What Percent of California’s State AND Local Budgets are Employee Compensation?

Earlier this week UnionWatch posted an analysis that estimated about two-thirds of California’s state budget covers state employee compensation expenses. This was in response to a widely quoted estimate that the number was only about 12%. Due to the huge disparity in these claims, and the implications having the correct number may have on the debate over public employee compensation, we decided to dig a little deeper.

For expert information, we talked with two individuals at the California Office of Legislative Analyst, Jason Sisney, the Director of State Finance, and Nick Schroeder, Public Employment and Fiscal Oversight. Both of them confirmed that state government employees compensation consumes about 12% of the state general fund budget. But the devil is in the details.

Probably the best source for information on state expenditures in California is available at “California Budget Information,” produced by the state Dept. of Finance. Using this data, and corroborating this data with other sources, this post will produce another, more in-depth estimate of what percentage of the state budget is consumed by personnel expense, as well as what percentage of state and local budgets combined are consumed by personnel expenses. Both Sisney and Schroeder, who ought to know, stated that arriving at a meaningful figure is “nearly impossible,” but they agreed with the rough percentages that will be arrived at in this analysis.

Beginning with how much state employees make in average salary; sources of information include the following:

State Finance Department: Personnel Years and Salary Cost Estimates, 2009-2010, which shows 345,777 full-time state employees in that year, collectively paid $23,104,763,000 in that year, which averages $66,820 each. This does not include benefits.

U.S. Census Bureau: California State Government Employment Data, March 2008, which shows 338,725 full-time employees who were collectively paid in that month $2,002,723,495, which averages $70,950 per year each, not including benefits. This page includes important additional information, the “full-time equivalent” number of part-time employees, 48,212, collectively making an additional $2,798,685,61, which averages $58,050 each. Using this data, the composite average of full-time plus full-time equivalent employees working directly for the state of California is $68,102 per year for 393,989 employees, which costs $26.8 billion per year. What about benefits?

To reprise the data presented in our last post, the overhead rate we used came from a 2010 study entitled “The Truth about Public Employees in California: They are Neither Overpaid nor Overcompensated,” from the Institute for Research on Labor and Employment at the University of California, Berkeley. In this study, the authors found “Public employers underwrite 35.7% of employee compensation in benefits.” If 35.7% of compensation is in the form of benefits, this means 64.3% of compensation is in the form of wages. To develop an overhead rate, you would determine what percentage 35.7 is of 64.3, i.e., the value of state employee benefits is equal to 55.5% of their compensation. This means total state worker compensation is $26.8 billion plus 55.5% of that number ($14.9 billion), which equals $41.7 billion.

What percentage of the total state budget does this represent? Here the numbers become even more subjective, because the state budget includes vast categories of “pass throughs” which are monies not used by the state, but passed on to local governments and agencies. A breakdown of the major categories of state revenues can be found at the Dept. of Finance’s “Chart B, Historical Data, Budget Expenditures,” where for the 2009-2010 year they report total revenue of $206.1 billion, breaking down into $87.2 billion into the General Fund, $23.5 billion into “Special Funds,” $6.3 in Bond Funds, and 89.1 of Federal Funds.

When speaking with Jason Sisney at the California Dept. of Finance, he claimed that virtually 100% of the Bond Funds and Federal Funds were pass-throughs to local governments and agencies, and that about 70% of the General Fund are passed through to local governments and agencies. This leaves between 30% of the General Fund and 100% of the Special Funds to pay for state employees, i.e., $49.7 billion. Using these numbers, state employee compensation consumes 84% of the state revenues that are retained by the state and not passed through to local governments.

To remain fair, the amount that employee overhead truly costs the state is debatable. One may argue it is overstated here, since it is applied to full-time equivalent figures for part-time employees. But typically part-time state employees accrue benefits at the rate they work; if they work 50% of the time, for example, their pension benefits accrue at half the rate they might accrue if they were working full time. One may also argue the Berkeley study was estimating an overhead rate of 37.5%, not that benefits consume 37.5% of compensation – which is what they said. But even if that is the case, realistic reductions to the estimated long-term returns on pension funds will pump that overhead rate right back up from 37.5% to 55.5%.

While this analysis attempts to estimate the percent of state spending consumed by employee compensation, the discussion would not be complete without at least considering what costs the state imposes on taxpayers by virtue of better-than-market benefits that are so-called soft costs. For example, if the state did away with the “9/80” program, a benefit that is, after all, unheard of by the ordinary private sector worker, how many fewer bureaucrats (40% of the state workforce) could they hire? The 9/80 program essentially provides state bureaucrats with an extra 26 days off per year, which means if all of them got this benefit and it were eliminated, the state could eliminate 10% of their bureaucrats, or 4% of the entire state workforce. This is just one example of hidden costs of staggering magnitude.

Since such a high percentage of state revenues are passed directly through to the local governments and agencies in California, what percentage of their spending is to compensate local government employees? This is a very difficult question to answer, since there are over 400 incorporated cities, 58 counties, and countless administrative districts for, for example, K-12 schools and public utilities. But let’s try:

The average local government worker, using the Census Bureau as the source; Public Employment Data 2008, Local Governments, indicates 1,451,619 (full time equivalent) local government workers made on average $64,285 per year, which totals $93.3 billion. Add 55.5% benefits overhead to that amount and you have a total of $145.1 billion in local government employee compensation per year in California. How much did local governments spend?

For this data it is again necessary to rely on census data, referencing compilations put together by analyst Chris Cantrill on the website USGovernmentSpending.com. His chart (click the tab “Local”), Local Government Spending California, 2009 estimate, shows local government spending totaling $270 billion. This suggests that spending for employees in local governments in California, on average, consumes about 54% of the total local government budgets.

With respect to local government, however, a collective figure can be quite misleading. At the county level where social services agencies issue direct payments to needy citizens, or in the case of public utilities and construction projects where there is substantial allocations for capital investments, the percentage of funds allocated to employee compensation may be relatively minute. In smaller incorporated cities, on the other hand, the percentage of funds used for employee compensation may be 90% or more.

Readers are invited to review these calculations and the underlying assumptions. But given California’s state and local governments combined spend nearly $200 billion per year to compensate state and local workers, a discussion of whether or not their compensation might be reduced to market rates is not only relevant from the standpoint of fairness, but may also be a meaningful option towards reducing budget deficits.