State Employee Compensation
Recommendation
Change state employee compensation to recruit and reward strong contributors and to reduce future state liabilities.
Background
Compensation
• State government provides more and different benefits to employees than private employers provide.
• Compensation patterns affect recruitment and retention.
• Government compensation is based more on tenure than on job performance.
• Government compensation includes higher levels of deferred wages in defined benefit pensions and health benefits for retirees than private sector compensation.
• Although average wages for state employees are equal to or higher than those for private sector workers, some positions in state government have compensation 30 percent below comparable wages in the private sector.
• The range of wages is much narrower in state government than in the private sector.
• State employee pay formulas have not been followed and pay increases have been smaller than raises for teachers.
State Funding
• Merit pay provisions have been unfunded while the legislature has spent more on across-the-board pay raises.
• Even after diversion of pension fund deposits to fund other government activities in 2001, state employee pensions are funded at 107 percent of liabilities.
• New reporting rules (GASB 45) mean the state must determine its unfunded liability for other post-employment benefits, namely retiree health benefits.
• The most recent actuarial estimate of this unfunded liability is $23.8 billion of a total $23.9 billion liability.
Why Reform is Needed
• Reduce problems with collective bargaining. Union representatives are the only ones who benefit from collective bargaining. Individual merit pay with freedom to pay market rates is more important.
• Focus on keeping the right employees. Some jobs have 24 percent vacancy rates, but turnover in state government is less than half that in the private sector. The key is keeping the right employees.
• North Carolina has a $24 billion unfunded liability for retiree health benefits. State government has expensive promises to keep. Changing compensation methods will help with reduce this liability, too.
• Currently, the state is more likely to retain less-productive employees. High turnover in critical jobs and among some of the best people hurts the effectiveness of state government. Productive employees are more likely to leave state employment, and less-productive employees are more likely to remain on the state payroll for shorter hours and better benefits.
• High costs of pay-as-you-go financing. If the state continues pay-as-you-go financing of retiree health benefits, the unfunded liability will reach $44.6 billion in 2014.
• Obtain benefits of health savings accounts. Besides contributing more per year to cover the future health benefits of retired state employees, a Health Savings Account (HSA) option in the state employee health plan could offset future liabilities.
Give employees more flexibility. Defined contribution pensions and health benefits, such as IRAs or HSAs, make employees less reliant on employers and help with transitions.
• Give employees more flexibility. Defined contribution pensions and health benefits, such as IRAs or HSAs, make employees less reliant on employers and help with transitions.
Analyst: Joseph Coletti
Fiscal and Health Care Policy Analyst
919/828.3876 • jcoletti-at-johnlocke.org
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