Response to Colorado State Auditor Report on State Employee Compensation

August 22, 1997

Members of the Legislative Audit Committee
Colorado State Legislature
State Capitol
Denver, CO 80203

Re: America's Protected Class and Colorado State Government Employment

Dear Members of the Legislative Audit Committee:

I have just received a copy of State Auditor's report (produced by Fox Lawson & Associates) on America's Protected Class, of which I am principal author (published by the American Legislative Exchange Council).

In short, we believe that the report is unfair in that it appears to:

  • Misrepresent our conclusion

  • Misconstrue our purpose

  • Focus on peripheral issues

  • Ignore the fundamental issue that employee turnover is the best indicator of whether a government is paying its employees at, above or below market compensation.
Had we been provided with a copy of the Fox Lawson & Associates report in a timely manner, we would have provided a response much earlier (we could have been available for discussion when the State Auditor's report was presented to you).

We have attached comments and our cover letter to the State Auditor.

We would be happy to provide additional information.


Wendell Cox,

cc: Mr. J. David Barbra, CPA, State Auditor

August 22, 1997

Mr. J. David Barbra, CPA
State Auditor
Office of the State Auditor
Legislative Services Building
Denver, CO 80203

Re: America's Protected Class and Colorado State Government Employment

Dear Mr. Barbra:

I have just received a copy of your July 3, 1997 submittal to the Legislative Audit Committee in response to my request of earlier this week with regard to America's Protected Class (of which I am the principal author; published by the American Legislative Exchange Council).

I would have thought, given the significant amount of time that I spent with your staff providing information for your review that I would have been accorded the courtesy of a copy upon release, to facilitate a timely response.

We believe that the report is unfair, as is indicated on the attached comments.


Wendell Cox,

cc: Members of the Legislative Audit Committee

Comments on the

Fox Lawson & Associates

Review of the ALEC Report America's Protected Class

By Wendell Cox, Principal Author

America's Protected Class

August 22, 1997

Our Conclusion Misrepresented

The Fox, Lawson & Associates (FLA) report appears to misrepresent our position on comparison of public and private compensation, noting:

In ALEC's conclusion, it stated that a complete analysis of the appropriate wages for state employees should be done on a position by position basis.

Our position is considerably different:

position by position public employee compensation should be comparable to that of similar positions in the private sector, adjusted to account for the inherent advantages (and disadvantages) of public employment. This will be most reliably obtained by setting public employee compensation at rates that result in replication of private sector turnover rates for comparable positions(1). (Emphasis added)

A crucial element in determining position by position comparisons is the adjustment to account for the inherent advantages (and disadvantages) of public employment. As indicated above, we believe that most reliable market test of public employment is employee turnover --- not the incomplete standard of wages. Advantages of public employment usually include superior employer paid benefits, more paid time off, superior employer security, and superior employee security.

Also, please note our position that the optimal method for ensuring fairness in compensation of employees performing government functions is to use the competitive market directly, through competitive contracting or vouchers (a point not mentioned by FLA). The fact that a myriad of government functions around the nation (and world) have been converted to market based alternatives, with substantial savings, demonstrates the tendency of government to pay more than market rates for labor (since virtually all other government purchases are through competitive mechanisms, such as competitive bidding, vouchers or the commercial market).

Our points on employee turnover, made in both the series of papers and in discussions with State Auditor employees, were simply ignored by FLA

Further, we and others have criticized the type of wage and salary studies used by the state of Colorado to establish employee compensation. These criticisms, outlined in greater detail in America's Protected Class: The Excess Value of Public Employment, are generally that salary surveys tend to be subjective, incomplete, subject to great variation, and are subject to political and administrative manipulation (whether indirectly or directly).

Our Purpose Misconstrued

The Fox and Associates report goes to considerable lengths to suggest that we inappropriately compared public and private compensation, and that such comparisons require a whole host of adjustments to be valid. This is absurd. Economists and other analysts routinely make inter-industry and inter-occupational comparisons:

    For example, it is valid to note that the average teacher is paid X and that the average fast food worker is paid Y --- and that there is a difference of Z between the two. To do so is not to suggest that fast food workers should be paid teacher's salaries, or vice versa.

Our purpose in comparing public and private compensation was simply:

To provide policy makers with information on government employee compensation in relation to the compensation of the people who pay their salaries --- employees not on government payrolls, and;

To document the trend in comparative compensation between government and private employees (which happens to be in the favor of public employees).

As FLA has noted, there are statistical differences between the two databases that we used (the only such databases available). However, our analysis used a common national aggregate database to "align" the data, and the required alignment required was minimal.

FLA notes that a an uneven balance in the distribution of salaries on "the high end or low end" could skew the comparison. With multi-million dollar executives in the private sector, and the nation's top government office holder paid only $200,000 annually, it would seem likely that any such distortion would work to reduce the compensation gap between government and private employees. In other words, it is probable that our analysis would have yielded a greater government employee compensation advantage if adjustment had been made for the distribution of salaries.

Had we suggested paying public employees the average rate of private employees then the FLA criticisms could have been appropriate. But we did not do that.

A Note on Unionization and Compensation

FLA cites the oft repeated maxim that unionization raises wages. It does not, as analysis of unionized and non-unionized companies in competitive markets shows. If unionization raised wages by any material amount, unionized companies would not be able to compete against non-unionized companies. But they do. The lack of competition, not unionization, raises wages, and at the expense of taxpayers and consumers (not at the expense of owners or managers).

Often jobs that are performed by unionized or non-unionized public employees can be performed in the private sector by smaller companies, with unionized or non-unionized staffs at considerably less cost. Some public officials shun consideration of competitive alternatives, but to do so violates public purposes by unnecessarily increasing the cost of public services

Government is able to guarantee above market compensation only to the few, not to the many. The overwhelming majority of employees have their compensation established by the market. For the relatively small percentage of employees who work for government to receive higher than market compensation violates the trust that government owes to the people. A good dictum would be the following:

What government does for one it should do for all;
What government does not do for all it should do for none.

To do otherwise is inconsistent with the principle of equal protection under the law.

Estimating the Market Advantage of Government Employment

In America's Protected Class: The Excess Value of Public Employment, we developed a model for estimating the compensation per work hour of public and private employees. At the national level, the model suggests that the average state employee is compensated 38 percent more than the average comparable private employee over a 40 year career. This model included not only wages, salaries, benefits and paid time off, but also estimated the value of both employer and employee security that state employees enjoy.

This analysis did not include state by state calculations. However, there is reason to believe that the state employee compensation advantage may be even greater in Colorado. In 1991, Colorado state government employees were compensated, on average, 36.9 percent more than private employees in Colorado --- a gap that ranked 10th nationally among the states, and more than half again above the median state employee compensation advantage of 21.4 percent (see America's Protected Class III)(2)

Until the administration of public employee compensation routinely employs complete and intellectually honest valuations of all comparative elements of government versus private sector compensation, private employees will continue to pay unnecessarily higher taxes to pay above market compensation to government employees.


The responses by the Colorado Legislative Council Staff and the State Auditor to America's Protected Class have mirrored responses by public employee unions by extended exposition on minor data issues, and implying we took positions that we did not. Never, however, has any response grappled with the fundamental issues we raise --- that the advantages to government employment make its value greater than that of similar private employment; and that the difference is reflected in the higher than market turnover rates typical of government employment.

Finally, the America's Protected Class series was not intended to provide the final set of data for use in properly aligning government employee compensation. The financial resources were simply not sufficient for such a task. Our hope was that the fundamental issues raised would generate objective and comprehensive analysis of the issues at the only levels such analysis can be performed --- state and local governments. That process is yet to begin in Colorado.


1. America's Protected Class II.

2. To anticipate an overly critical response to this point, it should be noted that we are not suggesting that this data allows the calculation of the state employee advantage over that of similar employees in the private sector. We are only suggesting that there is an indication that the state employee compensation advantage in Colorado may be more than the 38 percent national average state employee compensation advantage. The actual gap cannot be known without a comprehensive analysis, which has not yet been performed.

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