Are public employees overcompensated? Are elected officials less than honest with citizens about the obligations these employees incur on state and local treasuries? Perhaps the answer to both questions is yes.
There is no question that a lot of state and local public employees’ retirement plans are on shaky financial footing. Absent economic growth, and with returns on investments having very slim chances of improving, problems are only going to get worse for many jurisdictions.
What isn’t clear is how to correct the situation. That uncertainty stems in great part from a lack of consensus on the basic causes. Should we give public employees less in pay and benefits? Or should we demand greater transparency so that citizens will understand obligations incurred on their collective behalf and thus be willing to pay the taxes necessary to meet those obligations?
Two local issues bring urgency to these questions.
First is that the St. Paul Police Department is facing an unusually high number of retirements, ironically prompted by a pension reform that makes benefits less generous for people retiring after this year. The city needs to hire new officers, but there also is pressure to hold down local taxes. Some, including the police union, argue that St. Paul police compensation is no longer competitive with Minneapolis or with many of the suburbs and predict that it will be difficult to fill vacancies with well-qualified candidates.
Second, we have the Legislative Commission on Pensions and Retirement, headed by state Sen. Sandy Pappas, DFL-St. Paul, which has been meeting and taking testimony recently.
The fact that this commission exists is evidence of good government.
Officials in many other states continue with their heads firmly in the sand on this issue.
But the commission is unlikely to come to any conclusions that might be acted on in the next legislative session, and that is evidence of the political and economic knottiness of the problem.
Economists have a number of different takes on paying government workers that closely adhere with their political persuasion.
Liberal economists are more likely to suggest public employees get market wages.
They argue that rational people in labor markets consider all aspects of compensation, including pension benefits, together with working conditions and the work itself in deciding whether to apply for a public- or private-sector job.
If public-sector jobs have compensation above market levels, the argument goes, the result will be unusually large numbers of applicants for government jobs, attempts to use political “pull” to get jobs and public envy for those who succeed in getting on government payrolls.
Conservative economists are more likely to see market failure.
They argue that public employee unions engage in “rent seeking,” using their political clout to get pay and benefits well above free markets.
These unions make insidious pacts with politicians, offering the political clout of their members for campaign purposes and thus seduce officials from their duty to the public.
High-ranking civil servants use arcane details in retirement rules, such as those governing use of overtime pay and bonuses in the last years before retirement, to get benefits well above levels intended by the framers of the plans.
There is much irony in the fact that liberal economists who are quick to see market failures in other situations see little in public employment. Conservatives who think markets usually work well are quick to see imperfect information, monopoly power, externalities and rent seeking in public jobs.
But that market wages are the appropriate standard for government workers is one issue on which conservatives and liberals agree.
There is an element of truth in both sides’ positions.
Labor markets are not homogeneous. There are some jurisdictions where getting a public job, or at least one of a plum one, is a real coup. There are others where private-sector workers find little reason to envy their publicly employed counterparts.
There is one issue on which both wings of economists generally agree, perhaps too much: That people weigh all relevant factors, not just compensation, when considering a job.
So if you reduce pension levels, you reduce the “price” offered to do the job.
That would mean that with lower pensions, as contemplated by the legislative commission in various formats, government jobs would be harder to fill than now.
But that might be a minor problem if public-sector pay really exceeds what the private sector would pay for equivalent jobs.
We could move from a situation of much excess supply of workers to only some excess supply. So, as for the St. Paul Police Department, the empirical question of how public-sector jobs pay relative to other opportunities for applicants becomes a key one.
Moreover, as for the police jobs, the quality of candidates is important. Whenever our police department takes applications, it gets many. But not all of them are from people we want wearing a badge and carrying a gun for us, even if they meet the paper requirements.
This may not be true for other positions where there are more direct comparisons between a specific administrative or skilled-trade government jobs and occupations in the private sector.
Certainly, highly qualified teachers could likely shop freely between the public and private sectors for the best offers.
If turnover costs were negligible, we could simply experiment, moving to a lower level of compensation, including pension benefits, and seeing if we could still get people to do the job.
But turnover is not cost free, and you might lose some of your best people in the process.
These issues are going to be with us for a long time.