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What Percent of California’s State Budget is Employee Compensation?

Editor’s Note: Given the sensitive nature of the conclusions herein, and based on informed criticism from many who commented and emailed in response to this post, a 2nd, more in-depth analysis was posted on this topic on Feb. 11th, entitled “What Percent of California’s State AND Local Budgets Are Employee Compensation.” In that more thorough analysis, state worker compensation as a percentage of state government revenues (not passed through to local governments and agencies) was actually found to be higher, 84%, than in this analysis, 67%.

An influential liberal blogger in Orange County, Chris Prevatt, made the following claim on January 25, 2011 in his post “Busting The Myths About Public Employee Pension Costs,” “For California’s budget, salaries represent 7.5 percent of the total state budget. The costs for healthcare and pension benefits are another 3.7 percent.” If only this were true.

Because Prevatt’s statistic is being repeated as if it were fact, such as by guest columnist Nick Berardino in the Orange County Register, who on February 4th, 2011 in a “Reader Rebuttal” accused that newspaper of having “continued its misleading and irresponsible assault on public employees,” it is important to take a closer look. Is Prevatt correct? Using core data, as well as some studies funded by union-friendly think-tanks (hopefully to avoid accusations of bias), here are some numbers:

As a baseline, the California Governor’s Budget Summary for fiscal 2011 shows projected revenues and expenditures balanced at $89.6 billion. Using straightforward multiplication, according to Prevatt, this means salaries, healthcare and pensions should cost (.075 + .037) x $89.6 = $10.4 billion. So how much does California’s state government actually spend on total employee compensation?

According to California’s own state government payroll records, in March of 2008 there were 393,989 full-time workers employed by the state of California, and their payroll for that month was $2,235,947,296 (ref. http://www2.census.gov/govs/apes/08stca.txt). This equates to an average of $5,675 per employee per month, or $68,102 per year. So by using data that is nearly three years old and assumes zero increases to compensation since then, in aggregate, just payment of salaries to workers employed directly by the state of California totals $26.8 billion per year.

In percentage terms, this figure would suggest that just wages for California’s state workers consume $26.8 / $89.6 = 30% per year. But there’s much more – benefits. If you read the definitions section of the U.S. Census Bureau Data, “gross payroll” is defined as “all salaries, wages, fees, commissions, and overtime paid to employees before withholding for taxes, insurance, etc. It also includes incentive payments that are paid at regular pay intervals. It excludes employer share of fringe benefits like retirement, Social Security, health and life insurance, lump sum payments, and so forth.” How much do benefits cost the state?

To short-circuit a war of battling studies, let’s use a supposedly authoritative study recently produced by the U.C. Berkeley Center on Wage and Employment Dynamics, Institute for Research on Labor and Employment, entitled “The Truth about Public Employees in California: They are Neither Overpaid nor Overcompensated” where they calculate an average overhead cost for California’s state and local workers at 36% of total compensation. That is, they claim 36% of total compensation is benefits overhead, and 64% is actual pay. 36% of total compensation equates to a 56% overhead rate, i.e., [ 1 / (1 – .36) ] = .56. The Berkeley researchers, who did a very comprehensive study, had no motivation to overstate the benefits overhead paid to public employees. It is likely the actual overhead is probably much higher than 56%, because it is unlikely the Berkeley researchers included an amount any higher than the current official rates for the necessary pension fund contribution, because the conventional wisdom still adheres to higher rates of investment fund returns than are probably out there over the next 20-30 years. But when you apply a 56% overhead rate – which is probably on the low side – to an average base salary of $68,102, you arrive at a total compensation estimate for the average state government worker in California of $106,239 per year.

What this means is the total direct employee costs for California’s state government is not $26.8 billion per year, based on salary alone, but 393,989 x $106,239 = $41.9 billion per year, which is 47% of the total state budget. And yes, there’s more:

If you take a look at the data from the U.S. Census bureau, referenced earlier, you can see the many job descriptions where salary expenditures are tabulated do not include K-12 education employees. This is because the state doesn’t pay these employees directly, but helps fund them through transfer payments to the local school districts. Returning to the California Governor’s Budget Summary for fiscal 2011, page 11, $36.2 billion is proposed for K-12 education expenditures. The skeptical reader is invited to study the details of this line item, but barring such analysis, it is a reasonable assumption that half of that money is going to be spent on compensation for K-12 education employees – another $18.1 billion.

When you add this all up, personnel costs for California’s state government are not somewhere barely above 10% of their total expenditures, as Prevatt asserts, but, doing the math, $41.9 (direct employees) + $18.1 (K-12 employees) = $59.96 / $89.6 = 67%. That is, using data taken directly from the state’s payroll records, combined with overhead calculations courtesy of an exhaustive study commissioned by an (arguably) sympathetic academic institute, along with very reasonable assumptions regarding transfer payments – not even considering transfer payments to localities for line items other than K-12 education – taxpayers are seeing at least 2/3rds of California’s state budget used to pay employee compensation.

Aside from overheated rhetoric and cherry-picked statistics, have those who still claim that public sector compensation isn’t a legitimate issue for civil discourse actually tried to run the numbers themselves? A final thought: When public entities are required to contribute into funds for retirement pensions and retirement health care at more realistic, lower rates of investment returns, the percentage of public sector budgets that are consumed by employee compensation will go up by 10-20% overnight. However comforting it may be for critics of these numbers to assert otherwise, it is hard reality, not wishful thinking, nor anti-public employee sentiment, that informs whatever bias may seep through this analysis.