Public Sector Compensation Part 4

As the public sector union drama continues to unfold in Madison, now is a good time revisit my Public Sector Compensation series. Parts 1-3 (links below) provided evidence that public sector employees are generally paid less than their private sector counterparts especially as they move up the pay scale and possess more education and experience. There is some evidence that lower-skilled employees do better in the public sector. And, that may or may not be a bad thing given private sector wage scales for lower-level employees.

Part 3 specifically referenced the Minnesota Taxpayers Association (MTA)’s report, procured by the Minnesota Chamber of Commerce, on public sector compensation. I showed that one should not draw many conclusions from the report because it focused on a very small portion of the overall state labor force. That portion happened to be lower-level employees that most everyone acknowledges are better compensated in the public sector.

The second part of the MTA report focused on factors other than wages. As the report’s conclusion noted, compensation is only one dimension of a larger set of essential public sector human resource management reforms. While I found Part 1 of the MTA report to be misleading and filtered, Part 2 contained several recommendations worthy of consideration.

Longevity, Steps, and Lanes

Most public sector employees in Minnesota receive compensation increases based solely on experience without regard to performance (performance-based pay is often the number one persona non grata in labor negotiations). Experience counts to a point. One can reasonably surmise that an employee will grow in knowledge, skills, and abilities the longer a person has practice at the job. The question becomes at what point does the law of diminishing returns take effect? Is a twenty-year employee significantly more productive and valuable than a seven-year employee?

Similarly, many compensation systems, especially in public schools, provide financial incentives for employees to achieve extra education and certifications. Generally, a better-educated workforce is a more productive workforce. But, should an employee be rewarded for an advanced degree or certification in a position that does not require the certification?

The MTA advocates eliminating step and lane systems. I am a strong proponent of classified compensation systems in the public sector with grades (job classification) and steps (experience), but not lanes (certifications). Public sector managers do not have the luxury of granting arbitrary rewards based solely on managers discretion. Therefore, public sectors require established merit systems that outline job classifications and experience.

The MTA also advocates for stronger performance evaluations. Some unions will even oppose this on the grounds that performance evaluations are the first step toward pay-for-performance systems (as if that is a bad thing).

Cost of Living Adjustments (COLAs)

In the simplest terms, COLAs are the percentage increase that workers will receive in a given year. They are roughly (but not exactly) linked to inflation. The MTA report advocates for the elimination of COLAs. Similar to a classified merit system discussed above, COLAs exist so that there is less discretion (read: discrimination) in pay. Private sector managers can pay their employees “ within certain legal constraints “ as much or as little as they wish. COLAs exist for the expressed purpose that we are managing other peoples money. Ground rules must be established.

Pay Equity Compliance

Minnesota has a mandatory Pay Equity and Comparable Pay statute to protect female workers from wage discrimination. The law, however, goes well beyond what we call equal pay for equal work.  Minnesota requires government agencies to report its wages to determine if the agencies are paying equally for equally pointed work. The reports are based on very tedious, bureaucratic databases and formulas that often require the assistance of consultants. Further, retirements and wage negotiations (often weighted against the government by law) can place a government out of compliance despite the best intentions. In short, the goal is good. The administration is terrible. The City of East Grand Forks, along with the League of Minnesota Cities, the Coalition of Greater Minnesota Cities, and several other local government organizations, actively support the repeal of the pay equity statute in their current forms.

Prevailing Wage

Most know prevailing wage at the federal level as Davis-Bacon rates, in which contractors must pay their employees according to government wage schedules when performing government work. Minnesota has its own prevailing wage schedules that the MTA asserts is among the most generous in the nation.

Other Post Employment Benefits (OPEB)

OPEB is a rather nebulous topic that pertains to government accounting standards that I will not even begin to describe here (partially because it is huge, and partially because I only partially comprehend it). For Minnesota governments, one item that sticks out in the OPEB category is the mandatory provision that governments (including cities) offer health insurance to retirees until they reach the age of Medicare eligibility. Statistically, older persons are costlier persons to cover for health insurance. Therefore, this requirement arguably drives up the cost of health care to local governments.

Union Negotiation and Arbitration

The MTA report recommends more prominent reporting of arbitration proceedings between governments and unions. Public safety unions, especially, can demand binding arbitration because those units cannot strike. Arbitrators, meanwhile, are hired based on how favorably they are viewed by both government agencies and unions. Therefore, arbitrators interests are to split the baby in labor disputes to keep everyone happy (or at least equally unhappy). This results in pay scales and benefits that will always increase. The only question is how much they will increase.

Other recommendations

The MTA report also recommended object code spending in government compensation reporting. The rationale for this recommendation is puzzling. Governments practically invented object code reporting. Therefore, I am not sure of the information the MTA claims is lacking.

The MTA advocates the consideration of private sector compensation when determining public sector compensation. This seems fine on the surface. And, market studies are a must for any solid compensation plan. But, given the issues that I addressed regarding Part 1 of the MTAs report (Part 3 of my series); I have concerns about the legitimacy of such comparisons.

And, finally, the MTA recommends reforming public pensions, which arguably have been given the strongest weight in the whole debate. Virtually everyone agrees that public pensions are facing some issues regarding underfunding. As Girard Miller notes in a column entitled Misplaced Pension Hysteria, the attention may be overblown. And, as a Star-Tribune article recently pointed out, Minnesota public employees already pay much more into their pensions than their much-hyped neighbors in Wisconsin.

Related Blog Posts

Public Sector Compensation, Part 1

Public Sector Compensation, Part 1.5

Public Sector Compensation, Part 2

Public Sector Compensation, Part 3

Referenced Articles/Studies

Out of Balance, Comparing Public and Private Sector over 20 Years, Keith A Bender et al, Center for State and Local Government Excellence

The Paralysis of the State, David Brooks, New York Times

The Trouble with Public Sector Unions, Prof. Daniel DiSalvo

Minnesota Public Sector Compensation, Minnesota Tax Payers Association (commissioned by Minnesota Chamber of Commerce)

Misplaced Pension Hysteria, Girard Miller, Governing

In Pension and Benefits, Wisconsin tops Minnesota, Baird Helgeson, Star-Tribune

Government Unions vs. Taxpayers, Governor Tim Pawlenty (R “Minnesota)

Governors rants about public employees dont stand up to scrutiny, Jim Miller, League of Minnesota Cities Executive Director

Are Public Employees Pampered? MPR Insight Now Forum

Are Federal Workers Overpaid, Fact Check web site