This section describes the methodology used to compare the average amount of employment benefits provided to public sector and private sector employees in Michigan. Due to limitations in the availability of certain data, several assumptions were required.

With the exception of retirement benefits, benefit payments for Michigan’s state employees were assumed to be representative of statewide averages for all government employees. For a large chunk of the state’s government workforce, the CSC provides detailed pay and benefit information that this study relies upon, which includes paid leave payments, health insurance, legally required benefits[*] and other cash payments and services.[*]

The public school retirement system — MPSERS — was used as the benchmark for average costs for retirement benefits in Michigan’s public sector.[†] MPSERS’ costs roughly track with those of the Municipal Employees’ Retirement System of Michigan, another major government pension system, though at slightly lower rates. Although there are a number of different retirement plans that state and local government employees participate in (some of which are less and others more expensive than MPSERS), MPSERS and MERS cover the majority of these employees. MPSERS is the state’s largest retirement system, thus considered to be an adequate approximation for the whole, even if it does not reflect the experience of each government employee.

To get an average annual payment for benefits in the public sector, the estimates for insurance, legally required benefits, paid leave and other cash payments for state employees were divided by the total number of full-time equivalent state employees.[68] This was added to the estimate of MPSERS per-employee payments made in 2012.[69]

Costs for retiree health insurance were excluded from the calculation as these pay-as-you-go benefits are not included as part of an employee’s regular compensation package. Further, government employers can reduce these benefits at their discretion, and they are not a legally binding obligation of governments.

Private sector estimates on the costs of employment benefits come from the East North Central region used in the Bureau of Labor Statistics’ “Employer Costs for Employee Compensation” reports. This region is made up of Michigan, Ohio, Indiana, Illinois and Wisconsin. A Michigan-only report is unavailable. These databases provide statistics on paid leave, supplemental pay, insurance, retirement and legally required benefits.[‡]

The ECEC report provides the average private sector benefit costs on a per-hour basis. When annualizing was required, these figures were multiplied by 2,080, the typical number of work-hours in a full-time job (40 hours per week for 52 weeks).[§]

The annual difference between the public and private sector proxies was multiplied by the number of state and local government full-time employees in Michigan, as recorded by the U.S. Census Bureau.[70]

Based on these calculations, the total benefits in state and local governments in Michigan exceeded those averages in the private sector by $5.8 billion. In other words, government employers in Michigan could save a collective $5.8 billion annually if they offered employment benefits that mirrored those provided on average by Michigan’s private sector employers.

Graphic 4: Government Savings From
Benchmarking Benefits by Type, 2012

Employment Benefit

Difference

Insurance

$3,236,800,000

Retirement

$1,463,700,000

Paid Leave

$1,136,100,000

Supplemental Pay

-$84,000,000

Total

$5,752,600,000

The largest different between public and private sector employment benefits is in insurance benefits. If provided at average private sector rates, insurance benefits for state and local government employees would cost taxpayers $3.24 billion less (see Graphic 4). Given public sector employers’ tendency to use less part-time labor,[71] purchase fewer consumer-driven health plans[¶] and provide insurance coverage to a larger share of their employees,[72] gaps between public and private sector insurance coverage ought not be surprising.

Since research suggests that the type of insurance coverage offered to employees has little to do with the health outcomes of recipients, insurance coverage offered employees is primarily a decision concerning cost management.[73] While there have been some reductions in public sector health insurance costs in Michigan, these costs still significantly exceed private sector averages. With no clear productivity gains from these increased expenses, government managers, policymakers and taxpayers should question the value of these added costs of government services.

The next largest difference is in retirement benefits. Taxpayers could save $1.46 billion if state and local government employers provided retirement benefits that were similar to private sector averages. The greater incidence of defined-benefit plans with extraordinary unfunded liabilities and the use of retiree health insurance coverage carry these benefits well above the benefits in the private sector.

Paid leave also leaves a substantial mark in the difference with a $1.14 billion difference between the public and private sector averages. As mentioned earlier (see “Paid Leave”), this does not include the unique time off offered to school employees. However, the cost of providing sick, holiday and vacation time does add to the difference.[**]

State and local government employees receive smaller supplemental pay benefits, however. If they were offered benefits at private sector averages, governments would need to spend
$84 million more on compensation such as overtime pay and bonuses. It is often remarked that private sector employees receive bonuses unavailable to public sector employees, and this finding supports that theory.


[*]  These include federally required payments for Social Security, Medicare and unemployment insurance. It does not include benefits required by state statutes for government employee retirement systems, such as retirement benefits for school employees.

[†]  Using the state employee retirement system — MSERS — to estimate these average costs was also considered. MPSERS was chosen, however, because of the special status of the retirement benefits offered to state employees: the large expense and the attempt to prefund OPEB. The normal costs of retirement services were not used as the approximation for total costs because these amounts have been insufficient to ensure that the state’s pension funds have enough assets to cover the benefits earned. It is possible to recalculate these costs under more conservative assumptions. However, this would be an estimate that would not guide current policy. Under current policy, the state will be paying off unfunded liabilities for the next 24 years, essentially a long-term cost.

[‡]  The ECEC data on retirement costs does not include retiree health care costs. For definitions and methodology of the private sector estimates, see www.bls.gov/ncs. Note that the calculation for public sector employment benefits also does not include retiree health care costs.

[§]  According to the U.S. Census Bureau’s Current Population Survey, the average work week for all workers in 2012 was 38.5 hours. The private sector uses a greater proportion of part-time workers: 19 percent of private sector jobs require less than 35 hours of work per week, compared to 14 percent for state and local government employees. "Table 19: Persons at work in agriculture and nonagricultural industries by hours of work," (U.S. Bureau of Labor Statistics, 2013), http://goo.gl/Bhv9vy (accessed Oct. 8, 2013); Senior Policy Analyst at The Heritage Foundation James Sherk, email correspondence with James Hohman using data from the Current Population Survey, April 24, 2013.

[¶]  Consumer-driven health plans give consumers a greater role in making decisions about the medical services they receive, thereby creating incentives to be more frugal health care shoppers. While the term can refer to various arrangements, it is most often applied to high-deductible insurance policies that may include contributions to a tax-deferred health savings account that can be used to cover the cost of services below the deductible. These plans tend to offer coverage at lower premiums. "Employer Health Benefits: 2013 Annual Survey," (The Henry J. Kaiser Family Foundation, Health Research & Educational Trust, 2013), Exhibit 5.3, http://goo.gl/5466lu (accessed Sept. 12, 2013).

[**]  The cost of paid leave is based on average wages. Providing paid leave to higher-paid employees is more expensive than providing the same benefit to lower-paid ones. If state and local government employees in Michigan have higher average wages than those reported in the private sector, the cost for the same amount of paid leave would necessarily cost government employers more. In other words, even if the number of paid leave days used by private and public sector employees in Michigan is similar, the total costs of this benefit could still be higher in the public sector.