating in the City and being on-call.”

Since arguably the most ‘essential’ City staff have now been accommodated and are guaranteed to be in-City 24/7, the only other eligible employees are the City Manager and various Assistant City Managers. It is far less clear how having employees in these roles living in the City adds to residents’ safety or better execution of City operations. Maybe I’m missing something.

One-Percenters Don’t Need Public Housing Assistance

This author presented 2016 remuneration data for Laguna Beach employees (sourced from www.transparentcalifornia.com) during the City Council meeting of July 11 2017, as part of his argument against continuing the EEHAP. We reproduce the graphic here:

(These data are from 2016 and so the current amounts should all be increased by about 3% according to the most recent terms of the Employee Union contract).

After presenting this data, the City Manager felt it necessary to add some context to his EEHAP deal and where is current remuneration stands. His point, which is valid to a limited degree, is that he took the deal while he was still Assistant City Manager/Sewer System Manager and earning a lot less than the 2016 indicated amount. The background of his EEHAP deal:

• Originated in April 2001
• City put in $400,000, or 57.89% of the purchase price ($690,965) and provided him a loan for a portion of his remaining 42.11%

In April 2001 the Assistant City Manager was earning $136,200 annually ($11,350 per/mo). The then prevailing 30 year-fixed home loan interest-rate was approximately 7.0%. Assuming a 10% downpayment, the Pietig’s would have had monthly P&I payments of $4,138 and total monthly payments (inclusive of property taxes & insurance) of $4,925. This would have been too large of share of the monthly income at 40%. If the Pietigs could have made a 20% downpayment on the home, the numbers change a lot, and the percentage of monthly income needed for the purchase would have been 36.6%, arguably a manageable amount. Fiscal prudence might have dictated that the Pietigs wait a few years for the city salary to increase and their savings to do likewise and the purchase could have no doubt been made comfortably.

Final Thoughts

In the end, we applaud the City Council for halting future use of this informal program. The remaining 3 City employees will continue to enjoy the benefits of joint-ownership but we encourage them to buy their way out as soon as possible. The taxpayers’ money can be put to better use.

While the program will not continue to be used, we have some concerns that the program (or something largely similar) might be used on an ‘ad hoc’ basis in the future. During the Council’s deliberations on the agenda item, Mr. Dicterow (who readers will recall was the Council member who originally made the motion that resulted in the programs’ establishment in 2000) commented that he wanted the Council to have the option of using a housing assistance program in an ad hoc fashion. He stated: “I can support case-by-case assistance”. His reasoning was that when the city needs a new City Manager, such a facility should be available to the Council to ensure that the new manager lives in the city.

This author believes this is a very dangerous precedent and is worse than having an unwritten but semi-understood program in place in the first place. We take comfort in that the motion that the Council passed explicitly opted for Staff Report Option #4: “Discontinuing the program”, and expect that if a future Council wanted to offer ‘essential housing assistance’ in the future, the proposal would have to be agendized, discussed and voted upon before the public.

At about 11pm at the end of the March 28 City Council meeting, the council addressed the last item on the agenda: the annual review of City Manager Pietig’s employment contract.  This author was the only ‘member of the public’ remaining in the City Hall chambers to watch this annual spectacle of Council members singing the praises of a City Manager who is apparently perfect in every way.

With a 5/0 vote, Mr. Pietig was granted his demands which consisted of:

1. Extension of his employment contract to June 30, 2020 with an automatic additional 1 year extension to be enacted on July 1, 2018 (extending the total contract until June 30, 2021). The automatic extension will happen unless the City Council intervenes to stop the automatic extension.
2. Provision of a 5% “exceptional performance” pay/bonus for the next year (effective March 27, 2017, to be calculated against his current Regular Pay)
3. Elimination of a $4000 annual cap on reimbursements for attendance at conferences or payment of dues (no new limit on these reimbursements was mentioned).

It is difficult for the average Laguna Beach tax payer to determine what all of these newest changes to Mr. Pietig’s employment contract mean in terms of dollars and cents.  Since Mr. Pietig’s contract is reviewed and revised annually, with concessions that roll-out over a period of several years and which overlap earlier concessions, the nett results are very difficult to determine.  I have reviewed the relevant Staff Reports and can not claim to understand the details completely.

Take for example, the current concession of a 5% “exceptional performance” bonus which was sought and granted. The City Council made a point of saying that this was not a request for a salary increase; instead it is an optional, 1-time bonus. That sounds good, but the reader needs to bear in mind that Mr. Pietig has already been granted annual salary increase guarantees in previous years’ contract concessions.  Plus, the 5% “exceptional performance” bonus appears to be granted during annual reviews when a salary increase is already due, as agreed in previous year’s negotiations.  As best I can tell, the current 5% bonus will ride on top of an already approved 3% salary increase scheduled for July 1 2017.  LagunabeachCHAT tried to piece together the history of concessions that Mr. Pietig has received over the past several years from the City Council.  The overlapping increases to salary (negotiated directly with the City Manager or as part of a city-wide increase for all “management employees”) together with the 5% “exceptional performance” bonuses makes it very difficult to get a firm grasp of Mr. Pietig’s actual remuneration. (We will be the first to admit we might have gotten it wrong; and if so we will print a correction). Graphically, here’s what we’ve been able to piece together from the Staff Reports over the past 3 years:

Blue stars represent concessions that were agreed at the 2/3/15 City Council meeting. Those in red, during the 1/12/16 City Council meeting, and so on.  For reference, I have included links to the relevant Staff Reports where all of these concessions are discussed:

1 – Staff Report referenced in the City Council decision of Feb 3, 2015 is here

2 – Staff Report referenced in the City Council decision of Jan 12, 2016 is here

3 – Staff Report referenced in the City Council decision of Mar 28, 2017 is here

Pouring through those documents, what we can see is that Mr. Pietgi’s total compensation at the point of 2015 was:

Regular Pay – $229,436.69

Other Pay – $20,476.14

Benefits Pay – $71,579.66

Total Pay – $321,492.49

The Staff Report from 2017 indicates that his current Regular Pay is $251,809 and is scheduled for a 3% increase on July 1, 2017 (to $259,363) and another 3% on July 1, 2018 (to $267,144) as indicated on our graph above. We estimate that his total compensation will have reached $358,124 at the completion of that fiscal year).

I have to point out that in reviewing the remuneration of the City Managers in other Orange County cities, that of Mr. Pietig’s falls in the middle of the pack. That is to say, his 2015 total remuneration is at about the 50% percentile of the other 30-odd City Managers.  But bear in mind that such a comparison places him in the company of City Managers who’s cities have populations an order of magnitude more residents than Laguna Beach. The city of Santa Ana which has a population of 334,000 provides total remuneration of $453,000 to its City Manager, the highest in Orange County, as detailed last year in a Voice of OC article.  With Mr. Pietig soon at or near $350,000 per year, he is earning 3/4’s of that amount with 1/13th of the population.

A final note I’d like to make on this topic.  During the Council meeting on March 28, 2017 at 11pm, several council members took pains to extol on the many virtues of Mr. Pietig.  He is in their estimation among the best of the best. That very well may be. I am in no position to determine how well he compares to other senior city executives in other cities. However, I’d like to make a couple of points on that line of reasoning as the basis for handing out endless numbers of annual pay increases and ‘”exceptional performance” bonuses:

1. An executive at this level is expected to perform superbly and with the highest standards, otherwise they should not have the job in the 1st place. When did traits such as quick turn-around time and encyclopaedic knowledge of city issues become extraordinary for a City Manager?  Isn’t this the standard of performance that tax payers should expect? So how do these traits (which Mr. Pietig may well possess) become the basis of granting these generous, yearly concessions?
2. Private Company CEO comparison – To my mind, this comparison is not valid. Although both City Managers and CEOs require substantial leadership and organisational skills, a CEO of a publicly traded company deals with many issues and pressures that a City Manager simply does not. A CEO is measured on the change in value that their leadership brings to the company and hence, the share holders of the enterprise. And commercial enterprises are not guaranteed the majority of their annual income through the collection of taxes that are mandatory contributions to a City Manager’s “enterprise”. To suggest that Mr. Pietig’s job is similar to that of a CEO leading an enterprise with a $70+ million annual turnover is not a valid comparison.  Therefore to look at CEO’s compensation as a relevant measuring stick to that of a City Manager is not reasonable.
3. Need to compete with other cities – This is a valid concern. City Councils everywhere give-in to the demands of their executive employees with little regard for the financial implications.  The close and often long-term relationships that City Councils develop with their senior management leads them to be very supportive of demands for increases in compensation from these senior managers, as long as these senior managers give them the political capital they need to keep and do their jobs. We end up with an ‘arms race’ in executive compensation.  I do not have a solution to this dilemma, other than for City Councils to be very savvy in the HR policies they promote which may lead to viable future senior managers to be nurtured from within existing City employee staff.

What can we, the tax paying residents of Laguna Beach do check the apparent largess that the City Council seems determined to visit upon the City Manager annually?  Attend council meetings and make your voice hear during the public comments period.  You can send emails to the council members with your thoughts.  You can also register your opinion by taking the Survey Monkey survey that we’ve put together, to determine Laguna Beach voters’ opinions on governance: https://www.surveymonkey.com/r/X6Y2PJ9