Are proposed state employee compensation increases necessary and sustainable?
Connecticut Governor Lamont has proposed to award state employees significant wage increases and bonuses over three years. But before moving ahead, policymakers should consider whether public employee pay increases are warranted.
A recent study authored by one of us finds that the average Connecticut state employee already receives total pay and benefits roughly one-third higher than is received by comparable private sector workers in Connecticut. This 33% premium is the fifth highest compensation premium out of the 50 U.S. states. Lamont's proposal would likely widen that gap.
According to state employee union documents, Lamont is proposing to award all unionized state employees three annual base salary increases of 2.5% and, for about two-thirds of employees, annual "step increases" of 2.0%. The wage and step increases are retroactive to July 1, 2021. On top of these increases, every employee will receive bonuses of $2,500 this coming May and $1,000 in July. The bonuses are pensionable.
It is important for government to attract and retain quality employees, but are these proposed pay increases necessary, equitable, efficient and sustainable?
The new study of compensation for state government employees, authored by Andrew Biggs, examines wages and benefits of state government employees in the 50 states, in each state comparing their compensation to that of private sector workers with similar levels of education, experience and other characteristics. The use of the same methodology in all 50 states establishes a level playing field and produces genuine comparative results among the states.
Using wage and benefit data from 2017 through 2019, the most recent comprehensive state-by-state figures available, the study finds that Connecticut state government employees receive annual salaries that are 5.6 percent lower than is paid to comparable private sector workers. Thirty-six states pay their state workers even lower wages than their comparable private sector workers. Moreover, Connecticut's gap predated its state workers' big 2020 wage hike, which would have narrowed its gap.
State employees may not seem overpaid. But salaries are only part of the story.
The study also finds that fringe benefits are dramatically higher in state government than in the private sector. State employees in Connecticut accrue pension benefits that are roughly six times more generous than the employer contribution to 401(k) plans which predominate in the private sector.
Connecticut's retiree health program for state employees is by far the most generous in the country. According to state accounting disclosures, the future benefits accruing to current Connecticut state employees are worth an extra $16,000 for each year of work. Retiree health coverage is nearly extinct for private sector workers.
Overall, total fringe benefits for Connecticut state government employees are over three times higher than for similar private sector workers, which more than makes up for slightly lower salaries in state government.
Connecticut is different from other states with the highest state employee compensation. State employee retirement benefits are severely underfunded. The main pension plans for state employees in Connecticut and Illinois are only 39 percent funded. Among the other eight of the ten highest-compensating states, public pension funding ranges from 64% to 100% and averages 80%.
Retiree health care benefits in all states are severely underfunded, if funded at all. With the most generous retiree health care benefits in the nation, Connecticut's underfunded liability is enormous.
Both Connecticut's SERS pension plan and the state's retiree health plan had unfunded liabilities of about $24 billion, or $48 billion combined, in their most recent actuarial valuation reports, as cited in the study.
The proposed salary increases would burden the state pension fund even more. The higher the pay when a worker retires, the higher the pension benefit to which he/she becomes entitled.
The General Assembly should consider, first, whether the pre-existing 33% premium is fair, before potentially increasing it. Second, is paying such a high premium good management? What business would knowingly pay 33% above market to its workforce? Finally, is premium pay sustainable? The study calculates the aggregate cost of the premium at $2 billion annually.
We are concerned about process as well. Governor Lamont has not made public any official information about the proposed deal, stating that "...details on the agreement will be provided upon ratification [by union members]..." Only union members are receiving information – which has leaked to the public, as cited above.
Even if SEBAC has met its own deadline of union ratification by April 1 in all 35 different labor units, that will leave little time for legislators to assess details before May 5th when the General Assembly's current session ends. In Congress, proposed legislation is sent to the Congressional Budget Office for in-depth cost analysis before being voted upon by Congress. Will there be time or provision for the equivalent for the proposed agreement?
We have delivered a hard copy of Dr. Biggs' study, including a preface about Connecticut by Red Jahncke of the Connecticut-based Townsend Group, to every member of the General Assembly. We invited them to a briefing and question-and-answer session via a Zoom call. Many accepted the invitation and participated in a discussion which ran for well over an hour.
We recommend strongly that state legislators take time to evaluate the details of both existing salary and benefit plans and the proposed salary increases, hold public hearings and seek independent expert evaluations of the proposed agreement. Only then should they vote to approve or reject the proposed agreement.
Red Jahncke is president of The Townsend Group Intl., based in Connecticut. Andrew G. Biggs is a senior fellow at the American Enterprise Institute, where he studies Social Security reform, state and local government pensions, and public sector pay and benefits.