March 1st, 2011 1 Minute Read Issue Brief by Josh Barro

Tools for Better Budgets: Options for State and Local Governments to Manage Employee Costs

State and local governments all across the country are under financial strain, and lawmakers of both parties are looking to cut spending and balance budgets while maintaining vital services. To make ends meet, cuts must be made where the money is—and since state and local governments spend nearly half their budgets on employee salaries and benefits, public-employee compensation costs will be front and center in budget discussions all over the country.

This Issue Brief lays out policies that state and local governments can enact to reduce and control the cost of employee compensation. These recommendations are heavy on strategies to reduce the cost of employee benefits. Growth in benefit spending has been especially rapid in recent years, and, all things being equal, it is more efficient to pay workers in cash than in benefits.

Not recommended here is one strategy that has been frequently proposed in state capitols and city halls: layoffs. This is not to say that layoffs are always inappropriate; they may be the best choice for some governments, especially those with an unusually large workforce relative to population. But layoffs are usually the most disruptive way to reduce employee compensation costs, as they reduce the quality of public services and de-stimulate the economy. Elected officials often choose layoffs because other options (such as furloughs, wage cuts, and reductions in benefits) are legally or contractually unavailable. The reforms listed in this paper would give public-sector managers more options to cut costs, therefore reducing the appeal and likelihood of layoffs.



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