Public Sector v Private Sector; will (can) the private sector continue to carry the load?

Well, this is going to be a different kind of post for me.

I wrote it because I believe the original core values that helped to create and shape the US, and a state like California, are under duress. Some may view it as a political rant due to the subject matter but I actually think it is a bipartisan issue as it affects everyone on either side of the political spectrum. So, here it goes.

This weekend, due to the last minute intervention of California Governor Jerry Brown forcing a 60 day cooling off period, the SF Bay Area was able to avoid another  BART strike by Service Employees International Union Local 1021 over financial and safety concerns.

When interviewed by the local media, union negotiators made statements alluding to the fact they are focused on “public safety concerns”. While those statements are clearly designed to engender public sympathy and support, when you get details of the discussion the motivation appears to be primarily financially oriented.

On July 27, 2013 the San Jose Mercury News published an article titled, “BART workers’ paychecks already outpace their peers” which asserts the following:

  • BART workers earn the most money on average in 2012 among the 25 largest government agencies in the Bay Area
  • Average gross pay for blue-collar BART union workers threatening shutdown was $76,551 in 2013
  • BARTs top-paid train operator grossed $155,308 and top paid janitor made $82,752  and BART’s top paid electrician made $149,957.
  • Overall, BART’s average employee – including executives – made nearly $30,000 more than employees at Los Angeles’ transit line
  • BART has highly favorable rules that allow workers to “pile up lots of overtime and cash out unused sick time
  • but…25% of BART employees made less than $62,680 median income in the SF-Oakland-Fremont metropolitan areas

The article claimed that BART union workers are demanding a 20.1% pay raise over the next 3 years. One BART worker who was interviewed stated he is “tired of people thinking they are just drones who only push buttons and that, “employees work hard, often on off-hours, holidays and weekends, for their money.”

Well, I know a few other people in the SF Bay Area who work hard as well for their money- those in the high tech industry, for example. Or, how about traditional small business owners? I know the high tech industry best and that is the subject of this blog so that is my focus here.

Unlike the average public sector employee the people involved in high tech private sector do not have a safety net.  There are no guaranteed salaries. There are few, if any, pensions that I am aware of. There are few “free” healthcare plans or other benefits — especially in early-mid stage start ups.

The high tech community is the driving economic force that supplies the majority of the tax and revenue base in the SF Bay Area that BART employees serve. So, let’s compare high tech against BART and the overall public sector.

In a high tech company, there are virtually no wage or benefit protections — in fact, if you work for a competent high tech company and screw up more than a few times the only thing you can guarantee is you will be fired. If your company doesn’t grow, it will be sold or shut down. There is no collective bargaining in high tech, you get what the “market will bear” and what you can personally negotiate.

If your start up is one of the few that manages to become successful, your equity ownership  may generate some significant $ for you and your family –congratulations, that is what those of us who work and/or invest in high tech take risks for — but the facts show that more than 80% of high tech start ups fail. So, this means you have a much better than even shot of having all that sweat equity you’ve vested have no value whatsoever in the end.

High tech is a ruthless industry that operates at a high cadence and under high pressure. It destroys companies that fail to produce goods/services that businesses or consumers want and it churns out people who are unable to perform — at all levels from executives down to the individual contributor. In other words, there are no guarantees in high tech. None. Nada.

Success in high tech is linked to an age-old idea that America was founded upon; each of us should only be limited by our own skills and our ability to demonstrate individual value — and we should have unlimited upside to our success.

The public sector – across federal, state and local government – is the virtual antithesis of the the private sector. Once you get in, it is difficult to get fired unless you commit a crime — even then, it can be challenging to terminate someone.  Getting changes made to the system, even when it makes sense to many, is extraordinarily difficult. There are few personal incentives to over perform and spend less. And, “entitlements” such as pensions have grown increasingly over the past 4 decades through a succession of increasing demands made by unions and politicians succumbing to those demands, even when they knew that those future obligations would be challenging to fulfill.

In California, over the past 30 years, the public sector has grown to a significant majority and has voted in legislation and sympathetic legislators – with little or no business experience – to solidify artificial protections and benefits for public employees. This majority is now forcing the minority (the private sector) to pay for its public sector benefits. This is the “tyranny of the majority” that John Adams originally referred to as a negative consequence of a democracy.

Take a look at CA Proposition 30 which Gov. Jerry Brown pushed through the last election if you don’t believe that the public sector is putting a proverbial and powerful gun to the head of the private sector.

Through its passage by the majority last November, CA Prop 30 forces people making $250,000/year to pay a “penalty” income tax — when it passed, it was retroactive to the beginning of 2012. To get it through, Brown launched a state-wide ad campaign positioning those making $250,000/year as “rich” and not paying their fair share. Many, if not most, of the people that fit into this income bracket are in the private sector.

What Brown didn’t say was these “rich” people – unless they are the super wealthy and derive their income from solely from investments v salary – don’t have  write offs so they pay a full marginal state tax rate of 12.3%. He also failed to acknowledge that a starter home that is 60 years old/900 square feet on the “wrong side of the tracks” in San Carlos, CA – goes for $800,000 or more. $250,000 may sound like a lot if you live in a less expensive part of the country or state, but if you make $250,000/year in and around SF, you are going to have a challenging time buying a single family home and paying for it and all the other things a family needs. You are not poor but you certainly are not close to being rich.

Some may believe that everyone who works in high tech is wealthy, or will be. But, the truth does not exactly live up to that perception.

We read about the fabulous success and wealth of Mark Zuckerberg, Larry Page and Sergey Brin, Larry Ellison, and other high tech senior executives and the fortunate employees that have equity in companies that have  IPO’d or are acquired for significant multiples. These people deserve their wealth because they took phenomenal risks, worked extremely hard, and ultimately built companies that employ thousands of people and have generated significant shareholder value — well, Mark Z. looks like he’s now on the right path to generating shareholder value.

But the truth for a large percentage of high tech employees who put in their 30+ years of long work weeks, weekends, interrupted holidays, and significant periods of travel is that they simply get a paycheck with no pension and little equity of value. For every successful high tech start up, at least 8 fail, maybe more.

And, if you currently work for Oracle, Salesforce or SAP – some of the most successful high tech businesses – and you are a lower level employee, you know that your company does not provide you with any equity opportunity other than buying the stock as anyone can do. Perhaps you may get a small discount to the public market price through an ESPP plan. If you work for a smaller high tech start up you may be granted equity in exchange for that significant risk but that equity is worth zero until/unless the company becomes valuable.

If you work for any size/stage high tech company, you know that an ordinary day is 10-12 hours — with no such thing as overtime. It isn’t uncommon to leave on Saturday to make a meeting with a customer in London on Monday am — with no additional compensation. To get the quarter closed at the end of the year, you work over weekends and holidays for no additional pay.

And, as high tech employees get older, it is likely you will become less and less desirable. For example, we’ve read where venture capitalists say they wouldn’t invest in any company where the CEO was over 30 — this was a ridiculous statement, but nevertheless there is a lot of unsaid “ageism” in high tech, at least in the start up community.

So, I would like to ask that BART employee who complained about being unfairly criticized: how many days have you been forced to work more than 8 hours without any overtime? How many times have you had to be gone from your family several weeks at a time? How many weekends/holidays do you work for no additional pay? As you enter your 50’s, are you worried you will be replaced by a 30 something for half your salary? Have you ever had to live under the constant pressure of “personally making the next quarter”?

Retirement. Let’s compare a mid-level high tech employee in Silicon Valley v an “average” public employee with respect to their retirement opportunities.

Let’s say the high tech employee is in mid-management, a college graduate (usually a prerequisite), earns $150K/year. Let’s say that the public employee has no college (just for the sake of making a point here, not implying that many/most public employees don’t have college degrees) and makes 1/2 their private sector counterpart,  $75K/year.

Each has been earning at this level for the last 3 of their 30 years of employment.

Over the course of 30 years, let’s say the high tech employee has been able to put away, on average – some years less, some years more – $10K/year from savings and interest in her 401K account and now has $300K. The public employee, because she has made less than her high tech counterpart each comparative year, has not been able to set aside any real savings of her own for retirement.

Both employees are now 60 years old and considering retirement. What does each have to look forward to?

The high tech employee can look forward to drawing down 4%/year from her retirement savings – this is the high end of what financial consultants recommend as an annual draw down amount designed for 30 years of retirement without touching the principal.

$300,000 * 4% = $12,000 annual income

Now, let’s look at the public employee who will receive 90% of her last 3 years highest earnings – this is a typical public employee pension calculation formula:

$75,000 * 90% = $67,000 annual income

and we also have to add in highly subsidized healthcare benefits provided to the public employee.

To generate $67,000 of interest income assuming a 4% annual interest rate, the high tech private sector employee would have to have $1,675,000 in retirement savings.

It is as if the public sector employee generated $55,833 of savings for each of her 30 years of employment. But she didn’t – instead, she had her pension funded by the private sector — actually, it is likely that a state financial agency such as CalPERS or CalSTRS invested $ into the private sector where all real revenues come from — venture capital or private equity funds, for example –  to generate the returns needed to fund her pension obligations.

The private sector worker who sacrificed 30 years for her family, worked long hours, weekends and holidays won’t have the luxury of retiring at 55, 65, 75 or possibly ever. She may have to work another 30+ years to come close to saving the $1.675M depending upon her risk-adjusted returns from the stock and bond markets.

This is an imperfect comparison but I think it is close enough to make the point.

Is it any wonder our city, state and federal governments are swimming in red ink trying to live up to unfunded retirement commitments made by politicians in years past to earn votes? Vallejo and Stockton are two notable cities in deep trouble here in California. Detroit’s problems have earned them scrutiny on a national level.

How did we arrive at this point?

In 1962, President Kennedy signed Executive Order 10988 that legalized federal employee collective bargaining which then paved the way for state/local employee unions. For years, collective bargaining by federal employees had been illegal due to the simple fact that there are few, if any, free market alternatives for the services governments provide.

But, Kennedy set aside the prevailing wisdom at the time and ever since the US has been on an inexorable slide to where now all federal, state and local employees enjoy significant benefits that those in the private sector simply do not enjoy.

I was born and raised in a middle-class, public sector/union family – my parents were both public school teachers here in California. But, even at a young age I have always been a huge believer in the private sector and the values of capitalism and free markets. These are the driving forces that have made America a fantastic country and a place where nearly everyone else in the world wants to live and raise a family.

This issue, as far as I can tell, is bipartisan because the private sector and the public sectors need each other.  If one fails, so does the other. We need government services for things likes schools, roads, defense, etc. The problem is we have too many services and too small of a checkbook and no one wants their favorite service cut.

So, what are some things I think we might do to help get this back to center?

  • Teach our children and proselytize to others that producing a good or service that generates a profit is not inherently “evil”.
  • We should give ourselves permission to say it is ok to seek wealth for our families because it is good for society overall if we are self-reliant.
  • In spite of some media and politician comments to the contrary, companies/corporations are made up of “people” – many of them good, some bad – just like society in general. Just because a company is big, doesn’t make it bad.
  • There are only 500 Fortune 500 CEOs. Duh. The median salary for a Fortune 500 CEO in 2013 is $12.3M. The average NBA star makes $5M. Fortune 500 CEOs have to win the job over thousands, and employ the fate of thousands. NBA players win the job over thousands but essentially manage themselves. We make them out to be heroes, we make Fortune 500 CEOs out to be unworthy of their compensation. We need more people aspire to be business leaders. We have enough people who aspire to be NBA stars:).
  • We need more real private sector companies – not “fake”, “subsidized by the government” companies – to produce goods and services to employ people so they can have a family, buy cars, homes, etc and pay taxes.
  • If we don’t want jobs going overseas, then we need people willing to work here for a wage that is market based. If that’s a minimum wage, that is what it is. We might have to move those jobs – and the people – to “less desirable’ states/locations where a lot less income buys a lot more living but the environment isn’t as nice as San Francisco or Palo Alto.

While I can hear the hue and cry now, going forward we should require all public employees to save for their own retirements through a program similar to a 401K, just as the private sector does. We must eliminate pensions because we can’t afford them. We can’t renege on our commitments to those who were promised a pension and relied upon those promises because that really would be evil. But, for those new government sector employees yet to be hired they must self-fund their retirement.

Finally, we should rescind Executive Order 10988 and other laws that allow public sector collective bargaining. This right amounts to virtual blackmail as the group threatening to strike can shut down entire sectors of the economy with no viable alternative – as the recent BART strike could have done. But, I’m afraid that genie will never fit back into the bottle.

Next blog topic will be far less sensitive: religion.

  • etillema

    I agree with almost all of your article BUT: If the private employee earned $75,000 a year more for 30 years and only had $300,000 in their IRA upon retirement they deserve to be poor. They made $2,250,000 more than their public counterpart, if they had just put the money into a jar they would still be much better off than their public counterpart. But they should have used their college knowledge and invested it and then would be far ahead of their public counterpart. People need to be a little more ant and a little less grasshopper, grow a pair and take responsibility for themselves no matter who you work for.

    • I knew that whatever I put down as example $ amounts would be an easy target. So, the example was simply a way to highlight an issue.

      The fact is that the private sector employee woukdnt start out at $150K/year, they would more likely start at $50K/year. And, as their income grew, so would their marginal tax rate.

      So, they wouldnt net $75K/year more than their public sector counterpart.

      The $10K/year savings reflects the net average they might have saved over 30 years after having to raise a family, put kids through school, etc.

      And, the hypothetical example I used doesnt reflect reality. Most private sector jobs dont pay higher than most public sector jobs.

      My point was that an exceptional private sector employee v a typical public sector employee will be unable to ever retire unless some extraordinary things happen for them.

      The public sector employee gets a ‘free ride’ on the back of the private sector employee in that they get to retire after 25-30 years of ‘service’. Most private sector employees have no such option.

  • Angela — It is not my intent to pit the two groups against each other. As I said in my post, both sectors need each other to survive — we all need education, roads, police, fire, etc. But, the public sector was placed into an artificial economy in 1963 when it was granted the right to collective bargaining which gives it protections most private sector employees do not have.

    We could go a long way toward resolving this tension if we rescinded Kennedy’s executive order and eliminated public employee unions, public employee collective bargaining, pensions, and the right to strike. Let market pricing and benefits prevail in the public sector, as it does for the private sector. Let public sector groups compete for the best employees and let each public sector employee negotiate his/her own employment.

    • AngelaC

      what I meant is it seems that you are making the choice be between public unions versus no private unions with the suggestion that public unions be eliminated. If looking at only the segment of the industrial economy that is succeeding such as technology, than eliminating unions all together might be an option worth exploring because technology is doing great without them but if you take the whole economy and its multiple industries into account than most Americans do not make the incomes to cover cost of living today because they didn’t have unions to maintain them for them. I think the problem is not that the public sector has unions, its that the private sectors that need them don’t.

      The issue is tax allocation right and how much we now have to use our taxes to pay public employees for the work they agreed to do for the benefits they are expecting to receive. Is it now right to say well most Americans don’t get benefits like this so lets cut them from civil workers because taxes are getting too high for us to pay? Or should we look at all of America getting an equal share of the income benefits from their work by having more unions so that they have more to pay into the tax system?

      • Unions were originally developed in response to deplorable safety and working conditions. Over the years, many of those issues have been resolved through federal and state regulations and laws. Now, unions primarily exist in order to drive compensation and other benefits — this is true for both the private and public sector unions.

        For those industries where there continue to be unions, it causes issues such as the best workers are paid the same as the worst workers or the worst workers may be paid more based upon non performance factors such as tenure.

        Socialism argues for paying everyone the same irrespective of job. There is no single instance where Socialism has proven to be a successful economic model. Capitalism- with all its warts – has continued to be the most successful model from both an economic and human rights perspective.

        Unions violate the concept of capitalism and a free market. For example, they don’t allow the best electricians to negotiate their own hourly rate and benefits. Instead, union electricians are paid ‘at scale’ based upon how many years they’ve been in. So, there is no incentive to work faster or better than ‘the average’.

        I believe in free markets and the right for each person to negotiate their best deal based upon their personal abilities. I am willing to live with the notion of a minimum wage but only as a low floor for everyone who is unable to demonstrate anything more than basic skills. And, minimum wage is not meant to be a living wage per se — everyone should strive to become skilled in some area.

        I think we should eliminate all unions, let each individual negotiate their best deal based upon the skills they bring to the organization. But, I also understand why many people want a union due to the fact they don’t feel they could personally command the same or better compensation and benefits without union representation.