Montana public employees earn more than private counterparts

In a year when most state legislatures were engaged in budgetary belt-tightening, Montana Gov. Brian Schweitzer and public employee union representatives agreed to a pay plan package that would make any private sector worker envious. According to the agreement, each of the next two years state workers would receive both a 5 percent raise in pay and a 10 percent increase in the state contribution toward health insurance premiums. The price tag is estimated at $138 million

After the pay plan agreement was reached, a local representative of the American Federation of State, County, and Municipal Employees argued that it was necessary to "bring us closer to being compensated fairly with those in the private sector." Union representatives would have the public accept as conventional wisdom their caricature of the underpaid public employee, but the data suggest that public employees are actually compensated far more generously than their private sector counterparts.

Public sector unions have a vested interest in advancing the myth that they're undercompensated, as it gives them more power at the bargaining table. But state analysts tasked with comparing public and private pay have been encouraging it as well. In June 2012, legislators on the Legislative Finance Committee received a report outlining the results of the State Human Resources Division's biennial salary survey. Salary data culled for the survey is used to determine what the state calls the "market midpoint" of compensation for 750 occupations within stategovernment. According to the salary survey, state workers are earning on average 13.3 percent less than the market midpoint.

The state analysts are far more likely to shoot straight than AFSCME's research shop, but their salary survey unfortunately suffers from a weakness in methodology. By relying on salary ranges for occupational categories, the state's report has grossly oversimplified the compensation question. For instance, many positions in the public sector, such as correctional officers and fire fighters, have no private-sector equivalent. Additionally, employees within these categories are not interchangeable; some are more educated, some are older, some are more experienced. Comparing only occupational categories ignores all of this variation.

A final shortcoming in the salary survey is that it doesn't include the value of employee benefits — health insurance, paid leave, pension, etc. — which make up a considerable portion of any worker's compensation.

In sum, merely matching a state job to an occupational category will not yield apples-to-apples comparisons with private sector occupations and compensation. This is an argument that both conservative and liberal analysts have agreed upon when analyzing compensation in the public and private sector.

To facilitate a more accurate comparison, the Montana Policy Institute has released a report that uses the "human capital" approach to achieve apples-to-apples comparisons between public and private sector pay. Our report starts by using government data to compare public and private employees of similar personal and professional characteristics. For instance, instead of comparing pay in broad occupational categories, we compare public and private employees of similar work experience, education, gender, race and disability status. Additionally, we calculate the annual compensation value of fringe benefits on top of annual wages, including pension, paid leave and health insurance — including retiree health.

The results of the analysis are telling. Whereas the state's salary survey concludes that that average state employee is earning 13.3 percent less than the market midpoint, our report shows that after adjusting for age, work experience, education, gender, race and disability status, state and local public employees are in a statistical dead-heat with their private sector counterparts in terms of take-home pay. Where state and local public employees surpass private sector workers in total annual compensation is from their various fringe benefits. When compensation from fringe benefits is factored in, state and local public employees earn nearly 15.4 percent more in total annual compensation than comparable private sector workers.

Last session, lawmakers didn't enact the previously-negotiated pay plan, citing concerns over revenue forecasts and challenges faced by private sector workers. With fiscal analysts projecting a $457 million surplus, union representatives will lobby vociferously this coming session for some follow through from legislators. Half a billion dollars seems like a lot of extra money, but our fiscal house is not exactly in order. As the Montana Policy Institute details in another study on Montana's budget, there are long-term structural deficits that could break the bank in the near future, including unfunded liabilities of $3.8 billion in its pension programs for state workers and teachers.

This fiscal sleeping giant, and others, should be priority number one for lawmakers, and true solutions could easily consume whatever surplus materializes.

(Glenn Oppel is policy director of the Montana Policy Institute, a free market think tank in Bozeman.)