September 28, 2011

Accounting for the Cost of a Public Sector Worker in New Jersey

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Much of the debate over the growing size of pensions relative to budgets has focused on whether public sector compensation costs are fair either in comparison to other municipalities or to the private sector. But this fairness debate, while important, obscures a more technical and far more fundamental question: why does the bill for public employee benefits appear to be a surprise to governments, beneficiaries, and taxpayers? This paper finds two primary reasons. First, the costs are not fully reported, but instead reflect accounting and actuarial assumptions that systematically underestimate the size of benefit liabilities. Second, the data are not always made easily available to the public. This information is important as the cost of long-term liabilities for pension and health benefits are matters that inform negotiations between public sector unions and state and local government officials. If the full costs are obscured by accounting conventions and actuarial techniques then policy makers, taxpayers and public employees are agreeing to policies without sufficient information about costs.