NOTE: The following represents the analysis-based opinion of the author and do not reflect those of his employer or any other affiliations.
By Kenneth Hunter, Guest Blogger
Reports on the growing gap in compensation between government employees and their private sector counterparts, specifically focusing on the higher salary and benefit levels enjoyed by government workers, is not surprising. The present economic climate, along with the increased prominence of government involvement in life and society engineered by the Obama administration since it took office last January, easily facilitate the opportunity for the media and pundits to make quick note and judgement of a situation that, from an economic standpoint, does not bode well for the general public and their desire for economic growth.
Of course, the media and political focus is on the basic and the present. By now, we have all heard that total (salaries and benefits) Federal employee compensation was approximately $117,780 in 2009 (according to the Bureau of Economic Analysis). This is 93% greater than the comparable average (per FTE) in the private sector ($61,051). Respectively, state and local government employees’ average compensation is only 14.5% greater than the private sector.
For most of the public, recent media reports are the first time they have ever seen evidence that government employees, on average, earn more in benefits and salary than private sector employees. Many have been long aware of the gap government employees enjoy with respect to the value of their benefits, but the fact that Federal workers now possess significant advantage in direct earning potential is a discovery that shocks, and angers, most people who learn of it.
The reality, however, is that this compensation gap has existed for a while. Looking at the BEA’s sector compensation data for the past 80 years, we see that average compensation levels between the three employment groups remained close until 1970.
Between the end of the second world war and the end of the 1960’s, government employees lagged behind private sector employees in salary and acrruals (i.e., vacation, sick time, etc.), but saw greater value associated with their benefits. With the arrival of significant inflation in the late-60’s (precipitated, in large part, to increased Federal spending and monetization), indexed government salaries kept up with the cost of living, while private wages did not. Between 1968 and 1973, Federal employee wages (which started out this period close to private sector and state/local government) rose 10.5% per year, while private wages grew only 6.3% annually (growth for state and local was 7.1%/year).
In 1970, average Federal wages climbed ahead of the private sector, and they have remained there since. State and local wages continued to remain relatively close to the private sector until 1983 (once again influenced by inflationary indexing).
There are other factors, of course, that contribute to these disparities. Federal civil service reform in the 1970’s, especially the establishment of the Senior Executive Service, providing not only higher base salaries for thousands of select positions, but also the opportunity for annual performance awards and greater annual increases. According to Office of Personnel Management reports for FY 2009, more than 6,200 SES employees earn base salaries averaging more than $160,000, with performance bonuses averaging more than $15,000 (see http://www.opm.gov/ses/facts_and_figures/data_trends09.asp for more information).
Another factor, not discussed much, is the impact of salary “accruals”, including sick and vacation time. Workforces across the board are aging, but Federal workforces are in good position with respect to longevity-based allowances for vacation and sick time. Given that these accrued compensation days (along with the potential for comp time for certain salaried positions) is valued at ever-growing levels of pay, the impact to overall compensation (and its potential impact on short-term liabilities the government incurs on behalf of its workers) is magnified.
Benefit disparity requires much less an explanation. The same economic pressures that forced the private sector to limit growth in employee wages also contributed to the implementation of additional efficiencies to constrain growth in benefit costs. While private workers labored through reductions in health insurance coverage and the transition from defined-benefit pensions to defined-contribution retirement programs, government employees across the board relished in more generous provisions, mostly inherited from the pre-1969 era. Naturally, the cost of these benefits skyrocketed, especially on the Federal employee level. More than likely, without significant reduction measures, the value of these benefits will continue to grow, only increasing the compensation gap with private industry, even if salary growth is curtailed out of economic, fiscal and political necessity.
From a political perspective, the compensation gap serves to increase the level of anger and dissatisfaction citizens have with the government that, in our country at least, is supposed to reside in the position of humble, respectful servant. While we can get into a litany of discussion about the roles and responsibilities that government employees play in our modern society and economy (to the detriment and benefit of individual liberty and free market opportunity), this ignores a more salient reality. If government workers are compensated better than those in the private sector, is the condition desirable, or even viable?
Prior to end of the 1960’s, relative balance existed between private sector and government employee compensation. The growing disparities with these sectors, especially with respect to the significantly higher values for Federal employees, reflect a trend that needs to reverse course as quickly as possible. We cannot ignore the need to compensate government employees for the services they provide of value to the citizenry, and political shorthand goals of paying government employees the private sector “average” may not necessarily work. The reality, nevertheless, is that respective balance between sectors in compensation must be restored.
State and local governments have some work to do, mostly with respect to benefits. For the most part, if history holds true, their close proximity to the citizenry and its will should enable necessary adjustments. There is also the fiscal reality that smaller governments face, unable to buy their way out of a crisis through borrowing and printing money.
On the Federal level, bringing back balance will require significant civil service reforms, especially with respect to reducing the scope of government employee benefits. Unions and public employment advocates will fight tooth-and-nail to stop the efforts, regardless of and in deference to the financial ruin we face if nothing is done. However, if we remember that government in America exists at the bequest of its citizens, that they are the natural inheritors of power through their God-given rights, we are morally obligated to prove ourselves as the humble servants we are supposed to be.
ASPA Member Kenneth Hunter is an MPA Graduate of The University of Georgia with more than a decade of experience in local government finance. Kenneth is the Budget & Evaluation Manager for the City of Rocky Mount, North Carolina, and serves on the Executive Committee of the Association for Budgeting & Financial Management and is a Board Member and Webmaster for the North Carolina Local Government Budget Association.