California is on track to have 2.0 million people working for state and local government. According to 2008 U.S. Census data (ref. 2008 Public Employment Data, Local, and 2008 Public Employment Data, State) there are 1.85 million non-federal government workers in California today. It is becoming increasingly understood by voters and policymakers that a worker’s compensation is not adequately measured simply by referencing their annual salary or total annual wages. Overtime, sick time and vacation time payouts, health benefits, preferred access and rates for loans and insurance, transportation reimbursements, and more, are all examples of current year compensation that belong in any properly compiled estimate of a worker’s total annual compensation. And a heretofore arcane yet huge component of any worker’s total annual compensation is the current year funding requirements for future benefits – such as their retirement pension and their retirement health benefits.
In an analysis posted earlier this year entitled “California’s Personnel Costs,” the average total compensation for state and local government employees in California was estimated at $94K per year. In reality we feel this amount is still significantly lower than the true average because (1) public employee retirement pension funds are below the asset value necessary to ensure long-term solvency and therefore current-year payments into them on behalf of public employees will need to be further increased, and (2) assigning a value of $10K per year for the average current benefit package is probably too low, particularly when you take into account the extra vacation, other paid time off, and other reimbursements afforded public sector employees, and (3) the analysis did not take into account current-year funding requirements for any supplemental retirement health benefits. For these reasons, the default assumption on the interactive spreadsheet table below is an average total compensation for California’s state and local employees of $120K per year.
In the analysis below, the input assumptions are highlighted in yellow. These assumptions can be changed by any viewer, simply by clicking the cursor onto one of the yellow input cells and changing the number in the cell, then hitting the “Tab” key. The entire table will recalculate.
As the table is currently configured, 2.0 million workers making $120K per year would cost $240 billion per year – which is roughly 50% of California’s total state and local budgets combined. The remaining two assumptions on the spreadsheet allow the user to input percentage reduction scenarios both for the number of workers and the amount of average annual compensation. As can be seen, a 20% reduction to both the number of workers, as well as to the rate of compensation for the remaining workers, yields a total reduction of 36%, or $86 billion per year. This scenario is what I would like to call California’s “20% Solution.”
(enter new quantities in any yellow cell; to calculate, click cursor within any yellow cell, then move cursor off cell and click again)
If you consider what a solution like this would entail, it is important to note the cost should not include any draconian cuts to services, nor to the viability of earnings to employees who keep their jobs. Since most public employees have been getting nearly every Friday off, a 20% workforce reduction would simply mean that the remaining workers would have to work five days a week again. Reducing their generous holiday and vacation allotments incrementally – certainly not by 20% – would serve to easily build up worker attendance to a level sufficient to guarantee ongoing government services at the level they’ve been traditionally available.
Similarly, the 20% solution makes a reduction to compensation packages relatively easy to attain. Since public sector workers have already seen their direct compensation cut by virtue of getting nearly every Friday off without pay, all that is necessary is to put them back onto a full-time schedule without increasing their pay proportionally, then cut back on their benefits – current and future – enough to achieve the full 20% reduction in total compensation. The only area where a genuine hardship is inflicted is in the case of the workers who are laid off, which would be nearly 400,000 state and local government workers. But the question must be asked – if our state and local governments can continue to function with the actual labor hours lowered by one day per week – as the furlough Fridays has proven – then why should taxpayers continue to support these unnecessary jobs?
Using this interactive spreadsheet, however, one may input any variables they wish. Suppose you wanted to save $86 billion per year but didn’t want to lay anyone off? Then lower every state worker’s total compensation by 36% and you accomplish an identical level of savings. And you still have an average public employee compensation set at $77K per year, which is pretty good. For example, if you simply required public sector employees to collect social security and medicare instead of providing them pensions and supplemental retirement health care (that ordinary taxpayers have to become millionaires to ever hope to match), you could probably afford these reductions with NO reduction to any public employee’s current compensation. Alternatively, of course, some departments could be privatized, or eliminated selectively, ameliorating the hardship of headcount and compensation reductions elsewhere in the public workforce.
The value of an interactive spreadsheet is it defines and quantifies the immutability of the constraints we’re under. State and local governments have borrowed as much money as it is financially feasible for them to borrow. The Federal government can still borrow money to bail out the state and local governments, but that, too, is financially unsustainable and is encountering increasing resistance from concerned taxpayers. And speaking of taxes, it is ridiculous and futile to think California’s private sector workers are going to accept more taxes when Californians are already one of the most taxed states in the U.S., just so their public sector counterparts can continue to enjoy compensation packages that are, on average, at least twice as lucrative as these taxpayer’s own earnings in the competitive private sector. The choice is reduced to two hard variables – total headcount and average compensation. Hopefully these painful reductions will be made with humanity and wisdom.