Executive Summary

New York's civil service system was established a century ago to make a clean break with the abuses of the "spoils system." The civil service system was based upon competition and the removal of political influence from government employment. Its purpose was to ensure the people of New York the highest return in public services for the necessary costs of government. But in the intervening years, the civil service system has become overly cumbersome, and costly, and government employment has again become the object of considerable political

Despite rapidly rising revenues, New York governments have faced regular budget crises. These crises are attributable to the fact that governments in New York spend more than necessary.--- they waste the public's money. By its very nature, government waste represents a breaking of faith with democratic values. Government is to be the servant of the people, and it is both inappropriate and illegitimate for democratic government to spend more than necessary to produce public services.

Any review of government waste must begin with an analysis of government employee compensations because it represents the largest element of government expenditure. While non-government employee compensation is determined by the market, government employee compensation is determined by administrative mechanisms. It is the intention of public policy to pay government employees the same as non-government employees doing the same or similar work (they should be paid the market rate).

An analysis compares the career compensation of an average state government employee to that of a non-government employee who began working at the same time and the same wage rate, doing the same or similar work. Over a career the state government employee's total compensation (wages and employer paid benefits) would amount to $2,178,000 (1993 dollars).

However, it is estimated that a the average state government employee receives advantages valued at $911,000 more than a comparable non-government employee working the same number of hours. As a result, the career compensation of state government employees is estimated at 71.9 percent above market. To equalize government and non-government employee compensation would require application of a downward market rate adjustment of 41.8 percent to the compensation of the state government employee. New York local government employees are estimated to have an advantage of at least 57 percent over their comparable non-government counterparts. Further, the size of New York state and local government staffs is excessively large --- estimated at 61 percent higher than that of Pennsylvania.

The excess cost of government employment is estimated at $27.8 billion, including $7.1 billion at the state government level and $20.7 billion at the local government level. But, like all other attempts to estimate market prices, this analysis is speculative --- the market price can not be known until there is competition. Suffice it to say that New Yorkers pay billions and billions of dollars annually to support higher than necessary expenditures on government employee compensation.

The problem is that competitive incentives do not operate in government. It is exacerbated by political influence in government employment. The operation of these factors promise to visit recurring budget crises on New York. The demand for higher levels of taxation will continue to grow..There is no hope for material improvement until these deficiencies are rectified.

Bureaucratic incentives and political influence preclude internal reform of the civil service system. Only external reform can return government employment to the service of public purposes. Competitive mechanisms are available for the operation of government services, especially vouchers and competitive contracting. Use of these strategies ensures market compensation for employees performing public services.

Government employment must be minimized. It should be limited to those positions required to perform inherent government functions --- determination and administration of policy. Government service delivery units should be "corporatized." They would be established as commercial entities, publicly or privately owned, which would be fully subject to the competitive market and pay taxes. Regardless of ownership, their employees would be treated under law as private employees, and would have the protection of private labor law. Remaining government employment should be subject to external regulation.

To restore government in New York to its fundamental democratic values, government employment must no longer consume more tax funding than necessary. The following would achieve this objective:

1. Recognize that the civil service system is failing to achieve its public purpose of providing the public and the taxpayers of New York with the "highest return in services for the necessary costs of government."

2. Implement a government service delivery system under which employee compensation is determined by the market (transition to be completed within 10 years)..

a. Limit the state government and local government employment to inherent government functions.

b. Require the state government and local governments to "corporatize" service delivery units that are not inherent government functions.

c. Require the state government and local governments to use the competitive market to perform any non-inherent government function, relying upon the commercial market to the greatest degree possible.

d.. Establish regulatory mechanisms to ensure that government employee compensation and staff sizes replicate competitive levels to the greatest degree ascertainable.

2. Produce a comprehensive annual report on government employment and progress toward achievement of the recommendations above.

Part 1. Government Employment in New York

New York's civil service system, which governs state and local government employment, grew out of the best intentions. It was established in the late 19th century in reaction to the abuses of the "spoils system" under which a political party or political machine taking power was able to appoint virtually all of the necessary government employees. A particularly troublesome abuse involved instances of appointed government employees paying part of their salary back to the political machine as a condition of obtaining and maintaining employment. In this environment, government employees had little incentive to provide the taxpayers of New York with quality government services at the lowest possible cost.

The fundamental principle behind civil service reform was that, to the greatest degree feasible, competition, not favoritism or political influence, should govern the appointment of government employees to the greatest degree feasible. This principle was incorporated in the New York Constitution. The new system greatly increased the likelihood that government employees would be competent, since appointment depended upon achieving a sufficient score on the appropriate civil service examination. This system worked, more or less, until the size and scope of government increased to the extent that government employees were able to exert undue influence over political processes.

An underlying public purpose of the civil service system is:

...to insure to the people and the taxpayers of the state of New York the highest return in services for the necessary costs of government...⁽¹⁾

But the civil service system has become too cumbersome and expensive, and, as a result, it is failing to achieve this public purpose. In state government the civil service system has evolved into a maze of 7,000 job classifications and 46 salary grades.⁽²⁾ The multitude of job classifications and cumbersome work rules interfere with efficient assignment and performance of state services.

Excessive layers of bureaucracy, and "significant possibilities" for productivity improvement have been identified in New York state government.⁽³⁾

...productivity is perceived as "passing fancy" by the line and staff managers in state agencies. Too many people view productivity as a revenue issue, believing that, if revenue is not a problem, productivity is not discussed..⁽⁴⁾

And, for the most part, revenue has not been a problem. From 1980 to 1991, state government revenues increased by more than 35 percent per capita (all figures inflation adjusted).⁽⁵⁾

The extent of excess expenditure may be significant. Among clerical staff it has been estimated that a considerable amount of state government employee time is spent on activities that add no value to the public, including such activities as "drinking coffee and reading newspapers."⁽⁶⁾

This contrasts sharply with employment in the private sector, where competitive pressures have required streamlining of procedures, elimination of restrictive work rules and other strategies to improve efficiency. This trend toward greater efficiency, which has been most evident in the last decade, has yet to be applied in a material way to government in general, or to government in New York in particular.

The failure of the civil service system to achieve its public purpose of maximizing return to the public and the taxpayers is further illustrated by successes in competitive contracting of government services, through which considerable savings are routinely achieved while maintaining or improving quality. It is simply indisputable that the public purpose requires government to spend no more than necessary providing public services. And, wherever the same public service can be purchased through the competitive market for less than direct production by government the civil service system fails to deliver on its public purpose of maximizing the return to the public and taxpayers.

The Context: Budget Crises and Government Waste

But despite rapidly increasing state and local government revenues, there have been serious budget difficulties. Governments, in New York and elsewhere, have become accustomed to almost annual budget crises. The familiar refrain is that unless taxes are raised, services will have to be cut. During these budget crises, some public officials can be counted on to suggest that if only the waste in government were removed, the unsavory choice between higher taxes and service reductions would be unnecessary. Yet, in the end, little waste is excised. The fundamental reason for this is that while waste pervades government, its identification and eradication is difficult and complex. As David Osborne and Ted Gaebler wrote in Reinventing Government,⁽⁷⁾ waste cannot be found as a line item in a government budget, it is "marbled" throughout virtually every government function. It can be found in excessive overhead expense, excessive government employee compensation, and larger than necessary staffs. Government waste occurs wherever a public service could be produced for less --- wherever government spends more than necessary to accomplish public purposes..

Effective performance monitoring systems, more often than not, simply do not exist. Unit costs --- the cost of producing a particular measurement of service --- are largely unknown or untracked in government. Even where unit costs are known, they are not used to measure financial performance. To the extent that financial performance is evaluated, it is often on the basis of how much, rather than how little has been spent for a particular purpose. Education officials use measures of public expenditure relative to gross personal income to evaluate education performance. Transit officials evaluate transit performance by searching the world for examples of higher public expenditures. All too often, government attempts to instill in legislators and the people a sense of duty to provide more and more funding, while at the same time resisting efforts to seriously evaluate government performance, much less achieve potential efficiencies. Performance evaluation in government is often the reverse of what it should be. Government does not evaluate how well it performs services for the public. Government evaluates performance in terms of the generosity of the people, as if it were the master, rather than the servant of the people.

The public is barraged by a virtually endless anecdotal examples of government waste, from the relatively inexpensive (measured in thousands of dollars) to the expensive (measured in billions of dollars). But even inexpensive abuses add up to substantial amounts of money.

And, there are indications that the cost of government in New York is far higher than necessary. By virtually any measure, New York is an excessively high spending state. The average state and local tax burden per New York household was 58 percent greater than the national average in 1991. It was considerably greater than New York's primary regional competitors: New Jersey (20 percent), Connecticut (25 percent), and Pennsylvania (78 percent).⁽⁸⁾

This high tax burden has taken its toll on New York's economy. For decades, New York has lagged well behind other states in terms of job growth. If New York job growth had kept up with the national rate over the past decade, an additional 900,000 jobs would have been created.⁽⁹⁾ And maintaining employment in New York will become increasingly challenging because technological advances are fast eroding the necessity for physical proximity in commerce. This is especially so in the financial services on which the New York economy is so dependent.

New York's fundamental problem in public finance is not insufficient funding, it is excessive spending. By any measure, New York taxpayers have been forced to pay more than necessary for government services.

Part 2. Democratic Values

By its very nature, government waste violates the most fundamental precepts of American democracy. Government exists to serve people. This was not always so. Until the dawn of modern democratic government, the people were the servants of government. Government was not accountable to the people, the people were accountable to government. But in the intellectual cauldron that formed the American nation, a guiding principle was that government should be the servant of the people. Rule of law replaced the arbitrary rule of men. The very legitimacy of modern democratic government relies upon the principle that the people are sovereign, not government.

Important societal values proceed from the fundamental principle that government is the servant of the people. A government that is the servant of the people will:

1. Limit its activities to the accomplishment of public purposes. Public purposes include broadly applicable laws (the idea of universality of application⁽¹⁰⁾ or equal protection), and specifically exclude activities that create preferences, special privileges or favoritism.

2. Spend no more than necessary to accomplish public purposes. To the extent that government spends more than necessary, it pursues private, rather than public purposes. Unnecessary spending wastes the resources compelled from the people. Moreover, unnecessary spending is an illegitimate activity for a government that purports to be the servant of the people.

3. Arrange for routine and objective evaluation to identify opportunities for improving performance, both in terms of financial performance and quality. If there is no effective evaluation then the people cannot know the extent to which government achieves its objective of being the servant of the people rather than their master.

Where government is the servant of the people, the resources of the people belong first to the people. And while government must tax the people to accomplish public purposes, government has a special obligation to exercise stewardship over the resources it compels from people. This is not so in other sectors of the economy. People are not forced to purchase specific goods and services in the market. They are able to exercise personal choice. No such choice exists with respect to taxation. Government's financial obligation to the people, then is

...to spend each (dollar) to the best effect. Individuals do that, day after day. So do companies. They succeed, more or less, because they face choices as consumers and competition as producers. The minimum duty of a state should be to replicate such choice and competition in its own affairs, so that the billions it raises in taxes achieve the high-sounding aims it sets for itself.⁽¹¹⁾

Because government waste is "marbled" throughout government, it is necessary to seek its removal from the "bottom up," not from the "top down." "Across the board" spending reductions do not remove unnecessary spending, because they do not establish incentives that improve government productivity. Staff reductions in New York state government have not been accompanied by improvements in productivity.⁽¹²⁾

Part 3. Government Employee Compensation

Government employment represents the largest expenditure by state and local governments in New York --- approximately 45 percent of state government and 70 percent of local government current expenditure. For any examination of governmental efficiency to be complete, it must start with a thorough review of the costs of government employment.

The primary focus of this analysis is state government employee compensation. But local government employee compensation is also of interest to the state. Local units of government are created under the authority of the state. Moreover, their financial health is of considerable interest to the state. When local governments experience financial difficulties, state intervention can become necessary. Further, approximately one third of state expenditures is provided as support to governments. If local government employee compensation is higher than necessary, local government financial distress is more likely, and state taxpayers may be called upon to pay more to support local governments.

For the civil service system to achieve its public purpose, government employment must cost no more than necessary. Government employment compensation should be commensurate with non-government employees, and productivity should be equal. It is generally agreed that government employees should be paid market rates --- that they should be paid the same as non-government employees doing the same or similar work. But employee compensation includes more than wages and salaries. Employee compensation also includes employer paid fringe benefits and other elements of value such as paid time off, and superior security. All of these additional benefits confer real financial value, and they must be included in any objective analysis of government employment costs.

Non-government employee compensation is determined through the market by customers. Organizations do not have the freedom to artificially raise employee compensation. In the private sector, the prices that customers are willing to pay for goods and services constrain how much will be available for employee compensation, investment, and distribution of earnings to stockholders (including employee pension plans⁽¹³⁾). A company that raises employee compensation above levels that customers are willing to pay will lose market share and eventually close, taking with it the jobs of employees and the investment of owners.

There are two primary methods for determining employee compensation. The first is direct' through the competitive market itself. The second is indirect, involving an attempted replication of the market through administrative processes. The compensation of non-government employees is determined directly through the market. The compensation of government employees is determined indirectly through administrative mechanisms.

While non-government employee compensation is determined as a natural course of events through the market, market mechanisms do not operate in government. Governments often attempt to determine market rate employee compensation levels by evaluating pay rates for comparable work by non-government employees. Sometimes these evaluations are formal and sometimes informal. The findings of compensation comparability evaluations are often contradictory and the methodology is often flawed. Comparability evaluations:

usually focus on wages alone, leaving out fringe benefits and extra paid time off.

typically fail to make adjustments for other advantages of government employment, such as superior job security, lower productivity, and other factors (see below).

must identify jobs in the private sector that are comparable to public sector jobs --- a highly subjective process.

are susceptible to political manipulation. They are usually administered by agencies whose employees gain from conclusions that favor higher government employee compensation.

There is considerable controversy with respect to the methods used to estimate market rates of compensation. For example, the federal government estimated average federal employee pay at 23 percent less than market,⁽¹⁴⁾ while other studies have estimated federal employee compensation at up to 42 percent more than market.⁽¹⁵⁾ Administrative processes that can produce estimates ranging from minus 23 percent to plus 42 percent simply are not reliable for determining market rates of compensation.

There is simply no reliable method for administratively determining market prices. As the Nobel Laureate economist Frederik Hayek put it,

The market price cannot be known until there is competition.

The analysis that follows is subject to the same caveat: that the market price can be determined only through competition. This analysis may be, however, the first attempt at comprehensively quantifying the market value of government employment advantages.⁽¹⁶⁾

Estimating the Market Rate for Government Employment

Government employee compensation is often greater than that of non-government employees doing similar work. This is evident in the multitude of instances in which governments use the competitive market (especially through competitive contracting) to supply government services less expensively than they can be produced by government themselves. According to the AFL-CIO,

It is not uncommon that work done by government employees can be done for as much as 50 percent less in the private sector.⁽¹⁷⁾

Nonetheless, this analysis will assume that government employees and non-government employees doing the same or similar work in New York receive the basic salary rate (exclusive of employer paid benefits). This is consistent with a recent study published by a labor-oriented research organization, which suggested that state and local government workers in New York receive approximately the same level of wages and salaries as non-government workers doing the same or similar work.⁽¹⁸⁾

The analysis estimates the extent to which New York state government employee compensation differs from market rates. It is assumed that a state government employee (hereafter referred to as the "average" state government employee) and a non-government employee were hired at the same salary ($31,300⁽¹⁹⁾ annually, in 1993 dollars) 11.7 years ago. Over a 40 year career total compensation for the state government employee would be $2,178,000 (inflation adjusted, including salary and employer paid benefits).⁽²⁰⁾ The analysis then calculates an excess value for the advantages of government employment. The state government employee's career earnings are reduced downward to account for these advantages. The resulting figure is the estimate of market rate compensation for the state government employee (which reflects the compensation that would be received by a non-government employee doing similar work, starting at the same salary at the same time). To the extent that the government compensation package conveys advantages not available to the corresponding non-government employee, an "excess value of government employment is conveyed to the government employee (Box #1). A description of the advantages of state government employment follows.

Box #1 Excess Value of Government Employment The excess value of government employment is the extent to which a government employee gains financially in relation to market based compensation packages for non-government employees doing the same or similar work. The excess value of government employment is a form of government waste --- it is a cost that is higher than necessary to obtain public services.

(1) More generous paid fringe benefits.

State government employees have more generous employer paid benefits than non-government employees. It is estimated that state government paid benefits are more than 1.25 times that of non-government employees.⁽²¹⁾ Government employee excess paid benefits are exempt from federal and state income taxation, which increases their value relative to the paid fringe benefits of non-government employees. Over the average state government employee's career:

The excess value of employer paid benefits would amount to $78,000.

For the average state government employee, the excess value in terms of federal, state and, local income taxes not paid on excess employer paid benefits would amount to $51,000.⁽²²⁾

The total excess value of government employment attributable to employer paid benefits would be $129,000.

(2) Higher Compensation Increases.

State government employees received larger annual compensation increases. The experience of New York state government parallels the trend of inordinately large government employee compensation increases relative to those of non-government employees.⁽²³⁾

The tenancy of state government salaries to rise at an inordinate rate arises partially from "easily attainable merit or performance salary increases" that are in addition to regular union increases.⁽²⁴⁾

From 1980 to 1993, the average state government employee salary increase was 22.7 percent (inflation adjusted). This compares to a 12.4 percent increase for non-government employees in New York.⁽²⁵⁾ From 1980 to 1993, state government employees received approximately $1.80 in compensation increases for each $1.00 received by non-government employees. The excess value of government employment for the average state government employee attributable to inordinate wage and salary increases is estimated at $306,000 over a career.⁽²⁶⁾

(3) More Paid Time Off:

State government employees work fewer hours than non-government employees and are accorded "generous leave.⁽²⁷⁾ This is evident in shorter work schedules, excess paid holidays and vacation days, and excess usage of paid sick time.

The state government employee advantage in shorter work schedules is substantial.

Most state government employees work a 37.5 hour work week, compared to a 40 hour work week for non-government employees. This shorter government employee work week results in higher than necessary overtime premium payments.⁽²⁸⁾ It is estimated that shorter work weeks account for an excess value of government employment of $66,000 over the career of the average state government employee.

State government employees receive 12 paid holidays compared to an average of 9.5 for non-government workers.⁽²⁹⁾

State government employees are paid for more vacation days than non-government workers.

State government employees may take up to five paid personal days each year, a benefit available to only 16 percent of non-government workers.

The combined paid holidays, vacation days and personal days amount to more than 500 additional paid days off over a career --- approximately two years and four months of work days. Over a career, the excess value of additional paid time off is estimated at $154,000.⁽³⁰⁾

State government employees are paid for approximately 30 percent more sick days than non-government employees.⁽³¹⁾ Over a career, the average state government employee would obtain $15,000 in excess value from greater use of paid sick time.

For the average state government employee, the total excess value of government employment attributable to additional paid time off is estimated at $235,000 over the career.

(4) Exemption of Retirement Benefits from the State Income Tax

The retirement benefits of state (and local) government employees are exempt from the New York state income tax. This exemption is not available to non-government employees. This benefit is estimated to convey an excess value of $32,000 the average state government employee.⁽³²⁾

(5) Paid Retiree Health Care

Unlike most non-government retirees, state government retirees receive paid health care from their employer. Moreover, the value of unused sick time (up to 165 days) can be applied to the payment of the retired employee's health care payments. It is estimated that the excess value of paid retiree health care is $41,000.⁽³³⁾ In practice, this benefit is so lucrative that the average state government employee retiring at age 65 would be entitled to fully paid health care for life.

(6) Superior Security

Government employees have superior employer security. They have substantially less risk of job loss due to bankruptcy, corporate restructuring, merger, or economic downturn. Moreover, government employees have superior employment security. They are protected by civil service rules and procedures that make layoff or termination much more different than for non-government employees. Non-government employees have a far greater chance of being involuntarily terminated (laid off or discharged). On average, non-government employees are nearly three times as likely to lose their jobs as are state or local government employees.⁽³⁴⁾ (The average state government worker has been employed by the state for 11.7 years compared to the average non-government worker's 4.2 years.⁽³⁵⁾) While superior job security is good for employees in general, it cannot be achieved for all employees, government and non-government. Superior security has a significant market value.

A national state and local government security factor was calculated, using US Department of Labor data with respect to involuntary employee separations (layoffs and discharges), average time without employment, and the relative wage received in subsequent employment. Over a career, it is estimated that government employees have a financial security advantage of 11.5 percent. The security advantage ranges from just over one percent in the first year to 18.4 percent in the 40th year.⁽³⁶⁾

There are indications that New York state government employees have even greater security than their state and local government counterparts in other states. More than 40 percent of the state government employees laid off in early 1991 had regained jobs with the state by the end of the year.⁽³⁷⁾ Moreover, civil service rules make it overly difficult to discharge ("fire") a state employee for cause.⁽³⁸⁾

Over a career, the excess value of government employment attributable to superior security is estimated at $165,000 for the average state government employee.⁽³⁹⁾

(7) Other Advantages of State Government Employment

State government employees receive other above market advantages compared to comparable non-government employees, the value of which was not estimated.⁽⁴⁰⁾ A discussion of these advantages follows.

(a) More Lucrative Retirement Benefits

State government employees receive more lucrative retirement benefits than non-government employees. State government employees are covered by lucrative defined benefit retirement plans, which the overwhelming majority of non-government workers do not have. State government retirees receive pension increases, which are rare for non-government employees. Finally, state government employee pensions are exempt from the state income tax, a benefit not extended to non-government employees.

State government employees are covered by defined benefit retirement programs, while non-government employees are typically covered by considerably less lucrative defined contribution plans.

Defined contribution plans guarantee the retirement benefit amount, regardless of contributions and subsequent earnings. Defined benefit plans tend to be more expensive than defined contribution plans and can require "bail-outs" due to under-funding. Defined benefit retirement programs establish "entitlements" for government employees that are guaranteed by taxpayers.

Only 39 percent of non-government employees are covered by "defined benefit" plans.⁽⁴¹⁾ "Defined contribution" plans are used more frequently in the private sector. Under "defined contribution" plans, the retirement benefit is based upon contributions to the retirement fund and retirement portfolio earnings. Defined benefit retirement plans are beyond the resources of most firms that operate in competitive markets. Unlike government employers, private employers are unable to compel customers to cover such expenses.

(b) Retirement Benefit Increases

Moreover, state government employees receive "ad hoc" pension benefit increases. In contrast, only five percent of private sector retirees receive pension increases.⁽⁴²⁾

(c) Paid Lunch Breaks

Some state employees are paid for their lunch breaks.⁽⁴³⁾ Only eight percent of non-government employees are paid for their lunch breaks.

(d) Child Care

The state provides for on-site child care,⁽⁴⁴⁾ a benefit available to less than five percent of non-government employees.

The Market Rate

It is estimated that the average New York state government receives at least $911,000 more than a non-government employee doing the same or similar work over a career (adjusted for the advantages of government employment). This represents an above market premium of 71.9 percent. The subtraction of this figure from the total career compensation level of $2,178,000 yields an estimated market rate of $1,267,000 over a career for the average government employee. This figure represents an estimate of what a comparable non-government worker would be paid for working the same work schedule, with discounts for other benefits received in excess of the market rate (such as paid retiree health care and the income tax free value of excess employer paid benefits). To achieve market rate compensation, it is estimated that a downward "market rate adjustment" (Box #2) of at least 41.8 percent would be required.

Estimate of Market Rate: Career Compensation New York State Government Employee
Element	Amount	(1)
Actual Career Compensation	$2,178,000	171.9%
Estimated Market Rate Compensation	$1,267,000	100.0%
Excess Value of Public Employment
Excess Paid Benefits	($79,000)	6.2%
Excess Salary Increases	($306,000)	24.2%
Short Work Week	($66,000)	5.2%
Excess Paid Vacation, Holidays & Personal Days	($154,000)	12.2%
Excess Paid Sick Time	($15,000)	1.2%
Income Tax Free Value of Excess Paid Benefits	($52,000)	4.1%
State Income Tax Free Value of Pension Benefits	($32,000)	2.5%
Free Retiree Health Care	($41,000)	3.2%
Superior Security	($165,000)	13.0%
Total Excess Value	$911,000	71.9%
Market Rate Adjustment	-41.8%
In 1993$ (1) As a percentage of market rate.

The excess value of New York state government employment is nearly double the national average of state and local government employees, which has been estimated at 36.0 percent.⁽⁴⁵⁾ This places New York at a particular disadvantage relative to the economies of other states, by contributing substantially to New York's overly high per capita tax burden.

Box #2 Market Rate Adjustment The market rate adjustment is the amount by which government employee compensation would need to be adjusted to achieve parity with the compensation of non-government employees doing the same or similar work. Generally, a downward market rate adjustment is indicated, necessitated by the fact that government employees receive compensation greater than that of comparable non-government employees (the "excess value of government employment" [Box #1]).

Local Government Employees

Using a similar analysis, it is estimated that the excess value of local government employment is at least 57 percent.⁽⁴⁶⁾ To achieve parity with the market rate, a downward market rate adjustment of 37 percent would be required. As with New York state government employment, the excess value of New York local government employment is considerably above the estimated national state and local government average of 36.0 percent.⁽⁴⁷⁾

The excess value of New York state and local government employment may be even greater than the estimates above. The value of important advantages of government employment, such as more lucrative retirement programs, pension benefit increases and the probable higher value of security attendant to government employment in New York could increase these figures.

At the same time, the estimates above are subject to the same reservations as previously outlined with respect to non-market attempts to quantify market rates of compensation. To reiterate, the market price cannot be known until there is competition.

The financial implications of these estimates are as follows. In 1993, these levels of excess value would indicate excess government expenditures of $5.3 billion at the state government level and $15.8 billion at the local government level. The combined total excess expenditure is estimated at $21.1 billion.

Part 4. Productivity

The objective of compensating government employees at market rates also includes another dimension --- productivity. The output of government employees should be no less than that of non-government employees doing the same or similar work. Productivity can be evaluated on the basis of staff sizes. If there are more government employees than are necessary, then productivity is inferior. Inferior productivity raises the costs of government unnecessarily and represents government waste.

There is substantial variation among the states in the number of state and local government employees per capita. Only part of the variation can be explained by population and geographical size (states with larger land areas and smaller populations tend to have more state and local government employees).⁽⁴⁸⁾

It is clear that state and local government employment is higher than necessary in New York. Pennsylvania has the lowest number of state and local government employees per capita. Even so, Pennsylvania state and local government employment is higher than necessary.⁽⁴⁹⁾ If Pennsylvania were to reduce its government employment by modest proportion proposed in the federal government's Reinventing Government initiative, nearly $2 billion would be saved annually. New York's state and local government employment is 61 percent higher than that of Pennsylvania (adjusted for differences in population and geographical size).⁽⁵⁰⁾

But, because state and local government functions are assigned differently among the states, it is difficult to obtain a precise estimate allocation of excess employment between New York state and local governments.

A conservative estimate can be obtained by comparing New York's change in per capita state and local government employment to that of Maryland, which was the most successful state in the region in reducing employment from 1980 to 1991. In 1980, state government in Maryland employed slightly more personnel per capita than New York state government. By 1991, per capita New York state government employment had increased 32 percent relative to that of Maryland. (New York local government employment per capita had increased 32 percent relative to that of Maryland).⁽⁵¹⁾ It is reasonable to conclude, therefore, that, at a minimum, New York state employment is at least 32 percent higher than necessary. This would indicate a productivity deficit that translates into excess state government spending of $1.8⁽⁵²⁾ billion in 1993. At the same time, local government employment in New York increased 23 percent relative to that of Maryland. This would indicate that New York local government employment is at least 23 percent higher than necessary, which would translate into excess local government spending of $5.0 billion in 1993. The "Maryland standard" yields a state and local government excess spending level of $6.8 billion.

While it is not feasible to apportion the excess employment of New York relative to Pennsylvania between the state government and local governments, a more realistic combined estimate can be provided. If New York state and local governments had achieved the "Pennsylvania standard" in per capita government employment, $13.1 billion would have been saved in 1993. The reinventing government reduction, based upon the "Pennsylvania standard" would yield a savings of $15.7 billion.

Part 5. The Excess Cost of Government Employment

Overall, New York spends much more than necessary on government employment. A conservative estimate, based upon the "Maryland standard" of productivity and the excess value of government employment estimates above is that New York state and local governments spent at least $27.8 billion more than necessary in 1993 on government employment. Total expenditures on government employment were approximately double the necessary level. The "excess cost of government employment" (Box #3) consisted of the following:

Excess state of New York expenditures on government employment were at least $7.1 billion in 1993. This represents approximately 126 percent more than necessary.

Excess local government expenditures on government employment were at least $20.7 billion in 1993. This represents approximately 94 percent more than necessary.

The combined state and local excess cost of government employment amounts to more than $4,000 per year per New York household.⁽⁵³⁾The $27 billion in excess costs is nearly as much as all state and local sales taxes and income taxes combined.⁽⁵⁴⁾

If the more rigorous "Pennsylvania standard" of productivity were applied, the potential gross excess cost would approach $35 billion. Finally, these estimates do not include adjustments to account for excess overhead and administrative costs that would be saved at lower levels of state and local government employment.

These estimates may appear very high. But they are typical waste identified in government services that have been subjected to competition around the world. Many governments are using the competitive market to produce quality public services (competitive contracting) at substantial savings. The results provide strong evidence that government is spending too much to provide public services, and that government employment is an important element in that excess spending. The savings are broadly consistent with the extent of excess government employment expenditures in New York. Government produced services are typically 25 percent to 100 percent more than services that are competitively contracted.⁽⁵⁵⁾ In some cases, government services cost 150 percent more.⁽⁵⁶⁾

Again, the actual extent of the excess cost of government employment can only be imprecisely estimated. The actual extent can be only determined by the application of competition. Suffice it to say that New York state government is spending billions and billions of dollars more than necessary on government employment. The same holds true for local governments in New York. As was noted above, the market price --- what New York should be spending on government employment --- cannot be known until there is competition.

Box #3 Excess Cost of Government Employment The excess value of government employment is the extent to which the cost of government employee compensation exceeds the market rate for production of the same public goods and services. The excess cost of government employment includes excessive government employee compensation and excessively government staff sizes.

Finally, the actual cost to the economy may be even greater. The economic cost of taxation has been estimated at $1.39 per each $1.00 of excess taxation.⁽⁵⁷⁾ Using the excess cost of state and local government employment estimate above, this would suggest that up to $40 billion annually could be added to the economy in exchange for a tax reduction of in the amount of the excess cost of government employment. This is sufficient to create more than 800,000 non-government jobs at the average compensation rate in New York, together with additional revenues for private investment.⁽⁵⁸⁾

To the extent that it takes more from the people than is necessary to perform its public purposes, government in New York fails in its obligation as the servant of the people. As a result, citizens of New York are compelled to provide tax support of government waste, and to finance the pursuit of inherently private purposes.

Part 6. The Problem

The costs of government in New York continue to rise inordinately, fueling the demand for higher taxes. Government employment represents the most significant element of government operating costs at both the state and local level. Government employee compensation is substantially higher than that of non-government employees doing the same or similar work, and is rising at a greater rate. State and local government staffs in New York are exceptionally large. To the extent that more than necessary is spent on government labor (or any other factor of production), government wastes tax resources. It is a fundamental principle of public policy in America that government is to be the servant, not the master of the people. It is simply improper for a government of the people to spend more than necessary to produce its services. In the process, government illegitimately favors one class of people --- government employees --- at the expense of all others. In effect, an entitlement to excessive compensation has been established for government employees, who have become "New York's protected class."

New York government has too many employees and pays them too much because the incentives inherent in government are skewed against public purposes. A simple comparison with the incentives of the competitive market makes the point.

In the competitive market (the private sector), businesses and managers are rewarded for serving customers. Businesses must attract customers by providing sufficient quality at a low enough (competitive) price. The costs of all factors of production must be minimized. This means that the firm must maintain a staff no greater than allowed by competitive pressures, which is paid no more than competitive rates. Customers have alternative sources of supply, and they are not compelled to buy any product. A business can produce consistent profits over the long run only if it serves its customers. A business that provides insufficient quality or charges too much has two choices --- to reform or to fail.

In government, nearly the opposite incentives are in operation. Agencies and government managers obtain more revenue by increasing the size of their budgets and staffs. There is no competitive pressure to minimize the costs of employment. The public manager who is frugal with taxpayer money will be rewarded with diminished career advancement prospects, because both budget and staff will be reduced. Government agencies and government managers must violate the public purpose to get ahead. The bureaucratic incentives that are characteristic of government are at odds with the public purpose.

There is waste in the competitive market. But over the long run, waste tends to be eliminated as competitive pressures force firms to become more efficient, and as customers forsake the products of firms that fail to provide sufficient quality at a competitive price. This self correcting characteristic of the competitive market is not present in government.

Moreover, substantial political pressure is applied to raise the cost of government employment above market levels. Government employee unions exercise considerable political power through campaign contributions and campaign activities. Further, government managers often have virtually the same interest in increasing the costs of government employee compensation as government employee unions themselves, in that their compensation increases are to some degree limited by the increases negotiated in the labor contracts of their employees. By comparison, non-government employee unions are political outsiders. Non-government employee unions are largely unable to use the sovereign power of the political process to raise their compensation above market levels. This is yet another indication that government employees are "New York's protected class."

There is virtually no hope of removing waste in government employment through management strategies or other internal strategies. The successes of any such initiatives will be, at best, spotty and temporary. Management strategies are simply incapable of overcoming the bureaucratic and political incentives that result in higher than necessary government employment expenditures.

So long as bureaucratic incentives pervade government, and so long as government employee compensation is political, government waste will continue to grow. To restore government as the servant of the people, competitive incentives must be applied to the greatest degree possible. And, political influence must be removed from the determination of government personnel expenditures..

Despite the laudable intentions that led to its establishment, New York's civil service system is failing the public. While the civil service system brought an element of competition into government service, over the years entrenchment has become more characteristic than competition. For competition to achieve efficiency, it must not simply be a historical event in a government employee's career (a civil service examination). Government employees must face the same on-going competitive pressures as non-government employees. While the civil service system reduced the influence of politics in government employment, recent decades have seen considerable political interference in government employment as government employee unions have committed large amounts of money to the political process. Government employee unions have become one of the most formidable lobbying forces in Albany.

The bureaucratic and political incentives that control government employment in New York are missing a crucial element --- protection of the public interest. Generally, government managers and officials have no real financial stake in conserving the resources of the public. This is in contrast to the situation in the private sector, where corporate managers and officers face personal financial incentives to produce products of sufficient quality for the lowest possible cost. The fundamental problem has been characterized by Milton Friedman:

People are more careful with their own money than with other people's money,⁽⁵⁹⁾

The money taken from the people for government is "other people's money,"

New York's civil service system requires more than reform, it must be replaced by a wholly new system in which the interests of the public and taxpayers take precedence over the interests of government employees. The new system must incorporate the basic intentions of New York's pioneering civil service reform a century ago --- the application of competition, and the removal of political influence, for the good of the people and the taxpayers.

Part 7. Solutions

Wasteful expenditures on government employment cannot be eradicated unless government employment is subjected to market discipline. But this is a complicated and difficult undertaking. Government employment, in its present form, cannot be comprehensively subjected to competitive incentives. Government is a monopoly by its very nature, and government employee compensation can only be regulated --- it can only be indirectly determined through the market. Moreover, regulation of government employment will always be difficult and insufficiently effective because of the operation of bureaucratic incentives and the political influence of public employee unions (which, unlike their non-government counterparts are able to entice those who determine their compensation with financial rewards).

Through the years, there have been many attempts to reform the government operations by applying competitive market discipliners and management techniques. But they have routinely failed because, in the end, government continues to be driven by bureaucratic incentives. The answer is not to bring the competitive market to government, but to take government to the competitive market, to the greatest degree possible..

New York governments already use the competitive market to purchase virtually all goods and services, including the labor required to produce such goods and services. Only direct labor is exempt from competitive incentives. Governments obtain goods and services through competitive mechanisms, especially competitive bidding. Similar market disciplines must be applied to the functions that government directly produces.

Bringing Government to the Market

Government can obtain public services and ancillary services from the competitive market. Some services are already produced by the commercial market, and can be readily produced with minimal government intervention. In other cases, a greater degree of government is necessary because the required public services are not provided by the commercial market.

Where the public purpose requires production of a public service, then it is preferable to use the existing commercial market. Vouchers, which are used as cash to obtain the necessary goods or services from the firms that operate in the corresponding commercial market, are the most common mechanism. Vouchers have a long and successful history in the production of public goods and services. They have been used to provide higher education to veterans, especially after World War II. They have been used to provide food to those with low income, through the "food stamp" program. And, despite the abuses of that program, the voucher approach has been far more successful than the alternative, which would have been to establish a chain of government owned grocery stores to distribute food to the poor. The latter approach would have established a larger bureaucracy. An inevitable feature would have been government grocery store employee unions exerting political influence to increase their compensation. Prices at government grocery stores would risen well above market prices. The preferable alternative of vouchers has not only left the determination of grocery store employees subject to market disciplines, but it has also contributed to the financial health of governments, as the grocery stores pay taxes on voucher based sales to low income people. Employees who produce the services purchased with public vouchers have their compensation determined in the same way that other non-government employee compensation is determined, by the market.

Services that cannot be produced commercially should be purchased by government through competitive processes, especially competitive contracting. Competitive processes should be administered in such a way that genuine competition is ensured, and private monopoly does not emerge as to replace government monopoly. This requires that government carefully administer contractual requirements with respect to service quality, safety, and other matters necessary to the accomplishment of legitimate public purposes.⁽⁶⁰⁾ Competitive producer employee compensation is also determined by the competitive market. Moreover, competitive producers pay taxes on their revenues obtained through competitive contracting. Competitive contracting has been used for a wide variety of public services and has been required by law for some public services in the United Kingdom, Denmark, New Zealand, and Colorado.⁽⁶¹⁾

Further, market disciplines ensure that collective bargaining does not result in the public paying more than necessary for government goods and services. Because competition does not operate in government, and because government employee unions have considerable political power, labor agreements often contain provisions that unnecessarily increase the costs of government. In addition to higher than necessary compensation, work rules that are unnecessarily restrictive and larger than necessary staffs, government labor contracts often restrict the ability of government to use more cost effective service delivery alternatives. For example, labor contracts often forbid governments from using market based mechanisms, such as competitive contracting, even where savings to the public can be demonstrated. Other provisions violating public prerogatives involve limitations on government managers with respect to the efficient design of work and employee assignment. Government ratification of such labor contract provisions represent the abdication of essential public prerogatives. A government that is the servant of the people cannot foreclose alternatives for providing its services in a more cost effective manner. "Public prerogatives" legislation has been proposed to prohibit these such abdications of public responsibility.⁽⁶²⁾

Minimizing Government Employment

Not all of the functions of government need to be produced by government employees.

The essential function of government is deciding. Government may .. itself .. do what it has decided should be done. But equally it may not. Its basic intention is simply to see that what should be done is in fact done.-- Citizen's League of the Twin Cities⁽⁶³⁾

"Deciding," or policy is the only essential (or inherent) function of government. This includes public policy decisions such as establishing the laws and ordinances that delineate public goods and services. It includes the general administration such as establishment of regulations and service standards, regulatory compliance, oversight of contracts and evaluation of public service performance. What are not inherent functions of government, however, are the delivery of public goods and services. In fact, the combination of policy and service delivery establishes an inherent conflict between the roles of government as regulator and provider. In such an environment, objective evaluation is simply not possible.

Policy decisions must necessarily be made by elected and appointed government officials But elected and appointed officials use agents to perform government functions. More often than not, the agents are government employees, but the agents may also be private companies. Both government employees and the people who manage and work for private companies are interested in their own advancement. But once the government employee has the job, extraordinary job protection (virtually a job for life) and bureaucratic incentives establish an environment which fails to reward performance that serves the public purpose of minimizing costs for a specified quantity and quality of service. On the other hand, a private company, and its employees, faces competitive incentives. It is given the job for a only limited period of time, faces fines or other sanctions for substandard performance, and must face a new competition for the job at specified intervals (usually no more than five years).

New Zealand pioneered a new approach. Under Labor government Finance Minister Roger Douglas, New Zealand separated public policy from service delivery, by "corporatizing"⁽⁶⁴⁾ service delivery units. The corporatized units were established as commercial entities, fully subject to commercial disciplines and subject to taxation. Their monopoly status was revoked.

Employment declined by more than 50 percent among corporatized units from 1987 to 1992, the result of market discipline.⁽⁶⁵⁾ The reduction in public employment was substantial, representing nearly three percent of national employment. Even the corporatized post office has paid substantial sums in taxes.⁽⁶⁶⁾

The United Kingdom's Local Government Act requires Corporatization of certain municipal functions.⁽⁶⁷⁾ Corporatization has also been required in relation to competitive contracting programs in Sweden and Australia.

Generally, government employment should be prohibited except for legislators, executive officers, department heads, managers, and contract administrators and any other employees required to perform inherent public services. Clerical staff is readily available through the competitive market, and should generally not be directly employed by government. Ancillary services, such as custodial services and building maintenance should also be provided through the competitive market (even custodial services and building maintenance services that support inherent government functions).

Corporatized service delivery units should be fully subject to taxation, possess no preference with respect to obtaining government contracts, and be required to earn a commercial return on investment. There should be legal prohibitions against their receiving any revenues (or subsidies of any kind) from government except through fully open and equitable competitive processes (such as competitive contracting).

Corporatized units could be owned by governments or could be sold to private investors (including employees). However, the employees of corporatized firms should be considered to be private employees and should be accorded the protection that labor laws that apply to private labor markets.

All functions of government are performed by agents, whether they are employees or contractors. Any government function performed by an agent can be performed by the competitive market. And, virtually every service provided by government is provided through the competitive market by some jurisdictions. Strong competitive markets do not exist with respect to some government services. On the other hand, some services produced by government are readily available through the "yellow pages."

But even where competitive markets do not exist, they can be created in short order. The same general mechanisms that have been used to privatize the behemoth government enterprises in the former Soviet empire can be used to create competitive firms out of today's bureaucratic service delivery units.

As in the Czech Republic and Russia, the service providing units of state and local governments could be converted to private ownership through vouchers issued to government employees, who would compete to provide government services.

As in Poland and Hungary, the service providing units of state and local government could be sold to private investors, who, along with others, would compete to provide public services.

The process of market development can be advanced by adoption of "petition of interest" legislation, which allows non-government organizations to identify public services that can be performed by the competitive market. Upon demonstration of financial and technical capability, a competitive process is established.⁽⁶⁸⁾

Corporatization of government service delivery units, also called "separation of policy from operations,"⁽⁶⁹⁾ should be conducted in such a way to maximize competition and the operation of competitive incentives. Generally, governments would establish corporatized firms for each particular service, and where feasible they would establish more than one corporatized firm per service. Entrepreneurial and other private firms would join the competition. The result would be competitively determined employee compensation, and lower government unit costs of operation.

According to Roger Douglas:

(Corporatization)...frees governments from the conflicts arising from their multiple roles as owner, regulator and producer. It encourages them to focus on the policy-making role of setting the best possible framework in an even handed way for all business activity. And, by increasing the creation of wealth throughout the economy, it improves the ability of government to pursue its own broad social goals.⁽⁷⁰⁾

Regulation of Government Employee Compensation

Where government employment is necessary, or where government functions have not yet been converted to competitive strategies, government employee compensation should be strictly regulated.

This follows the practice in the private sector. Generally, government does not apply economic or price regulation to competitive markets in the private sector. Economic regulation, however, is applied with respect to statutory monopolies --- where the incentives of the competitive market do not operate. For example, private electric utilities are required to obtain approval from regulatory agencies for rate increases. Monopolies are subjected to economic regulation to minimize their ability to take advantage of their position through exorbitant rate increases or substandard quality. The purpose of economic regulation is to achieve, to the greatest degree possible, the results that would be obtained in a competitive market --- the lowest prices possible while maintaining quality sufficient to the desires of consumers. Nonetheless, economic regulation is an insufficient substitute for market competition, and as competitive alternatives become possible in previously monopolistic industries, public policy responses often seek to establish competitive markets through deregulation.

Government, too, is a monopoly. Like private monopolies, it takes advantage of its position by allowing its costs to rise more than necessary (and often by allowing its service quality to suffer). While this tenancy may not be overtly conscious, it can be witnessed through the countless appeals to legislatures and taxpayers for higher levels of revenue. The continuing increase in government unit costs and the rising costs of government employment also demonstrate this tenancy.

Following the model imposed by government on the private sector, government employment should be subjected to independent regulation that seeks to replicate the compensation packages of the competitive market.

This should be implemented in conjunction with a streamlining of civil service classifications and salary grades. A substantially reduction in the number of job classifications, and would result ("broad banding"). A commission would regulate the extent and change in government employee compensation by applying guidelines under which government would establish employee compensation (including collective bargaining). The commission would be required to establish government employment compensation guidelines based upon market rate compensation for non-government employees doing similar work. The guidlines would fully adjust for the value of superior government employee security, tax advantages, retirement advantages, hours worked and any other difference to which a monetary value can be reasonably assigned. The result would be government employee compensation packages that are consistent with those of the people of New York, who are not government employees, and who are doing similar work The commission would use economists and cementation specialists in establishing the cementation guidelines. Further, the commission would establish overall staff size guidelines for governments in New York. By regulating government employee compensation and the number of government employees, the commission would achieve the same public purpose that is sought through government regulation of privately owned utilities.

But just as it is a poor substitute for market incentives in the private sector, regulation of government employee compensation is less effective than market incentives. This is another reason for seeking to minimize government employment.

As in regulated private markets, collective bargaining would still occur in an environment of regulated government employment, except that bargaining would not be permitted with respect to matters of inherent public prerogative.

But bureaucracies will not be brought to the market willingly. Around the world, it has been left to national and state executives, legislatures, and parliaments to effect the necessary changes, because bureaucratic incentives prevent effective reform from within.

Government must be brought to the market in a comprehensive manner. The "default" option must no longer be that government produces services with its own employees; the public purpose requires that government produce its services using the competitive market and its employees. This represents a fundamental paradigm shift, the result of which will be to restore government as the servant of the people.

Part 8. Restoring Democratic Values

Above market government employee compensation represents a serious breach of faith with the people of New York. It violates the fundamental principles on which American democracy was established. And the impacts of excess government employee compensation go beyond mere comparisons of compensation differentials. Above market government employee compensation requires higher than necessary taxes, which retard economic growth.⁽⁷¹⁾ One economic study estimated a loss in state personal income of $6.00 for each $1.00 in excess government employee compensation.⁽⁷²⁾ Excess government employee compensation is substantial. Its extent has the net effect of re-establishing the old order (albeit in a new way) --- under which the people are the servant of government.

Excess government employee compensation would not be so harmful if government were able to ensure that all employees, non-government and government, were compensated at the same percentage rate above market. Some suggest⁽⁷³⁾ that government should be a model employer, giving government employees more lucrative compensation, to set an example for non-government employers to follow. But non-government employers cannot follow, because they are unable to compel resources from their customers in excess of market rates.

Raising the compensation of all has been tried, and the result has been spectacular failure (The former Soviet Union and Argentina are examples). The cost would be paid either in hyper-inflation (which the US has never experienced) or excessive unemployment. Government is incapable of raising the income of all. But government can raise the income of some at the expense of others. Today, non-government employees, who pay virtually all of nation's taxes pay⁽⁷⁴⁾ the cost of protecting government employees from the market forces that determine non-government employee compensation. The result is monopoly profits, paid through above market compensation, for government employees.

The administrative mechanisms for setting government employee compensation have failed, and are beyond repair. Economist Ludwig von Mises pointed out that central planning was incapable of replicating market prices, because planners could not specify all of the factors that determine market prices, much less identify and obtain all of the necessary data.⁽⁷⁵⁾ The same is true of government employee compensation. Administrative determination of employee compensation is necessarily subjective and flawed. The answer is not better administrative systems, it is direct application of market forces.

The fundamental issue is fairness. Higher than necessary employee compensation increases result from compensation determination mechanisms that protect government employees from the market forces that govern non-government employee compensation. Moreover, it is exacerbated by political access of government employees, which cannot be duplicated by non-government employees.

The transition of government to the market in New York will be, in many ways, as difficult as the transition from statist economies to market economies in eastern Europe and the former Soviet Union. There will be resistance from those who profit from the present set of privileges, just as the "nomenklatura" has sought to frustrate the conversion to markets in the former communist states.

But a fundamental change is required. New York will continue on a "treadmill" of budget crises until the demand for higher taxes is brought under control. A principle element in the demand for higher taxes is government employee compensation. New York has an opportunity to restore its historic position of leadership in both government operations and economic growth. Just as New York led the nation in civil service reform a century ago, New York can take the next step by disciplining government through the only mechanism capable of reliably delivering quality at the lowest price --- the market. Such leadership would honor the original intentions of civil service reform. It would re-establish government in New York as the servant of the people.

Part 9. Recommendations

The following recommendations would allow New York to transition to market determined labor costs, through application of competitive incentives in public service, and through minimization of political influence in the determination of government employee compensation.

The state and its constituent units of local government should undertake a 10 year transition of government employment to the market. This objective could be achieved through the following actions.

1. Recognize that the civil service system is failing to achieve its public purpose of providing the public and the taxpayers of New York with the "highest return in services for the necessary costs of government."

2. Implement a government service delivery system under which employee compensation is determined by the market.

The transition to a competitive compensation system should take place over no more than ten years. The following actions would be required:

a. Limit the state government and local government employment to inherent government functions.

Because it is shielded from the market, government employment necessarily consumes more in the financial resources of the people than necessary. Moreover, government employees represent a strong internal lobby group that routinely opposes strategies to apply market disciplines to government (a strategy not available to non-government employees). The public purpose requires, therefore, that government employment should be minimized. Government employment would be limited to inherent government functions, --- determination and administration of public policy.

b. Require the state government and local governments to "corporatize" service delivery units that are not inherent government functions.

Governments would be required to establish their service delivery units (including ancillary services such as custodial, clerical, etc.) as fully separated corporate entities, which would compete in the commercial market. This process, called "corporatization," could ultimately result in various ownership arrangements including government ownership, employee ownership or commercial ownership. There should be a preference for smaller, more entrepreneurial corporatized units with individual governments establishing corporatized units for different types of services (this would dilute the lobbying power of corporatized entities).Through corporatization much of government employment would be subjected to the market by joining the market.

Corporatized firms would compete with other firms (including corporations, partnerships, and proprietorships that were not previously government units) for government contracts with other firms. Corporatized firms would be fully subject to taxation and would be permitted to receive revenues only from commercial sources or from government programs subjected to open competitive processes. The law would treat employees of corporatized units as private (not government) employees. They would be protected by the labor laws that apply to non-government employment.

c. Require the state government and local governments to use the competitive market to perform any non-inherent government function, relying upon the commercial market to the greatest degree possible.

Consistent with the strategies above, governments would be required to produce all except inherent government functions through the competitive market. There would be a preference for commercial production (production that relies upon existing commercial markets, especially through the use of vouchers). Where use of the commercial market is not feasible, government services would be produced through competitive contracting. Legislative requirements would be enacted to ensure the operation of the competitive market. As indicated above, all firms, including corporatized firms, would compete for contracts.

d.. Establish a Government Employment Commission (GECC) to ensure that government employee compensation and staff sizes replicate competitive levels to the greatest degree ascertainable.

Recognizing that government is a monopoly, and that monopolies are subjected to economic regulation in non-government sectors, economic regulation should be applied to government employment. The Government Employment Compensation Commission should be established to protect the public interest with respect to government employment. The Commission would regulate government employee compensation at the government unit personnel budget level. The commission could allow government employee compensation increases only upon making a rebuttable finding that the resulting overall compensation levels would not exceed that of non-government employees doing the same or similar work. Overall compensation levels would include wages and paid benefits, and would be increased to account for advantages in government employment, such as more time off, more lucrative pension programs, superior security, and productivity (size of staff). Collective bargaining would be conducted within the constraints of regulation, just as it is conducted within regulatory barriers in monopoly sectors of the private economy.

The commission would have two basic areas of responsibility.

The first (and ultimately the only function) would be regulation of government employee compensation in inherent government functions.

The second (and temporary function) would be regulation of government employee compensation in non-inherent government functions during the transition to corporatization.

2. Produce a comprehensive annual report on government employment and progress toward achievement of the recommendations above.

Footnotes

1. Civil Service Law Section 116.

2. Arthur Andersen & Co, State of New York: Productivity Enhancement Initiative Feasibility Study (New York: March 12, 1990).

3. Arthur Andersen & Co.

4. Arthur Andersen & Co

5. US Department of Commerce, Bureau of the Census, Government Finance series.

6. Arthur Andersen & Co.

7. David Osborne and Ted Gaebler, Reinventing Government: How the Entrepreneurial Spirit is Transforming the Public Sector (Reading, MA: Addison-Wesley Publishing Company, 1992).

8. Calculated from data in Government Finance series (1991).

9. Assembly Republican Task Force on Economic Growth, New York's Job Creation Deficit: A Leading Indicator of Competitive Decline (Albany: 1993).

10. "What government does for one it should do for all, what government is incapable of doing for all, it should do for none." See "The Public Purpose," Jean Love and Samuel A. Brunelli (editors), Legislative Issue Briefs (Second Edition), American Legislative Exchange Council (Washington: August 1993).

11. "Britain's Underclass," The Economist, May 23, 1987.

12. Arthur Andersen & Co.

13. Nearly 30 percent of the value of US corporate equities are held by employee pension funds (Fact Book: 1992 Data, New York Stock Exchange, Inc. [New York: 1993]).

14. Comparability of the Federal Statutory Pay Systems with Private Enterprise Pay Rates: Annual Report of the President's Pay Agent U.S. Secretary of Labor (Washington, DC: August 23, 1990). (Pay Agent Report).

15. See page 149, Donald Devine, Reagan's Terrible Swift Sword: An Insider's Story of Abuse and Reform within the Federal Bureaucracy, Jameson Books, Inc. (Ottawa, IL: 1991).

16. A national analysis is contained in Wendell Cox and Samuel A. Brunelli, "America's Protected Class: The Excess Value of Public Employment, The State Factor, Vol. 20 Number 7, American Legislative Exchange Council (Washington: June 1994).

17. Elliot Sclar, "Privatization: A Giant Step Backwards," Privatization Update, Fall 1991, Government employee Department, AFL-CIO, (Washington: 1991).

18. Dale Belman and John Heywood, "The Truth about Public Employees: Underpaid or Overpaid," Briefing Paper, Economic Policy Institute (Washington: 1993).

19. This is the 1993 dollar value of the estimated starting salary (11.7 years ago, based upon the average tenure of state government employees) of a state government employee paid the average rate in 1993. The starting salary is estimated using the average annual increase in state government salaries over the 1980 to 1993 period.

20. Includes an adjustment for annual increases in excess of inflation.

21. The state government employee benefits are assumed to be 25.3 percent above salary, which is estimated using data from the National Income and Product Accounts (US Department of Commerce) and the Census of Governments (US Census Bureau). Non-government employee benefits are estimated at 19.0 percent, based upon the National Income and Product Accounts and regional differences as reported in US Department of Labor data.

22. Assumes a federal tax rate of 28 percent and an average New York income tax rate of 9.7 percent (which includes an adjustment to account for the higher city of New York income tax rate). Because excess benefits are in addition to taxable income, the imputed tax free value is calculated at the top state and city income tax rate.

23. Wendell Cox and Samuel A. Brunelli, "America's Protected Class III: The Unfair Pay Advantage of Public Employees," The State Factor, Vol. 20 Number 4, American Legislative Exchange Council (Washington: April 1994).

24. Arthur Andersen & Co.

25. The state government salary increase is based upon 1983 to 1993 data from the Office of the State Controller and US Census Bureau data from 1980 to 1983. The non-government salary increase is calculated from United States Department of Labor, Bureau of Labor Statistics data.

26. Assumes an annual inflation adjusted compensation increase of 1.59 percent for the state government employee and 0.90 for non-government employees (based upon the actual 1908 to 1993 rates).

27. Arthur Andersen & Co.

28. Arthur Andersen & Co.

29. Non-government employee benefit data from Employee Benefits in Medium and Large Private Establishments; US Department of Labor, Bureau of Labor Statistics (Washington: May 1993); Employee Benefits in Small Private Establishments US Department of Labor, Bureau of Labor Statistics (Washington: September 1991) (referred to in subsequent notes as USDOL Employee Benefits Series.

30. Calculated using the non-government employee rate of compensation.

31. New York state government employees are paid for 8.6 sick days annually. Non-government employees in the United States are paid for 6.7 non-scheduled days off, including sick days (calculated from data in Employment and Earnings, United States Department of Labor, Bureau of Labor Statistics (Washington: January. 1994).

32. Based upon a 17.2 year life expectancy for a person retiring at 65 years of age (US National Center for Health Statistics data as reported in the Statistical Abstract of the United States: 1993)

33. Based upon a 17.2 year life expectancy for a person retiring at 65 years of age and assuming that the employee has accrued sufficient unused sick days for the state to cover all health care expenditures.

34. Based upon analysis of unpublished 1989 and 1993 Bureau of Labor Statistics data. The probability of a private employees losing a job is nearly 4 times that of a government employee.

35. New York State Department of Civil Service, 1992 New York State Work Force Profile. Average private sector tenure calculated from US Department of Labor Bureau of Labor Statistics data.

36. Probability of involuntary termination developed from an analysis of unpublished 1989 and 1992 Bureau of Labor Statistics data (Annual probability of involuntary separation: 3.8 percent private sector, 1.0 percent state & local government, 1.0 percent federal government). Average tenure of unemployment from 1992 Bureau of Labor Statistics data (9.5 weeks private employees, 9.9 percent government employees). Compensation level for new employment estimated based upon data in Jennifer M. Gardner, Displaced Workers: 1987-1991, US Department of Labor, Bureau of Labor Statistics (Washington: July 1993) (private sector employees: reduction of 20 percent from former employment, public sector employees: reduction of 20 percent from former employment).

37. New York State Assembly Republican Ways and Means Staff, The State of the State's Workforce: Trends in New York State Government Employment (Albany: 1992).

38. Arthur Andersen & Co.

39. Based upon national data. Sufficient state data is not readily available, but would probably result in a higher excess value attributable to security.

40. Largely due to the lack of sufficient data.

41. Bradley R. Braden and Stephanie L. Hyland, "Cost of Employee Compensation in Public and Private Sectors,,", U. S. Department of Labor, Bureau of Labor Statistics (Washington: May 1993).

42. US DOL Employee Benefits series.

43. 1994 State Employee Benefits Survey, Workplace Economics, Inc. (Washington: 1994).

44. 1994 State Employee Benefits Survey.

45. "America's Protected Class: The Excess Value of Public Employment."

46. Local government employer paid benefits are higher than that of state government employees, but annual increases have been lower (though still higher than those of non-government employees). This excess value estimate for local government employees is considered to be low, because readily available data is not available to do a more complete analysis.

47. "America's Protected Class: The Excess Value of Public Employment."

48. For each 1 percent variation in population there is a -0.13% variation in state and local government employees per capita. For each 1 percent variation in land area, there is a +0.26% variation in state and local government employees per capita. (R²= 0.401, statistical significance at the 99 percent confidence level).

49. See House Appropriations Committee (R), Pennsylvania's Fiscal Crisis/Budget Reductions (Harrisburg, PA: May 1991).

50. "America's Protected Class III: The Unfair Pay Advantage of Public Employees."

51. Government Employment 1990-1.

52. All figures based upon compensation levels reduced by the aggregate "excess value of public employment" estimates above.

53. The excess cost of New York government employment relative to the national average for state and local governments is nearly $3,000 per household.

54. Sales and income taxes produced $29.3 billion in revenues in 1992 (Government Finance [Preliminary] 1991-2).

55. Cost savings from public-private competition are documented in a variety of sources. See for example, E. S. Savas, Privatization: The Key to Better Government, Chatham House Publishers (Chatham, NJ: 1987), David Osborne and Ted Gaebler, Reinventing Government: How the Entrepreneurial Spirit is Transforming the Public Sector (Reading, MA: Addison-Wesley Publishing Company, 1992), and Wendell Cox and Jean Love, "Controlling the Demand for Taxes through Competitive Incentives," The State Factor, Vol.17, No.12 (Washington, DC: American Legislative Exchange Council, December 1991).

56. For example, Los Angeles competitively contracted transit routes that were threatened with cancellation as a result of financial constraints. In an independent audit, Price Waterhouse reported (Price Waterhouse, Bus Service Continuation Project Fiscal Year 1988-89 Evaluation Report [1991]):

Unit cost savings of 60 percent savings (public costs were 150 percent higher than competitive costs). Savings on some routes were found to be 69 percent, which is unprecedented in transit contracting.

An improvement in service reliability of over 300 percent, a 75 percent reduction in passenger complaints, and virtually the same safety performance relative to the region's large public transit agency.

57. Dale W. Jorgerson and Kung-Young Yun, The Excess Burden of Taxation in the United States. Journal of Accounting, Auditing and Finance (September 1990).

58. Estimated using 1993 state personal income at place of work data (Survey of Current Business, US Department of Commerce [Washington: August 1994]).

59. Milton Friedman, "The Real Free Lunch: Markets and Private Property," Cato Policy Report, July-August 1993.

60. Wendell Cox and Jean Love, "Bus Service," Privatization for New York: Competing for a Better Future, edited by E.S. Savas, (New York State Senate Advisory Commission on Privatization), 1992.

61. The Colorado law required 20 percent of the Denver transit system to be competitively contracted. Savings have been 31 percent, even after start-up costs. See KPMG Peat Marwick in association with Mundle and Associates, Inc. and Transportation Support Group, Denver RTD Privatization Performance Audit Update: July 1990 - June 1991: Final Report (November 1, 1991).

62. See, for example "Public Prerogatives" model legislation adopted by the American Legislative Exchange Council (The Source Book of American State Legislation: 1995-6, in publication). In 1979 Massachusetts applied public prerogatives legislation to the Massachusetts Bay Transportation Authority. Public prerogatives legislation has also been called "management rights" legislation. This is an unfortunate title, since it puts the issue in the pejorative terms of private sector management-labor conflicts. Public prerogatives legislation is required not to maintain a balance between management and labor, it is rather to ensure that government remains faithful to its public obligations by not foreclosing alternatives to improve the efficiency of public services.

63. Citizen's League of the Twin Cities, Enlarging Our Capacity to Adapt (Minneapolis: 1983).

64. "Corporatization" should not be confused with the establishment of government authorities (such as a turnpike authority) or monopoly government corporations. Despite their theoretical independence, government authorities and government monopolies do not operate in the competitive market. A corporatized entity would operate in the competitive market, subject to all of the competitive pressures faced by other firms.

65. Roger Douglas, Unfinished Business, Random House (Auckland, New Zealand: 1993).

66. Over a five year period, the corporatized postal service has paid what in the United States would be the equivalent of $2.5 billion in taxes.

67. In the United Kingdom, corporatized units are called "direct service organizations."

68. See "Competitive Contracting of Public Service Act," model legislation adopted by the American Legislative Exchange Council (The Source Book of American State Legislation: 1993-4). Petition of interest legislation has been introduced in a number of states. In 1989 the Arizona legislature passed a petition of interest bill, which was vetoed by the governor.

69. Jean Love and Samuel A. Brunelli, eds. "Competitive Markets and Monopoly," Legislative Issue Briefs, Second Edition (Washington, DC: American Legislative Exchange Council, 1993).

70. Douglas.

71. Based upon Jorgerson and Kung-Young Yun..

72. Richard Vedder, Economic Impact of Government Spending: A 50 State Analysis, NCPA Policy Report #178, National Center for Policy Analysis (Dallas: April 1993).

73. For example see Belman and Heywood.

74. All taxes are paid by consumers either through direct taxes, such as income taxes, or through indirect taxes that are included in the prices of products. Private employees pay taxes from privately produced income and are thus net tax payers. Government employees pay taxes from tax produced income and are net tax recipients (their tax payments are less than their income from taxation).

75. Ludwig von Mises, Economic Calculation in the Socialist Commonwealth.