State and Local Pay vs. Private Pay

Do state and local workers get paid more or less than their private sector counterparts?

That old question has taken on renewed life with the budget and labor disputes raging in Wisconsin and other states. Unfortunately, it’s not an easy question to answer.

As Ford Fessenden notes in a nice set of graphics at the New York Times,one reason is that observers disagree on what “paid” and “counterpart” mean.

If you simply compare average pay and benefits, for example, state and local workers come out well ahead:

But the two workforces differ. State and local workers are more educated, on average, than private ones. About 50% of state and local workers have a college degree, for example, while only 29% of private workers do. Controlling for that reduces the compensation differential.

But then you need to consider other factors as well, such as the generally longer hours and lower job security in the private sector.

Fessenden doesn’t reach a firm conclusion. Some data suggest that public employees are indeed paid more. But some narrower (and therefore more precise or less representative) comparisons show parity (hospital workers) or higher private pay (higher education).

Well worth flipping through the charts if you are interested in this issue.

Borrowing from One Pocket to Lend to the Other

Public pensions funds are the key budget challenge facing many state and local governments. Why? Because it’s been easy for officials to promise future pension benefits without setting aside enough money to pay for them (the same problem afflicts corporate pension plans and Social Security).

The New York Times has a front-page story describing New York’s latest plan to put off pension funding:

Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund.

And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund — from the same pension fund.

Perhaps not surprisingly, some leaders are hesitant to refer to this as borrowing:

Those pushing the plan are taking pains to avoid describing it as “borrowing,” saying they are seeking to amortize or “smooth” pension contributions. That is in part because they have distanced themselves from a plan proposed by Lt. Gov. Richard Ravitch that would have the state borrow as much as $6 billion for general operating expenses over the next three years in exchange for budget reforms.

“We’re not borrowing,” said Robert Megna, the state budget director and one of the governor’s top advisers.

Mr. DiNapoli, the comptroller, said: “We would view it more as an extended-payment plan.”

Asked about the pension plan, Mr. Ravitch said, “Call it what you will, it’s taking money from future budgets to help solve this year’s budget.”

Mr. Megna, when reminded that the plan envisioned delaying an obligation today and eventually paying it back with interest, softened his view in the process of a lengthy interview.

“I’m not going to sit here and characterize it as not a borrowing,” he said. “But it is an annual, relatively small borrowing we’re doing this year that were doing to get a modest savings.”

Of course, those “savings” are only of the temporary, political variety. The plan does nothing to add actual savings to New York’s underfunded pension plan.

Will Illinois Go Bankrupt Because of Scott Brown?

A sharp reader offers the following hypothesis (which I have edited):

Illinois is fundamentally bankrupt. It has less than $1 million in cash, pays vendors net 90, and owes its state university $450 million that it cannot pay. Oh, and it also has $60 billion in unfunded pension liabilities.

Now that the Republicans have 41 votes in the Senate, Illinois can’t count on any federal aid. The President’s home state will thus become insolvent.

(For some background on Illinois’s budget woes, see this link.)

My reader expresses similar concerns about California (where Governor Schwarzenegger’s budget assumes $6.9 billion in federal aid) and New York.

All of which raises a question for policymakers and municipal bond investors. Does the election of Scott Brown mean that the Senate will be unwilling to give federal aid to the states? The $862 billion stimulus bill last year (formerly known as the $787 billion stimulus bill) included substantial state aid, and it squeaked through the Senate with exactly 60 votes. Now the Democrats (and the Independents who caucus with them) account for only 59 votes.

Does that bode ill for struggling states and the investors who own their debt? Only time will tell. But I wouldn’t count the states out just yet.

The stimulus bill could have had 62 votes, but Senator Kennedy didn’t vote and Senator Franken hadn’t yet been seated. If the Senate majority can coordinate the same coalition–including Republican Senators Snowe and Collins of Maine–they will have one vote to spare for any new jobs bill (formerly known as a stimulus bill). In addition, with his paean to tax cuts in the State of the Union, the President was signaling that he wants to find enough common ground with congressional Republicans to get a jobs bill passed.

In the short run, then, I wouldn’t be surprised if substantial state aid finds its way into the jobs bill. That may buy Illinois and other struggling states some time.

In the long run, however, the reader is probably right that fiscally-strapped states will find the Senate less welcoming.

Legalistic answer to the title question: No. States can’t seek protection in bankruptcy court, so Illinois can’t technically go bankrupt.