State Employees' Average Cost Up to $117,000

Legacy costs mean fewer people doing more

The average state employee now costs taxpayers $117,000 per year, according to data from the state Department of Civil Service. This includes both salaries and benefits.

The total cost of benefits has exploded, even though there are fewer state employees. Annual retirement costs increased from $431.8 million in 2001 to $1.6 billion in 2015. Three factors are driving the increase in employee compensation: a jump in the pension system’s unfunded liabilities, an attempt to pre-fund retiree health care benefits and an increase in the cost of medical insurance.

Between 2001 and 2015, the gap between how much has been set aside to pay for defined-benefit state employee pensions and the estimate of how much they will eventually cost increased from $754.5 million to $6.2 billion. The annual cost of amortizing that gap over time has increased proportionately.

This has happened despite the fact that state employees hired after March 30, 1997, are not members of this retirement system. They are instead offered retirement benefits that cost up to 7 percent of payroll.

Today’s unfunded liabilities would be even higher if not for that change 19 years ago. The reason they have risen despite that reform is insufficient funding based on overly optimistic assumptions about how much the pension fund's investments would yield. The state paid less into the system than appropriate because policymakers assumed the market would deliver better growth than it did. The state also put in less than the annual amounts to fund the system that actuaries recommended over the period.

The state has also promised employees post-retirement health insurance benefits, the cost of which has been covered on a “pay as you go” basis. Unlike pensions, these are not protected by the state Constitution, but the Snyder administration is attempting to pre-fund them. This effort increased total payments to the retirement system, which are reflected in the average costs of compensation. Pre-funding these health benefits may also defray future costs, however.

On top of those legacy costs, the cost of providing medical and other insurance benefits for state employees increased from $463.0 million in 2001 ($7,460 per employee) to $607.8 million in 2015 ($13,046 per employee). New laws increased the employee share of insurance premiums, and managers have negotiated less generous coverage over time, but the cost to taxpayers still went up.

The typical state employee probably doesn’t feel much better off, however, because salary increases were much smaller than increases in pension funding and health insurance. Average salaries increased from $46,676 in 2001 to $63,228, which is just slightly above inflation.

The rise in employment costs has occurred even though the number of administrators, corrections officers, conservation officers and others on the state payroll has fallen drastically over the past 15 years.

The state hasn’t cut back on its functions much, but the number of people performing those functions fell from 62,057 full-time equivalent workers in 2001 to 46,588 FTEs in 2015. Despite the smaller workforce, their annual cost has increased from $3.9 billion to $5.4 billion.

The growing average costs of employment have spread the government workforce thin while also requiring more cash. As a former House Appropriations Chair Chuck Moss once quipped, “At this rate, eventually the entire budget will go to employ just one person.”

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.