“NYC Government Workers Paid Less Than Private Sector Peers,” is the headline on today’s press release from Comptroller John Liu’s office. But the truth is actually much more complex and “difficult to generalize,” as the study in question acknowledges.

Liu’s analysis, “Municipal Employee Compensation in New York City,” builds on previous work by defenders of the current state and local government compensation system — and builds, as well, on some of the weaknesses and limitations of those other studies.

The comptroller’s press release headline is based on a straight comparison of average pay data for private sector vs. municipal workers.  With no adjustment for occupations, ages or educational levels, the average full-time local government employee in New York City earns 17 percent less than the average full-time private-sector employee.  No surprise there: the difference in gross averages largely reflects the inflationary impact of high average wages on Wall Street.

Further parsing the data, the Liu study says lower-skilled and less educated municipal workers earn considerably higher pay than their private-sector counterparts, while more educated professionals earn less than private-sector workers who have a post-graduate degree.  Here’s a summary table, reflecting some wage regressions by the study’s authors:

That pay differential in the “Masters and More” category is deserving of a little more scrutiny.  The data used in the study indicate that workers with post-graduate degrees make up only 14 percent of the total private sector workforce, compared to 27 percent of the municipal payroll.  And although the study does not say so, on the private side of the ledger, that group would include some of the world’s most highly paid professionals — lawyers, surgeons, architects, etc.  On the city government side, the pool of post-grads is dominated by elementary and secondary school teachers, who need a master’s degree for certification.  (Interestingly, the study does not compare public school teachers directly to private school teachers.)

The study assumes that one worker with a post-grad or professional degree is pretty much the equivalent of another.  As Nicole Gelinas put it, “it seems (Liu’s) strongest point can be summed up by saying that a Skadden Arps M&A guy makes a heckuva lot more than the guy who reviews city vendor documents.”  Exactly.  And, when you come right down to it, so what?

The most glaringly questionable aspect of Liu’s study is its attempt to compare retirement benefits across sectors.  The study asserts that the true cost of municipal retirement benefit is neither what the city actually contributes to the pension fund, nor what the private-sector would calculate as the benefit’s present value.  Rather, it suggests, the right measure is the “Entry Age Normal” (EAN) rate estimated by the city pension funds’ actuary. This can be as low as 4.33 percent for a 25-year-old male enrolled in the age-57 pension plan New York City Employee Retirement System (NYCERS), ranging up to 22.97 percent for a 25-year-old female firefighter.

There are two huge flaws with this method.  First and foremost, the EAN is based on an assumed rate of return of 8 percent–which, as explained in this widely quoted study, among others, is the root cause of the nation’s public pension funding crisis.  Based on the current Treasury spread, the risk-adjusted EAN would more like 8 percent for that 25-year-old NYCERS member.  And even at that, the EAN is a highly misleading measure for purposes of comparing compensation levels.

The true cost to New York City taxpayers of providing a guaranteed DB pension is not the amount that would be paid into a theoretically fully funded system comprised of newly hired 25 or 30 year-olds.  It’s the cost of funding that benefit out of New York City’s existing pension plans, which are seriously underfunded — and currently charging employer contribution rates that range from 20 percent of average salary for NYCERS members to 82.5 percent for firefighters. The current cost to city taxpayers of teacher pensions — about 32 percent of salary, on average — is enough to wipe out the report’s estimate of the private-sector compensation advantage among workers with post-graduate degrees.

Liu’s study says that the employer pension cost should not be equated to the actual employer contribution rate in any given year because “employer contributions to pension funds may vary dramatically from year to year, based on the financial condition of the employer, the past investment returns of the fund, and the overall funding status of the plan.”  True enough — but this is a feature, not a bug, of the system Liu is defending.   Dramatic and unpredictable variations in employer contributions are the inevitable result of chasing that 8 percent target rate of return, which requires investing more heavily in risky assets more prone to volatile market swings.  The down cycles are made worse by the inevitable tendency of politicians to repeatedly sweeten public-sector retirement benefits during bull market periods.

If the actual contribution rate is not quite the right measure, neither is an actuarial device such as the EAN, which is un-moored from financial reality in a city that, in fiscal 2012, will pay its pension funds a whopping $8.4 billion — 20 percent of tax receipts, and roughly 40 percent of total salaries.  A decade ago, it was just over $1 billion.  The skyrocketing cost of pensions is the price paid by taxpayers to protect public employees from the downside risks associated with an aggressive investment strategy.  If the investment strategy was more conservative, or if the liabilities were measured using a less risky discount rate, the benefit (even as measured by the EAN) would cost much more—and the comptroller could no longer claim it was cheap.

Liu’s analysis also attempts to draw a comparison between a NYCERS plan and a corporate defined contribution plan requiring matching 6 percent contributions by employers and employees.  This, it says, is “roughly comparable to the NYCERS defined benefit plan in terms of the value of retirement benefits, if an 8 percent annual rate of return is achieved on the investment portfolio.”  Huh?   This side of Bernie Madoff, that’s one enormous “if.”

What about the value of a benefit to individual workers?  From that perspective, if you want to purchase an annuity replicating the partially indexed, city-and-state tax-free pension of $45,000 available to a typical NYCERS member who retires at 62 after three decades of service with a career peak salary of about $70,000, you will need a nest egg of at least $775,000.  Risk-free benefits are not cheap in the real world.

Carefully avoiding sweeping generalizations (despite that press release headline), the study says “it would be desirable to have an overall measure of the degree to which retirement benefits add to the effective compensation of City employees, relative to their private-sector counterparts.”  That would, indeed, be desirable.  Unfortunately, this study doesn’t do the trick.

On the issue of health benefits, the study concedes that city workers (who contribute nothing to their premiums) have a better deal than private-sector employees, although it minimizes this difference by confining the comparison to the largest employers.  It notes that the city also provides continuing free health coverage in retirement–a benefit rapidly vanishing from the private sector.

Unlike pensions, retiree health insurance premiums are not pre-funded but covered out of the annual budget on a pay-as-you-go basis (at a cost of $1.3 billion this year).  Liu’s study doesn’t even attempt to calculate the the present value of this perk, although it does admit that “it is easy to see that if it accrued as a constant percentage of salary during the employee’s years of service, it would add materially to the compensation of a typical City employee.”  In fact, the city’s unfunded liability for retiree health care most recently was estimated by the city itself at $75 billion.  Perhaps the comptroller will devote another study to explaining how that $75 billion promise can possibly be kept.