NCPA - National Center for Policy Analysis

Reforming Public Employee Compensation

March 10, 2011

State and local governments all across the country are under financial strain, and lawmakers of both parties are looking to cut spending and balance budgets while maintaining vital services.  To make ends meet, cuts must be made where the money is -- and since state and local governments spend nearly half their budgets on employee salaries and benefits, public-employee compensation costs will be front and center in budget discussions all over the country, says Josh Barro, the Walter B. Wriston Fellow at the Manhattan Institute.

  • Benefits paid or owed to public-employee unions are not the sole source of fiscal trouble in the states.
  • But employee compensation accounts for nearly half of state and local spending, making reforms to compensation a necessary part of the solution.
  • We have seen this over the last two years, with state and local elected officials from both political parties showing a new willingness to seek cost control in employee compensation.
  • Their hands are being forced by budget realities.

Not recommended here is one strategy that has been frequently proposed in state capitols and city halls: layoffs.  This is not to say that layoffs are always inappropriate; they may be the best choice for some governments, especially those with an unusually large workforce relative to population.  But layoffs are usually the most disruptive way to reduce employee compensation costs, as they reduce the quality of public services and de-stimulate the economy, says Barro.

Source: Josh Barro, "Options for State and Local Governments to Manage Employee Costs," Manhattan Institute, March 2011.

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