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City Council Resolution 12-044 Resolution Amending Agreement for Employment of City Manager Dave Anderson
RESOLUTION NO. 12-044 RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SARATOGA APPROVING AMENDED AGREEMENT FOR EMPLOYMENT OF CITY MANAGER WHEREAS, Dave Anderson ("Anderson") was hired in the position of City Manager on August 21, 2000; and WHEREAS, Anderson's employment agreement has been amended from time to time, most recently on November 2, 2011; and WHEREAS, the Agreement For Employment Of City Manager (Effective Date Of July 1, 2012) ("Agreement") attached hereto and made a part hereof supersedes all prior agreements between Anderson and the City effective July 1, 2012; and WHEREAS, this Council finds that the provisions and agreements contained in Agreement are fair and proper and in the best interest of the City and in compliance with California Government Code sections 3511.1 and 3511.2; and NOW, THEREFORE BE IT RESOLVED, by the City Council of the City of Saratoga the Agreement attached as Exhibit A to this resolution is hereby adopted. The above and foregoing resolution was passed and adopted by the Saratoga City Council at a regular meeting held on the 18th day of July 2012, by the following vote: AYES: Council Member Manny Cappello, Emily Lo, Howard Miller, Vice Mayor Jill Hunter, Mayor Chuck Page NOES: None ABSENT: None ABSTAIN: None ATTEST: ck Page, Mayor at/ti DATE: V7 0/70 (Z al Morrow, City Clerk 410725.2 AGREEMENT FOR EMPLOYMENT OF CITY MANAGER (EFFECTIVE DATE OF JULY 1, 2012) This agreement is made and entered on this 1st day of July, 2012, by and between the City of Saratoga (the "City"), a general law city, and David Anderson ("Anderson"). This agreement for employment of Anderson, hired in the position of City Manager on August 21, 2000, supersedes all prior agreements between Anderson and the City effective July 1, 2012. In compliance with Section VI. G. of the November 2, 2011 Agreement, this Agreement hereby expressly states that it intends to modify and is modifying the November 2, 2011 Agreement. The November 2, 2011 Agreement is being revised for Fiscal Year 2012-2013, effective July 1, 2012, and subsequent years to comply with AB 1344 (Government Code sections 3511.1 and 3511.2), which provides for greater transparency of local agency executives' contracts. In consideration of the mutual covenants contained herein, the parties agree as follows: I. EMPLOYMENT. A. Appointment of City Manager. The City Council of the City hereby appoints Anderson to the position of City Manager to perform the functions and duties specified under the laws of the State of California, the Saratoga City Code, the Ordinances and Resolutions of the City, and this Agreement, and to perform such other duties and functions as the City Council shall assign. Anderson shall serve at the pleasure of the City Council. II. POWERS, DUTIES AND RESPONSIBILITIES. A. Employment Duties. Anderson shall function as the City Manager of the City and shall be vested with the powers, duties and responsibilities set forth in Article 2-20 of the Municipal Code and California law as they now exist and may be amended hereafter, the terms of which are incorporated herein by reference. In addition, Anderson shall perform such other duties as may be assigned by the City Council and which are consistent with the position of City Manager, without additional compensation because the City Manager is an overtime - exempt executive position. Such duties shall include, but not be limited to, the following: 1. Assemble and explain pertinent facts and prepare committee reports as required; 2. Prepare agendas for Council meetings and advise Council on appropriate priorities and required actions; 3. Direct City Clerk in preparation for City Council meetings, maintenance of official records, conduct of municipal elections and execution of related functions; 2012 Agreement for Employment of City Manager Page 1 of 11 006055.00001/10467804v1 4. Represent the City Council in relationships with other governmental and private agencies; 5. Confer with and direct all department heads in the formation and implementation of administrative policies and practices; 6. Prepare and submit the annual budget; 7. Represent City to press and other information media as required; 8. Meet with individual citizens groups to discuss complaints and explain City policy; and 9. Administer any bonds approved by the voters of the City. B. Hours of Work. Anderson is expected to devote necessary time outside normal office hours to business of the City. To that end, Anderson shall be allowed flexibility in setting his own office hours, provided that Anderson shall work as necessary during customary business hours to satisfactorily perform his duties and responsibilities as City Manager. As of the effective date of this Agreement the City's customary business hours are based on a 9/80 work schedule where a full-time work week constitutes 40 hours within seven consecutive 24 hour days. Anderson shall schedule any appointments for medical treatment, industrial injury medical treatment, or other personal appointments so as to minimize the inconvenience to fellow employees and the impact on his ability to perform his job. III. COMPENSATION AND BENEFITS OF ANDERSON. A. Salary. 1. Anderson's salary as of June 30, 2012 is One Hundred Ninety -Nine Thousand, Three Hundred Eighty -Nine Dollars ($199,389) per year. The salary shall be paid in bi- weekly installments. (Future changes to compensation are addressed in Section IV.) 2. In the event the City, at any time during the term of this Agreement, reduces the salary specified in section III.A.1 of this Agreement or reduces the benefits specified in section III.B of this Agreement to a level below that made available to members of the Saratoga Management Organization, then Anderson may, at his option, be deemed to be "terminated" by the City Council within the meaning of Section V.A.4 of this Agreement as of the date of such reduction. B. Benefits. Anderson shall be entitled to the following benefits: 1. Health, Dental, Vision, and Employee Assistance Program (EAP): The City provides Anderson with health benefits, dental benefits, voluntary vision benefits and an employee assistance program (EAP). The premiums are fully paid, excluding the 2012 Agreement for Employment of City Manager Page 2 of 11 006055.00001/10467804v1 voluntary vision benefits, by the City for Anderson and his spouse unless Anderson enrolls in the PERS Care Plan, in which case the City will pay the premium for the highest -cost HMO plan with Anderson paying the balance for the PERS Care Plan. 2. Cash -in -Lieu: Effective January 1, 2012, if Anderson completes and submits required documents (1) to prove that Anderson has other health insurance coverage and (2) to waive City -provided health insurance coverage, Anderson will receive a payment per month of $350.00 as additional taxable wages. Effective January 1, 2012, if Anderson completes and submits required documents (1) to prove that Anderson has other dental insurance coverage and (2) to waive City -provided dental insurance coverage, Anderson will receive a payment per month of $25.00 as additional taxable wages. Anderson must complete and submit any required documents and provide proof of other health or dental insurance coverage during open enrollment (in or around October) to be eligible for the cash -in -lieu payment beginning the following January. 3. 457 Plan: The City provides Anderson the opportunity to contribute to an IRS Section 457 deferred compensation plan. Anderson may contribute up to the maximum allowed by law. Contributions may come from Anderson's regular earnings through payroll deductions, or from any unused portion of his Benefits Allowance. The City will match Anderson's contributions to a deferred compensation account up to a maximum of $200 per month. 4. Car Allowance and Organization Dues: Anderson shall receive a $375 monthly car allowance to be used to attend to local City business and shall be entitled to reimbursement of $1,000 per year for dues and meal expenses incurred in the course of participating in Saratoga based civic organizations which require membership as an individual. 5. Life Insurance:- The City shall pay 100% of the premium cost for life insurance coverage for Anderson with a death benefit of $150,000. 6. Disability Coverage: The City shall provide disability coverage, consisting of short term disability payments and long term disability insurance as described below, to provide Anderson with income protection if he becomes unable to perform the functions of his position due to a serious health condition or disability. a. Short-term The City will pay 75% of Anderson's monthly salary after Anderson has used all accrued paid time off (PTO) and will maintain existing insurance benefits for six months from the date of injury/illness. Short Term Disability payments will commence only after 12 continuous working days during which Anderson is totally disabled, or when all accrued PTO is exhausted, whichever is later. Short term disability payments are reported to PERS as salary earned. 2012 Agreement for Employment of City Manager Page 3 of 11 006055.00001/10467804v1 b. Long-term The City shall provide Anderson long term disability insurance including a paid coverage plan design of 66.66% of salary to a maximum of $2,000 per month with a voluntary buy -up option paid by Anderson to a maximum of $8,200 per month. Because these payments are made through a group policy they are not reported to PERS as salary earned. 7. Section 125 Plan: The City will make available to Anderson the option of enrolling in a Section 125 flexible benefits plan. Under the plan, Anderson may deduct from his earnings up to the maximum allowable amounts per calendar year for health care reimbursement and/or dependent care reimbursement. 8. Long-term Care: Anderson may purchase long term care insurance through a group benefits program administered by PERS. 9. PERS: City is a contracting agency of the California Public Employees Retirement System (PERS). The PERS contract requires contributions by the employer and each covered employee. Effective July 1, 2011, Anderson agreed to pay the 7% employee required contribution. The City through its contract with PERS provides a retirement benefit plan for Anderson of 2% at 55. 10. Administrative Leave: City shall grant Anderson, on a fiscal year basis, sixty-five (65) hours of administrative leave. Such leave shall be taken in a manner consistent with the use of PTO. 11. Leave without Pay: In cases of hardship or for other good and sufficient reasons, the City Council may grant leaves of absence upon written request by Anderson for a period up to 90 days. Anderson will not accrue any annual leave while on leave without pay, and the leave period will be considered as discontinuous service. During the time Anderson is on leave without pay, the City may discontinue paying for insurance benefits on behalf of Anderson (including health, dental, life, and long term disability), although he shall have the option to continue benefits at his own cost. 12. Legally Required Benefits: Anderson will receive all benefits that are legally required, including workers' compensation coverage, unemployment insurance contributions, the right to Family and Medical Care Leave, the right to industrial injury leave (including full pay for the first three days of leave and health benefits for the first 12 months after date of injury/illness if Anderson submits the required claim 2012 Agreement for Employment of City Manager Page 4 of 11 006055.00001/10467804v1 form), the right to COBRA benefits after a qualifying event has occurred, and the right to other legally authorized leaves. 13. Holidays: Anderson shall receive the following paid holidays: (1) (2) (3) (4) (5) (6) (7) (8) New Year's Day Martin Luther King's Birthday President's Day Memorial Day Independence Day Labor Day Columbus Day Veteran's Day (9) Thanksgiving Day (10) Day after Thanksgiving (11) Christmas Eve (12) Christmas Day (13) New Year's Eve January 1 3rd Monday in January 3rd Monday in February Last Monday in May July 4 1st Monday in September 2nd Monday in October November 11 4th Thursday in November Friday after Thanksgiving December 24 December 25 December 31 If a holiday falls on a Saturday, the preceding Friday will be observed. If a holiday falls on a Sunday, the following Monday will be observed. In those years in which one of the Christmas and/or New Year's holidays falls on a weekend, the Friday preceding the weekend and the Monday following the weekend shall be observed as holidays. If a holiday falls on an off -Friday when the City offices are closed, the preceding Thursday will be observed. If the preceding Thursday is already a holiday, the off -Friday holiday will be observed on the first weekday after Christmas that is not already an observed holiday. If a holiday occurs when Anderson is using PTO, the holiday will not be charged against Anderson's PTO balance. In order to receive holiday pay, Anderson must be on the payroll on the last regularly scheduled workday preceding the holiday and the first regularly scheduled work day following the holiday except if Anderson is on Family and Medical Care Leave, he shall only be entitled to receive holiday pay within the six month period after the date of injury/illness. If Anderson is using PTO when the holiday occurs, payment for the holiday shall be prorated to the amount of PTO being used in the pay period in which the holiday occurs. If Anderson is receiving Short Term Disability payments in the pay period when the holiday occurs, payment for the holiday shall be at 75% of Anderson's regular rate of pay. If the City adopts a holiday furlough whereby the City operations are closed from December 24 through January 1 Anderson shall utilize his available PTO balances. 2012 Agreement for Employment of City Manager Page 5 of 11 006055.00001/10467804v1 14. Jury Duty: If Anderson is called for jury duty he will continue to receive full pay and benefits for that period of absence. Fees received for jury duty will be deducted from Anderson's gross wages. 15. PTO: Anderson accrues annual leave (paid time off or PTO) at the rate of 32 days (256 hours) per year. a. FY PTO Cash -Out Option Effective Fiscal Year 2012-2013 through Fiscal Year 2014-2015: A PTO Cash -Out Option will not be made other than at the time of termination, except for the optional PTO cash -out plan described as follows: If Anderson has used the required minimum of 80 accrued hours of PTO in the prior fiscal year, Anderson is eligible to cash out up to a maximum of 200 accrued hours of PTO per fiscal year on approximately September 1 and/or March 1. Anderson must maintain a minimum balance of 200 hours of accrued PTO after the cash out. b. PTO Accruals: Effective July 1, 2012, the PTO accrual cap in the Personnel Rules will be enforced. Under no circumstances can Anderson accrue more than the accrual PTO cap at any point in time. Once Anderson reaches the accrual cap, no additional PTO will accrue until Anderson uses his or her accrued PTO and reduces the balance to less than the accrual cap. Thereafter, PTO benefits will continue to accrue on a prospective basis only until Anderson reaches the cap. No retroactive credit will be given for the time when accrued PTO was at the cap. c. PTO Increments: PTO must be taken by Anderson only in increments of four (4) hours or more in a workday. d. PTO Upon Separation: 1) Upon retirement from City service, Anderson may choose to use all of his accrued paid time off as sick leave for the purpose of service credit if allowed to do so by PERS. If Anderson uses less than 100% of his paid time off toward PERS service credit, the City will pay the balance of Anderson's accrued paid time off at Anderson's regular rate of pay. 2) Upon separation from City service other than retirement, the City will pay 100% of Anderson's accrued paid time off at Anderson's regular rate of pay. 2012 Agreement for Employment of City Manager Page 6 of 11 006055.00001/10467804v1 IV. COMPENSATION CHANGES AND PERFORMANCE EVALUATION. A. CPI Increase: Cost of Living Adjustment — For fiscal year 2012-13, and for each subsequent year of this agreement, Anderson shall receive an annual cost -of -living adjustment (COLA) to his salary on each July 1 (beginning July 1, 2012) of the actual COLA but no greater than two and one-half percent (2.5%). The COLA will be based on the California CPI for Urban Wage Earners and Clerical Workers for the 12 months between December and December as calculated by the Department of Industrial Relations as authorized by AB 1344 (effective January 1, 2012, Gov. Code 3511.1 and 3511.2). The July 1, 2012 increase in salary of 2.48% is based on the COLA/CPI determined by the 12 months between December 2010 and December 2011. The July 1 COLA/CPI increase for each subsequent year will be based on a calculation using the December number from about 18 months before to the December number from about 6 months before the July 1 at issue. If the COLA increases above two and one-half percent (2.5%) in any year, Anderson shall nevertheless receive a maximum two and one-half percent (2.5%) cost -of -living adjustment for that year. B. Evaluation: The City Council shall review and evaluate the performance of Anderson in September of 2012, and annually thereafter in May or June, beginning in May/June of 2013. Anderson will timely cause to be placed on the City Council agenda each year a "closed session" for the purpose of the performance evaluation. Said review and evaluation shall be in accordance with specific criteria developed jointly by Anderson and the City Council. Those criteria may be added to or deleted from as the City Council may from time to time determine in consultation with Anderson. C. Satisfactory Evaluation: In September, 2012, and in May or June of 2013 and May or June of each year thereafter, contingent upon a satisfactory performance evaluation, the Mayor will document the satisfactory performance evaluation by a memo to the Finance and Administrative Services Director, with a copy to Human Resources and Anderson, which will trigger Anderson or the Finance and Administrative Services Director to timely cause to be placed on the City Council's regular meeting agenda the City Council's consideration of any applicable salary increase in addition to that referenced in section IV.A. above. The City Council shall consider each year and vote on whether Anderson shall receive a salary increase to raise Anderson to the average salary rate for the city managers in the comparison cities of Los Altos, Menlo Park, San Carlos, Cupertino, Los Gatos, Morgan Hill, and Campbell as determined by a salary survey conducted within the preceding six months, provided that the total salary increase in any year shall not exceed five percent (5.0%). The City Council vote for the September 2012 evaluation will occur in the Fall of 2012 and be effective on or before November 1, 2012. The City Council vote for the May or June evaluations, beginning in 2013, will occur in May or June and be effective on or before July 1 of the same calendar year as the vote. If Anderson's salary (as adjusted by the increase pursuant to section IV.A. above) is at or above average determined by of the salary survey, Anderson's salary will not be adjusted. 2012 Agreement for Employment of City Manager Page 7 of 11 006055.00001/10467804v1 V. TERM OF AGREEMENT. A. Term of Agreement. 1. The Agreement shall continue until terminated by City or Anderson as discussed below. 2. Nothing in this Agreement shall prevent, limit or otherwise interfere with the rights of the City under Section 2-20.080 of the Municipal Code to terminate this Agreement without cause at any time (except for 90 days after a council member is elected as provided in 2-20.080), or the right of Anderson to resign at any time from his position. 3. Anderson may terminate this Agreement by giving the City thirty (30) days written notice in advance of resignation, at the end of which period this Agreement will terminate, unless the City and Anderson otherwise agree. 4. In the event of termination pursuant to section V.A.2, Anderson shall be entitled to a severance payment equal to six (6) month's salary and shall be entitled to the continuation of the City paid health and dental benefits that Anderson is receiving at the time of separation for a six (6) month period after termination, but in no case can this amount exceed the limits in Government Code section 53260 or other applicable law as it exists July 1, 2012 and as it may be amended from time to time thereafter. Anderson has reviewed and understands the provisions of this law. At Anderson's discretion, the severance payment shall be paid either in a lump sum, or in bi-weekly payments, beginning within ten (10) days of the effective date of termination. If Anderson selects bi-weekly payments, Anderson may later choose to receive a lump sum payment for the balance of the monthly severance payments. The change from bi-weekly payments to a lump sum payment for the balance will be processed as soon as reasonably feasible and by no later than two weeks after Anderson chooses to change to a lump sum payment for the balance. The severance payment shall be based on Anderson's then monthly salary. Severance benefits shall begin the first of the month succeeding the effective date of termination. Such severance pay and health and dental benefits shall not be due or payable if Anderson is terminated after being convicted of a felony or of a misdemeanor involving moral turpitude. 5. AB 1344 Provisions The parties agree to fully comply with the following Government Code sections that are part of AB 1344 adopted in 2011 and effective January 1, 2012 and to fully comply with other applicable law as it exists July 1, 2012 and as it may be amended from time to time thereafter. AB 1344 includes the following Government Code sections: § 53243. Reimbursement of paid leave salary required upon conviction of crime involving office or position 2012 Agreement for Employment of City Manager Page 8 of 11 006055.00001/10467804v1 § 53243.1. Reimbursement of legal criminal defense upon conviction of crime involving office or position § 53243.2. Reimbursement of cash settlement upon conviction of crime involving office or position § 53243.3. Reimbursement of noncontractual payments upon conviction or crime involving office or position § 53243.4. Abuse of office or position defined Anderson has reviewed, is familiar with, and agrees to comply fully with each of these provisions if any of these provisions are applicable to Anderson, including that Anderson agrees that any cash settlement related to the termination that Anderson may receive from the local agency shall be fully reimbursed to the local agency if Anderson is convicted of a crime involving an abuse of his or her office or position. VI. MISCELLANEOUS PROVISIONS. A. Administration. This Agreement shall be administered by the City Attorney of the City of Saratoga ("Administrator"). All correspondence from Anderson to the City shall be directed to or through the Administrator or his or her designee. B. Notices. Any written notice to Anderson shall be sent to: David Anderson c/o City Hall 13777 Fruitvale Avenue Saratoga, CA 95070 Any written notice to City shall be sent to: Richard S. Taylor City Attorney of City of Saratoga Shute, Mihaly & Weinberger LLP 396 Hayes Street San Francisco, CA 94102 (Or such other address as the City Attorney may have at the time of the notice.) C. Conflict of Interest. Anderson warrants that he presently does not have and will not acquire any direct or indirect financial interest which would conflict with his performance of this Agreement. 2012 Agreement for Employment of City Manager Page 9 of 11 006055.00001/10467804v1 D. Assignment Prohibited. No party to this Agreement may assign any right or obligation pursuant to this Agreement. Any attempted or purported assignment of any right or obligation pursuant to this Agreement shall be void and of no effect. E. Documents. All documents provided to Anderson by the City and all reports and supporting data prepared by Anderson for the City are the sole property of the City and shall be delivered to the City upon termination of this Agreement or at the City's written request. All confidential reports, information, exhibits and data, including but not limited to electronic data, prepared or assembled by Anderson while he serves as City Manager are confidential until released by the City to the public, and Anderson shall not make any of these unreleased documents or information available to any individual or organization, other than the City Attorney without prior written consent of the City Council. F. Effect of Waiver. The failure of either party to insist on strict compliance with any of the terms, covenants or conditions of this Agreement by the other party shall not be deemed a waiver of that term, covenant or condition, and no waiver or relinquishment of any right or power on any given occasion shall be deemed a waiver of relinquishment of that right or power on any subsequent occasions. G. Entire Agreement. The text herein shall constitute the entire Agreement between the parties. This Agreement incorporates the entire understanding between Anderson and the City, recites the sole considerations for the promises exchanged herein, and fully supersedes any and all prior agreements or understandings, written or oral or implied, between the parties pertaining to the subject matter hereof. In reaching this agreement, no party has relied upon any representation or promise except those expressly set forth herein. This Agreement cannot be modified by the parties except in a writing that is signed by both parties, ratified by City Council, and that expressly states that it intends to modify this Agreement. H. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the heirs at law and executors of the parties. I. Severability. If any provision, or any portion thereof, contained in this Agreement is held unconstitutional, invalid or unenforceable, the remainder of this Agreement, or portion thereof, shall be deemed severable, shall not be affected and shall remain in full force and effect. J. Attorneys Fees. In the event that either party to this Agreement brings a lawsuit to enforce or interpret any provisions of this Agreement, each party shall bear its own attorneys' fees, expenses and costs. K. Governing Law. This Agreement shall be governed by the laws of the State of California. L. Interpretation. The parties agree that any ambiguity in this Agreement shall not be construed or interpreted against, or in favor of, either party. The parties agree that ambiguities concerning matters addressed in this Agreement should be resolved in a manner consistent 2012 Agreement for Employment of City Manager Page 10 of 11 006055.00001/10467804v1 with the City's personnel rules and procedures to the extent those rules and procedures are not inconsistent with this Agreement. In witness whereof, the City has caused this Agreement to be signed and executed on its behalf by its Mayor and duly attested by its City Clerk, and Anderson has signed and executed this amendment agreement effective July 1, 2012. DAVID ANDERSON CITY OF SARATOGA David Anderson Date c P Mayor 410796.4 ATTEST: (L G�a�ia.l Ow) WO 0 cz Cryslal Morrow Date City Clerk APPROVED AS TO FORM: Richard S. Taylor City Attorney Date 2012 Agreement for Employment of City Manager Page 11 of 11 006055.00001/10467804v1 CALIFORNIA CONSUMER PRICE INDEX (1955-2012) ALL ITEMS (1982-1984=100) - Urban Wage All Urban Year Month Earners and Consumers . - - Clerical Workers - • . - • . 2012 I April 1 238,090 1 231.722 2012 ! February i 235.828 229.430 2011 i Annual • 232.930 226.364 2011 ; December -; 232.985 226.170 , . - - - : 2011 October 234.317 227.713 •2011 August : 233.256 226.427 2011 i June ; 233.285 226.715 2011 i April ; 234.113 228.118 2011 ; February 230.338 223.663 .. !.- 2010 ' 1 Annual i 226.919 219.714 .! ; ! 2010 ; December 227.487 : 220.693 2010 i October I. 227.737 ; 220.562 ,.• 2010 ! August 227.401 220.109 2010 ---- June 227.113 • - - 219.740 . 2010 April 227.007 ; 219.802 2010 ; . February 225.626 1 218.299 2009 1 Annual ' 224.110 216.292 ..._ 1 2009 ; December ! 224.349 217.112 2009 i October• 226.035 : • 218.458 , - • . ,,,, 2009 i August 225.438 c 217.743 : . . . 2009 1 June 1 224.994 217.322 2009 I April 1 222.896 214.689 2009 i February 1 222.181 , 214.017 ; 2008 1 Annual i 224.807 ! 217.648 2008 ; December ; 219.775 211.519 2008 I October 1 226.572 219.161 !.--- • 2008 I -August 228.024 i 220.946 .-, 2008 ! June 228.324 221.798 2008 i April i 224.323 217.587 2008 i February ;- 221.357 i 214.121 2007 I Annual 217.424 209.876 2007 December ; 219.593 ; 212.559 2007 ; October 218.959 211.522 2007 i August 217.480 209.663 2007 i June 217.404 ; 209.859 • 2007 ; April 217.704 ; 210.187 2007 ; February i 214.910 I 206.994 2006 ! Annual ! 210.6 i 203.3 2006 ; December ! 211.0 203.4 • 2006 ! October ; 211.8 204.0 2006 August ! 212.0 ; 205.2 2006 ; June 210.9 ; 204.2 2006 . April 210.5 203.2 Division of Labor Statistics & Research - Frequently asked questions (and answers) regar... Page 1 of 5 wox.cMy.S{� mnr.,,,4pT, —w:;SttaakzemnW:2FY £m'YS..t.'s:.Ctiia::t;'uXELi'.93iciil°..};"..:.:th:::d`(�w'ft,"ib7�'Si9:'-5t"L'.U'b'...::`67.:':P.s]7_S Welcome to the California DEPARTMENT OF INDUSTRIALRELAT'ONS Frequently asked questions (and answers) regarding the consumer price index. Note: Questions and corresponding answer for each, were reproduced from "Understanding the Consumer Price Index: Answers to Some Questions" - a publication of the U.S. Department of Labor, Bureau of Labor Statistics. November 1997 (Revised). Please select from the questions listed below: 01. What is the CPI? 02. How is the CPI used? 03. is the CPI a cost -of -living index? 04. Whose buying habits does the CPI reflect? Q5. How is the CPI market basket determined? 05. What goods and services does the CPI cover? Q7. How are CPI prices calculated and reviewed? Q8. How is the CPI calculated? Q9. How do I read or interet an index? 010. How can I get CPI information? 01. What is the CPI? Al. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a fixed market basket of goods and services. The CPI provides a way to compare what this market basket of goods and services costs this month with what the same market basket cost, say, a month or year ago. Q2. How is the CPI used? A2. The Consumer Price Index affects nearly all Americans, because of the many ways it is used. Three major uses are: As an economic indicator. The CPI is the most widely used measure of inflation and is sometimes viewed as an indicator of the effectiveness of government economic policy. It provides information about price changes in the Nation's economy to government, business, labor, and other private citizens, and is used by them as a guide to making economic decisions. In addition, the President, Congress, and the Federal Reserve Board use trends in the CPI to aid in formulating fiscal and monetary policies. As a deflator of other economic series. The CPI and its components are used to adjust other economic series for price changes and to translate these series into inflation -free dollars. Examples of series adjusted by the CPI include retail sales, hourly and weekly earnings, and components of the national income and product accounts. An interesting example is to use the CPI as a deflator of the value of the consumer's dollar to find its purchasing power. The purchasing power of the consumer's dollar measures the change in the quantity of goods and services a dollar will buy at different dates. In other words, as prices increase, the purchasing power of the consumer's dollar declines. As a means of adjusting dollar values. As inflation erodes consumer's purchasing power, the CPI is often used to adjust consumers' income payments, for example, Social Security; to adjust income eligibility levels for government assistance; and to automatically provide cost -of -living wage adjustments to millions of American workers. The CPI affects the income of almost 80 million persons, as a result of statutory action: 47.8 million Social Security beneficiaries, about 22.4 million food stamp recipients, and http://www.dir.ca.gov/dlsr/cpi/fags.htm 6/26/2012 Division of Labor Statistics & Research - Frequently asked questions (and answers) regar... !age 2 of � about 4.1 million military and Federal Civil Service retirees and survivors. Changes in the CPI also affect the cost of lunches for 26.7 million children who eat lunch at school, while collective bargaining agreements that tie wages to the CPI cove another 2 million workers. Another example of how dollar values may be adjusted is the use of the CPI to adjust the Federal income tax structure. These adjustments prevent inflation -induced increases in tax rates, an effect called "bracket creep." Q3. Is the CPI a cost -of -living index? A3. No, although it frequently (and mistakenly) is called a cost -of -living index. The Bureau of Labor Statistics (BLS or the Bureau) has for some time used a cost -of -living framework in making practical decisions about questions that arise in constructing the CPI. A cost -of -living index is a conceptual measurement goal, however, not a straightforward alternative to the CPI. A cost -of -living index would measure changes over time in the amount that consumers need to spend to reach a certain "utility level" or "standard of living." Both the CPI and a cost -of -living index would reflect changes in the prices of goods and services, such as food and clothing, that are directly purchased in the marketplace; but a complete cost -of -living index would go beyond this to also take into account changes in other governmental or environmental factors that affect consumers' well-being. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime that would comprise a complete cost -of -living framework. Another difference between the CPI and a cost -of -living index is that the CPI does not reflect the changes in buying or consumption patterns that consumers would probably make to adjust to relative price changes. For example, if the price of pork increases compared to those of other meats, shoppers might shift their purchases away from pork to beef, poultry, or fish. The ability to substitute means that the increase in the cost to consumers of maintaining their level of well-being tends to be somewhat less than the increase in the cost of the mix of goods and services they previously purchased. The current CPI does not reflect this substitution among items as a cost -of -living index would. Rather, the current CPI measures the cost of items, in the same fixed proportions (or weights) month after month. Experimental projects that may move the CPI closer to a cost -of -living measure are underway. Nevertheless, the difficult problems of defining living standards and measuring changes in the cost of their attainment over time make it improbable that a true cost -of -living measure can be produced in the foreseeable future. Q4. Whose buying habits does the CPI reflect? A4. The CPI reflects spending patterns for each of two population groups: All Urban Consumers (CPI -U) and Urban Wage Earners and Clerical Workers (CPI -W). The CPI -U represents about 87 percent of the U.S. population. It is based on the expenditures of almost all residents of urban or metropolitan areas, including professionals, the self-employed, the poor, the unemployed, and retired persons, as well as urban wage earners and clerical workers. Not included in the CPI are spending patterns of persons living in rural non -metropolitan areas, farm families, persons in the Armed Forces, and those in institutions, such as prisons and mental hospitals. The CPI -W is based on the expenditures of households that are included in the CPI -U definition that also meet two requirements: more than one-half of the households income must come from clerical or wage occupations, and at least one of the household's earners must have been employed for at least 37 weeks during the previous 12 months. The CPI -W's population represents about 32 percent of the total U.S. population and is a subset, or part, of the CPI -U's population. Q5. How is the CPI market basket determined? A5. The CPI market basket is developed from detailed expenditure information provided by families and individuals on what they actually bought. For the current CPI, this information was collected from the Consumer Expenditure Survey over the three years 1993, 1994, and 1995. In each of these three years, about 7,000 families from around the country provided information on their spending habits in a series of quarterly interviews. To collect information on frequently purchased items, such as food and personal care products, another 5,000 families in each of the three years kept diaries listing everything they bought during a 2 -week period. Altogether, about 36,000 individuals and families provided expenditure information for use in determining the importance, or weight, of the over 200 item categories in the CPI index structure. http://www.dir.ca.gov/dlsr/cpi/fags.htrn 6/26/2012 Division of Labor Statistics & Research - Frequently asked questions (and answers) regar... Page 3 of 5 Q6. What goods and services does the CPI cover? A6. The CPI represents all goods and services purchased for consumption by the reference population (CPI -U or CPI -W). BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups. Major groups and examples of categories in each are as follows: FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full-service meals, and snacks); HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture); APPAREL (men's shirts and sweaters, women's dresses, jewelry); TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance); MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services); RECREATION (televisions, cable television, pets and pet products, sports equipment, admissions); EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories); OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses). Also included within these major groups are various government -charged user fees, such as water and sewage charges, auto registration fees, and vehicle tolls. The CPI also includes taxes (such as sales and excise taxes) that are directly associated with the prices of specific goods and services. However; the CPI excludes taxes (such as income and Social Security taxes) not directly associated with the purchase of consumer goods and services. The CPI does not include investment items, such as stocks, bonds, real estate, and life insurance. (These items relate to savings and not to day-to-day consumption expenses.) For each of the more than 200 item categories, BLS has chosen samples of several hundred specific items within selected business establishments, using scientific statistical procedures, to represent the thousands of varieties available in the marketplace. For example, in a given supermarket, the Bureau may choose a plastic bag of golden -delicious apples, U.S. extra fancy grade, weighing 4.4 pounds to represent the "Apples" category. 07. How are CPI prices collected and reviewed? A7. Each month, BLS data collectors called economic assistants (formerly known as field representatives) visit or call thousands of retail stores, service establishments, rental units, and doctors' offices, all over the United States, to obtain price information on the thousands of items used to track and measure price change in the CPI. These economic assistants record the prices of about 80,000 items each month. These 80,000 prices represent a scientifically selected sample of the prices paid by consumers for the goods and services purchased. During each call or visit, the economic assistant collects price data on a specified good or service that was precisely defined during an earlier visit. If the selected item is available, the economic assistant records its price. If the selected item is no longer available, or if there has been changes in the quality or quantity (for example, eggs sold in packages of 8, when previously they had been sold by the dozen) of the good or service since the last time prices were collected, the economic assistant selects a new item or records the quality change in the current item. The recorded information is sent to the national office of the BLS where commodity specialists, who have detailed knowledge about the particular goods or services priced, review the data. These specialists check the data for accuracy and consistency and make any necessary corrections or adjustments. These can range from an adjustment for a change in the size or quantity of a packaged item to more complex adjustments based upon statistical analysis of the value of an item's features or quality. Thus, the commodity specialists strive to prevent changes in the quality of items from affecting the CPI's measurement of price change. Q8. How is the CPI calculated? http://www.dir.ca.gov/dlsr/cpi/fags.htm 6/26/2012 Division of Labor Statistics & Research - Frequently asked questions (and answers) regar... Page 4 of 5 A8. The CPI is a product of a series of interrelated sample. First, using data from the 1990 Census of Population, BLS selects the urban areas from which prices are to be collected and chooses the housing units within each area that are eligible for use in the shelter component of the CPI. The Census of Population also provides data on the number of consumers represented by each area selected as a CPI price collection area. Next, another sample (of about 16,000 families each year)serves as the basis for a Point -of -Purchase Survey that identifies the places where households purchase various types of goods and services. Data from the Consumer Expenditures Survey conducted from 1993 through 1995, involving a national sample of almost 36,000 families, provided detailed information on their spending habits. This enabled BLS to construct the CPI market basket of goods and services and to assign each item in the basket a weight, or importance. based on total family expenditures. The final stage in the sampling process is the selection of the specific detailed item to priced in each outlet. This is done in the field, using a method called "disaggregation." For example, BLS economic assistants may be directed to price "fresh whole milk." Through the dissaggregation process, the economic assistant selects the specific kind of fresh whole milk that will be priced in the outlet over time. By this process, each kind of whole milk is assigned a probability of selection, or weight, based on the quantity the store sells. If, for example, vitamin D, homogenized milk in half -gallon containers makes up 70 percent of the sales of whole milk; and the same milk in quart containers accounts for 10 percent of all whole milk sales, then the half -gallon container would be seven times as likely to be chosen as the quart container. After probabilities are assigned, one type, brand, and size container of milk is chosen by an objective selection process based on the theory of random sampling. The particular kind of milk that is selected by disaggregation will continue to be priced each month in that outlet. In summary, the price movement measurement is weighted by the importance of the item in the spending patterns of the appropriate population group. The combination of all these factors gives a weighted measurement of price change for all items in all outlets, in all areas priced for the CPI. Q9. How do I read or interpret an index? A9. An index is a tool that simplifies the measurement of movements in a numerical series. Most of the specific CPI indexes have a 1982-84 reference base. That is, BLS sets the average index level (representing the average price level) - for the 36 month period covering the years 1982, 1983, and 1984 - equal to 100. The Bureau measures changes in relation to that figure. An index of 110, for example, means there has been a 10 -percent increase in price since the reference. period; similarly an index of 90 means a 10 -percent decrease. Movements of the index from one date to another can be expressed as changes in index points (simply, the difference between index levels), but is more useful to express the movements as percent changes. This is because index points are affected by the level of the index in relation to its reference period. while percent changes are not. In the following table, Item A increased by half as many index points as Item B between Year I and Year II. Yet, because of the different starting figures, both items had the same percent change; that is, prices advanced at the same rate. On the other hand, Items B and C show the same change in index points, but the percent change is greater for Item C because of its lower starting value. Year 11 Change in index points Percent change Item A 112.5 121.5 9.0 8.0% Item B 225.0 243.0 18.0 8.0% Item C 110.0 128.0 18.0 16.4% BLS usually updates reference periods every 10 years or so, to make it easier for people to relate changes in the CPI to other economic and cultural changes. Q10. How can I get CPI information? A10. BLS on the Internet. Through the Internet, BLS provides free, easy, and continuous access to almost all published CPI data and press releases. The most recent month's CPI is made available immediately at the time of release. http://www.dir.ca.gov/dlsr/cpi/fags.htm 6/26/2012 Division of Labor Statistics & Research - Frequently asked questions (and answers) regar... Page 5 of 5 Additionally, a database called LABSTAT, containing current and historical data for the CPI is accessible. Data and press releases from other BLS surveys are also available. This material is accessible via the World Wide Web (WWW), Gopher, and File Transfer Protocal (FTP), as described below. For help in using any of these systems, send e-mail to Iabstat.helpdesk@bls.gov World Wide Web. BLS maintains a Web site at http://stats.bls.gov The BLS home page provides easy access to LABSTAT, as well as links to program specific home pages. In addition to data, the CPI home page, httD://www.bls.dov/cpi/ provides other CPI information. FTP and Gopher. These tools provide access to CPI LABSTAT data, as well as documentation and press release files organized in hierarchical directories. Connect to stats.bls.gov using FTP or Gopher, log on as ANONYMOUS and use your complete Internet e-mail address and password. 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