Intergovernmental Free-Riding, Teacher Salaries and Teacher Pensions

In recent years, much attention has been paid to the relatively large fractions of their lifetime income that public sector employees receive in the form of deferred compensation, like back-loaded salary increases and retirement benefits. Despite the growing interest, relatively little is known about why these deferred compensation mechanisms are used so heavily in the public sector as compared to the private sector. The current work focuses on one potential explanation: local governments have some discretion over the size of employee pension benefits, but the costs of pensions are borne by the state (and the employees themselves). This creates a situation where local governments have incentives to free-ride off of each other’s taxpayers when making salary (and pension) decisions. I propose to make use of a natural experiment that shifted the intergovernmental incentives between the state of Illinois and its school districts. Specifically, in 2005, the state legislature passed a law requiring districts to pay the full cost of end-of-career salary increases above six percent that served to increase the retirement benefits of public school employees. The legislature applied the new policy only to contracts or collective bargaining agreements put into place after the law’s passage in June 2005. Because contract negotiation is staggered across districts over time, there is exogenous variation in implementation of the policy across districts over time. This allows me to use traditional difference-in-difference methods to estimate the causal effects of the disincentives policy shift on teachers\u27 salaries and wages