Calpensions

Government pay lower than private sector?

State and local government workers earn less than comparable workers in the private sector, a new study by two economics professors finds, even when pension and other benefits are included.

The study commissioned by two public employee-connected research groups contradicts comparisons in the “popular press” that show government work pays more than the private sector.

The media compares average pay and benefits, the study released last week said, which misses the point that the average public-sector worker and the average private-sector worker have different education levels and different job duties.

Compensation specialists have repeatedly shown that the average state and local government worker has “more education, more tenure and more responsibilities,” said the study by Keith Bender and John Heywood of the University of Wisconsin-Milwaukee.

Nearly half of state and local government workers, 48 percent, have completed college, said the study of workers nationwide. Only a little more than a fifth of private-sector workers, 23 percent, have a degree.

Many of the most common state and local government jobs require higher education: teachers, social workers, nurses and university professors. In Michigan, more than half of the state jobs require that applicants have at least a bachelor’s degree.

“Thus, the fact that public sector workers receive greater average compensation than private sector workers should be no more surprising than the fact that those with more skills and education earn more,” said the study.

A number of previous academic studies, using the proper methodology, are said to have found that state and local government pay and benefits are less than for comparable workers in the private sector.

The new study finds that state workers earn 11 percent less and local government workers 12 percent less than comparable private-sector workers. The pay gap has grown during the last 15 years as government jobs fell farther behind the private sector.

Adjusted for higher public-employee benefits, the new study said the gap is 6.8 percent for state workers, 7.4 percent for local government workers.

“Unfortunately, explanation of the standard of comparability and its measurement rarely makes it to the popular press,” said the new study, mentioning that USA Today reported that public-sector pay averaged $11.90 an hour more than private-sector pay.

The new study was commissioned by two non-profit research groups formed in 2007 as, among other things, public debate continued on switching new public employees to the 401(k)-style individual investment plans common in the private sector.

The Center for State and Local Government Excellence was created with financial support from ICMA-RC, which sells various retirement financial products to the public sector.

The National Institute on Retirement Security was formed by the Council of Institutional Investors, the National Association of State Retirement Administrators, and the National Council on Teacher Retirement.

The new academic study, titled “Out of Balance? Comparing Public and Private Sector compensation over 20 years” draws a firm conclusion about the finding of a widening pay gap.

“These implications lead to the policy prescription that now is not the time to advocate for large-scale rollbacks in the compensation of state and local workers,” said the study. “Although the current recession calls for equal sacrifice, the long-term pattern indicates that state and local workers are not, on average, overcompensated.”

An opinion article in the Wall Street Journal last March, not mentioned in the study, makes a comparison similar to the USA Today averages: $39.66 per hour in total compensation for state and local government workers, $27.42 for private-sector workers.

But the Journal article also talks about a major form of compensation not covered in the new study — the “long-term benefit commitments” made to government workers for pensions and retiree health care.

Gov. Schwarzenegger and others who say we have a “pension crisis” are not talking about current costs only. A main cause of their alarm is the projected growth of costs in the future to pay for benefits promised current workers when they retire.

Most public pension systems, particularly after the stock market crash, are far from being fully funded. Higher annual payments from employers are scheduled, which in part will pay for the current years of service.

Another form of “compensation” for current work that will not be paid until the future: retiree health care. The state and many local governments are not setting aside money now to pay for the health care promised workers when they retire.

A governor’s commission estimated two years ago that state and local governments in California have an unfunded liability of at least $118 billion over the next 30 years for their current retiree health care promises.

Most private employers, if they offer a retirement plan, provide a 401(k) that might have a current contribution similar to a pension. But the 401(k) leaves the employer with no future cost, while current-year public pension costs could continue to grow.

Yet when the new study concludes that state and local government workers earn less total compensation than comparable workers in the private sector, even when pensions and other benefits are included, it’s only looking at current costs.

“The data on fringe benefits we used (of which pensions are part) measure the current cost to employers (both public and private),” Professor Heywood replied to a question via e-mail.

“To the extent that public costs of pensions change in the future, these measures would change,” he said. “As you note, we made no attempt to forecast these changes. The study thus represents a ‘snapshot’ of the current state of comparability between sectors.”

Four years ago, the state released its first attempt in two decades to compare state and private-sector compensation. The private data came from surveys in which businesses agreed to participate only if anonymous, keeping competitors in the dark.

The comparison of “benchmark” job classifications found that state worker total compensation was higher than the private sector for clerical jobs, accountants, custodians, electricians, stationary engineers and analysts, but lagged in medical occupations.

The state Department of Personnel Administration listed several concerns about the study: an incomplete analysis, less detail about private than public-sector jobs, and the use of only salaries not benefits in “job-by-job comparisons” with the private sector.

The introduction to the state study contained some history. Before a new law in 1978 allowed state workers to form unions and bargain for labor contracts, the State Personnel Board collected “labor market salary data” each year.

“The information they compiled provided the basis for the State Personnel Board’s annual recommendation to the Legislature on employee compensation,” said the introduction.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 4 May 10