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Government Outpaces Private Sector in Wages and Benefits

Government wage increases vastly outpaced the public sector, and the number of government jobs have soared. For the federal government alone, there are 2.1 million workers, “costing over $260 billion in wages and benefits this year.” according to recent data analysed by the US Bureau of Economic Analysis (BEA).

There is no justification for government workers to earn more than the private sector. What was once a noble profession — the idea of ‘public service’ — has been replaced by as system that allows for and encourages the economic imbalance because the government is not market-driven. Structures such as arbitration and non-firing allow public service employees to continue to receive their benefits and artificial pay raises regardless of the outside economic conditions.

Because of this, public sector wages eventually exceed the normal market-based wages. Negotiations in the public sector should never be “how much of an increase will I receive from before”, but rather, “can we justify these wages and benefits at all?” We should not be paying more than the private sector, which responds and adjusts to the mitigating economic factors; the government does not, and the result is what we see today: sprawling wages, busted pensions, and bloated budgets.

In essence, government workers have stronger job security because they are not dependent on the economy to keep them going. What’s even more sobering is the fact that the private sector marketplace is beginning to lose the best and brightest people, because the government is paying more, and providing employment with better benefits. This will have long-lasting detrimental effects. It was never intended for the government to compete with the private sector. This phenomenon has turned the entire system on its head.

Public Sector Employee Wages Outpace Private Sector


This is an point that I have been writing about for years: workers in the public sector makes more than their private sector counterparts, especially when benefits are factors into the compensation package.

Now, a new study by CATO affirms my supposition. CATO analyzed data from the US Bureau of Economic Analysis (BEA) and found that “that federal government workers earned an average of $84,153 in 2014, compared to the private sector’s average of $56,350.”

Even more incredibly, “when adding in benefits pay for federal workers, the difference becomes more dramatic. Federal employees made $119,934 in total compensation last year, while private sector workers earned $67,246, a difference of over $52,000, or 78 percent.”

Government wage increases vastly outpaced the public sector, and the number of government jobs have soared. For the federal government alone, there are 2.1 million workers, “costing over $260 billion in wages and benefits this year.”

It is interesting to ponder the secondary effects of this phenomenon. First, as the amount of government jobs increases, the amount of voters with government jobs increases. What voter is going to seriously vote to cut the size and scope of government when he is the direct beneficiary. Likewise as pay continues to grow, it becomes less likely that someone will vote to cut his or her own pay.
At some point, the number of voters with government pay and benefits will outnumber those without. When that happens, we’ve reached the tipping point with trying to reign in government spending.

State Budgets: Big (Empty) Promises

Many states continue to bamboozle their citizens by obfuscating the true depth of their debt that is occurring in the form of unfunded liabilities. Those liabilities are mainly state public pension plans, and they continue to routinely promise pie-in-the-sky returns, even after years of bleak economic growth and investment.

A group called State Budget Solutions analyzes the problem of underfunding each year. Its annual report “reveals that state public pension plans are underfunded by $4.7 trillion, up from $4.1 trillion in 2013. Overall, the combined plans’ funded status has dipped three percentage points to 36%. Split among all Americans, the unfunded liability is over $15,000 per person.”

Many people might think, “I don’t work for my state government, so it doesn’t affect me”. It most certainly does. We are facing a generation of Baby Boomers who are getting ready to retire, and expect to have the pension that has been promised to them. Those promises are the unfunded liabilities which must be paid out. Pension costs come from state budgets — you and me — and in order to cover the costs, adjustments must be made. Expect tax increases and/or reduced government services in the coming years because a greater portion of the state budget will need to be dedicated to meeting these obligations.

How did we get here? The most damning factor is that of generous promises.

Ultimately, negotiators — be it union heads, lawmakers, or other bureaucrats — have had a fiduciary responsibility not to pay more than fair compensation, thereby restricting compensation and benefits to amounts no greater than what those skills would command in the private sector. Unfortunately, there are really no such competitive inhibitions in the public sector and therefore the negotiation routine lacks the incentive for restraint. In most cases, the self-interest of the public sector negotiator is more directly aligned with the leader that can get him elected rather than the taxpayer whom he is representing.

Lofty and mythical promises have been made for years now without a care about how it will be paid for — because the negotiator will likely be long gone when obligations come due. This is a true case of the fox in charge of the hen house. Thus runaway financial promises have deeply accumulated in state governments for which it cannot properly budget, while binding future governments not yet in office.

The Great Recession has made the problem more acute in recent years. “As the economy struggles to get back on track, states’ fiscal health also suffers, making it more difficult for state officials to make up for the shortfalls with greater contributions. As bond yields have suffered due to interest rates being held at historic lows, the fair market valuation of public pension liabilities also took a hit.”

Furthermore, most, if not all states, have hidden the vast problem by using accounting tricks — probably hoping the economy or investment will bounce back, or else just passing the buck year after year so it becomes someone else’s problem.

For instance, “state pension funds use a high discount rate. Discounting liabilities is a necessary part of fund management. Fund managers must assume that the current assets will be worth more in the future due to a number of factors, notably the return on investing those current assets. The problem arises because the discount rate is not based on the nature of the assets held by the pension plan, but is rather based on the assumed rate of return.”

The assumed rate of return — herein lies the problem. By continuing to perpetuate and promise rates of return of 5-8% for pensions, state governments show on paper that their liabilities are much smaller than they are. However, for years now, returns have been much closer to 2-3%. Yet state governments fail to make those realistic adjustments because it sounds neither glamorous nor generous to the employee.

What’s more, some states are facing such enormous financial pressures and shortfalls in all sectors of the state budget that they have reduced or skipped the yearly contribution to the pension funds altogether — thereby making the gulf that much wider. New Jersey balanced its budget (again) this year by reducing (again) the payment by $2.4 billion; Virginia skipped its payment back altogether in 2010 — although it did implement a repayment plan over subsequent 5 years to make up for that choice.

In fact, a cursory glance back at these practices reveal that the games have been ongoing for several years now. A Wall Street Journal article on this subject from Spring of 2010 — nearly 5 years ago — discusses how states were reducing and skipping payments and delaying the “day of reckoning”. New Jersey, California, and Illinois were some of the worse offenders then.

Is it any wonder that these three states are in the top ten for the amount of unfunded liabilities? California has the worst, $754 billion. In terms of funding ratios, Illinois leads the list with only 22% of its obligations funded. You can look at the full and various lists here.

The crisis will only continue to worsen unless changes are made. The outlook is gloomy for state governments and, based on past performance, is not likely to get better anytime soon. For most states, the “kick the can” approach allows them to coast while the liabilities fester, letting it become the problem of other future governments at some undefined point in the future. That is reprehensible.

What Was Promised and Who Promised It


promise_day_02
Pension reform needs to begin in the public sector. it is clear that a wide gulf between funding and compensation exists. When pointing out the fact that the majority of federal and state public employees are overcompensated, the response is typically that “these amounts were promised”. But with most budgets now currently running severely in the red, addressing the compensation question is the key to solving major deficit dilemmas across the country. We need to analyze how we got here from two perspectives: 1) what was promised and 2) who promised it.

For localities that want to achieve solvency, it is essential to find out foremost exactly what was really and contractually promised to the public workers and for how long. An executive or union member works under a contract that exists for a specific time period. Their obligation is to provide their services in return for certain compensation and benefits during that time. But that’s it — they are only covered for the period of the current contract.

This point is important because there really can be no part of a negotiated contract that promises any compensation or benefits for services rendered after the end of the contract period; otherwise, the locality runs the risk of runaway financial obligations for which it cannot properly budget and it was not binding future governments not yet in office.

Therefore, if accruals to a defined benefit retirement program to a public service employee have been contracted for, the benefit accruals earned by that employee during the period of the contract can’t be taken away. However, unless a new contract specifically continues that same program into that next contract, the employee should not be entitled to any additional accruals.

Unfortunately, it is apparent that this simple concept has typically not been followed during the vast majority of contract negotiations in the public sector. If it had, negotiators for management would have long discontinued offering the out-of-control defined benefit plan.

Such dereliction is part of the reason that it’s necessary to examine the second point – “who promised it”.  It is evident that serious research needs to be done in localities into who it was that negotiated such overgenerous contracts. Ultimately, negotiators have a fiduciary responsibility to the taxpayer not to pay more than fair compensation, thereby restricting compensation and benefits to amounts no greater than what those skills would command in the private sector. Valuable (and expensive) benefits such as job security must be factored in as an element of compensation paid to public sector employees.

Contrast how negotiations are performed in the private sector. The profit motive there keeps compensation at levels where economic forces show to be appropriate (i.e., the point where people generate results that justify its cost). This reflects economically rational “fair” compensation levels. But because the public sector does not have these economic forces to keep compensation levels in check, it is incumbent upon the public negotiators to do so properly. Failing to properly negotiate has created the soaring budget deficits we are experiencing.

There truly is a fundamental difference between private sector “management” and those doing the negotiating in the public sectors. In the private sector, the negotiator — either personally or the company who pays their merit based salary — will suffer serious financial damage if they offer their work force too much, because they will be unable to compete with their competitors in the marketplace.

On the other hand, there are no such competitive inhibitions in the public sector and therefore the negotiation routine lacks the incentive for restraint. Even worse, in most cases, the self-interest of the public sector negotiator is more directly aligned with the union that can get him elected rather than the taxpayer whom he is representing. This is a true case of the fox in charge of the hen house.

Examining the contract process in the public sector will provide an opportunity for fiscal reform. This will ensure that no public sector worker be paid more in any new contract then what those services warrant, without regard to what the prior contract provided. Most importantly, once a contract ends there is nothing on the table. There is nothing to prevent any new contract from offering less that the prior contract, especially where pay and benefits of the prior contract were out of line.

Even though it may be politically difficult and unpalatable, anybody representing the taxpayers has an obligation to those taxpayers. Those who breached the public trust with mismanagement should be held accountable. Budget reform and deficit reduction will naturally follow once compensation levels have been stabilized and brought in line with their private counterparts.

More Chris Christie

From the Washington Examiner:
Well, this might be the best Chris Christie-tells-off-pubic-employees video yet. In part because in this case the poor policeman doesn’t come off as arrogant, and also because Christie does his best to level with the guy and respect him. But that doesn’t keep Christie from flinching when it comes to leveling with the guy. Money quote: ““Here’s the thing: You’re getting a paycheck. And there are 9% of the people in the state of New Jersey who are not.”:

Read more watch the video here.