Headcount Cuts vs. Compensation Cuts

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.

4 comments to Headcount Cuts vs. Compensation Cuts

  • Tough Love

    Nice article, but here’s a MUCH better idea ………………

    Indiana has the BEST approach … DECERTIFYING Indiana’s public-employee unions ….NOW WE’RE TALKIN ………from TIME magazine (at link below):

    http://www.time.com/time/nation/article/0,8599,1997284-3,00.html

    Indiana Governor Mitch Daniels, a budget czar in the free-spending Bush Administration, has proved an efficiency fiend at the state level, privatizing bureaucracies, selling a poorly managed toll road, even harvesting the paper clips from state tax returns for reuse in government offices. Daniels took the controversial step of decertifying Indiana’s public-employee unions, a move that may endear him to Republican voters should he decide to run for President in 2012.

  • Don

    Interesting figures you bandy about. I’ve worked for the State of California for 33 years, and my annual gross salary prior to the furlough reduction is just a tad over $40,000. If I continue to work 3 more years until I’m 55 and assuming 36 years of service at that point, I will retire with a pension equal to 72 percent of my salary. Yes, that is a retirement benefit of nearly $30,000 per year. But, that was my intended trade-off of working for wages less than that of much of the private sector for the same job for all of these years.

    I also pay into Social Security, but I expect by the time I am eligible to receive those benefits the laws will be amended to reduce my SS benefits because I will be receiving other public retirement income. (Such is the case for California teachers, although they do not contribute to SS while contributing to the state teachers’ retirement system.)

    Perhaps with your $120K figure (certainly a figure far beyond my reach) you’re also lumping in the salaries and per diem of California’s legislators, the very ones who can’t pass an annual budget in a timely manner? If I consistently failed to do my job year after year as our lawmakers tend to do, I’d have been fired long ago. (And, yes, they do fire state employees.)

    Believe it or not, there are a significant number of us who take pride in our work and strive to provide a high level of service to the public. But we’re most likely the ones who are on the low end of the pay and benefit scale, yet are the most visible and receive the greater wrath of resentment from the public.

  • Ed

    Don – I’m not sure what your job description is, or whether or not you are including overtime in the $40K salary you reference, but let’s work with that figure. If you are going to get a 72% pension, i.e., $28,800 for the rest of your life, at a real, inflation adjusted fund return of 2.5%, you would have to have set aside 46.5% of your paycheck each year to fund this pension. This is a mathematical fact based on solid and conservative assumptions – salary doubling in real dollars during your career, 30 years working, 30 years retired. This means you actually make $40K plus 46.5% of 40K, or $58.6K per year, less whatever you actually contributed to your pension through withholding – usually not more than 5%, or $2K.

    What about all the vacation, personal days, extra holidays, comp. time, and other extra paid time off that you got when you’d worked, which amounts to far more days off than private sector workers? This is, on average, 20 extra days per year, meaning private sector workers, with four weeks off including holidays on average, work 240 days per year, and you work 220 days per year. This adds another 9% to your pay, which puts you at $63.9K per year. Not bad, is it? This is what you really make. But we’re not finished.

    What about your health benefits? Were they equal to the private sector? Have you checked on that lately? What about supplemental retirement health benefits, to tide you over between when you retire at age 55 and when medicare kicks in when you turn 62, or even supplemental retirement benefits to augment medicare after you’ve turned 62? Add all this up – there are costs for all of this that probably greatly exceed what private sector workers earn, and I’ll bet they are worth another $10K per year. So you actually are making $73.9K per year. Not bad at all.

    The average base salary for a state worker in California is $60K per year. In your case you can see there is an 84% premium for the current year funding requirements for your current and future benefits. Add that overhead rate on $60K and you get an average of $110K per year. I think the rate is closer, on average to $120K per year, but will concede the $10K. State workers used to make less than their counterparts in private industry, and their pension was to make up for that. This is clearly no longer true. The fact that you also participate in Social Security is an additional benefit, by the way, necessitating another 9% contribution from your employer. Altogether, your total annual compensation is well over $80K per year.

  • Thank you, I have been looking for details about this subject for ages and yours is the best I have found so far.