Executive Summary

Since 2000, the cost of state and local government employment benefits in Michigan has outpaced those typically found in the private sector. The more government spends on these benefits, the less it can spend providing services to Michigan residents. Benchmarking these costs to more closely resemble private sector averages would do much to free up cash to support government services, while simultaneously allowing taxpayers to keep more of their own resources.

This analysis of government statistics finds that if the cost of the average benefits package for Michigan government employees was the same as the average in Michigan’s private sector, the state and its subsidiary governments would save $5.8 billion annually.

Most full-time employees receive benefits packages that include paid leave, retirement savings plans, insurance coverage and other cash benefits like bonuses and extra pay for holiday work. These are in addition to benefits that state and federal statutes require employers to pay for, such as Social Security and unemployment insurance.

The largest gap in cost between state and local government employers in Michigan and those in the private sector were for insurance benefits. If Michigan governments averaged spending what the private sector does on health insurance benefits, the state would save $3.24 billion annually. Private sector employers tend to provide insurance coverage that requires less costly premiums and also tends to require employees to contribute more toward the cost of these insurance benefits compared to government employers.

Retirement benefits make up the next largest contributor to the large difference in public and private sector employment benefits in Michigan. The consistent underfunding of defined-benefit pension plans among state and local governments caused the costs of these benefits in the public sector to soar. Transitioning to more cost-effective defined-contribution plans and benchmarking costs to private sector averages could potentially save $1.46 billion annually when fully implemented.

Differences in the cost of providing employees with paid leave for vacation time, sick leave and other time off from work also contributes to the overall gap in benefits between Michigan’s public and private sectors. Government employers in Michigan spend about $1.14 billion more providing paid leave to employees than private sector employers do in Michigan on average.

This analysis also found that Michigan’s state and local government employees receive less in “nonproduction bonuses,” such as Christmas bonuses and company stock, than their counterparts in the private sector on average. Benchmarking these benefits would cost state and local governments $84 million annually.

While the level of benefits provided to public sector employees is most often determined at the discretion of local government officials — such as school boards and city councils — there are several different options legislators should consider in order to bring public sector benefits more in line with private sector averages in Michigan.

For example, legislators should continue to financially incentivize local government entities to reduce the costs of their employees’ benefits and more closely aligning them to private sector averages. The state has offered additional revenue-sharing money to local municipalities and additional state aid to school districts that meet some benefits requirements in the past, and it should continue and expand this practice.

The state could also simply mandate limits to the benefits that local governments are able to offer. Current law already does this to a limited extent by capping the amount some government employers can pay for health insurance premiums. Likewise, retirement benefits provided to state, school and other government employees are mandated by state statute, and thus can be changed by new state statutes.

Other options for legislators include introducing a constitutional amendment to be put to voters which would mandate that state and local government employees not receive benefits that exceed certain private sector averages.

The savings from putting public sector benefits in balance with private sector averages in Michigan could result in significant positive outcomes for Michigan taxpayers and residents. The less government revenue is tied up in paying for expensive employee benefits, the more is available to provide residents with the government services that they use. Alternatively, the savings from these changes could also more directly benefit taxpayers if paired with reductions in tax rates that allow taxpayers to keep more of their earnings.