The Grand Bargain is Still Dead

By Matt A. Mayer

Shortly after we published our report, “The Grand Bargain is Dead: The Compensation of State Government Workers Far Exceeds Their Private-Sector Neighbors,” in July 2010, we received a single critique based on our decision to exclude the employer’s share of the Social Security tax from the yearly and lifetime cost of the Median Private Employee. More recently, we received criticism that our calculation concerning longevity pay was erroneous. After conducting additional research on that issue, we have concluded that our calculation was, indeed, wrong.[1]

Pursuant to our “Commitment to Quality Scholarship” pledge, therefore, we feel it is important to publish the corrected figures that resolve both criticisms. This correction is even more important now that the issue of government compensation reform is likely to be addressed as part of eliminating Ohio’s $8.4 billion budget deficit. We want to make sure that our public officials have the right data. We also want to thank our critics for ensuring that we meet our own quality standards.

Critically, our projection that realigning state government compensation to the private sector could save $2.1 billion in the next budget remains accurate, as those projections did not rely upon the longevity pay projections. Instead, those projections used the actual 2009 W-2 state worker data and health care cost data. In fact, with the more accurate longevity pay data and the current private sector 401(K) employer contribution match of 4 percent (we initially used 5 percent, which was too high), we now project the estimated savings to be nearly $2.3 billion, which could be done without a single layoff or service disruption to vulnerable populations in need of vital government services. For details, please see Table 1.

Similarly, the overall thrust of the report – that the compensation of state government workers far exceeds their private-sector neighbors – remains correct. Specifically, the Median State Worker base wage is based on the actual W-2 state worker data from 2003-2008 and, even with the longevity pay correction, the Median State Worker still costs 45 percent more than his private sector peer over a 30-year career. For a specific breakdown, please see Tables 2-5.

Finally, other than entrenched interests, defenders of the status quo dwindle each passing day. Since January 2000, Ohio’s private sector ranks have decreased by 601,500 net jobs (the 2nd most in America) compared to a net decrease of only 800 government jobs. With such a weak economy, we simply cannot afford to pay so many government workers as generously as we have been paying them. Realigning government pay to reflect the realities of the private sector is a must.

Table 1:

Two-Year Estimated State Budget Realignment Savings*

Compensation

Year One

Year Two

Total

Wages (19.73% Across-the-Board Cut)

$639,889,878

$639,889,878

$1,279,779,756

Retirement (Reducing Employer Share from 14% to 4%)

$324,323,303

$324,323,303

$648,646,606

Health (Increasing Employee Premium from 17% to 23%)

$43,980,467

$43,980,467

$87,960,934

Sick Pay (Reduce from $1,541 to $395)

$70,038,044

$70,038,044

$140,076,088

Longevity (Eliminate)

$57,590,000

$57,590,000

$115,180,000

Total

$1,135,821,692

$1,135,821,692

$2,271,643,384

*Across-the-board realignment adjustments of government compensation packages also would substantially reduce government costs at the local level and in higher education, and forestall or significantly reduce projected deficits, layoffs, and/or program cuts. These realignment adjustments would have a positive impact on the $1 billion Local Government Fund in the state budget and the individual budgets of each local government entity. For example, the 33 school districts in Cuyahoga County currently project an aggregated deficit in 2015 of $1.043 billion and expect personnel costs to absorb roughly 97% of projected revenues. Because personnel costs swallow 77 percent of expenditures, to eliminate or reduce this enormous projected deficit, those school districts will have to raise property taxes on Cuyahoga County homeowners by over $1 billion. Alternatively, if an across-the-board 10% realignment adjustment is made to personnel costs for 2011 and future increases are tied to a 3.2% inflation rate, the $1.043 billion deficit shrinks to a far more manageable $114 million in 2015.

Table 2:

Total Lifetime Cost

Median Employee

30 Years Service (Not Discounted)

Compensation

State Employee

Private Employee

Difference

Wages

$1,899,000

$1,232,000

$667,000

Retirement

$266,000

$49,000

$217,000

Social Security

$0

$94,000

($94,000)

Health

$685,000

$584,000

$101,000

Sick Pay

$82,000

$16,000

$66,000

Total

$2,932,000

$1,975,000

$957,000

 

Table 3:

Total Lifetime Cost

Median Employee

30 years service (Discounted Present Value)

Compensation

State Employee

Private Employee

Difference

Wages

$1,022,000

$689,000

$333,000

Retirement

$143,000

$28,000

$115,000

Social Security

$0

$53,000

($53,000)

Health

$357,000

$304,000

$53,000

Sick Pay

$44,000

$9,000

$35,000

Total

$1,566,000

$1,083,000

$483,000

 

Table 4:

Total Lifetime Cost – Median State Employee

   

Wage

Pension

Heath

Sick

Total

PV of Total

2009

22

$36,858

$5,160

$10,312

$1,581

$53,911

$53,911

2010

23

$36,858

$5,160

$10,828

$1,585

$54,431

$52,337

2011

24

$36,858

$5,160

$11,369

$1,585

$54,972

$50,825

2012

25

$38,207

$5,349

$11,937

$1,643

$57,136

$50,794

2013

26

$39,605

$5,545

$12,534

$1,703

$59,387

$50,765

2014

27

$41,976

$5,877

$13,161

$1,805

$62,819

$51,633

2015

28

$43,663

$6,113

$13,819

$1,878

$65,473

$51,744

2016

29

$45,405

$6,357

$14,510

$1,952

$68,224

$51,845

2017

30

$47,204

$6,609

$15,236

$2,030

$71,078

$51,936

2018

31

$49,062

$6,869

$15,997

$2,110

$74,038

$52,018

2019

32

$50,981

$7,137

$16,797

$2,192

$77,108

$52,091

2020

33

$52,964

$7,415

$17,637

$2,277

$80,294

$52,157

2021

34

$55,013

$7,702

$18,519

$2,366

$83,599

$52,216

2022

35

$57,129

$7,998

$19,445

$2,457

$87,029

$52,267

2023

36

$59,317

$8,304

$20,417

$2,551

$90,589

$52,313

2024

37

$61,578

$8,621

$21,438

$2,648

$94,285

$52,353

2025

38

$63,915

$8,948

$22,510

$2,748

$98,121

$52,388

2026

39

$66,330

$9,286

$23,635

$2,852

$102,104

$52,418

2027

40

$68,828

$9,636

$24,817

$2,960

$106,240

$52,443

2028

41

$71,410

$9,997

$26,058

$3,071

$110,536

$52,465

2029

42

$74,079

$10,371

$27,361

$3,185

$114,997

$52,483

2030

43

$76,791

$10,751

$28,729

$3,302

$119,572

$52,472

2031

44

$79,601

$11,144

$30,165

$3,423

$124,334

$52,463

2032

45

$82,515

$11,552

$31,674

$3,548

$129,288

$52,456

2033

46

$85,535

$11,975

$33,257

$3,678

$134,445

$52,450

2034

47

$88,665

$12,413

$34,920

$3,813

$139,811

$52,445

2035

48

$91,910

$12,867

$36,666

$3,952

$145,396

$52,443

2036

49

$95,274

$13,338

$38,499

$4,097

$151,209

$52,442

2037

50

$98,761

$13,827

$40,424

$4,247

$157,259

$52,442

2038

51

$102,376

$14,333

$42,446

$4,402

$163,556

$52,445

2039

52

$106,123

$14,857

$44,568

$4,563

$170,111

$52,449

2040

53

$110,007

$15,401

$46,796

$4,730

$176,935

$52,454

2041

54

$114,033

$15,965

$49,136

$4,903

$184,038

$52,461

2042

55

$118,207

$16,549

$51,593

$5,083

$191,432

$52,470

2043

56

$122,533

$17,155

$54,173

$5,269

$199,129

$52,481

2044

57

$127,018

$17,783

$56,881

$5,462

$207,144

$52,493

2045

58

$131,667

$18,433

$59,725

$5,662

$215,487

$52,507

2046

59

$136,486

$19,108

$62,711

$5,869

$224,174

$52,523

2047

60

$141,481

$19,807

$65,847

$6,084

$233,219

$52,541

2048

61

$146,660

$20,532

$69,139

$6,306

$242,638

$52,560

2049

62

$152,027

$21,284

$72,596

$6,537

$252,445

$52,581

2050

63

$157,591

$22,063

$76,226

$6,776

$262,657

$52,604

2051

64

$163,359

$22,870

$80,037

$7,024

$273,292

$52,629

2052

65

$169,338

$23,707

$84,039

$7,282

$284,367

$52,656

2053

66

$175,536

$24,575

$88,241

$7,548

$295,901

$52,684

2054

67

$181,961

$25,474

$92,653

$7,824

$307,913

$52,714

Total

$4,152,699

$581,378

$1,739,481

$178,562

$6,652,120

$2,406,268

 


Table 5:

Total Lifetime Cost – Median Private Employee

Year

Age

Wage

Pension

SS

Heath

Sick

Total

PV of Total

2009

22

$29,586

$1,183

$2,263

$8,783

$395

$42,211

$42,211

2010

23

$29,586

$1,183

$2,263

$9,222

$395

$42,650

$41,010

2011

24

$29,586

$1,183

$2,263

$9,683

$395

$43,111

$39,859

2012

25

$30,314

$1,213

$2,319

$10,167

$405

$44,418

$39,487

2013

26

$31,060

$1,242

$2,376

$10,676

$415

$45,769

$39,123

2014

27

$31,824

$1,273

$2,435

$11,210

$425

$47,166

$38,767

2015

28

$32,607

$1,304

$2,494

$11,770

$435

$48,611

$38,418

2016

29

$33,409

$1,336

$2,556

$12,359

$446

$50,105

$38,076

2017

30

$34,231

$1,369

$2,619

$12,976

$457

$51,652

$37,742

2018

31

$35,073

$1,403

$2,683

$13,625

$468

$53,252

$37,414

2019

32

$35,935

$1,437

$2,749

$14,307

$480

$54,908

$37,094

2020

33

$36,819

$1,473

$2,817

$15,022

$492

$56,622

$36,781

2021

34

$37,725

$1,509

$2,886

$15,773

$504

$58,397

$36,474

2022

35

$38,653

$1,546

$2,957

$16,562

$516

$60,234

$36,175

2023

36

$39,604

$1,584

$3,030

$17,390

$529

$62,136

$35,882

2024

37

$40,578

$1,623

$3,104

$18,259

$542

$64,107

$35,596

2025

38

$41,577

$1,663

$3,181

$19,172

$555

$66,147

$35,317

2026

39

$42,599

$1,704

$3,259

$20,131

$569

$68,262

$35,044

2027

40

$43,647

$1,746

$3,339

$21,137

$583

$70,452

$34,777

2028

41

$44,721

$1,789

$3,421

$22,194

$597

$72,722

$34,517

2029

42

$45,821

$1,833

$3,505

$23,304

$612

$75,075

$34,263

2030

43

$46,948

$1,878

$3,592

$24,469

$627

$77,514

$34,016

2031

44

$48,103

$1,924

$3,680

$25,693

$642

$80,042

$33,774

2032

45

$49,287

$1,971

$3,770

$26,977

$658

$82,664

$33,539

2033

46

$50,499

$2,020

$3,863

$28,326

$674

$85,382

$33,310

2034

47

$51,741

$2,070

$3,958

$29,742

$691

$88,202

$33,086

2035

48

$53,014

$2,121

$4,056

$31,229

$708

$91,128

$32,869

2036

49

$54,318

$2,173

$4,155

$32,791

$725

$94,163

$32,657

2037

50

$55,655

$2,226

$4,258

$34,430

$743

$97,312

$32,451

2038

51

$57,024

$2,281

$4,362

$36,152

$761

$100,580

$32,251

2039

52

$58,426

$2,337

$4,470

$37,960

$780

$103,973

$32,057

2040

53

$59,864

$2,395

$4,580

$39,858

$799

$107,495

$31,868

2041

54

$61,336

$2,453

$4,692

$41,850

$819

$111,151

$31,685

2042

55

$62,845

$2,514

$4,808

$43,943

$839

$114,949

$31,507

2043

56

$64,391

$2,576

$4,926

$46,140

$860

$118,893

$31,334

2044

57

$65,975

$2,639

$5,047

$48,447

$881

$122,989

$31,167

2045

58

$67,598

$2,704

$5,171

$50,870

$902

$127,245

$31,006

2046

59

$69,261

$2,770

$5,298

$53,413

$925

$131,668

$30,849

2047

60

$70,965

$2,839

$5,429

$56,084

$947

$136,264

$30,698

2048

61

$72,711

$2,908

$5,562

$58,888

$971

$141,040

$30,552

2049

62

$74,499

$2,980

$5,699

$61,832

$995

$146,005

$30,411

2050

63

$76,332

$3,053

$5,839

$64,924

$1,019

$151,168

$30,276

2051

64

$78,210

$3,128

$5,983

$68,170

$1,044

$156,536

$30,145

2052

65

$80,134

$3,205

$6,130

$71,579

$1,070

$162,118

$30,019

2053

66

$82,105

$3,284

$6,281

$75,157

$1,096

$167,924

$29,898

2054

67

$84,125

$3,365

$6,436

$78,915

$1,123

$173,964

$29,782

Total

$2,360,323

$94,413

$180,565

$1,481,562

$31,512

$4,148,374

$1,575,234

 

 


[1] In the original report, our wage calculation treated the longevity pay as a compounding component. In the course of drafting the report, Dr. Matthew Marlin twice confirmed that his understanding on how longevity pay worked was correct. Unfortunately, through no fault of his or the individuals he talked to, it appears, like the famous two ships Peerless passing in the night, they didn’t fully understand each other.