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Legislature must tackle state employee benefit costs

May 17, 2016

Politicians and pundits frequently and rightfully say government should operate more like a business, treating taxpayers like shareholders to ensure every dollar is spent as effectively and efficiently as possible.

An excellent case study on managing taxpayer dollars can be found right here in Delaware, where the state could save anywhere from $260 million to $720 million if state government operated like its private business counterparts.

This is according to a study by the Delaware Public Policy Institute that found the total average compensation of state employees is substantially higher than Delaware private-sector workers with similar education and experience. These excess costs are driven entirely by the generous health, pension and retiree health benefits packages that taxpayers provide state workers.

The study found that Delaware state government employees earn salaries that are 12.4 percent lower than similarly qualified private-sector employees. However, state government employees receive a benefits package that is anywhere from 53 to 102 percent more generous than those provided to private-sector workers.

The total package for the average Delaware state government employee is between $88,530 and $97,197 a year - compared to $78,814 for a private-sector employee. That’s a difference of between 8.5 percent and 23.3 percent.

How does Delaware compare to other states? The study found that Delaware’s compensation premium - the amount of total pay above private sector levels - was slightly lower than the national average and lower than neighboring states of New Jersey and Pennsylvania (which are facing severe pension difficulties), while higher than Maryland. However, the study found that Delaware’s compensation premium was the highest among all states with AAA credit ratings - as states with better credit ratings paid smaller salaries and benefits premiums to public employees.

The DPPI study puts projectable savings numbers on an issue that many already recognize. Two earlier studies - the Delaware Expenditure Review Committee established by Gov. Markell and the Delaware Business Roundtable’s Study of State Finances - found personnel costs are a major cost driver of the state budget.

Markell is to be commended for his leadership in working to rein in the taxpayer burden on paying for state employee benefits. He has proposed raising premiums of existing state employees and providing health savings accounts for new employees. This is a step that private-sector employers long ago adopted to cut costs, but one that the state has yet to take.

There are significant costs associated with the existing approach. The state pays 87 to 96 percent of health insurance premiums for roughly 122,000 individuals covered by the state plan, according to the report: “Put in terms of the ratings used in the Affordable Care Act Marketplaces - bronze, silver, gold and platinum - the average GHIP plan would qualify as ‘platinum’ coverage.”

This is significantly more generous than the typical private-sector plan. In fact, the DPPI report states that private employers in the South Atlantic region generally paid about 78 percent of costs for single-employee health coverage and 64 percent of costs for family health coverage.

All told, the cost of providing health coverage to state employees is projected to reach $1 billion by 2020. Couple those costs with the fact that government contributions for the Delaware State Employees’ Pension Plan have risen six-fold since 2001 and you have a recipe for economic disaster. These numbers and growth rates are simply unsustainable for a state the size of Delaware.

The DPPI report concludes, “There is no compelling reason why public-sector employees should receive a total compensation premium over similarly qualified private-sector workers. Government jobs offer certain unique benefits, such as strong job security, that should allow them to pay lower wages and benefits than private sector positions. The fact that Delaware offers state employees higher compensation than similar workers receive in private-sector jobs points toward potential savings to the state budget by rationalizing employee compensation policies.”

The savings are real - and they are substantial. Policymakers simply must take politically brave but fiscally sound steps that will ensure overly generous benefits do not sink the state financially.

David Lyons is president and CEO of Lyons Companies and vice chairman of the Delaware Business Roundtable.

 

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