Michigan Taxpayers Could Save $5.8 Billion Annually if Public Sector Benefits were Benchmarked to Private Sector Averages

Money could be directed toward road repairs, tax cuts

For Immediate Release
Thursday, Oct. 17, 2013
Ted O'Neil
Media Relations Manager

MIDLAND — Benchmarking public sector benefits at all levels of government in Michigan to private sector averages would save taxpayers $5.8 billion a year, according to a new study released today by the Mackinac Center for Public Policy.

“The more government spends on these benefits, the less it can spend providing services to Michigan residents,” said James Hohman, assistant director of fiscal policy and author of the study. “The people of Michigan have a government that is supposed to serve them, not the other way around. This is money that could be put toward lowering taxes for families and business owners, or used for road repairs instead of increasing gas or vehicle registration taxes.”

The largest gap between the public and private sectors of the $5.8 billion is for insurance benefits, at $3.24 billion. Private sector employers generally provide coverage with less costly premiums and also require employees to contribute more toward the cost of their policies. Retirement benefits are the next largest contributor to the difference, accounting for $1.46 billion annually, Hohman said.

“That could be eliminated if government employees were transitioned to more cost-effective defined-contribution plans, such as 401(k) plans commonly found in the private sector,” he noted. “A good chunk of the difference is because the defined-benefit retirements many public sector employees enjoy have been historically underfunded.”

Another $1.14 billion can be accounted for in the higher costs government employers incur to provide employees with paid leave as compared to private sector averages. Hohman did find, however, that private sector employees outpace their public sector counterparts by $84 million when it comes to “nonproduction bonuses,” such as payments in the form of holiday bonuses or stock options.

Hohman notes that while the level of benefits provided to public sector employees is usually left to the discretion of local government officials — such as school boards and city councils — there are several options for legislators to consider.

“Lawmakers could continue to provide financial incentives to local governments to reduce the costs of their employees’ benefits and more closely align them with public sector averages,” he said. “The state has offered additional revenue-sharing money to local municipalities and additional state aid to school districts that meet certain requirements, such as requiring employees to pay a greater share of their own insurance premiums.

“The state has already mandated some benchmarking for local governments by passing the Publicly Funded Health Insurance Contribution Act of 2011,” Hohman added. “Similar statutory measures restricting the costs of benefits can be added in other areas.”

A constitutional amendment could also be put before voters that would mandate state and local government employees not receive benefits that exceed certain private sector averages.

“These savings could result in significant, positive outcomes for Michigan,” Hohman noted. “And achieving them would not require eliminating a single public sector job.”

The full study can be found here.

The Mackinac Center for Public Policy is a research and educational institute headquartered in Midland, Mich. The largest state-based free-market think tank in the country celebrates its 25th anniversary this year.


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